<PAGE>
As filed with the Securities and Exchange Commission on January 12, 1998
Registration No. 333-42223
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
Amendment No. 1
to
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MIZAR, INC.
(Exact name of registrant as specified in its charter)
Delaware 3571 41-1425902
(State of incorporation) (Primary Standard (I.R.S. employer
Industrial Classification Code) identification number)
2410 Luna Road
Carrollton, Texas 75006
972-277-4600
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
---------------------------
Charles D. Brockenbush
Vice President-Finance and Chief Financial Officer
Mizar, Inc.
2410 Luna Road
Carrollton, Texas 75006
972-277-4600
(Name, address including zip code, and telephone number, including area
code, of agent for service)
---------------------------
Copy to:
Bruce H. Hallett, Esq.
Crouch & Hallett, L.L.P.
717 N. Harwood St., Suite 1400
Dallas, Texas 75201
214-953-0053
---------------------------
Approximate date of commencement of proposed sale to the public: Upon the
consummation of the share exchange referred to herein.
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>
MIZAR, INC.
CROSS-REFERENCE SHEET FOR REGISTRATION STATEMENT ON FORM S-4
<TABLE>
<CAPTION>
Item of Form S-4 Prospectus Caption or Location
---------------- ------------------------------
<S> <C> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus..................................................................... Facing Page of Registration Statement;
Outside Front Cover Page of Proxy
Statement/Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus............................................................ Inside Front Cover Page of Proxy Statement/
Prospectus; Available Information;
Table of Contents
3. Risk Factors, Ratio of Earnings to
Fixed Charges and Other Information............................................ Risk Factors; Summary of Proxy Statement/
Prospectus
4. Terms of the Transaction........................................................ Summary of Proxy Statement/Prospectus;
The Share Exchange; Description of Mizar
Capital Stock; Summary Comparison of
Mizar Common Stock and LSI Stock
5. Pro Forma Financial Information................................................. Pro Forma Financial Information
6. Material Contacts with the Company
Being Acquired................................................................. Summary of Proxy Statement/Prospectus;
The Share Exchange
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters...................................................... Not Applicable
8. Interests of Named Experts and
Counsel........................................................................ Not Applicable
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................................................... Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3
Registrants.................................................................... Not Applicable
11. Incorporation of Certain Information by
Reference...................................................................... Not Applicable
12. Information with Respect to S-2 or
S-3 Registrants............................................................... Not Applicable
13. Incorporation of Certain Information
by Reference................................................................... Not Applicable
14. Information with Respect to Registrants
Other than S-2 or S-3 Registrants.............................................. Summary of Proxy Statement/Prospectus;
The Share Exchange; Business of Mizar;
Mizar Selected Financial Data;
Description of Mizar
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Capital Stock; Market for and Dividends on
Mizar Common Stock; Mizar Management's
Discussion and Analysis of Financial
Condition and Results of Operations
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3
Companies..................................................................... Not Applicable
16. Information with Respect to S-2 or S-3
Companies..................................................................... Not Applicable
17. Information with Respect to Companies
Other than S-2 or S-3 Companies............................................... Summary of Proxy Statement/Prospectus; The
Share Exchange; Business of LSI;
Absence of Market for and Dividends
on LSI's Shares; LSI Selected Consolidated
Financial Data; LSI Management's Discussion
and Analysis of Financial Condition and
Results of Operations
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations are to be Solicited............................................ Summary of Proxy Statement/Prospectus; Annual
Meeting; The Share Exchange; Amendment to
Mizar Stock Option Plan; Amendments to
Mizar's Certificate of Incorporation;
Management; Election of Directors; Security
Ownership of Certain Beneficial Owners and
Management
19. Information if Proxies, Consents or
Authorizations are not to be
Solicited or in an Exchange Offer............................................. Not Applicable
</TABLE>
<PAGE>
[Logo of Mizar, Inc. appears here]
MIZAR, INC.
2410 LUNA ROAD
CARROLLTON, TEXAS 75006
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY , 1998
----------------
To the Stockholders of
Mizar, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the "Annual
Meeting") of Mizar, Inc., a Delaware corporation ("Mizar"), will be held at
Mizar's executive offices located at 2410 Luna Road, Carrollton, Texas on
February , 1998, at 10:00 a.m., Central Standard Time, for the following
purposes:
(1) to consider and vote upon a proposal to issue approximately 8,441,000
shares of Common Stock, $.01 par value, of Mizar ("Mizar Common Stock"),
which includes approximately 599,000 shares underlying options, upon the
consummation of the transactions contemplated by that certain Share
Purchase Agreement, dated as of November 17, 1997 (the "Share Purchase
Agreement"), between Mizar and Loughborough Sound Images Limited (formerly
Loughborough Sound Images plc), a company registered in England and Wales
("LSI"), whereby Mizar will purchase (the "Share Exchange") the outstanding
capital stock of LSI in exchange for shares of Mizar Common Stock and
options exercisable therefor, as such Share Purchase Agreement and Share
Exchange are more particularly described in the enclosed Proxy
Statement/Prospectus;
(2) to consider and vote upon a proposed amendment to the Mizar, Inc.
Stock Option Plan to increase the number of shares of Mizar Common Stock
issuable upon exercise of stock options under the plan from 2,177,500
shares to 2,427,500 shares;
(3) to consider and vote upon an amendment to the Certificate of
Incorporation of Mizar to change its name from "Mizar, Inc." to "Blue Wave
Systems Inc.;"
(4) to consider and vote upon an amendment to the Certificate of
Incorporation of Mizar to increase the number of authorized shares of Mizar
Common Stock from 25 million to 50 million;
(5) to elect five directors to serve until the next Annual Meeting of
Stockholders and until their successors are elected; and
(6) to transact such other business as may properly come before the
Annual Meeting and any adjournment thereof.
Stockholders of record at the close of business on January 15, 1998 will be
entitled to receive notice of and to vote at the Annual Meeting and any
adjournments thereof. A form of proxy and a Proxy Statement/Prospectus
containing more detailed information with respect to the matters to be
considered at the Annual Meeting accompany and form a part of this notice.
<PAGE>
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING AND REGARDLESS OF THE
NUMBER OF SHARES YOU OWN, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED
PROXY AT YOUR EARLIEST CONVENIENCE IN THE ENCLOSED SELF-ADDRESSED, STAMPED
ENVELOPE. YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN PERSON, AND
IF YOU ATTEND YOU MAY WITHDRAW YOUR PROXY AND VOTE YOUR SHARES PERSONALLY.
By Order of the Board of Directors
John L. Rynearson
Secretary
January __, 1998
Carrollton, Texas
THE BOARD OF DIRECTORS OF MIZAR RECOMMENDS THAT YOU VOTE IN FAVOR OF THE
ISSUANCE OF THE REQUISITE NUMBER OF SHARES OF MIZAR COMMON STOCK AS CONTEMPLATED
BY THE SHARE PURCHASE AGREEMENT AND SHARE EXCHANGE, THE AMENDMENT TO THE MIZAR,
INC. STOCK OPTION PLAN, THE AMENDMENTS TO MIZAR'S CERTIFICATE OF INCORPORATION
TO CHANGE ITS CORPORATE NAME AND TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
MIZAR COMMON STOCK AND THE ELECTION OF EACH OF THE NOMINEES FOR DIRECTOR SET
FORTH IN THE ENCLOSED PROXY STATEMENT/PROSPECTUS.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+an offer to buy be accepted prior to the time the registration statement +
+becomes effective. This prospectus shall not constitute an offer to sell or +
+the solicitation of an offer to buy, nor shall there be any sale of these +
+securities in any state in which such offer, soliciation or sale would be +
+unlawful prior to registration or qualification under the securities laws of +
+any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS OF
MIZAR, INC.
----------------
PROSPECTUS
MIZAR, INC.
COMMON STOCK
----------------
This Proxy Statement is being furnished to stockholders of Mizar, Inc., a
Delaware corporation ("Mizar"), in connection with the solicitation of proxies
by the Board of Directors of Mizar for use at the Annual Meeting of
Stockholders to be held at 10:00 a.m., local time, on February , 1998, at
Mizar's executive offices located at 2410 Luna Road, Carrollton, Texas
(together with any adjournment or postponement thereof, the "Annual Meeting").
This document also constitutes a Prospectus of Mizar under the Securities
Act of 1933, as amended (the "Securities Act"), with respect to the shares of
common stock, $.01 par value per share (the "Mizar Common Stock"), of Mizar to
be issued or reserved for issuance to persons who hold all of the outstanding
securities issued by Loughborough Sound Images Limited (formerly Loughborough
Sound Images plc), a company registered in England and Wales ("LSI"). Shares
of Mizar Common Stock and options exercisable for shares of Mizar Common Stock
will be issued in exchange for all of the outstanding ordinary shares of LSI
and all options issued by LSI (the "Share Exchange") in accordance with the
Share Purchase Agreement, dated as of November 17, 1997 (the "Share Purchase
Agreement"), between Mizar and LSI. In addition, certain of the outstanding
preferred shares issued by LSI will be redeemed by LSI, and the rest of such
preferred shares will be purchased by Mizar at the time of the Share Exchange.
As a result of the Share Exchange, LSI will become a wholly owned subsidiary
of Mizar, and the former holders of ordinary shares, warrants and options of
LSI (the "LSI Shareholders") will own approximately 60% of the outstanding
shares of Mizar Common Stock, on a fully diluted basis.
The principal executive offices of Mizar are located at 2410 Luna Road,
Carrollton, Texas 75006, and its telephone number is (972) 277-4600. The
principal executive offices of LSI are located at Loughborough Park, Ashby
Road, Loughborough, Leicestershire, LE11 3NE, England, and its telephone
number is (44) 1509-634444.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. FOR A SUMMARY
OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY STOCKHOLDERS OF MIZAR (THE
"MIZAR STOCKHOLDERS") AND THE LSI SHAREHOLDERS, SEE "RISK FACTORS" BEGINNING
ON PAGE 13.
This Proxy Statement/Prospectus and the enclosed Proxy Card are first being
mailed to all Mizar stockholders of record on January 15, 1998, which is the
record date of the Annual Meeting (the "Record Date"), on or about January __,
1998.
THE SHARES OF MIZAR COMMON STOCK TO BE OFFERED IN CONNECTION WITH THE SHARE
EXCHANGE HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES AUTHORITY NOR HAS THE COMMISSION OR ANY
STATE SECURITIES AUTHORITY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS JANUARY , 1998.
<PAGE>
AVAILABLE INFORMATION
Mizar is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed with the Commission by Mizar under the
Exchange Act can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 or at the Regional Offices of the Commission, which are located as
follows: Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York,
New York 10048. Copies of such material can also be obtained from the
Commission at prescribed rates. Written requests for such material should be
addressed to the Public Reference Section, Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains
a Web site that contains reports, proxy statements and other information filed
electronically by Mizar with the Commission, which can be accessed over the
internet at http://www.sec.gov.
LSI is not subject to the informational requirements of the Exchange Act.
The Mizar Common Stock is listed and traded on the Nasdaq National Market
System (the "NMS"). Reports and other information concerning Mizar may also be
inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
Mizar has filed a Registration Statement on Form S-4 (the "Registration
Statement") with the Commission under the Securities Act with respect to the
shares of Mizar Common Stock that will be issued in the Share Exchange. As
permitted by the rules and regulations of the Commission, this Proxy
Statement/Prospectus omits certain information, exhibits, and undertakings
contained in the Registration Statement. Reference is made to the Registration
Statement and to the exhibits thereto for further information, which may be
inspected without charge at the office of the Commission at 450 Fifth Street,
N.W., Washington D.C., and copies of which may be obtained from the Commission
at prescribed rates. Statements contained in this Proxy Statement/Prospectus
relating to the contents of any contract or other document referred to herein
are not necessarily complete and, in each instance, reference is made to the
copy of such document filed as an exhibit to the Registration Statement. Each
such statement is qualified in its entirety by such reference.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN CONNECTION
WITH THE OFFERS MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY MIZAR.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER IN SUCH PERSON'S JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT, SINCE THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS, THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF MIZAR AND ITS
AFFILIATES OR OF LSI AND ITS AFFILIATES.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... ii
Summary of Proxy Statement/Prospectus..................................... 1
Risk Factors.............................................................. 13
Annual Meeting............................................................ 15
The Share Exchange........................................................ 16
Summary Comparison of Mizar Common Stock and LSI Stock.................... 30
Pro Forma Financial Information........................................... 36
Description of Mizar Capital Stock........................................ 44
Business of Mizar......................................................... 46
Market for and Dividends on Mizar Common Stock............................ 50
Mizar Selected Financial Data............................................. 51
Mizar Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 52
Business of LSI........................................................... 55
Absence of Market for and Dividends on LSI's Shares....................... 59
LSI Selected Consolidated Financial Data.................................. 60
LSI Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 61
Amendment to Mizar Stock Option Plan...................................... 64
Amendments to Mizar's Certificate of Incorporation........................ 68
Election of Directors..................................................... 68
Management................................................................ 69
Security Ownership of Certain Beneficial Owners and Management ........... 73
Certain Transactions...................................................... 75
Legal Opinions............................................................ 75
Experts................................................................... 75
Stockholders' Proposals for 1998 Annual Meeting........................... 75
Index to Financial Statements............................................. F-1
Appendix A--Share Purchase Agreement...................................... A-1
Appendix B--Opinion of Cowen & Company.................................... B-1
</TABLE>
iii
<PAGE>
SUMMARY OF PROXY STATEMENT/PROSPECTUS
The following is a summary of certain information contained elsewhere in this
Proxy Statement/Prospectus. The summary is necessarily incomplete and selective
and is qualified in its entirety by the more detailed information contained in
this Proxy Statement/Prospectus, including the appendices hereto. The term
"Mizar" refers to Mizar, Inc., and the term "LSI" refers to Loughborough Sound
Images Limited and its subsidiaries, unless the context otherwise requires. The
information contained herein regarding Mizar and its affiliates has been
provided by Mizar, and the information contained herein regarding LSI and its
affiliates has been provided by LSI.
This Proxy Statement/Prospectus contains various forward-looking statements
and information that are based on management's belief as well as assumptions
made by and information currently available to management. When used in this
document, the words "anticipate," "estimate," "project," "expect" and similar
expressions are intended to identify forward-looking statements. These forward-
looking statements involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of
Mizar or LSI to be materially different from any future results, performance or
achievements expressed or implied by these forward-looking statements. Among
the material factors known to Mizar and LSI are general economic and business
conditions, competition with other companies and the other factors set forth in
"Risk Factors."
RISK FACTORS
The Mizar Stockholders and the LSI Shareholders should carefully evaluate
certain risk factors relating to Mizar, the Mizar Common Stock offered in the
Share Exchange and the Share Exchange. See "Risk Factors."
PARTIES TO THE SHARE PURCHASE AGREEMENT
Mizar. Mizar designs, develops and markets multi-processor digital signal
processing ("DSP") computing sub-systems, which are used primarily for real-
time image and signal processing. Mizar's products are typically sold to
original equipment manufacturers in a variety of industries. Many of Mizar's
DSP-based product line are ruggedized products, capable of withstanding
extremes of temperature, shock, humidity and vibration. Mizar continues to sell
its prior generation of non-DSP computing sub-systems primarily to existing
commercial customers for industrial automation applications.
The principal executive offices of Mizar are located at 2410 Luna Road,
Carrollton, Texas 75006, and its telephone number is (972) 277-4600.
LSI. LSI designs, manufactures and markets a broad range of DSP products
targeted at the embedded computing market. These products are used by a wide
variety of commercial and industrial customers in application markets that
include telecommunications, test and measurement, industrial inspection and
medical imaging. LSI has offices in the United Kingdom (Loughborough, England),
France (Paris), Germany (Munich) and in the United States (Lexington,
Massachusetts).
The principal executive offices of LSI are located at Loughborough Park,
Ashby Road, Loughborough, Leicestershire, England, LE11 3NE, and its telephone
number is (44) 1509-634444.
SHARE EXCHANGE
Under the terms of the Share Purchase Agreement and the related Exchange
Agreements (as defined below), (i) holders of shares of LSI Stock (as defined
below) will receive 94.632 shares (the "Exchange Ratio") of Mizar Common Stock
for each share of LSI Stock sold to Mizar, (ii) holders of currently
outstanding options (the "LSI
1
<PAGE>
Options") granted by LSI under its option plans (the "LSI Option Plans") have
the choice of exercising their LSI Options for shares of LSI Stock, which will
then be exchanged for shares of Mizar Common Stock, or exchanging their LSI
Options for options issued by Mizar that are exercisable for Mizar Common Stock
(the "Mizar Options"), and the holder of the Preferred Shares (as defined
below) and the LSI Warrants (as defined below) will exercise the LSI Warrants
for shares of LSI Stock, which will then be exchanged for shares of Mizar
Common Stock in accordance with the Exchange Ratio. The proceeds received by
LSI upon exercise of the LSI Warrants will be used to redeem a portion of the
Preferred Shares, and any Preferred Shares not so redeemed will be purchased by
Mizar for a price per share equal to the redemption price of such shares. The
Share Purchase Agreement provides that the foregoing exchanges of the
outstanding securities of LSI will occur under separate security exchange
agreements (the "Exchange Agreements") governed by United Kingdom laws, which
will be entered into between Mizar and the LSI security holders. The offer by
Mizar to enter into the Exchange Agreements will be made by a separate offering
circular drafted in accordance with United Kingdom securities laws. As a result
of the Share Exchange, LSI will become a wholly owned subsidiary of Mizar, and
the LSI Shareholders will receive approximately 7,842,000 shares of Mizar Common
Stock and Mizar Options exercisable for approximately 599,000 shares of Mizar
Common Stock in exchange for their LSI Stock and LSI Options, which will
represent approximately 60% of the outstanding shares of Mizar Common Stock
after the Share Exchange, on a fully diluted basis.
LSI Ordinary Shares. LSI has issued and outstanding 62,747 "A" ordinary
shares, (Pounds)1 par value ("A Shares"), and 1 "B" ordinary share, (Pounds)1
par value ("B Shares") (all of the outstanding and issued A Shares and B Shares
are referred to as the "LSI Stock"). In addition, 6,335 A Shares are reserved
for issuance upon the exercise of the LSI Options. Under the terms of the Share
Purchase Agreement and the Exchange Agreements, each LSI Shareholder will
receive shares of Mizar Common Stock for each share of LSI Stock tendered to
Mizar in the Share Exchange on the basis of the Exchange Ratio.
LSI Warrants and Preference Shares. LSI has issued and outstanding 5,708,548
preference shares, (Pounds)0.75 par value (the "Preferred Shares"), all of
which are owned by Boston Holdings Limited ("Bank Holdings"). In addition, Bank
Holdings owns 1 outstanding B Share and warrants (the "LSI Warrants") to
subscribe for up to 20,115 B Shares. Mizar and Bank Holdings intend to enter
into an Exchange Agreement pursuant to which Bank Holdings will exercise the
LSI Warrants for shares of LSI Stock, which, together with its outstanding B
Share, will then be exchanged for shares of Mizar Common Stock pursuant to the
Share Exchange. All of the proceeds received by LSI upon exercise of the LSI
Warrants will be used to redeem Preferred Shares, and any Preferred Shares
outstanding after such redemption will be purchased by Mizar for a price per
share equal to the redemption price of such shares (which shall include accrued
and unpaid dividends thereon).
LSI Options. Mizar intends to enter into Exchange Agreements with the holders
of the LSI Options. Under the terms of these Exchange Agreements, holders of
LSI Options may either (i) exercise their LSI Options for shares of LSI Stock
immediately prior to the Share Exchange, which will then be exchanged for Mizar
Common Stock in accordance with the Exchange Ratio, or (ii) exchange their LSI
Options for options issued by Mizar (the "Mizar Options"). The Mizar Options
will be on substantially the same terms as the LSI Options, except that (i) the
holder of each Mizar Option, upon its exercise in accordance with its terms,
will be entitled to receive that whole number of shares of Mizar Common Stock
(rounded to the nearest whole share) into which the number of shares of LSI
Stock subject to the LSI Option exchanged for such Mizar Option would be
exchanged for based upon the Exchange Ratio, and (ii) the exercise price per
share of Mizar Common Stock under the Mizar Options shall be equal to the
exercise price per share of LSI Stock applicable to such LSI Option immediately
prior to the Share Exchange, divided by the Exchange Ratio, and converted into
U.S. dollars. The Mizar Options will reflect the fact that a triggering event
has occurred under the LSI Options as a result of the Share Exchange.
Mizar's Rights to Purchase Remaining Minority Shares. In the event that more
than 90%, but less than 100%, of LSI's ordinary shares (including shares
issuable under the LSI Options) are tendered to Mizar in the Share Exchange,
Mizar intends to purchase compulsorily any such remaining shares held by
minority shareholders in accordance with the provisions of section 428-430F of
the Companies Act 1985 (as amended by the Companies Act 1989). In respect of
any class of shares to which the Share Exchange relates and for which Mizar has
received acceptance in respect of not less than 90% of such shares within the
four months beginning with the date of Mizar's offer to the LSI Shareholders
(which is estimated to begin on January __, 1998, at the time of the posting of
the United Kingdom offering circular describing such offer), Mizar may give
notice under section 429 to the holders of the remaining shares of that class
that it desires to acquire the remaining shares. Serving such notice under
section 429 entitles and binds Mizar to acquire any outstanding shares of LSI
that are subject of the notice on the same conditions on which the other LSI
Shareholders were offered under the terms of the Share Exchange. At the end of
six weeks from the date of service of such Notice, Mizar is required to (i) send
a copy of the notice to LSI, (ii) allot the shares of Mizar Common Stock which
are the consideration for the acquisition of the shares subject to the notice to
LSI, which shall be held by LSI in trust for the minority shareholders entitled
to them, and (iii) send to LSI instruments of transfer in respect of the shares
that are the subject of the notice. Upon receipt of the foregoing, LSI will then
register Mizar as the holder of the shares that are subject of the notice. See
"The Share Exchange -- Share Exchange - Mizar's Rights to Purchase Remaining
Minority Shares."
ANNUAL MEETING
Date, Time and Place. The Annual Meeting will be held at Mizar's executive
offices located at 2410 Luna Road, Carrollton, Texas, on February __, 1998, at
10:00 a.m., local time.
2
<PAGE>
Record Date; Quorum. Only Mizar Stockholders of record at the close of
business on the Record Date will be entitled to notice of, and to vote at, the
Annual Meeting. On the Record Date, there were 5,135,976 shares of the Mizar
Common Stock outstanding and entitled to vote at the Annual Meeting. Each Mizar
Stockholder is entitled to one vote for each share of Mizar Common Stock owned
by such Mizar Stockholder, exercisable in person or by properly executed and
delivered proxy, at the Annual Meeting. The presence of the holders of at least
a majority of the shares of the Mizar Common Stock outstanding on the Record
Date, whether present in person or by properly executed and delivered proxy,
will constitute a quorum for purposes of the Annual Meeting.
Matters to be Voted Upon. At the Annual Meeting, the Mizar Stockholders will
be asked to approve a proposal which authorizes the issuance of approximately
8,441,000 shares of Mizar Common Stock pursuant to the Share Exchange, including
approximately 599,000 shares reserved for issuance under Mizar Options issued in
the Share Exchange and to elect five directors to serve until the next Annual
Meeting of Stockholders and until their successors are elected. In addition, the
Mizar Stockholders will be asked to approve and adopt (i) an amendment to the
Mizar, Inc. Stock Option Plan (the "Mizar Option Plan") to increase the number
of shares of Mizar Common Stock subject to such plan from 2,177,500 shares to
2,427,500 shares and (ii) two amendments to Mizar's Certificate of
Incorporation, one to change Mizar's corporate name to "Blue Wave Systems Inc."
and the other to increase the number of authorized shares of Mizar Common Stock
from 25 million to 50 million.
Votes Required. At the Annual Meeting, the affirmative vote of the holders of
at least a majority of the shares of Mizar Common Stock represented in person or
by proxy at the Annual Meeting is required to elect the director nominees, to
approve the issuance of the shares of Mizar Common Stock pursuant to the
transactions contemplated by the Share Exchange and related Share Purchase
Agreement and to approve and adopt the amendment to the Mizar Option Plan. The
affirmative vote of the holders of at least a majority of the shares of Mizar
Common Stock outstanding on the Record Date is required to approve the
amendments to Mizar's Certificate of Incorporation to change its name to "Blue
Wave Systems Inc." and to increase the number of authorized shares of Mizar
Common Stock to 50 million. The directors and executive officers of Mizar and
their affiliates (who in the aggregate beneficially owned approximately 29% of
the outstanding shares of Mizar Common Stock as of January , 1998) have advised
Mizar that they will vote their shares in favor of the proposals being presented
to the Mizar Stockholders at the Annual Meeting. See "Annual Meeting."
RECOMMENDATION OF BOARD OF DIRECTORS OF MIZAR
THE BOARD OF DIRECTORS OF MIZAR BELIEVES THAT THE SHARE EXCHANGE IS IN THE
BEST INTERESTS OF THE MIZAR STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE FOR THE ISSUANCE OF THE SHARES OF MIZAR COMMON STOCK AS
CONTEMPLATED BY THE SHARE PURCHASE AGREEMENT. See "The Share Exchange--
Background of the Share Exchange" and "The Share Exchange--Mizar's Reasons for
the Share Exchange." THE BOARD OF DIRECTORS OF MIZAR ALSO UNANIMOUSLY RECOMMENDS
THAT STOCKHOLDERS VOTE FOR THE ELECTION OF THE NOMINEES FOR DIRECTOR, THE
AMENDMENT TO THE MIZAR OPTION PLAN TO INCREASE THE NUMBER OF SHARES AVAILABLE
UNDER THE PLAN AND FOR THE AMENDMENTS TO MIZAR'S CERTIFICATE OF INCORPORATION TO
CHANGE ITS CORPORATE NAME AND INCREASE THE NUMBER OF AUTHORIZED SHARES OF MIZAR
COMMON STOCK.
OPINION OF FINANCIAL ADVISOR OF MIZAR
Cowen & Company ("Cowen") has delivered its written opinion, dated as of
November 10, 1997, to the Board of Directors of Mizar to the effect that, as of
the date of its opinion, the financial terms of the Share Exchange are fair to
Mizar from a financial point of view. A copy of the opinion of Cowen, which
sets forth the assumptions made, procedures followed, other matters considered
and limits of Cowen's review, is attached to this Proxy Statement/Prospectus as
Appendix B and should be read in its entirety. See "The Share Exchange--
Fairness Opinion of Cowen & Company."
3
<PAGE>
CHANGE OF CONTROL; MIZAR BOARD OF DIRECTORS
As a result of the Share Exchange and related Share Purchase Agreement, the
former LSI Shareholders will beneficially own approximately 60% of the
outstanding shares of Mizar Common Stock on a fully diluted basis.
LSI and Mizar agreed in the Share Purchase Agreement to use their reasonable
best efforts to choose a mutually acceptable slate of nominees to the Mizar
Board of Directors and mutually acceptable Board of Directors for LSI and to
cause both current Boards of Directors to take all action necessary to cause the
Board of Directors of Mizar and LSI, as applicable, to be increased or decreased
as necessary, and take all such other actions as they deem necessary, to cause
the persons so chosen to be nominated for the Mizar and LSI Boards of Directors.
Mizar and LSI have agreed to nominate the following five persons for election to
the Mizar Board of Directors: Simon Yates, Sam Smith, John Forrest, Rob Shaddock
and David Irwin.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
Mizar Stockholders are not entitled to dissenters' rights or an appraisal of
their shares in connection with the issuance of shares under the Share Exchange
and related Share Purchase Agreement because, among other things, the Mizar
Stockholders will not exchange or otherwise relinquish any shares of Mizar
Common Stock as a result of the Share Exchange.
FEDERAL INCOME TAX CONSEQUENCES
LSI security holders who are not U.S. citizens will not be subject to taxation
under the U.S. income tax laws. Mizar Stockholders will not recognize any
taxable gains as a result of the Share Exchange. See "The Share Exchange--
Federal Income Tax Consequences."
EFFECTIVE TIME OF THE SHARE EXCHANGE
It is currently contemplated that the Share Exchange will be consummated as
soon as practicable after the Annual Meeting (the "Effective Time").
CONDITIONS TO THE SHARE EXCHANGE
Each party's obligation to effect the Share Exchange is subject to the
satisfaction of a number of conditions, most of which may be waived by a
specified party or parties. The most significant conditions to consummate the
Share Exchange include (i) no material adverse effect having occurred to
Mizar's or LSI's business, operations, assets or financial condition or to
either party's ability to consummate the transactions contemplated by the Share
Purchase Agreement, (ii) Mizar and LSI obtaining all consents and approvals,
including the listing of the shares of Mizar Common Stock to be issued in the
Share Exchange on the NMS, (iii) holders of at least 90% of the outstanding LSI
Stock (after giving effect to the exercise of the LSI Warrants and the LSI
Options prior to the Effective Time) validly tendering their shares to Mizar
pursuant to validly executed Exchange Agreements, (iv) the Mizar Stockholders
approving the issuance of the shares of Mizar Common Stock to be issued in the
Share Exchange, (v) the representations and warranties of each party being true
and correct in all material respects as of the Effective Time, except for
certain changes that are specifically permitted by the Share Purchase
Agreement, (vi) Mr. Simon Yates, the Managing Director of LSI, being elected as
the Chief Executive Officer of Mizar, (vii) Bank Holdings exercising the LSI
Warrants and tendering any unredeemed Preferred Shares to Mizar in accordance
with the applicable Exchange Agreement, (viii) the Board of Directors of Mizar
being set as
4
<PAGE>
described in "--Board of Directors" above, and (ix) certain pooling related
letters being issued by each of Arthur Andersen LLP, independent auditors for
Mizar, and Price Waterhouse, independent accountants for LSI; provided, that
Mizar has agreed that if those letters are not delivered by the accountants,
Mizar will seek an opinion of a financial advisor that the financial terms of
the Share Exchange would be fair to Mizar if the Share Exchange is accounted
for as a purchase rather than a pooling of interests.
Even if the Mizar Stockholders approve the proposals related to the Share
Exchange, there can be no assurance that the Share Exchange will be
consummated.
MARKET, DIVIDEND AND SHARE PRICE INFORMATION
The Mizar Common Stock is traded on the NMS (symbol: MIZR). The following
table sets forth the high and low sales prices for the periods indicated since
Mizar's initial public offering of Mizar Common Stock on September 28, 1995.
<TABLE>
<CAPTION>
FISCAL YEAR HIGH LOW
----------- ---- ---
<S> <C> <C>
1996
First Quarter (9/28/95 to 9/30/95).......................... 9 1/2 9
Second Quarter.............................................. 9 1/2 8 1/8
Third Quarter............................................... 8 3/4 5
Fourth Quarter.............................................. 8 5
1997
First Quarter............................................... 7 3 3/4
Second Quarter.............................................. 5 7/8 4
Third Quarter............................................... 5 1/8 3 3/4
Fourth Quarter.............................................. 3 7/8 2 3/4
1998
First Quarter............................................... 7 3/8 3 3/8
Second Quarter.............................................. 7 1/4 5 1/2
Third Quarter (through 1/7/98).............................. 6 4 7/8
</TABLE>
On November 19, 1997, the last trading day prior to the issuance of a press
release by Mizar stating that it had executed the Share Purchase Agreement, the
closing price per share of the Mizar Common Stock as reported on the NMS was
$6.125. On January __, 1998, the last trading day prior to printing of this
Proxy Statement/Prospectus, the closing price per share of the Mizar Common
Stock as reported on the NMS was $__.
On the Record Date, there were approximately 1,500 beneficial holders of the
Mizar common stock, of which approximately 65 were record holders. No dividends
have been paid to date on the shares of Mizar Common Stock.
No active trading market exists for any of the shares of any class of capital
stock of LSI.
5
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables set forth certain unaudited pro forma combined condensed
and historical financial data for Mizar and LSI. The following data gives
effect to the Share Exchange under the pooling-of-interests method of
accounting as if those events had occurred on July 1, 1994 with respect to the
statement of operations data, and on September 30, 1997 with respect to the
balance sheet data. For further information on the manner in which the summary
pro forma financial information was derived, see "Pro Forma Financial
Statements." The following data should be read in conjunction with the
respective financial statements and notes thereto of Mizar (which have been
incorporated by reference) and LSI and with the pro forma financial statements
and notes thereto appearing elsewhere in this Proxy Statement/Prospectus.
The unaudited pro forma combined condensed financial information is presented
for illustrative purposes only and is not necessarily indicative of the
operating results or financial position that could have occurred if the Share
Exchange had been consummated on such dates, nor is it necessarily indicative
of future operating results or financial position.
6
<PAGE>
MIZAR, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------- ---------------
1995 1996 1997 1996 1997
------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales........................... $32,043 $35,194 $34,388 $8,374 $10,286
Cost of sales....................... 14,110 15,778 15,295 3,764 4,205
------- ------- ------- ------ -------
Gross margin........................ 17,933 19,416 19,093 4,610 6,081
Operating expenses:
Product development & engineering. 5,414 4,980 6,451 1,304 1,705
Sales and marketing............... 4,728 5,040 5,740 1,338 1,835
General and administrative........ 3,230 4,281 6,696 1,482 1,512
Loss on assets held for sale...... 204 -- -- -- --
------- ------- ------- ------ -------
Total operating expenses........ 13,576 14,301 18,887 4,124 5,052
------- ------- ------- ------ -------
Operating income.................... 4,357 5,115 206 486 1,029
Interest and other income........... 117 491 611 138 148
Interest expense.................... (447) (419) (205) (76) --
Other, net.......................... 539 68 77 18 32
------- ------- ------- ------ -------
Income from continuing operations
before provision for income taxes.. 4,566 5,255 689 566 1,209
Provision for income taxes.......... 899 291 397 81 193
------- ------- ------- ------ -------
Income from continuing operations... $ 3,667 $ 4,964 $ 292 $ 485 $ 1,016
======= ======= ======= ====== =======
Net income per share from continuing
operations:
Primary........................... $ 0.36 $ 0.41 $ 0.02 $ 0.04 $ 0.08
======= ======= ======= ====== =======
Fully diluted..................... $ 0.32 $ 0.41 $ 0.02 $ 0.04 $ 0.08
======= ======= ======= ====== =======
</TABLE>
7
<PAGE>
MIZAR, INC.
SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash and cash equivalents............................................... $2,943
Marketable securities, at fair value.................................... 4,060
Total current assets.................................................... 23,360
Total assets............................................................ 27,916
Total liabilities....................................................... 12,624
Total stockholders' equity.............................................. 15,292
</TABLE>
8
<PAGE>
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma combined financial statements give effect to the
business combination between Mizar and LSI accounted for on a pooling-of-
interests basis. The pro forma combined financial statements are based on the
respective historical financial statements and the notes thereto. The pro forma
combined balance sheet combines Mizar's and LSI's balance sheet as of September
30, 1997. The pro forma combined statements of operations combine Mizar's and
LSI's historical statements of operations for each of the three years in the
period ended June 30, 1997 and September 30, 1997, respectively, and the
unaudited statements of operations for the three months ended September 30,
1997 and September 30, 1996. LSI's historical statements of operations for the
years ended September 30, 1997 and 1996 include the same unaudited statement of
operations information presented for the three months ended September 30, 1997
and 1996.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the business combination had been consummated at the
beginning of the periods presented nor is it necessarily indicative of future
operating results or financial position.
These pro forma combined financial statements should be read in conjunction
with the historical financial statements and the related notes thereto of Mizar
and LSI included or incorporated elsewhere herein. See "Index to Financial
Statements."
Adjustments to the pro forma statements of operations assume the business
combination of Mizar and LSI was consummated on July 1, 1994, and the pro forma
combined balance sheet assumes the business combination was consummated as of
September 30, 1997. The business combination has been accounted for using the
pooling-of-interests method of accounting. The following adjustments have been
provided in connection with the business combination in accordance with
Accounting Principles Board Opinion No. 16:
1) Reflecting the redemption of Preferred Shares held by Bank Holdings
and the elimination of related interest expense. The amount of the
redemption is $9,250,000 and is reflected as a reduction in
marketable securities and as a reduction in the number of outstanding
Preferred Shares and retained earnings.
2) The exercise of warrants for ordinary shares in LSI held by Bank
Holdings. This adjustment is reflected as a $19,000 increase in common
stock, a $5,360,000 increase in paid-in-capital and a $5,379,000
increase in marketable securities. The issuance of shares of Mizar
Common Stock in exchange for the outstanding shares of LSI is reflected
as a $59,000 increase in common stock and a decrease in paid-in-capital.
<TABLE>
<CAPTION>
Proforma Adjustments
Marketable Securities Accrued Liabilities Preference Shares
--------------------- ------------------- -----------------
Debit Credit Debit Credit Debit Credit
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adjustment 1 -- (9,250) -- -- 9,250
(688)
(389)
Adjustment 2 5,379 -- -- -- --
Adjustment 3 -- -- -- (2,500) -- --
Adjustment 4 -- -- -- -- -- --
Total 5,379 (9,250) -- (2,500) 9,250 (1,077)
===== ====== ===== ====== ===== ======
Net Adjustment -- (3,871) -- (2,500) 8,173 --
===== ====== ===== ====== ===== ======
<CAPTION>
Common Stock Additional Paid-in Capital Retained Earnings
------------------- -------------------------- -----------------
Debit Credit Debit Credit Debit Credit
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adjustment 1
-- -- -- -- 688 --
389
Adjustment 2 -- (19) 59 (5,360)
(59)
Adjustment 3 -- -- -- 2,500 --
Adjustment 4 -- -- -- (3,500) 3,500 --
Total -- (78) 59 (8,860) 7,077 --
===== === ===== ====== ===== =====
Net Adjustment -- (78) -- (8,801) 7,077 --
===== === ===== ====== ===== =====
</TABLE>
3) The accrual of expenses related to the business combination of
$2,500,000. This accrual is reflected as an increase in accounts
payable and a reduction in retained earnings. This charge will be
reflected as an expense in the first accounting period immediately
following the consummation of the business combination.
4) Retained earnings has been decreased and paid in capital has been
increased for a $3,500,000 compensation expense related to certain
variable options of LSI. This non-cash charge will be reflected as an
expense in the first accounting period immediately following the
consummation of the combination.
9
<PAGE>
MIZAR, INC.
SUMMARY HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents selected historical financial data for Mizar for
each of the three fiscal years ended June 30, 1997, and for the three months
ended September 30, 1996 and 1997. The data presented is derived from the
financial statements of Mizar and should be read in conjunction with the more
detailed information and financial statements and notes thereto, of Mizar,
which are included elsewhere in this Proxy Statement/Prospectus. In the opinion
of the management of Mizar, the interim financial information includes all
adjustments (consisting only of normal recurring accruals) that are considered
necessary for a fair presentation of the results of operations for such
periods. Results for the interim periods are not necessarily indicative of
results for the year.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------- -------------
1995 1996 1997 1996 1997
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales............................. $14,018 $14,052 $11,507 $3,025 $3,203
Cost of sales......................... 6,330 6,680 5,929 1,380 1,555
------- ------- ------- ------ ------
Gross margin.......................... 7,688 7,372 5,578 1,645 1,648
Operating expenses:
Product development & engineering... 1,577 1,652 2,660 474 571
Sales and marketing................. 2,352 2,385 1,780 464 520
General and administrative.......... 872 968 1,522 351 353
------- ------- ------- ------ ------
Total operating expenses ......... 4,801 5,005 5,962 1,289 1,444
------- ------- ------- ------ ------
Operating income (loss)............... 2,887 2,367 (384) 356 204
Interest and other income (expense)... (102) 400 595 135 146
------- ------- ------- ------ ------
Income before provision (benefit) for
income taxes......................... 2,785 2,767 211 491 350
Provision (benefit) for income taxes.. 131 (507) 32 52 35
------- ------- ------- ------ ------
Net income............................ $ 2,654 $ 3,274 $ 179 $ 439 $ 315
======= ======= ======= ====== ======
Net income per share:
Primary............................. $ 0.68 $ 0.62 $ 0.03 $ 0.08 $ 0.06
======= ======= ======= ====== ======
Fully diluted....................... $ 0.56 $ 0.60 $ 0.03 $ 0.08 $ 0.06
======= ======= ======= ====== ======
Weighted average shares outstanding:
Primary............................. 3,912 5,316 5,475 5,579 5,404
======= ======= ======= ====== ======
Fully diluted....................... 4,915 5,532 5,475 5,579 5,458
======= ======= ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................................... $ 1,993
Marketable securities............................................. 7,931
Working capital................................................... 13,848
Total assets...................................................... 16,928
Total debt and capital leases..................................... --
Stockholders' equity.............................................. 14,776
</TABLE>
10
<PAGE>
LOUGHBOROUGH SOUND IMAGES LIMITED
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table presents selected historical consolidated financial data
for LSI for each of the three fiscal years ended September 30, 1997, and the
three months ended September 30, 1996 and 1997. The data presented is derived
from the consolidated financial statements of LSI and should be read in
conjunction with the more detailed information and consolidated financial
statements and notes thereto, of LSI, which are included elsewhere in this
Proxy Statement/Prospectus. In the opinion of the management of LSI, the
interim financial information includes all adjustments (consisting only of
normal recurring accruals) that are considered necessary for a fair
presentation of the results of operations for such periods. Results for the
interim periods are not necessarily indicative of results for the year. LSI's
consolidated financial statements have been translated from British pound
sterling to United States dollars ($), in accordance with the provisions of FAS
52. The consolidated statement of operations have been translated at an average
exchange rate for each period presented and the consolidated balance sheets
have been translated at a year-end rate for the date presented.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED SEPTEMBER ENDED
30, SEPTEMBER 30,
------------------------- ----------------
1995 1996 1997 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERA-
TIONS DATA:
Net sales......................... $18,025 $21,142 $22,881 $ 5,349 $ 7,083
Cost of sales..................... 7,780 9,098 9,366 2,384 2,650
------- ------- ------- ------- -------
Gross margin...................... 10,245 12,044 13,515 2,965 4,433
Operating expenses:
Product development &
engineering.................... 3,837 3,328 3,791 830 1,134
Sales and marketing............. 2,376 2,655 3,960 874 1,315
General and administrative...... 2,358 3,313 5,174 1,131 1,159
Loss on disposal of asset....... 204 -- -- -- --
------- ------- ------- ------- -------
Total operating expenses ..... 8,775 9,296 12,925 2,835 3,608
------- ------- ------- ------- -------
Operating income.................. 1,470 2,748 590 130 825
Interest and other income (ex-
pense):
Interest expense................ (238) (339) (205) (76) --
Interest income................. 5 6 16 3 2
Other, net...................... 544 73 77 18 32
------- ------- ------- ------- -------
Total other income (expense)...... 311 (260) (112) (55) 34
------- ------- ------- ------- -------
Income before provision for income
taxes............................ 1,781 2,488 478 75 859
Provision for income taxes........ 768 798 365 29 158
------- ------- ------- ------- -------
Income from continuing operations. 1,013 1,690 113 46 701
Loss for discontinued operations.. (1,179) (1,341) (1,248) (92) (137)
------- ------- ------- ------- -------
Net income (loss)................. $ (166) $ 349 $(1,135) $(46) $ 564
======= ======= ======= ======= =======
Net income (loss)................. $ (166) $ 349 $(1,135) $(46) $ 564
Preference share dividends,
accretion and amortization of
issuance costs of preference
shares........................... -- -- (874) -- (437)
------- ------- ------- ------- -------
Net income (loss) available to or-
dinary shareholders.............. $ (166) $ 349 $(2,009) $ (46) $ 127
======= ======= ======= ======= =======
Net income (loss) per share:
Continuing operations........... $ 16.21 $ 27.04 $(12.79) $ 0.74 $ 4.67
Discontinued operations......... (18.86) (21.46) (20.98) (1.47) (2.42)
------- ------- ------- ------- -------
$ (2.65) $ 5.58 $(33.77) $ (0.73) $ 2.25
======= ======= ======= ======= =======
Weighted average shares outstand-
ing.............................. 62,500 62,500 59,499 62,500 56,498
======= ======= ======= ======= =======
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................................... $ 950
Working capital................................................... 4,701
Total assets...................................................... 14,859
Total debt and capital leases..................................... 1,092
Mandatorily redeemable preference shares.......................... 8,173
Stockholders' equity.............................................. (1,286)
</TABLE>
COMPARATIVE PER SHARE DATA
The following tables set forth unaudited data concerning the net income
(loss) per share and book value per common share for Mizar and LSI (i) on a
combined pro forma basis after giving effect to the Share Exchange, (ii) on a
historical basis for Mizar, (iii) on a historical basis for LSI per equivalent
share of Mizar Common Stock to be issued in the Share Exchange for the capital
stock of LSI (as though such shares had been issued at the beginning of the
period), and (iv) on a historical basis for LSI. The following comparative per
share data should be read in conjunction with the historical financial
statements of Mizar, the historical consolidated financial statements of LSI
and the Pro Forma Financial Statements, appearing elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
(MIZAR)
THREE MONTHS AND SEPTEMBER 30
ENDED (LSI)
SEPTEMBER 30, ---------------------
1997 1995 1996 1997
------------- ------ ------ -------
<S> <C> <C> <C> <C>
Net Income (Loss) Per Share:
Mizar--Primary........................... $ .06 $ .68 $ .62 $ .03
--Fully Diluted....................... .06 .56 .60 .03
LSI--From Continuing Operations.......... 4.67 16.21 27.04 (12.79)
LSI Equivalent Pro Forma................. 7.57 30.28 38.80 1.89
Pro Forma Combined....................... .08 .32 .41 .02
Book Value Per Share:
Mizar.................................... $ 2.88 -- -- $ 3.05
LSI...................................... (22.76) -- -- (22.76)
LSI Equivalent Pro Forma................. 114.50 -- -- 111.67
Pro Forma Combined....................... 1.21 -- -- 1.18
</TABLE>
12
<PAGE>
RISK FACTORS
The Mizar Stockholders and LSI Shareholders should carefully evaluate all of
the information contained and incorporated by reference in this Proxy
Statement/Prospectus, and in addition, should carefully consider the following
factors relating to Mizar, LSI and the Share Exchange:
Technological Change. The market for high performance computer sub-systems
and components has traditionally experienced short product life cycles and
rapid technological change, requiring high levels of expenditures for research
and development. Although Mizar has been engaged in serving the real-time
image processing market for several years, it has incorporated multi processor
DSP architecture into its product line only since fiscal 1993. Mizar has
introduced several DSP products during the past five years and, in order to
retain its competitive position, must continue after the Share Exchange to
enhance its existing products and LSI's products and must successfully develop
and introduce new products. In the event Mizar does not continue to
incorporate new advances in DSP technology into its products, Mizar's business
will be adversely affected.
Quarterly Fluctuations. Mizar's and LSI's quarterly financial results may
vary significantly depending upon factors such as the timing of significant
orders and the timing and success of new product introductions by Mizar and
LSI and their competitors. In the most recent fiscal year, Mizar's business
has been increasingly dominated by longer customer contracts, and LSI is
increasingly entering into larger volume customer contracts. Therefore, the
loss of a single contract, or the change in delivery schedules thereunder, can
significantly affect quarterly financial results. Factors such as quarterly
variations in financial results could cause the market price of the Mizar
Common Stock to fluctuate substantially.
Integration of Mizar and LSI Operations. Mizar and LSI may not be able to
successfully integrate their operations, facilities and management following
the completion of the Share Exchange. Such integration could also have an
adverse effect upon Mizar and LSI's respective relationships with customers
and suppliers. The diversion of management time towards such integration may
also adversely affect customer support of existing products and the
development of new products.
Defense Industry Customer Concentration. Mizar's DSP products have been sold
primarily for defense electronics applications. The federal government has
reduced overall defense spending and, in certain cases, delayed or deferred
funding for defense applications, which in turn has, in certain occasions,
adversely affected Mizar's revenues. Mizar believes, however, that reduced
defense spending has increased the demand for efficiency and for upgraded
electronics in new and existing defense electronics systems. There can be no
assurance that continued defense cutbacks would not adversely affect Mizar's
customers and its business. Additionally, there has been extensive
consolidation of companies in the defense industry, and further consolidation
is possible in the future. There can be no assurance that such consolidation
will not adversely affect Mizar. The completion of the Share Exchange will
lessen this customer concentration.
Relationship with TI DSEG/Raytheon Company. Several of Mizar's current DSP
products are marketed pursuant to licenses granted by Texas Instrument's Defense
Systems and Electronics Group ("TI DSEG"), which is now a subsidiary of Raytheon
Company. Mizar has entered into a series of license agreements with TI DSEG
relating to the design of several DSP products. These licenses are exclusive,
perpetual and world wide, subject to Mizar's payment of required royalties and
performance of its other obligations under the licenses. In fiscal 1997, the
royalty expense related to these licenses was approximately $225,000. The
royalties due pursuant to the majority of these licensing agreements were fully
paid up in fiscal 1997. None of the licenses restrict Mizar from developing
independently non-licensed designs on a non-royalty basis or allowing the
development of designs based on DSP microprocessors from other suppliers. The
licensing agreements with TI DSEG have been very beneficial to Mizar and were
instrumental to Mizar's entry into the DSP computing sub-system business. These
licenses are subject to several restrictions and requirements, and the
termination of one or more of these licenses could adversely affect Mizar's
business. Additionally, TI DSEG is under no obligation to offer licenses to
Mizar with respect to new products developed by TI DSEG. LSI does not operate
under product design licenses from TI DSEG, but has entered into commercially
available, non-exclusive software user license agreements with Texas Instruments
and its affiliates, none of which would materially adversely affect LSI if
terminated.
Commercial Market Uncertainties. Although Mizar has historically served
commercial accounts in its non-DSP business, Mizar has limited experience in
the marketing and sales of DSP products to commercial customers. Because
Mizar's product line is focused towards highly complex and ruggedized
products, these products may not be cost competitive for many emerging
commercial applications. Many of the commercial applications may require
product volumes which are higher than those required by Mizar's defense
customers. LSI's experience with commercial customers is expected to benefit
Mizar if the Share Exchange is consummated.
13
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Dependence upon Suppliers and Subcontractors. All of Mizar's products
incorporate electronic components available from a limited number of sources. In
the event of shortages of any of the single source components, Mizar would be
severely impacted. The vendors of these single source components include Texas
Instruments, Cypress Semiconductor, Linear Technology, Matsushita, Motorola,
Philips, Quality Semiconductor, Quick Logic, Advanced Interconnection Technology
and Xilinx. In addition, neither Mizar nor LSI has internal manufacturing
capability. In the event that one or more of the several qualified
subcontractors currently used by Mizar should cease operations or become unable
or unwilling to handle Mizar's requirements, Mizar may be adversely affected. In
addition, approximately 60% of LSI's products are based on processors supplied
by Texas Instruments or software licensed from them. Other semiconductor
manufacturers produce DSP processors with similar functionality to those
manufactured by Texas Instruments. Because of LSI's relationships with other DSP
processor vendors, substitute products are generally available for most
applications. However, because LSI's products are designed specifically to
utilize a particular device, the ability to switch manufacturers would be
limited by the necessity and expense of modification of each product.
Dependence on Key Personnel. Mizar and LSI are dependent on their key sales
and technical personnel. Mizar's future success will also depend, in part, on
its ability to attract and retain highly qualified personnel, which are in
high demand in the job marketplace. There can be no assurance that Mizar will
be successful in hiring or retaining qualified personnel. The loss of key
personnel, or inability to hire and retain qualified personnel, could have an
adverse effect on Mizar's business, financial condition and results of
operations. Mizar does not have key-person life insurance on any of its
personnel.
Competition. Mizar participates in a highly competitive industry, which is
subject to rapid and innovative technological change. There can be no
assurance that future technological changes or the development of new or
competitive products by others will not render Mizar's or LSI's current or
planned products less competitive or obsolete. Additionally, many of the
companies with which Mizar competes have significantly greater financial and
other resources than Mizar.
Year 2000 Compliance. Currently, there is significant uncertainty in the
software industry and among software users regarding the impact of the year 2000
on installed software. Software database modifications, and/or implementation
modifications, will be required to enable such software to distinguish between
21st and 20th century dates. Mizar uses third-party system software which will
need to be modified or replaced in order to address Year 2000 compliance. Mizar
considers the cost to become Year 2000 complaint to be a normal operating cost
necessary to periodically upgrade system software.
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ANNUAL MEETING
The Annual Meeting will be held at Mizar's executive offices located at 2410
Luna Road, Carrollton, Texas, at 10:00 a.m., local time, on February __, 1998
The enclosed proxy being sent to the Mizar Stockholders is being solicited on
behalf of the Board of Directors of Mizar for use at the Annual Meeting and any
adjournment thereof.
Matters To Be Voted On. At the Annual Meeting the Mizar Stockholders will be
asked to approve the issuance of approximately 8,441,000 shares of Mizar Common
Stock (includes approximately 599,000 shares issuable under Mizar Options) in
accordance with the Share Exchange and the related Share Purchase Agreement. In
addition, the Mizar Stockholders will be asked (i) to approve and adopt an
amendment to the Mizar Option Plan to increase the number of shares subject to
such plan from 2,177,500 shares to 2,427,500 shares and (ii) to approve two
amendments to the Certificate of Incorporation of Mizar, one to change its
corporate name to "Blue Wave Systems Inc." and a second to increase the
authorized shares of Mizar Common Stock to 50 million. Finally, the Mizar
Stockholders will be asked to elect five directors to serve until the next
Annual Meeting of Stockholders, or until their successors are elected and
qualified. In addition, any other business as may properly come before the
Annual Meeting will be considered and the persons named in the proxies will
vote in accordance with their judgment on such business. The Board of Directors
of Mizar knows of no such other business that will be brought before the Annual
Meeting as of the date of this Proxy Statement/Prospectus.
Record Date. Mizar has set the Record Date for the determination of
stockholders entitled to receive notice of and to vote at the Annual Meeting as
the close of business on January 15, 1998. As of the Record Date, 5,135,976
shares of the Mizar Common Stock were outstanding and entitled to vote at the
Annual Meeting.
Required Vote. A majority of the Mizar Common Stock outstanding on the Record
Date will constitute a quorum for the transaction of business at the Annual
Meeting. Each share of Mizar Common Stock outstanding on the Record Date is
entitled to one vote. The affirmative votes of a majority of the shares of Mizar
Common Stock represented in person or by proxy at the Annual Meeting will be
required to approve (i) the issuance of the shares of Mizar Common Stock
pursuant to the Share Exchange and related Share Purchase Agreement, (ii) the
amendment to the Mizar Option Plan to increase the number of available shares
thereunder to 2,427,500 and (iii) the election of the nominees for the Board of
Directors of Mizar. The affirmative votes of a majority of outstanding shares of
Mizar Common Stock will be required (i) to approve the amendment to the
Certificate of Incorporation to change Mizar's corporate name and (ii) to
approve the amendment to the Certificate of Incorporation to increase the
authorized number of shares of common stock to 50 million shares. Abstentions
and broker non-votes will be counted toward determining whether a quorum is
present at the Annual Meeting, but will not be counted for or against the
election of director nominees or the proposals to approve the issuance of shares
of Mizar Common Stock in accordance with the Share Exchange, the amendments to
Mizar's Certificate of Incorporation and the amendment to the Mizar Option Plan.
However, because the approval of a majority of the shares present at the Annual
Meeting is required to approve the election of director nominees and the
issuance of shares and the amendment to the Mizar Option Plan, abstentions and
broker non-votes will have the same effect as a vote against such proposals. In
addition, because the approval of the amendments to Mizar's Certificate of
Incorporation requires the approval of a majority of the outstanding shares of
Mizar Common Stock, abstention and broker non-votes will also have the same
effect as a vote against such proposals. An automated system administered by
Mizar's transfer agent will tabulate the votes at the Annual Meeting.
Proxies. All the shares of Mizar Common Stock represented by properly
executed proxies will be voted at the Annual Meeting in accordance with
the directions in such proxies. If no contrary instructions are given, the
shares of Mizar Common Stock represented thereby will be voted for (i) the
issuance of the shares of Mizar Common Stock as contemplated under the Share
Purchase Agreement, (ii) the amendment to the Mizar Option Plan, (iii) the
amendment to the Mizar Certificate of Incorporation to change its corporate name
to "Blue Wave Systems Inc.," (iv) the amendment to the Mizar Certificate of
Incorporation to increase the number of authorized shares of Mizar Common Stock
to 50 million shares and (v) the election of the nominees named in this Proxy
Statement/Prospectus. Any person executing a proxy may revoke it at any time
prior to its exercise. A proxy may be revoked by delivery of written notice of
such revocation to the Secretary of Mizar, by a subsequent proxy executed by the
person executing the prior proxy and presented before or at the Annual Meeting,
or by attendance at the Annual Meeting and voting in person by the person
executing the proxy.
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Solicitation of Proxies. The cost of the solicitation of proxies for the
management of Mizar will be borne by Mizar. In addition to solicitation by
mail, some of Mizar's directors, officers and regular employees, without extra
compensation, may conduct additional solicitation by facsimile, telephone and
personal interview. Mizar may also enlist the assistance of banks, brokerage
houses and nominees in additional solicitation of proxies, particularly from
persons whose shares of Mizar Common Stock are not registered in the
beneficial owners' names.
THE SHARE EXCHANGE
INTRODUCTION
The terms and conditions of the Share Exchange are set forth in the Share
Purchase Agreement, the text of which is attached to this Proxy
Statement/Prospectus as Appendix A. The summary of the material terms of the
Share Purchase Agreement contained in this Proxy Statement/Prospectus is
qualified in its entirety by reference to the complete text of the document.
Under the terms of the Share Exchange Agreement, the LSI Shareholders will
acquire approximately 8,441,000 million shares of Mizar Common Stock
(including shares issuable under Mizar Options) or approximately 60% of the
outstanding shares of Mizar Common Stock on a fully diluted basis. As a result
of the Share Exchange, LSI will become a wholly owned subsidiary of Mizar.
The Mizar Stockholders will not receive any consideration in the Share
Exchange nor will the Share Exchange affect the number of shares held by any
stockholder of Mizar.
Mizar intends to treat the Share Exchange as a pooling-of-interests for
financial reporting purposes. See "The Share Exchange--Accounting Treatment."
BACKGROUND OF THE SHARE EXCHANGE
The terms of the Share Exchange and related Share Purchase Agreement
resulted from arm's length negotiations between representatives of Mizar and
LSI. The following is a brief discussion of the background of these
negotiations.
In 1987, LSI entered into a 10-year exclusive distribution agreement with
Spectrum Signal Processing Inc., a Canadian company ("Spectrum"), whereby
Spectrum became LSI's sole distributor for all of North America. As a result,
until July 1997, LSI was contractually prohibited from selling directly into the
United States and Canada. In partial exchange for these exclusive distribution
rights, LSI obtained an equity stake in Spectrum, which LSI disposed of in 1993.
Pursuant to the distribution agreement, Spectrum also had limited rights to
manufacture certain LSI products under a license from LSI.
In the ensuing years, Spectrum increased sales of LSI products in North
America, supplying both distributed products produced by LSI and licensed
products produced by Spectrum. In January 1997, the distribution and licensing
agreements were re-negotiated granting Spectrum certain non-exclusive
distribution rights through December 1998 and certain licensing rights until
December 2003.
At the same time, LSI began to develop plans for direct sales channels into
the North American market. In June 1997, LSI opened a sales office in
Lexington, Massachusetts and announced plans to open a second office in the
State of California. During the same period, LSI began exploring the option of
acquiring a company in the United States, which would give LSI direct sales
capability in the U.S. market. In April 1997, LSI entered into an agreement
with Bank Boston Capital whereby its subsidiary, Bank Holdings, invested
(Pounds)5.5 million in the form of the Preferred Shares, the LSI Warrants and
1 B Share to be used in part to facilitate such an acquisition. Thereafter,
LSI began the effort of identifying possible acquisition candidates in order
to gain direct sales channels in the U.S. market.
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Since 1993, Mizar's Board has had discussions relating to consolidation of
smaller companies in the embedded computing industry. In December 1993, Mr.
David Irwin, who was serving as the Chief Executive Officer of Mizar, and Mr.
John Marshall, who was serving as Mizar's Senior Vice President of Sales and
Marketing, met in Dallas with Mr. Rob Shaddock, a director of LSI, in part to
discuss future opportunities for the companies to work together. However, due
to the distribution and licensing agreements with Spectrum, further
opportunities for the companies to work together were not pursued.
In September 1995, Mizar completed its initial public offering with a stated
goal of participating through acquisitions in the continuing consolidation of
the embedded computing industry. After its initial public offering, Mizar
evaluated several potential acquisition candidates; however, no
recommendations were made to the Mizar Board of Directors with respect to any
specific candidates, and no acquisition offers were made.
In July 1997, several members of Mizar's Board of Directors became aware,
through industry contacts, of the possibility that LSI might be interested in
exploring merger options with companies such as Mizar. Mr. Irwin contacted Mr.
Shaddock in late July, and it was agreed that a preliminary meeting to discuss
a merger of LSI and Mizar was of interest to both parties. The parties agreed
that Mr. Yates, LSI's Managing Director, would meet Mr. Irwin to discuss the
possibility of pursuing such a transaction.
On August 21, 1997, Mr. Yates and Mr. Irwin met at Schipol Airport,
Amsterdam, Netherlands. In the course of their discussion, the concept of a
merger of LSI and Mizar was discussed at some length and was deemed to be
potentially beneficial to both companies. On August 22, 1997, Mr. Irwin sent a
report to the other directors of Mizar suggesting that a merger be further
explored and that the issue be discussed at a previously scheduled Board
meeting on August 26, 1997. At the August 26 meeting, the Mizar Board of
Directors unanimously agreed to explore the opportunity of merging with or
otherwise acquiring LSI. The directors also authorized Mr. Irwin to contact
the London Managing Director of Cowen to explore their potential involvement
as Mizar's financial advisors for such transaction.
After the meeting of Mizar's Board of Directors, Mr. Irwin communicated
their decision to pursue discussions with LSI to Mr. Yates. Messrs. Yates and
Irwin agreed that three of Mizar's directors, Mr. Irwin, Mr. Sam Smith and Mr.
Robert Smith, would visit LSI the next week for face-to-face discussions with
management of LSI. In addition to the foregoing directors of Mizar, Mr. Yates,
Mr. Shaddock, Mr. Julian Jenkins, LSI's Finance Director, and Dr. Kevin
Parslow, LSI's Sales Director, participated in the discussions of a possible
merger of the two companies.
On September 10, 1997, Messrs. Yates and Shaddock visited Mizar's facilities
in Carrollton, Texas to further ascertain their interest in combining with
Mizar. Members of Mizar's Board of Directors and other members of Mizar's
management team also attended this meeting.
In September 1997, the Mizar Board of Directors authorized Mr. Irwin to
negotiate an engagement letter with Cowen and to act as Mizar's primary
negotiator with LSI. The final engagement letter was executed by Mr. Irwin and
a representative of Cowen on September 10, 1997. On September 19, 1997, a
mutual Non-Disclosure Agreement was entered into by the two companies to
further discussions of a possible merger transaction.
During the next week, financial information regarding LSI was communicated
by Mr. Irwin to Cowen. On September 23, 1997, Mr. Charles Brockenbush, Mizar's
Chief Financial Officer, met with Mr. Jenkins at LSI's offices in Loughborough
to familiarize each other with the financial aspects of the two companies, and
Mr. Sam Smith and Mr. Yates met to discuss management and board governance
issues for the surviving companies. On September 24, 1997, Messrs. Irwin,
Robert Smith and Brockenbush of Mizar met with Messrs. Jenkins and Yates of
LSI and several representatives of Cowen to discuss the finances of each
company on a stand-alone basis and on a combined basis.
On September 25, 1997, Cowen discussed with the parties possible valuation
ranges of LSI. A general structure for a combination of Mizar and LSI was
agreed upon, whereby Mizar would acquire the outstanding
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shares of LSI, and Mr. Yates would assume the position as Chief Executive
Officer of the combined entity. It was also agreed that Mizar would change its
name. After further negotiations, it was agreed that the holders of LSI's
outstanding shares, warrants and options would obtain approximately 60% of the
stock of Mizar on a fully diluted basis.
Further meetings were held among the principals of Mizar and LSI in early
October 1997, to ascertain mutual business strategies and to negotiate the
general terms of the Share Exchange. On October 10, 1997, the parties signed a
letter of intent (the "Letter of Intent") providing for the acquisition of LSI
by Mizar. The letter of intent stated that an actual transaction would be
subject to a number of conditions, including the completion of due diligence,
the formal approval of both boards of directors and the negotiation of a
definitive purchase agreement.
During the time period between the execution of the Letter of Intent and the
execution of the Share Purchase Agreement, both companies and their respective
attorneys, accountants and agents performed due diligence functions and
negotiated the terms of the Share Purchase Agreement and related documents. On
November 7 and 10, 1997, respectively, the Board of Directors of LSI and the
Board of Directors of Mizar met to authorize the execution and delivery of the
Share Purchase Agreement. Due to regulatory issues relating to the effect of
the Share Exchange on the LSI Warrants and the Preferred Shares, Mizar and LSI
delayed the execution of the Share Purchase Agreement until the structure of
that exchange was determined to be acceptable with respect to applicable
regulations and the pooling-of-interests treatment sought for the Share
Exchange. These issues were resolved by the parties on November 17, 1997.
Mizar and LSI executed the Share Purchase Agreement on November 17, 1997. The
public announcement of the Share Purchase Agreement was delayed until
November 20, 1997, the day on which LSI became re-registered as a private
company, because of certain United Kingdom regulatory issues relating to the
Share Exchange.
MIZAR'S REASONS FOR THE SHARE EXCHANGE
At its meeting on November 10, 1997, the Mizar Board of Directors received and
considered the presentations of the management of Mizar and its legal and
financial advisors regarding the Share Exchange. The Mizar Board of Directors
concluded that the terms of the Share Purchase Agreement were established
through arms' length negotiations with LSI and that the transactions
contemplated thereby are fair to, and in the best interest of, Mizar and its
stockholders.
In reaching its determination to approve the Share Exchange, the Mizar Board
of Directors considered a number of factors. Listed below are the factors
considered by the Mizar Board of Directors. In view of the importance of each
factor considered in connection with its evaluation of the Share Exchange, the
Mizar Board of Directors did not consider it practicable to, nor did it attempt
to, quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination.
Strategic Factors. The Mizar Board of Directors considered that the Share
Exchange would result in Mizar becoming a larger, more diverse technology
company with offices worldwide. Specifically, the addition of LSI's sales
personnel in European markets and LSI's presence in the telecommunications
industry were considered particularly advantageous, since Mizar believes they
will expand Mizar's access to the telecommunications market and to the European
and Israeli defense industries. Furthermore, the addition of Simon Yates as
Chief Executive Officer of Mizar, as the resulting corporate parent company,
fills management needs for the Mizar management team. Finally, the Mizar Board
of Directors noted Mizar's current dependence on large defense contracts, which
have introduced significant quarterly fluctuations into its business. Mizar's
Board of Directors believes that the acquisition of LSI through the Share
Exchange will enhance the financial stability of Mizar and LSI by reducing the
dependence on large defense contracts.
Analysis of Key Provisions of the Share Purchase Agreement. The Mizar Board
of Directors analyzed in particular the following aspects of the Share Purchase
Agreement:
(a) the right of Mizar to negotiate with third parties and terminate the
Share Purchase Agreement in the event of an unsolicited alternative proposal,
if such action were required in the exercise of the fiduciary duties of the
Mizar Board of Directors. If such fiduciary duty termination provision is
exercised, Mizar would be obligated to pay LSI $1.0 million (as well as LSI's
expenses up to $300,000). The Mizar Board of Directors did not believe the
existence of these obligations would preclude any third party from proposing
an alternative transaction;
(b) the fact that the Share Purchase Agreement contains a fixed share
exchange ratio and has no provisions that permit adjustments in the value of
the consideration to be issued by Mizar to the stockholders of LSI, which
provide reasonable assurance to the Mizar stockholders as to the percentage of
Mizar that will be owned by them upon completion of the Share Exchange,
regardless of changes in the trading price of the Mizar Common Stock; and
(c) the fact that the Share Purchase Agreement does not contain any
termination provision in the event of a decline in the market price of Mizar
Common Stock, which insulates the transaction from general market
fluctuations.
Opinion of Cowen. The Mizar Board of Directors considered the presentation of
its financial advisor and its written opinion to the effect that, as of November
10, 1997, and based upon and subject to the assumptions, limitations and
qualifications set forth in such opinion, the Share Exchange is fair to Mizar
from a financial point of view. For a summary of such opinion, the assumptions
made,the matters considered and the limitations thereon, see "Fairness Opinion
of Cowen & Company."
Management's Recommendation. The Mizar Board of Directors received and
reviewed presentations from, and discussed the terms and conditions of the Share
Purchase Agreement with, executive officers of Mizar and its financial and legal
advisors. The Mizar Board of Directors considered management's views of trends
in the embedded computing industry, including recent acquisitions and business
combinations.
THE BOARD OF DIRECTORS OF MIZAR BELIEVES THAT THE SHARE EXCHANGE IS IN THE
BEST INTERESTS OF THE MIZAR STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS A VOTE FOR
THE ISSUANCE OF THE SHARES OF MIZAR COMMON STOCK TO BE ISSUED PURSUANT TO THE
SHARE EXCHANGE.
LSI'S REASONS FOR THE SHARE EXCHANGE
The Board of Directors of LSI believes that the Share Exchange represents an
opportunity for holders of LSI Stock to exchange their shares for a security
with much greater market liquidity. The Share Exchange also provides LSI
Shareholders the ability to participate as a shareholder in a larger, more
diverse technology company with offices worldwide. Specifically, the addition
of sales personnel in North America, together with an increased presence in
the defense industry, were considered advantageous. The Share Exchange will
enable LSI to provide greater global support for its products and more rapid
development of its direct route to the North American market. Among the other
factors considered by the LSI Board of Directors in deciding to proceed with
the Share Exchange were the terms and conditions of the Share Purchase
Agreement, the recent market prices of Mizar Common Stock, the lack of a
public trading market for the LSI Stock, the competitive position of LSI and
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Mizar and the changing nature of the embedded computing industry, the
consideration to be received in the Share Exchange, the tax-free nature of the
Share Exchange to the shareholders of LSI and the compatibility of the
business philosophies of the two companies. The Board of Directors of LSI also
considered that the Share Exchange presents an opportunity to alleviate
certain constraints on LSI caused by limited capital and represents a
strategic alliance with a company whose experience in closely related markets
and products would enhance LSI's technical base and market position. While the
Board of Directors did not assign any specific or relative weights in
considering the foregoing factors, the Board considered the Share Exchange to
be advantageous to the shareholders of LSI.
FAIRNESS OPINION OF COWEN & COMPANY
Cowen has acted as exclusive financial advisor to the Board of Directors of
Mizar in connection with the Share Exchange. Pursuant to an engagement letter
dated September 10, 1997 (the "Cowen Engagement Letter"), Mizar retained Cowen
to serve as its exclusive financial advisor in connection with the Share
Exchange. As part of this assignment, Cowen was asked to render an opinion as
to whether the financial terms of the Share Exchange are fair, from a
financial point of view, to Mizar. The amount of consideration was determined
through negotiations between Mizar and LSI and not pursuant to recommendations
of Cowen.
On November 10, 1997, Cowen delivered certain of its written analyses and
its oral opinion to the Mizar Board of Directors and confirmed in writing as
of the same date to the effect that, as of such date, the Share Exchange as
contemplated in the Share Exchange Agreement is fair, from a financial point
of view, to the Company. THE FULL TEXT OF THE WRITTEN OPINION OF COWEN, DATED
NOVEMBER 10, 1997, IS ATTACHED HERETO AS APPENDIX B AND IS INCORPORATED BY
REFERENCE. HOLDERS OF MIZAR COMMON STOCK ARE URGED TO READ THE OPINION IN ITS
ENTIRETY FOR THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED
AND LIMITS OF THE REVIEW BY COWEN. THIS SUMMARY OF THE MATERIAL TERMS OF THE
WRITTEN OPINION OF COWEN SET FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION. COWEN'S ANALYSES AND OPINION WERE
PREPARED FOR AND ADDRESSED TO THE MIZAR BOARD OF DIRECTORS AND ARE DIRECTED ONLY
TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE SHARE EXCHANGE AND DO
NOT CONSTITUTE AN OPINION AS TO THE MERITS OF THE SHARE EXCHANGE CONTEMPLATED BY
THE AGREEMENT OR A RECOMMENDATION TO ANY HOLDERS OF MIZAR COMMON STOCK AS TO HOW
TO VOTE AT THE ANNUAL MEETING.
Cowen was selected by the Mizar Board of Directors as its financial advisor,
and to render an opinion to the Mizar Board of Directors, because Cowen is a
nationally recognized investment banking firm and because the principals of
Cowen have substantial experience in transactions similar to the Share
Exchange and are familiar with Mizar and its businesses. As part of its
investment banking business, Cowen is continually engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions
and valuations for corporate and other purposes. In addition, in the ordinary
course of its business, Cowen and its affiliates trade the equity securities
of Mizar for their own account and for the accounts of their customers, and
accordingly, may at any time hold a long or short position in such securities.
In arriving at its opinion, Cowen (i) reviewed Mizar's financial statements
for the fiscal years ended June 30, 1995 through June 30, 1997, and certain
publicly available filings with the Commission; (ii) reviewed LSI's financial
statements for the fiscal years ended September 30, 1993 through September 30,
1997 and certain other relevant operating data of LSI; (iii) reviewed the
November 3, 1997 draft of the Share Purchase Agreement provided to Cowen by
management of Mizar; (iv) held meetings and discussions with management and
senior personnel of Mizar and LSI to discuss the business, operations,
historical financial results and future prospects of Mizar, LSI and the combined
company; (v) reviewed financial projections for both Mizar and LSI prepared by
Mizar and LSI, respectively, and pro forma combined financial projections (based
on each of Mizar's and LSI's own projections) prepared by Mizar, including,
among other things, the capital structure, sales, net income, cash flow, capital
requirements and other data that Cowen deemed relevant; (vi) analyzed the
respective contributions of actual revenues, operating income and net income of
Mizar and LSI to the combined company based upon the historical and projected
financial results of Mizar and LSI provided by managements of Mizar and LSI,
respectively, excluding the possible effects of cost savings and synergies in
the Share Exchange; (vii) reviewed the valuation of LSI in comparison to other
similar publicly traded companies; (viii) reviewed the historical prices and
trading activity of Mizar Common Stock since Mizar's initial public offering,
over the last twelve months, and during
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the last 45 trading days (each period ended October 31, 1997); (ix) analyzed
the potential dilutive effects of the Share Exchange; (x) compared the Share
Exchange with other similar transactions, including a comparison of the
multiples paid in the Share Exchange with the multiples paid in those similar
transactions; and (xi) conducted such other studies, analyses, inquiries and
investigations as Cowen deemed appropriate.
In rendering its opinion, Cowen relied upon Mizar's management with respect
to the accuracy and completeness of the financial and other information
furnished to it as described above. Cowen assumed that financial forecasts,
projections and estimates of operating efficiencies and potential synergies
reflected the best currently available estimates and judgments of Mizar's
management and LSI as to the expected future financial performance of their
respective entities. Cowen has not assumed any responsibility for independent
verification of such information, including financial information, nor has it
made an independent evaluation or appraisal of any of the properties or assets
of LSI. With respect to all legal matters relating to Mizar and LSI, Cowen has
relied on the advice of legal counsel to Mizar.
Cowen's opinion is necessarily based on general economic, market, financial
and other conditions as they exist on, and can be evaluated as of, the date
hereof, as well as the information currently available to it. It should be
understood that, although subsequent developments may affect Cowen's opinion,
it does not have any obligation to update, revise or reaffirm its opinion.
Cowen's opinion does not constitute a recommendation to any stockholder as to
how such stockholder should vote on the proposed Share Exchange. Cowen's
opinion does not imply any conclusion as to the likely trading range for the
Mizar Common Stock following consummation of the Share Exchange or otherwise,
which may vary depending on numerous factors that generally influence the
price of securities. Cowen's opinion is limited to the fairness, from a
financial point of view, of the terms of the Share Exchange. Cowen expresses
no opinion with respect to any other reasons, legal, business or otherwise,
that may support the decision of the Board of Directors of Mizar to approve,
or Mizar's decision to consummate, the Share Exchange.
For purposes of rendering its opinion Cowen assumed in all respects material
to its analysis, that the representations and warranties of each party
contained in the Share Purchase Agreement are true and correct, that each
party will perform all of the covenants and agreements required to be
performed by it under the Share Purchase Agreement and that all conditions to
the consummation of the Share Exchange will be satisfied without waiver
thereof. In addition, Cowen has assumed that all governmental, regulatory or
other consents and approvals contemplated by the Share Purchase Agreement will
be obtained and that in the course of obtaining any of those consents no
restrictions will be imposed or waivers made that would have an adverse effect
on the contemplated benefits of the Share Exchange.
Cowen has also assumed, with Mizar's permission, that (i) the Share Exchange
will be treated as "pooling of interests" for accounting purposes, (ii) the
Company will purchase all issued and outstanding LSI Stock, (iii) all options
outstanding under LSI Option Plans would be exchanged for Mizar Options as
contemplated in the Share Purchase Agreement, (iv) Bank Holdings will exercise
all of the LSI Warrants as contemplated in the Share Purchase Agreement (the
"Warrant Exercise") and (v) LSI will use the proceeds of the Warrant Exercise
to redeem LSI's Preferred Shares and Bank Holdings will sell to Mizar any of
such Preferred Shares not so redeemed. Cowen expresses no opinion, nor has it
conducted any analysis, with respect to a transaction that does not
contemplate the aforementioned accounting treatment, purchase of LSI Stock,
exchange of options, exercise of warrants and redemption and purchase of LSI's
Preferred Shares.
The following is a summary of certain financial analyses performed by Cowen
to arrive at its opinion. Cowen performed certain procedures, including each
of the financial analyses described below, and reviewed with the management of
Mizar the assumptions on which such analyses were based and other factors,
including the historical and projected financial results of Mizar and LSI. No
limitations were imposed by Mizar with respect to the investigations made or
procedures followed by Cowen in rendering its opinion.
Contribution Analysis. Cowen analyzed the respective contributions of actual
revenues, operating income and net income of Mizar and LSI to the combined
company based upon the historical financial results of Mizar
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(based on a June 30 fiscal year end) and LSI (based on a September 30 fiscal
year end) provided by managements of Mizar and LSI, respectively, excluding
the possible effect of cost savings and synergies in the Share Exchange. This
analysis showed that for each case for fiscal years June 30, 1995, June 30,
1996 and June 30, 1997 Mizar would have contributed to the combined company
44.0%, 40.0% and 34.0% of revenues, 56.4%, 45.4% and -13.4% of operating
income, and 66.5%, 65.7% and 8.4% of net income, respectively.
Cowen also analyzed the respective contributions of estimated revenues,
operating income and net income of Mizar and LSI to the combined company based
upon the projected financial results of Mizar and LSI (based on a June 30 fiscal
year end for both Mizar and LSI) provided by managements of Mizar and LSI,
respectively, excluding the possible effect of cost savings and synergies in the
Share Exchange. This analysis showed that Mizar would contribute to the combined
company 35.4% and 34.9% of revenues, 24.6% and 29.3% of operating income, and
34.8% and 40.0% of net income, in each case for fiscal years June 30, 1998 and
June 30, 1999, respectively. Cowen analyzed the respective contribution to
estimated revenues, operating income and net income based on: (i) projections
for LSI prepared by Mizar's management (for the years ended June 30, 1998 and
1999) using LSI management projections that were prepared by LSI; (ii) Mizar's
projections provided by Mizar's management; and (iii) Mizar's prevailing market
price of $6.00 per share as of October 31, 1997.
Pro Forma Ownership Analysis of the Combined Company. Cowen analyzed pro
forma ownership in the combined company by holders of Mizar Common Stock.
Cowen's analysis concluded that current holders of Mizar Common Stock would
own approximately 40% of the combined company.
Analysis of Certain Publicly Traded Companies. To provide contextual data
and comparative market information, Cowen compared selected historical
operating and financial ratios for LSI to the corresponding data and ratios of
certain other companies (the "Selected Companies") whose securities are
publicly traded and which Cowen believes have operating, market valuation and
trading valuations similar to what might be expected of LSI. These companies
included Ariel Corp., Mizar, RadiSys Corp., SBS Technologies, Inc. and
Spectrum Signal Processing, Inc. Such data and ratios include the Enterprise
Value of such Selected Companies as multiples of revenues, EBITDA and EBIT for
the LTM period, and the market capitalization of common stock of such Selected
Companies as a multiple of the book value of common shareholders' equity.
Cowen also examined the ratios of the current prices of the Selected Companies
to the LTM earnings per share ("EPS"), estimated current 1997 calendar year
EPS (as estimated by Institutional Brokers Estimating System ("IBES") and
First Call) and estimated EPS for the following (1998) calendar year (as
estimated by IBES and First Call) for these companies. In conducting its
analysis, Cowen noted that LSI's (in US$ assuming an average exchange rate of
1.6357 for LTM financials and an exchange rate of 1.6142 for balance sheet
data as of September 30, 1997) last twelve month revenues, EBIT, book value,
pro-forma LTM earnings (applies a 40% tax rate to LSI's LTM operating income),
and projected 1998 calendar year earnings were $22.3 million, $3.3 million,
$8.4 million, $2.0 million and $2.4 million, respectively.
Such analyses indicated that, the Enterprise Value as a multiple of LTM
sales for the Selected Companies ranged from 1.99x to 4.18x, with a median of
2.40x and a mean of 2.70x; and from 10.7x to 23.7x LTM EBIT with a median of
15.6x and a mean of 16.7x. The corresponding multiples implied by Mizar's
offer, calculated on the basis of the closing price of Mizar Common Stock as
of October 31, 1997, are 2.41x LTM Revenues and 16.5x LTM EBIT. The
corresponding multiples implied by Mizar's offer, calculated on the basis of
the average closing price of Mizar Common Stock over the period August 29,
1997 to October 31, 1997 (the "Period"), are 2.51x LTM Revenues and 17.2x LTM
EBIT.
The same analysis indicated that, the equity value as a multiple of book
value for the Selected Companies ranged from 2.30x to 5.86x book value, with a
median of 5.04x and a mean of 4.39x; from 21.2x to 57.1x LTM earnings, with a
median of 25.3x and a mean of 34.5x (excluding two of the Selected Companies,
one of which had a net loss over the LTM period and another which had an LTM
earnings multiple that was not meaningful); from 19.9x to 24.5x estimated
current calendar year (1997) earnings with a median of 20.6x and a mean of
21.6x (excluding two of the Selected Companies which had negative calendar
year 1997 net income); and, from 14.9x to 20.2x estimated 1998 calendar year
earnings with a median of 17.8x and a mean of 17.7x (excluding one of the
Selected Companies for which there was no estimated 1998 calendar year
earnings available). The
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corresponding multiples implied by Mizar's offer, calculated on the basis of
the closing price of Mizar Common Stock as of October 31, 1997, are 6.06x book
value, 26.0x LTM earnings, 33.1x estimated 1997 calendar year earnings and
20.8x estimated 1998 calendar year earnings. The corresponding multiples
implied by Mizar's offer, calculated on the basis of the average closing price
of the Mizar Common Stock over the period August 29, 1997 to October 31, 1997
(the "Period"), are 27.1x LTM earnings and 21.7x estimated 1998 calendar year
earnings.
Although the Selected Companies were used for comparison purposes, none of
such companies is directly comparable to LSI. Accordingly, an analysis of the
results of such a comparison is not purely mathematical but instead involves
complex considerations and judgments concerning differences in historical and
projected financial and operating characteristics of the Selected Companies
and other factors that could affect the public trading value of the Selected
Companies or LSI to which they are being compared.
Analysis of Certain Transactions. Cowen reviewed the financial terms, to the
extent publicly available, of seven selected related transactions
(collectively, the "Selected Transactions") involving the acquisition of
companies in the Embedded Systems / DSP industry, which were announced or
completed since March 31, 1995. The Selected Transactions consisted of the
following (listed as acquiror/target): SBS Technologies, Inc./Bit 3 Computer
Corporation, Radisys Corporation/Intel Corporation--Multibus products unit,
Adaptec, Inc./Western Digital--Connectivity Solutions Group, Mylex
Corporation/BusLogic Inc., EMC Corporation/McDATA Corporation, Adaptec,
Inc./Future Domain Corporation and Sequoia Systems, Inc./Texas Microsystems,
Inc.
Cowen reviewed the market capitalization of common stock plus total debt
less cash and equivalents ("Enterprise Value") paid in the Selected
Transactions as a multiple of latest reported twelve month ("LTM") revenues,
earnings before interest expense, income, taxes, depreciation, and
amortization ("EBIDTA") and earnings before interest expense and income taxes
("EBIT") and also examined the multiples of equity value paid in the Selected
Transactions to book value, LTM earnings and tangible assets. In conducting
its analysis, Cowen noted that LSI's (in US$ assuming an average exchange rate
of 1.6357 for LTM financials and an exchange rate of 1.6142 for balance sheet
data as of September 30, 1997) last twelve month revenues, EBIT, book value,
pro-forma LTM earnings (applies a 40% tax rate to LSI's LTM operating income)
and tangible assets were $22.3 million, $3.3 million, $8.4 million, $2.0
million and $14.1 million, respectively.
Such analyses indicated that, the Enterprise Value paid in each of the
Selected Transactions ranged from 0.50x to 2.31x LTM revenues, with a median
of 1.39x and a mean of 1.25x (excluding two of the Selected Transactions, for
which information was not available); and from 1.0x to 39.3x LTM EBIT with a
median of 3.7x and a mean of 11.1x. The corresponding multiples implied by
Mizar's offer, calculated on the basis of the closing price of Mizar Common
Stock as of October 31, 1997, are 2.41x LTM Revenues and 16.5x LTM EBIT. The
corresponding multiples implied by Mizar's offer, calculated on the basis of
the average closing price of Mizar Common Stock over the period August 29,
1997 to October 31, 1997 (the "Period"), are 2.51x LTM Revenues and 17.2x LTM
EBIT.
Such analyses indicated that, the equity value paid in each of the Selected
Transactions ranged from 2.98x to 7.22x book value, with a median of 5.14x and
a mean of 4.98x (excluding two of the Selected Transactions, for which
information was not available); from 1.7x to 10.1x LTM earnings, with a median
of 4.3x and a mean of 5.1x (excluding two of the Selected Transactions, for
which information was not available); and from 1.12x to 5.28x tangible assets
with a median of 4.96x and a mean of 4.02x (excluding two of the Selected
Transactions, for which information was not available). The corresponding
multiples implied by Mizar's offer, calculated on the basis of the closing
price of Mizar Common Stock as of October 31, 1997, are 6.06x book value,
26.0x LTM earnings and 3.61x tangible assets. The corresponding multiples
implied by Mizar's offer, calculated on the basis of the average closing price
of Mizar Common Stock over the period August 29, 1997 to October 31, 1997, are
6.33x book value, 27.1x LTM earnings and 3.76x tangible assets.
Although the Selected Transactions were used for comparison purposes, none
of such transactions is directly comparable to the Transaction, and none of
the companies in such transactions are directly comparable to Mizar or LSI.
Accordingly, an analysis of the results of such a comparison is not purely
mathematical but instead
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involves complex considerations and judgments concerning differences in
historical and projected financial and operating characteristics of the
companies involved and other factors that could affect the acquisition value
of such companies or LSI to which they are being compared.
Pro Forma Earnings Analysis. Cowen analyzed the potential effect of the Share
Exchange on the projected combined income statement of Mizar and LSI for Mizar's
fiscal years ended June 30, 1998 and June 30, 1999. This analysis was based on:
a) projections for LSI prepared by Mizar's management (for the years ended June
30, 1998 and 1999) using LSI management projections prepared by LSI; b) Mizar's
projections provided by Mizar's management; and c) Mizar's prevailing market
price of $6.00 per share as of October 31, 1997. This analysis concluded that
the Share Exchange would be approximately 12.0% accretive to Mizar's projected
EPS for the year ending June 30, 1998 and would be approximately 0.9% accretive
to Mizar's projected EPS for the year ending June 30, 1999.
Stock Trading History. Cowen reviewed the historical market prices and
trading volumes of Mizar Common Stock from its initial public offering date of
September 28, 1995 to October 31, 1997 and over the last twelve months ended
October 31, 1997. Cowen also compared Mizar's closing stock price over the
last twelve months with a 45-day moving average of its stock price. This
information was presented solely to provide Mizar with background information
regarding the price of Mizar Common Stock over the period since Mizar's
initial public offering and over the last twelve month (LTM) period (each
period ended October 31, 1997). Cowen noted that Mizar Common Stock has closed
at an LTM high of $7.125 and an LTM low of $2.75; since Mizar's initial public
offering, Mizar Common Stock has closed at a high of $9.50 and a low of $2.75.
As of October 31, 1997, the closing price of Mizar Common Stock was $6.00 and
the 45 day average closing price for the 45 day period ended October 31, 1997
was $6.26.
Cowen also reviewed the volume of shares traded at various price ranges over
both the last 45 days and the last twelve months ended October 31, 1997. For
the 45-day period ended October 31, 1997, Cowen noted that for the price
ranges of less than $5.50, $5.50 to $6.00, $6.00 to $6.50, $6.50 to $7.00 and
greater than $7.00, the percent of total shares traded during the period was
28.1%, 9.3%, 28.2%, 22.2% and 12.2%, respectively. For the last twelve month
period ended October 31, 1997, the percent of shares traded during the period
was 0.2%, 44.1%, 32.8%, 13.0%, 7.9% and 2.0%, respectively.
The summary set forth above includes all material aspects of, but does not
purport to be a complete description of, the analyses performed by Cowen. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
these methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to partial analysis or summary description. Cowen did
not attribute any particular weight to any analysis or factor considered by it,
but rather made qualitative judgments as to the significance and relevance of
each analysis and factor. Accordingly, notwithstanding the separate factors
summarized above, Cowen believes, and has advised Mizar's Board of Directors,
that its analyses must be considered as a whole and that selecting portions of
its analyses and the factors considered by it, without considering all analyses
and factors, could create an incomplete view of the process underlying its
opinion. In performing its analyses, Cowen made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of Mizar and LSI. These analyses
performed by Cowen are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
such analyses. In addition, analyses relating to the value of businesses do not
purport to be appraisals or to reflect the prices at which businesses or
securities may actually be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty and none of Mizar, LSI, Cowen or
any other person assumes responsibility for their accuracy. As mentioned above,
the analyses supplied by Cowen and its opinion were among several factors taken
into consideration by Mizar in making its determination to enter the Share
Purchase Agreement. The analyses of Cowen and its opinion should not be
considered as determinative of such decision.
Pursuant to the Cowen Engagement Letter, as compensation for Cowen's services
as financial advisor to Mizar in connection with the Share Exchange, Mizar has
paid Cowen a non-refundable retainer fee of $50,000. If the Share Exchange is
consummated, the Cowen Engagement Letter provides for payment by Mizar to Cowen
of $500,000 (against which fee the retainer fee will be credited) based on a
closing price of $6.50 or less per share of Mizar Common Stock. Additionally,
Mizar has agreed to reimburse Cowen for its out-of-pocket expenses (including
the reasonable fees and expenses of its counsel) incurred or
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accrued during the period of, and in connection with, Cowen's engagement. Mizar
has also agreed to indemnify Cowen against certain liabilities, including
liabilities under the federal securities laws, relating to or arising out of
services performed by Cowen as financial advisor to Mizar in connection with
the Share Purchase Agreement, unless it is finally judicially determined that
such liabilities arose out of Cowen's gross negligence or willful misconduct.
The terms of the fee arrangement with Cowen, which are customary in
transactions of this nature, were negotiated at arm's length between Mizar and
Cowen, and Mizar's Board of Directors was aware of such arrangement, including
the fact that a significant portion of the aggregate fee payable to Cowen is
contingent upon consummation of the Share Exchange.
SHARE EXCHANGE
The conversion of the outstanding securities of LSI into shares of Mizar
Common Stock, Mizar Options or other consideration will occur under Exchange
Agreements to be entered into between Mizar and each LSI security holder. The
consideration to be received by each LSI security holder upon the exchange of
such holder's LSI securities varies according to the LSI security being
exchanged.
LSI Stock. LSI has issued and outstanding 62,747 A Shares and 1 B Share,
and, in addition, 6,335 A Shares are reserved for issuance upon the exercise
of the LSI Options. Under the terms of the Share Purchase Agreement and the
Exchange Agreements, a holder of shares of LSI Stock, including shares issued
upon exercise of any LSI Options prior to the Effective Time, will receive
94.632 shares of Mizar Common Stock for each share of LSI Stock tendered
pursuant to a validly executed Exchange Agreement.
LSI Options. The Share Purchase Agreement provides that Mizar will seek to
enter into Exchange Agreements with holders of the LSI Options granted under
the LSI Option Plans. Under the terms of these Exchange Agreements, holders of
LSI Options may either convert the LSI Options into LSI Stock, which will then
be exchanged for shares of Mizar Common Stock in accordance with the Exchange
Ratio, or exchange the LSI Options for newly issued Mizar Options. The Mizar
Options will be on substantially the same terms as the LSI Options, except
that (i) the holder of each Mizar Option, upon its exercise in accordance with
its terms, will be entitled to receive that whole number of shares of Mizar
Common Stock (rounded to the nearest whole share) into which the number of
shares of LSI Stock subject to the LSI Option exchanged for such Mizar Option
would be converted, based upon the Exchange Ratio, and (ii) the exercise price
per share of Mizar Common Stock under the Mizar Options shall be equal to the
exercise price per share of LSI Stock applicable to such LSI Option
immediately prior to the Effective Time, divided by the Exchange Ratio, and
converted into U.S. dollars using the average currency conversion rate for
converting British pounds to U.S. dollars over a ten day period ending the
second day before the date of the Share Exchange.
LSI Warrants and Preferred Shares. LSI has issued and outstanding 5,708,548
Preferred Shares, all of which are owned by Bank Holdings. In addition, Bank
Holdings owns LSI Warrants to subscribe for up to 20,115 B Shares. The Share
Purchase Agreement provides that Mizar and Bank Holdings will seek to enter into
an Exchange Agreement in which Bank Holdings will agree to exercise the LSI
Warrants for shares of LSI Stock, which will then be exchanged, together with 1
B Share presently held by Bank Holdings, for shares of Mizar Common Stock
pursuant to the Share Exchange. All of the proceeds received by LSI upon
exercise of the LSI Warrants will be used to redeem Preferred Shares, and
Preferred Shares thereafter outstanding will be purchased by Mizar for a price
per share equal to the redemption price of such shares. The redemption price of
the Preferred Shares is (pound)1 per share plus accrued dividends to the date of
redemption (approximately (pound).02 per share as of December 31, 1997).
Mizar's Rights to Purchase Remaining Minority Shares. In the event that more
than 90%, but less than 100%, of LSI's ordinary shares (including shares
issuable under the LSI Options) are tendered to Mizar in the Share Exchange,
Mizar intends to purchase compulsorily any such remaining shares held by
minority shareholders in accordance with the provisions of section 428-430F of
the Companies Act 1985 (as amended by the Companies Act 1989). In respect of
any class of shares to which the Share Exchange relates and for which Mizar has
received acceptance in respect of not less than 90% of such shares within the
four months beginning with the date of Mizar's offer to the LSI Shareholders
(which is estimated to begin on January __, 1998, at the time of the posting of
the United Kingdom offering circular describing such offer), Mizar may give
notice under section 429 (the "Notice") to the holders of the remaining shares
of that class that it desires to acquire the remaining shares. No such Notice
may be served by Mizar more than two months after the date upon which Mizar has
received sufficient acceptances to satisfy the minimum requirement for serving a
notice under section 429.
When Mizar serves the first Notice under section 429 in relation to the Share
Exchange, it shall send a copy of the Notice to LSI, together with a statutory
declaration signed by a director stating that the conditions for the giving of
the Notice have been satisfied. Failure to send this notice to LSI or any false
statement in the declaration thereof would constitute an offence under UK law.
Any Notice served under section 429 entitles and binds Mizar to acquire any
outstanding shares of LSI that are the subject of the notice on the same
conditions on which the other LSI Shareholders were offered under the terms of
the Share Exchange.
At the end of 6 weeks from the date of service of the Notice, Mizar shall:
(i) send a copy of the Notice to LSI;
(ii) allot the shares of Mizar Common Stock which are the consideration
for the acquisition of the shares subject to the Notice to LSI, which
shall be held by LSI in trust for the minority shareholders entitled
to them; and
(iii) send to LSI instruments of transfer in respect of the shares the
subject of the Notice executed by a person appointed by Mizar on
behalf of the relevant LSI Shareholder.
Upon receipt of the foregoing, LSI will then register Mizar as the holder of the
shares that are subject of the Notice.
Conversely, upon Mizar receiving acceptances for not less than 90% of the
shares of any class, the non-accepting LSI Shareholders may serve written
notice on Mizar under section 430A requiring Mizar to acquire their shares. If
Mizar has not already served notices under section 429, Mizar is obliged, within
one month of the closing of the Offer (which must be no less than 21 days after
it was commenced) to notify the non-accepting LSI Shareholders of their rights
under section 430A.
CONDITIONS TO THE SHARE EXCHANGE
Each party's obligation to effect the Share Exchange is subject to the
satisfaction of a number of conditions, most of which may be waived by a
specified party or parties. The conditions to the Share Exchange include (i)
no occurrence of any material adverse effect to Mizar's or LSI's business,
operations, assets or financial condition since September 30, 1997, nor to
either party's ability to consummate the transactions contemplated by the
Share Purchase Agreement, (ii) both parties obtaining all consents and
approvals and the absence of any injunction or order prohibiting the Share
Exchange and the consummation of the transactions contemplated by the Share
Purchase Agreement, (iii) the representations and warranties of each party
being true and correct in all
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material respects as of the Effective Time, except for certain changes that
are specifically permitted under the Share Purchase Agreement, (iv) compliance
by each party to the terms of the Share Purchase Agreement, (v) receipt by
each party of certain officer's certificates from executive officers of the
other party, (vi) the approval of the issuance of the Mizar Common Stock
pursuant to transactions contemplated by the Share Purchase Agreement by the
Mizar Stockholders, (vii) the holders of at least 90% of the LSI Stock
(including any shares issuable upon exercise of LSI Options or the LSI
Warrants prior to the Effective Time) having tendered their shares to Mizar
pursuant to validly executed Exchange Agreements, (viii) the effectiveness of
the Registration Statement, (ix) Mr. Yates being elected the Chief Executive
Officer of Mizar, (x) the LSI Warrants having been exercised and the Preferred
Shares being tendered to Mizar, under Exchange Agreements, (xi) the Boards of
Directors of Mizar and LSI being set as described in "Summary, Board of
Directors" above, (xii) certain pooling related letters being issued by each
of Arthur Andersen LLP and Price Waterhouse; provided, that Mizar has agreed
to seek an opinion as to the fairness of the Share Exchange that is not
conditioned on the pooling letters if such letters are not delivered by the
accountants and (xiii) the consummation of the Share Exchange complying with
applicable federal securities laws.
Even if the Mizar Stockholders approve the proposals relating to the Share
Exchange, there can be no assurance that the Share Exchange will be
consummated.
REGULATORY APPROVAL REQUIRED FOR THE SHARE EXCHANGE
Other than certain filings and approvals which may be required under certain
state securities or "blue sky" laws, or under similar United Kingdom
securities laws, and the effectiveness of the Registration Statement, there
are no federal or state regulatory requirements that must be complied with or
approvals that must be obtained in connection with the Share Exchange.
TERMINATION AND AMENDMENT OF SHARE PURCHASE AGREEMENT
The Share Purchase Agreement may be terminated and the Share Exchange
abandoned at any time before the Effective Time by the mutual consent of LSI
and Mizar. In addition, the Share Purchase Agreement may be terminated (i) by
Mizar if there has been a material misrepresentation or breach of warranty in
the representations and warranties of LSI set forth in the Share Purchase
Agreement or a failure to perform in any material respect a covenant on the
part of LSI with respect to its representations, warranties and covenants set
forth in the Share Purchase Agreement, except for any misrepresentations,
breaches or failures to perform which are disclosed in this Proxy
Statement/Prospectus, (ii) by LSI if there has been a material
misrepresentation or breach of warranty in the representations and warranties
of Mizar set forth in the Share Purchase Agreement or a failure to perform in
any material respect a covenant on the part of Mizar with respect to its
representations, warranties and covenants set forth in the Share Purchase
Agreement, except for any misrepresentations, breaches or failures to perform
which are disclosed in this Proxy Statement/Prospectus, (iii) by either Mizar
or LSI if the transactions contemplated by the Share Purchase Agreement have
not been consummated by March 31, 1998, unless the failure to consummate is
due to the failure of the terminating party to perform or observe the
covenants, agreements and conditions to be performed or observed by it at or
before the Closing Date, (iv) by either LSI or Mizar if the transactions
contemplated by the Share Purchase Agreement violate any nonappealable final
order, decree or judgment of any court or governmental body or agency having
jurisdiction, (v) by either party if its Board of Directors believes, in the
exercise of good faith judgment, that such termination is required because of
a third party's offer to acquire it, or (vi) by either party if the other
party withdraws or materially modifies its recommendation to its stockholders
to approve the Share Exchange, if at such time there exists an offer from a
third party to acquire such other party.
EXPENSES OF THE SHARE EXCHANGE
If the Share Exchange is consummated, Mizar will generally bear the expenses
of the Share Exchange. See Note 3 under the caption "Notes to Pro Forma
Combined Financial Statements." The Share Purchase Agreement
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provides that Mizar and LSI will generally bear their respective costs and
expenses of the Share Exchange if the Share Exchange is not consummated.
If the Share Purchase Agreement is terminated by Mizar because the Mizar
Board of Directors believes it has a fiduciary duty to do so as a result of a
third party offer to acquire Mizar, or if the Mizar Stockholders do not
approve the issuance of shares of Mizar Common Stock required for the Share
Exchange or Mizar fails to use its best efforts to obtain a regulatory
approval necessary for the Share Exchange, or if Mizar enters into discussions
with a third party prior to March 31, 1998 (as it may be extended), whereby
such third party will acquire Mizar prior to March 31, 1999 (as it may be
extended), then Mizar will pay to LSI, as LSI's sole remedy for any claim
against Mizar, the sum of $1,000,000 plus up to $300,000 of documented fees,
costs and expenses incurred in connection with the Share Exchange. If the
Share Purchase Agreement is terminated by LSI because the LSI Board of
Directors believes it has a fiduciary duty to do so as a result of a third
party offer to acquire LSI, or if less than 90% of the outstanding LSI Stock
(including shares issued upon exercise of LSI Options prior to the Effective
Time) is tendered to Mizar pursuant to the Exchange Agreements, or if LSI
fails to use its best efforts to obtain a regulatory approval necessary for
the Share Exchange, or if LSI enters into discussions with a third party prior
to March 31, 1998 (as it may be extended), whereby such third party will
acquire LSI prior to March 31, 1999 (as it may be extended), then LSI will pay
to Mizar, as Mizar's sole remedy for any claim against LSI, the sum of
$1,000,000 plus up to $300,000 of documented fees, costs and expenses incurred
in connection with the Share Exchange.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of the material federal income
tax consequences anticipated to occur as a result of the Share Exchange and is
based on relevant provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations promulgated thereunder and published
positions of the Internal Revenue Service ("IRS"), all of which are subject to
change. In addition, the conclusions expressed herein are based solely on a
review of the Share Purchase Agreement and related documents, and certain
factual assumptions have been made. The Share Exchange is not conditioned upon
the receipt by Mizar or LSI of a ruling of the IRS with respect to the tax
treatment of the Share Exchange. The IRS is not being requested to issue a
ruling as to the tax consequences of the Share Exchange.
The federal income tax consequences of the Share Exchange to the LSI
Shareholders are expected to be as follows:
(i) no gain or loss will be recognized to the LSI Shareholders upon
their receipt of the shares of Mizar Common Stock in exchange for
their LSI Stock;
(ii) the basis of the shares of Mizar Common Stock to be received by the
LSI Shareholders in the Share Exchange will be the same as the
basis of such shareholders in the shares of LSI Stock exchanged for
such shares of Mizar Common Stock; and
(iii) the holding period of the shares of Mizar Common Stock to be
received by the stockholders of LSI will include the period during
which they held their LSI Stock exchanged for the shares of Mizar
Common Stock.
An LSI Shareholder who does not tender his shares of LSI Stock, but as to
which Mizar exercises its demand rights under section 429, Companies Act 1985,
and receives payment in cash for the "fair value" of his or her LSI Stock will
be treated as having received such payment in a redemption of LSI Stock
subject to the provisions of Section 302 of the Code. In general, such an LSI
Shareholder will recognize capital gain or loss measured by the difference
between the amount of cash received by such LSI Shareholder in payment for
their LSI Shares and the basis of such shareholder's LSI Stock.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND SUMMARIZES THE
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
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OF THE TRANSACTION. IT IS NOT INTENDED AS AN ALTERNATIVE FOR INDIVIDUAL TAX
PLANNING. EACH STOCKHOLDER OF LSI SHOULD CONSULT HIS OR HER OWN TAX ADVISOR
CONCERNING FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES OF THE SHARE
EXCHANGE TO SUCH HOLDER.
ACCOUNTING TREATMENT
Mizar intends to account for the business combination of Mizar and LSI in
its financial statements by the pooling-of-interests method of accounting.
Receipt by Mizar of a letter from Arthur Andersen LLP, independent public
accountants, concurring with Mizar's conclusion as to the appropriateness of
accounting for the Share Exchange with LSI as a pooling-of-interests, is a
condition precedent to the Share Exchange. The delivery by Price Waterhouse,
independent chartered accountants and the independent accountants of LSI, of a
letter to the effect that, subject to customary qualifications, no conditions
exist with respect to LSI that would preclude the Share Exchange from being
treated as a pooling-of-interests for accounting purposes, is also a condition
of the Share Exchange. Receipt of the foregoing letters is also a condition to
the fairness opinion delivered by Cowen. See "Fairness Opinion of Cowen &
Company." However, in the event such letters are not delivered to Mizar, Mizar
has agreed that it will seek another opinion of a financial advisor that the
Share Exchange, if treated as a purchase and not a pooling of interests, is
fair to the Mizar Stockholders. See "The Share Exchange--Conditions to the
Share Exchange."
OPERATION OF THE BUSINESS OF MIZAR FOLLOWING THE SHARE EXCHANGE
Mizar and LSI will indemnify the former officers and directors of Mizar and
LSI from liabilities arising out of their former positions with such companies
or certain entities affiliated therewith, unless such indemnification is
prohibited by law.
MANAGEMENT FOLLOWING THE SHARE EXCHANGE
Upon the occurrence of the closing of the Share Exchange, Mizar's Board of
Directors will consist of the following five persons (if elected at the Annual
Meeting):
Simon Yates
Sam Smith
John Forrest
Rob Shaddock
David Irwin
Mizar's Certificate of Incorporation, as amended, limits the liability of
directors to the fullest extent permitted by the Delaware General Corporation
Law ("DGCL"). The DGCL provides that directors of a company will not be
personally liable for monetary damages for breach of their fiduciary duties as
directors, except for liability for (i) any breach of their duty of loyalty to
the company or its stockholders, (ii) acts or omissions not in good faith or
involving intentional misconduct or a knowing violation of law, (iii) unlawful
payment of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the DGCL or (iv) any transaction from which the director
derived an improper personal benefit.
Mizar's Bylaws provide that directors and officers of Mizar will be
indemnified against all expenses (including attorneys' fees), judgments, fines
and amounts paid or incurred by them for settlement in any threatened, pending
or completed action, suit or proceeding, including any derivative action, if
they acted in good faith and in a manner they reasonably believed to be in the
best interests of Mizar.
Mizar maintains a policy of insurance under which the directors and officers
of Mizar are insured, subject to the limits of the policy, against certain
losses arising from claims made against such directors and officers by reason
of any acts or omissions covered under such policy in their respective
capacities as directors or officers,
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including liabilities under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of Mizar pursuant to the foregoing
provisions, or otherwise, Mizar has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
See "Description of Mizar Capital Stock--Limitation of Liability and
Indemnification of Directors and Officers."
EXCHANGE OF CERTIFICATES REPRESENTING LSI SECURITIES
Mizar has authorized Securities Transfer Corporation, Dallas, Texas, its
stock transfer agent, to serve as the exchange agent (the "Exchange Agent").
In order to receive the shares of Mizar Common Stock, the LSI Shareholders
will be required to surrender their stock certificates after the Effective
Time, together with a duly completed and executed letter of transmittal, to
the Exchange Agent. Prior to the Closing Date, Mizar will deposit with the
Exchange Agent certificates representing the number of whole shares of Mizar
Common Stock to which the LSI Shareholders are entitled to receive in the
Share Exchange together with cash sufficient to pay for any fractional shares.
Upon receipt from a former shareholder of LSI of a stock certificate or
certificates and a properly completed stock transfer form, the Exchange Agent
will deliver certificates representing such holder's shares of Mizar Common
Stock to the registered holder.
If the shares of Mizar Common Stock are to be delivered to a person other
than the person in whose name the certificates for the shares of LSI capital
stock surrendered for exchange is registered, it will be a condition to
delivery of the certificates representing the shares of Mizar Common Stock (i)
that the stock certificate so surrendered be properly endorsed and otherwise
in proper form for transfer, and (ii) that the person requesting such delivery
must either (a) pay in advance any transfer or other taxes required by reason
of the delivery of certificates to a person other than the registered holder
of the LSI shares surrendered or (b) establish to the satisfaction of the
Exchange Agent that such taxes have been paid or are not applicable.
From and after the Effective Time of the Share Exchange, the stock transfer
books of LSI will be closed, and no transfer of LSI Shares will be made or
consummated thereafter, other than to reflect the acquisition of LSI Stock by
Mizar pursuant to the Share Exchange.
POTENTIAL RESALES OF SHARES OF MIZAR COMMON STOCK RECEIVED IN THE SHARE
EXCHANGE; RESTRICTIONS ON LSI AFFILIATES
The shares of Mizar Common Stock that will be issued if the Share Exchange
is consummated have been registered under the Securities Act and will be
freely transferable, except for shares of Mizar Common Stock issued to any
person who may be deemed to be an "affiliate" of LSI within the meaning of
Rule 145 under the Securities Act. In general, affiliates of LSI include any
person or entity who controls, is controlled by, or is under common control
with LSI. Generally, directors and executive officers are presumed to be
affiliates. Rule 145, among other provisions, imposes certain restrictions
upon the resale of securities received by affiliates of the acquired company
in connection with certain acquisitions and other related transactions and
generally permits resales only in compliance with Rule 144. The shares of
Mizar Common Stock received by affiliates of LSI in the Share Exchange will be
subject to the applicable resale limitations of Rule 145 and Rule 144.
Furthermore, certain of the LSI Shareholders will likely be considered
affiliates of Mizar following the Share Exchange because of their percentage
ownership of Mizar Common Stock following the Share Exchange or their service
on the Mizar Board of Directors. Such persons will, in the absence of a
registration statement covering the resale of their shares, be subject to the
resale restrictions imposed by Rule 144. In general, affiliates of Mizar may
only sell within any three-month period, a number of shares of Mizar Common
Stock that does not exceed the greater of 1% of the then outstanding shares of
Mizar Common Stock or the average weekly reported trading volume in the Mizar
Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 also are subject to certain notice and manner-of-sale requirements
and the availability of current public information about Mizar.
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Additionally, consistent with the requirements of a pooling-of-interests
transaction, affiliates of Mizar and LSI will be restricted from disposing of
any shares of Mizar Common Stock until the publication of financial statements
by Mizar which include at least 30 days of post-Effective Time operating
results. Mizar has agreed to publish the appropriate financial information as
soon as practicable after the completion of the first fiscal quarter of Mizar
which includes at least 30 days of post-Effective Time results. Mizar will
receive a written undertaking from the principal shareholders of LSI not to
sell any shares of Mizar Common Stock owned directly or indirectly by them
until after the publication of these post-Effective Time financial statements.
APPRAISAL RIGHTS.
The Mizar Stockholders are not entitled to dissenters' rights or an
appraisal of their shares in connection with the Share Exchange because, among
other things, the Mizar Stockholders will not exchange or otherwise relinquish
any of their stock as a result of the Share Exchange.
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SUMMARY COMPARISON OF MIZAR COMMON STOCK AND LSI STOCK
Because Mizar is incorporated under the laws of Delaware, the rights of
stockholders and management are primarily governed by the DGCL and Mizar's
Certificate of Incorporation and Bylaws. Because LSI is organized under the
laws of England, the rights of stockholders and management are primarily
governed by Companies Act 1985, as amended (the "Companies Act"), and LSI's
Articles of Association. The following is a summary of the material
differences between the rights of holders of shares of Mizar Common Stock and
the rights of holders of LSI Stock.
AUTHORIZED CAPITAL STOCK. Mizar. Mizar is authorized to issue 25,000,000
shares of Mizar Common Stock, of which 5,135,976 shares were outstanding on
December 31, 1997, and 1,000,000 shares of Preferred Stock, none of which are
outstanding on that date. See "Description of Mizar Capital Stock."
LSI. LSI is authorized to issue (i) 80,000 A Shares, of which approximately
62,747 shares were outstanding and 6,335 were reserved for issuance under LSI
Options on December 31, 1997, (ii) 25,000 B Shares, of which 1 share was
outstanding and 20,115 were reserved for issuance under the LSI Warrants on
December 31, 1997, and (iii) 7,500,000 Preferred Shares, of which 5,708,548
shares were outstanding on December 31, 1997.
RIGHT TO CALL MEETINGS AND SUBMIT PROPOSALS. Mizar. As permitted by the
DGCL, Mizar's Bylaws provide that the special meetings of stockholders may be
called at any time by the Chairman of the Board, the President or the
Secretary at the request in writing of a majority of the Mizar Board of
Directors, specifying the matter or matters proposed to be presented to the
meeting. Each special meeting will be held at such place as the person or
persons calling the meeting shall fix.
LSI. Under English law, notwithstanding any provision to the contrary in a
company's articles of association, an extraordinary general meeting of
shareholders may be called by a request of shareholders holding not less than
one-tenth of the paid-up capital of the company having voting rights at
general meetings.
NOTICE OF STOCKHOLDER MEETINGS. Mizar. Under the Mizar Bylaws, the holders
of the outstanding shares of Mizar Common Stock, represented in person or by
proxy, constitute a quorum at a stockholders' meeting, and, unless otherwise
required by the DGCL, all matters are decided by a majority of the votes cast
at the meeting in person or by proxy. The DGCL generally requires a vote of a
majority of the outstanding shares of common stock to approve mergers (subject
to certain exceptions), share exchanges, the sale of all a corporation's
assets and amendments to a corporation's certificate of incorporation.
Under the DGCL and Mizar's Bylaws, stockholders must be given, personally or
by mail, not fewer than ten nor more than 60 days before the meeting (unless
otherwise required by law) to each stockholder entitled to vote at such
meeting. This notice must state the place, date and hour of the meeting and
the purpose or purposes for which the meeting is called and the name or names
of the persons who have directed the calling of the meeting.
LSI. Under English law, an ordinary resolution requires 14 clear days'
notice and requires a majority vote of those present and voting in person or
by proxy at a quorate general meeting. A special resolution requires 21 clear
days' notice and a majority vote of those present and voting in person or by
proxy at a quorate general meeting. An annual general meeting requires 21
clear days' notice regardless of the type of resolution to be proposed. The
term "clear days' notice" means calendar days and excludes the day of mailing,
the deemed date of receipt of such notice (normally the day following such
mailing, if sent by first class mail) and the date of the meeting itself.
Extraordinary resolutions are limited to certain matters out of the ordinary
course of business, such as a proposal to wind up the affairs of the company
and require 14 clear days notice. Proposals that are the subject of special
resolutions include proposals to change the name of a company, alter a
company's capital structure (but not to increase an existing class of share
capital), change or amend the rights of shareholders, amend a company's
objects (purpose) clause, amend the Articles of Association, and carry out
certain other matters. Most other proposals relating to the ordinary course of
a company's business, such as the election of
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directors, are the subject of an ordinary resolution. Notice of any type of
meeting must state the place, date and hour of the meeting and the general
nature of the business to be transacted at the meeting. The consent or
sanction of the holders of B Shares shall be required before the company can
pass certain resolutions, including the creation, allotment or issue of any
further shares, the modification, variation or alteration of any of the
rights, privileges or restrictions attaching to any class of shares, sales of
the business undertaking or assets, alterations to the memorandum and Articles
of Association, resolutions for winding-up and certain other matters as set
out in the Articles of Association of LSI.
RIGHT TO STOCKHOLDER LISTS. Mizar. Stockholders of Mizar have the right, in
person or by attorney or other agent, upon written demand stating the purpose
thereof, during usual business hours, to inspect for any proper purpose a list
of the names, addresses and shares held by stockholders.
LSI. Shareholders may, in general, inspect the register of shareholders and
index of shareholders' names during business hours without charge. In
addition, any person, even if not a shareholder, may request to be supplied
with a copy of the whole or part of the register upon payment of a charge.
RIGHT TO INSPECTION OF BOOKS AND RECORDS. Mizar. Under the DGCL, any
stockholder of Mizar, upon written request stating the purpose of the
inspection, has the right to inspect for any proper purpose Mizar's books and
records and to make copies of those records.
LSI. Shareholders may inspect the minutes of shareholder meetings and obtain
copies (within seven days) upon payment of a charge. Shareholders are not
entitled to inspect the accounting records of a company or minutes of
directors' meetings. The Secretary of State of Trade and Industry may, on the
application of at least 200 shareholders or of shareholders holding not less
than 10% of the issued share capital of a company, appoint inspectors (i) to
investigate the affairs of the company and report to the Shareholders and (ii)
to inspect all documents relating to the company.
The registers required to be kept by a company are open to public inspection
at LSI's registered office, including the Register of Directors and
Secretaries, Register of Directors' Interests in Shares and Debentures,
Register of Charges, the Register of Debenture Holders and the Register of
Members. Service contracts of directors of the company are available for
inspection in certain circumstances and at certain times. Copies of
instruments creating charges that are registerable with the Registrar of
Companies together with any other charges in the Register of Charges of the
company must be kept and be made available for inspection by shareholders and
creditors without charge.
VOTING RIGHTS. Mizar. The DGCL provides that, unless otherwise provided in a
company's certificate of incorporation, each stockholder is entitled to one
vote for each share of stock held by such stockholder, on each matter
submitted to a vote of stockholders of the company. Mizar's Certificate of
Incorporation provides that a stockholder is entitled to one vote for each
share of Mizar Common Stock held by such stockholder.
As permitted by its Certificate of Incorporation, the Board of Directors of
Mizar at its discretion and without stockholder approval may from time to time
establish one or more series of preferred stock. Any issuance of preferred
stock established by the Mizar Board of Directors may have such rights
(including voting rights) as determined by the Mizar Board. At this time, the
Board of Directors of Mizar has not approved the issuance of any shares of
preferred stock.
Under the DGCL, voting by stockholders for directors is non-cumulative
unless provided otherwise in the certificate of incorporation. Mizar's
Certificate of Incorporation denies cumulative voting. Under noncumulative
voting, each stockholder entitled to vote for directors may vote, for each
director, the number of votes equal to the number of shares held by the
stockholder. Because voting is noncumulative, the holders of a majority of the
Mizar Common Stock may elect all of the directors.
LSI. The voting rights of shareholders are governed by the Companies Act and
by a company's Articles of Association. Shareholders have the statutory right
to demand a poll (a vote by the number of shares held rather
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than by a show of hands) at a general meeting in certain circumstances. Under
LSI's Articles of Association, a poll may be demanded at any general meeting
by the chairman of the meeting or any shareholder or shareholders present in
person or by proxy. Under the Articles of Association of LSI, the holders of
the Preferred Shares shall have the right to receive notice of general
meetings of LSI but not the right to attend or vote either in person or by
proxy (except in certain limited circumstances) and holders of A Shares or B
Shares present in person, by proxy or by corporate representative shall be
entitled on a show of hands to one vote and on a poll to one vote for each A
Share or B Share held.
Two shareholders present in person constitute a quorum for purposes of a
general meeting. LSI's Articles of Association specify that (i) if holders of
any B Shares are entitled to vote on any resolution, then in order for the
meeting to be quorate one such member of the company must be a holder of B
Shares present in person, by proxy or by corporate representation, and (ii) if
the holders of Preferred Shares are entitled to vote on any resolution at a
general meeting, then one such member must be a holder of Preferred Shares
present in person by proxy or by corporate representative in order for it to
be quorate.
Under English law and subject to any special rights or restrictions attached
to any shares, on the show of hands, every shareholder who, being an
individual, is present in person or by proxy, or being a corporation, is
present by a duly authorized corporate representative, at any meeting and is
entitled to vote shall have one vote, and on a poll every shareholder who is
present either personally or by proxy and is entitled to vote shall have one
vote for every ordinary share held by him. Although a proxy is normally only
valid for the meeting therein mentioned, it is also valid for any adjournment
of the meeting. To be valid, the proxy must be in writing and be deposited in
accordance with LSI's Articles of Association, which require the proxy to be
delivered to LSI no later than 48 hours before the time of the meeting or
adjourned meeting.
Should all the shareholders entitled to vote at a general meeting sign
written resolutions in lieu of a vote at such meeting, such written
resolutions shall be valid and effective as resolutions passed at a general
meeting.
DISTRIBUTIONS AND DIVIDENDS. Mizar. Under the DGCL, a corporation is
permitted to declare dividends out of surplus or net profits for the current
or preceding fiscal year, so long as dividends will not reduce capital below
that represented by all classes of stock having preferences upon the
distribution of assets. Mizar has not paid any dividends on the Mizar Common
Stock since its inception. Mizar's Bylaws provide that the Board of Directors
(but not any committee thereof) may, at any regular meeting, declare dividends
upon the issued and outstanding shares of Mizar's capital stock. The ability
of Mizar's Board of Directors to declare dividends for holders of the Mizar
Common Stock may be limited in the future by the rights and priority of
holders of Mizar's preferred stock to the extent Mizar issues preferred stock.
LSI. Holders of LSI Stock will be entitled to receive such dividends as may
be declared by the Board of Directors of LSI. Holders of Preferred Shares are
entitled to receive, in priority to any payment by way of dividend to the
holders of any other class of shares, a cumulative preferential dividend of 6%
per annum on the capital from time to time paid up or credited as paid up on
the Preferred Shares payable in two equal installments on March 31 and
September 30 of each year, beginning April 1, 1998. Preferential shareholders
shall also be entitled to receive, in priority to any payments by way of
dividend to the holders of any other class of shares, a cumulative
preferential dividend at the rate of 8% per annum up to March 31, 1998, and 2%
per annum thereafter. The balance of any other profits shall be distributed
amongst the holders of the LSI Stock pari passu on a pro rata basis.
DILUTION. Mizar. Under NMS rules, Mizar may not issue shares of Mizar Common
Stock equal to 20% or more of the then outstanding shares in connection with
the acquisition of the stock or assets of another entity without stockholder
approval. Issuances of additional shares of Mizar Common Stock or preferred
stock could adversely affect existing stockholders' equity interest in Mizar
and the market price of the common stock. Mizar's Board of Directors, by
resolution, may establish one or more classes or series of preferred stock
having the number of shares, designations, relative voting rights,
preferences, and limitations that the Board of Directors determines without
any stockholder approval.
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Under the DGCL, stockholders are denied preemptive rights unless preemptive
rights are provided for in the certificate of incorporation. Mizar's
Certificate of Incorporation currently does not provide for preemptive rights.
LSI. Without prejudice to the special rights conferred on the holders of
existing class of shares, any shares in the capital of LSI may be issued with
such special rights, privileges or restrictions as shareholders at an LSI
general meeting may (before the issuance of such shares) from time to time
determine. The consent of the holders of B Shares is required to create, allot
or issue further shares, or to modify, vary, alter or abrogate any of the
rights, privileges or restrictions attaching to any class of shares. Subject
to these restrictions, LSI may from time to time by ordinary resolution of
stockholders increase its capital by the creation of new shares, consolidate
all or any of its shares into shares of a larger amount than its existing
shares and subdivide its existing shares or any of them into shares of smaller
amount.
TRANSFERABILITY. Mizar. Shares of Mizar Common Stock are transferable on
Mizar's books, pursuant to applicable law and any rules as the Board of
Directors may prescribe from time to time.
LSI. No share or interest in any shares of LSI stock shall be transferred,
and the directors shall not register any transfer of shares in LSI except in
certain circumstances permitted by its Articles of Association. The board may
in its absolute discretion or at the request of an Investor Director, and
without giving a reason therefor, decline to register transfers of shares over
which LSI has a lien or a transfer of any shares that is not fully paid or
that is to a person of whom the board does not approve. The Articles of
Association set out further provisions in relation to transfers. Any share may
be transferred at any time by a shareholder to any other person with the
written consent of the holders of 75% of each class of issued shares. Shares
may also be transferred by shareholders to a wife, husband, child or step-
child or remoter issue of such shareholders. In certain situations with regard
to certain family trusts, transfers are mandatory. No sale or transfer of any
shares can be made if it would result in the relevant transferees obtaining
thereby controlling interest in LSI, except in certain circumstances where the
shares have been offered to purchase the entire issued share capital of LSI or
preference shares then in issue are to be redeemed in accordance with their
rights.
CHANGE OF CONTROL. Mizar. Certain provisions in Mizar's Certificate of
Incorporation, including the ability of the Board of Directors to issue
classes or series of preferred stock, may impede a takeover attempt. Mizar is
subject to the provisions of Section 203 of the DGCL, which restricts
"business combinations" involving a company and an "interested stockholder"
for three years following the date on which the stockholder acquired 15% or
more of the outstanding voting stock of the company, unless certain statutory
exceptions are satisfied
LSI. Because LSI is a private company, it is not subject to the restrictions
of the City Code on Takeovers and Mergers.
INDEMNIFICATION. Mizar. The DGCL provides that a corporation may indemnify
any person who is, or is threatened to be made, a party to any suit owing to
the fact that the person is or was a director or officer of the corporation or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another organization. Mizar's Certificate of
Incorporation and Bylaws require indemnification of any director or officer of
Mizar to the fullest extent permitted by Delaware law.
LSI. LSI may indemnify its officers and directors against liabilities they
incur in the execution of their duties or in defending proceedings (whether
civil or criminal) in which (i) a judgment has been given in the director or
officer's favor, (ii) the officer or director is acquitted or (iii) relief is
granted by the court from liability for negligence default, breach of duty or
breach of trust in relation to the affairs of LSI or its subsidiaries. The
Articles of Association of LSI provide that directors and officers of LSI will
be entitled to the benefit of this indemnification.
LIMITS ON DIRECTOR'S LIABILITY. Mizar. Mizar's Certificate of Incorporation,
as permitted by the DGCL, eliminates the monetary liability of Mizar's
directors for a breach of their fiduciary duty as directors, except for
liability (i) for any breach of a director's duty of loyalty to Mizar or its
stockholders, (ii) for acts or omissions
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not in good faith or that involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL (which provides for
liability of directors for unlawful payment of dividends or unlawful stock
purchases or redemptions), or (iv) for any transaction from which the director
derived an improper personal benefit.
LSI. English law does not provide any mechanism for limiting the liability
of directors.
APPRAISAL RIGHTS. Mizar. Under Delaware law, appraisal rights are generally
available for the shares of any class or series of stock of a Delaware
corporation in a merger or consolidation. However, no appraisal rights are
available for the shares of any class or series of stock which, at the record
date for the meeting held to approve such transaction, were either (i) listed
on a national security exchange or designated as a national market system
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc. ("NASD") or (ii) held of record by more than 2,000
stockholders. Even if the shares of any class or series of stock meet the
requirements of clause (i) or (ii) above, appraisal rights are available for
such class or series if the holders thereof receive in the merger or
consolidation anything except: (i) shares of stock of the corporation
surviving or resulting from such merger or consolidation; (ii) shares of stock
of any other corporation which at the effective date of the merger or
consolidation is either listed on a national securities change, or designated
as a national market system security on an interdealer quotation system by the
NASD or held of record by more than 2,000 stockholders; (iii) cash in lieu of
fractional shares; or (iv) any combination of the foregoing. No appraisal
rights are available to stockholders of the surviving corporation if the
merger did not require their approval.
LSI. While English law does not generally provide for appraisal rights, if a
stockholder applies to a court as described below, the court may specify such
terms for the acquisition as it considers appropriate. The Companies Act
provides that where a take-over offer (as defined therein) is made for the
shares of a company incorporated in the UK and the offeror has, within four
months of the date of the offer, acquired or contracted to acquire not less
than nine-tenths in value of the shares to which the offer relates, the
offeror may, within two months of reaching the nine-tenths level, notify
stockholders who did not accept the offer and require them to transfer their
shares on the terms of the offer. A dissenting stockholder may apply to the
court within six weeks of the date on which such notice is given, objecting to
the transfer or its proposed terms. The court is unlikely (absent fraud or
oppression) to exercise its discretion to order that the acquisition not take
effect, but it may order that the offeror shall not be entitled to acquire the
relevant shares or specify such terms of the transfer as it finds appropriate.
A minority stockholder is also entitled in these circumstances to require the
offeror to acquire his shares on the terms of the offer.
CONFLICTS OF INTEREST. Mizar. Mizar's Certificate of Incorporation provides
that no contract or other transaction between Mizar and any other corporation
in which one or more of its directors or officers has a pecuniary or other
interest shall, absent fraud, be in any way invalidated or otherwise affected
by the fact that any one or more of the directors of Mizar are pecuniarily or
otherwise interested in, or are directors or officers of, such other
corporation.
LSI. LSI's Articles of Association provide that a director, or a firm in
which he is interested, may act in a professional capacity for LSI and will be
entitled to remuneration for such services as if he were not a director,
except that such party is not authorized to act as auditor to LSI. A director
may contract with LSI provided he discloses his interests. LSI's Articles of
Association also detail those matters on which an interested director may and
may not vote.
STOCKHOLDERS' SUITS. Mizar. Under the DGCL, stockholders may bring
derivative, individual and class action lawsuits against a corporation and its
officers and directors for breach of fiduciary duty and other wrongs. A
derivative action allows stockholders to sue on behalf of the corporation
where those in control of the corporation refuse to assert a claim belonging
to it. In order to maintain a derivative action, a plaintiff must (i) be a
stockholder of the defendant corporation at the time of the alleged wrong;
(ii) make demand on the directors of the corporation to assert the claim
unless such a demand would be futile; and (iii) be an adequate representative
of the corporation's other stockholders.
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LSI. While shareholders can sue a company for infringement of their
membership rights, rights of action against a company and its officers are
generally vested in the majority and not the minority of shareholders.
Protections available to all shareholders under English law include the right
for shareholders of the company to apply to the courts on the grounds that the
affairs of the Company are being conducted in a manner unfairly prejudicial to
the interests of the members or some of the members, to seek to have the
company wound up where that would be just and equitable, or to bring a
derivative action for fraud on the minority.
TRADING IN SHARES. Mizar. Shares of Mizar Common Stock is traded on the NMS
under the symbol "MIZR." Quotations for shares traded on NMS are generally
available in newspapers and other publications, as well as some computer
online services. Investors may place orders for the purchase or sale of shares
traded on NMS through most licensed broker dealers in the United States.
LSI. The shares of LSI are not admitted to dealing in any regulated share
exchange.
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PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
assume a business combination between Mizar and LSI accounted for on a pooling
of interests basis. The pro forma combined condensed financial statements are
based on the respective historical financial statements and the notes thereto,
which are incorporated by reference or included elsewhere herein. The pro
forma combined balance sheet combines Mizar's September 30, 1997 balance sheet
with LSI's September 30, 1997 balance sheet. The pro forma combined condensed
statements of operations combine Mizar's historical statements of operations
for each of the three years in the period ended June 30, 1997 with the
corresponding LSI historical statements of operations for each of the three
years in the period ended September 30, 1997. The pro forma combined condensed
statements of operations also combine Mizar's historical unaudited statements
of operations for the three months ended September 30, 1997 and 1996 with the
corresponding LSI historical unaudited statements of operations for the three
months ended September 30, 1997 and 1996. The amounts included as LSI
historical amounts have been reclassified to conform to classifications used
by Mizar.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the business combination had been consummated at the
beginning of the periods presented, nor is the pro forma financial information
necessarily indicative of future operating results or financial position.
These pro forma combined condensed financial statements and the related
notes should be read in conjunction with the historical financial statements
and the related notes thereto of Mizar and LSI included elsewhere herein. See
"Index to Financial Statements."
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UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED ADJUSTMENTS MIZAR LSI
-------- ----------- ------- -------
<S> <C> <C> <C> <C>
Cash and cash equivalents............... $ 2,943 $ -- $ 1,993 $ 950
Marketable securities, at fair value.... 4,060 (3,871) 7,931 --
Accounts receivable..................... 8,326 -- 2,300 6,026
Inventories............................. 5,371 -- 2,609 2,762
Prepaid expenses and other.............. 1,556 -- 63 1,493
Deferred tax asset...................... 1,104 -- 1,104 --
------- ------- ------- -------
Total current assets................ 23,360 (3,871) 16,000 11,231
Plant and equipment--
Buildings and equipment............... 6,034 -- 1,946 4,088
Furniture and fixtures................ 3,254 -- 325 2,929
------- ------- ------- -------
9,288 -- 2,271 7,017
Less--accumulated depreciation........ (4,823) -- (1,434) (3,389)
------- ------- ------- -------
Plant and equipment, net.............. 4,465 -- 837 3,628
Other assets............................ 91 -- 91 --
------- ------- ------- -------
Total assets............................ $27,916 $(3,871) $16,928 $14,859
======= ======= ======= =======
Current liabilities--
Accounts payable...................... $ 7,158 $ 2,500 $ 1,068 $ 3,590
Accrued compensation.................. 348 -- 348 --
Current portion of debt............... 282 -- -- 282
Other current liabilities............. 3,394 -- 736 2,658
------- ------- ------- -------
Total current liabilities............... 11,182 2,500 2,152 6,530
Deferred income taxes................... 632 -- -- 632
Long-term debt, net of current portion.. 810 -- -- 810
------- ------- ------- -------
Total liabilities....................... 12,624 2,500 2,152 7,972
Preference shares....................... -- (8,173) -- 8,173
Stockholders' equity--
Common stock.......................... 224 78 56 90
Additional paid-in capital............ 23,662 8,801 14,074 787
Net unrealized loss on marketable
securities........................... (5) -- (5) --
Cumulative translation adjustment..... 201 -- -- 201
Retained earnings (deficit)........... (7,389) (7,077) 1,242 (1,554)
------- ------- ------- -------
16,693 1,802 15,367 (476)
Less--treasury stock.................. (1,401) -- (591) (810)
------- ------- ------- -------
Total stockholders' equity.............. 15,292 1,802 14,776 (1,286)
------- ------- ------- -------
Total liabilities and stockholders'
equity................................. $27,916 $(3,871) $16,928 $14,859
======= ======= ======= =======
</TABLE>
37
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1995 (MIZAR) AND THE YEAR ENDED SEPTEMBER 30, 1995 (LSI)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMBINED ADJUSTMENTS MIZAR LSI
-------- ----------- ------- -------
<S> <C> <C> <C> <C>
Net sales............................... $32,043 $ -- $14,018 $18,025
Cost of sales........................... 14,110 -- 6,330 7,780
------- ------- ------- -------
Gross margin............................ 17,933 -- 7,688 10,245
Operating expenses:
Product development and engineering... 5,414 -- 1,577 3,837
Sales and marketing................... 4,728 -- 2,352 2,376
General and administrative............ 3,230 -- 872 2,358
Loss on assets held for sale.......... 204 -- -- 204
------- ------- ------- -------
Total operating expenses................ 13,576 -- 4,801 8,775
------- ------- ------- -------
Operating income........................ 4,357 -- 2,887 1,470
Interest income......................... 117 -- 112 5
Interest expense........................ (447) -- (209) (238)
Other, net.............................. 539 -- (5) 544
------- ------- ------- -------
Income from continuing operations before
income taxes........................... 4,566 -- 2,785 1,781
Provision for income taxes.............. 899 -- 131 768
------- ------- ------- -------
Income from continuing operations....... $ 3,667 $ -- $ 2,654 $ 1,013
======= ======= ======= =======
Net income per share from continuing
operations:
Primary............................... $ 0.36 -- $ 0.68 $ 16.21
======= ======= ======= =======
Fully diluted......................... $ 0.32 -- $ 0.56 $ 16.21
======= ======= ======= =======
Weighted average shares outstanding
Primary............................... 10,311 -- 3,912 63
======= ======= ======= =======
Fully diluted......................... 11,332 -- 4,915 63
======= ======= ======= =======
</TABLE>
38
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1996 (MIZAR) AND THE YEAR ENDED SEPTEMBER 30, 1996 (LSI)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMBINED ADJUSTMENTS MIZAR LSI
-------- ----------- ------- -------
<S> <C> <C> <C> <C>
Net sales............................... $35,194 $ -- $14,052 $21,142
Cost of sales........................... 15,778 -- 6,680 9,098
------- ------- ------- -------
Gross margin............................ 19,416 -- 7,372 12,044
Operating expenses:
Product development and engineering... 4,980 -- 1,652 3,328
Sales and marketing................... 5,040 -- 2,385 2,655
General and administrative............ 4,281 -- 968 3,313
------- ------- ------- -------
Total operating expenses................ 14,301 -- 5,005 9,296
------- ------- ------- -------
Operating income........................ 5,115 -- 2,367 2,748
Interest income......................... 491 -- 485 6
Interest expense........................ (419) -- (80) (339)
Other, net.............................. 68 -- (5) 73
------- ------- ------- -------
Income from continuing operations before
income taxes........................... 5,255 -- 2,767 2,488
Provision (benefit) for income taxes.... 291 -- (507) 798
------- ------- ------- -------
Income from continuing operations....... $ 4,964 $ -- $ 3,274 $1, 690
======= ======= ======= =======
Net income per share from continuing
operations:
Primary............................... $ 0.41 -- $ 0.62 $ 27.04
======= ======= ======= =======
Fully diluted......................... $ 0.41 -- $ 0.60 $ 27.04
======= ======= ======= =======
Weighted average shares outstanding
Primary............................... 12,000 -- 5,316 63
======= ======= ======= =======
Fully diluted......................... 12,217 -- 5,532 63
======= ======= ======= =======
</TABLE>
39
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997 (MIZAR) AND THE YEAR ENDED SEPTEMBER 30, 1997 (LSI)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMBINED ADJUSTMENTS MIZAR LSI
-------- ----------- ------- -------
<S> <C> <C> <C> <C>
Net sales............................. $34,388 $ -- $11,507 $22,881
Cost of sales......................... 15,295 -- 5,929 9,366
------- ---- ------- -------
Gross margin.......................... 19,093 -- 5,578 13,515
Operating expenses:
Product development and engineering. 6,451 -- 2,660 3,791
Sales and marketing................. 5,740 -- 1,780 3,960
General and administrative.......... 6,696 -- 1,522 5,174
------- ---- ------- -------
Total operating expenses.............. 18,887 -- 5,962 12,925
------- ---- ------- -------
Operating income (loss)............... 206 -- (384) 590
Interest income....................... 611 -- 595 16
Interest expense...................... (205) -- -- (205)
Other, net............................ 77 -- -- 77
------- ---- ------- -------
Income from continuing operations
before income taxes.................. 689 -- 211 478
Provision for income taxes............ 397 -- 32 365
------- ---- ------- -------
Income from continuing operations..... $ 292 $ -- $ 179 $ 113
======= ==== ======= =======
Net income (loss) per share from
continuing operations:
Primary............................. $ 0.02 -- $ 0.03 $(12.79)
======= ==== ======= =======
Fully diluted....................... $ 0.02 -- $ 0.03 $(12.79)
======= ==== ======= =======
Weighted average shares outstanding
Primary............................. 13,029 -- 5,475 60
======= ==== ======= =======
Fully diluted....................... 13,029 -- 5,475 60
======= ==== ======= =======
</TABLE>
40
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMBINED ADJUSTMENTS MIZAR LSI
-------- ----------- ------ ------
<S> <C> <C> <C> <C>
Net sales.................................. $8,374 $ -- $3,025 $5,349
Cost of sales.............................. 3,764 -- 1,380 2,384
------ ---- ------ ------
Gross margin............................... 4,610 -- 1,645 2,965
Operating expenses:
Product development and engineering...... 1,304 -- 474 830
Sales and marketing...................... 1,338 -- 464 874
General and administrative............... 1,482 -- 351 1,131
------ ---- ------ ------
Total operating expenses................... 4,124 -- 1,289 2,835
------ ---- ------ ------
Operating income .......................... 486 -- 356 130
Interest income............................ 138 -- 135 3
Interest expense........................... (76) -- -- (76)
Other, net................................. 18 -- -- 18
------ ---- ------ ------
Income from continuing operations before
income taxes.............................. 566 -- 491 75
Provision for income taxes................. 81 -- 52 29
------ ---- ------ ------
Income from continuing operations.......... $ 485 $ -- $ 439 $ 46
====== ==== ====== ======
Net income per share from continuing
operations:
Primary.................................. $ 0.04 -- $ 0.08 $ 0.74
====== ==== ====== ======
Fully diluted............................ $ 0.04 -- $ 0.08 $ 0.74
====== ==== ====== ======
Weighted average shares outstanding
Primary.................................. 12,450 -- 5,579 63
====== ==== ====== ======
Fully diluted............................ 12,450 -- 5,579 63
====== ==== ====== ======
</TABLE>
41
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMBINED ADJUSTMENTS MIZAR LSI
-------- ----------- ------ ------
<S> <C> <C> <C> <C>
Net sales................................... $10,286 $ -- $3,203 $7,083
Cost of sales............................... 4,205 -- 1,555 2,650
------- ----- ------ ------
Gross margin................................ 6,081 -- 1,648 4,433
Operating expenses:
Product development and engineering....... 1,705 -- 571 1,134
Sales and marketing....................... 1,835 -- 520 1,315
General and administrative................ 1,512 -- 353 1,159
------- ----- ------ ------
Total operating expenses.................... 5,052 -- 1,444 3,608
------- ----- ------ ------
Operating income............................ 1,029 -- 204 825
Interest income............................. 148 -- 146 2
Other, net.................................. 32 -- -- 32
------- ----- ------ ------
Income from continuing operations before
income taxes............................... 1,209 -- 350 859
Provision for income taxes.................. 193 -- 35 158
------- ----- ------ ------
Income from continuing operations........... $ 1,016 $ -- $ 315 $ 701
======= ===== ====== ======
Net income per share from continuing
operations:
Primary................................... $ 0.08 -- $ 0.06 $ 4.67
======= ===== ====== ======
Fully diluted............................. $ 0.08 -- $ 0.06 $ 4.67
======= ===== ====== ======
Weighted average shares outstanding
Primary................................... 12,710 -- 5,404 57
======= ===== ====== ======
Fully diluted............................. 13,013 -- 5,458 57
======= ===== ====== ======
</TABLE>
42
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined financial statements give effect to the
business combination between Mizar, Inc. and Loughborough Sound Images, Ltd.
accounted for on a pooling-of-interests basis. The pro forma combined
financial statements are based on the respective historical financial
statements and the notes thereto. The pro forma combined balance sheet
combines Mizar's and LSI's balance sheet as of September 30, 1997. The pro
forma combined statements of operations combine Mizar's and LSI's historical
statements of operations for each of the three years in the period ended June
30, 1997, and September 30, 1997, respectively, and the unaudited statements
of operations for the three months ended September 30, 1997 and September 30,
1996. LSI's historical statements of operations for the years ended September
30, 1997 and 1996 include the same unaudited statement of operations
information presented for the three months ended September 30, 1997 and 1996.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the business combination had been consummated at the
beginning of the periods presented nor is it necessarily indicative of future
operating results or financial position.
These pro forma combined financial statements should be read in conjunction
with the historical financial statements and the related notes thereto of
Mizar and LSI included or incorporated elsewhere herein. See "Index to
Financial Statements."
Adjustments to the pro forma combined statements of operations assume the
merger of Mizar and LSI was consummated on July 1, 1994. The adjustments to
the pro forma balance sheet assume the business combination was consummated on
September 30, 1997. The business combination has been accounted for using the
pooling-of-interests method of accounting. The following adjustments have been
provided in connection with the business combination in accordance with
Accounting Principles Board Opinion No. 16:
1) Reflecting the redemption of Preferred Shares held by Bank Holdings
and the elimination of related interest expense. The amount of the
redemption is $9,250,000 and is reflected as a reduction in
marketable securities and as a reduction in the number of outstanding
Preference Shares and retained earnings.
2) The exercise of warrants for ordinary shares in LSI held by Bank
Holdings. This adjustment is reflected as a $19,000 increase in common
stock, a $5,360,000 increase in paid-in-capital and a $5,379,000
increase in marketable securities. The issuance of shares of Mizar
Common Stock in exchange for the outstanding shares of LSI is reflected
as a $59,000 increase to common stock and a decrease in paid-in-capital.
<TABLE>
<CAPTION>
Proforma Adjustments
Marketable Securities Accrued Liabilities Preference Shares
--------------------- ------------------- -----------------
Debit Credit Debit Credit Debit Credit
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adjustment 1 -- (9,250) -- -- 9,250
-- (688)
(389)
Adjustment 2 5,379 -- -- -- -- --
Adjustment 3 -- -- -- (2,500) -- --
Adjustment 4 -- -- -- -- -- --
Total 5,379 (9,250) -- (2,500) 9,250 (1,077)
===== ====== ===== ====== ===== ======
Net Adjustment -- (3,871) -- (2,500) 8,173 --
===== ====== ===== ====== ===== ======
<CAPTION>
Common Stock Additional Paid-in Capital Retained Earnings
------------------- -------------------------- -----------------
Debit Credit Debit Credit Debit Credit
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adjustment 1
-- -- -- -- 688 --
389
Adjustment 2 -- (19) 59 (5,360)
(59)
Adjustment 3 -- -- -- 2,500 --
Adjustment 4 -- -- -- (3,500) 3,500 --
Total -- (78) 59 (8,860) 7,077 --
===== === ===== ====== ===== =====
Net Adjustment -- (78) -- (8,801) 7,077 --
===== === ===== ====== ===== =====
</TABLE>
3) The accrual of expenses related to the business combination of
$2,500,000. This accrual is reflected as an increase in accounts
payable and a reduction in retained earnings. This charge will be
reflected as an expense in the first accounting period immediately
following the consummation of the business combination.
4) Retained earnings has been decreased and paid in capital has been
increased for a $3,500,000 compensation expense related to certain
variable options of LSI. This non-cash charge will be reflected as an
expense in the first accounting period immediately following the
consummation of the combination.
43
<PAGE>
DESCRIPTION OF MIZAR CAPITAL STOCK
The Company's authorized capital stock consists of 26,000,000 shares of
capital stock, par value $.01 per share, of which 25,000,000 are Common Stock
and 1,000,000 are Preferred Stock, par value $.01 per share (the "Preferred
Stock"). As of December 31, 1997, Mizar had 5,135,976 shares of Mizar Common
Stock outstanding.
The following summary description of Mizar's capital stock does not purport
to be complete. Persons desiring additional information may wish to refer to
Mizar's Certificate of Incorporation, as amended (the "Mizar Certificate of
Incorporation"), and Bylaws of Mizar, as amended (the "Mizar Bylaws"), copies
of which have been filed or incorporated as exhibits to the Registration
Statement.
COMMON STOCK
The holders of Mizar Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders, including the election of
directors. The Mizar Common Stock does not have cumulative voting rights,
which means that the holders of a majority of the shares voting for election
of directors can elect all members of the Board of Directors. Dividends may be
paid ratably to holders of Mizar Common Stock when and if declared by the
Board of Directors out of funds legally available therefor. Upon liquidation
or dissolution of Mizar, the holders of Mizar Common Stock will be entitled to
share ratably in the assets of Mizar legally available for distribution to
stockholders after payment of all liabilities and the liquidation preferences
of any outstanding Preferred Stock.
The holders of Mizar Common Stock have no preemptive or conversion rights or
other subscription rights and are not subject to redemption or sinking fund
provisions or to calls or assessments by Mizar. The shares of Mizar Common
Stock offered hereby will be, when issued and paid for, fully paid and not
liable for call or assessment. Mizar will apply for listing of the Mizar
Common Stock to be issued upon the Share Exchange on the NMS.
As of December 31, 1997, there were approximately 1,500 beneficial holders
of Mizar Common Stock.
PREFERRED STOCK
Under governing Delaware law and the Mizar Certificate of Incorporation, no
action by Mizar's stockholders is necessary, and only action of the Board of
Directors is required, to authorize the issuance of any of the Preferred
Stock. The Board of Directors is empowered to establish, and to designate the
name of, each class or series of the Preferred Stock.
During 1987 and 1988, the Board of Directors designated two different series
of Preferred Stock; however, these shares are no longer outstanding. Although
Mizar has no present plans to issue additional series of Preferred Stock, such
shares may be issued from time to time in one or more classes or series with
such designations, powers, preferences, rights, qualifications, limitations
and restrictions as may be fixed by Mizar's Board of Directors. The Board of
Directors, without obtaining stockholder approval, may issue such shares with
voting or conversion rights or both and thereby dilute the voting power and
equity of the holders of Mizar Common Stock and adversely affect the market
price of such stock.
The existence of authorized Preferred Stock may have the effect of
discouraging an attempt, through acquisition of a substantial number of shares
of Mizar Common Stock, to acquire control of Mizar with a view to effecting a
merger, sale or exchange of assets or a similar transaction. The anti-takeover
effects of authorized Preferred Stock may deny stockholders the receipt of a
premium on their Mizar Common Stock and may also have a depressive effect on
the market price of the Mizar Common Stock.
OUTSTANDING OPTIONS AND WARRANTS
As of December 31, 1997, there were outstanding options to purchase 596,090
shares of Mizar Common Stock (including shares issuable under options granted
pursuant to Mizar's Directors' Stock Option Plan) at prices
44
<PAGE>
ranging from $0.15 to $9.13 per share, with a weighted average exercise price
of $3.66 per share. In addition, there are outstanding warrants to purchase
15,000 shares of Mizar Common Stock at a price of $10.20 per share.
Mizar has agreed to issue new Mizar Options in exchange for outstanding LSI
Options in the Share Exchange. See "The Share Exchange--Share Exchange--LSI
Options."
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Mizar Certificate of Incorporation, as amended, limits the liability of
directors to the fullest extent permitted by the DGCL. The DGCL provides that
directors of a company will not be personally liable for monetary damages for
breach of their fiduciary duties as directors, except for liability for (i)
any breach of their duty of loyalty to the company or its stockholders, (ii)
acts or omissions not in good faith or involving intentional misconduct or a
knowing violation of law, (iii) unlawful payment of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the DGCL or
(iv) any transaction from which the director derived an improper personal
benefit.
The Mizar Bylaws provide that directors, trustees, officers, employees and
agents of Mizar will be indemnified against all expenses (including attorneys'
fees), judgments, fines and amounts paid or incurred by them for settlement in
any threatened, pending or completed action, suit or proceeding, including any
derivative action, if they acted in good faith and in a manner they reasonably
believed to be in the best interests of Mizar. Mizar has entered into
agreements with each of its directors that provide for Mizar to indemnify its
directors to the extent permitted under applicable law.
TRANSFER AGENT
The transfer agent and registrar for the Mizar Common Stock is Securities
Transfer Corporation, Dallas, Texas.
See "Summary Comparison of Mizar Common Stock and LSI Stock" for additional
information regarding the capital stock of Mizar.
45
<PAGE>
BUSINESS OF MIZAR
GENERAL
Mizar designs, develops and markets multi-processor DSP computing sub-
systems used primarily for real-time image and signal processing. Mizar's
products are typically sold to original equipment manufacturers in a variety
of industries. Many of Mizar's DSP-based product line are ruggedized products,
capable of withstanding extremes of temperature, shock, humidity and
vibration. Mizar continues to sell its prior generation of non-DSP computing
sub-systems primarily to existing commercial customers for industrial
automation applications.
DIGITAL SIGNAL PROCESSING
DSP involves the mathematical manipulation and analysis of digitized light,
sound and other naturally occurring analog wave forms. Examples of input
devices which collect and digitize these analog wave forms include video
cameras, radar arrays, digital x-ray cameras, sonar arrays and a variety of
telecommunications devices. As compared to general computing, the mathematical
algorithms used to manipulate digitized images, audio and speech use
multiplication and addition functions more intensively. DSP microprocessors
perform these functions in one clock cycle at millions of instructions per
second, whereas non-DSP microprocessors may require several clock cycles to
accomplish the same operation. Generally, the mathematical algorithms are
applied in order to modify or improve a signal or image. Multi-processor DSP
is an enabling technology applicable to a diverse range of existing and
emerging real-time image and signal processing applications, including
communications, military and aerospace electronics and machine vision.
STRATEGY
Mizar's strategy is to use its depth of knowledge in multi-processor DSP
design to be a leading supplier of DSP computing sub-systems to the real-time
image and signal processing industry. Key elements of Mizar's strategy include
the following:
Provide General Purpose Enabling DSP Technology. Mizar has designed its DSP
products for a broad range of defense and commercial applications. Because
Mizar's products are programmable, they are intended to interface with a wide
variety of other components or application software supplied by Original
Equipment Manufacturers ("OEMs"). Mizar has focused its product line on those
applications where high performance, product quality and reliability, rather
than cost, are the customer's most important product considerations. Mizar's
programmable, general purpose products permit customers to decrease the time
required to develop their products, with the benefit of "reduced time to
market."
Ruggedization Design Capability. The military and aerospace marketplace
requires that many system components be able to operate in ruggedized
environments, capable of withstanding extremes of temperature, shock,
vibration and humidity. Mizar's products are available in several ruggedized
build options which address severe environmental conditions.
Enhance Financial Stability. Mizar believes that commercial and defense
customers select suppliers based in part upon their financial condition, and
therefore their perceived ability to meet long-term customer requirements. The
completion of Mizar's initial public offering in 1995 has further enhanced
Mizar's financial stability.
46
<PAGE>
MULTI PROCESSOR DSP PRODUCTS
Mizar offers products based on two families of TI DSP microprocessors, the
TMS320C40 ("C40") and the TMS320C60 ("C60"), each of which is designed into
VME computing environments. VME is an open bus which is very common to
industrial and defense applications but rarely used in desktop or workstation
computers. Descriptions of Mizar's product lines follow:
Commercial C40 on VME Product Line. This product line consists of a series
of C40s on VME single board computers and associated operating software.
Products are available in single, dual, quad and octal processor versions, all
of which are generally software compatible. A variety of memory configurations
and daughtercards is available.
Ruggedized C40 on VME Product Line. Mizar offers a variety of harsh
environment DSP products using C40s in the VME computing environment. This
product line is primarily aimed at defense applications in which a controlled
environment may not always be present such as battlefield vehicles or
aircraft.
Commercial C60 on VME Product Line. This product line is targeted for
developers of a broad range of signal processing applications, including
telecommunications and defense applications.
NON-DSP PRODUCTS
Mizar continues to sell its prior generation of non-DSP computing sub-
systems, primarily to existing commercial customers who have previously
designed these products into their equipment which they continue to market for
industrial automation applications. Mizar does not actively market these
products and is not currently designing any new non-DSP products. Mizar
foresees a steady decline in the sales of these products.
SALES AND MARKETING
Mizar uses its own direct sales force and, to a lesser extent, independent
manufacturer's representatives and distributors to market its products.
Mizar's customers frequently require that a product be tailored to their
particular requirements. Mizar believes that it is advantageous to have its
own employees interacting directly with customers in order to fully understand
their requirements. Mizar's sales personnel generally have engineering
backgrounds, which Mizar believes enhances their ability to create
relationships with their customer counterparts, who are typically design and
systems engineers. Mizar maintains regional sales offices on the West Coast
and in the Northeast region of the United States and a sales office in the
United Kingdom.
DESCRIPTION OF PROPERTIES
Mizar's general corporate offices, research and development facilities and a
regional sales office are located in Carrollton, Texas (a suburb of Dallas)
where it leases approximately 21,000 square feet. Mizar also leases offices
for regional sales operations on the West Coast and in the Northeast region of
the United States and a sales office in the United Kingdom.
CUSTOMERS
Mizar's customer base consists primarily of defense contractors and OEMs
which incorporate Mizar's products as a part of their systems. Typically,
these customers initially purchase a small volume of products for development
testing and comparison to competitive products. If upon completion of testing
the customer elects to incorporate Mizar's product into its design, it
frequently purchases Mizar's standard or customized products in higher
volumes.
Mizar's historic customer base for non-DSP products was OEMs engaged in
commercial product applications such as industrial automation. Mizar's DSP
customer base consists primarily of defense customers, including the major
prime defense contractors. Mizar's objective is to build a base of both
defense contractors and commercial OEMs.
47
<PAGE>
Northrop Grumman Corp. and Lockheed Martin Corp. represented approximately
16% and 15%, respectively, of Mizar's fiscal 1997 revenues. On July 3, 1997,
Lockheed Martin Corp. and Northrop Grumman Corp. announced a merger plan.
BACKLOG
Mizar's backlog includes bookings based upon the receipt of a written
purchase order or contract. It generally does not include options in contracts
for additional quantities not covered by a current purchase order. Mizar's
backlog at June 30, 1997 was $7,729,000 as compared to $2,267,000 at June 30,
1996. A much larger proportion of the customer orders received in fiscal 1997
required engineering effort in order to meet ruggedization (environmental)
specifications which in turn has resulted in longer lead times. Much of the
adaptation is the result of environmental requirements associated with deployed
customer systems in the military/aerospace market. Previously, a large portion
of the Company's DSP business were modest orders for relatively standard
products which were used to prove a concept or deploy a small number of
prototypes or systems. Mizar cautions readers who may utilize published bookings
and backlog information as tools to forecast Mizar's revenue during a given time
frame since certain purchase orders may be subject to cancellation and/or
delivery schedule revision.
PRODUCT DEVELOPMENT
Mizar has made a significant investment in its engineering group. Mizar's
current internal design strengths exist in areas such as DSP computing, high
speed digital circuit design, architecture for multi-processor computing,
harsh environment architectures, driver and related software design and rapid
customization of designs.
With respect to VME based DSP products, Mizar has augmented its internal
research and development capability with licensed technology from TI DSEG,
although the last license of technology with TI DSEG was in 1995.
In February 1997, Mizar announced the formation of its Telecommunications
Products Group. The Telecommunications Products Group will be responsible for
migrating Mizar's extensive experience and expertise in designing and building
real-time signal processing products to the telecommunications markets.
During the last three fiscal years, Mizar incurred approximately $2,660,000,
$1,652,000, and $1,577,000 of product development and engineering expenses,
exclusive of royalties paid under the TI DSEG license agreements.
MANUFACTURING AND QUALITY CONTROL
Mizar relies exclusively upon subcontractors to assemble its products. Mizar
believes that this enhances its flexibility in product development, as it is
not required to invest in specialized capital equipment that may have limited
use, but instead can choose subcontractors based upon their capabilities for
particular manufacturing tasks. The existence of these outsourcing
relationships allows Mizar to absorb varying production levels without
incurring the costs normally attendant to such fluctuations. Mizar has
relationships with several contract manufacturers but has no long-term
contracts with any of them. Mizar believes there are a number of contract
manufacturers equipped to meet its needs although there is no assurance of
this in the future. Mizar's internal manufacturing operations consist
primarily of test engineering, material purchasing, incoming inspection and
acceptance testing. Mizar's subcontractors perform quality control at their
facilities. Mizar undertakes subsequent additional quality control procedures.
All of Mizar's products incorporate electronic components available from a
limited number of sources and, in certain instances, from a single source. Most
notably, all of Mizar's DSP products use DSP microprocessors manufactured by
Texas Instruments. Additional single source suppliers for Mizar are Cypress
Semiconductor, Linear Technology, Matsushita, Motorola, Philips, Quality
Semiconductor, Advanced Interconnection Technology, Quick Logic and Xilinx.
Mizar believes that electronic component availability is sufficient to meet the
demand for its products. See "Risk Factors -- Dependence upon Suppliers and
Subcontractors."
48
<PAGE>
COMPETITION
The industries and markets in which Mizar operates are highly competitive,
and Mizar believes that competition is likely to intensify. Many of Mizar's
competitors have substantially greater financial resources, larger research,
development and sales staffs as well as greater name recognition than Mizar.
Mizar has direct competitors which use DSP technology similar to that of
Mizar. Mizar also has competitors offering technologies other than
programmable DSPs for signal/image processing applications. These technologies
include application-specific integrated circuits ("ASICs"), fixed program DSPs
and programmable non-DSP processors. From time to time, Mizar competes with
the in-house design department of its customers. However, Mizar believes that
its customers increasingly rely on outside suppliers for sub-systems such as
those designed and marketed by Mizar.
New or improved products can be expected from competitors in the future.
Market participants must compete on many fronts, including development time;
engineering expertise; product quality, performance and reliability; price;
name recognition; financial stability; customer support; and access to
distribution channels.
INTELLECTUAL PROPERTY
Mizar believes that due to the rapid pace of innovation within its industry,
factors such as product quality, performance and reliability are more
important in establishing and maintaining customer relationships than are the
various protections afforded by patents. Mizar generally refers to its
products by part numbers rather than by their specific names, and therefore,
has not sought trade name protection for product names.
Mizar has entered into a series of license agreements with TI DSEG relating
to the design of several DSP products. These licenses are exclusive, perpetual
and world wide, subject to Mizar's payment of required royalties and
performance of its other obligations under the licenses. In fiscal 1997, the
royalty expense related to these licenses was approximately $225,000. The
royalties due pursuant to the majority of these licensing agreements were
fully paid up in fiscal 1997. None of the licenses restrict Mizar from
developing independently non-licensed designs on a non-royalty basis or
allowing the development of designs based on DSP microprocessors from other
suppliers. On July 11, 1997, Texas Instruments completed the sale of the DSEG
group to Raytheon Company. Texas Instruments and Mizar have executed an
agreement whereby all of Texas Instruments' rights and interests in the
licensing agreements have been assigned to a subsidiary of Raytheon Company,
named Raytheon TI Systems, Inc.
EMPLOYEES
As of June 30, 1997, Mizar employed 51 full-time employees, including 15 in
product development, 10 in sales and marketing, 18 in operations and 8 in
finance and administration. Mizar's continued success will depend in large
measure on its ability to attract and retain highly skilled employees. None of
Mizar's employees is represented by a labor union.
49
<PAGE>
MARKET FOR AND DIVIDENDS ON MIZAR COMMON STOCK
Mizar's Common Stock is traded on the NMS under the ticker symbol "MIZR."
The following table sets forth the quarterly high and low sales prices on the
Nasdaq National Market since Mizar's initial public offering of Mizar Common
Stock on September 28, 1995:
<TABLE>
<CAPTION>
FISCAL YEAR HIGH LOW
----------- ---- ---
<S> <C> <C>
1996
First Quarter (9/28/95 to 9/30/95).......................... 9 1/2 9
Second Quarter.............................................. 9 1/2 8 1/8
Third Quarter............................................... 8 3/4 5
Fourth Quarter.............................................. 8 5
1997
First Quarter............................................... 7 3 3/4
Second Quarter.............................................. 5 7/8 4
Third Quarter............................................... 5 1/8 3 3/4
Fourth Quarter.............................................. 3 7/8 2 3/4
1998
First Quarter............................................... 7 3/8 3 3/8
Second Quarter ............................................. 7 1/4 5 1/2
Third Quarter (through 1/7/98).............................. 6 4 7/8
</TABLE>
On November 19, 1997, the last trading day prior to the issuance of a press
release by Mizar stating that it had executed the Share Purchase Agreement,
the closing price per share of the Mizar Common Stock as reported on the NMS
was $6.125. On January __, 1998, the last trading day prior to printing of
this Proxy Statement/Prospectus, the closing price per share of the Mizar
Common Stock as reported on the NMS was $__.
As of the Record Date of the Annual Meeting, there were approximately 1,500
beneficial holders of the Mizar Common Stock, of which approximately 65 were
record holders.
Mizar has not declared or paid any cash or other dividends on the Mizar
Common Stock to date and has no intention of doing so in the foreseeable
future. The declaration of dividends, cash or otherwise, is subject to the
discretion of Mizar's Board of Directors and will depend on a number of
factors, including the cash position, earnings, financial position and
anticipated financial requirements of Mizar and other factors deemed relevant
by the Board of Directors.
50
<PAGE>
MIZAR SELECTED FINANCIAL DATA
The following table presents selected historical financial data for Mizar
for each of the five fiscal years in the period ended June 30, 1997 and for
the three months ended September 30, 1996 and 1997. The data presented is
derived from the financial statements of Mizar and should be read in
conjunction with the more detailed information and financial statements and
notes thereto, of Mizar, which are included elsewhere in this Proxy
Statement/Prospectus. In the opinion of the management of Mizar, the interim
financial information includes all adjustments (consisting only of normal
recurring accruals) that are considered necessary for a fair presentation of
the results of operations for such periods. Results for the interim periods
are not necessarily indicative of results for the year.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
--------------------------------------- --------------
1993 1994 1995 1996 1997 1996 1997
------ ------- ------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net sales............... $7,454 $11,088 $14,018 $14,052 $11,507 $3,025 $3,203
Cost of sales........... 3,448 5,305 6,330 6,680 5,929 1,380 1,555
------ ------- ------- ------- ------- ------ ------
Gross margin............ 4,006 5,783 7,688 7,372 5,578 1,645 1,648
Operating expenses:
Product development &
engineering........... 973 1,191 1,577 1,652 2,660 474 571
Sales and marketing.... 2,101 2,191 2,352 2,385 1,780 464 520
General and
administrative........ 729 899 872 968 1,522 351 353
------ ------- ------- ------- ------- ------ ------
Total operating
expenses ........... 3,803 4,281 4,801 5,005 5,962 1,289 1,444
------ ------- ------- ------- ------- ------ ------
Operating income (loss). 203 1,502 2,887 2,367 (384) 356 204
Interest and other
expense (income)....... 188 208 102 (400) (595) (135) (146)
------ ------- ------- ------- ------- ------ ------
Income before provision
(benefit) for income
taxes.................. 15 1,294 2,785 2,767 211 491 350
Provision (benefit) for
income taxes........... -- 25 131 (507) 32 52 35
------ ------- ------- ------- ------- ------ ------
Income before
extraordinary item..... 15 1,269 2,654 3,274 179 439 315
------ ------- ------- ------- ------- ------ ------
Extraordinary item--gain
on debt restructuring.. 1,768 -- -- -- -- -- --
------ ------- ------- ------- ------- ------ ------
Net income.............. $1,783 $ 1,269 $ 2,654 $ 3,274 $ 179 $ 439 $ 315
====== ======= ======= ======= ======= ====== ======
Net income per share:
Primary................ $ 0.75 $ 0.43 $ 0.68 $ 0.62 $ 0.03 $ 0.08 $ 0.06
====== ======= ======= ======= ======= ====== ======
Fully diluted.......... $ 0.53 $ 0.33 $ 0.56 $ 0.60 $ 0.03 $ 0.08 $ 0.06
====== ======= ======= ======= ======= ====== ======
Net income per share on
extraordinary item:
Primary................ $ 0.74 ---- ---- ---- ---- ---- ----
====== ======= ======= ======= ======= ====== ======
Fully diluted.......... $ 0.51 ---- ---- ---- ---- ---- ----
====== ======= ======= ======= ======= ====== ======
Weighted average shares
outstanding:
Primary................ 2,380 2,944 3,912 5,316 5,475 5,579 5,404
====== ======= ======= ======= ======= ====== ======
Fully diluted.......... 3,489 4,018 4,915 5,532 5,475 5,579 5,458
====== ======= ======= ======= ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1997
------ ------ ------ ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.. $ 183 $1,444 $3,710 $ 1,550 $ 2,266 $ 1,993
Marketable securities...... 75 76 76 10,286 8,598 7,931
Working capital............ 1,203 2,466 4,094 14,144 13,688 13,848
Total assets............... 3,109 4,855 7,122 16,095 16,696 16,928
Total debt and capital
leases (including current
portions)................. 2,457 2,080 1,945 15 2 --
Stockholders' equity....... (33) 1,311 3,607 14,669 14,662 14,776
</TABLE>
51
<PAGE>
MIZAR MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS, THREE YEARS ENDED JUNE 30, 1997
Net Sales. Net sales increased from $14,018,000 in fiscal 1995, to
$14,052,000 in fiscal 1996, and declined to $11,507,000 in fiscal 1997.
Revenues from DSP-based products grew from $8,174,000 in fiscal 1995, to
$8,697,000 in fiscal 1996, and declined to $7,701,000 in fiscal 1997, however
DSP sales as a percent of total revenue increased in fiscal 1997 to 67% from
62% in fiscal 1996. The majority of DSP-based revenues were to prime
contractors for the federal government and were used in defense, aviation and
intelligence applications. Mizar believes that the trend of the federal
government to emphasize the purchase of commercial-off-the-shelf (COTS)
products versus proprietary designs dedicated to a specific application has
helped stimulate the growth in Mizar's DSP revenues and is expected to
continue to have a positive impact in the future. Major program selling in
this industry inherently raises the risk of revenue fluctuations such as that
experienced in fiscal 1997. The decline in DSP revenues occurred despite
bookings associated with DSP-based products increasing from $8,288,000 in
fiscal 1996 to $11,367,000 in fiscal 1997. More recently, Mizar has also
experienced a significant increase in bookings for "ruggedized" DSP-based
products. The time lag between order booking and revenue recognition
associated with ruggedized products can be much longer due to engineering
effort, component ordering and manufacturing lead-times. Revenues from non-DSP
products declined from $5,844,000 in fiscal 1995, to $5,355,000 in fiscal
1996, and to $3,806,000 in fiscal 1997. The rate of decline in revenues from
non-DSP products is expected to accelerate in fiscal 1998.
Gross Margin. Gross margin as a percentage of revenues was 54.8% in fiscal
1995, 52.5% in fiscal 1996, and 48.5% in fiscal 1997. The decline in gross
margin percentage in 1996 is mostly attributable to the presence of labor and
capacity inefficiencies caused by lower production volumes in the fourth
fiscal quarter of 1996, and to a lesser extent, the third fiscal quarter. The
decline in gross margin percentage in 1997 is mostly attributable to reserves
taken for excess and obsolete inventory and fixed manufacturing costs spread
over lower volume. Mizar's gross margin percentage has varied each year, and
each quarter, in both a positive and negative fashion due to factors such as
the inefficiencies mentioned above, and changes in customer and specific
product mix. Such variations will continue to impact gross margin percentages
in a similar fashion during future reporting periods as DSP-based products
comprise a larger percentage of revenues.
Engineering. Engineering expenses increased from $1,577,000 in fiscal 1995,
to $1,652,000 in fiscal 1996, and to $2,660,000 in fiscal 1997. These expenses
expressed as a percentage of revenues were 11.2%, 11.8%, and 23.1% in fiscal
1995, 1996 and 1997, respectively. Mizar has steadily increased its investment
in new product development and will continue to do so throughout fiscal 1998,
especially in the areas of expanding the capabilities of its products to
function in non-benign environments such as extended shock, vibration,
humidity or temperature ranges. Engineering expenses are expected to increase
in fiscal 1998, in part, due to product development associated with Mizar's
Telecommunications Products Group.
Sales and Marketing. Sales and marketing expenses increased from $2,352,000 in
fiscal 1995, to $2,385,000 in fiscal 1996, and declined to $1,780,000 in fiscal
1997. These expenses expressed as a percentage of revenues were 16.8%, 17.0%,
and 15.5% in fiscal 1995, 1996 and 1997, respectively. The decline in fiscal
1997 reflected both a reduction in commissions paid (due to the revenue
decrease) and a lower number of sales personnel during fiscal 1997. These
expenses are expected to increase in fiscal 1998 as a result of increased
spending related to strategic and product marketing efforts associated with
entering new product and geographical markets. In February 1997, Mizar announced
the formation of its Telecommunications Products Group. Product development and
marketing efforts associated with expanding into this market will increase in
fiscal 1998.
General and Administrative. General and administrative expenses were
$872,000 in fiscal 1995, $968,000 in fiscal 1996, and $1,522,000 in fiscal
1997. These expenses expressed as a percentage of revenues were 6.2%, 6.9%,
and 13.2% in fiscal 1995, 1996 and 1997, respectively. The increase in fiscal
1997 is due to the recognition of $340,000 associated with both the employment
agreement of David Irwin, who resigned in June 1997, and the resulting
executive search fees for a new Chief Executive Officer for Mizar.
52
<PAGE>
Interest Income. Interest income increased from $112,000 in fiscal 1995, to
$485,000 in fiscal 1996, and to $595,000 in fiscal 1997. Interest income
increased significantly in 1996 and 1997 primarily as a result of investing
the proceeds of Mizar's initial public offering and, to a lesser extent, cash
generated from operations.
Interest Expense. Interest expense was $209,000 and $80,000 in fiscal 1995
and 1996, respectively, and relates primarily to previously outstanding
convertible and subordinated debentures. The convertible debentures were
converted to common stock in connection with the initial public offering in
fiscal 1996 and the subordinated debentures were retired using the proceeds of
the initial public offering. Interest expense was not significant in fiscal
1997, and relates to capital leases.
Provision (Benefit) for Income Taxes. Provision (benefit) for income taxes
was $131,000, $(507,000), and $32,000 in fiscal 1995, 1996 and 1997,
respectively. As a result of the significant net losses incurred by Mizar
through fiscal 1991, Mizar has accumulated a net operating loss ("NOL")
carryforward, a portion of which was used to reduce Mizar's federal income tax
liability in fiscal years 1992 through 1997. Pursuant to Section 382 of the
Internal Revenue Code, a change in ownership of Mizar greater than 50%, as
defined, within a three-year period has occurred, in part due to Mizar's
initial public offering of Mizar Common Stock in September 1995 (the "IPO").
This has resulted in an annual limitation on Mizar's ability to utilize its
NOL carryforward which accrued during the tax periods prior to the change in
ownership of approximately $2,300,000. As of June 30, 1997, Mizar had an NOL
carryforward of approximately $7,300,000, which begins to expire in 2004. In
accordance with the criteria contained in Statement of Financial Accounting
Standard No. 109, Accounting for Income Taxes, a valuation allowance
associated with Mizar's NOL was reduced in 1996 and a deferred tax asset of
$790,000 was recognized. In fiscal 1997, the deferred tax asset was increased
to $1,101,000, primarily as a result of the tax benefit recorded as a result
of the disqualifying dispositions of employee incentive stock options.
RESULTS OF OPERATIONS--THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
For the three months ended September 30, 1997, Mizar reported net sales of
$3,203,000, as compared to $3,025,000 in the same period of the prior year.
DSP-based product sales were $2,568,000, or 80% of total sales during the
quarter. On a comparative basis, sales from DSP-based products were
$2,363,000, or 78% of total sales during the same quarter in the prior year.
Sales in the first quarter of fiscal 1998 from non-DSP products were
essentially flat as compared to the same period in the prior year. Revenues
from non-DSP products are expected to continue to decline in future periods.
Bookings, which are generally realized upon receipt of a written purchase
order or contract, were $4,143,000 in the first quarter of fiscal 1998, as
compared to $4,805,000 during the same period in fiscal 1997. The customer
order backlog was $8,669,000 at September 30, 1997, as compared to $4,047,000
at September 30, 1996. A much larger proportion of the customer orders
received in fiscal 1997 required engineering effort in order to meet
ruggedization (environmental) specifications, which in turn has resulted in
longer lead times. Much of the adaptation is the result of environmental
requirements associated with deployed customer systems in the
military/aerospace market. Previously, a large portion of Mizar's DSP business
were modest orders for relatively standard products, which were used to prove
a concept or deploy a small number of prototypes or systems.
Gross margin percent for the quarter ended September 30, 1997 was 51%, as
compared to 54% for the same period in the prior year. Mizar's historical
gross margin percentage has varied by quarter in both a positive and negative
fashion due to volume related efficiencies and changes in product and customer
mix. Such variations will continue to impact gross margin percentages in a
similar fashion during future reporting periods.
During the three months ended September 30, 1997, operating expenses were
$1,444,000, or 45% of net sales, as compared to $1,289,000 during the same
period in the prior year. Product development and engineering expenses were
higher during the first quarter of fiscal 1998 as compared to the same period
in fiscal 1997 due to increased headcount dedicated to ruggedization efforts
and the design of a new suite of products targeted for the digital wireless
communications market. Sales expense was higher during the first quarter of
fiscal 1998 as compared to the same period in fiscal 1997 due to increased
sales commissions.
53
<PAGE>
Interest income for the quarter ended September 30, 1997 was $146,000, as
compared to $135,000 for the same period in the prior year.
Mizar reported net income of $315,000 for the quarter ended September 30,
1997, as compared to net income of $439,000 during the same period in the
prior year. The decrease in net income for the three months ended September
30, 1997, as compared to the same period in the prior year, is due primarily
to the increase in operating expenses and a lower gross margin percentage.
LIQUIDITY AND CAPITAL RESOURCES
Mizar's cash flow from operations was $2,781,000, $2,915,000, and $345,000
in fiscal 1995, 1996 and 1997, respectively. Net working capital was
$4,094,000, $14,144,000, and $13,688,000 as of June 30, 1995, 1996 and 1997,
respectively, and $13,848,000 at September 30, 1997. The increase in working
capital in 1996 is primarily the result of proceeds received from Mizar's
initial public offering in September 1995, and to a lesser extent, positive
cash generated from operations. The decrease in working capital in 1997 is
primarily the result of common stock repurchased through Mizar's stock
repurchase plan in the amount of $509,000, and increased capital asset
purchases.
Mizar's only significant indebtedness during the periods presented consisted
of the Convertible Debentures (balance of $1,048,000 as of June 30, 1995) and
the Subordinated Debentures (balance of $856,000 as of June 30, 1995). The
Convertible Debentures were converted into 891,084 shares of common stock in
connection with Mizar's IPO, and the Subordinated Debentures were retired with
a portion of the proceeds of the IPO.
Mizar's investment in capital equipment was $329,000, $364,000, and $982,000
in fiscal 1995, 1996, and 1997, respectively, and $43,000 for the three months
ended September 30, 1997. Capital equipment generally consists of production
test equipment, design engineering tools and computers for general use. The
investment in capital equipment prior to 1997 was not significant, however, in
1997, more significant investments in design, simulation and test equipment
and software were made. Additionally, Mizar has remodeled and expanded its
home office facilities in order to accommodate a larger workforce. Mizar
believes that its current available cash and investments, together with
expected cash flow from operations, will be sufficient to fund its capital
expenditures, product development and working capital requirements during
fiscal 1998.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No 128, Earnings per Share. The adoption of
this standard is required for financial statements issued for periods ending
after December 15, 1997. This Statement establishes standards for computing
and presenting earnings per share ("EPS"). It replaces the presentation of
primary EPS with a presentation of basic earnings per share. Additionally, it
requires presentation of diluted EPS which is similar to fully diluted EPS,
pursuant to APB Opinion No. 15. Had Mizar adopted the provisions of SFAS No.
128 in fiscal 1997, basic and diluted earnings per share for the year ended
June 30, 1997, would have been $0.04 and $0.03, respectively, and for the
quarter ended September 30, 1997, would have been $0.06 and $0.06,
respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 129, Disclosure of Information About
Capital Structure. The adoption of this standard is required for financial
statements issued for periods ending after December 15, 1997. This Statement
establishes standards for disclosing information about an entity's capital
structure. The impact of this adoption will not be significant.
54
<PAGE>
BUSINESS OF LSI
GENERAL
LSI is a leading designer and manufacturer of DSP boards and related
software, primarily used for real-time image and signal processing. LSI's
products are typically sold to OEMs which utilize these products as subsystems
in capital equipment they sell in areas such as telecommunications, automotive
test, medical imaging, industrial inspection, document processing and defense.
The majority of these customers are multinational companies and include 28 of
the world's 50 largest industrial companies.
DIGITAL SIGNAL PROCESSING
DSP is a technique whereby signals are captured in digital form and
processed either to enhance them, compress them or to take decisions based on
them in real time. DSP has applications in a diverse range of industries.
Specific applications include the removal of noise from speech over a
telephone line, the transmission of information more quickly or efficiently
(i.e. fax/modems) or inspection of goods on a conveyer belt.
PRODUCTS AND MARKETS
The principal products sold by LSI combine a DSP board and software to
enable customers to develop applications quickly. Customers will typically
write application software using the software provided in LSI's DSP product to
run on LSI's DSP board. This application will then be embedded into the
customer's own product and sold by the customer into the end market or used by
the customer in an end application.
LSI offers products designed for the popular Personal Computer buses such as
PCI and ISA as well as for the VME bus, with a split in revenues between PC
buses and the VME bus of approximately 57% PC and 43% VME. Typically, LSI
first develops a PC-based product which early adopters use to evaluate new DSP
processor technology and to perform early application software development.
Later, more complex VME-based designs are developed. OEM users often utilize
the more robust VME bus. In recent years, however, the use of PC buses in
industrial applications becomes more prevalent.
LSI historically has developed DSP boards based on a wide range of DSP
processors from the most of the major DSP processor suppliers including Texas
Instruments, Analog Devices, Lucent (formerly ATT Microelectronics) and
Motorola. With the Texas Instruments DSP area, LSI has developed board
products based on the following processor families: C20, C30, C40, C50, C80
and recently the C60. Board designs have included single and multiple DSP
processors.
LSI currently sells a range of over 300 standard products which target "high
end" applications where value is placed on system performance not low cost
manufacturing. LSI has deliberately not focused on the volume end of the
market where margins are typically lower and under greater pressure.
DSP is a rapidly changing field with new technology and new applications
constantly emerging. LSI believes this presents many opportunities to LSI to
extend its product range into new applications and develop new technologies to
address these new markets. Considerable emphasis is therefore placed on new
product development which is predominantly market led.
LSI emphasizes its relationships with its major customers. New product
development efforts are therefore focused on the perceived needs, both present
and future, of these customers. It is not uncommon for LSI to receive orders
for its new products before product development is complete.
55
<PAGE>
LSI's DSP products are used in a wide range of applications, examples of
which are outlined below:
Industrial Inspection. LSI's products are used in systems which utilize
real-time image processing to recognize selected features in an image,
commonly referred to as machine vision. As an example, one of Europe's largest
companies used an LSI DSP board in a system which classifies and sorts mail.
LSI's DSP boards are used to perform real-time image processing functions. The
products are used to automatically read and identify addresses and therefore
increase throughput. Price and performance constraints coupled with the need
for flexibility dictated the use of DSP technology. Similar products from LSI
have also been used by one of Europe's largest steel manufacturing companies
to implement a quality inspection system.
Automotive Test and Measurement. LSI's products are used in systems in which
a large number of sensors are attached to prototype automobiles during the
design phase, and these sensors capture and analyze real information such as
vibration, noise and heat. Also, LSI's products are used in production testing
and quality assurance. As an example, one of the world's largest automotive
manufacturers used LSI DSP boards in engine test cells. Having previously used
dedicated test instruments, DSP technology combined with an industry standard
PC's meant that engine mapping could be performed more efficiently and in
real-time rather than off-line. Similar products have been used by a number of
other automotive companies and subcontractors for rapid measurements in areas
such as active suspension and braking systems.
Medical Diagnostics. LSI's products are used in the real time processing of
medical imagery such as Magnetic Resonance Imaging (MRI) and X-Ray diagnostic
equipment. As an example, one of the world's largest suppliers of medical
equipment has used LSI DSP boards in a system for low dosage fluoroscopy now
under development. LSI's DSP boards are used to perform real-time image
enhancement functions. Choosing standard commercial boards from LSI gave the
customer the opportunity to get the product quickly to market with low risk.
LSI products are used by a number of medical equipment manufacturers around
the globe, in applications as diverse as Ultrasound and Neurology.
Defense. LSI's products have been used for the analysis of communications
signals, for image manipulation in simulators and other classified image and
signal processing applications. LSI DSP boards are generally utilized in
environmentally benign situations such as in building and on large ships and
do not incorporate ruggedized features, in contrast to Mizar's products. As an
example, LSI DSP boards are used in a simulator developed by a European
governmental defense organization. This system rapidly alters imagery for the
training of pilots. By using LSI commercial off the shelf (COTS) boards,
together with sophisticated development software, the project was able to
utilize some 450 processor nodes. Use of LSI's DSP boards ensured an upgrade
path for future systems. LSI products are used in many defense programs for
airborne, naval and ground based RADAR, SONAR and C3I systems by prime
contractors and armed services around the world.
Telecommunications. LSI's products are used to analyze and process voice and
data signals in real-time generally for the purpose of speech recognition and
signal compression. As an example, one of the world's largest
telecommunications service providers voice messaging system used LSI designed
DSP boards to recognize and process speech commands from the caller. The DSP
boards perform the speech generation, synthesis and recognition functions
required by the system in addition to other basic DSP tasks. Now operational,
the system can potentially provide the service to millions of subscribers. The
same company has also utilized PC based DSP products from LSI to improve the
efficiency of directory enquiry services.
CUSTOMERS
LSI sells to a broad and diverse customer base. In the last financial year
LSI had over 500 active customers spanning a wide range of industries such as
telecommunications, media electronics, automotive, medical electronics and
defense. Within these customers are 28 of the 50 largest corporations,
including Alcatel SEL, BT, Bull SpA, Ericsson, Ford, GE Medical Systems, GEC
Marconi, Mitsubishi, Nokia, Panasonic, Schlumberger, Siemens and Thomson CSF.
56
<PAGE>
As a result of LSI's strategy to target major OEM accounts, a significant
proportion of LSI's sales are to multinational companies who incorporate LSI's
boards into their own products. As a consequence, the majority of LSI's products
are exported outside the U.K. For the three years in the period ended September
30, 1997, LSI's total revenues by geographic region were as follows (dollars in
thousands):
<TABLE>
<S> <C> <C> <C>
1995 1996 1997
------- ------- -------
United Kingdom $ 5,518 $ 7,595 $ 5,534
Europe 5,593 7,544 7,302
North America 2,580 2,692 5,723
Rest of World 4,334 3,311 4,322
------- ------- -------
$18,025 $21,142 $22,881
------- ------- -------
</TABLE>
SALES AND MARKETING
LSI's sales channels combine both direct sales operations and a network of
distributors. LSI has direct sales offices in Loughborough, UK; Paris, France;
Munich, Germany; and Lexington, Massachusetts in the United States. LSI sells
its products into 22 territories worldwide through these sales offices and a
network of 17 distributors and an agent in Israel.
OEM customers typically wish to deal with the supplier directly and it is
therefore important for LSI to be able to trade directly with such customers
in each territory, as well as trading through its distributors. As a
consequence all of LSI's distribution agreements are non-exclusive.
LSI believes North America represents the single largest potential market
for LSI's products and yet is the one that has not yet been exploited fully by
LSI. Until recently LSI has had an exclusive distribution and manufacturing
agreement with Spectrum. Under the terms of the agreement, Spectrum had the
right to purchase products from LSI and to manufacture the products under
license. This agreement was re-negotiated in January 1997 and has been
replaced with a non-exclusive contract. LSI, therefore, now has commenced
selling directly to the North American market.
TECHNICAL SUPPORT
LSI works closely with its OEM customers to design its DSP systems into the
customers' end product. This involves providing a high level of technical
support to the customer at all stages of the design cycle. LSI's technical
support engineers work with those of the customer to analyze system
requirements, to identify potential solutions and suggest the most appropriate
LSI products to use. The same team of engineers providing advice and technical
support once the customer begins development work with LSI's products.
A typical customer design in cycle from the start of development using LSI's
products to the first volume order is 9-18 months. LSI therefore invests
considerable time and money to support the customer during the design-in
phase. LSI believes long-term relationships with its customers are developed
in this process. LSI believes that one consequence of this is that its
products have a longer life cycle than that expected for leading edge
technology products.
LSI also offers maintenance terms to its OEM customers giving extended
warranty repair agreements to support the customer throughout the lifetime of
the end product.
SUPPLIERS
LSI's suppliers include electronic component manufacturers and distributors,
PCB CAD houses, PCB manufacturers and board assemblers. Wherever possible LSI
ensures that it has multiple sources and multiple
57
<PAGE>
suppliers. Suppliers are selected on criteria that include, quality, value and
capacity. LSI ideally prefers to work with suppliers who have an ISO9000
accreditation.
In addition, LSI believes that a key element of its strategy is the close
relationships that have been developed and maintained with the leading DSP
processor suppliers. These suppliers include Texas Instruments, Analog Devices
and Motorola, with whom LSI cooperates closely with respect to development on
new DSP processors.
Approximately 60% of LSI's products are based on processors supplied by
Texas Instruments or software licensed from them. Other semiconductor
manufacturers produce DSP processors with similar functionality to those
manufactured by Texas Instruments. Because of LSI's relationships with other
DSP processor vendors, substitute products are generally available for most
applications. However, because LSI's products are designed specifically to
utilize a particular device the ability to switch manufacturer would be
limited by the necessity and expense of modification of each such product.
PRODUCT DEVELOPMENT
DSP is evolving rapidly giving rise to what LSI believes to be many new
opportunities for LSI. These opportunities can arise from discussions with
customers about their future plans and objectives, discussions with suppliers,
in particular the DSP processor suppliers, about new emerging technologies and
LSI's own visions of new markets and applications that can be serviced with
DSP systems. New product developments can therefore be customer led, market
led or technology led and are typically a blend of all three. LSI places
considerable emphasis on research and development activities.
As a result, approximately 50% of LSI's employees currently work on the
design and development of new products. LSI believes it has a staff of highly
qualified technical engineers.
In the year ended September 30, 1997, LSI spent $3.8 million on research and
development.
DESIGN AND PRODUCTION
When a requirement or demand for a new product has been identified a project
team is assembled to specify, design, and test it and to introduce it into
production. Specifications are produced by a multi-disciplinary team
reflecting the commercial goals of the product, the needs of the customer, the
market, any technological requirements or design constraints and input from
the production group to aid manufacturing or production test. LSI therefore
operates a simultaneous engineering approach to product development.
Once product specifications are agreed design work commences using CAD
packages to aid development. Design are normally simulated using these CAD
packages before prototypes are produced. Once a design is completed design
information is sent to a printed circuit board layout sub-contractor who
produces the information necessary to manufacture a printed circuit board.
This information is then reviewed by LSI before being sent to a printed
circuit board manufacturer who builds prototype PCBs. These boards are then
sent together with a component kit to an assembly house to manufacture the
prototype cards. Prototypes are then extensively tested by LSI before being
released to production by the project team.
Production is planned using automated MRP systems taking account of historic
and forecast demand for each of the products. Once a MRP schedule is agreed
component kits are purchased from kitting houses and PCB's from PCB
manufacturers before being sent to assembly houses for manufacture. Finished
product is then returned to LSI for final testing and dispatch.
58
<PAGE>
QUALITY CONTROL
LSI believes that the quality and reliability of its products are
fundamental elements of its strategy. All of LSI's products are thoroughly
tested at each stage of the design process and, once in production, before
being dispatched to customers. LSI's quality control systems were approved in
September 1995 for, and LSI has been awarded, the international quality system
standard ISO9001. In addition its software design processes have also been
approved for, and LSI has been awarded, the internationally recognized Tick-IT
standard.
COMPETITION
The industries and markets in which LSI operates are highly competitive, and
LSI believes that competition is likely to intensify. Many of LSI's
competitors have substantially greater financial resources. New or improved
products can be expected from competitors in the future. Market participants
must compete on many fronts, including development time; engineering
expertise; product quality, performance and reliability; price; name
recognition; financial stability; customer support; and access to distribution
channels. The market in which LSI operates is fragmented with over 100
companies providing products and services. The majority of these companies are
small and address the development system sector of the market. Most do not
compete in the OEM market that LSI has chosen to concentrate on. The market is
beginning to consolidate and the competitive position is therefore likely to
change rapidly. Further, from time to time LSI also competes with in-house
design groups within its customers although this is subsiding as these
customers are increasingly turning to outsourcing to meet their DSP board
needs.
EMPLOYEES
As of September 30, 1997, LSI employed 135 full time employees. 119 of these
were based in the UK, 7 in France, 6 in Germany and 3 in the United States. Of
the 135 total full time employees, 66 were employed in product development, 33
in sales and marketing, 18 in manufacturing and 18 in administration. LSI
success depends largely on its ability to recruit and retain key individuals.
None of LSI's employees are represented by a Trade Union.
ABSENCE OF MARKET FOR AND DIVIDENDS ON LSI'S SHARES
No active trading market exists with respect to any of the shares of any
class of capital stock of LSI. Such shares are not listed on any exchange and
are not traded in the over-the-counter market. No dividends have been declared
or paid by LSI on its outstanding shares of LSI Stock. The Articles of
Association, as amended, of LSI restricts the ability of LSI to pay any cash
dividends on the LSI Stock without the consent of the holder of a majority of
the outstanding LSI Preferred Stock.
LSI had approximately 25 stockholders of record as of December 31, 1997.
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<PAGE>
LSI SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial data
for LSI for each of the five fiscal years ended September 30, 1997 and the
three months ended September 30, 1996 and 1997. The data presented are derived
from the consolidated financial statements of LSI and should be read in
conjunction with the more detailed information and financial statements and
notes thereto, of LSI, which are included elsewhere in this Proxy
Statement/Prospectus. In the opinion of the management of LSI, the interim
financial information includes all adjustments (consisting only of normal
recurring accruals) that are considered necessary for a fair presentation of
the results of operations for such periods. LSI is based in the United
Kingdom, and its functional currency is the British pound sterling ((Pounds)).
LSI's consolidated financial statements have been translated from sterling to
United States dollars ($), in accordance with the provisions of FAS 52. The
consolidated statements of operations have been translated at an average
exchange rate for each period presented and the consolidated balance sheets
have been translated at a year-end rate for the date presented.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------- --------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT SHARE PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Net sales............... $11,324 $13,089 $18,025 $21,142 $22,881 $5,349 $7,083
Cost of sales........... 4,130 4,998 7,780 9,098 9,366 2,384 2,650
------- ------- ------- ------- ------- ------ ------
Gross margin............ 7,194 8,091 10,245 12,044 13,515 2,965 4,433
Operating expenses:
Product development &
engineering........... 2,244 2,655 3,837 3,328 3,791 830 1,134
Sales and marketing.... 1,552 1,803 2,376 2,655 3,960 874 1,315
General and
administrative........ 2,014 2,011 2,358 3,313 5,174 1,131 1,159
Loss on disposal of
asset................. -- -- 204 -- -- -- --
------- ------- ------- ------- ------- ------ ------
Total operating
expenses ........... 5,810 6,469 8,775 9,296 12,925 2,835 3,608
------- ------- ------- ------- ------- ------ ------
Operating income........ 1,384 1,622 1,470 2,748 590 130 825
Other income (expense)
Interest expense....... (35) (61) (238) (339) (205) (76) --
Interest income........ 21 -- 5 6 16 3 2
Other, net............. 253 (18) 544 73 77 18 32
------- ------- ------- ------- ------- ------ ------
Total other income
(expense).............. 239 (79) 311 (260) (112) (55) 34
------- ------- ------- ------- ------- ------ ------
Income before provision
for income taxes....... 1,623 1,543 1,781 2,488 478 75 859
Provision for income
taxes.................. 544 521 768 798 365 29 158
------- ------- ------- ------- ------- ------ ------
Income from continuing
operations............. 1,079 1,022 1,013 1,690 113 46 701
Loss from discontinued
operations............. -- (378) (1,179) (1,341) (1,248) (92) (137)
------- ------- ------- ------- ------- ------ ------
Net income (loss)....... $ 1,079 $ 644 $ (166) $ 349 $(1,135) $ (46) $ 564
======= ======= ======= ======= ======= ====== ======
Net income (loss)....... $ 1,079 $ 644 $ (166) $ 349 $(1,135) $ (46) $ 564
Preference share
dividends, accretion
and amortization of
issuance costs of
preference shares...... -- -- -- -- (874) -- (437)
------- ------- ------- ------- ------- ------ ------
Net income (loss)
available to ordinary
shareholders........... $ 1,079 $ 644 $ (166) $ 349 $(2,009) $ (46) $ 127
======= ======= ======= ======= ======= ====== ======
Net income (loss) per
share:
Continuing operations.. $ 17.26 $ 16.35 $ 16.21 $ 27.04 $(12.79) $ 0.74 $ 4.67
Discontinued
operations............ -- (6.05) (18.86) (21.46) (20.98) (1.47) (2.42)
------- ------- ------- ------- ------- ------ ------
$ 17.26 $ 10.30 $ (2.65) $ 5.58 $(33.77) $(0.73) 2.25
======= ======= ======= ======= ======= ====== ======
Weighted average shares
outstanding............ 62,500 62,500 62,500 62,500 59,499 62,500 56,498
======= ======= ======= ======= ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------
1993 1994 1995 1996 1997
------ ------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............... $ 443 $ 131 $ 305 $ 195 $ 950
Total assets............................ 6,564 9,626 12,438 11,898 14,859
Mandatorily redeemable preference
shares................................. -- -- -- -- 8,173
Total liabilities....................... 4,579 6,863 9,821 8,960 7,972
Shareholder equity...................... 1,985 2,763 2,617 2,938 (1,286)
</TABLE>
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<PAGE>
LSI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LSI is based in the United Kingdom, and its functional currency is British
pounds sterling ((Pounds)). LSI's financial statements have been translated
from sterling to United States dollars ($), in accordance with the provisions
of FAS 52. The statements of operations have been translated at an average
exchange rate for each period presented and the consolidated balance sheets
have been translated at a year-end rate for the date presented.
RESULTS OF OPERATIONS--THREE YEARS ENDED SEPTEMBER 30, 1997
Net Sales. Sales from continuing operations increased from $18,025,000 in
fiscal 1995, to $21,142,000 in fiscal 1996, and increased to $22,881,000 in
fiscal 1997. DSP sales as a percent of total revenue increased in fiscal 1997
to 98.8% from 93.5% in fiscal 1996. The majority of DSP revenues were to
commercial OEM's and government agencies for use in telecommunications,
industrial test and measurement, military/aerospace and intelligence
applications. LSI believes that the trend for customers to look for purchasing
efficiencies by procuring off the shelf product versus in-house proprietary
design will continue to have a positive impact on DSP revenues in the future.
DSP revenues in 1997 were adversely affected by the start-up position of LSI's
German subsidiary, LSI Deutschland GmbH, based in Munich and the transition of
direct sales by LSI into this territory from the previous third party
distributor. In April 1997 LSI announced the termination of its Video
Multimedia activities and the closure of the associated Video Multimedia Group
("VMG"). The results of the VMG are shown as discontinued activities
throughout the reported period.
Gross Margin. Gross margin as a percentage of revenues was 56.8% in fiscal
1995, 56.9% in fiscal 1996, and 59.1% in fiscal 1997. The increase in gross
margin in both 1996 and 1997 reflects improvements in purchasing and
manufacturing efficiencies offset partially by additional stock reserves for
slower moving inventory lines. LSI's gross margin percentage can be affected
each year, and each quarter, in both a positive and negative fashion due to
factors such as changes in customer and specific product mix. Such variations
will continue to impact gross margin percentages in a similar fashion during
future reporting periods.
Sales and Marketing. Sales and marketing expenses increased from $2,376,000
in fiscal 1995, to $2,655,000 in fiscal 1996, and increased to $3,960,000 in
fiscal 1997. These expenses as a percentage of revenues were 13.2%, 12.6% and
17.3% in fiscal 1995, 1996 and 1997, respectively. The increases in 1997
reflect a full year's cost for the direct sales operations in Germany and the
selling and marketing activities for the direct selling operations in
Lexington, Massachusetts, which commenced in June 1997.
Product Development & Engineering. This consists predominantly of research
and development costs which decreased from $3,837,000 in fiscal 1995, to
$3,328,000 in fiscal 1996, and increased to $3,791,000 in fiscal 1997. These
expenses expressed as a percentage of revenues were 21.3%, 15.7%, and 16.6% in
fiscal 1995, 1996 and 1997, respectively. LSI has maintained its investment in
new product development in line with the releases of new processors from the
semiconductor vendors and its attention to existing and future customers'
requirements. The expenditure trends reflect the interaction of engineering
development with these factors. The absolute and relative levels of DSP
engineering costs can vary both on a comparative annual and quarterly basis
due to the phasing of engineering projects and the processor releases from
semiconductor manufacturers. In 1998 a larger proportion of the total
engineering costs will be focused on telecommunication products.
General and Administrative. General and administrative expenses were
$2,358,000 in fiscal 1995, $3,313,000 in fiscal 1996, and $5,174,000 in fiscal
1997. These expenses expressed as a percentage of revenues were 13.1%, 15.7%
and 22.6% in fiscal 1995, 1996 and 1997, respectively. The increase in 1996
reflects $185,000 due to the termination of the employment agreement of Brian
Newall, LSI Chairman, and legal costs in respect of both establishing the
Munich based subsidiary and initial work undertaken in respect of seeking new
sources of finance for the company together with a full year's impact of
property costs following the move in the prior year. In 1997 the increased
level of expenses was a result of $677,000 in respect of a settlement with
LSI's German distributor, additional property costs of $296,000 in respect of
the completion and subsequent
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<PAGE>
rental of the new Phase II building by LSI, exchange losses of $181,000 and
the full year's impact of Board compensation costs including non-executive
directors.
Interest Expense. Interest expense increased from $238,000 in fiscal 1995 to
$339,000 in fiscal 1996 and reduced to $205,000 in fiscal 1997. This expense
relates to interest payable on bank credit lines, bank loans and interest on
capital leases. The increase in 1996 was mainly due to the full year's impact
of capital leases taken out in 1995 and the increased utilisation of credit
lines and bank loans. The reduction in interest expense in 1997 reflects the
improved cash position of the company arising from the inward investment from
Boston Holdings Limited during the year and the subsequent repayment of bank
loans and lines of credit.
Other Income. Other income in 1995 includes an amount of $475,000 arising
from the sale of a property lease option.
Provision for Income Taxes. Provision for income taxes was $768,000,
$798,000 and $365,000 in fiscal 1995, 1996 and 1997, respectively. The
relatively high level of provision in 1995 and 1996 reflects the write-off of
irrecoverable withholding taxes and the non-deductibility of the write-down of
the property held for resale. The high provision in 1997 primarily arises due
to the non-recognition of losses arising in Germany and America, due to the
uncertainty over their utilisation.
Discontinued Operations. In April 1997, LSI adopted a plan to discontinue
its VMG operations in order to focus LSI's resources on its core products. The
VMG operations principally designed, manufactured and sold products for the
video conferencing industry. These activities operated as a distinct business
segment. The results of the VMG operations for the years ended September 30,
1995, 1996 and 1997, net of related tax benefits, were losses of $1,179,000,
$1,341,000 and $1,248,000, respectively. The VMG operations were fully
abandoned by September 30, 1997.
RESULTS OF OPERATIONS--THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
For the three months ended September 30, 1997, LSI reported net sales of
$7,083,000, as compared to $5,349,000 in the same period of the prior year.
The increase reflects the fulfilment of a number of orders including increased
activity into North America. The DSP product backlog was $2,990,000 at
September 30, 1997, as compared to $3,442,000 at September 30, 1996. This
reduction in backlog was due primarily to record monthly revenues of
$3,501,000 in September 1997. Due to the nature of LSI's business, the backlog
portion can be volatile and is not necessarily an indicator of future
prospects.
Gross margin percent for the quarter ended September 30, 1997 was 62.6%, as
compared to 55.4% for the same period in the prior year. This improvement
reflects the improved procurement and manufacturing operations that have been
in place for the majority of 1997. LSI's historical gross margin percentage
has varied by quarter in both a positive and negative fashion due mainly to
changes in product and customer mix.
During the three months ended September 30, 1997, operating expenses were
$3,608,000, or 50.9% of net sales, as compared to $2,835,000 or 53.0% of net
sales during the same period in the prior year. Product development and
engineering expenses were higher during the last quarter of fiscal 1997 as
compared to the same period in fiscal 1996 due to increased levels of
prototype spending and engineering staff related costs. The increase in sales
and marketing expenses is as a result of opening the direct sales operations
in Lexington, Massachusetts of LSI Inc. There were no significant changes in
overall general and administrative expenses.
Movements in interest for the quarter ended September 30, 1997 compared to
the same period in the prior year was due to the positive cash position
following the refinancing in April 1997.
In April 1997, LSI adopted a plan to discontinue its VMG operations in order
to focus LSI's resources on its core products. The VMG operations principally
designed, manufactured and sold products for the video
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<PAGE>
conferencing industry. These activities operated as a distinct business
segment. The results of the VMG operations for the quarters ended September
30, 1996 and 1997, net of related tax benefits, were losses of $92,000 and
$137,000, respectively. The VMG operations were fully abandoned by September
30, 1997.
LSI reported net income of $574,000 for the quarter ended September 30,
1997, as compared to a net loss of $27,000 during the same period in the prior
year. The increase in the net result is due primarily to the increased level
of sales as compared to the comparative 1996 quarter.
LIQUIDITY AND CAPITAL RESOURCES
LSI's cash flow from operations was $592,000, ($67,000) and ($607,000) in
fiscal 1995, 1996 and 1997, respectively. Net working capital was $468,000,
$406,000 and $4,701,000 as of September 30, 1995, 1996 and 1997, respectively.
The increase in working capital in 1997 is primarily the result of the cash
received from the inward investment from Bank Holdings in April 1997 less the
amounts used in the share repurchase.
LSI's indebtedness during the periods presented consisted of a utilised bank
line of credit to the extent of $2,419,000 and $2,341,000 as at September 30,
1995 and 1996, respectively, bank loans of $227,000 and $747,000 at September
30, 1995 and 1996 respectively, and capital leases of $1,166,000, $831,000 and
$282,000 as at September 30, 1995, 1996 and 1997 respectively. All outstanding
bank lines of credit and loans were repaid on the receipt of cash from the
Bank Holdings investment. From April 1997 LSI had a total credit line
available of $3,200,000.
LSI's investment in capital equipment was $762,000, $517,000 and $860,000 in
fiscal 1995, 1996, and 1997, respectively, and $153,000 for the three months
ended September 30, 1997. Capital equipment generally consists of design
engineering tools and computers for general use. LSI believes that its current
available cash and investments, together with expected cash flow from
operations, will be sufficient to fund its capital expenditures, product
development and working capital requirements during fiscal 1998.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share. The adoption of
this standard is required for financial statements issued for periods ending
after December 15, 1997. This Statement establishes standards for computing
and presenting earnings per share ("EPS"). It replaces the presentation of
primary EPS with a presentation of basic earnings per share. Additionally, it
requires presentation of diluted EPS which is similar to fully diluted EPS,
pursuant to APB Opinion No. 15. Had LSI adopted the provisions to SFAS No. 128
in fiscal 1997, basic and diluted earnings per share for the year ended June
30, 1997, would not change from those disclosed.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129, Disclosure of Information About
Capital Structure. The adoption of this standard is required for financial
statements issued for periods ending after December 15, 1997. This Statement
establishes standards for disclosing information about an entity's capital
structure. The impact of this adoption will not be significant.
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<PAGE>
AMENDMENT TO MIZAR STOCK OPTION PLAN
The proposed amendment to the Mizar Option Plan would increase the number of
shares of Mizar Common Stock subject to the plan from 2,177,500 shares to
2,427,500 shares. Approval of this amendment requires the affirmative vote of
the holders of a majority of the shares of Mizar Common Stock represented at the
Annual Meeting. THE BOARD OF DIRECTORS OF MIZAR RECOMMENDS A VOTE FOR APPROVAL
OF THE AMENDMENT TO THE MIZAR OPTION PLAN.
THE MIZAR, INC. STOCK OPTION PLAN
The Mizar Board of Directors believes that providing selected persons with
an opportunity to invest in Mizar will give them additional incentive to
increase their efforts on behalf of Mizar and will enable Mizar to attract and
retain the best available employees, officers, directors, consultants and
independent contractors. The purpose of the Mizar Option Plan is to promote
the growth and profitability of Mizar by enabling it to furnish maximum
incentive to those selected persons deemed capable of improving operations and
increasing profits and encouraging such persons to commence or continue
working for or with Mizar, as the case may be, and to become owners of shares
of Mizar Common Stock. The Mizar Option Plan will terminate on February 19,
2002, but may be terminated at any time before then by the Mizar Board of
Directors. Any options outstanding at the time of termination of the Mizar
Option Plan will remain in effect until they are exercised or expire.
The Board of Directors of Mizar has approved an amendment to the Mizar
Option Plan to increase the number of shares of Mizar Common Stock reserved
for issuance upon the exercise of options granted under the Mizar Option Plan
from 2,177,500 to 2,427,500 shares. The Mizar Board of Directors has approved
the increase of shares subject to the Mizar Option Plan in view of the
exchange of the LSI Options for Mizar Options and the increase in the number
of employees resulting from the Share Exchange. In order to continue to obtain
the beneficial effects of the Mizar Option Plan, it will be necessary to
increase the number of shares available under the plan to provide for future
options that may be granted to employees of LSI who will become employees of
Mizar as a result of the Share Exchange, as well as new employees that may
subsequently be hired.
Stockholder approval of the amendment to the Mizar Option Plan is being
sought to satisfy Section 422 of the Code, which requires stockholder approval
of amendments of the Mizar Option Plan in order that options granted under the
Mizar Option Plan may qualify as "incentive stock options" ("ISOs") and thus
be entitled to receive special tax treatment under the Code.
The Mizar Option Plan is designed so that options granted under the Mizar
Option Plan may be designated ISOs, which receive special tax treatment under
the Code, or non-qualified stock options ("NQSOs"). However, ISOs may be
granted only to employees of Mizar.
As of September 30, 1997, options to purchase an aggregate of 1,858,478 shares
of Mizar Common Stock (net of options canceled) had been granted pursuant to the
Mizar Option Plan, options to purchase 1,348,282 shares had been exercised,
options to purchase 510,196 shares remained outstanding, and only 319,022 shares
remained available for future grant. The foregoing does not reflect options
issued or issuable under a separate option plan for Mizar's directors. As of
January 9, 1998, the market value of all shares of Mizar Common Stock (i)
subject to outstanding options under the Mizar Option Plan and (ii) remaining
available for future grant was approximately $2,599,666 and $1,235,467
respectively (based upon the closing sale price of the Mizar Common Stock as
reported on the NMS on such date). If the proposed amendment to the Mizar Option
Plan is approved, then 517,128 shares of Mizar Common Stock will be available
for future grant, the aggregate market value of which would have been
approximately $2,391,717 at January 9, 1998 (based on the closing sale price of
the Mizar Common Stock as reported on the NMS on such Date). During the 1997
fiscal year, options covering 183,325 shares of Mizar Common Stock were granted
to employees of Mizar. See, also, "Management--Executive Compensation." Since
adoption of the Mizar Option Plan, all current executive officers, as a group,
have been granted options under the Mizar Option Plan covering 688,500 shares of
Mizar Common Stock which represents approximately 36% of the total number of
options granted pursuant to the Mizar Option Plan. In addition, all current
directors who are not executive officers as a group have been granted options
covering 637,500 shares, (33%), the nominees for election as director as a group
has been granted options covering 0 shares (0%) and no associate of the
foregoing has received options. All employees of Mizar as a group (including all
officers who are not executive officers) received options covering 584,372
shares (31%). David Irwin and John Marshall have received options covering 5% or
more of those available under the Mizar Option Plan.
Administration of the Mizar Option Plan. The Mizar Option Plan is
administered by the Mizar Board of Directors or, to the extent authorized by a
resolution of the board, the Compensation Committee of two or more
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<PAGE>
directors (the "Committee") selected by the Mizar Board of Directors. The
powers of the Mizar Board of Directors or Committee, as the case may be,
include the determination of which persons shall be granted options under the
Mizar Option Plan, the number of shares to be granted to the optionee, whether
each option granted is to be an ISO or a NQSO, the price and term of the
options, and all other terms and conditions of an option pursuant to the Mizar
Option Plan. In addition, the Mizar Board of Directors has the right to
construe and interpret ambiguities in the Mizar Option Plan. While it is
within the discretion of the Mizar Board of Directors or Committee, as the
case may be, to determine the exercise price and term of the options, no term
of an option shall extend for more than ten years from the date of the grant
and no option may be granted at an exercise price less than the fair market
value of the stock at the time of the grant. Furthermore, as to any employee
owning more than 10% of the voting power of all classes of stock of Mizar, the
exercise price must be at least 110% of the fair market value of the stock at
the time of grant and the option term may not be more than five years.
The Mizar Option Plan currently provides that options to purchase a maximum of
2,177,500 shares of Mizar Common Stock (subject to adjustments to reflect
changes in the capitalization of Mizar) may be granted to employees, officers,
directors, consultants or independent contractors of Mizar as selected by the
Mizar Board of Directors or Committee, as the case may be. Currently, there are
approximately 55 employees (including approximately 10 officers and directors,
no consultants and no independent contractors who are currently eligible for
participation in the Mizar Option Plan). Under the proposed amendment, the Mizar
Option Plan would provide that options to purchase a maximum of 2,427,500 shares
of Mizar Common Stock might be granted. The shares of Mizar Common Stock
issuable upon the exercise of any option shall be either shares authorized but
unissued by Mizar or shares issued and reacquired by Mizar. The granting of an
option under the Mizar Option Plan does not affect Mizar's or the stockholders'
existing rights to remove such optionee from the Mizar Board of Directors or
terminate the optionee's work for or with Mizar.
Payment for shares purchased pursuant to the exercise of an option must be
paid in full in cash or in whatever manner the Mizar Board of Directors
authorizes. Within a reasonable time after receipt of such payment, Mizar will
issue and deliver certificates representing the purchased shares. Mizar does not
receive any payments for the granting or extension of options under the Mizar
Option Plan.
No employee may be granted presently exercisable options for shares having
an aggregate fair market value greater than $100,000 in any calendar year.
Options granted under the Mizar Option Plan are subject to such vesting
arrangements as are set forth in the stock option agreement between Mizar and
the optionee.
An option may be exercised only while the optionee is an employee, officer,
director, consultant or independent contractor of Mizar, except that (i) if an
optionee's work for or with Mizar is terminated by reason of the death or
disability of such optionee, the option may be exercised by the optionee or
his heirs or legal representatives, as the case may be, within 12 months of
such termination or within the remaining term of the option, whichever is
less, but only as to shares which were immediately purchasable by him on the
date of such termination, or (ii) if an optionee's work for or with Mizar is
terminated for any reason (except termination "for cause") other than his
death or disability, the option may be exercised by the optionee within three
months of the date of such termination or within the remaining term of the
option, whichever is less, but only as to shares which were immediately
purchasable by him on the date of such termination.
Options are not assignable or transferable except by will or the laws of
descent and distribution, and are exercisable only by the optionee or by his
heirs or legal representatives.
The Mizar Option Plan may be amended, suspended or terminated at any time by
the Mizar Board of Directors, without stockholder approval, in such respects
as the Mizar Board of Directors may deem advisable in order that the options
granted pursuant thereto may conform to any changes in the law or in any other
respect which the Mizar Board of Directors may deem to be in the best
interests of Mizar; provided, however, that no amendment may be made without
stockholder approval when such approval is required by Rule 16b-3 promulgated
under the Exchange Act, the requirements of Nasdaq, or any other applicable
law, rule or regulation. An amendment, suspension or termination will not
affect any previously granted option without the consent of the optionee so
affected.
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<PAGE>
The preceding discussion summarizes the material terms of the Mizar Option
Plan. The full text of the Mizar Option Plan is filed as an exhibit to the
Registration Statement. See "Available Information."
FEDERAL INCOME TAX ASPECTS
ISOs. Some options to be issued under the Mizar Option Plan will be
designated as ISOs and are intended to qualify under Section 422 of the Code.
Under the provisions of that Section, the optionee will not be deemed to have
received any income at the time an ISO is granted or exercised. However, the
excess, if any, of the fair market value of the shares on the date of exercise
over the exercise price will be treated as a tax preference item and may
subject the optionee to the alternative minimum tax in the year of exercise.
If the optionee disposes of the shares later than two years after the date
of grant and one year after the exercise of the ISO, the gain or loss, if any
(i.e., the difference between the amount of income realized for the shares and
the exercise price), will be long-term capital gain or loss.
If the optionee disposes of the shares acquired on exercise of an ISO within
two years after the date of grant or within one year after the exercise of the
ISO, the disposition will constitute a "disqualifying disposition," and the
optionee will have income in the year of the disqualifying disposition equal
to the excess of the amount received for the shares over the exercise price.
Of that income, the portion equal to the excess of the fair market value of
the shares at the time the ISO was exercised over the exercise price will be
compensation income, and the balance, if any, will be either short-term
capital gain, if the shares are disposed of within one year after the ISO is
exercised, or long-term capital gain, if the shares are disposed of more than
one year after the ISO is exercised.
If the optionee disposes of the shares in a disqualifying disposition at a
price that is below the fair market value of the shares at the time the ISO
was exercised and such disposition is a sale or exchange to an unrelated
party, the amount includible as compensation income to the optionee will be
limited to the excess of the amount of income realized on the sale or exchange
over the exercise price.
If an ISO is exercised through the payment of the exercise price by the
delivery of Mizar Common Stock, to the extent that the number of shares
received exceeds the number of shares surrendered, such excess shares will
possibly be considered as ISO stock with a zero basis.
Mizar is not entitled to a deduction as a result of the grant or exercise of
an ISO. If the optionee has compensation income as a result of a disqualifying
disposition, Mizar will have a corresponding deductible compensation expense
in an equivalent amount in the taxable year of Mizar in which the
disqualifying disposition occurs.
NQSOs. Some options to be issued under the Mizar Option Plan will be
designated as NQSOs which receive no special tax treatment, but are taxed
pursuant to Section 83 of the Code. Under the provisions of that Section, if
an option is granted to an employee in connection with the performance of
services and has a "readily ascertainable fair market value" at the time of
the grant, the employee will be deemed to have received compensation income in
the year of grant in an amount equal to the excess of the fair market value of
the option at the time of grant over the amount, if any, paid by the optionee
for the option. However, a NQSO generally has "readily ascertainable fair
market value" only when the option is actively traded on an established market
and when certain stringent Code requirements are met.
If the option does not have a readily ascertainable fair market value at the
time of the grant, the option is not included as compensation income at that
time. Rather, the optionee realizes compensation income at the time the option
is exercised. The amount of income realized is equal to the excess of the fair
market value of the shares at the time the option is exercised over the sum of
the exercise price plus the amount, if any, paid by the optionee for the
option.
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<PAGE>
If a NQSO is exercised through payment of the exercise price by the delivery
of Mizar Common Stock, to the extent that the number of shares received by the
optionee exceeds the number of shares surrendered, ordinary income will be
realized by the optionee at that time only in the amount of the fair market
value of such excess shares, and the tax basis of such excess shares will be
such fair market value.
Once a NQSO is subject to tax as compensation income, it is treated as an
investment option or investment shares and becomes subject to the investment
property rules. No gain or loss arises from the exercise of an option that was
taxed at the time of grant. When the optionee disposes of the shares acquired
pursuant to a NQSO, whether taxed at the time of grant or exercise, the
optionee will recognize capital gain or loss equal to the difference between
the amount of income realized for the shares and the optionee's basis in the
shares.
Generally, the optionee's basis in the shares will be the exercise price
plus the optionee's basis in the option. The optionee's basis in the option is
equal to the sum of the compensation income realized at the time of grant or
exercise, whichever is applicable, and the amount, if any, paid by the
optionee for the option. In the compensatory option context, optionees
normally pay nothing for the grant of the option so the basis in the option
will usually be the amount of compensation income realized at the time of
grant or exercise. Thus, the optionee's basis in the shares will usually be
equal to the exercise price of the option plus the amount of compensation
income realized by the optionee at the time of grant or exercise. The capital
gain or loss will be short-term if the shares are disposed of within one year
after the option is granted or exercised (depending on which event caused the
shares to be included as compensation income), and long-term if the shares are
disposed of more than one year after the option is granted or exercised,
whichever is applicable.
If a NQSO is taxed at the time of grant and expires or lapses without being
exercised, it is treated in the same manner as the lapse of an investment
option. The lapse is deemed to be a sale or exchange of the option on the day
the option expires and the amount of income realized is zero. The optionee
recognizes a capital loss in the amount of the optionee's basis (compensation
income realized at the time of the grant plus the amount, if any, paid by the
optionee for the option) in the option at the time of the lapse. The loss is
short-term or long-term, depending on the optionee's holding period in the
option.
If a NQSO is not taxed at the time of grant and expires without being
exercised, the optionee will have no tax consequences unless the optionee paid
for the option. In such case, the optionee would recognize a loss in the
amount of the price paid by the optionee for the option.
Mizar is entitled to a deductible compensation expense in an amount
equivalent to the amount included as compensation income to the optionee. This
deduction is allowed in Mizar's taxable year in which the income is included
as compensation to the optionee. Mizar is only entitled to this deduction if
Mizar deducts and withholds upon the amount included in an employee's
compensation.
The preceding discussion is based upon federal tax laws and regulations in
effect on the date of this Proxy Statement/Prospectus, which are subject to
change, and upon an interpretation of the relevant sections of the Code, their
legislative histories and the income tax regulations which interpret similar
provisions of the Code. Furthermore, the foregoing is only a general
discussion of the federal income tax aspects of the Mizar Option Plan and does
not purport to be a complete description of all federal income tax aspects of
the Mizar Option Plan. Optionees may also be subject to state and local taxes
in connection with the grant or exercise of options granted under the Mizar
Option Plan and the sale or other disposition of shares acquired upon exercise
of the options.
EACH PERSON RECEIVING A GRANT OF OPTIONS SHOULD CONSULT WITH HIS OR HER
PERSONAL TAX ADVISOR REGARDING FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF
PARTICIPATING IN THE MIZAR OPTION PLAN.
67
<PAGE>
AMENDMENT TO MIZAR'S CERTIFICATE OF INCORPORATION
AMENDMENT TO MIZAR'S CORPORATE NAME
The Board of Directors of Mizar has approved an amendment to Mizar's
Certificate of Incorporation to change the company's name to "Blue Wave
Systems Inc." THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
PROPOSED NAME CHANGE.
The Board of Directors of Mizar believes that changing the name of Mizar to
Blue Wave Systems Inc. will reflect the important strengths and synergies that
results from the Share Exchange and establish a new corporate identity for
customers of the combined entity who may have had particular brand loyalties
to the constituent companies.
The symbol on the NMS for the Mizar Common Stock after the change of its
corporate name is expected to be BWSI.
If the proposed name change is approved by stockholders, stock certificates
representing shares of common stock of "Mizar, Inc." will continue to
represent shares of common stock of "Blue Wave Systems Inc." The new Blue Wave
Systems Inc. stock certificates will be issued in exchange for old Mizar, Inc.
stock certificates as such certificates are received for transfer by Mizar's
transfer agent in the ordinary course of business.
AMENDMENT TO INCREASE AUTHORIZED CAPITAL STOCK
Mizar is authorized to issue 25,000,000 shares of Mizar Common Stock, of
which approximately 5,135,976 shares were outstanding on December 31, 1997,
and 1,000,000 shares of Preferred Stock, $0.01 par value, of which none were
outstanding on such date. In connection with the Share Exchange, Mizar is
expected to issue an aggregate of 8,440,891 shares (including shares issuable
upon the exercise of LSI's outstanding options and warrants).
The proposed amendment to increase Mizar's authorized shares of Mizar Common
Stock is necessary to provide for the flexibility to declare stock splits or
stock dividends in the future when appropriate or the additional issuance of
shares (in financings or acquisitions) when appropriate. Aside from the
issuance of Mizar Common Stock pursuant to employee stock options and the
Share Exchange, Mizar does not currently have any plans for the issuance of
additional shares of Mizar Common Stock.
Approval of the proposed amendment requires the affirmative vote of the
holders of a majority of the shares of Mizar Common Stock that are issued and
outstanding as of the record date of the Annual Meeting. See "Annual Meeting --
Required Vote."
THE BOARD OF DIRECTORS OF MIZAR UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS
VOTE FOR THE PROPOSED AMENDMENT TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
MIZAR COMMON STOCK.
ELECTION OF DIRECTORS
Five directors are to be elected at the Annual Meeting to serve until the next
Annual Meeting of the Stockholders and until their respective successors are
elected. Except where authority to vote for directors has been withheld, it is
intended that the proxies received pursuant to this solicitation will be voted
FOR the following five nominees: Simon Yates, John Forrest, Rob Shaddock, Sam
Smith and David Irwin. If for any reason any of such nominees is not available
for election, such proxies will be voted in favor of the remaining named
nominees and may be voted for substitute nominees in place of those who are not
candidates. Management, however, has no reason to expect that any of the
nominees will be unavailable for election. Messrs, Yates, Forrest and Shaddock
have informed Mizar that they do not intend to serve as directors of Mizar if
the Share Exchange is not consummated.
The following is information which has been furnished to Mizar by certain of
the nominees for director:
John Forrest has been a director of LSI since 1996. He was a Professor of
Electronic Engineering from 1970 to 1984 at University College London, following
which he joined Marconi Defence Systems as Technical Director. Between 1986 and
1991, he was Director of Engineering at the Independent Broadcasting Authority.
In 1991, he was appointed Chief Executive of National Transcommunications
Limited ("NTL") by the Home Office, from which he resigned in 1994.
David H. Irwin has served in various capacities at Mizar since 1991. Mr.
Irwin has in excess of 20 years of sales, marketing and general management
experience with several technology companies. As the President of Bridge
Management, Inc., a management consulting firm, he served as the interim
President and Chief Executive Officer of the Company from June to October 1991
in order to initiate the board of directors' strategic plan to reposition the
Company. He continued to serve as a director of the Company until 1993,
whereupon he resumed the additional duties of interim President and Chief
Executive Officer initially through Bridge Management, Inc. and subsequently
as a principal of Excelsior Investment Group, Ltd., a management consulting
and private merchant banking firm. Effective May 1994, Mr. Irwin ceased his
consulting practice and became a full time employee of the Company. Mr. Irwin
resigned the positions as Chairman, President and Chief Executive Officer on
June 30, 1997, but continues to serve as a director.
Samuel K. Smith, a director of Mizar since 1994 and interim Chief Executive
Officer since June 1997, has been an independent consultant for technology
companies since 1993. From 1984 until 1993, Mr. Smith was a special partner of
Sevin-Rosen Management Co., a venture capital firm. In June 1997, Mr. Smith
was named Chairman of the Board of Directors and Interim Chief Executive
Officer of Mizar. He serves as a director of Hart Graphics, TD Technologies,
and Silicon Biology.
For similar information regarding Messrs. Yates and Shaddock, see "Management
- -- Directors and Executive Officers."
The Bylaws of Mizar provide that the Board of Directors shall consist of not
less than one and no more than fifteen members and that vacancies on the Board
of Directors and newly-created directorships may be filled by the Board of
Directors at any meeting .
The election of directors shall be determined by the affirmative vote of the
shares represented in person or proxy and entitled to vote at the Annual
Meeting. See "Annual Meeting -- Required Vote."
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR EACH OF THE ABOVE-NAMED
NOMINEES. See "Management" and "Security Ownership of Certain Beneficial Owners
and Management" for additional information regarding the nominees.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Mizar. The directors and executive officers of Mizar as of the Effective
Time shall be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Simon Yates..................... 35 President & CEO
John L. Marshall................ 54 Senior Vice President--Sales and Marketing
Joseph E. Andrulis.............. 33 Vice President--Strategic Marketing
Charles D. Brockenbush.......... 37 Vice President--Finance and Chief Financial
Officer
Michael J. Brown, Jr............ 35 Vice-President of Operations
M. Keith Burgess................ 35 Vice President--Advanced Technology
John W. Clark................... 46 Vice President--Engineering
</TABLE>
The nominees for director of Mizar are Mr. Yates; John Forrest, 54; Rob
Shaddock, 39; Sam Smith, 65; and David Irwin, 49.
LSI. The directors and executive officers of LSI as of the Effective Time
shall be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Simon Yates.............................................. 35 Director & CEO
Julian Jenkins........................................... 33 Finance Director
Dr. Kevin Parslow........................................ 38 Sales Director
Rob Shaddock............................................. 39 Marketing Director
</TABLE>
Simon Yates will be elected as Chief Executive Officer of Mizar at the
Effective Time. Mr. Yates has been the managing director of LSI since 1995.
Mr. Yates joined LSI in 1984 as the third member of the original management
team. He became a board member in 1988, and took responsibility for LSI's
overall engineering team two years later. Mr. Yates is an Associate Member of
the Institute of Electrical Engineers and a Member of the Institute of
Acoustics. During the 1980's, he served on the Department of Trade and
Industry's Speech and Language Technology (SALT) initiative.
Rob Shaddock will be elected marketing director of Mizar at the Effective
Time. Mr. Shaddock has served as marketing director of LSI since 1997. Mr.
Shaddock joined LSI in October 1992 as technical director, when it merged with
a London-based DSP manufacturer, Data Beta Ltd. ("Data Beta"), at which time
he became responsible for overseeing LSI's technical management team and for
all research and development operations.
Dr. Kevin Parslow will be elected as Mizar's sales director at the Effective
Time. He has served as LSI's sales director since 1994, and has been a board
member of LSI since April 1995. Dr. Parslow joined LSI in October 1992, when
LSI merged with Data Beta, where he was marketing manager. Prior to working at
Data Beta, Dr. Parslow co-founded DataCell Ltd, the largest supplier of
imaging equipment in the United Kingdom, where he was marketing director. Dr.
Parslow is a Member of the Institute of Physics, a Member of the Institute of
Electronic Engineering and a Member of the Institute of Chartered Engineers.
Julian Jenkins will be elected finance director of Mizar at the Effective
Time. Mr. Jenkins also serves as finance director and secretary of LSI. Mr.
Jenkins worked at Price Waterhouse from 1987 to 1996, where he was promoted to
senior manager in 1995. He was appointed to the board of LSI in February 1996.
69
<PAGE>
John L. Marshall joined Mizar in 1991 as Vice President-Sales and became
Senior Vice President-Sales and Marketing in 1992.
Joseph E. Andrulis joined Mizar in May 1996 as Vice President-Strategic
Marketing. From December 1993 to May 1996, he held various positions at
Pinpoint Communications, Inc., the most recent of which was Director of
Marketing. Mr. Andrulis was an Associate at McKinsey & Co. from September 1990
to December 1993.
Charles D. Brockenbush joined Mizar in January 1996 as Vice President-
Finance and Chief Financial Officer and was named Acting Vice President-
Operations in January 1997. From February 1995 to January 1996, he served as
Vice-President and Chief Financial Officer of TeKnowlogy, Inc. From 1988 to
1995, he was Controller and Assistant Treasurer of Interphase Corporation.
Michael J. Browne, Jr. joined Mizar in November 1997. Mr. Browne joined
Texas Instruments in 1988, where he served in various manufacturing and
technical positions through 1997 with the most recent being a program
manufacturing manager.
M. Keith Burgess joined Mizar in September 1989 and has served in a variety
of engineering and technical marketing management positions. He became Vice
President-Advanced Technology in January 1997.
John W. Clark joined Mizar in July 1996 as Special Products Manager and
became Vice President-Engineering in January 1997. From July 1994 to June
1996, he worked as a private investor. From October 1982 to June 1994, he held
various positions at Convex Computer Corporation, the most recent of which was
Manager of Systems.
Each of Mizar's directors holds office until the next annual meeting of
stockholders and until their respective successors shall have been elected and
qualified or until their earlier death, resignation or removal. Mizar's
officers are elected annually by, and serve at the discretion of, the Board of
Directors.
The Board of Directors held nine meetings in fiscal 1997. No director attended
fewer than 75% of the meetings of the Board (and any committees thereof) which
they were required to attend.
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<PAGE>
SUMMARY OF EXECUTIVE COMPENSATION
The following table sets forth information concerning cash compensation paid
or accrued by Mizar during the three years in the period ended June 30, 1997
to or for Mizar's Chief Executive Officer and the four other highest
compensated executive officers of Mizar whose total salary and bonus exceeded
$100,000.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------- ------------
SECURITIES
NAME AND PRINCIPAL FISCAL OTHER ANNUAL UNDERLYING
POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS
- ------------------ ------ -------- ------ --------------- ------------
<S> <C> <C> <C> <C> <C>
Sam K. Smith ............. 1997 -- -- -- --
Interim Chief Executive
Officer(2)
David H. Irwin............ 1997 $200,000 $1,146 $644 --
former President and Chief
Executive Officer 1996 200,000 -- -- 8,500
1995 183,077 93,546 -- 544,000
John L. Marshall.......... 1997 $118,893 $ 680 $824 --
Senior Vice President,
Sales 1996 112,949 -- -- --
1995 107,385 55,076 -- 119,000
Charles D. Brockenbush.... 1997 $102,941 $ 440 $713 15,000
Vice President--Finance
and Chief Financial
Officer(3) 1996 42,308 -- -- 35,000
Joseph E. Andrulis........ 1997 $100,000 $ 573 $692 25,000
Vice President--Strategic
Marketing(4) 1996 9,615 -- -- 50,000
</TABLE>
- --------
(1) Amounts indicated reflect Mizar's contribution to its 401(k) savings plan.
(2) Mr. Smith was appointed Interim Chief Executive Officer in June 1997, and
will resign upon consummation of the Share Exchange.
(3) Mr. Brockenbush joined Mizar in January 1996.
(4) Mr. Andrulis joined Mizar in May 1996.
None of the named executive officers received perquisites and other personal
benefits or property in excess of the lesser of $50,000 or 10% of such
officer's total annual salary or bonus.
STOCK OPTIONS
The following table sets forth certain information with respect to the options
granted during the fiscal year ended June 30, 1997 to the executive officers
named in the above compensation table:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- -----------------------------------------------------------------------
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM (1)
OPTIONS EMPLOYEES PRICE EXPIRATION ----------------
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ----------- -------------- -------- ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Mr. Smith............... -- -- -- -- -- --
Mr. Irwin............... -- -- -- -- -- --
Mr. Marshall............ -- -- -- -- -- --
Mr. Brockenbush......... 15,000 7.8% $3.75 6/26/07 $35,375 $ 89,648
Mr. Andrulis............ 25,000 13.0% $3.75 6/26/07 $58,959 $149,413
</TABLE>
- --------
(1) The assumed annual appreciation rates are disclosed pursuant to the rules
of the Commission and are not intended to forecast future appreciation of
the Mizar Common Stock.
71
<PAGE>
The following table sets forth certain information with respect to the
options exercised by the executive officers named in the above compensation
table during the fiscal year ended June 30, 1997 or held by such persons at
June 30, 1997:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT JUNE 30, 1997 JUNE 30, 1997(1)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Smith............... -- -- 42,500 -- $ 131,438 --
Mr. Irwin............... -- -- 373,983 110,517 1,150,026 $322,074
Mr. Marshall............ -- -- 78,376 40,624 246,308 126,667
Mr. Brockenbush......... -- -- 8,750 41,250 -- 1,875
Mr. Andrulis............ -- -- 12,500 62,500 -- 3,125
</TABLE>
- --------
(1) Based upon the closing price of the Mizar Common Stock on June 30, 1997,
which price was $3.875 per share.
DIRECTOR COMPENSATION
Mizar does not pay any annual retainer or per meeting fees to its directors.
Mizar reimburses all of the directors for their out-of-pocket expenses in
connection with performing their duties as directors of Mizar. In addition,
each non-employee director is granted options under the Directors' Stock
Option Plan to purchase shares of Mizar Common Stock. In November 1996, Mr.
Rynearson received a grant under this plan of 8,500 immediately vested options
at an exercise price of $4.88 per share.
AUDIT COMMITTEE
The Audit Committee is empowered to recommend to the Board the appointment of
the Company's independent public accountants and to periodically meet with such
accountants to discuss their fees, audit and non-audit services, and the
internal controls and audit results for Mizar. The Audit Committee also is
empowered to meet with Mizar accounting personnel to review accounting policies
and reports. The Audit Committee met four times during fiscal 1997. John
Rynearson and Robert Smith, a former director of Mizar, served as the members of
the Audit Committee during fiscal 1997. The ongoing members have not yet been
determined.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1997, the Compensation Committee of Mizar's Board of Directors
consisted of two members, Messrs. Douglas E. Johnson (who resigned in February
1997) and Sam K. Smith, who was appointed as Interim Chief Executive Officer
of the Company on June 30, 1997. Until such appointment, Mr. Smith was not at
any time during the fiscal year an officer or employee of Mizar. Mr. Johnson
was not at any time during the fiscal year ended June 30, 1997, an officer or
employee of Mizar. During fiscal 1997, no executive officer of Mizar served 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 Mizar's Board
of Directors or Compensation Committee. The Compensation Committee met two times
during fiscal 1997.
CERTAIN FILINGS BY EXECUTIVE OFFICERS AND DIRECTORS
Under the securities laws of the United States, Mizar's directors, executive
officers and persons who own more than 10% of the Mizar Common Stock are
required to report their initial ownership of the Mizar Common Stock and any
subsequent changes in that ownership to the Securities and Exchange Commission.
Specific due dates have been established for these reports, and Mizar is
required to disclose in this Proxy Statement/Prospectus any failure to file by
these dates. All of these filing requirements were satisfied during fiscal
1997.
EMPLOYMENT AGREEMENTS
In 1994, Mizar entered into employment agreements with each of Mr. Irwin and
Mr. Marshall. Each of the agreements provides for the payment of base salary
amounts, participation in executive bonus plans and participation in other
employee benefit plans. Each agreement provides for the employee to receive
severance payments, as defined. Mr. Irwin's resignation as President and Chief
Executive Officer was effective in June, 1997 and triggered a salary
continuation obligation of approximately $250,000, which was accrued as an
operating expense in June 1997. The term of Mr. Marshall's agreement expires
on December 31, 1997, and entitles him to receive severance payments in
amounts equivalent to six months to one year of salary and bonus, as defined.
STOCK PRICE PERFORMANCE
Mizar completed the initial public offering of its common stock in September
1995. Prior to such date, there was no established market for its common Stock.
Set forth below is a line graph indicating a comparison of cumulative total
returns (change in stock price plus reinvested dividends) for Mizar's common
stock from the initial offering price of $8.50 on September 28, 1995 through
June 30, 1997 as contrasted with (i) the Nasdaq Market Index and (ii) electronic
computer industry (SIC Code 3571) index. Each index assumes $100 invested at
September 28, 1995 and is calculated assuming reinvestment of dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN
OF COMPANY, INDUSTRY INDEX AND BROAD MARKET
<TABLE>
<CAPTION>
MIZAR, INC. SIC CODE INDEX NASDAQ MKT. INDEX
<S> <C> <C> <C>
9/28/1995 100.00 100.00 100.00
9/29/1995 107.41 100.00 100.00
12/29/1995 100.00 96.72 99.20
3/29/1996 67.65 104.85 103.78
6/28/1996 76.47 105.60 111.47
9/30/1996 52.94 117.68 114.54
12/31/1996 57.41 133.37 119.93
3/31/1997 44.12 129.71 113.83
6/30/1997 45.65 160.84 134.67
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee (the "Committee") is responsible for setting and
administering the policies governing cash compensation and stock option grants
to Mizar's executive officers. In carrying out its duties, the Committee reviews
compensation surveys, including that published by the American Electronics
Association, and other available information regarding salary, bonus and stock
options with a particular focus on companies in similar industries and of
comparable size.
The goals of the Committee's executive compensation program are to 1) align
executive compensation with Mizar's performance and 2) attract, retain and
reward executive officers who contribute to Mizar's success. The compensation
philosophy of the Committee is that annual compensation should be significantly
leveraged on the basis of Mizar's performance. To achieve this leverage,
executive compensation is comprised of a base salary, contingent cash bonus and
stock options. The annual cash compensation paid to executive officers will
generally approximate that of comparable companies if agreed-upon objectives
(both corporate and individual) are met, as well as provide the incentive of
higher annual compensation that may exceed the average of comparable companies
if the agreed-upon objectives are exceeded.
With respect to fiscal 1997, the majority of contingent bonus compensation was
based upon Mizar meeting certain defined revenue profitability goals. Such goals
were not met in fiscal 1997.
The Committee strives to maintain the equity position of all executive
officers at competitive levels with comparable companies. The Committee believes
that employee equity ownership provides critical additional motivation to
executive officers to maximize value for Mizar's stockholders, and therefore
makes periodic grants of stock options. Option grants to executive officers are
based upon the relative positions and responsibilities of each executive
officer, the historical and expected contributions of that officer to Mizar and
previous grants to that officer. Certain changes in control of Mizar will cause
the options to vest immediately. The Committee believes that stock options serve
to align the interests of executive officers closely with other stockholders
because of the direct benefit executive officers receive through improved stock
performance.
The Committee determined the Chief Executive Officer compensation of Dave
Irwin during 1997 based upon a number of factors and criteria. The Chief
Executive Officer's base salary was determined based upon review of the salaries
of chief executive officers for technology companies of comparable size and
complexity, as set forth in the survey published by the American Electronics
Association. The Chief Executive Officer also participated in a executive bonus
program which, as set forth above, is based on the achievement by Mizar
of certain revenue and profit performance goals, which were not met.
Section 162(m) of the Internal Revenue Code of 1986 limits to $1,000,000 per
person the amount that Mizar may deduct for compensation paid to any of
its most highly compensated officers in any year. The levels of salary and bonus
generally paid by Mizar do not exceed this limit. Many of the options
granted under Mizar's 1995 Stock Incentive Plan have been Incentive Stock
Options. The Company receives no tax deduction from the exercise of an
Incentive Stock Option unless the optionee disposes of the acquired shares
before satisfying certain holding periods. Under IRS regulations, the $1,000,000
limit on deductibility applies to compensation recognized by an optionee upon
such an early disposition, as well as compensation recognized upon the exercise
of a Nonstatutory Stock Option, unless the option meets certain requirements. It
is Mizar's policy generally to grant options that meet the requirements of
the IRS regulations so that any such compensation recognized by an optionee will
be fully deductible.
Compensation Committee
Sam Smith
72
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Mizar. The following table sets forth certain information as to the
beneficial ownership of Mizar Common Stock as of December 31, 1997 by (i) each
person who is known to beneficially own more than 5% of the outstanding Mizar
Common Stock, (ii) each director of Mizar, (iii) certain named executive
officers of Mizar and (iv) all executive officers and directors of Mizar as a
group. Except pursuant to applicable community property laws and except as
otherwise indicated, each stockholder identified in the table possesses sole
voting and investment power with respect to its or his shares.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED (1)
-----------------
NAME NUMBER PERCENT
- ---- --------- -------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
David H. Irwin (2)........................................... 792,261 15.1%
John L. Rynearson (3)........................................ 410,000 7.9
John L. Marshall............................................. 246,200 4.8
Sam K. Smith................................................. 66,500 1.3
Charles D. Brockenbush....................................... 22,250 *
Joseph E. Andrulis........................................... 12,500 *
All directors and executive officers as a group (9 individu-
als)........................................................ 1,570,466 29.1
CERTAIN BENEFICIAL OWNERS:
Heartland Advisors, Inc. (4)................................. 1,446,700 28.2
</TABLE>
- --------
* Less than one percent.
(1) Includes shares issuable upon exercise of stock options which will be
vested within 60 days of the date set forth above.
(2) Includes 78,000 shares owned by trusts for the benefit of Mr. Irwin's
children. Mr. Irwin disclaims beneficial ownership of such shares. Mr.
Irwin's address is 18815 Heathcote Drive, Deephaven, Minnesota 55391.
(3) Mr. Rynearson's address is 6221 E. Pershing Avenue, Scottsdale, Arizona
85254.
(4) The shares of common stock indicated are held in investment advisory
accounts. As a result, various persons have the right to receive or the
power to direct the receipt of dividends from, or the proceeds from the sale
of, the securities. The address of Heartland Advisors, Inc. is 790 North
Milwaukee Street, Milwaukee, Wisconsin 53202.
73
<PAGE>
LSI. The following table sets forth certain information as to the beneficial
ownership of LSI Stock as of December 31, 1997 by (i) each person who is known
to beneficially own more than 5% of the outstanding LSI Stock; (ii) each
director of LSI; (iii) the chief executive officer and certain other executive
officers of LSI; and (iv) all executive officers and directors of LSI as a
group:
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED(1)
--------------
NAME NUMBER PERCENT
- ---- ------ -------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Simon Yates(2)................................................ 6,951 7.8
Julian Jenkins................................................ 663 *
Kevin Parslow................................................. 3,683 4.1
Rob Shaddock(2)............................................... 6,772 7.6
David Quarmby(3).............................................. 16,253 18.2
Geoffrey Duck(4).............................................. 18,459 20.7
Mark Storey(5)................................................ -- --
John Forrest.................................................. 200 *
Grahame Purvis................................................ -- --
All directors and executive officers as a group (9
individuals):................................................ 52,981 59.3
CERTAIN BENEFICIAL OWNERS:
Boston Holdings Limited(5).................................... 20,116 22.6
</TABLE>
- --------
* Less than one percent
(1) Includes shares issuable upon exercise of options and warrants which will
be vested within 60 days of the date set forth above.
(2) The address of Messrs. Yates and Shaddock is c/o LSI, Loughborough Park,
Ashby Road, Loughborough, Leicestershire, LE11 3NE England.
(3) The address of Mr. Quarmby is 16 Mayfield Terrace, Edinburgh EH9 1SA,
Scotland.
(4) The address of Mr. Duck is St. Anne's House, St. Anne's Lane, Sutton
Bonington, Loughborough, Leicestershire LE12 5NJ, England.
(5) The address of Boston Holdings Limited is 39 Victoria Street, London SW1H
OED, England. Mr. Storey, an executive officer of Boston Holdings Limited,
disclaims any beneficial ownership of the shares owned by Boston Holdings
Limited.
Security Ownership of Mizar After the Share Exchange. At and after the
Closing Date, by reason of the exchange of the LSI Stock for Mizar Common
Stock, the equity ownership of Mizar will be shared by the persons who were
holders of Mizar Common Stock and LSI Stock immediately before the Closing
Date. Accordingly, the equity interest which each holder of Mizar Common Stock
or LSI Stock holds in Mizar or LSI, as the case may be, immediately before the
Effective Time will be converted into a smaller percentage ownership interest
in a larger company. As a result of the Share Exchange, immediately after the
Closing Date the current holders of Mizar Common Stock will hold approximately
40% of the then outstanding shares of Mizar Common Stock, and the current
holders of LSI Stock, LSI Options and LSI Warrants will hold approximately 60%
of the then outstanding shares of Mizar Common Stock, assuming the exercise of
all outstanding options and warrants to purchase Mizar Common Stock or LSI
Stock that are currently exercisable or that become exercisable within 60 days
of the date of the Annual Meeting.
The following table sets forth certain information as to the beneficial
ownership of Mizar Common Stock, on a pro forma basis assuming the Share
Exchange had occured on December 31, 1997, by (i) each person who owns more than
5% of the outstanding Mizar Common Stock or the outstanding LSI Stock; (ii) each
director of LSI; (iii) each director of Mizar; (iv) the chief executive officer
and certain other executive officers of LSI; (v) certain named executive
officers of Mizar; (vi) all current executive officers and directors of LSI as
a group; (vii) all current executive officers and directors of Mizar as a group;
(viii) all nominees for director of Mizar as a group. The footnotes to the two
preceding share ownership tables are incorporated herein.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED(1)
--------------
NAME NUMBER PERCENT
- ---- ------ -------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS OF MIZAR:
David H. Irwin........................................ 792,261 5.8
John L. Rynearson..................................... 410,000 3.0
John L. Marshall...................................... 246,200 1.8
Sam K. Smith.......................................... 66,500 *
Charles D. Brokenbush................................. 22,250 *
Joseph E. Andrulis.................................... 12,500 *
All directors and executive officers
of Mizar as a group (9 individuals)................... 1,570,466 11.3
DIRECTORS AND EXECUTIVE OFFICERS OF LSI
Simon Yates........................................... 657,787 4.8
Julian Jenkins........................................ 62,741 *
Kevin Parslow......................................... 348,529 2.6
Rob Shaddock.......................................... 640,847 4.7
David Quarmby......................................... 1,538,053 11.3
Geoffrey Duck......................................... 1,746,812 12.9
Mark Storey........................................... -- --
John Forrest.......................................... 18,926 *
Grahame Purvis........................................ -- --
All directors and executive officers of LSI
as a group (9 individuals)............................ 5,013,697 36.9
CERTAIN BENEFICIAL OWNERS:
Boston Holdings Limited............................... 1,903,617 14.0
Heartland Advisors, Inc............................... 1,446,700 10.7
NOMINEES FOR DIRECTOR OF MIZAR
All nominees for directors of Mizar
as a group (5 individuals)............................ 2,176,321 15.8
</TABLE>
- ------------------
* Less than one percent
(1) Assumes that each share of LSI Stock held (including shares under LSI
Options) is exchanged for 94.632 shares of Mizar Common Stock. Includes shares
issuable upon exercise of options which will be vested within 60 days of the
date set forth above.
74
<PAGE>
CERTAIN TRANSACTIONS
The Board of Directors of Mizar authorized a Stock Repurchase Plan in May
1997, pursuant to which repurchases were made in open market and private
transactions. On August 18, 1997, Mizar repurchased 70,500 shares from Mr.
Marshall at $4.125 per share for a total consideration of approximately
$290,800.
See "Management-Employment Agreements" for a description of employment
agreements Mizar has entered into with certain of its executive officers.
LEGAL OPINIONS
The validity of the shares of Mizar Common Stock to be issued in connection
with the Share Exchange is being passed upon for Mizar by Crouch & Hallett,
L.L.P., Dallas, Texas.
EXPERTS
The financial statements of Mizar at June 30, 1996 and 1997, and for each of
the fiscal years ended June 30, 1995, 1996 and 1997, included in this Proxy
Statement/Prospectus have been audited by Arthur Andersen LLP, independent
public accountants, to the extent and for the periods indicated in their
reports with respect thereto, and are included in reliance upon the authority
of said firm as experts in giving said reports.
The consolidated financial statements of LSI as of September 30, 1996 and
1997, and for each of the three years in the period ended September 30, 1997,
included in this Proxy Statement/Prospectus have been so included in reliance
on the report of Price Waterhouse, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
STOCKHOLDERS' PROPOSALS FOR 1998 ANNUAL MEETING
Any proposals that stockholders of Mizar desire to have presented at the
1998 annual meeting of stockholders of Mizar must be received by Mizar at its
principal executive offices no later than ____________, 1998.
75
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MIZAR
Report of Independent Public Accountants.................................. F-2
Balance Sheets as of June 30, 1997 and 1996............................... F-3
Statements of Operations For the Years Ended June 30, 1997, 1996 and 1995. F-4
Statements of Changes in Stockholders' Equity For the Years Ended June 30,
1997, 1996 and 1995...................................................... F-5
Statements of Cash Flows For the Years Ended June 30, 1997, 1996 and 1995. F-6
Notes to Financial Statements............................................. F-7
Balance Sheet as of September 30, 1997.................................... F-16
Statements of Operations For the Three Months Ended September 30, 1997 and
1996..................................................................... F-17
Statements of Cash Flows For the Three Months Ended September 30, 1997 and
1996..................................................................... F-18
Notes to Interim Financial Statements..................................... F-19
LSI
Report of Independent Accountants......................................... F-21
Consolidated Balance Sheets as of September 30, 1996 and 1997............. F-22
Consolidated Statements of Operations For the Years Ended September 30,
1995, 1996 and 1997...................................................... F-23
Consolidated Statements of Changes in Shareholders' Equity (Deficit) For
the Years Ended September 30, 1995, 1996 and 1997........................ F-24
Consolidated Statements of Cash Flows For the Years Ended September 30,
1995, 1996 and 1997...................................................... F-25
Notes to Consolidated Financial Statements................................ F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mizar, Inc.:
We have audited the accompanying balance sheets of Mizar, Inc. (a Delaware
corporation) as of June 30, 1997 and 1996, and the related statements of
operations, changes in stockholders' equity and cash flows for each of the
three years in the period ended June 30, 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Mizar, Inc. as of June 30,
1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
-------------------------------------
ARTHUR ANDERSEN LLP
Dallas, Texas
July 25, 1997
F-2
<PAGE>
MIZAR, INC.
BALANCE SHEETS
JUNE 30, 1997 AND 1996
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 2,266 $ 1,550
Marketable securities, at fair value....................... 8,598 10,286
Accounts receivable, net of allowances of $123 and $123,
respectively.............................................. 1,816 1,319
Inventories, net........................................... 1,840 1,456
Prepaid expenses and other................................. 92 131
Deferred tax asset......................................... 1,110 826
------- -------
Total current assets..................................... 15,722 15,568
------- -------
Certificate of deposit....................................... -- 100
Plant and equipment:
Machinery and equipment.................................... 1,910 1,376
Furniture and fixtures..................................... 321 175
------- -------
2,231 1,551
Less accumulated depreciation.............................. (1,303) (1,170)
------- -------
Plant and equipment, net................................. 928 381
------- -------
Other assets................................................. 46 46
------- -------
Total assets............................................. $16,696 $16,095
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable........................................... $ 915 $ 584
Accrued compensation....................................... 421 191
Other current liabilities.................................. 696 636
Current maturities of capital lease obligations............ 2 13
------- -------
Total current liabilities................................ 2,034 1,424
------- -------
Capital lease obligations.................................... -- 2
------- -------
Total liabilities........................................ 2,034 1,426
------- -------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding at June 30,
1997 and 1996............................................. -- --
Common stock, $.01 par value; 25,000,000 shares authorized;
5,472,810 and 5,468,063 shares issued at June 30, 1997 and
1996, respectively, and 4,805,922 and 4,968,009 shares
outstanding at June 30, 1997 and 1996, respectively....... 55 55
Additional paid-in capital................................. 13,934 13,656
Net unrealized loss on marketable securities............... (16) (66)
Retained earnings.......................................... 1,789 1,610
------- -------
15,762 15,255
------- -------
Less -- treasury stock, at cost.............................. (1,100) (586)
------- -------
Total stockholders' equity............................... 14,662 14,669
------- -------
Total liabilities and stockholders' equity............... $16,696 $16,095
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
MIZAR, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997, 1996, AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net sales............................................ $11,507 $14,052 $14,018
Cost of sales........................................ 5,929 6,680 6,330
------- ------- -------
Gross margin..................................... 5,578 7,372 7,688
Operating expenses:
Product development and engineering................ 2,660 1,652 1,577
Sales and marketing................................ 1,780 2,385 2,352
General and administrative......................... 1,522 968 872
------- ------- -------
Total operating expenses......................... 5,962 5,005 4,801
------- ------- -------
Operating income (loss).............................. (384) 2,367 2,887
------- ------- -------
Other income (expense):
Interest expense................................... -- (80) (209)
Interest income.................................... 595 485 112
Other, net......................................... -- (5) (5)
------- ------- -------
Total other income (expense)..................... 595 400 (102)
------- ------- -------
Income before provision (benefit) for income taxes... 211 2,767 2,785
------- ------- -------
Provision (benefit) for income taxes................. 32 (507) 131
Net income........................................... $ 179 $ 3,274 $ 2,654
======= ======= =======
Primary net income per share......................... $ 0.03 $ 0.62 $ 0.68
======= ======= =======
Fully diluted net income per share................... $ 0.03 $ 0.60 $ 0.56
======= ======= =======
Weighted average common shares outstanding:
Primary............................................ 5,475 5,316 3,912
======= ======= =======
Fully diluted...................................... 5,475 5,532 4,915
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
MIZAR, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
OPTION,
NET UNREALIZED OBLIGATION
COMMON STOCK LOSS ON RETAINED AND
---------------- PAID-IN MARKETABLE EARNINGS/ TREASURY
SHARES PAR VALUE CAPITAL SECURITIES (DEFICIT) STOCK TOTAL
------ --------- ------- -------------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1994.. 3,271 $33 $ 5,596 $ -- $(4,318) $ -- $ 1,311
Purchase of treasury
stock, at cost........ -- -- -- -- -- (214) (214)
Obligation to purchase
treasury stock, at
cost.................. -- -- -- -- -- (232) (232)
Payment for option to
purchase treasury
stock................. -- -- -- -- -- (31) (31)
Issuance of treasury
stock for exercise of
stock warrants........ -- -- (20) -- -- 138 118
Issuance of treasury
stock for exercise of
stock options......... -- -- (6) -- -- 7 1
Net income............. -- -- -- -- 2,654 -- 2,654
----- --- ------- ---- ------- ------- -------
BALANCE, June 30, 1995.. 3,271 33 5,570 -- (1,664) (332) 3,607
Issuance of common
shares for initial
public offering....... 918 9 7,188 -- -- -- 7,197
Initial public offering
expenses.............. -- -- (372) -- -- -- (372)
Issuance of common
shares for conversion
of debentures......... 891 9 1,039 -- -- -- 1,048
Issuance of common
shares for exercise of
stock options......... 388 4 206 -- -- -- 210
Purchase of treasury
stock, at cost........ -- -- -- -- -- (254) (254)
Payments on employee
loans for exercise of
stock options......... -- -- 25 -- -- -- 25
Change in unrealized
loss on marketable
securities............ -- -- -- (66) -- -- (66)
Net income............. -- -- -- -- 3,274 -- 3,274
----- --- ------- ---- ------- ------- -------
BALANCE, June 30, 1996.. 5,468 55 13,656 (66) 1,610 (586) 14,669
Issuance of common
shares for exercise of
stock options......... 5 -- 11 -- -- -- 11
Purchase of treasury
stock, at cost........ -- -- -- -- -- (514) (514)
Payments on employee
loans for exercise of
stock options......... -- -- 4 -- -- -- 4
Tax effect of
disqualifying
dispositions.......... -- -- 263 -- -- -- 263
Change in unrealized
loss on marketable
securities............ -- -- -- 50 -- -- 50
Net income............. -- -- -- -- 179 -- 179
----- --- ------- ---- ------- ------- -------
BALANCE, June 30, 1997.. 5,473 $55 $13,934 $(16) $ 1,789 $(1,100) $14,662
===== === ======= ==== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
MIZAR, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 179 $3,274 $2,654
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation...................................... 435 274 226
Amortization of deferred loan costs............... -- 4 15
Prepaid rent...................................... (13) (16) (16)
Deferred tax asset................................ (48) (790) --
Changes in assets and liabilities --
Accounts receivable, net.......................... (497) 327 468
Inventories, net.................................. (384) (232) (523)
Prepaid expenses.................................. 39 (49) (4)
Other assets...................................... 13 50 87
Accounts payable.................................. 331 197 (81)
Accrued liabilities............................... 290 (124) (45)
------ ------- ------
Net cash provided by operating activities....... 345 2,915 2,781
------ ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of machinery and equipment.............. (982) (364) (329)
Proceeds from dispositions of machinery and
equipment........................................ -- -- 76
Purchases of marketable securities................ (3,398) (11,526) --
Proceeds from maturities of marketable
securities....................................... 3,903 1,114 --
Proceeds from sales of marketable securities
before maturity.................................. 1,360 -- --
------ ------- ------
Net cash provided (used) by investing
activities..................................... 883 (10,776) (253)
------ ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock (net of expenses)............ -- 6,834 --
Exercise of stock warrants and options (net of
employee loans).................................. 15 235 119
Payment for option to purchase stock.............. -- -- (31)
Purchase of treasury stock........................ (514) (486) (214)
Net payments on long-term debt, capital lease
obligations, and subordinated debentures......... (13) (882) (136)
------ ------- ------
Net cash provided (used) by financing
activities..................................... (512) 5,701 (262)
------ ------- ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.. 716 (2,160) 2,266
CASH AND CASH EQUIVALENTS, beginning of year.......... 1,550 3,710 1,444
------ ------- ------
CASH AND CASH EQUIVALENTS, end of year................ $2,266 $1,550 $3,710
====== ======= ======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest............................ $ 1 $ 72 $ 215
Cash paid for income taxes........................ 113 187 48
Assets acquired under capital leases.............. -- -- 32
Common stock issued in conversion of convertible
debentures....................................... -- 1,048 --
Tax effect of disqualifying dispositions on stock
options.......................................... 263 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
MIZAR, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997, 1996, AND 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Mizar, Inc. (a Delaware corporation) (the "Company") designs, develops and
markets multiprocessor DSP (Digital Signal Processing) computing sub-systems
used primarily for real-time image and signal processing. The Company's
products have been used primarily for defense applications, but are also
incorporated by OEM customers in a variety of commercial applications. The
Company continues to sell its prior generation of non-DSP computing sub-
systems primarily to existing commercial customers for industrial automation
applications.
Certain previously reported amounts have been reclassified to conform with
the current year presentation.
Revenue Recognition
Revenue from product sales is recorded only when the earnings process is
completed, which is generally when the product is shipped.
For sales of products under certain government contracts, revenues are
recognized using the units of delivery method. Under this method, portions of
the total estimated contract revenues and costs are reflected in income each
period based on the units shipped in each period. Any expected loss on
contracts is recognized in the period when estimable and determinable.
Cash and Cash Equivalents
Cash and cash equivalents includes cash placed in money market funds or
investments in highly liquid securities with original maturities of three
months or less.
Marketable Securities
The Company has determined that all of its marketable securities should be
classified as available for sale and reflected in the accompanying balance
sheet at their respective market values. The Company's results of operations
include earnings from such securities as calculated on a yield-to-maturity
basis. Unrealized gains and losses from the changes in fair value are excluded
from income and are reported as an adjustment to stockholders' equity, net of
the deferred tax effect. The Company's marketable securities consist of
government securities, certificates of deposit, and corporate bonds.
The Company does not invest in or use derivative financial instruments.
Inventories
Inventories are stated at the lower of cost (including direct materials,
labor, and applied overhead) or market using the first-in, first-out method
(FIFO). The Company periodically reviews inventory items on hand and provides
allowances, if necessary, to reduce inventory to its realizable value.
Plant and Equipment
Plant and equipment are carried at cost and depreciated using the straight-
line method over the estimated economic lives of the assets as follows:
<TABLE>
<S> <C>
Machinery and equipment 3-5 years
Furniture and fixtures 2-5 years
Software 1-2 years
</TABLE>
F-7
<PAGE>
MIZAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996, AND 1995
When plant and equipment are sold or otherwise retired, the cost and
accumulated depreciation applicable to such assets are eliminated from the
accounts, and any resulting gain or loss is reflected in current operations.
Income Taxes
The Company uses the liability method to determine deferred taxes. Deferred
tax assets and liabilities are based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of enacted tax law.
Research and Development
Research and development costs are included in and inseparable from product
development and engineering and are charged to expense as incurred.
Net Income Per Share
Primary and fully diluted net income per share were computed by dividing net
income by the weighted average number of shares of common stock and common
stock equivalents outstanding during the year. Common stock equivalents
included in primary net income per share are incentive stock options under the
treasury stock method. Fully diluted net income per share prior to 1997
includes the shares as if the convertible debentures were converted at the
beginning of the period.
Initial Public Offering
On September 28, 1995, the Company completed an initial public offering
("IPO") of 918,000 shares of common stock. Proceeds from the offering, net of
expenses, aggregated $6,834,000 and were used to retire $856,000 of debt and
fulfill a commitment, as well as an option, to purchase the Company's common
stock owned by United Technologies, Inc. ("UTC"), and to add to working
capital.
The Company sold John G. Kinnard and Company, Incorporated, as
representative of the underwriters in connection with the IPO, a five-year
warrant to purchase up to 15,000 shares of the Company's common stock,
exercisable at $10.20 per share. As of June 30, 1997, this warrant had not
been exercised.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements:
In fiscal year 1997, the Company adopted Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. This statement requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity
be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
impact of the adoption was not material.
F-8
<PAGE>
MIZAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996, AND 1995
In fiscal 1997, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires companies to either recognize compensation
expense related to employee stock options in the income statement or disclose
the proforma effect on earnings of the stock options in the footnotes to the
financial statements. The Company has elected to follow the proforma
disclosure requirements promulgated by SFAS No. 123 and the proforma
disclosure can be found in Note 6 to the financial statements.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, Earnings per Share. The adoption of
this standard is required for financial statements issued for periods ending
after December 15, 1997. This Statement establishes standards for computing
and presenting earnings per share ("EPS"). It replaces the presentation of
primary EPS with a presentation of basic earnings per share. Additionally, it
requires presentation of diluted EPS which is similar to fully diluted EPS,
pursuant to APB Opinion No. 15. Had the Company adopted the provisions of SFAS
No. 128 in fiscal 1997, basic and diluted earnings per share for the year
ended June 30, 1997, would have been $0.04 and $0.03, respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 129, Disclosure of Information About
Capital Structure. The adoption of this standard is required for financial
statements issued for periods ending after December 15, 1997. This Statement
establishes standards for disclosing information about an entity's capital
structure. The impact of this adoption will not be significant.
2. INVENTORIES:
Net inventories at June 30, 1997 and 1996, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Raw materials............................................... $ 948 $ 591
Work-in-process............................................. 752 686
Finished goods.............................................. 140 179
------ ------
Inventories, net............................................ $1,840 $1,456
====== ======
</TABLE>
3. OTHER CURRENT LIABILITIES:
At June 30, 1997 and 1996, other accrued liabilities consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Sales representative commissions............................... $ 19 $ 56
Property tax................................................... 34 31
Warranties..................................................... 278 150
Accrued franchise tax.......................................... 171 231
Professional services and other................................ 194 168
---- ----
$696 $636
==== ====
</TABLE>
F-9
<PAGE>
MIZAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996, AND 1995
4. ROYALTIES:
During the fiscal years 1997, 1996 and 1995, the Company paid royalties of
$225,000, $360,000, and $410,000, primarily related to license agreements with
Texas Instruments Incorporated. The royalties due pursuant to the majority of
these licensing agreements were fully paid up in fiscal 1997. On July 11,
1997, TI completed the sale of it DSEG group to Raytheon Company. TI and the
Company have executed an agreement whereby all of TI's rights and interests in
the licensing agreements have been assigned to Raytheon Company.
The license agreements allow the Company to use certain products in its DSP
sub-system business. These licenses are subject to several restrictions and
requirements, and the termination of one or more of the licenses could
adversely effect the Company's business.
5. SIGNIFICANT CUSTOMERS, RECEIVABLES, AND CONCENTRATION OF CREDIT RISK:
The following table summarizes sales by major customer group and accounts
receivable by major customer group for the years ended June 30, 1997, 1996 and
1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
SALES BY CUSTOMER GROUP:
Commercial and other................................. $ 4,552 $ 7,037 $ 6,326
Prime contractors to U.S. Government................. 6,955 7,015 7,692
------- ------- -------
$11,507 $14,052 $14,018
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
ACCOUNTS RECEIVABLE BY CUSTOMER GROUP:
Commercial and other........................................... $1,346 $ 551
Prime contractors to U.S. Government........................... 593 891
------ ------
$1,939 $1,442
====== ======
</TABLE>
The Company's primary customers are original equipment manufacturers and
companies that develop and integrate defense and aerospace electronics
applications in the United States. During 1997, two customers accounted for
16% and 15% of net sales, respectively. These two customers have announced a
merger plan. During 1996, two customers accounted for 12% and 13% of net
sales, respectively. During 1995, one customer accounted for approximately 26%
of the Company's net sales. Due to the extensive consolidation of companies in
the defense industry, the amount of sales to any one defense industry customer
may become a more significant percentage of sales in future years.
During the fiscal years 1997, 1996, and 1995, export sales accounted for
less than 10% of the Company's net sales.
6. EMPLOYEE BENEFIT PLANS:
Bonus Plan
All full-time employees of the Company participate in a bonus program in
which yearly bonus amounts are calculated on a predetermined performance
formula. There were $8,000 of bonuses earned in 1997, no bonuses earned in
1996, and $269,000 of bonuses earned under this program in 1995. Bonuses, if
earned, are included in accrued compensation in the accompanying financial
statements.
F-10
<PAGE>
MIZAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996, AND 1995
Stock Option Plan
The Company has a stock option plan, which includes nonqualified and
incentive stock options, for directors and employees which authorizes options
for 2,252,500 shares of common stock to be granted at fair value as determined
by the Board of Directors. Options are exercisable on a schedule determined by
the Board of Directors and expire 10 years after the date of grant or earlier,
in accordance with the terms of the plan.
In fiscal 1997, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation. The Company accounts for the stock option plan under APB Opinion
No. 25, under which no compensation cost has been recognized. Had compensation
cost been determined pursuant to the fair value recognition provisions of SFAS
No. 123, the cost would have been $131,000 and $45,000 for fiscal 1997 and
1996, respectively. The Company's proforma net income for fiscal 1997 and 1996
would have been $48,000 and $3,229,000, respectively, resulting in fully
diluted earnings per share of $0.01 and $0.59, respectively. The fair value of
each option grant is estimated on the date of grant using the Black Scholes
option pricing model with the following weighted-average assumptions used for
options granted in fiscal 1997 and 1996: risk-free interest rate of 6.14% and
5.69%, expected dividend yield of zero, expected lives of 3 years and expected
volatility of 69.3% and 46.8%, respectively.
Because SFAS No. 123 fair value method of accounting has not been applied to
options granted prior to July 1, 1995, the resulting proforma compensation cost
may not be representative of that to be expected in future years, and the
weighted average exercise prices for fiscal 1995 have not been disclosed in the
table below. All options are granted at fair value on the date of grant. There
have been no grants of equity instruments other than options in the periods
presented. The following summarizes the activity under the plan (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ------------------------ ----
Weighted Weighted
Average Average
Options Exercise Price Options Exercise Price Options
------- -------------- ------- -------------- -------
<S> <C> <C> <C> <C> <C>
Options outstanding, beginning of the year 952 $ 2.18 1,225 $ .74 542
Options granted 192 4.21 199 7.52 746
Options exercised (5) 2.21 (388) .54 (7)
Options forfeited (157) 5.12 (84) 1.45 (56)
------- ------- -------
Options outstanding, end of year 982 2.11 952 2.18 1,225
======= ======= =======
Options exercisable, end of year 579 1.16 464 .86 491
======= ======= =======
Exercise price range $.15 to $9.13 $.15 to $9.13 $.15 to $2.55
</TABLE>
The following table summarizes information about the outstanding and
exercisable stock options at June 30, 1997 (number of shares in thousands):
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
------------------------- -------------------------
Weighted
Weighted Average Weighted
Range of Shares Average Remaining Shares Average
Exercise Prices at 6/30/97 Exercise Price Contractual Life at 6/30/97 Exercise Price
- --------------- ---------- -------------- ---------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
$ .15 to $2.55 685 $ .74 6.9 years 537 $ .72
$3.63 to $4.88 167 4.09 9.6 years 9 4.88
$5.00 to $6.75 81 5.73 9.0 years 14 6.03
$8.38 to $9.13 49 8.44 8.4 years 19 8.46
--- ---
982 579
=== ===
</TABLE>
Defined Contribution Plan
The Company maintains a defined contribution profit sharing and retirement
plan, which covers substantially all employees. Participants may elect to
contribute up to the lesser of the statutory maximum or 20% of total
compensation. The Company began making contributions in the third quarter of
1997 in the amount of 25% of the first 6% of each employee's contribution, for
a total contribution of $15,000 in 1997. No such contributions were made in
1995 or 1996.
The Company does not offer any postemployment or postretirement benefits to
its employees. David Irwin, former President and CEO of the Company who
resigned in June 1997, and one other officer have employment agreements that
provide up to one year of compensation for termination under certain
circumstances. The Company accrued approximately $250,000 in the year ended
June 30, 1997, related to Mr. Irwin's resignation from the aforementioned
positions.
F-11
<PAGE>
MIZAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996, AND 1995
7. INCOME TAXES:
At June 30, 1997, the Company had net operating loss (NOL) carryforwards of
approximately $7,300,000 which begin to expire in 2004. Research and
development tax credit carryforwards of approximately $41,000 at June 30,
1997, were also available to reduce future federal income taxes. Pursuant to
Section 382 of the Internal Revenue Code, a change in ownership occurred with
the initial public offering of the Company. As a result, the Company will be
subject to a $2,300,000 annual net operating loss utilization limitation.
The Company had net tax assets of $3,306,000 (composed primarily of the tax
effect of NOL's) at June 30, 1997. In accordance with the criteria contained
in Statement of Financial Accounting Standard No. 109, Accounting for Income
Taxes, a valuation allowance associated with the Company's NOL was reduced in
1996 and a deferred tax asset of $790,000 was recognized. In fiscal 1997, the
deferred tax asset was increased to $1,101,000, primarily as a result of the
tax benefit recorded as a result of the disqualifying dispositions of employee
incentive stock options. The Company believes it is more likely than not that
it will be able to realize the benefit of this net asset.
The components of the income tax provisions in the accompanying statements
of operations consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ----- ----
<S> <C> <C> <C>
State--
Current.................................................... $70 $ 63 $ 72
Deferred................................................... -- 108 --
Federal--
Current.................................................... 10 41 59
Deferred................................................... -- 71 --
Reduction in valuation allowance............................. (48) (790) --
--- ----- ----
Total.................................................... $32 $(507) $131
=== ===== ====
</TABLE>
The difference between the federal statutory tax rate and the effective tax
rate is reconciled as follows (in thousands):
<TABLE>
<CAPTION>
1997 % 1996 % 1995 %
---- --- ----- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Income tax provision at statutory rate........ $65 35% $ 968 35% $975 35%
Utilization of NOL............................ (52) (28) (920) (33) (916) (33)
Deduction for state taxes..................... 70 38 63 2 47 2
Reduction in valuation allowance.............. (48) (27) (790) (28) -- --
Other......................................... (3) (1) 172 6 25 1
--- --- ----- --- ---- ---
Income tax provision at effective tax rate.... $32 17% $(507) (18)% $131 5%
=== === ===== === ==== ===
</TABLE>
F-12
<PAGE>
MIZAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996, AND 1995
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial reporting and tax bases of assets and
liabilities given the provisions of the enacted tax laws. The net deferred tax
asset is comprised of the following (in thousands):
<TABLE>
<CAPTION>
1997 CHANGE 1996
------- ------ -------
<S> <C> <C> <C>
DEFERRED TAX ASSETS:
Current--
Nondeductible allowances...................... $ 296 $ 85 $ 211
UCC adjustment................................ 7 3 4
Other......................................... 336 132 204
Noncurrent--
Depreciation.................................. 50 20 30
Disqualifying dispositions.................... 263 263 --
Net operating losses.......................... 2,354 (290) 2,644
------- ----- -------
Net deferred tax asset, before valuation
reserve........................................ 3,306 213 3,093
Valuation reserve............................... (2,205) 98 (2,303)
------- ----- -------
Net deferred tax assets......................... $ 1,101 $ 311 $ 790
======= ===== =======
</TABLE>
8. COMMITMENTS:
Leases
The Company leases its facilities and certain machinery and equipment under
operating leases with remaining terms of up to 36 months. Rent expense
applicable to operating leases was $221,000, $175,000 and $156,000 in 1997,
1996, and 1995, respectively. At June 30, 1997, the future minimum rental
payments required by operating leases were as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................. $102
1999................................................................. 89
2000................................................................. 7
2001................................................................. --
Thereafter........................................................... --
----
$198
====
</TABLE>
9. STOCKHOLDERS' EQUITY:
In May 1997, the Company announced a plan to repurchase up to $1,000,000
worth of the common stock outstanding. As of June 30, 1997, 144,400 shares had
been repurchased for a total of $509,000. In August 1997, the Company
announced a $1,000,000 expansion to its common stock repurchase plan. As of
September 12, 1997, a total of 281,900 shares had been repurchased for a total
of $1,081,000 since the commencement of the program in May.
F-13
<PAGE>
MIZAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996, AND 1995
10. MARKETABLE SECURITIES:
A summary of the amortized cost, unrealized gains and losses, and fair
values of available for sale marketable securities at June 30, 1997 and 1996
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------------------------- ----------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING FAIR AMORTIZED HOLDING FAIR
TYPE OF SECURITY COST LOSSES VALUE COST LOSSES VALUE
---------------- --------- ---------- ------ --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government......... $4,160 $ 3 $4,157 $ 2,054 $ 7 $ 2,047
Corporate Bonds......... 4,358 22 4,336 7,835 94 7,741
Commercial Paper........ -- -- -- 498 -- 498
Certificate of Deposit.. 105 -- 105 -- -- --
------ --- ------ ------- ---- -------
Totals................ $8,623 $25 $8,598 $10,387 $101 $10,286
====== === ====== ======= ==== =======
</TABLE>
Net of the tax effect, the unrealized loss on securities available for sale
is $16,000, which is included in stockholders' equity.
The Company established a $100,000 certificate of deposit as collateral for
a stand-by letter of credit which was required by a customer. This certificate
of deposit matures in December 1997, and was classified as a long-term
security in fiscal 1996.
A comparison of the amortized cost and fair value of the Company's available
for sale marketable securities at June 30, 1997, by maturity date follows (in
thousands):
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- ------
<S> <C> <C>
One year or less........................................ $5,564 $5,549
Two through three years................................. 3,059 3,049
------ ------
Total................................................... $8,623 $8,598
====== ======
</TABLE>
F-14
<PAGE>
MIZAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996, AND 1995
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
A summary of the unaudited quarterly results of operations follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1997 1997
------------- ------------ --------- --------
<S> <C> <C> <C> <C>
Net sales........................ $3,025 $3,389 $2,203 $2,890
Gross margin..................... 1,645 1,625 801 1,507
Income (loss) before provision
(benefit) for income taxes...... 491 384 (732) 68
Net income (loss)................ 439 344 (665) 61
Fully diluted net income (loss)
per share....................... $ .08 $ .06 $ (.13) $ .01
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996
------------- ------------ --------- --------
<S> <C> <C> <C> <C>
Net sales........................ $4,458 $3,952 $3,255 $2,387
Gross margin..................... 2,582 2,026 1,672 1,092
Income before provision (benefit)
for income taxes................ 1,266 833 632 36
Net income....................... 1,133 1,529 579 33
Fully diluted net income per
share........................... $ .22 $ .27 $ .10 $ .01
</TABLE>
During the quarter ended December 31, 1995, the Company recognized a
deferred tax asset of $790,000 associated with a net operating loss
carryforward. The net income and net income per share for the quarter ended
December 31, 1995 were positively impacted by the recognition of this asset,
which added approximately $.14 to net income per share.
F-15
<PAGE>
MIZAR, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
ASSETS (UNAUDITED)
------
Current assets:
<S> <C>
Cash and cash equivalents...................................... $ 1,993
Marketable securities, at fair value........................... 7,931
Accounts receivable, net of allowances of $86.................. 2,300
Inventories, net............................................... 2,609
Prepaid expenses and other..................................... 63
Deferred tax asset............................................. 1,104
-------
Total current assets......................................... 16,000
-------
Plant and equipment:
Machinery and equipment........................................ 1,946
Furniture and fixtures......................................... 325
-------
2,271
Less accumulated depreciation.................................. (1,434)
-------
Plant and equipment, net..................................... 837
-------
Other assets..................................................... 91
-------
Total assets................................................. $16,928
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable............................................... $ 1,068
Accrued compensation........................................... 348
Other current liabilities...................................... 736
Current maturities of capital lease obligations................ --
-------
Total current liabilities.................................... 2,152
-------
Total liabilities............................................ 2,152
-------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
no shares issued and outstanding ............................. --
Common stock, $.01 par value; 25,000,000 shares authorized,
5,658,464 shares issued and 5,135,976 shares outstanding ..... 56
Additional paid-in capital..................................... 14,074
Net unrealized loss on marketable securities................... (5)
Retained earnings.............................................. 1,242
-------
15,367
-------
Less--treasury stock, at cost.................................... (591)
-------
Total stockholders' equity................................... 14,776
-------
Total liabilities and stockholders' equity................... $16,928
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
MIZAR, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
--------- ---------
<S> <C> <C>
Net sales.................................................. $ 3,203 $ 3,025
Cost of sales.............................................. 1,555 1,380
--------- ---------
Gross margin........................................... 1,648 1,645
Operating expenses:
Product development and engineering...................... 571 474
Sales and marketing...................................... 520 464
General and administrative............................... 353 351
--------- ---------
Total operating expenses............................... 1,444 1,289
--------- ---------
Operating income........................................... 204 356
Interest income............................................ 146 135
--------- ---------
Income before provision for income taxes................... 350 491
Provision for income taxes................................. 35 52
--------- ---------
Net income................................................. $ 315 $ 439
========= =========
Primary net income per share............................... $ 0.06 $ 0.08
========= =========
Fully diluted net income per share......................... $ 0.06 $ 0.08
========= =========
Weighted average common shares outstanding:
Primary.................................................. 5,404 5,579
========= =========
Fully diluted............................................ 5,458 5,579
========= =========
</TABLE>
The accompaning notes are an integral part of these financial statements.
F-17
<PAGE>
MIZAR, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 315 $ 439
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation.......................................... 134 90
Prepaid rent.......................................... 5 (4)
Changes in assets and liabilities --
Accounts receivable, net.............................. (484) (1,265)
Inventories, net...................................... (769) (343)
Prepaid expenses...................................... 29 (16)
Other assets.......................................... (50) 12
Accounts payable...................................... 153 194
Accrued liabilities................................... (33) 108
--------- ---------
Net cash used by operating activities............... (700) (785)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of machinery, equipment, furniture and
fixtures............................................. (43) (280)
Purchases of marketable securities.................... -- (459)
Proceeds from maturities of marketable securities..... 684 625
Proceeds from sales of marketable securities before
maturity............................................. -- 1,360
--------- ---------
Net cash provided by investing activities........... 641 1,246
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock warrants and options................ 361 11
Purchase of treasury stock............................ (573) (3)
Net payments on capital lease obligations............. (2) (6)
--------- ---------
Net cash provided (used) by financing activities.... (214) 2
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... (273) 463
CASH AND CASH EQUIVALENTS, beginning of period.......... 2,266 1,550
--------- ---------
CASH AND CASH EQUIVALENTS, end of period................ $ 1,993 $ 2,013
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for income taxes............................ $ 10 $ 16
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
MIZAR, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
While the accompanying interim financial statements are unaudited, they have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of the Company, all
material adjustments and disclosures necessary to fairly present the results
of such periods have been made. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. These financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended June 30, 1997, as
included in the Form 10-K, previously filed. The interim results of operations
for the period ended September 30, 1997, are not necessarily indicative of
results to be expected for the year ending June 30, 1998.
2. MARKETABLE SECURITIES
The Company has determined that all of its marketable securities should be
classified as available for sale and reflected in the accompanying balance
sheet at their respective market values. The Company's results of operations
include earnings from such securities as calculated on a yield-to-maturity
basis. Unrealized gains and losses from the changes in fair value are excluded
from income and are reported as an adjustment to stockholders' equity, net of
the deferred tax effect. The Company's marketable securities consist of direct
and implied obligations of the U. S. Government, certificates of deposit, and
corporate bonds.
3. INVENTORIES
Inventories at September 30, 1997 and June 30, 1997, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- --------
<S> <C> <C>
Raw materials...................................... $ 884 $ 948
Work-in-process.................................... 1,514 752
Finished goods..................................... 211 140
------ ------
Inventories, net................................... $2,609 $1,840
====== ======
</TABLE>
4. INCOME TAXES
The Company's effective income tax rate as reflected in the accompanying
interim statements of operations has been significantly impacted by the
utilization of net operating loss carryforwards. During fiscal year 1996, the
Company's accounting for income taxes was further impacted by the recognition
of a deferred tax asset of $790,000. In accordance with SFAS No. 109,
Accounting for Income Taxes, a valuation allowance associated with the net
operating loss carryforward was reduced and the $790,000 asset was recognized.
In fiscal 1997, the deferred tax asset was increased to $1,101,000, primarily
as a result of the tax benefit recorded as a result of disqualifying
dispositions of employee incentive stock options. The Company believes that it
is more likely than not that it will be able to realize the benefit of this
net asset, which relates to the estimated value to be derived from utilizing
net operating loss carryforwards in future accounting periods.
5. INCOME PER SHARE
Primary and fully diluted income per share for the three months ended
September 30, 1997 and 1996 were computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the periods presented. Common stock equivalents included in
both primary and fully diluted income per share are stock options using the
treasury stock method. For the three months ended September 30, 1997, common
stock equivalents included in primary income per share were calculated under
the
F-19
<PAGE>
MIZAR, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS--(CONTINUED)
treasury stock method using the average market price, whereas the common stock
equivalents included in fully diluted income per share were calculated using
the ending market price, which was higher than the average market price. For
the three months ended September 30, 1996, both primary and fully diluted
income per share were computed using the average market price, which was
higher than the ending market price. Shares used in primary and fully diluted
income per share calculations are presented below (in thousands):
<TABLE>
<CAPTION>
FULLY
PRIMARY DILUTED
----------- -----------
THREE THREE
MONTHS MONTHS
ENDED ENDED
SEPTEMBER SEPTEMBER
30, 30,
----------- -----------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Weighted average common stock outstanding during the
period................................................ 5,020 4,966 5,020 4,966
Common stock equivalents of stock programs............. 384 613 438 613
----- ----- ----- -----
Shares used in net income per share calculation........ 5,404 5,579 5,458 5,579
===== ===== ===== =====
</TABLE>
6. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In fiscal year 1997, the Company adopted Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. This statement requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity
be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
impact of the adoption was not material.
In fiscal year 1997, the Company adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation. SFAS No. 123
requires companies to either recognize compensation expense related to
employee stock options in the statements of operations or disclose the
proforma effect on earnings of the stock options in the footnotes to the
financial statements. The Company has elected to follow the proforma
disclosure requirements promulgated by SFAS No. 123 and the proforma
disclosure can be found in Note 6 to the financial statements in the Form 10-K
for the year ended June 30, 1997.
7. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, Earnings per Share. The adoption of
this standard is required for financial statements issued for periods ending
after December 15, 1997. This Statement establishes standards for computing
and presenting earnings per share ("EPS"). It replaces the presentation of
primary EPS with a presentation of basic earnings per share. Additionally, it
requires presentation of diluted EPS which is similar to fully diluted EPS,
pursuant to APB Opinion No. 15. Had the Company previously adopted the
provisions of SFAS No. 128, basic and diluted earnings per share for the
quarter ended September 30, 1997, would have been $0.06 and $0.06,
respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 129, Disclosure of Information About
Capital Structure. The adoption of this standard is required for financial
statements issued for periods ending after December 15, 1997. This Statement
establishes standards for disclosing information about an entity's capital
structure. The impact of this adoption will not be significant.
8. STOCKHOLDERS' EQUITY
In May 1997, the Company announced a plan to repurchase up to $1,000,000
worth of the common stock outstanding. As of June 30, 1997, 144,400 shares had
been repurchased for a total of $509,000. In August 1997, the Company
announced a $1,000,000 expansion to its common stock repurchase plan. As of
September 30, 1997, a total of 281,900 shares had been repurchased for a total
of $1,081,000 since the commencement of the program in May.
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Loughborough Sound Images Limited
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Loughborough Sound Images Limited and its subsidiaries
at September 30, 1996 and 1997 and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1997,
in conformity with accounting principles generally accepted in the United
States. 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 of these financial
statements in accordance with auditing standards generally accepted in the
United States which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse
PRICE WATERHOUSE
Leicester, England
December 9, 1997
F-21
<PAGE>
LOUGHBOROUGH SOUND IMAGES LIMITED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1996 1997
------- -------
ASSETS
------
<S> <C> <C>
Current Assets:
Cash............................................................ $ 195 $ 140
Restricted cash................................................. -- 810
Accounts receivable, net of allowance for doubtful accounts of
$214 and $183.................................................. 4,453 6,026
Inventories, net................................................ 2,892 2,762
Prepaid expenses and other...................................... 803 1,493
------- -------
Total current assets.......................................... 8,343 11,231
------- -------
Plant and equipment:
Buildings and equipment......................................... 3,283 4,088
Furniture and fixtures.......................................... 2,845 2,929
------- -------
6,128 7,017
Less--accumulated depreciation.................................. (2,573) (3,389)
------- -------
Plant and equipment, net...................................... 3,555 3,628
------- -------
Total assets................................................ $11,898 $14,859
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable................................................ $ 2,269 $ 3,590
Other current liabilities....................................... 2,029 2,658
Line of credit.................................................. 2,341 --
Current maturities of debt and capital lease obligations........ 1,298 282
------- -------
Total current liabilities..................................... 7,937 6,530
------- -------
Deferred income taxes............................................. 743 632
Long-term debt and capital lease obligations, net of current
maturities....................................................... 280 810
------- -------
Total liabilities............................................. 8,960 7,972
------- -------
Commitments and contingencies (Note 12)
Mandatorily redeemable preference shares.......................... -- 8,173
Shareholders' equity (deficit):
Ordinary shares, (Pounds)1 par; 80,000 shares authorized, 62,500
and 56,497 shares issued and outstanding, respectively......... 99 90
B ordinary shares, (Pounds)1 par; 25,000 shares authorized, 1
share issued and outstanding in 1997........................... -- --
Additional paid-in capital...................................... -- 787
Retained earnings (accumulated deficit)......................... 2,713 (1,554)
Unearned ESOP shares............................................ -- (810)
Cumulative translation adjustment............................... 126 201
------- -------
Total shareholders' equity (deficit).......................... 2,938 (1,286)
------- -------
Total liabilities and shareholders' equity (deficit)........ $11,898 $14,859
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE>
LOUGHBOROUGH SOUND IMAGES LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Net sales........................................... $18,025 $21,142 $22,881
Cost of sales....................................... 7,780 9,098 9,366
------- ------- -------
Gross margin.................................... 10,245 12,044 13,515
Operating expenses:
Sales and marketing............................... 2,376 2,655 3,960
Product development and engineering............... 3,837 3,328 3,791
General and administrative........................ 2,358 3,313 5,174
Loss on assets held for sale...................... 204 -- --
------- ------- -------
Total operating expenses........................ 8,775 9,296 12,925
------- ------- -------
Operating income.................................... 1,470 2,748 590
Other income (expense):
Interest expense.................................. (238) (339) (205)
Interest income................................... 5 6 16
Other, net........................................ 544 73 77
------- ------- -------
Total other income (expense).................... 311 (260) (112)
------- ------- -------
Income from continuing operations before income
taxes.............................................. 1,781 2,488 478
Provision for income taxes.......................... 768 798 365
------- ------- -------
Income from continuing operations................... 1,013 1,690 113
Loss from discontinued operations, net of tax
benefit of $581, $661 and $560, respectively....... (1,179) (1,341) (1,248)
------- ------- -------
Net income (loss)................................... $ (166) $ 349 $(1,135)
======= ======= =======
Net income (loss)................................... $ (166) $ 349 $(1,135)
Preference share dividends, accretion and
amortization of issuance costs of preference
shares............................................. -- -- (874)
------- ------- -------
Net income (loss) available to ordinary
shareholders....................................... $ (166) $ 349 $(2,009)
======= ======= =======
Net income (loss) per share:
Continuing operations............................. $ 16.21 $ 27.04 $(12.79)
Discontinued operations........................... (18.86) (21.46) (20.98)
------- ------- -------
$ (2.65) $ 5.58 $(33.77)
======= ======= =======
Weighted average shares outstanding................. 62,500 62,500 59,499
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE>
LOUGHBOROUGH SOUND IMAGES LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ORDINARY SHARES AND RETAINED
B ORDINARY SHARE ADDITIONAL EARNINGS UNEARNED CUMULATIVE
---------------------- PAID-IN (ACCUMULATED ESOP TRANSLATION
NUMBER AMOUNT CAPITAL DEFICIT) SHARES ADJUSTMENT TOTAL
------ --------- ---------- ------------ -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1994................... 62,500 $ 99 $ -- $ 2,530 $ -- $134 $ 2,763
Net loss.............. -- -- -- (166) -- -- (166)
Foreign currency
translation.......... -- -- -- -- -- 20 20
----------- -------- ---- ------- ----- ---- -------
Balance at September 30,
1995................... 62,500 99 -- 2,364 -- 154 2,617
Net income............ -- -- -- 349 -- -- 349
Foreign currency
translation.......... -- -- -- -- -- (28) (28)
----------- -------- ---- ------- ----- ---- -------
Balance at September 30,
1996................... 62,500 99 -- 2,713 -- 126 2,938
Net loss.............. -- -- -- (1,135) -- -- (1,135)
Issuance of shares.... 602 1 204 -- -- -- 205
Issuance of warrants.. -- -- 583 -- -- -- 583
Dividends, accretion
and amortization of
issuance costs....... -- -- -- (874) -- -- (874)
Purchase and
cancellation of
treasury shares...... (6,604) (10) -- (2,258) -- -- (2,268)
Purchase of shares for
ESOP................. -- -- -- -- (810) -- (810)
Foreign currency
translation.......... -- -- -- -- -- 75 75
----------- -------- ---- ------- ----- ---- -------
Balance at September 30,
1997 .................. 56,498 $ 90 $787 $(1,554) $(810) $201 $(1,286)
=========== ======== ==== ======= ===== ==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
LOUGHBOROUGH SOUND IMAGES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1995 1996 1997
-------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ (166) $ 349 $ (1,135)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation................................. 398 739 821
Loss on assets held for sale................. 204 -- --
Deferred tax provision (benefit)............. 762 (194) (182)
Changes in assets and liabilities:
Accounts receivable, net..................... (438) (981) (1,572)
Inventories, net............................. 610 (258) 131
Prepaid expenses and other................... (1,278) 852 (690)
Accounts payable and accrued liabilities..... 500 (574) 2,020
-------- ------ ---------
Net cash provided by (used in) operating
activities................................ 592 (67) (607)
-------- ------ ---------
Cash flows from investing activities:
Purchases of plant and equipment................. (762) (517) (860)
Proceeds from dispositions of plant and equipment
and assets held for sale........................ -- 529 98
-------- ------ ---------
Net cash provided by (used in) investing
activities.................................. (762) 12 (762)
-------- ------ ---------
Cash flows from financing activities:
Proceeds from sales of preference shares......... -- -- 8,914
Payment of preference shares issuance costs...... -- -- (827)
Purchase or ESOP shares.......................... -- -- (810)
Purchase of treasury shares...................... -- -- (2,268)
Proceeds from debt............................... 579 500 810
Restricted cash in escrow........................ -- -- (810)
Payments on debt................................. (250) (523) (3,783)
-------- ------ ---------
Net cash provided by (used in) financing
activities.................................. 329 (23) 1,226
-------- ------ ---------
Effect of translation exchange rates on cash....... 15 (32) 88
-------- ------ ---------
Net increase (decrease) in cash.................... 174 (110) (55)
Cash at beginning of year.......................... 131 305 195
-------- ------ ---------
Cash at end of year................................ $ 305 $ 195 $ 140
======== ====== =========
Supplemental disclosures of cash flow information:
Cash paid for interest........................... $ 225 $ 339 $ 205
Cash paid for income taxes....................... 14 381 977
Assets acquired under capital leases............. 1,368 257 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE>
LOUGHBOROUGH SOUND IMAGES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Loughborough Sound Images Limited ("LSI") was incorporated in England in
1983 and is registered as a limited liability company under the Companies Act
of 1985 (registration number 1751065). In November 1997, LSI re-registered as
a private limited company and changed its name from Loughborough Sound Images
plc to Loughborough Sound Images Limited. LSI and its wholly-owned
subsidiaries are collectively referred to herein as the "Company". The Company
is a leading supplier of digital signal processing ("DSP") technology and
products used in a range of industries, including automotive electronics,
medical electronics, defense and communications intelligence. The Company's
products are generally comprised of a DSP board and related software which are
included in the products of OEM customers. During 1997, the Company
discontinued its Video Multimedia business activities, the details of which
are discussed in Note 13.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies are as follows:
Accounting convention--The accompanying consolidated financial statements
have been prepared in accordance with United States generally accepted
accounting principles.
Foreign currency translation--The financial statements have been translated
into U.S. dollars ("$") from United Kingdom pound sterling ("(Pounds)") using
the exchange rate at each balance sheet date for assets and liabilities and an
average exchange rate for each period for net sales, costs, expenses and other
income and expenses. Translation adjustments have been recorded as a separate
component of shareholders' equity.
Principles of consolidation--The accompanying consolidated financial
statements include the accounts of LSI and its wholly-owned subsidiaries after
elimination of intercompany transactions and balances.
Restricted cash--In connection with the establishment of an employee stock
ownership plan ("ESOP"), the Company has guaranteed the debt of the ESOP. The
guarantee required the Company to place cash in escrow in an amount equal to
the debt. Such cash has been reflected as restricted cash in the accompanying
consolidated financial statements. See Notes 6 and 11.
Inventories--Inventories are stated at the lower of cost (including direct
materials, labor and applied overhead) or market value using the first-in,
first-out method. The Company periodically reviews inventory items on hand to
determine that items are realizable and are included in current or future
products. The Company provides allowances, if necessary, to reduce inventory
to its realizable value.
Property, plant and equipment--Property, plant and equipment, including
assets under capital lease, are carried at acquisition cost. Depreciation and
amortization are computed on the straight-line basis over the estimated
remaining useful lives of the assets (ranging from 5 to 25 years). Repair and
maintenance expenditures are charged to operations as incurred, and
expenditures for major renewals and betterments are capitalized. When units of
property are disposed, the cost and related accumulated depreciation are
removed from the accounts, and the resulting gains or losses are included in
operations.
The Company applies Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" to determine whether the carrying amount of long-lived
assets may not be recoverable. The Company has determined that no impairment
loss need be recognized for the period presented.
Income taxes--The Company uses the liability method of accounting for income
taxes. Deferred taxes are based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities.
Revenue recognition--Sales, net of value added taxes, and related cost of
sales are recognized as products are shipped to customers.
F-26
<PAGE>
LOUGHBOROUGH SOUND IMAGES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Research and development--Product development and engineering primarily
include research and development costs which are charged to expense as
incurred.
Net income (loss) per share--Net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of ordinary shares
and dilutive ordinary share equivalents outstanding during the year. Ordinary
share equivalents included in weighted average shares outstanding include
stock options and warrants determined under the treasury stock method, and are
not included in the weighted average shares outstanding if their effect would
have been antidilutive.
Use of estimates--Financial statements prepared in conformity with generally
accepted accounting principles require management to make estimates and
assumptions about reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities and reported amounts of revenues and
expenses. Management must also make estimates and judgments about future
results of operations related to specific elements of the business in
assessing recoverability of assets and recorded values of liabilities. Actual
results could differ from those estimates.
Fair value of financial instruments--Management believes the recorded values
of financial instruments approximate their current fair values as such items
are current in nature and/or generally bear variable interest rates which
adjust yield to derive current market value.
Stock-based compensation--Effective October 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
based Compensation" ("FAS 123"). This statement requires the fair value of
stock options and other stock-based compensation issued to employees to either
be included as compensation in the statement of operations, or the pro forma
effect on net income of such compensation expense to be disclosed in the notes
to the Company's consolidated statements. The Company has adopted FAS 123 on a
disclosure basis only and has opted to continue to apply the existing
accounting rules contained in Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"). As such, implementation
of FAS 123 did not impact the Company's financial position or results of
operations.
New accounting pronouncement--In February 1997, Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("FAS 128") was issued.
This statement establishes a new methodology for calculating earnings per
share. FAS 128 must be adopted as of December 31, 1997, and earlier adoption
is not permitted. Had net income per share been determined under this new
standard in the accompanying financial statements, there would have been no
change from the amounts reported.
F-27
<PAGE>
LOUGHBOROUGH SOUND IMAGES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1996 1997
------ ------
<S> <C> <C>
Raw materials............................................... $ 880 $1,099
Work-in progress............................................ 638 977
Finished goods.............................................. 1,374 686
------ ------
$2,892 $2,762
====== ======
</TABLE>
At September 30, 1996 and 1997, the Company had recorded allowances for
estimated excess and obsolete inventory of $255,000 and $681,000,
respectively, which amounts are reflected within the components of inventory.
For the years ended September 30, 1995, 1996 and 1997, the Company reflected
charges in its consolidated statements of operations of $342,000, $148,000 and
$493,000, respectively, for estimated excess and obsolete inventory.
4. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER
30,
-----------
1996 1997
---- ------
<S> <C> <C>
VAT taxes receivable.......................................... $ 37 $ 301
Prepaid expenses.............................................. 203 498
Other current assets.......................................... 563 694
---- ------
$803 $1,493
==== ======
</TABLE>
At September 30, 1996, other current assets includes $431,000 related to
prepaid legal and professional fees associated with the financing completed by
the Company in April 1997 discussed in Note 7. At September 30, 1997, other
current assets includes a receivable for income taxes of $471,000.
5. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1996 1997
------ ------
<S> <C> <C>
Accrued expenses........................................... $1,182 $1,250
Income taxes payable....................................... 350 47
Distributor settlement payable............................. -- 668
Taxes payable, other than income........................... 306 407
Other current liabilities.................................. 191 286
------ ------
$2,029 $2,658
====== ======
</TABLE>
The distributor settlement payable relates to an amount due following an
agreement on a non-exclusivity arrangement.
F-28
<PAGE>
LOUGHBOROUGH SOUND IMAGES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. DEBT
Line of Credit
The Company makes short-term borrowings under a short-term credit facility
made available by a commercial bank. At September 30, 1997, the Company had no
amounts outstanding, but had approximately $3,242,000 in aggregate
availability under such credit facility. The credit facility bears interest at
the bank's reference rate, plus 1.75% (8.75% at September 30, 1997).
Long-term Debt
Long-term debt (including capital lease obligations) consists of the
following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1996 1997
------- -----
<S> <C> <C>
Note payable to a commercial bank, interest at the bank's base
rate, plus 1.5% (7.25% at September 30, 1997); payable in
2002; secured by escrow of $810,000 cash..................... $ -- $ 810
Note payable to a commercial bank, interest at the bank's base
rate, plus 3.75%, (9.5% at September 30, 1996); payable
monthly; secured by all assets of the Company; due in 1997... 747 --
Capital lease obligations, secured by related equipment....... 831 282
------- -----
1,578 1,092
Less--current maturities...................................... (1,298) (282)
------- -----
$ 280 $ 810
======= =====
</TABLE>
The debt agreements related to the above contain warranties and covenants
and require maintenance of certain financial ratios. Default on any warranty
or covenant could, if not waived or corrected, accelerate the maturity of any
borrowings outstanding.
7. CAPITAL STOCK
General
Effective April 10, 1997, the Company restated its Articles of Association
resulting in an authorized share structure as follows: (a) 7,500,000
preference shares with a par value of (Pounds)0.75 per share; (b) 80,000
ordinary shares with a par value of (Pounds)1 per share; and (c) 25,000 "B'
ordinary shares with a par value of (Pounds)1 per share.
The preference shares and accrued dividends thereon rank first in
liquidation priority over all other equity shares and accrue first preference
cumulative dividends of 6% per annum beginning on April 1, 1998, such
dividends being payable in cash biannually on March 31 and September 30. The
preference shares also accrue a second preference cumulative dividend of 8%
per annum until March 31, 1998, and 2% per annum thereafter, such dividends
being payable in cash (or in at the election of the preference shareholders,
one additional preference share for each (Pounds)1 in dividends due) on March
31 and September 30. The preference shares are, to the extent possible,
mandatorily redeemable on the earlier of (a) the sale of the Company, (b) the
sale of businesses or assets comprising more than 50% of the net assets, sales
or profits of the Company, (c) a public offering of the Company's shares, or
(d) as follows:
<TABLE>
<CAPTION>
PROPORTION OF THEN
OUTSTANDING PREFERENCE
REDEMPTION DATE SHARES TO BE REDEEMED
--------------- ----------------------
<S> <C>
March 31, 2002..................................... One-quarter
March 31, 2003..................................... One-third
March 31, 2004..................................... One-half
March 31, 2005..................................... Balance
</TABLE>
F-29
<PAGE>
LOUGHBOROUGH SOUND IMAGES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company may, at its option, redeem a portion (in 100,000 share
increments) or all preference shares at any time for (Pounds)1 per share plus
accrued and unpaid dividends.
"B' ordinary shares carry the same rights and privileges of ordinary shares.
In addition, the consent or sanction of the holders of B' ordinary shares is
required before the Company or any of its subsidiaries can take certain
actions, including but not limited to (a) the authorization or issuance of
additional shares or rights to acquire additional shares, (b) reacquire shares
or make distributions to shareholders other than in accordance with the terms
of shares issued, (c) reduce any uncalled liability, (d) sell, lease or
otherwise dispose of the whole or substantially all of its business
undertakings or assets, or (e) acquire another company.
Preference Shares
On April 10, 1997, the Company entered into an agreement with Boston
Holdings Limited ("BHL"), a subsidiary of BancBoston Capital Limited, to sell
to BHL at a subscription price of (Pounds)5,500,001 ($8,914,000), 5,500,000
preference shares, one 'B' ordinary share, and warrants to acquire an
additional 20,115 'B' ordinary shares. The warrants are exercisable in whole
or in part through March 31, 2012 at a price determined by a formula but will
be between (Pounds)165 to (Pounds)212 per share. If a controlling interest in
the Company has not been sold privately or through a public offering by March
31, 2000, the exercise price of the warrants will be reduced by 5% to 10% per
year. Under the terms of the Company's Articles of Association, any proceeds
resulting from the exercises of the warrants must be used to redeem the
preference shares.
The Company valued the warrants at (Pounds)360,000 ($583,000) and reflected
such amount of the proceeds noted above as an increase to additional paid-in
capital. In addition, the Company incurred $1,032,000 in costs ($827,000 cash
and the issuance of 601 ordinary shares valued at $205,000) to issue the
preference shares. Such amount has been reflected as a reduction of the
preference shares. Both the value of the warrants and the issuance costs are
being amortized to retained earnings over the estimated life of the warrants
and preference shares. The preference shares, net of the unamortized value of
the warrants and the issuance costs, has been reflected in the accompanying
consolidated financial statements as mandatorily redeemable preference shares.
Share Options
The Company granted options to directors and employees in 1993 to acquire
ordinary shares at an exercise price of (Pounds)22 per share which was
determined by the board of directors to be the per share fair value of the
Company's ordinary shares. Such options expire ten years after the date of
grant and are exercisable at any time after the third anniversary of the date
of grant. The Company also granted options in 1996 and 1997 to acquire
ordinary shares at an exercise price of (Pounds)22 per share which was
determined by the board of directors to be the per share fair value of the
Company's ordinary shares. These options are exercisable upon the (1) sale of
the Company, (2) sale of a majority ownership of the Company or (3) an initial
public offering of the Company's ordinary shares.
The Company applies APB 25 to account for its share options. Accordingly, no
compensation cost has been recognized for grants of share options. Had
compensation cost for the share option grants been determined based on their
fair value, net income and net income available to ordinary shareholders for
the year ended September 30, 1996, would have been $328,000, and net income
per share would have been $5.26. There were no grants of share options in
1995, and the grants in 1997 were not significant. The fair value of option
grants in 1996 was estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions: --% dividend yield, --%
expected volatility, 5.72% risk-free interest rate, and an expected life of
three years.
F-30
<PAGE>
LOUGHBOROUGH SOUND IMAGES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of the Company's share options is presented below:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------------------------
1995 1996 1997
----------------- ------------------- ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ---------- ------ ------------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year................ 6,250 (Pounds)22 6,250 (Pounds)22 12,628 (Pounds)22
Granted............... -- -- 6,378 22 990 22
Cancelled............. -- -- -- (1,033) 22
----- ------ ------
Outstanding, end of
year................... 6,250 22 12,628 22 12,585 22
===== ====== ======
Options exercisable..... 6,250 6,250 6,250
===== ====== ======
Weighted-average fair
value of options
granted during the
year................... (Pounds)-- (Pounds)3.47 (Pounds)--
$(5.30)
</TABLE>
Of the 12,585 options outstanding at September 30, 1997, the weighted-
average remaining contractual life is 5.08 years and the weighted-average
exercise price is (Pounds)22. Of the 6,250 options exercisable at September
30, 1997, the weighted-average exercise price is (Pounds)22.
8. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Continuing operations:
Current........................................... $ 6 $ 992 $ 547
Deferred.......................................... 762 (194) (182)
----- ----- -----
768 798 365
Discontinued operations--current.................... (581) (661) (560)
----- ----- -----
$ 187 $ 137 $(195)
===== ===== =====
</TABLE>
The Company's effective tax rates for continuing operations differs from the
statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Provision at statutory rate.............................. $588 $821 $148
Add (deduct) effect of--
Meals and entertainment................................ 14 14 18
Capital allowance on ineligible property............... 68 18 (57)
Unrecognized losses.................................... -- -- 332
Withholding taxes...................................... 74 -- --
Other.................................................. 24 (55) (76)
---- ---- ----
$768 $798 $365
==== ==== ====
</TABLE>
F-31
<PAGE>
LOUGHBOROUGH SOUND IMAGES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's net deferred tax assets and liabilities were
comprised of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER
30,
------------
1996 1997
----- -----
<S> <C> <C>
Deferred tax assets:
Pension accrual........................................... $ 33 $ 47
Warranty accrual.......................................... 28 27
Other..................................................... -- 26
Deferred tax liabilities:
Deferred gain............................................. (60) (58)
Depreciation.............................................. (743) (632)
----- -----
$(742) $(590)
===== =====
</TABLE>
9. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
During the years ended September 30, 1995, 1996 and 1997, the Company had
certain customers which individually account for more than 10% of total sales
during such periods, as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
----------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Customer A................................................. 15% 12% 21%
Customer B................................................. 13% 12% --%
Customer C................................................. -- 11% --%
</TABLE>
At September 30, 1997, customer A represented 36% of the net accounts
receivable. No other customer represented 10% or more of such balance.
In the normal course of business, the Company extends credit on open account
to its customers. Extensions of credit are closely monitored and no
significant credit losses have occurred during the years ended September 30,
1995, 1996 and 1997.
10. GEOGRAPHICAL INFORMATION
The Company's sales, operating income and identifiable assets by geographic
region were as follows (in thousands):
<TABLE>
<CAPTION>
United Europe (excluding North Total
Kingdom United Kingdom) America
<S> <C> <C> <C> <C>
1995
Net sales $16,394 $ 1,631 $ -- $18,025
Transfers between
geographic areas 910 -- --
------ ------ ------ ------
$17,304 $ 1,631 $ -- $18,025
====== ====== ====== ======
Operating income $ 1,447 $ 23 $ -- $ 1,470
------ ------ ------ ------
Identifiable assets $11,458 $ 980 $ -- $12,438
====== ====== ====== ======
1996
Net sales $19,327 $ 1,815 $ -- $21,142
Transfers between
geographic areas 1,132 -- --
------ ------ ------ ------
$20,459 $ 1,815 $ -- $21,142
====== ====== ====== ======
Operating income $ 2,959 $ (211) $ -- $ 2,748
------ ------ ------ ------
Identifiable assets $10,801 $ 1,097 $ -- $11,898
====== ====== ====== ======
1997
Net sales $19,891 $ 2,990 $ -- $22,881
Transfers between
geographic areas 2,069 -- --
------ ------ ------ ------
$21,960 $ 2,990 $ -- $22,881
====== ====== ====== ======
Operating income $ 1,583 $ (548) $ (445) $ 590
====== ====== ====== ======
Identifiable assets $12,961 $ 1,639 $ 259 $14,859
====== ====== ====== ======
</TABLE>
Net sales outside the United Kingdom of products manufactured and exported
from the United Kingdom were $10,876,000, $11,732,000 and $14,357,000 for the
years ended September 30, 1995, 1996 and 1997, respectively. Products are
transferred between geographic areas on a basis intended to approximate the
market value of such products.
11. EMPLOYEE BENEFITS
Employee Savings Plan
The Company has an employee savings plan which allows for contributions by
the employees and the Company. The Company pays all general and administrative
expenses of the plan. During the years ended September 30, 1995, 1996 and
1997, the Company made contributions of $450,000, $430,000 and $409,000,
respectively.
F-32
<PAGE>
LOUGHBOROUGH SOUND IMAGES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Employee Stock Ownership Plan
In April of 1997, the Company established an employee stock ownership plan
(the "ESOP") for the benefit of employees of the Company. The ESOP borrowed
(Pounds)500,000 ($810,000) from a commercial bank and used the proceeds to
purchase 2,358 shares of the Company's ordinary shares from a director of the
Company at (Pounds)212 per share which was estimated to be the fair value of
the Company's ordinary shares. The Company has guaranteed the debt of the ESOP
and has placed in escrow cash in an equal amount of the debt. The Company has
reflected the guaranteed ESOP debt and a corresponding amount of guaranteed
ESOP obligations as a reduction of shareholders' equity in its consolidated
balance sheet at September 30, 1997. None of the shares acquired had been
allocated to the participants of the ESOP. Interest payments in 1997 were
$35,000.
12. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain buildings and equipment under operating leases.
Rent expense applicable to operating leases was $472,000, $530,000 and
$872,000 for the years ended September 30, 1995, 1996 and 1997, respectively.
At September 30, 1997, the future minimum lease payments required by operating
leases were as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................... $1,034
1999............................................................... 968
2000............................................................... 922
2001............................................................... 922
2002............................................................... 520
Thereafter......................................................... 14,820
</TABLE>
Litigation
The Company is party to certain legal proceedings incidental to its
business. Certain claims arising in the ordinary course of business have been
filed or are pending against the Company. The Company accrues for claims that
are both probable and for which expected loss can be reasonably estimated.
Management believes that the resolution of any such claims will not materially
affect the financial position or results of operations of the Company.
13. DISCONTINUED OPERATIONS
In April 1997, the Company adopted a plan to discontinue its Video
Multimedia Group ("VMG") operations in order to focus the Company's resources
on its digital signal processing activities. The VMG operations principally
designed, manufactured and sold products for the videoconferencing industry.
These activities operated as a distinct business segment the results of which
have been separately disclosed as discontinued operations in the accompanying
consolidated statements of operations. The VMG operations were fully abandoned
by September 30, 1997. Sales of VMG were $189,000, $1,462,000 and $277,000 for
the years ended September 30, 1995, 1996 and 1997, respectively.
14. SUBSEQUENT EVENT--MERGER WITH MIZAR, INC.
On November 17, 1997, the Company and Mizar, Inc. ("Mizar") executed a
definitive agreement and plan of merger. The merger is contingent upon, among
other matters, the approval of the shareholders of the Company. The merger, if
completed, will be effected by Mizar issuing its common shares for each
ordinary share of the Company in accordance with the exchange ratio set forth
in the agreement and plan of merger. In addition, the warrants for the "B'
ordinary shares discussed in Note 7 will be exercised and the proceeds used to
redeem a portion of the preference shares, and outstanding options to purchase
ordinary shares of the Company will be exchanged for options to purchase Mizar
common stock based on the exchange ratio discussed above. The agreement
contains provisions for the payment of expenses up to a maximum of $1.3
million by either party if certain conditions are met and the transaction is
not completed.
F-33
<PAGE>
APPENDIX A
<PAGE>
SHARE PURCHASE AGREEMENT
BETWEEN
MIZAR, INC.
(A DELAWARE CORPORATION)
AND
LOUGHBOROUGH SOUND IMAGES PLC
(A COMPANY REGISTERED IN ENGLAND AND WALES)
DATED: NOVEMBER 17, 1997
<PAGE>
This Share Purchase Agreement (this "Agreement") is made as of the 17th day
of November, 1997, between Mizar, Inc., a Delaware corporation ("Mizar"), and
Loughborough Sound Images plc, a company registered in England and Wales
("LSI").
W 1 T N E S S E T H:
WHEREAS, the respective Boards of Directors of Mizar and LSI each have
determined that it is in the best interests of their respective stockholders
for Mizar to acquire LSI through (i) an exchange of shares of common stock
issued by Mizar for all of the issued and outstanding ordinary shares of LSI,
in an acquisition that constitutes a tax-free transaction meeting the
requirements of Section 135 of the Taxation of Chargeable Gains Act 1992 (the
"TCGA"), and (ii) the partial redemption by LSI and partial purchase by Mizar
of all of the issued and outstanding preference shares of LSI, upon the terms
and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and certain other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
covenant and agree as follows:
ARTICLE 1.
PURCHASE OF SHARES
1.1. Exchange. Upon the terms and subject to the conditions set forth in
this Agreement, as soon as practicable after the execution of this Agreement,
LSI shall use its reasonable best efforts (a) to cause each of the registered
shareholders of LSI (collectively, the "LSI Shareholders") to accept an offer
made by Mizar to the LSI Shareholders by entering into a share exchange
agreement, in a mutually agreeable form, between such shareholder and Mizar
(the "Share Exchange Agreements"), which shall provide for each LSI
Shareholder to sell, assign, transfer, convey and deliver to Mizar, and for
Mizar to purchase, all right, title and interest in and to all of such
shareholder's shares of LSI Stock (as defined in Section 3.7 below), free and
clear of all liens, security interests, charges, encumbrances and rights of
others and (b) to cause each person holding Old Options (as defined in Section
2.4 below) (such persons shall be collectively referred to herein as the "LSI
Optionholders") to enter into an option exchange agreement, in a mutually
agreeable form, between such LSI Optionholder and Mizar (the "Option Exchange
Agreements"), which shall provide for each LSI Optionholder either to exercise
his Old Options for shares of LSI Stock, which shall then be sold to Mizar, or
to enter into a new option agreement with Mizar as set forth in Section 2.4
below, at the option of such LSI Optionholder. In addition, LSI shall use its
reasonable best efforts to cause Boston Holdings Limited ("Bank") to enter
into an agreement, in a mutually agreeable form, with LSI and Mizar (the "Bank
Agreement," and together with the Share Exchange Agreement and the Option
Exchange Agreement, the "Exchange Agreements"), which shall provide for (a)
Bank to exercise all the Warrants (as defined in Section 2.4 below) for shares
of LSI Stock which shall then be exchanged for shares of Mizar Common Stock,
(b) LSI to use all of the proceeds of such exercise to redeem Preferred Shares
(as defined in Section 3.7 below), and (c) Bank to sell any Preferred Shares
not so redeemed (the "Remaining Preferred Shares") to Mizar for an amount per
share that is equal to the amount payable upon redemption of the Remaining
Preferred Shares. The Exchange Agreements shall be mailed by Mizar to the
other parties to such agreements with such covering letters or other
documentation as may be necessary or desirable to comply with any relevant
provisions of United States and United Kingdom law. No such mailing shall be
made unless and until the parties shall have agreed on the form of all
documents referred to in this agreement as being "in a mutually agreeable
form," and until LSI shall have re-registered as a private company under
section 53 Companies Act 1985 (the "Companies Act") and shall have received a
certificate of change of name from the Registrar of Companies confirming such
re-registration. In consideration for the shares of LSI Stock so acquired by
Mizar, Mizar shall issue and deliver 94.632 shares of common stock, $.01 par
value, of Mizar ("Mizar Common Stock") in exchange for each share of LSI Stock
transferred to Mizar pursuant to an Exchange Agreement, as soon as practicable
following the satisfaction or permissible waiver of the conditions
A-1
<PAGE>
set forth in Articles 6 and 7 (the exchange of shares of Mizar Common Stock
for shares of LSI Stock, including shares issued at the Closing (as defined in
Section 1.2 below) upon the exercise of the Options and Warrants, shall be
referred to herein as the "Exchange").
1.2. Closing. Consummation of the transactions contemplated by this
Agreement and the Exchange Agreements (the "Closing"), shall take place at the
executive offices of Mizar in Carrollton, Texas, commencing at 10:00 a.m.,
local time, as soon as practicable after the last to be fulfilled or waived of
the conditions set forth in Articles 6 and 7, or at such other place, time and
date as shall be fixed by mutual agreement between Mizar and LSI. The day on
which the Closing shall occur shall be referred to herein as the "Closing
Date." Each party will use its reasonable best efforts to cause to be
prepared, executed and delivered the documents to be delivered pursuant to
Articles 6 and 7 and all other appropriate and customary documents as any
party or its counsel may reasonably request for the purpose of consummating
the transactions contemplated by this Agreement or the Exchange Agreements.
LSI will use its reasonable best efforts to facilitate the consummation of the
transactions contemplated by the Exchange Agreements at or prior to the
Closing. All actions taken at the Closing shall be deemed to have been taken
simultaneously at the time the last of any such actions is taken or completed.
1.3. Tax Consequences. It is the intention of the parties hereto that no
taxable income or gain shall be recognized by holders of LSI Stock upon the
Exchange under Section 135 of the TCGA.
1.4. Pooling of Interests. It is the intention of the parties hereto that
the Exchange will be treated for financial reporting purposes in the United
States as a pooling of interests.
ARTICLE 2.
EXCHANGE OF SHARES; TREATMENT OF OPTIONS AND WARRANTS
2.1. Warrants; Options; Exchange of Shares. On or before the Closing Date,
as provided in the applicable Exchange Agreements, but subject to the Closing,
the Warrants shall be exercised, in accordance with their terms, into shares
of LSI Stock, and each outstanding Old Option shall be, at the option of the
holder, exercised or converted into an option for shares of Mizar Common
Stock, as described in Section 2.4. Immediately after the satisfaction or
permissible waiver of the conditions set forth in Articles 6 and 7 at the
Closing, and after giving effect to the foregoing, each of the shares of LSI
Stock that are outstanding and tendered to Mizar pursuant to the Exchange
Agreements (the "Converted Shares") shall be exchanged for 94.632 (such number
being referred to herein as the "Exchange Ratio") shares of Mizar Common
Stock.
2.2. Fractional Shares. No scrip or fractional shares of Mizar Common Stock
shall be issued in the Exchange. All fractional shares of Mizar Common Stock
to which an LSI Shareholder would otherwise be entitled at the Closing Date
pursuant to a Share Exchange Agreement shall be aggregated. If a fractional
share results from such aggregation, then such shareholder shall be entitled,
after the later of (a) the Closing Date or (b) the surrender of such
shareholder's Certificate (as defined in Section 2.5 below) or Certificates
that represent such shares, to receive from Mizar an amount in cash in lieu of
such fractional share. The amount of such cash payment shall be equal to such
fractional proportion of the Average Closing Price (as defined below) of a
share of the Mizar Common Stock. For purposes of this Agreement, "Average
Closing Price" shall mean the average per share closing price for the Mizar
Common Stock as reported on the Nasdaq National Market System (the "NMS") over
the twenty (20) trading days ending on the fifth full trading day prior to the
Closing Date. Mizar will make available to the Exchange Agent (as defined in
Section 2.5 below) the cash necessary for the purpose of paying cash for
fractional shares.
2.3. Demand Rights. LSI shall use its reasonable best efforts to provide
that LSI Shareholders who have not, immediately prior to the Closing Date,
tendered their shares of LSI Stock and accepted the Exchange, and with respect
of which Mizar has validly exercised its rights properly demanded in
accordance with the applicable provisions of Section 429, the Companies Act,
comply with the provisions of Part XIIIA of the Companies Act, and both LSI
and Mizar agree that they shall comply with the provisions of Part XIIIA of
the Companies Act.
A-2
<PAGE>
2.4. Stock Options.
(a) On the Closing Date, LSI shall use its reasonable best efforts to
provide that all share options (the "Old Options") then outstanding under
LSI's share option plans (the "Option Plans"), shall, pursuant to the Option
Exchange Agreements, be exercised for shares of LSI Stock (immediately prior
to the Exchange), or exchanged in accordance with the Option Exchange
Agreements for options for Mizar Common Stock ("New Options"), to the effect
that (i) the holder of each such New Option, upon its exercise in accordance
with its terms, shall be entitled to receive that whole number of shares of
Mizar Common Stock (rounded to the nearest whole share) into which the number
of shares of LSI Stock subject to the Old Option exchanged for such New Option
would be convened based upon the Exchange Ratio, (ii) the exercise price per
share of Mizar Common Stock under the New Options shall be equal to the
exercise price per share of LSI Stock applicable to such Old Option
immediately prior to the Exchange, divided by the Exchange Ratio, and
converted into U.S. dollars using the average currency conversion rate for
converting British Pounds into U.S. dollars over the ten (10) days ending on
the second day before the Closing Date (and rounded to the nearest cent), and
(iii) all other terms and conditions of the New Options shall be substantially
the same as under the Old Options, as more explicitly set forth in the Option
Exchange Agreements. The terms of the New Options shall acknowledge the fact
that a triggering event shall have occurred under the Old Options as a result
of the Exchange. From and after the date of this Agreement, no additional
options shall be granted by LSI under the Option Plans or otherwise.
(b) It is intended that the New Options, as set forth herein, shall not give
to any holder thereof any benefits in addition to those which such holder had
prior to the conversion of the Old Options into New Options. Mizar shall take
all corporate action necessary to reserve for issuance a sufficient number of
shares of Mizar Common Stock for delivery upon exercise of the New Options. As
soon as practicable after the Closing Date, Mizar shall file a registration
statement, or an amendment to an existing registration statement, under the
Securities Act of 1933, as amended (the "Securities Act"), on Form S-8 (or
other successor form) with respect to the unissued shares of Mizar Common
Stock subject to any unexercised New Options and shall use its best efforts to
maintain the effectiveness of such registration statement for so long as such
New Options remain outstanding. In addition, Mizar will cause the shares of
Mizar Common Stock issuable under the New Options to be listed on the NMS.
(c) Approval by the stockholders of Mizar of this Agreement shall constitute
authorization and approval of any and all of the actions described in this
Section 2.4.
2.5. Exchange Agent.
(a) Mizar shall authorize Securities Transfer Corp., or such other firm as
is reasonably acceptable to LSI, to serve as exchange agent hereunder (the
"Exchange Agent"). Promptly after the Closing Date, Mizar shall deposit or
shall cause to be deposited in trust with the Exchange Agent (i) certificates
representing the number of whole shares of Mizar Common Stock to which the
holders of LSI Stock are entitled pursuant to the Exchange Agreements and
Section 2.1(a), and (ii) cash sufficient to pay for fractional shares then
known to Mizar, if applicable (such cash amounts and certificates being
hereinafter referred to as the "Exchange Fund"). The Exchange Agent shall,
pursuant to irrevocable instructions received from Mizar, deliver the number
of shares of Mizar Common Stock and pay the amounts of cash required under
this Article 2 with respect to each Converted Share out of the Exchange Fund.
Any cash needed from time to time by the Exchange Agent to make payments for
fractional shares shall be provided by Mizar and shall become part of the
Exchange Fund. The Exchange Fund shall not be used for any other purpose,
except as provided in this Agreement, or as otherwise agreed to by Mizar and
LSI prior to the Closing Date.
(b) As soon as practicable after the Closing Date, the Exchange Agent shall
mail and otherwise make available to each LSI Shareholder who, as of the
Closing Date, was a record holder of an outstanding certificate or
certificates, which immediately prior to the Closing Date represented shares
of LSI Stock (the "Certificates"), a stock transfer form or other appropriate
documents of transfer and instructions for their use in effecting the
surrender of the Certificates for payment therefor and exchange thereof, which
transfer documents shall comply with all applicable rules of the NMS.
A-3
<PAGE>
(c) Delivery of Certificates shall be effected, and risk of loss and title
to the Certificates shall pass, only upon proper delivery of the Certificates
to the Exchange Agent, and the form of transfer documents shall so reflect.
Upon surrender to the Exchange Agent of a Certificate, together with such
transfer documents duly executed, the holder of such Certificate shall be
entitled to receive in exchange therefor one or more certificates as requested
by the holder (properly issued, executed and countersigned, as appropriate)
representing that number of whole shares of Mizar Common Stock to which such
holder of LSI Stock shall have become entitled pursuant to the provisions of
this Article 2, and the Certificate so surrendered shall forthwith be
canceled.
(d) Mizar shall pay any stamp duty transfer taxes or other transfer taxes
under the laws of the United Kingdom and the United States required by reason
of the transfer to Mizar of LSI Stock or the issuance of a certificate
representing shares of Mizar Common Stock if such certificate is issued in the
name of the person in whose name the Certificate surrendered in exchange
therefor is registered. If any portion of the consideration to be received
pursuant to this Article 2 upon exchange of a Certificate is to be issued or
paid to a person other than the person in whose name the Certificate
surrendered in exchange therefor is registered, it shall be a condition of
such issuance and payment that the Certificate so surrendered shall be
properly endorsed or otherwise in proper form for transfer and that the person
requesting such exchange shall pay in advance any stamp duty transfer or other
taxes required by reason of the issuance of a certificate representing shares
of Mizar Common Stock to such other person, or establish to the satisfaction
of the Exchange Agent that such tax has been paid or that no such tax is
applicable. From the Closing Date until surrender in accordance with the
provisions of this Section 2.5, each Certificate shall represent for all
purposes only the right to receive the consideration provided in Sections 2.1
and 2.2. No dividends that are otherwise payable on Mizar Common Stock will be
paid to persons entitled to receive Mizar Common Stock until such persons
surrender their Certificates. After such surrender, there shall be paid to the
person in whose name Mizar Common Stock shall be issued any dividends on such
Mizar Common Stock that have a record date on or after the Closing Date and
prior to such surrender. In no event shall the persons entitled to receive
such dividends, if any, be entitled to receive interest on such dividends.
(e) In the case of any lost, mislaid, stolen or destroyed Certificates, the
holder thereof may be required, as a condition precedent to the delivery to
such holder of the consideration described in this Article 2, to deliver to
Mizar a bond in such reasonable sum as Mizar may direct as indemnity against
any claim that may be made against the Exchange Agent, Mizar or LSI with
respect to the Certificate alleged to have been lost, mislaid, stolen or
destroyed.
(f) After the Closing Date, there shall be no transfers on the share
register of LSI of the shares of LSI Stock that were outstanding immediately
prior to the Closing Date.
2.6. Adjustments. If, between the date of this Agreement and the Closing
Date, (i) the outstanding shares of LSI Stock or Mizar Common Stock shall have
been changed into a different number of shares or a different class by reason
of any reclassification, recapitalization, split-up, combination, exchange of
shares, or readjustment or a stock dividend thereon shall be declared with a
record date within such period, or (ii) Mizar or LSI shall have issued
additional shares of its capital stock (except upon conversion or exercise of
outstanding convertible securities or options or warrants), or options or
warrants to purchase capital stock, or securities convertible into capital
stock (except for issuances of options by Mizar or LSI that are consented to
by the Managing Director of LSI and the chief executive officer of Mizar and
issuances of any New Options), then the consideration to be received pursuant
to Section 2.1(a) hereof by the holders of shares of LSI Stock shall be
adjusted to accurately reflect such change.
A-4
<PAGE>
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF LSI
LSI hereby represents and warrants to Mizar that, except as otherwise set
forth on the LSI Disclosure Schedule (herein so called) attached hereto:
3.1. Organization and Good Standing of LSI. LSI is a public limited company
duly organized, validly existing and in good standing under the laws of the
United Kingdom. Except for the LSI Subsidiaries, LSI has no subsidiaries and
no equity, profit sharing, participation or other ownership interest
(including any general partnership interest) in any corporation, partnership,
limited partnership or other entity.
3.2. Capital Stock of LSI Subsidiaries and Other Ownership Interests. The
membership interests of Data Beta Limited, Multimedia Video Products Limited,
MVP Limited, Stanford Court Technology Limited, Ultimate Vision plc,
Loughborough Sound Images France Sarl, Loughborough Sound Images Deutschland
GmbH and Loughborough Sound Images, Inc. (collectively, the "LSI
Subsidiaries") have been duly authorized and are validly issued, fully paid
and nonassessable. The number of authorized and outstanding membership
interests or other equity interests of the LSI Subsidiaries, and the record
and beneficial owners of the same, are set forth on the LSI Disclosure
Schedule and, except as set forth on the LSI Disclosure Schedule, are owned by
LSI, either directly or indirectly, free and clear of all liens, charges,
encumbrances, equities or claims.
3.3. Foreign Qualification. LSI is duly qualified or licensed to do business
and is in good standing as a foreign corporation in every jurisdiction where
the failure so to qualify would have a material adverse effect on (a) the
current business, operations, assets or financial condition of LSI or (b) the
validity or enforceability of, or the ability of LSI to perform its
obligations under, this Agreement (an "LSI Material Adverse Effect").
3.4. Corporate Power and Authority. Each of LSI and each LSI Subsidiary has
the corporate power and authority to own, lease and operate its properties and
assets and to carry on its business as currently being conducted. LSI has the
corporate power and authority to execute and deliver this Agreement and to
perform its obligations under this Agreement. The execution, delivery and
performance by LSI of this Agreement has been duly authorized by all necessary
corporate action.
3.5. Binding Effect. This Agreement has been duly executed and delivered by
LSI and is the legal, valid and binding obligation of LSI enforceable in
accordance with its terms, except that:
(a) enforceability may be limited by bankruptcy, insolvency or other
similar laws affecting creditors' rights;
(b) the availability of equitable remedies may be limited by equitable
principles of general applicability; and
(c) rights to indemnification may be limited by considerations of public
policy.
3.6. Absence of Restrictions and Conflicts. Except as set forth on the LSI
Disclosure Schedule, the execution, delivery and performance of this Agreement
and the consummation of the Exchange and the fulfillment of and compliance
with the terms and conditions of this Agreement do not and will not, with the
passing of time or the giving of notice or both, violate or conflict with,
constitute a breach of or default under, result in the loss of any material
benefit under, or permit the acceleration of any obligation under, (i) any
term or provision of the relevant governing corporate documents of LSI or the
LSI Subsidiaries, (ii) any LSI Material Contract (as defined in Section 3.12),
(iii) any judgment, decree or order of any court or governmental authority or
agency to which LSI or the LSI Subsidiaries are parties or by which LSI or an
LSI Subsidiary or any of their respective properties is bound, or (iv) any
statute, law, regulation or rule applicable to LSI, including the Companies
Act and the City Code on Takeovers and Mergers (the "Takeover Code"), other
than such violations, conflicts, breaches or defaults which would not have an
LSI Material Adverse Effect. Except for compliance with the applicable
requirements of the Securities Act, the Securities Exchange Act of 1934, as
amended (the
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"Exchange Act"), and applicable securities laws, including the Takeover Code,
no consent, approval, order or authorization of, or registration, declaration
or filing with, any governmental agency or public or regulatory unit, agency,
body or authority with respect to LSI is required in connection with the
execution, delivery or performance of this Agreement by LSI or the
consummation of the transactions contemplated hereby.
3.7. Capitalization of LSI.
(a) The authorized capital stock of LSI consists of 7,500,000 preference
shares, (Pounds)0.75 par value ("Preferred Shares"), 80,000 "A" ordinary
shares, (Pounds)1 par value ("A Shares") and 25,000 "B" ordinary shares ("B
Shares"), (Pounds)1 par value (the outstanding and issued A Shares and the B
Shares are collectively referred to herein as the "LSI Stock"). As of the date
hereof, there were 5,708,548 Preferred Shares issued and outstanding, 56,497 A
Shares issued and outstanding, 12,585 A Shares reserved for issuance upon the
exercise of currently outstanding options granted under the Option Plans and 1
B share issued and outstanding. In addition, warrants to subscribe for up to
20,115 B Shares (the "Warrants") have been granted.
(b) All of the issued and outstanding shares of LSI Stock and the Preferred
Shares have been duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights.
(c) To LSI's knowledge, there are no voting trusts, shareholder agreements
or other voting arrangements, capacities, charges, liens or encumbrances on
shares issued by LSI that have been granted by the shareholders of LSI, except
as set forth on the LSI Disclosure Schedule.
(d) Except as set forth on the LSI Disclosure Schedule, there is no
outstanding subscription, contract, convertible or exchangeable security,
option, warrant, call or other right obligating LSI or an LSI Subsidiary to
issue, sell, exchange, or otherwise dispose of, or to purchase, redeem or
otherwise acquire, shares of, or securities convertible into or exchangeable
for, shares of LSI or an LSI Subsidiary, except as set forth on the LSI
Disclosure Schedule or with respect to the Warrants.
3.8. Financial Statements and Records of LSI. LSI has made available to
Mizar true, correct and complete copies of the following financial statements
(the "LSI Financial Statements"):
(a) the audited consolidated balance sheet and profit and loss account of
LSI and its subsidiaries as of September 30, 1995 and 1996 and for the
years then ended, including the notes thereto, in both cases examined by
and accompanied by the report of Price Waterhouse, LP (collectively, the
"LSI Year-End Statements"); and
(b) the unaudited consolidated management account and balance sheet of
LSI and its subsidiaries as of September 30, 1997, with any notes thereto,
(collectively, the "LSI Balance Sheet").
The LSI Financial Statements present fairly, in all material respects, the
financial position of LSI and/or its subsidiaries, as the case may be, as of
the dates thereof and the results of operations and cash flows thereof for the
periods then ended, in each case in conformity with the legal requirements and
generally accepted accounting principles relevant to such entity's place of
incorporation, consistently applied, except as noted therein. Since September
30, 1996, there has been no change in accounting principles applicable to, or
methods of accounting utilized by, LSI and/or such LSI Subsidiary, as the case
may be, except as noted in the LSI Financial Statements. The books and records
of LSI have been and are being maintained in accordance with good business
practice, reflect only valid transactions and are complete and correct in all
material respects.
3.9. Absence of Certain Changes. Since September 30, 1997, LSI and the LSI
Subsidiaries have not, except as otherwise set forth on the LSI Disclosure
Schedule:
(a) suffered any adverse change in the business, operations, assets, or
financial condition, except as reflected on the LSI Financial Statements
and except for such changes that would not result in an LSI Material
Adverse Effect;
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(b) suffered any material damage or destruction to or loss of the assets
of LSI or the LSI Subsidiaries, whether or not covered by insurance, which
property or assets are material to the operations or business of LSI and
the LSI Subsidiaries taken as a whole;
(c) settled, forgiven, compromised, canceled, released, waived or
permitted to lapse any material rights or claims other than in the ordinary
course of business;
(d) entered into or terminated any material agreement, commitment or
transaction, or agreed to or made any changes in material leases or
agreements, other than renewals or extensions thereof and leases,
agreements, transactions and commitments entered into or terminated in the
ordinary course of business;
(e) written up, written down or written off the book value of any
material amount of assets other than in the ordinary course of business;
(f) declared, paid or set aside for payment any dividend or distribution
with respect to the LSI Stock;
(g) redeemed, purchased or otherwise acquired, or sold, granted or
otherwise disposed of, directly or indirectly, any shares of LSI Stock or
securities (other than the redemption of the Preferred Shares pursuant to
this Agreement and the Bank Agreement and the issuance of shares issued
upon exercise of the Old Options or the Warrants) or any rights to acquire
such capital stock or securities, or agreed to changes in the terms and
conditions of any such rights outstanding as of the date of this Agreement;
(h) increased the compensation of or paid any bonuses to any employees or
contributed to any employee benefit plan or pension scheme, other than in
the ordinary course of business and consistent with established policies,
practices or requirements;
(i) entered into any employment, consulting or compensation agreement
with any person or group, except for agreements which in the aggregate
would not have an LSI Material Adverse Effect;
(j) entered into any collective bargaining agreement or trade union
recognition agreement with any person or group;
(k) entered into, adopted or amended any employee benefit plan or share
option scheme or agreement; or
(l) entered into any agreement to do any of the foregoing.
3.10. No Material Undisclosed Liabilities. There are no liabilities or
obligations of LSI or the LSI Subsidiaries of any nature, whether absolute,
accrued, contingent, or otherwise, other than:
(a) the liabilities and obligations that are reflected, accrued or
reserved against on the LSI Balance Sheet, or referred to in the footnotes
to LSI Balance Sheet, or incurred in the ordinary course of business and
consistent with past practices since September 30, 1997; or
(b) liabilities and obligations which in the aggregate would not result
in an LSI Material Adverse Effect.
3.11. Tax Returns: Taxes. Each of LSI and the LSI Subsidiaries (a) have duly
filed all material local and foreign tax returns and reports required to be
filed by it, including those with respect to advance corporation tax, capital
gains tax, corporation tax, excise duties, income tax (including "Pay as You
Earn"), inheritance tax, insurance premium tax, National Insurance
contributions, stamp duty taxes, value added tax and similar taxes, and all
such returns and reports are correct in all material respects; (b) have either
paid in full all taxes that have become due as reflected on any return or
report and any interest and penalties with respect thereto or have fully
accrued on its books or have established adequate reserves for all taxes
payable but not yet due; and (c) have made cash deposits with appropriate
governmental authorities representing estimated payments of taxes, including
income taxes and employee withholding tax obligations. No extension or waiver
of any statute of limitations or time within which to file any return has been
granted to or requested by LSI or any LSI Subsidiary with respect to any tax.
No unsatisfied deficiency, delinquency or default for any tax, assessment or
governmental
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charge has been claimed, proposed or assessed against LSI or the LSI
Subsidiaries, nor has LSI or the LSI Subsidiaries received notice of any such
deficiency, delinquency or default. LSI and the LSI Subsidiaries have no
material tax liabilities other than those reflected on LSI Balance Sheet and
those arising in the ordinary course of business since the date thereof. LSI
will make available to Mizar true, complete and correct copies of LSI's tax
returns for the last five years and make available such other tax returns
requested by Mizar. The income tax liabilities of LSI and the LSI Subsidiaries
have been paid for all fiscal years up to and including the year ended
September 30, 1997.
3.12. Material Contracts. LSI has furnished or made available to Mizar
accurate and complete copies of the LSI Material Contracts applicable to LSI
or the LSI Subsidiaries. Except as set forth on the LSI Disclosure Schedule,
there is not under any of the LSI Material Contracts any existing breach,
default or event of default by LSI or any LSI Subsidiary nor event that with
notice or lapse of time or both would constitute a breach, default or event of
default by LSI or the LSI Subsidiaries, other than breaches, defaults or
events of default which would not have an LSI Material Adverse Effect nor does
LSI know of, and LSI has not received notice of, or made a claim with respect
to, any breach or default by any other party thereto which would, severally or
in the aggregate, have an LSI Material Adverse Effect. As used herein, the
term "LSI Material Contracts" shall mean all (i) employee benefit plans, share
option schemes or agreements and employment, consulting or similar contracts,
(ii) contracts that involve remaining aggregate payments by LSI or an LSI
Subsidiary in excess of $100,000 (or equivalent based on applicable exchange
rate) or which have a remaining term in excess of one year and (iii) insurance
policies.
3.13. Litigation and Government Claims. There is no pending suit, claim,
action or litigation, or administrative, arbitration or other proceeding or
governmental investigation or inquiry against LSI or the LSI Subsidiaries to
which their businesses or assets are subject which would, severally or in the
aggregate, reasonably be expected to result in an LSI Material Adverse Effect.
To the knowledge of LSI, there are no such proceedings threatened or
contemplated which would, severally or in the aggregate, have an LSI Material
Adverse Effect. Neither LSI nor the LSI Subsidiaries is subject to any
judgment, decree, injunction, rule or order of any court, or, to the knowledge
of LSI, any governmental restriction applicable to LSI or the LSI Subsidiaries
which is reasonably likely (i) to have an LSI Material Adverse Effect or (ii)
to cause a material limitation on Mizar's ability to own and operate the
business of LSI (as it is currently operated) after the Closing.
3.14. Compliance With Laws. LSI and the LSI Subsidiaries each have all
material authorizations, approvals, licenses and orders to carry on their
respective businesses as they are now being conducted, to own or hold under
lease the properties and assets they own or hold under lease and to perform
all of their obligations under the agreements to which they are a party,
except for instances which would not have an LSI Material Adverse Effect. LSI
and the LSI Subsidiaries have been and are, to the knowledge of LSI, in
compliance with all applicable laws, regulations and administrative orders of
any country, state or municipality or of any subdivision of any thereof to
which their respective businesses, ownership of assets and their employment of
labor or their use or occupancy of properties or any part thereof are subject,
the violation of which would have an LSI Material Adverse Effect.
3.15. Employee Benefits Plans. Each employee benefit plan of LSI complies
with all applicable requirements of the Pension Schemes Act of 1993 and the
Income and Corporation Taxes Act 1988.
3.16. Employment Agreements; Labor Relations.
(a) The LSI Disclosure Schedule sets forth a complete and accurate list of
all material employee benefit or compensation plans, agreements and
arrangements to which LSI or an LSI Subsidiary is a party, including without
limitation (i) all severance, employment, consulting or similar contracts,
(ii) all material agreements and contracts with "change of control" provisions
or similar provisions and (iii) all indemnification agreements or arrangements
with directors or officers.
(b) Each of LSI and the LSI Subsidiaries is in compliance in all material
respects with all laws respecting employment and employment practices, terms
and conditions of employment, wages and hours, and is not
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engaged in any unfair labor or unlawful employment practice. There is no
unlawful employment practice discrimination charge pending before any
competent court or tribunal. Except as would not have an LSI Material Adverse
Effect, there is no unfair labor practice charge or complaint against LSI or
the LSI Subsidiaries pending before any competent court or tribunal. There is
no labor strike, dispute, slowdown or stoppage actually pending or, to the
knowledge of LSI, threatened against or involving or affecting LSI or the LSI
Subsidiaries and no representation question exists with respect to their
respective employees. Except as would not have an LSI Material Adverse Effect,
no grievances or arbitration proceeding is pending and no written claim
therefor exists. There is no collective bargaining agreement or trade union
recognition agreement that is binding on LSI or the LSI Subsidiaries.
3.17. Intellectual Property. LSI and the LSI Subsidiaries own or have valid,
binding and enforceable rights to use all material patents, trademarks, trade
names, service marks, service names, copyrights, applications therefor and
licenses or other rights in respect thereof ("LSI Intellectual Property") used
or held for use in connection with the business of LSI or the LSI
Subsidiaries, without any known conflict with the rights of others, except for
such conflicts as do not have an LSI Material Adverse Effect. Neither LSI nor
any of the LSI Subsidiaries have received any notice from any other person
pertaining to or challenging the right of LSI or the LSI Subsidiaries to use
any LSI Intellectual Property or any trade secrets, proprietary information,
inventions, know-how, processes and procedures owned or used or licensed to
LSI or the LSI Subsidiaries, except with respect to rights the loss of which,
individually or in the aggregate, would not have an LSI Material Adverse
Effect. The LSI Intellectual Property represents all of the proprietary rights
necessary to operate the respective businesses of LSI and the LSI
Subsidiaries.
3.18. Title to Properties and Related Matters.
(a) LSI and the LSI Subsidiaries have good and marketable title to or valid
leasehold interests in their respective properties reflected on the LSI
Balance Sheet or acquired after the date thereof (other than personal
properties sold or otherwise disposed of in the ordinary course of business),
and all of such properties and all assets purchased by LSI since the date of
the LSI Balance Sheet are free and clear of any lien, claim or encumbrance,
except as reflected in the LSI Balance Sheet or notes thereto and except for:
(i) liens for taxes, assessments or other governmental charges not yet
due and payable or the validity of which are being contested in good faith
by appropriate proceedings;
(ii) statutory liens incurred in the ordinary course of business that are
not yet due and payable or the validity of which are being contested in
good faith by appropriate proceedings;
(iii) landlord liens contained in leases entered in the ordinary course
of business; and
(iv) other liens, claims or encumbrances that, in the aggregate, do not
materially subtract from the value of, or materially interfere with, the
present use of, the LSI Real Estate.
Except for those assets acquired since the date of the LSI Balance Sheet, all
properties and assets material to the present operations of LSI are owned or
leased by LSI and are reflected on the LSI Balance Sheet and notes thereto in
the manner and to the extent required by the Companies Act and generally
accepted accounting principles.
(b) (i) Applicable planning permissions and consents and zoning ordinances
permit the operation of LSI's business as currently conducted at the real
property owned or leased by LSI (the "LSI Real Estate"); (ii) LSI has all
easements and rights, including easements for all utilities, services,
roadways and other means of ingress and egress, material to the operation of
its business at the LSI Real Estate; (iii) the LSI Real Estate is not located
within a flood or lakeshore erosion hazard area; and (iv) neither the whole
nor any portion of the LSI Real Estate has been condemned, requisitioned or
otherwise taken by any public authority, and no written notice of any such
condemnation, requisition or taking has been received by LSI. No such
condemnation, requisition or taking is threatened or contemplated to LSI's
actual knowledge, and there are no pending public improvements which may
result in special assessments against or which may otherwise materially and
adversely affect the LSI Real Estate.
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To the actual knowledge of LSI, the LSI Real Estate has not been used for
deposit or disposal of hazardous wastes or substances in violation of any past
or current law in any material respect and there is no material liability
under past or current law with respect to any hazardous wastes or substances
which have been deposited or disposed of on or in or from the LSI Real Estate.
(c) LSI has received no written notice of, and has no actual knowledge of,
any material violation of any zoning, building, health, fire, water use or
similar statute, ordinance, law, regulation or code in connection with the LSI
Real Estate.
(d) To LSI's actual knowledge, no hazardous or toxic material (as
hereinafter defined) exists in any structure located on, or exists on or under
the surface of, the LSI Real Estate which is, in any case, in material
violation of applicable environmental law. For purposes of this Agreement,
"hazardous or toxic material" shall mean waste, substance, materials, smoke,
gas or particulate matter designated as hazardous, toxic or dangerous under
any environmental law. For purposes of this Agreement, "environmental law"
shall mean any and all relevant statutes, rules, regulations, treaties,
directives, bylaws, codes of practice, orders, notices, demands, injunctions,
common laws or duty of care of any governmental or regulatory agency or body
in the U.S., the European Community or any other jurisdiction relating to or
imposing liability or standards concerning or in connection with hazardous or
toxic material or dangerous waste, substance, materials, smoke, gas or
particulate matter including the Comprehensive Environmental Response
Compensation and Liability Act, the Clean Air Act, the Clean Water Act and any
other applicable federal, state or local laws.
3.19. Brokers and Finders. None of LSI, any LSI Subsidiary or, to LSI's
knowledge, any of their respective officers, directors and employees has
employed any broker, finder or investment bank or incurred any liability for
any investment banking fees, financial advisory fees, brokerage fees or
finders' fees in connection with the transactions contemplated hereby. LSI is
not aware of any claim for payment of any finder's fees, brokerage or agent's
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby.
3.20. Potential Conflicts of Interest. No officer, director or security
holder of LSI or an LSI Subsidiary (a) owns, directly, or indirectly, any
interest in (excepting not more than 5% stockholdings for investment purposes
in securities of publicly held and traded companies) or is an officer,
director, employee or consultant of any person which is a competitor, lessor,
lessee or client of LSI or an LSI Subsidiary; (b) owns, directly or
indirectly, in whole or in part, any material tangible or intangible property
which LSI or an LSI Subsidiary is using or the use of which is necessary for
the business of LSI or an LSI Subsidiary; or (c) has any cause of action or
other claim whatsoever against, or owes any amount to, LSI or an LSI
Subsidiary, except for claims in the ordinary course of business, such as for
accrued vacation pay, accrued benefits under employee benefit plans and
similar matters and agreements.
3.21. Insurance. The LSI Disclosure Schedule lists all policies of fire,
liability, workmen's compensation, life, property and casualty and other
insurance owned or held by LSI or the LSI Subsidiaries. Such policies of
insurance (a) are in full force and effect, (13) are sufficient for compliance
by LSI or the LSI Subsidiaries with all requirements of applicable law and all
LSI Material Agreements, (c) provide that they will remain in full force and
effect through the respective dates set forth in the LSI Disclosure Schedule,
and (d) will not in any way be affected by, or terminate or lapse by reason of
the transactions contemplated by this Agreement. LSI and the LSI Subsidiaries
are not in default with respect to their respective obligations under any of
such insurance policies and have not received any notification of cancellation
of any such insurance policies.
3.22. Products Liability. Since January 1, 1993, there have been no claims,
actions, losses, or liabilities of LSI or the LSI Subsidiaries relating to
death or injury to persons or properties resulting from any actual or alleged
defect in any product sold or manufactured by LSI or the LSI Subsidiaries, and
there is, as of the date hereof, no such claim, action or other proceeding
pending or, to the knowledge of LSI or the LSI Subsidiaries threatened.
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ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF MIZAR
Mizar hereby represents and warrants that, except as otherwise set forth in
the Mizar Disclosure Schedule (herein so called) attached hereto:
4.1. Organization and Good Standing. Mizar is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation. Mizar has no subsidiaries and no equity, profit sharing,
participation or other ownership interest (including any general partnership
interest) in any corporation, partnership, limited partnership or other
entity.
4.2. Foreign Qualification. Mizar is duly qualified or licensed to do
business and is in good standing as a foreign corporation in every
jurisdiction where the failure so to qualify would have a material adverse
effect on (a) the current business, operations, assets or financial condition
of Mizar or (13) the validity or enforceability of, or the ability of Mizar to
perform its obligations under, this Agreement (a "Mizar Material Adverse
Effect").
4.3. Corporate Power and Authority. Mizar has the corporate power and
authority and all material licenses and permits to own, lease and operate its
properties and assets and to carry on its business as currently being
conducted. Mizar has the corporate power and authority to execute and deliver
this Agreement and to perform its obligations under this Agreement and to
consummate the Exchange. The execution, delivery and performance by Mizar of
this Agreement has been duly authorized by all necessary corporate action,
except for the approval of the stockholders of Mizar.
4.4. Binding Effect. This Agreement has been duly executed and delivered by
Mizar and is the legal, valid and binding obligation of Mizar, enforceable in
accordance with its terms, except that:
(a) enforceability may be limited by bankruptcy, insolvency or other
similar laws affecting creditors' rights;
(b) the availability of equitable remedies may be limited by equitable
principles of general applicability; and
(c) rights to indemnification may be limited by considerations of public
policy.
4.5. Absence of Restrictions and Conflicts. The execution, delivery and
performance of this Agreement and the consummation of the Exchange and the
fulfillment of and compliance with the terms and conditions of this Agreement
do not and will not, with the passing of time or the giving of notice or both,
violate or conflict with, constitute a breach of or default under, result in
the loss of any material benefit under, or permit the acceleration of any
obligation under, (i) any term or provision of the Certificate of
Incorporation or Bylaws of Mizar, (ii) any Mizar Material Contract (as defined
in Section 4.12 below), (iii) any judgment, decree or order of any court or
governmental authority or agency to which Mizar is a party or by which Mizar
or any of its properties is bound, or (iv) any statute, law, regulation or
rule applicable to Mizar other than such violations, conflicts, breaches or
default as would not have a Mizar Material Adverse Effect. Except for
compliance with the applicable requirements of the Securities Act, the
Exchange Act and applicable state securities laws, no consent, approval, order
or authorization of, or registration, declaration or filing with, any
governmental agency or public or regulatory unit, agency, body or authority
with respect to Mizar is required in connection with the execution, delivery
or performance of this Agreement by Mizar or the consummation of the
transactions contemplated hereby.
4.6. Capitalization of Mizar.
(a) The authorized capital stock of Mizar consists of 25,000,000 shares of
Mizar Common Stock, and 1,000,000 Stock of preferred stock, $.01 par value. As
of the date hereof, there are (i) 5,135,976 shares of Mizar Common Stock
outstanding, (ii) no shares of the Preferred Stock outstanding and (iii)
527,196 shares reserved
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for issuance upon the exercise of currently outstanding options under the
Mizar Stock Option Plan (the "Mizar Options" and "Mizar Option Plans,"
respectively). A warrant for 15,000 shares of Mizar Common Stock, exercisable
at $10.20 per share, was issued to John G. Kinnard and Company, Incorporated
in September 1995.
(b) All of the issued and outstanding shares of Mizar Common Stock have been
duly authorized and validly issued and are fully paid, nonassessable and free
of preemptive rights.
(c) To Mizar's knowledge, there are no voting trusts, stockholder agreements
or other voting arrangements that have been granted by the stockholders of
Mizar.
(d) Except as set forth in subsection (a) above, there is no outstanding
subscription, contract, convertible or exchangeable security, option, warrant,
call or other right obligating Mizar to issue, sell, exchange, or otherwise
dispose of, or to purchase, redeem or otherwise acquire, shares of, or
securities convertible into or exchangeable for, capital stock of Mizar.
4.7. Mizar SEC Reports. Mizar has made available to LSI (i) Mizar's Annual
Reports on Form 10-K, including all exhibits filed thereto and items
incorporated therein by reference, and any amendments thereto, (ii) Mizar's
Quarterly Reports on Form 10-Q, including all exhibits thereto and items
incorporated therein by reference, (iii) proxy statements relating to Mizar's
meetings of stockholders and (iv) all other reports or registration statements
(as amended or supplemented prior to the date hereof), filed by Mizar with the
SEC since January 1, 1997, including all exhibits thereto and items
incorporated therein by reference (items (i) through (iv) being referred to as
the "Mizar SEC Reports"). As of their respective dates, the Mizar SEC Reports
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Since January 1, 1997, Mizar has filed all material forms,
reports and documents with the SEC required to be filed by it pursuant to the
federal securities laws and the SEC rules and regulations thereunder, each of
which complied as to form, at the time such form, report or document was
filed, in all material respects with the applicable requirements of the
Securities Act and the Exchange Act and the applicable rules and regulations
thereunder.
4.8. Financial Statements and Records of Mizar. Mizar has made available to
LSI true, correct and complete copies of the following financial statements
(the "Mizar Financial Statements"):
(a) the balance sheets of Mizar as of June 30, 1997 and June 30, 1996,
and the related statements of income, stockholders' equity and cash flows
for the fiscal years then ended, including the notes thereto, in each case
examined by and accompanied by the report of Arthur Andersen LLP; and
(b) the unaudited balance sheet of Mizar as of September 30, 1997 (the
"Mizar Balance Sheet"), with any notes thereto, and the related unaudited
statement of income for the fiscal quarter then ended (collectively, the
"Mizar Quarterly Statements").
The Mizar Financial Statements present fairly, in all material respects, the
financial position of Mizar as of the dates thereof and the results of
operations and changes in financial position thereof for the periods then
ended, in each case in conformity with generally accepted accounting
principles, consistently applied, except as noted therein. Since September 30,
1997, there has been no change in accounting principles applicable to, or
methods of accounting utilized by, Mizar, except as noted in Mizar Financial
Statements. The books and records of Mizar have been and are being maintained
in accordance with good business practice, reflect only valid transactions,
are complete and correct in all material respects, and present fairly in all
material respects the basis for the financial position and results of
operations of Mizar set forth in Mizar Financial Statements.
4.9. Absence of Certain Changes. Since September 30, 1997, Mizar has not,
except as otherwise set forth in the Mizar SEC Reports or on the Mizar
Disclosure Schedule:
(a) suffered any adverse change in the business, operations, assets, or
financial condition except for such changes that would not have a Mizar
Material Adverse Effect;
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(b) suffered any material damage or destruction to or loss of the assets
of Mizar, whether or not covered by insurance, which property or assets are
material to the operations or business of Mizar and its subsidiaries taken
as a whole;
(c) settled, forgiven, compromised, canceled, released, waived or
permitted to lapse any material rights or claims other than in the ordinary
course of business;
(d) entered into or terminated any material agreement, commitment or
transaction, or agreed to or made any changes in material leases or
agreements, other than renewals or extensions thereof and leases,
agreements, transactions and commitments entered into or terminated in the
ordinary course of business;
(e) written up, written down or written off the book value of any
material amount of assets other than in the ordinary course of business;
(f) declared, paid or set aside for payment any dividend or distribution
with respect to Mizar's capital stock;
(g) redeemed, purchased or otherwise acquired, or sold, granted or
otherwise disposed of, directly or indirectly, any of Mizar's capital stock
or securities or any rights to acquire such capital stock or securities, or
agreed to changes in the terms and conditions of any such rights
outstanding as of the date of this Agreement;
(h) increased the compensation of or paid any bonuses to any employees or
contributed to any employee benefit plan, other than in the ordinary course
of business and consistent with established policies, practices or
requirements;
(i) entered into any employment, consulting or compensation agreement
with any person or group, except for the Employment Agreement (as defined
in Section 6.9 below) or agreements which in the aggregate would not have a
Mizar Material Adverse Effect;
(j) entered into any collective bargaining agreement with any person or
group;
(k) entered into, adopted or amended any employee benefit plan; or
(1) entered into any agreement to do any of the foregoing.
4.10. No Material Undisclosed Liabilities. There are no liabilities or
obligations of Mizar of any nature, whether absolute, accrued, contingent, or
otherwise, other than:
(a) liabilities and obligations that are reflected, accrued or reserved
against on Mizar Balance Sheet or referred to in the footnotes to the Mizar
Balance Sheet, or incurred in the ordinary course of business and
consistent with past practices since September 30, 1997; or
(b) liabilities and obligations which in the aggregate would not result
in a Mizar Material Adverse Effect.
4.11. Tax Returns; Taxes. Mizar (a) has duly filed all U.S. federal and
material state, county, local and foreign tax returns and reports required to
be filed by it, including those with respect to income, payroll, property,
withholding, social security, unemployment, franchise, excise and sales taxes
and all such returns and reports are correct in all material respects; (b) has
either paid in full all taxes that have become due as reflected on any return
or report and any interest and penalties with respect thereto or have fully
accrued on its books or have established adequate reserves for all taxes
payable but not yet due; and (c) has made cash deposits with appropriate
governmental authorities representing estimated payments of taxes, including
income taxes and employee withholding tax obligations. No extension or waiver
of any statute of limitations or time within which to file any return has been
granted to or requested by Mizar with respect to any tax, except that Mizar
has been granted extensions for the filing of its federal tax returns for the
year ended June 30, 1997, and its Texas franchise taxes are paid pursuant to a
valid extension agreement. No unsatisfied deficiency, delinquency or default
for any tax, assessment or governmental charge has been claimed, proposed or
assessed against Mizar, nor has Mizar
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received notice of any such deficiency, delinquency or default. Mizar has no
material tax liabilities other than those reflected on Mizar Balance Sheet and
those arising in the ordinary course of business since the date thereof. Mizar
will make available to LSI true, complete and correct copies of Mizar's
consolidated U.S. federal tax returns for the last five years and make
available such other tax returns requested by LSI. The U.S. federal income tax
liabilities of Mizar have been paid for all fiscal years up to and including
the year ended June 30, 1997.
4.12. Material Contracts. Mizar has furnished or made available to LSI
accurate and complete copies of the Mizar Material Contracts applicable to
Mizar. There is not under any of the Mizar Material Contracts any existing
breach, default or event of default by Mizar nor event that with notice or
lapse of time or both would constitute a breach, default or event of default
by Mizar other than breaches, defaults or events of default which would not
have a Mizar Material Adverse Effect nor does Mizar know of, and Mizar has not
received notice of, or made a claim with respect to, any breach or default by
any other party thereto which would, severally or in the aggregate, have a
Mizar Material Adverse Effect. As used herein, the term "Mizar Material
Contracts" shall mean all (i) employee benefit plans, stock option agreements
and employment, consulting or similar contracts, (ii) contracts that involve
remaining aggregate payments by Mizar in excess of $100,000 (or equivalent
based on applicable exchange rate) or which have a remaining term in excess of
one year and (iii) insurance policies.
4.13. Litigation and Government Claims. Except as disclosed in Mizar SEC
Reports, there is no pending suit, claim, action or litigation, or
administrative, arbitration or other proceeding or governmental investigation
or inquiry against Mizar to which its businesses or assets are subject which
would, severally or in the aggregate, reasonably be expected to result in a
Mizar Material Adverse Effect. To the knowledge of Mizar, there are no such
proceedings threatened or contemplated which would, severally or in the
aggregate, have a Mizar Material Adverse Effect. Mizar is not subject to any
judgment, decree, injunction, rule or order of any court, or, to the knowledge
of Mizar, any governmental restriction applicable to Mizar which is reasonably
likely to have a Mizar Material Adverse Effect.
4.14. Compliance with Laws. Mizar has all material authorizations,
approvals, licenses and orders to carry on its businesses as it is now being
conducted, to own or hold under lease the properties or assets it owns or
holds under lease and to perform all of its obligations under the agreements
to which it is a party, except for instances which would not have a Mizar
Material Adverse Effect. Mizar has been and is, to the knowledge of Mizar, in
compliance with all applicable laws, regulations and administrative orders of
any country, state or municipality or any subdivision of any thereof to which
its businesses, ownership of assets and its employment of labor or its use or
occupancy of properties or any part thereof are subject, the violation of
which would have a Mizar Material Adverse Effect.
4.15. Employment Agreements; Labor Relations.
(a) The Mizar Disclosure Schedule sets forth a complete and accurate list of
all material employee benefit or compensation plans, agreements and
arrangements to which Mizar is a party, including without limitation (i) all
severance, employment, consulting or similar contracts, (ii) all material
agreements and contracts with "change of control" provisions or similar
provisions and (iii) all indemnification agreements or arrangements with
directors or officers.
(b) Mizar is in compliance in all material respects with all laws respecting
employment and employment practices, terms and conditions of employment, wages
and hours, and is not engaged in any unfair labor or unlawful employment
practice. There is no unlawful employment practice discrimination charge
pending before the EEOC or EEOC recognized state "referral agency." Except as
would not have a Mizar Material Adverse Effect, there is no unfair labor
practice charge or complaint against Mizar pending before the National Labor
Review Board. There is no labor strike, dispute, slowdown or stoppage actually
pending or, to the knowledge of Mizar, threatened against or involving or
affecting Mizar and no National Labor Review Board representation question
exists respecting their respective employees. Except as would not have a Mizar
Material Adverse Effect, no grievances or arbitration proceeding is pending
and no written claim therefor exists. There is no collective bargaining
agreement that is binding on Mizar.
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4.16. Intellectual Property. Mizar owns or has valid, binding and
enforceable rights to use all material patents, trademarks, trade names,
service marks, service names, copyrights, applications therefor and licenses
or other rights in respect thereof ("Mizar Intellectual Property") used or
held for use in connection with the business of Mizar, without any known
conflict with the rights of others, except for such conflicts as do not have a
Mizar Material Adverse Effect. Mizar has not received any notice from any
other person pertaining to or challenging the right of Mizar to use any Mizar
Intellectual Property or any trade secrets, proprietary information,
inventions, know-how, processes and procedures owned or used or licensed to
Mizar, except with respect to rights the loss of which, individually or in the
aggregate, would not have a Mizar Material Adverse Effect. The Mizar
Intellectual Property represents all of the proprietary rights necessary to
operate Mizar's business.
4.17. Title to Properties and Related Matters.
(a) Mizar has good and marketable title to or valid leasehold interests in
its properties reflected on the Mizar Balance Sheet or acquired after the date
thereof (other than personal properties sold or otherwise disposed of in the
ordinary course of business), and all of such properties and all assets
purchased by Mizar since the date of the Mizar Balance Sheet are free and
clear of any lien, claim or encumbrance, except as reflected in the Mizar
Balance Sheet or notes thereto and except for:
(i) liens for taxes, assessments or other governmental charges not yet
due and payable or the validity of which are being contested in good faith
by appropriate proceedings;
(ii) statutory liens incurred in the ordinary course of business that are
not yet due and payable or the validity of which are being contested in
good faith by appropriate proceedings;
(iii) landlord liens contained in leases entered in the ordinary course
of business; and
(iv) other liens, claims or encumbrances that, in the aggregate,. do not
materially subtract from the value of, or materially interfere with, the
present use of, the Mizar Real Estate.
Except for those assets acquired since the date of the Mizar Balance Sheet,
all properties and assets material to the present operations of Mizar are
owned or leased by Mizar and are reflected on the Mizar Balance Sheet and
notes thereto in the manner and to the extent required by generally accepted
accounting principles.
(b) (i) Applicable zoning ordinances permit the operation of Mizar's
business as currently conducted at the real property owned or leased by Mizar
( the "Mizar Real Estate"); (ii) Mizar has all easements and rights, including
easements for all utilities, services, roadways and other means of ingress or
egress, material to the operation of its business at the Mizar Real Estate;
(iii) the Mizar Real Estate is not located within a flood or lakeshore erosion
hazard area; and (iv) neither the whole nor any portion of the Mizar Real
Estate has been condemned, requisitioned or otherwise taken by any public
authority, and no written notice of any such condemnation, requisition or
taking has been received by Mizar. No such condemnation, requisition or taking
is threatened or contemplated to Mizar's actual knowledge, and there are no
pending public improvements which may result in special assessments against or
which may otherwise materially and adversely affect the Mizar Real Estate. To
the actual knowledge of Mizar, the Mizar Real Estate has not been used for
deposit or disposal of hazardous wastes or substances in violation of any past
or current law in any material respect and there is no material liability
under past or current law with respect to any hazardous wastes or substances
which have been deposited or disposed of on or in or from the Mizar Real
Estate.
(c) Mizar has received no written notice of, and has no actual knowledge of,
any material violation of any zoning, building, health, fire, water use or
similar statute, ordinance, law, regulation or code in connection with the
Mizar Real Estate.
(d) To Mizar's actual knowledge, Mizar is in compliance with all applicable
environmental laws (as defined in Section 3.18) relating to emissions,
discharges and releases of hazardous or toxic materials into the environment,
except as would not cause a Mizar Material Adverse Effect. To Mizar's actual
knowledge, no hazardous or toxic material (as defined in Section 3.18) exists
in any structure located on, or exists on or under
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the surface of, any the Mizar Real Estate which is, in any case, in material
violation of applicable environmental law.
4.18. Employee Benefit Plans. Each employee benefit plan, as such term is
defined in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), of Mizar (collectively the "Employee Plans")
complies in all material respects with all applicable requirements of ERISA
and the Code, and other applicable laws. None of the Employee Plans is an
employee pension benefit plan or a multi employer plan, as such terms are
defined in ERISA.
Neither Mizar nor any of its respective directors, officers, employees or
agents has, with respect to any Employee Plan, engaged in any "prohibited
transaction," as such term is defined in the Code or ERISA, nor has any
Employee Plan engaged in such prohibited transaction which could result in any
taxes or penalties or other prohibited transactions, which in the aggregate
could have a Mizar Material Adverse Effect.
4.19. Brokers and Finders. None of Mizar or, to Mizar's knowledge, any of
its officers, directors and employees has employed any broker, finder or
investment bank or incurred any liability for any investment banking fees,
financial advisory fees, brokerage fees or finders' fees in connection with
the transactions contemplated hereby, except that Mizar has engaged Cowen &
Company as its financial advisor. Other than the foregoing arrangements, Mizar
is not aware of any claim for payment of any finder's fees, brokerage or
agent's commissions or other like payments in connection with the negotiations
leading to this Agreement or the consummation of the transactions contemplated
hereby.
4.20. Opinion of Financial Advisor. Mizar has received the opinion of Cowen
& Company to the effect that, as of the date hereof, the Exchange is fair to
Mizar from a financial point of view.
4.21. Potential Conflicts of Interest. No officer or director of Mizar (a)
owns, directly, or indirectly, any interest in (excepting not more than 5%
stockholdings for investment purposes in securities of publicly held and
traded companies) or is an officer, director, employee or consultant of any
person which is a competitor, lessor, lessee or client of Mizar; (b) owns,
directly or indirectly, in whole or in part, any material tangible or
intangible property which Mizar is using or the use of which is necessary for
the business of Mizar; or (c) has any cause of action or other claim
whatsoever against, or owes any amount to, Mizar, except for claims in the
ordinary course of business, such as for accrued vacation pay, accrued
benefits under employee benefit plans and similar matters and agreements.
4.22. Insurance. The Mizar Disclosure Schedule lists all policies of fire,
liability, workmen's compensation, life, property and casualty and other
insurance owned or held by Mizar. Such policies of insurance (a) are in full
force and effect, (b) are sufficient for compliance by Mizar with all
requirements of applicable law and all Mizar Material Agreements, (c) provide
that they will remain in full force and effect through the respective dates
set forth in the Mizar Disclosure Schedule, and (d) will not in any way be
affected by, or terminate or lapse by reason of the transactions contemplated
by this Agreement. Mizar is not in default with respect to its obligations
under any of such insurance policies and has not received any notification of
cancellation of any such insurance policies.
4.23. Products Liability. Since January 1, 1993, there have been no claims,
actions, losses, or liabilities of Mizar relating to death or injury to
persons or properties resulting from any actual or alleged defect in any
product sold or manufactured by Mizar, and there is, as of the date hereof, no
such claim, action or other proceeding pending or, to the knowledge of Mizar
threatened.
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ARTICLE 5.
CERTAIN COVENANTS AND AGREEMENTS
5.1. Conduct of Business by LSI. From the date hereof to the Closing Date,
LSI will, and will cause the LSI Subsidiaries to, except as required in
connection with the Exchange and the other transactions contemplated by this
Agreement and except as otherwise disclosed on the LSI Disclosure Schedule or
consented to in writing by Mizar:
(a) carry on its business in the ordinary and regular course in
substantially the same manner as heretofore conducted and not engage in any
new line of business or enter into any material agreement, transaction or
activity or make any material commitment except those in the ordinary and
regular course of business and not otherwise prohibited under this Section
5.1;
(b) neither change nor amend its memorandum and articles of association
(in the case of LSI) or the equivalent governing corporate documents (in
the case of the LSI Subsidiaries), except as required to re-register LSI as
a private limited company;
(c) not issue (other than upon any exercise of Old Options or the
Warrants) or sell or register the transfer of shares of securities or
capital stock of LSI or the LSI Subsidiaries or issue, sell or grant
options, warrants or rights to purchase or subscribe to, or enter into any
arrangement or contract with respect to the issuance or sale of any of the
securities of LSI or the LSI Subsidiaries or rights or obligations
convertible into or exchangeable for any securities of LSI or any LSI
Subsidiary and not alter the terms of any presently outstanding options or
the Option Plans or the Warrants or make any changes (by split-up,
combination, reorganization or otherwise) in the capital structure of LSI
or the LSI Subsidiaries;
(d) not declare, pay or set aside for payment any dividend or other
distribution in respect of the capital stock or other equity securities of
LSI or the LSI Subsidiaries and not redeem, purchase or otherwise acquire
any shares of the capital stock or other securities of LSI or the LSI
Subsidiaries or rights or obligations convertible into or exchangeable for
any shares of the capital stock or other securities of LSI or the LSI
Subsidiaries or obligations convertible into such, or any options, warrants
or other rights to purchase or subscribe to any of the foregoing, except
for the redemption of the outstanding Preferred Shares contemplated in this
Agreement;
(e) not acquire or enter into any agreement to acquire, by merger,
consolidation or purchase of securities or assets, any business or entity
or any material part of the same;
(f) use its reasonable efforts to preserve intact the corporate
existence, goodwill and business organization of LSI and the LSI
Subsidiaries, to keep the officers and employees of LSI and the LSI
Subsidiaries available to LSI and to preserve the relationships of LSI and
the LSI Subsidiaries with suppliers, customers and others having business
relations with any of them, except for such instances which would not have
an LSI Material Adverse Effect;
(g) not (i) create, incur or assume any debt or create, incur or assume
any short-term debt for borrowed money, (ii) assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person other than the LSI
Subsidiaries, (iii) make any loans or advances to any other person other
than the LSI Subsidiaries, or (iv) make any capital contributions to, or
investments in, any person; provided, however, that LSI shall not be
prohibited from taking an action described in (i) through (iv) above if
such action is being taken in the ordinary course of LSI's business and if
the aggregate amount of all of the liabilities, obligations, loans,
contributions and investments attributable to actions described in (i)
through (iv) above and taken after the date hereof do not exceed $100,000
(or equivalent based on applicable exchange rate) in the aggregate at the
time of the Closing;
(h) not (i) enter into, modify or extend in any manner the terms of any
employment, severance or similar agreements with officers and directors,
(ii) grant any increase in the compensation of officers or
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directors, whether now or hereafter payable or (iii) grant any increase in
the compensation of any other employees except for compensation increases
in the ordinary course of business and consistent with past practice (it
being understood by the parties hereto that for the purposes of (ii) and
(iii) above increases in compensation shall include any increase pursuant
to any option, bonus, stock purchase, pension, profit-sharing, deferred
compensation, retirement or other plan, arrangement, contract or
commitment);
(i) not make or incur (other than in the ordinary course of business) any
individual capital expenditure in excess of $100,000 or capital
expenditures in the aggregate in excess of $500,000 without the prior
approval of Mizar (as used herein, "capital expenditure" shall mean all
payments in respect of the cost of any fixed asset or improvement or
replacement, substitution or addition thereto which has a useful life of
more than one year, including those costs arising in connection with the
acquisition of such assets by way of increased product or service charges
or offset items or in connection with capital leases);
(j) except in instances which would not have an LSI Material Adverse
Effect, perform all of its obligations under all LSI Material Contracts
(except those being contested in good faith) and not enter into, assume or
amend any contract or commitment that would be an LSI Material Contract
other than contracts to provide services entered into in the ordinary
course of business; and
(k) except in instances which would not have an LSI Material Adverse
Effect, prepare and file all returns for taxes and other tax reports,
filings and amendments thereto required to be filed by it, and allow Mizar,
at its request, to review all such returns, reports, filings and amendments
at LSI's offices prior to the filing thereof, which review shall not
interfere with the timely filing of such returns.
In connection with the continued operation of the business of LSI and the
LSI Subsidiaries between the date of this Agreement and the Closing Date, LSI
shall confer in good faith and on a regular and frequent basis with one or
more representatives of Mizar designated in writing to report operational
matters of materiality and the general status of ongoing operations. In
addition, LSI will allow Mizar employees and agents to be present at LSI's
business locations to observe the business and operations of LSI and the LSI
Subsidiaries. LSI acknowledges that Mizar does not and will not waive any
rights it may have under this Agreement as a result of such consultations nor
shall Mizar be responsible for any decisions made by LSI's officers and
directors with respect to matters which are the subject of such consultation.
5.2. Conduct of Business by Mizar. From the date hereof to the Closing Date,
Mizar will, except as required in connection with the Exchange and the other
transactions contemplated by this Agreement and except as otherwise disclosed
in the Mizar Disclosure Schedule or as consented to in writing by LSI:
(a) carry on its businesses in the ordinary and regular course in
substantially the same manner as heretofore conducted and not engage in any
new line of business or enter into any agreement, transaction or activity
or make any commitment except in the ordinary and regular course of
business and not otherwise prohibited under this Section 5.2;
(b) neither change nor amend its Certificate of Incorporation or Bylaws;
(c) not issue (other than upon the exercise of outstanding options or
warrants) or sell any securities of Mizar or issue, sell or grant options,
warrants or rights to purchase or subscribe to, or enter into any
arrangement or contract with respect to the issuance or sale of any of the
securities of Mizar or rights or obligations convertible into or
exchangeable for any securities of Mizar (other than pursuant to the
Exchange Agreements or as consented to by the Managing Director of LSI) and
not alter the terms of any presently outstanding options or option plans or
warrants or make any changes (by split-up, combination, reorganization or
otherwise) in the capital structure of Mizar;
(d) not declare, pay or set aside for payment any dividend or other
distribution in respect of the capital stock or other equity securities of
Mizar and not redeem, purchase or otherwise acquire any shares of the
capital stock or other securities, or rights or obligations convertible
into or exchangeable for any shares of the capital stock or other
securities of Mizar or obligations convertible into such, or any options,
warrants or other rights to purchase or subscribe to any of the foregoing;
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(e) not acquire or enter into any agreement to acquire, by merger,
consolidation or purchase of securities or assets, any business or entity
or any material part thereof;
(f) use its reasonable efforts to preserve intact the corporate
existence, goodwill and business organization of Mizar, to keep the
officers and employees of Mizar available to Mizar and to preserve the
relationships of Mizar with suppliers, Customers and others having business
relations with any of them, except for such instances which would not have
a Mizar Material Adverse Effect;
(g) not (i) create, incur or assume any debt or create, incur or assume
any short-term debt for borrowed money, (ii) assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person, (iii) make any loans or
advances to any other person, or (iv) make any capital contributions to, or
investments in, any person; provided, however, that Mizar shall not be
prohibited from taking an action described in (i) through (iv) above if
such action is being taken in the ordinary course of Mizar's business, and
if the aggregate amount of all of the liabilities, obligations, loans,
contributions, and investments and other actions described in (i) through
(iv) above and taken by Mizar after the date hereof do not exceed $100,000
(or equivalent based on applicable exchange rate) in the aggregate at the
time of the Closing;
(h) not (i) enter into, modify or extend in any manner the terms of any
employment, severance or similar agreements with officers and directors,
(ii) grant any increase in the compensation of officers or directors,
whether now or hereafter payable or (iii) grant any increase in the
compensation of any other employees except for compensation increases in
the ordinary course of business and consistent with past practice (it being
understood by the parties hereto that for the purposes of (ii) and (iii)
above increases in compensation shall include any increase pursuant to any
option, bonus, stock purchase, pension, profit-sharing, deferred
compensation, retirement or other plan, arrangement, contract or
commitment);
(i) not make or incur (other than in the ordinary course of business) any
individual capital expenditure in excess of $100,000 or capital
expenditures in the aggregate in excess of $500,000 without the prior
approval of LSI (as used herein, "capital expenditure" shall mean all
payments in respect of the cost of any fixed asset or improvement or
replacement, substitution or addition thereto which has a useful life of
more than one year, including those costs arising in connection with the
acquisition of such assets by way of increased product or service charges
or offset items or in connection with capital leases);
(j) except in instances which would not have a Mizar Material Adverse
Effect, perform all of its obligations under all Mizar Material Contracts
(except those being contested in good faith) and not enter into, assume or
amend any contract or commitment that would be a Mizar Material Contract
other than contracts to provide services entered into in the ordinary
course of business; and
(k) except in instances which would not have a Mizar Material Adverse
Effect, prepare and file all federal, state, local and foreign returns for
taxes and other tax reports, filings and amendments thereto required to be
filed by it, and allow LSI, at its request, to review all such returns,
reports, filings and amendments at Mizar's offices prior to the filing
thereof, which review shall not interfere with the timely filing of such
returns.
In connection with the continued operation of the business of Mizar between
the date of this Agreement and the Closing Date, Mizar shall confer in good
faith and on a regular and frequent basis with one or more representatives of
LSI designated in writing to report operational matters of materiality and the
general status of ongoing operations. In addition, Mizar will allow LSI
employees and agents to be present at Mizar's business locations to observe
the business and operations of Mizar. Mizar acknowledges that LSI does not and
will not waive any rights it may have under this Agreement as a result of such
consultations nor shall LSI be responsible for any decisions made by Mizar's
officers and directors with respect to matters which are the subject of such
consultation.
5.3. Notice of any Material Change. Each of LSI and Mizar shall, promptly
after the first notice or occurrence thereof but not later than the Closing
Date, advise the other in writing of any event or the existence
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of any state of facts that (i) would make any of its representations and
warranties in this Agreement untrue in any material respect, (ii) would
constitute a breach of any provisions of this Article 5 or (iii) would
otherwise constitute either an LSI Material Adverse Effect or a Mizar Material
Adverse Effect.
5.4. Inspection and Access to Information.
(a) Between the date of this Agreement and the Closing Date, LSI will, and
will cause the LSI Subsidiaries to, provide to Mizar and its accountants,
counsel and other authorized representatives reasonable access, during normal
business hours to its premises, properties, contracts, commitments, books,
records and other information (including tax returns filed and those in
preparation) and will cause its officers to furnish to Mizar and its
authorized representatives such financial, technical and operating data and
other information pertaining to its business, as Mizar shall from time to time
reasonably request.
(b) Between the date of this Agreement and the Closing Date, Mizar will
provide to LSI and its accountants, counsel and other authorized
representatives reasonable access, during normal business hours to its
premises, properties, contracts, commitments, books, records and other
information (including tax returns filed and those in preparation) and will
cause its officers to furnish to LSI and its authorized representatives such
financial, technical and operating data and other information pertaining to
its business, as LSI shall from time to time reasonably request.
(c) Each of the parties hereto and their respective representatives shall
maintain the confidentiality of all information (other than information which
is generally available to the public) concerning the other parties hereto
acquired pursuant to the transactions contemplated hereby in the event that
the Exchange is not consummated. Each of the parties hereto and their
representatives shall not use such information so obtained for any purpose
other than in connection with the Exchange. All files, records, documents,
information, data and similar items relating to the confidential information
of LSI, whether prepared by Mizar or otherwise coming into Mizar's possession,
shall remain the exclusive property of LSI and shall be promptly delivered to
LSI upon termination of this Agreement. All files, records, documents,
information, data and similar items relating to the confidential information
of Mizar, whether prepared by LSI or otherwise coming into LSI's possession,
shall remain the exclusive property of Mizar and shall be promptly delivered
to Mizar upon termination of this Agreement.
5.5. Registration Statement and Proxy Statement.
(a) Mizar and LSI shall promptly prepare after execution of this Agreement,
and Mizar shall file the proxy statement with respect to the meeting of the
stockholders of Mizar in connection with the Exchange (the "Proxy Statement")
and a registration statement on Form S-4 (which registration statement, in the
form it is declared effective by the SEC, together with any and all amendments
and supplements thereto and all information incorporated by reference therein,
is referred to herein as the "Registration Statement") under and pursuant to
the provisions of the Securities Act for the purpose of registering Mizar
Common Stock to be issued in the Exchange. Mizar will use its best efforts to
receive and respond to the comments of the SEC and to have the Registration
Statement declared effective as promptly as practicable, and Mizar shall
promptly mail to its stockholders the Proxy Statement in its definitive form
contained in the Registration Statement.
(b) Each of Mizar and LSI agrees to provide as promptly as practicable to
the other such information concerning its business and financial statements
and affairs as, in the reasonable judgment of the other party, may be required
or appropriate for inclusion in the Registration Statement and the Proxy
Statement or in any amendments or supplements thereto, and to cause its
counsel and auditors to cooperate with the other's counsel and auditors in the
preparation of the Registration Statement and the Proxy Statement.
(c) Each of the parties shall use their best efforts to ensure that at the
time the Registration Statement becomes effective, as such Registration
Statement is then amended or supplemented, at the time the Proxy Statement is
mailed to Mizar's stockholders and at the Closing Date, such Registration
Statement and Proxy Statement (i) will not, with respect to such party,
contain any untrue statement of a material fact, or omit to state
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any material fact required to be stated therein as necessary, in order to make
the statements made by such party therein, in light of the circumstances under
which they were made, not misleading or necessary and (ii) will comply in all
material respects with the provisions of the Securities Act and Exchange Act,
as applicable, and the rules and regulations thereunder; provided, however, no
representation is made by Mizar or LSI with respect to statements made in the
Registration Statement and Proxy Statement based on information supplied by
the other party expressly for inclusion or incorporation by reference in the
Proxy Statement or Registration Statement or information omitted with respect
to the other party.
5.6. Affiliates. At least 30 days prior to the Closing Date, LSI shall
deliver to Mizar a letter identifying all persons who are, as of the date
thereof, "affiliates" of LSI for purposes of Rule 145 under the Securities
Act, and shall provide an updated letter identifying any such persons on the
Closing Date. LSI shall use its reasonable efforts to cause each person who is
identified as an "affiliate" in the letter dated the Closing Date to deliver
to Mizar on or prior to the Closing Date a written statement, in form
satisfactory to Mizar and LSI, that such person will not offer to sell,
transfer or otherwise dispose of any of the shares of Mizar Common Stock
issued to such person pursuant to the Exchange, (i) except in accordance with
the applicable provisions of the Securities Act and the rules and regulations
thereunder and (ii) until such time as financial results covering at least 30
days of combined operations of Mizar and LSI (the "Combined Financials") have
been published. Mizar hereby covenants to file a Form 8-K or 10-Q (as
applicable) satisfying such publication requirement as soon as practicable
after the completion of any month which contains at least 30 days of combined
operations. Furthermore, Mizar shall use its reasonable best efforts to cause
each person who is an "affiliate" of Mizar to deliver a letter to Mizar
agreeing that such person will not offer to sell, transfer or otherwise
dispose of any shares of Mizar Common Stock commencing 30 days prior to the
Exchange until such time as the Combined Financials have been published. Mizar
shall be entitled to place legends on any certificates of Mizar Common Stock
issued to such affiliates to restrict the transfer of such shares as set forth
above.
5.7. Stockholders' Meeting. Mizar will take all action necessary in
accordance with applicable law and its governing corporate documents to
convene a meeting of its stockholders as promptly as practicable to consider
and vote upon the approval of this Agreement and the transactions contemplated
hereby. The Board of Directors of Mizar shall recommend such approval and
Mizar shall take all lawful action to solicit such approval, including,
without limitation, timely mailing the Proxy Statement/Prospectus.
5.8. Listing Application. No later than 15 days before the Closing Date,
Mizar will file a listing application with the NMS to approve for listing,
subject to official notice of issuance, the shares of Mizar Common Stock to be
issued in the Exchange. Mizar shall use its reasonable efforts to cause the
shares of Mizar Common Stock to be issued in the Exchange to be approved for
listing on the NMS, subject to official notice of issuance, prior to the
Closing Date.
5.9. Reasonable Efforts; Further Assurances; Co-operation. Subject to the
other provisions of this Agreement, the parties hereto shall each use their
reasonable efforts to perform their obligations herein and to take, or cause
to be taken or do, or cause to be done, all things reasonably necessary,
proper or advisable under applicable law to obtain all regulatory approvals
and satisfy all conditions to the obligations of the parties under this
Agreement and to cause the Exchange and the other transactions contemplated
herein to be carried out promptly in accordance with the terms hereof and
shall cooperate fully with each other and their respective officers,
directors, employees, agents, counsel, accountants and other designees in
connection with any steps required to be taken as a part of their respective
obligations under this Agreement, including without limitation:
(a) LSI and Mizar shall promptly make their respective filings and
submissions and shall take, or cause to be taken, all actions and do, or
cause to be done, all things reasonably necessary, proper or advisable
under applicable laws and regulations to (i) comply with the provisions of
the Securities Act, Exchange Act and the Takeover Code, and (ii) obtain any
other required approval of any other federal, state or local governmental
agency or regulatory body with jurisdiction over the transactions
contemplated by this Agreement.
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(b) In the event any claim, action, suit, investigation or other
proceeding by any governmental body or other person is commenced which
questions the validity or legality of the Exchange or any of the other
transactions contemplated hereby or seeks damages in connection therewith,
the parties agree to cooperate and use all reasonable efforts to defend
against such claim, action, suit, investigation or other proceeding and, if
an injunction or other order is issued in any such action, suit or other
proceeding, to use all reasonable efforts to have such injunction or other
order lifted, and to cooperate reasonably regarding any other impediment to
the consummation of the transactions contemplated by this Agreement.
(c) Each party shall give prompt written notice to the other of (i) the
occurrence, Of failure to occur, of any event which occurrence or failure
would be likely to cause any representation or warranty of LSI or Mizar, as
the case may be, contained in this Agreement to be untrue or inaccurate in
any material respect at any time from the date hereof to the Closing Date
or that will or may result in the failure to satisfy the Conditions
specified in Article 6 or 7 and (ii) any failure of LSI or Mizar, as the
case may be, to comply with or satisfy any covenant, condition or agreement
to be complied with or satisfied by it hereunder.
(d) Mizar and LSI shall take all actions that the parties deem necessary
or advisable for purposes of obtaining duly executed Exchange Agreements
from each of the LSI Shareholders, LSI Optionholders and Bank, and to cause
the consummation of the transactions contemplated thereby at the Closing.
5.10. Public Announcements. The timing and content of all announcements
regarding any aspect of this Agreement or the Exchange to the financial
community, government agencies, employees or the general public shall be
mutually agreed upon in advance (unless Mizar or LSI is advised by counsel
that any such announcement or other disclosure not mutually agreed upon in
advance is required to be made by law or the Takeover Code or applicable NMS
rule and then only after making a reasonable attempt to comply with the
provisions of this Section).
5.11. No Solicitations.
(a) From the date hereof until the Closing Date or until this Agreement is
terminated or abandoned as provided in this Agreement, neither LSI nor the LSI
Subsidiaries shall directly or indirectly (i) solicit, initiate or take part
in discussions with, (ii) enter into negotiations or agreements with, or (iii)
furnish any information to, any corporation, partnership, person or other
entity or group (other than Mizar, an affiliate of Mizar or their authorized
representatives pursuant to this Agreement) concerning any formal or informal
proposal for a merger, sale of substantial assets, sale of shares of stock or
securities or other takeover or business combination transaction (an
"Acquisition Proposal") involving LSI or the LSI Subsidiaries, and LSI will
instruct its officers, directors, advisors and its financial and legal
representatives and consultants not to take any action contrary to the
foregoing provisions of this sentence; provided, however, that LSI may furnish
(on terms including confidentiality terms, substantially similar to those set
forth in that certain Letter of Intent between LSI and Mizar) information
concerning its business, properties or assets to a corporation, partnership,
person or other entity or group (a "Potential Acquirer") if (i) LSI's Board of
Directors determines that such Potential Acquirer is reasonably likely to
submit a bona fide offer to consummate an Acquisition Proposal on terms that
would yield such a higher value to LSI's stockholders if provided with
confidential information about LSI, and (ii) after consultation with counsel,
LSI's Board of Directors determines that the failure to provide such
confidential information would constitute a breach of its fiduciary duty to
stockholders of LSI. Following receipt of a bona fide offer from a Potential
Acquirer proposing an Acquisition Proposal, which offer the Board of Directors
of LSI determines would likely yield a higher value to the stockholders of LSI
than will the Exchange, LSI may with respect to such Potential Acquirer,
negotiate and take any of the actions otherwise prohibited by this Section
5.11 if, in the opinion of the Board of Directors of LSI after consultation
with counsel, the failure to negotiate with such Potential Acquirer would
constitute a breach by the Board of Directors of its fiduciary duty to the
stockholders of LSI. In the event LSI shall determine to provide any
information as described above, or shall receive any offer relating to an
Acquisition Proposal, (i) it shall promptly notify Mizar (a "Notice of
Proposal") as to the fact that information is to be provided or that on offer
relating to an Acquisition Proposal has been received and shall furnish to
Mizar the identity of the recipient of such information or the proponent of
such
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offer or proposal, if applicable, and, if an offer or proposal has been
received, a description of the material terms thereof, and (ii) Mizar shall be
permitted to take the same actions taken by LSI pursuant to this provision
with respect to any Potential Acquirer of Mizar, notwithstanding the fact that
such actions may otherwise be prohibited by this Section 5.11. LSI may enter
into a definitive agreement for an Acquisition Proposal with a Potential
Acquirer with which it is permitted to negotiate pursuant to this Section
5.11; provided, however, that at least one business day prior to LSI's
execution thereof LSI shall have provided Mizar written notice (a "Notice
Agreement") indicating LSI's intent to enter into such agreement and
describing all the material terms of such agreement. Following the execution
of such a definitive agreement, LSI or Mizar may terminate this Agreement in
accordance with Article IX hereof, subject to the fee and expense
reimbursement provisions of Section 9.2. LSI will notify Mizar promptly in
writing if LSI becomes aware that any inquiries or proposals are received by,
any information is requested from or any negotiations or discussions are
sought to be initiated with, LSI with respect to an Acquisition Proposal, and
LSI shall promptly deliver to Mizar any written inquiries or proposals
received by LSI relating to an Acquisition Proposal. LSI will notify Mizar
promptly if LSI becomes aware that any inquiries or proposals are received by,
any information is requested from or any negotiations or discussions are
sought to be initiated with, LSI or the LSI Subsidiaries with respect to an
Acquisition Proposal, and LSI shall promptly deliver to Mizar any written
inquiries or proposals received by LSI relating to an Acquisition Proposal.
Each time, if any, that the Board of Directors of LSI determines that it must
enter into negotiations with, or furnish any information tat is not publicly
available to, any Potential Acquirer (other than Mizar, an affiliate of Mizar
or their authorized representatives) concerning any Acquisition Proposal, LSI
will give Mizar prompt notice of such determination (which shall include a
copy of the non-public information which LSI has delivered to such Potential
Acquirer).
(b) From the date hereof until the Closing Date or until this Agreement is
terminated or abandoned as provided in this Agreement, Mizar shall not
directly or indirectly (i) solicit, initiate or take part in discussions with,
(ii) enter into negotiations or agreements with, or (iii) furnish any
information that is not publicly available to, any corporation, partnership,
person or other entity or group (other than LSI, an affiliate of LSI or their
authorized representatives pursuant to this Agreement) concerning any
Acquisition Proposal involving Mizar, and Mizar will instruct its officers,
directors, advisors and its financial and legal representatives and
consultants not to take any action contrary to the foregoing provisions of
this sentence; provided, however, that Mizar may furnish (on terms including
confidentiality terms, substantially similar to those set forth in that
certain Letter of Intent between LSI and Mizar) information concerning its
business, properties or assets to a Potential Acquirer if (i) Mizar's Board of
Directors is advised by its financial advisor that such Potential Acquirer has
the financial wherewithal to consummate an Acquisition Proposal that would
yield a higher value to Mizar's stockholders than will the Exchange, (ii)
Mizar's Board of Directors determines that such Potential Acquirer is
reasonably likely to submit a bona fide offer to consummate an Acquisition
Proposal on terms that would yield such a higher value to Mizar's stockholders
if provided with confidential information about Mizar, and (iii) after
consultation with counsel, Mizar's Board of Directors determines that the
failure to provide such confidential information would constitute a breach of
its fiduciary duty to stockholders of Mizar. Following receipt of a bona fide
offer from a Potential Acquirer proposing an Acquisition Proposal, which offer
the Board of Directors of Mizar determines would likely yield a higher value
to the stockholders of Mizar than will the Exchange, Mizar may with respect to
such Potential Acquirer, negotiate and take any of the actions otherwise
prohibited by this Section 5.11 if, in the opinion of the Board of Directors
of Mizar after consultation with counsel, the failure to negotiate with such
Potential Acquirer would constitute a breach by the Board of Directors of its
fiduciary duty to the stockholders of Mizar. In the event Mizar shall
determine to provide any information as described above, or shall receive any
offer relating to an Acquisition Proposal, (i) it shall promptly notify LSI (a
"Notice of Proposal") as to the fact that information is to be provided or
that on offer relating to an Acquisition Proposal has been received and shall
furnish to LSI the identity of the recipient of such information or the
proponent of such offer or proposal, if applicable, and, if an offer or
proposal has been received, a description of the material terms thereof, and
(ii) LSI shall be permitted to take the same actions taken by Mizar pursuant
to this provision with respect to any Potential Acquirer of LSI,
notwithstanding the fact that such actions may otherwise be prohibited by this
Section 5.11. Mizar may enter into a definitive agreement for an Acquisition
Proposal with a Potential Acquirer with which it is permitted to negotiate
pursuant to this Section 5.11; provided, however, that at least one business
day prior to
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Mizar's execution thereof Mizar shall have provided LSI a Notice Agreement
indicating Mizar's intent to enter into such agreement and describing all the
material terms of such agreement. Following the execution of such a definitive
agreement, LSI or Mizar may terminate this Agreement in accordance with
Article IX hereof, subject to the fee and expense reimbursement provisions of
Section 9.2. Mizar will notify LSI promptly in writing if Mizar becomes aware
that any inquiries or proposals are received by, any information is requested
from or any negotiations or discussions are sought to be initiated with, Mizar
with respect to an Acquisition Proposal, and Mizar shall promptly deliver to
LSI any written inquiries or proposals received by Mizar relating to an
Acquisition Proposal. Each time, if any, that the Board of Directors of Mizar
determines that it must enter into negotiations with, or furnish any
information that is not publicly available to, any Potential Acquirer (other
than LSI, an affiliate of LSI or their authorized representatives) concerning
any Acquisition Proposal, Mizar will give LSI prompt notice of such
determination (which shall include a copy of the non-public information which
Mizar has delivered to such Potential Acquirer).
5.12. Boards of Directors.
LSI and Mizar shall use their reasonable best efforts to agree on a mutually
acceptable Board of Directors for each of LSI and Mizar. Both current Boards
of Directors shall take all action necessary to cause the Board of Directors
of Mizar and LSI, as applicable, on or before the Closing Date, to be
increased or decreased as necessary, and shall take all such other actions as
they deem necessary, to cause the persons so chosen to be appointed to the
Mizar and LSI Boards of Directors. If Mizar and LSI are unable to agree on the
persons to serve as the foregoing directors before the Closing Date, then two
persons shall be chosen by the present Board of Directors of Mizar (the "Mizar
Nominees"), and three persons shall be chosen by the present Board of
Directors of LSI (the "LSI Nominees"), and both LSI and Mizar shall use their
reasonable best efforts to cause the Mizar Nominees and the LSI Nominees to be
elected as directors of Mizar to replace the existing Board of Directors for a
term expiring at the first annual meeting of stockholders of Mizar following
the Closing Date. The current Board of Directors of LSI shall nominate a
person, who shall be chosen by the new Board of Directors of Mizar, to serve
on the LSI Board of Directors until his successor is duly elected and
qualified, and the current Board of Directors of LSI shall resign effective at
the time of such persons appointment.
5.13. Corporate Government of the Companies After the Exchange. The Board of
Directors of Mizar and LSI shall take all actions necessary after the Closing
to do the following, including obtaining any necessary approvals of their
stockholders prior to the Closing:
(a) The Certificate of Incorporation of Mizar, as in effect on the
Closing Date, shall continue in full force and effect, except that it shall
be amended to change the corporate name of Mizar to a name mutually agreed
upon by LSI and Mizar.
(b) The Bylaws of Mizar, as in effect as of the Closing Date, shall
continue in full force and effect.
(c) The members of the Board of Directors of each of Mizar and LSI shall
be as determined under Section 5.12. The officers of Mizar and LSI shall be
the persons holding such offices as of the Closing Date.
5.14. Pooling. From and after the date hereof and until the Closing Date,
neither Mizar nor LSI, nor any of their respective subsidiaries or other
affiliates, shall (i) knowingly take any action, or knowingly fail to take any
action, that would jeopardize the treatment of the Exchange as a "pooling of
interest" for accounting purposes or (ii) knowingly take any action, or
knowingly fail to take any action, that would jeopardize qualification of the
Exchange as a tax free transaction under the TCGA. In addition, both Mizar and
LSI shall use their reasonable best efforts to cause Mizar to obtain, prior to
the Closing Date, a letter from Arthur Andersen, dated the Closing Date and
addressed to Mizar, stating substantially to the effect that, based on such
firm's review of this Agreement and the other procedures set forth in such
letter, such firm concurs that the Exchange will qualify as a pooling of
interests transaction under Opinion 16 of the Accounting Principles Board.
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ARTICLE 6.
CONDITIONS PRECEDENT TO OBLIGATIONS OF LSI
Except as may be waived by LSI, the obligations of LSI to consummate the
transactions contemplated by this Agreement shall be subject to the
satisfaction on or before the Closing Date of each of the following
conditions:
6.1. Compliance. Mizar shall have, or shall have caused to be, satisfied or
complied with and performed in all material respects all terms, covenants and
conditions of this Agreement to be complied with or performed by Mizar on or
before the Closing Date.
6.2. Representations and Warranties. All of the representations and
warranties made by Mizar in this Agreement shall be true and correct in all
material respects at and as of the Closing Date with the same force and effect
as if such representations and warranties had been made at and as of the
Closing Date, except for changes permitted or contemplated by this Agreement
and except that if information which would constitute a breach of the
representations and warranties of Mizar made in this Agreement is disclosed in
the Proxy Statement and if LSI has consented in writing to such disclosure,
then LSI shall be deemed to have waived this condition to the performance of
its obligations hereunder; provided, however, that notwithstanding anything
herein to the contrary, this Section 6.2 shall be deemed to have been
satisfied even if such representations or warranties are not true and correct,
unless the failure of any of the representations or warranties to be so true
and correct would have or would be reasonably likely to have a Mizar Material
Adverse Effect. Mizar shall deliver to LSI on or before the Closing Date,
updates of the Mizar Disclosure Schedule described in Section 4 hereof
disclosing any changes to such schedules since the date of this Agreement;
provided that no amendment or supplement to a schedule that reflects a Mizar
Material Adverse Effect shall be taken into account in determining whether the
conditions precedent to LSI's obligations to consummate the transactions
herein have been satisfied.
6.3. Material Adverse Changes. Subsequent to September 30, 1997, there shall
have occurred no Mizar Material Adverse Effect other than any such change that
affects both Mizar and LSI in a substantially similar manner; provided,
however, if such Mizar Material Adverse Change is disclosed in the Proxy
Statement (to the extent LSI consented in writing to such disclosure) on the
date such Proxy Statement is mailed to LSI's stockholders, then LSI shall be
deemed to have waived this condition to the performance of its obligations
hereunder.
6.4. NMS Listing. Mizar Common Stock issuable (a) pursuant to the Exchange,
including those issued upon exercise of the Warrants, and (b) pursuant to the
exercise of the Options after the Closing Date shall have been authorized for
listing on the NMS.
6.5. Certificates. LSI shall have received a certificate or certificates,
executed on behalf of Mizar by an executive officer of Mizar, to the effect
that the conditions contained in Sections 6.1, 6.2, 6.3 and 6.6 hereof have
been satisfied.
6.6. Shareholder Approval. This Agreement shall have been approved and
adopted by the affirmative vote of the holders of a majority of all of the
outstanding shares (as of the "record date" set forth in the Proxy Statement)
of Mizar Common Stock, and the holders of at least ninety percent (90%) of all
of the outstanding shares of LSI Stock, after giving effect to the exercise of
the Warrants and any exercises of outstanding Old Options, shall have tendered
their shares to Mizar pursuant to validly executed Exchange Agreements.
6.7. Effectiveness of Registration Statement. The Registration Statement
shall have become effective and no stop order shall have been issued by the
SEC or any other governmental authority suspending the effectiveness of the
Registration Statement or preventing or suspending the use thereof or any
related prospectus.
6.8. Consents; Litigation. All authorizations, consents, orders or approvals
of, or declarations or filings with, or expirations or terminations of waiting
periods imposed by any governmental entity, and all required third-party
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consents, the failure to obtain which would have an LSI Material Adverse
Effect or a Mizar Material Adverse Effect, shall have been obtained. In
addition, no preliminary or permanent injunction or other order shall have
been issued by any court or by any governmental or regulatory agency, body or
authority which prohibits the consummation of the Exchange and the
transactions contemplated by this Agreement and which is in effect at the
Closing Date.
6.9 Chief Executive Officer. Mr. Yates shall have been elected as the Chief
Executive Officer of Mizar.
6.10 Warrants and Preferred Shares; Options. The outstanding Warrants shall
immediately prior to the time of Closing be converted into shares of LSI
Stock. The net proceeds of the conversion of the Warrants shall be used for
the redemption of outstanding Preferred Shares at the Closing, and LSI shall
have no further obligation thereunder, and the remainder of the Preferred
Shares shall be sold to Mizar by the Bank. All of the Optionholders shall have
executed and delivered and performed their obligations under the Option
Exchange Agreements.
6.11 Board Composition. The respective Boards of Directors of Mizar and LSI
shall have been set in accordance with Section 5.12.
6.12 Applicable Laws. The consummation of the Exchange shall be in
compliance with all applicable terms and provisions of the Securities Act and
the Exchange Act. LSI shall have been re-registered as a private limited
company and shall have otherwise complied with the Takeover Code or obtained
any necessary waivers or exemptions therefrom.
6.13 Receipt of Pooling Letter. Mizar shall have received (a) a letter from
Arthur Andersen, dated the Closing Date and addressed to Mizar, stating
substantially to the effect that, based on such firm's review of this
Agreement and the other procedures set forth in such letter, such firm concurs
that the Exchange will qualify as a pooling of interests transaction under
Opinion 16 of the Accounting Principles Board and (b) a letter from Price
Waterhouse, independent auditors for LSI, to the effect that LSI qualifies as
an entity such that the Exchange will qualify as a "pooling of interests"
transaction under generally accepted accounting principles; provided, that if
this condition is not satisfied prior to March 31, 1998, then (a) the
Termination Date (as defined in Section 9.1(b) below) shall be automatically
extended to May 30, 1998, (b) the parties hereto shall use their reasonable
best efforts to obtain an opinion from Mizar's financial advisor to the effect
that the Exchange is fair to Mizar from a financial point of view, without
regard to whether the Exchange qualifies as a pooling of interests
transaction, and (c) this condition shall be deemed satisfied upon Mizar's
receipt of such an opinion of its financial advisor.
ARTICLE 7.
CONDITIONS PRECEDENT TO OBLIGATIONS OF MIZAR
Except as may be waived by Mizar, the obligations of Mizar to consummate the
transactions contemplated by this Agreement shall be subject to the
satisfaction, on or before the Closing Date, of each of the following
conditions:
7.1. Compliance. LSI shall have, or shall have caused to be, satisfied or
complied with and performed in all material respects all terms, covenants, and
conditions of this Agreement to be complied with or performed by it on or
before the Closing Date.
7.2. Representations and Warranties. All of the representations and
warranties made by LSI in this Agreement shall be true and correct in all
material respects at and as of the Closing Date with the same force and effect
as if such representations and warranties had been made at and as of the
Closing Date, except for changes permitted or contemplated by this Agreement
and except that if information which would constitute a breach of the
representations and warranties of LSI made in this Agreement is disclosed in
the Proxy Statement
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and if Mizar has consented in writing to such disclosure, then Mizar shall be
deemed to have waived this condition to the performance of its obligations
hereunder; provided, however, that notwithstanding anything herein to the
contrary, this Section 7.2 shall be deemed to have been satisfied even if such
representations or warranties are not true and correct, unless the failure of
any of the representations or warranties to be so true and correct would have
or would be reasonably likely to have an LSI Material Adverse Effect. LSI
shall deliver to Mizar on or before the Closing Date, updates of the LSI
Disclosure Schedule described in Section 3 hereof disclosing any changes to
such schedules since the date of this Agreement; provided that no amendment or
supplement to a schedule that reflects an LSI Material Adverse Effect shall be
taken into account in determining whether the conditions precedent to Mizar's
obligations to consummate the transactions hereby have been satisfied.
7.3. Material Adverse Changes. Since September 30, 1997, except as set forth
in this Agreement or on the schedules hereto, there shall have occurred no LSI
Material Adverse Effect other than any such change that affects both Mizar and
LSI in a substantially similar manner; provided, however, if such change is
disclosed in the Proxy Statement (to the extent Mizar consented to such
disclosure) on the date such Proxy Statement is mailed to Mizar's
stockholders, then Mizar shall be deemed to have waived this condition to the
performance of its obligations hereunder.
7.4. Certificates. Mizar shall have received a certificate or certificates,
executed on behalf of LSI by an executive officer of LSI, to the effect that
the conditions in Sections 7.1, 7.2, 7.3 and 7.5 hereof have been satisfied.
7.5. Shareholder Approval. This Agreement shall have been approved and
adopted by the affirmative vote of the holders of a majority of all of the
outstanding shares (as of the "record date" set forth in the Proxy Statement)
of Mizar Common Stock, and the holders of at least ninety percent (90%) of all
of the outstanding shares of LSI Stock, after giving effect to the exercise of
the Warrants and assuming the exercise of any outstanding Old Options, shall
have tendered their shares to Mizar pursuant to validly executed Exchange
Agreements.
7.6. Effectiveness of Registration Statement. The Registration Statement
shall have become effective and no stop order shall have been issued by the
SEC or any other governmental authority suspending the effectiveness of the
Registration Statement or preventing or suspending the use thereof or any
related prospectus.
7.7. Consents; Litigation. All authorizations, consents, orders or approvals
of, or declarations or filings with, or expirations or terminations of waiting
periods imposed by, any governmental entity, and all required third-party
consents, the failure to obtain which would have an LSI Material Adverse
Effect or a Mizar Material Adverse Effect, shall have been obtained. In
addition, no preliminary or permanent injunction or other order shall have
been issued by any court or by any governmental or regulatory agency, body or
authority which prohibits the consummation of the Exchange and the
transactions contemplated by this Agreement and which is in effect at the
Closing Date.
7.8. Chief Executive Officer. Mr. Yates shall have been elected as the Chief
Executive Officer of Mizar.
7.9. Warrants and Preferred Shares; Options. The outstanding Warrants shall
immediately prior to the time of Closing be converted into shares of LSI
Stock. The net proceeds of the conversion of the Warrants shall be used for
the redemption of outstanding Preferred Shares at the Closing, and LSI shall
have no further obligation thereunder, and the remainder of the Preferred
Shares shall be sold to Mizar by Bank. All of the Optionholders shall have
executed and delivered and performed their obligations under the Option
Exchange Agreements.
7.10. Board Composition. The respective Boards of Directors of Mizar and LSI
shall have been set in accordance with Section 5.12.
7.11. Applicable Laws. The consummation of the Exchange shall be in
compliance with all applicable terms and provisions of the Securities Act and
the Exchange Act. LSI shall have been re-registered as a private limited
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company and shall have otherwise complied with the Takeover Code or obtained
any necessary waivers or exemptions therefrom.
7.12. Receipt of Pooling Letter. Mizar shall have received (a) a letter from
Arthur Andersen, dated the Closing Date and addressed to Mizar, stating
substantially to the effect that, based on such firm's review of this
Agreement and the other procedures set forth in such letter, such firm concurs
that the Exchange will qualify as a pooling of interests transaction under
Opinion 16 of the Accounting Principles Board and (b) a letter from Price
Waterhouse, independent auditors for LSI, to the effect that LSI qualifies as
an entity such that the Exchange will qualify as a "pooling of interests"
transaction under generally accepted accounting principles; provided, that if
this condition is not satisfied prior to March 31, 1998, then (a) the
Termination Date shall be automatically extended to May 30, 1998, (b) the
parties hereto shall use their reasonable best efforts to obtain an opinion
from Mizar's financial advisor to the effect that the Exchange is fair to
Mizar from a financial point of view, without regard to whether the Exchange
qualifies as a pooling of interests transaction, and (c) this condition shall
be deemed satisfied upon Mizar's receipt of such an opinion of its financial
advisor.
ARTICLE 8.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
8.1. Indemnification. In the event of any threatened or actual claim,
action, suit, proceeding or investigation, whether civil, criminal or
administrative, including, without limitation, any such claim, action, suit,
proceeding or investigation in which any of the present or former officers or
directors of LSI, the LSI Subsidiaries or Mizar (collectively, the "Managers")
is, or is threatened to be, made a party by reason of the fact that he or she
is or was a stockholder, director, officer, employee or agent of LSI, the LSI
Subsidiaries or Mizar, or is or was serving at the request of LSI, the LSI
Subsidiaries or Mizar as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, whether
before or after the Closing Date, then (i) LSI and Mizar shall indemnify and
hold harmless, as and to the full extent permitted by applicable law
(including by advancing expenses promptly as statements therefor are
received), each such Manager against any losses, claims, damages, liabilities,
costs, expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement in connection with any such claim, action, suit, proceeding or
investigation, and in the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Closing Date), (ii) if LSI
or Mizar have not promptly assumed the defense of such matter, the Managers
may retain counsel satisfactory to them, and LSI, and Mizar, shall pay all
fees and expenses of such counsel for the Managers promptly, as statements
therefor are received, and (iii) LSI, and Mizar, will use their respective
best efforts to assist in the vigorous defense of any such matter; provided
that neither LSI nor Mizar shall be liable for any settlement effected without
its prior written consent (which consent shall not be unreasonably withheld).
Upon the determination that Mizar is not liable for any such indemnification
claims, the Manager will reimburse Mizar and LSI, as applicable, for any fees,
expenses and costs incurred by Mizar or LSI in connection with the defense of
such claims. Any Manager wishing to claim indemnification under this Section
8.1, upon learning of any such claim, action, suit, proceeding or
investigation, shall immediately notify LSI and Mizar thereof (provided that
the failure to give such notice shall not affect any obligations hereunder,
except to the extent that the indemnifying party is actually and materially
prejudiced thereby). Mizar and LSI agree that all rights to indemnification
existing in favor of the Managers as in effect as of the date hereof shall
survive the Exchange. Mizar further covenants not to amend or repeal any
provisions of the governing charter documents of Mizar or of LSI in any manner
which would adversely affect the indemnification or exculpatory provisions
contained therein. The provisions of this Section 8.1 are intended to be for
the benefit of, and shall be enforceable by, each indemnified party and his or
her heirs and representatives.
8.2. Directors' and Officers' Insurance. For a period of two years from the
Closing Date, Mizar shall maintain in effect Mizar's current directors' and
officers' liability insurance policy (a copy of which has been heretofore
delivered to LSI) (the "Indemnified Parties") to cover the Managers; provided.
however, that Mizar may substitute for such Mizar policies, policies with at
least the same coverage containing terms and conditions
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<PAGE>
which are no less advantageous to the Managers and provided that said
substitution does not result in any gaps or lapses in coverage with respect to
matters occurring prior to the Closing Date. The provisions of this Section
8.2 are intended to be for the benefit of, and shall be enforceable by, each
Manager and his or her heirs and representatives.
ARTICLE 9.
MISCELLANEOUS
9.1. Termination. Subject to Section 9.4, this Agreement and the
transactions contemplated hereby and the provisions herein may be terminated
at any time on or before the Closing Date:
(a) by mutual consent of LSI and Mizar;
(b) by either Mizar or LSI if the transactions contemplated by this
Agreement have not been consummated by March 31, 1998 or as may be extended
hereunder (the "Termination Date"), unless such failure of consummation is
due to the failure of the terminating party to perform or observe the
covenants, agreements, and conditions hereof to be performed or observed by
it at or before the Closing Date; provided, that the non-breaching party's
cause of action resulting from such failure to perform or to observe the
covenants, agreements and conditions hereof shall not be terminated;
(c) by either LSI or Mizar if the transactions contemplated hereby
violate any non-appealable final order, decree, or judgment of any court or
governmental body or agency having competent jurisdiction;
(d) by Mizar if in the exercise of the good faith judgment of its Board
of Directors as to its fiduciary duties to its stockholders such
termination is required by reason of an Acquisition Proposal or if the
Board of Directors of Mizar does not make or withdraws or materially
modifies or changes its recommendation to the stockholders of Mizar to
approve this Agreement and the Exchange if there exists at such time an
Acquisition Proposal for Mizar, in either case pursuant to Section 5.11;
(e) by LSI if in the exercise of the good faith judgment of its Board of
Directors as to its fiduciary duties to its stockholders such termination
is required by reason of an Acquisition Proposal or if the Board of
Directors of LSI does not make or withdraws or materially modifies or
changes its recommendation to the stockholders of LSI to approve this
Agreement and the Exchange if there exists at such time an Acquisition
Proposal for LSI, in either case pursuant to Section 5.11;
(f) by LSI if the Mizar Board of Directors withdraws or materially
modifies or changes its recommendation to the stockholders of Mizar to
approve this Agreement and the Exchange and if there exists at such time an
Acquisition Proposal for Mizar; and
(g) by Mizar if the LSI Board of Directors withdraws or materially
modifies or changes its recommendations to the LSI Stockholders to approve
this Agreement and the Exchange and if there exists at such time an
Acquisition Proposal for LSI.
9.2. Expenses.
(a) Except as provided in (b) and (c) below, if the transactions
contemplated by this Agreement are not consummated, each party hereto shall
pay its own expenses incurred in connection with this Agreement and the
transactions contemplated hereby.
(b) If (i) this Agreement is terminated (A) by Mizar pursuant to Section
9.1(d) hereof or (B) by LSI pursuant to Section 9.1(f) hereof, (ii) following
the mailing of the Proxy Statement by Mizar, Mizar's stockholders have not
approved this Agreement or Mizar has failed to use its best efforts to obtain
a regulatory or governmental approval necessary to consummate the Exchange, or
(iii) on or before the Termination Date, and while this Agreement remains in
effect, Mizar enters into discussions with respect to an Acquisition Proposal
with any corporation, partnership, person or other entity or group (other than
LSI or any affiliate of LSI), and such
A-29
<PAGE>
transaction (including any revised transaction based upon the Acquisition
Proposal) is thereafter consummated on or before the first anniversary of the
Termination Date), then Mizar shall pay to LSI a fee equal to the sum of (i)
up to $300,000 of documented fees, costs and expenses, including legal and
accounting fees and fees payable to LSI's financial advisors, incurred by LSI
in connection with the transactions contemplated by this Agreement and (ii)
$1,000,000, which amounts shall be payable in same day funds to an account
specified by LSI.
(c) If (i) this Agreement is terminated (A) by LSI pursuant to Section
9.1(e) hereof or (B) by Mizar pursuant to Section 9.1(g) hereof, (ii)
following the mailing of the Exchange Agreements by Mizar to the other parties
thereto, the LSI Shareholders have tendered less than ninety percent (90%) of
the outstanding LSI Stock (including shares issuable under the Old Options and
the Warrants) to Mizar in accordance with Exchange Agreements or LSI has
failed to use its best efforts to obtain a regulatory or governmental approval
necessary to consummate the Exchange, or (iii) on or before the Termination
Date, and while this Agreement remains in effect, LSI enters into discussions
with respect to an Acquisition Proposal with any corporation, partnership,
person or other entity or group (other than Mizar or any affiliate of Mizar),
and such transaction (including any revised transaction based upon the
Acquisition Proposal) is thereafter consummated on or before the first
anniversary of the Termination Date), then LSI shall pay Mizar a cash fee
equal to the sum of (i) up to $300,000 of documented fees, costs and expenses,
including legal and accounting fees and fees payable to LSI's financial
advisors, incurred by LSI in connection with the transactions contemplated by
this Agreement and (ii) $1,000,000, which amounts shall be payable in same day
funds to an account specified by Mizar.
(d) If any provision of this Section 9.2 shall be void under applicable law,
or if the performance by any party of its obligations hereunder is prohibited
by applicable law, but such provision or action would be permissible if some
part or all of this Section 9.2 were deleted, then such modification as may be
necessary to make such provision or action permissible shall be deemed to have
taken place.
9.3. Entire Agreement. This Agreement and the exhibits hereto contain the
complete agreement among the parties with respect to the transactions
contemplated hereby and supersede all prior agreements and understandings
among the parties with respect to such transactions. Section and other
headings are for reference purposes only and shall not affect the
interpretation or construction of this Agreement. The parties hereto have not
made any representation or warranty except as expressly set forth in this
Agreement or in any certificate or schedule delivered pursuant hereto. The
obligations of any party under any agreement executed pursuant to this
Agreement shall not be affected by this section.
9.4. Survival of Provisions. The representations and warranties of each
party contained herein or in any exhibit, certificate, document or instrument
delivered pursuant to this Agreement shall not survive the Closing. The
covenants and agreements of Sections 5.6, 5.12, 5.13, 8.1, 8.2 and 9.4 shall
survive the Closing. The covenants and agreements of Sections 5.4, 9.2, 9.4,
9.6, 9.8 and 9.12 shall survive the termination of this Agreement in
accordance with Section 9.1.
9.5. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, and such counterparts together shall constitute only one original.
9.6. Notices. All notices, demands, requests, or other communications that
may be or are required to be given, served, or sent by any party to any other
party pursuant to this Agreement shall be in writing and shall be sent by
facsimile transmission, next-day courier or mailed by first-class, registered
or certified mail, return receipt requested, postage prepaid, or transmitted
by hand delivery, addressed as follows:
(i) If to LSI:
Loughborough Sound Images
Loughborough Park
Ashby Road
Loughborough, Leicestershire
A-30
<PAGE>
LE113NE, England
Attn: Simon Yates
Telephone: 011-44-1509-634412
Fax: 011-44-1509-634438
with a copy (which shall not constitute notice) to:
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
Attn: David L. Engel
Telephone: (617) 951-8000
Fax: (617) 951-8736
(ii) If to Mizar:
Mizar, Inc.
2410 Luna Road
Carrollton, Texas 75006
Attn: Samuel Smith
Telephone: (972) 277-4650
Fax: (972) 277-4671
with a copy (which shall not constitute notice) to:
Crouch & Hallett, L.L.P.
717 North Harwood Street
Suite 1400
Dallas, Texas 75201
Attn: Bruce H.Hallett
Telephone: (214) 922-4120
Fax: (214) 953-0576
Each party may designate by notice in writing a new address to which any
notice, demand, request, or communication may thereafter be so given, served,
or sent. Each notice, demand, request, or communication that is mailed,
delivered, or transmitted in the manner described above shall be deemed
sufficiently given, served, sent, and received for all purposes at such time
as it is delivered to the addressee (with the return receipt, the delivery
receipt or the affidavit of messenger being deemed conclusive evidence of such
delivery) or at such time as delivery is refused by the addressee upon
presentation.
9.7. Successors; Assignments. This Agreement and the rights, interests, and
obligations hereunder shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns. Neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned, by operation of law or otherwise, by any of the parties hereto
without the prior written consent of the other.
9.8. Governing Law; Venue. This Agreement shall be construed and enforced in
accordance with the laws of the State of Delaware (except the choice of law
rules thereof). Venue of any action brought to enforce or interpret this
Agreement shall be commenced and maintained in a federal court sitting in New
Castle County, Delaware. The parties irrevocably consent to jurisdiction and
venue in such courts for such purposes.
9.9. Waiver and Other Action. This Agreement may be amended, modified, or
supplemented only by a written instrument executed by the parties against
which enforcement of the amendment, modification or supplement is sought.
9.10. Severability. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable, such provision shall be fully severable,
and this Agreement shall be construed and enforced as if such illegal,
invalid,
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<PAGE>
or unenforceable provision were never a part hereof; the remaining provisions
hereof shall remain in full force and effect and shall not be affected by the
illegal, invalid, or unenforceable provision or by its severance; and in lieu
of such illegal, invalid, or unenforceable provision, there shall be added
automatically as part of this Agreement, a provision as similar in its terms
to such illegal, invalid, or unenforceable provision as may be possible and be
legal, valid, and enforceable.
9.11. No Third Party Beneficiaries. Article 8 is intended for the benefit of
each "Manager" (as defined in Article 8) and may be enforced by such persons,
their heirs and representatives. Other than as expressly set forth in this
Section 9.11, nothing expressed or implied in this Agreement is intended, or
shall be construed, to confer upon or give any person, firm or corporation
other than the parties hereto and their stockholders, any rights, remedies,
obligations or liabilities under or by reason of this Agreement or result in
such person, firm or corporation being deemed a third party beneficiary of
this Agreement.
9.12. Mutual Contribution. The parties to this Agreement and their counsel
have mutually contributed to its drafting. Consequently, no provision of this
Agreement shall be construed against any party on the ground that such party
drafted the provision or caused it to be drafted or the provision contains a
covenant of such party.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
MIZAR, INC.
By: /s/ Samuel Smith
-----------------------------------
Samuel Smith
Chief Executive Officer
LOUGHBOROUGH SOUND IMAGES PLC
By: /s/ Simon Yates
-----------------------------------
Simon Yates
Managing Director
A-32
<PAGE>
APPENDIX B
<PAGE>
[LOGO OF COWEN APPEARS HERE]
November 10, 1997
Board of Directors
Mizar, Inc.
2410 Luna Road
Carrollton, TX 75006
Ladies and Gentlemen:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to Mizar, Inc., a Delaware corporation (the
"Company"), of the terms of the Transaction (as hereinafter defined) with
Loughborough Sound Images ("LSI"). For the purposes of this opinion, the
"Transaction" means the purchase by the Company of all the outstanding
ordinary shares of LSI ("LSI Shares") described below pursuant to a Share
Purchase Agreement between the Company and LSI (the "Agreement").
The Agreement provides for the purchase by the Company of all the LSI
shares, subject to the terms and conditions thereof and as more specifically
set forth therein. Upon effectiveness of the Transaction, among other things,
each issued and outstanding LSI Share that is tendered pursuant to the
Agreement will be converted into the right to receive 94.632 shares of common
stock, $0.01 par value per share ("Mizar Common Stock"), of the Company. For
the purposes of this letter, the exchange of Mizar Common Stock for LSI shares
shall be referred to herein as the "Exchange".
In the ordinary course of its services, Cowen & Company ("Cowen") is
regularly engaged in the valuation and pricing of businesses and their
securities and in advising corporate securities issuers on related matters.
In arriving at our opinion, Cowen has, among other things:
(1) reviewed Mizar's financial statements for the fiscal years ended June
30, 1995 through June 30, 1997, and certain publicly available filings with
the Securities and Exchange Commission;
(2) reviewed LSI's financial statements for the fiscal years ended
September 30, 1993 through September 30, 1997 and certain other relevant
operating data of the company;
(3) reviewed the November 3, 1997 draft of the Agreement provided to us
by management of the Company;
(4) held meetings and discussions with management and senior personnel of
the Company and LSI to discuss the business, operations, historical
financial results and future prospects of Mizar, LSI and the combined
company;
COWEN & COMPANY
FOUR EMBARCADERO CENTER, SUITE 1200, SAN FRANCISCO, CA 94111-5994. TEL
(415)646-7200
MEMBER ALL PRINCIPAL EXCHANGES
<PAGE>
Mizar, Inc.
November 10, 1997
Page 2
(5) reviewed financial projections for both Mizar and LSI furnished to us
by the Company including, among other things, the capital structure, sales,
net income, cash flow, capital requirements and other data that we deemed
relevant;
(6) analyzed the respective contributions of actual revenues, operating
income and net income of Mizar and LSI to the combined company based upon
the historical and projected financial results of Mizar and LSI provided by
managements of Mizar and LSI, respectively, excluding the possible effects
of cost savings and synergies in the Transaction;
(7) reviewed the valuation of LSI in comparison to other similar publicly
traded companies;
(8) reviewed the historical prices and trading activity of Mizar Common
Stock since the Company's IPO, over the last twelve months, and during the
last 45 trading days (each period ended October 31, 1997);
(9) analyzed the potential dilutive effects of the Transaction;
(10) compared the Transaction with other similar transactions, including
a comparison of the multiples paid in the Transaction with the multiples
paid in those similar transactions; and
(11) conducted such other studies, analysis, inquiries and investigations
as we deemed appropriate.
On November 10, 1997, the closing sale price of the Mizar Common Stock as
reported by Nasdaq was $6.25 per share.
In rendering our opinion, we relied upon the Company's management with
respect to the accuracy and completeness of the financial and other
information furnished to us as described above. We assumed that financial
forecasts, projections and estimates of operating efficiencies and potential
synergies reflected the best currently available estimates and judgments of
the Company's management and LSI as to the expected future financial
performance of their respective entities. We have not assumed any
responsibility for independent verification of such information, including
financial information, nor have we made an independent evaluation or appraisal
of any of the properties or assets of LSI. With respect to all legal matters
relating to the Company and LSI, we have relied on the advice of legal counsel
to the Company.
Our opinion is necessarily based on general economic, market financial and
other conditions as they exist on, and can be evaluated as of, the date
hereof, as well as the information currently available to us. It should be
understood that, although subsequent developments may affect our opinion, we
do not have any obligation to update, revise or reaffirm our opinion. Our
opinion does not constitute a recommendation to any stockholder as to how such
stockholder should vote on the proposed Transaction. Our opinion does not
imply any conclusion as to the likely trading range for the Mizar Common Stock
following consummation of the Transaction or otherwise, which may vary
depending on numerous factors that generally influence the price of
securities. Our opinion is limited to the fairness, from a financial point of
view, of the terms of the Transaction. We express no opinion with respect to
any other reasons, legal, business or otherwise, that may support the decision
of the Board of Directors to approve, or the Company's decision to consummate
the Transaction.
For purposes of rendering our opinion we have assumed in all respects
material to our analysis, that the representations and warranties of each
party contained in the Agreement are true and correct, that each party will
perform all of the covenants and agreements required to be performed by it
under the Agreement and that all conditions to the consummation of the
Transaction will be satisfied without waiver thereof. We have also assumed
that all governmental, regulatory or other consents and approvals contemplated
by the Agreement will be obtained and that in the course of obtaining any of
those consents no restrictions will be imposed or waivers made that would have
an adverse effect on the contemplated benefits of the Transaction.
<PAGE>
Mizar, Inc.
November 10, 1997
Page 3
We have also assumed, with your permission, that (i) the Transaction will be
treated as "pooling of interests" for accounting purposes, (ii) the Company
will purchase all issued and outstanding LSI Shares, (iii) all options
outstanding under LSI's share option plans would be exchanged for options of
Mizar Common Stock as contemplated in the Agreement, (iv) Boston Holdings
Limited will exercise all of its warrants of LSI as contemplated in the
Agreement (the "Warrant Exercise") and (v) LSI will use the proceeds of the
Warrant Exercise to redeem LSI's preference shares and Boston Holdings Limited
will sell to the Company, as contemplated in the Agreement, any of such
preference shares not so redeemed. We express no opinion, nor have we
conducted any analysis, with respect to a Transaction that does not
contemplate the aforementioned accounting treatment, purchase of LSI Shares,
exchange of options, exercise of warrants and redemption and purchase of LSI's
preference shares.
We have acted as exclusive financial advisor to the Board of Directors of
the Company in connection with the Transaction and will receive a fee for our
services, a significant portion of which is contingent upon the consummation
of the Transaction. In addition, in the ordinary course of its business, Cowen
and its affiliates trade the equity securities of the Company for their own
account and for the accounts of their customers, and accordingly, may at any
time hold a long or short position in such securities.
On the basis of our review and analysis, and subject to the assumptions and
limitations described herein, it is our opinion as investment bankers that, as
of the date hereof, the Exchange is fair, from a financial point of view, to
the Company.
Very truly yours,
/s/ Cowen & Company
---------------------
Cowen & Company
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
-----------------------------------------
The Registrant's Certificate of Incorporation eliminates to the
fullest extent permissible under the General Corporation Law of Delaware the
liability of directors of the Registrant and the stockholders for monetary
damages for breach of fiduciary duty as a director. This provision does not
eliminate liability (a) for any breach of a director's duty of loyalty to the
Registrant or its stockholders; (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law; (c) in
connection with payment of any illegal dividend or illegal stock repurchase; or
(d) for any transaction from which the director derives an improper personal
benefit. In addition, these provisions do not apply to equitable remedies such
as injunctive relief.
The Bylaws of the Registrant provide that indemnification of directors
and officers shall be provided to the fullest extent permitted under Delaware
law and the Registrant's Certificate of Incorporation.
The Registrant has entered into Indemnification Agreements with each
of its directors contractually requiring the Registrant to provide such
indemnification to the extent permitted by law.
Item 21. Exhibits and Financial Statement Schedules.
------------------------------------------
(a) Exhibits
2 Share Purchase Agreement, dated November 17, 1997, between the
Registrant and Loughborough Sound Images Limited (formerly
Loughborough Sound Images plc) ("LSI") (1)
3.1 Certificate of Incorporation of the Registrant (2)
3.2 Bylaws, as amended, of the Registrant (2)
5 Opinion of Crouch & Hallett, L.L.P.(4)
8 Tax opinion of Crouch & Hallett, L.L.P.(4)
10.1 Form of Indemnification and Hold Harmless Agreement (2)
10.2 Employment Agreement between the Registrant and John L. Marshall (2)
10.3 Commercial Quad-C40 Program ("Commercial") by and between Texas
Instruments, Incorporated ("TI") and the Registrant dated
October 9, 1992 (2)
10.4 Amendment 1 to Commercial dated March 19, 1993 (2)
10.5 Amendment 2 to Commercial dated July 1, 1993 (2)
10.6 Amendment 3 to Commercial dated January 12, 1995 (2)
10.7 MIL-SPEC Quad-C40 Program ("MIL-SPEC") by and between TI and the
Registrant dated January 20, 1993 (2)
10.8 Amendment 1 to MIL-SPEC dated March 19, 1993 (2)
10.9 Amendment 2 to MIL-SPEC dated July 1, 1993 (2)
10.10 ASP048 License Agreement ("ASP048 License Agreement") by and between
TI and the Registrant dated December 29, 1992 (2)
10.11 Amendment 1 to ASP048 License Agreement dated July 15, 1993 (2)
10.12 MIL-SPEC Octal-C40 Program ("MIL-SPEC Octal") by and between TI and
the Registrant dated March 28, 1994 (2)
10.13 Dual MVP Digital Computer Board License Agreement by and between
TI and the Registrant dated January 12, 1995 (2)
11.1 Computation of per share net income of the Registrant (4)
11.2 Computation of per share net income of LSI (4)
23.1 Consent of Arthur Andersen, LLP (3)
23.2 Consent of Price Waterhouse (3)
23.3 Consent of Crouch & Hallett, L.L.P. (included in Exhibit 5)
99.1 Form of Proxy Card (3)
99.2 Consent of Simon Yates (4)
99.3 Consent of John Forrest (4)
99.4 Consent of Robert Shaddock(4)
______________________
(1) Attached as Appendix A to the Proxy Statement/Prospectus.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (File No. 33-95852).
(3) Filed herewith.
(4) Filed previously.
<PAGE>
Item 22. Undertakings.
------------
(a) The registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement 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.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant 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 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 its 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 Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11 or 13 in 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 the registration statement
through the date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(e) (1) The undersigned registrant hereby undertakes as follows: That
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus (a) that is
filed pursuant to paragraph (e)(1) immediately preceding, or (b) that purports
to meet the requirements of section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415 ((S) 230.415 of
this chapter), will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Carrollton and State of
Texas on January 12, 1998.
MIZAR, INC.
By: /s/ Charles D. Brockenbush
----------------------------
Charles D. Brockenbush
Vice President-Finance
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated and on January 12, 1998.
Signature Title
- --------- -----
/s/ Sam K. Smith Chairman of the Board and Chief Executive
- ------------------------------- Officer (Chief Executive Officer)
Sam K. Smith
/s/ Charles D. Brockenbush Vice President-Finance and Chief Financial
- ------------------------------- Officer (Chief Financial and Accounting
Charles D. Brockenbush Officer)
/s/ David H. Irwin
- ------------------------------- Director
David H. Irwin
/s/ John L. Rynearson
- ------------------------------- Director
John L. Rynearson
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
No.
-------
2 Share Purchase Agreement, dated November 17, 1997, between the
Registrant and Loughborough Sound Images Limited (formerly
Loughborough Sound Images plc) ("LSI") (1)
3.1 Certificate of Incorporation of the Registrant (2)
3.2 Bylaws, as amended, of the Registrant (2)
5 Opinion of Crouch & Hallett, L.L.P.(4)
8 Tax opinion of Crouch & Hallett, L.L.P.(4)
10.1 Form of Indemnification and Hold Harmless Agreement (2)
10.2 Employment Agreement between the Registrant and John L. Marshall (2)
10.3 Commercial Quad-C40 Program ("Commercial") by and between Texas
Instruments, Incorporated ("TI") and the Registrant dated
October 9, 1992 (2)
10.4 Amendment 1 to Commercial dated March 19, 1993 (2)
10.5 Amendment 2 to Commercial dated July 1, 1993 (2)
10.6 Amendment 3 to Commercial dated January 12, 1995 (2)
10.7 MIL-SPEC Quad-C40 Program ("MIL-SPEC") by and between TI and the
Registrant dated January 20, 1993 (2)
10.8 Amendment 1 to MIL-SPEC dated March 19, 1993 (2)
10.9 Amendment 2 to MIL-SPEC dated July 1, 1993 (2)
10.10 ASP048 License Agreement ("ASP048 License Agreement") by and between
TI and the Registrant dated December 29, 1992 (2)
10.11 Amendment 1 to ASP048 License Agreement dated July 15, 1993 (2)
10.12 MIL-SPEC Octal-C40 Program ("MIL-SPEC Octal") by and between TI and
the Registrant dated March 28, 1994 (2)
10.13 Dual MVP Digital Computer Board License Agreement by and between
TI and the Registrant dated January 12, 1995 (2)
11.1 Computation of per share net income of the Registrant (4)
11.2 Computation of per share net income of LSI (4)
23.1 Consent of Arthur Andersen, LLP (3)
23.2 Consent of Price Waterhouse (3)
23.3 Consent of Crouch & Hallett, L.L.P. (included in Exhibit 5)
99.1 Form of Proxy Card (3)
99.2 Consent of Simon Yates (4)
99.3 Consent of John Forrest (4)
99.4 Consent of Robert Shaddock (4)
______________________
(1) Attached as Appendix A to the Proxy Statement/Prospectus.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (File No. 33-95852).
(3) Filed herewith.
(4) Previously filed.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
included in or made a part of this Registration Statement on Form S-4.
ARTHUR ANDERSEN
Dallas, Texas
January 12, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Proxy Statement/Prospectus constituting part
of this Registration Statement on Form S-4 of Mizar, Inc. of our report dated
December 9, 1997 relating to the consolidated financial statements of
Loughborough Sound Images Limited which appears in such Proxy
Statement/Prospectus. We also consent to the reference to us under the heading
"Experts."
PRICE WATERHOUSE
Leicester, England
January 8, 1998
<PAGE>
EXHIBIT 99.1
P R O X Y
PROXY
MIZAR, INC.
The undersigned hereby (a) acknowledges receipt of the Notice of Annual Meeting
of Stockholders of Mizar, Inc. (the "Company") to be held on __________, 1998,
at 10:00 a.m., local time, and the Proxy Statement/Prospectus in connection
therewith, and (b) appoints Sam K. Smith and Charles D. Brockenbush, or each of
them, his proxies, with full power of substitution and revocation, for and in
the name, place and stead of the undersigned, to vote upon and act with respect
to all of the shares of Common Stock of the Company (the "Common Stock")
standing in the name of the undersigned or with respect to which the undersigned
is entitled to vote and act at said meeting or at any adjournment thereof, and
the undersigned directs that his proxy be voted as follows:
1. Proposal to issue up to 8,440,891 shares of Common Stock to former
shareholders of Loughborough Sound Images Ltd., a company registered in
England and Wales ("LSI"), pursuant to the Share Purchase Agreement, dated
November 17, 1997, between the Company and LSI.
[_] FOR [_] AGAINST [_] ABSTAIN
2. Proposal to amend the Mizar Stock Option Plan (the "Plan") to increase the
number of shares of Common Stock issuable upon exercise of options granted
under the Plan from 2,177,500 to 2,427,500.
[_] FOR [_] AGAINST [_] ABSTAIN
3. Proposal to amend the Certificate of Incorporation of the Company to change
the Company's corporate name to "Blue Wave Systems Inc."
[_] FOR [_] AGAINST [_] ABSTAIN
4. Proposal to amend the Certificate of Incorporation of the Company to
increase the number of authorized shares of Common Stock from 25 million to
50 million.
[_] FOR [_] AGAINST [_] ABSTAIN
5. Election of Directors.
[_] FOR nominees listed below except as otherwise marked
[_] WITHHOLD AUTHORITY to vote for all nominees listed below
Simon Yates; David Irwin; Sam Smith; Rob Shaddock and John Forrest
INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space below.
6. To transact such other business as may come before the Annual Meeting.
[_] FOR [_] AGAINST [_] ABSTAIN
If more than one of the proxies listed on the reverse side shall be present
in person or by substitute at the meeting or any adjournment thereof, the
majority of said proxies so present and voting, either in person or by
substitute, shall exercise all of the powers hereby given.
THIS PROXY WILL BE VOTED AS SPECIFIED ON THE REVERSE SIDE. IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR ALL PROPOSALS SET FORTH ON
THE REVERSE SIDE.
P R O X Y
The undersigned hereby revokes any proxy or proxies heretofore given to vote
upon or act with respect to such stock and hereby ratifies and confirms all
that said proxies, their substitutes, or any of them, may lawfully do by virtue
hereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.
Dated: _________________________
--------------------------------
Signature
--------------------------------
(Signature if held jointly)
Please date the proxy and sign
your name exactly as it appears
hereon. Where there is more
than one owner, each should
sign. When signing as an
attorney, administrator,
executor, guardian or trustee,
please add your title as such.
If executed by a corporation,
the proxy should be signed by a
duly authorized officer. Please
sign the proxy and return it
promptly whether or not you
expect to attend the meeting.
You may nevertheless vote in
person if you do attend.
