-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OHXeddRadFj7mGph0MF0WD4qqjtR0Oz2/XUp8apE8HZEGHJlkt7IdAQfu+U8XXQG Sbm2O3dSo04WeIcJarIL8Q== 0000950136-97-000335.txt : 19970328 0000950136-97-000335.hdr.sgml : 19970328 ACCESSION NUMBER: 0000950136-97-000335 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXSYS TECHNOLOGIES INC CENTRAL INDEX KEY: 0000206030 STANDARD INDUSTRIAL CLASSIFICATION: MOTORS & GENERATORS [3621] IRS NUMBER: 111962029 STATE OF INCORPORATION: DE FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16182 FILM NUMBER: 97565547 BUSINESS ADDRESS: STREET 1: 645 MADISON AVE CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2125937900 MAIL ADDRESS: STREET 1: 645 MADISON AVENUE STREET 2: 645 MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: VERNITRON CORP DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NO.: 0-16182 AXSYS TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 11-1962029 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 645 MADISON AVENUE NEW YORK, NEW YORK 10022 (Address of principal executive offices) (Zip Code) (212) 593-7900 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, par value $.01 per share $1.20 Cumulative Exchangeable Redeemable Preferred Stock, par value $.01 per share SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. Aggregate market value of the voting stock held by non-affiliates of the registrant as of the close of business on March 25, 1997, $22,480,000. Common Stock outstanding at March 25, 1997: 2,986,381 shares. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENT FORM 10-K REFERENCE Portion of Axsys Technologies, Inc. Notice of Annual Meeting of Stockholders and Proxy Statement. Part III, Items 10-13 PART I ITEM 1. BUSINESS GENERAL Axsys Technologies, Inc. (the "Company"), formerly known as Vernitron Corporation, was incorporated in New York in 1959 and reincorporated in Delaware in 1968. On April 25, 1996, the Company acquired the stock of Precision Aerotech, Inc. ("PAI"), a leading manufacturer of high performance laser scanners, optics and precision machined components. On October 2, 1996, the Company's Speedring, Inc. subsidiary acquired substantially all of the assets of Lockheed Martin Beryllium Corporation ("LMBC"), a precision machining business of beryllium and other exotic material components. The Company is primarily engaged in the design, manufacture and sale of precision optical and positioning components and sub-systems and electrical/electronic interconnect devices, and the distribution and service of precision ball bearings. BUSINESS OF THE COMPANY The Company operates in five manufacturing plants and three distribution facilities located in the United States in one business segment, electromechanical components and sub-systems, which is organized into two product groups: the Precision Systems group, formerly known as the Motion Control group, and the Industrial Components group. The Precision Systems and Industrial Components groups accounted for 53% and 47%, respectively, of the Company's consolidated net sales of $91.3 million in 1996 (see Management's Discussion and Analysis of Financial Condition and Results of Operations for three year sales comparisons). PRECISION SYSTEMS GROUP. The Precision Systems group designs, manufactures and sells precision optical and positioning components and sub-systems used in high performance markets such as the commercial satellite, defense, digital imaging and semiconductor capital equipment markets. The group's products generally involve a high degree of interactive application engineering to meet each customer's unique requirements for reliability and accuracy under demanding and often hostile environmental or shock conditions, such as space flight and industrial automation. Average unit prices for the component products generally exceed $100 and range upward to more than $1,000. Average unit prices for sub-systems range from $1,500 to $100,000. However, limited volume custom products may sell for as high as $400,000 per unit. Individual purchase orders generally cover small unit quantities. Approximately 51% of current bookings by this group are for U.S. and foreign government defense applications. The remainder of the business is spread over a variety of commercial and industrial applications. A large percentage of the defense business is used in or to support tactical missiles programs, infrared night vision systems and other pointing and targeting systems. The Precision Systems group offers one of the broadest range of precision optical and positioning components in the industry. The group's component product offering includes precision metal optics, precision airbearings, electronic controls, magnetic based prime movers and motors, position and speed feedback devices utilizing magnetic, potentiometric and optical technologies and pressure transducers. In addition, the group's capabilities include precision machining of beryllium and other exotic material components. The Precision Systems group's breadth of component product offerings also enables it to provide a single solution to customers' often diverse precision optical and positioning requirements. Through the integration and packaging of various optics, airbearings, motors, feedback devices and electronics, the group can produce sophisticated sub-systems such as airbearing and ball bearing scanners and rotary and linear actuators. Applications for these sub-systems include semiconductor capital equipment, medical surgical tools and imaging equipment, mass data storage drives, laser scanners for high speed film recording, satellite instrumentation, air and ground based targeting and positioning systems, missile guidance systems and industrial control systems. Sub-systems sales represented approximately 23% of the group's sales in 1996. The Precision Systems group operates through the Company's Vernitron division and two subsidiaries, Speedring Systems, Inc. and Speedring, Inc. INDUSTRIAL COMPONENTS GROUP. The Industrial Components group designs, manufactures and sells 2 electrical/electronic interconnect devices through the Company's Beau Interconnect Systems division and distributes and services precision ball bearings used in a diverse group of industrial, commercial and consumer applications through the Company's AST Bearings division. The group's products are almost always sold as components and require a minimum amount of specialized application engineering. Average unit selling prices range from $1 to $3 and individual purchase orders generally cover large unit quantities. Substantially all of the Industrial Components group sales are to domestic commercial and industrial markets. The Industrial Components group's interconnect product line designs and manufactures safety agency approved barrier terminal blocks in the .5 to 50 ampere capacity range. These terminal blocks are used in a broad range of applications such as industrial controls and automations, HVAC, security, power supplies and telecommunications. The interconnect product line also manufactures power connectors for frequent connect and disconnect applications such as vending machines, coin changers and traffic controls. The Industrial Components group also distributes precision ball bearings from three warehouse locations - Montville, New Jersey, Irvine, California and Dallas, Texas - to bearing distributors and to end users in a variety of industries such as machine tools, office automation and semiconductor processing equipment and manufacturers of other precision instruments. MARKETING. The Company's products are sold directly to original equipment manufacturers and U.S. Government agencies and contractors, and through a network of manufacturers' representatives and distributors. DOMESTIC AND FOREIGN SALES. The following table sets forth, for each of the last three fiscal years, information concerning the Company's domestic and foreign net sales and operating income from continuing operations and identifiable assets (dollars in thousands): Fiscal Years ------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Net sales: USA .................. $ 80,898 $ 57,402 $ 57,752 Foreign .............. 10,403 7,811 4,380 ------------ ------------ ------------ $ 91,301 $ 65,213 $ 62,132 ============ ============ ============ Export sales as a % of total net sales: 11.4% 12.0% 7.0% ============ ============ ============ Operating income: USA .................. $ 6,603 $ 3,155 $ 3,363 Foreign .............. 504 540 314 Restructuring/ inventory writedown charges (USA) ...... - - (1,315) ------------ ------------ ------------ $ 7,107 $ 3,695 $ 2,362 ============ ============ ============ Identifiable assets: USA..................... $ 62,171 $ 40,485 $ 42,197 ============ ============ ============ COMPETITION. The Company competes primarily on the basis of its ability to design and engineer its products to meet performance specifications set by its customers, most of whom are original equipment manufacturers who purchase component parts or sub-systems for inclusion in their end products. Quality, customer service and competitive pricing are also critical success factors. There are a limited number of competitors in each of the markets for the various types of precision optical and positioning components and sub-systems and electrical/electronic interconnect devices manufactured and sold by the Company. These competitors, especially those in the precision optical and positioning product lines, are typically focused on a smaller number of product offerings than the Company and are often well entrenched. Some of these competitors have substantially greater resources than the Company. The Company believes, however, that the breath of its technologies and product offerings provides it with a competitive advantage over its sub-system competitors in terms of performance and cost. 3 There are numerous competitors in markets to which we distribute precision ball bearings. These competitors, who vary in size, include other bearing distributors as well as bearing manufacturers. CUSTOMERS. There is no customer or group of affiliated customers to which sales during the fiscal year ended December 31, 1996 were in the aggregate 10% or more of the Company's consolidated net sales, and there is no customer, the loss of which would have a material adverse effect on the Company's operations taken as a whole. In fiscal 1996, the Company had aggregate sales, both military and non-military, of approximately $5.1 million directly to the U.S. Government, including its agencies and departments. These sales accounted for approximately 6% of total net sales in 1996 as compared to 5% in 1995 and 6% in 1994. Approximately 22% of net sales in 1996 was derived from subcontracts with U.S. Government contractors as compared to 13% in 1995 and 18% in 1994. The majority of these contracts may be subject to termination at the convenience of the Government, and certain contracts may also be subject to renegotiation. Currently, the Company is not aware of any termination or renegotiation of such contracts which would have a material adverse effect on its business. Because approximately 28% of the Company's business is derived directly from contracts with the U.S. Government or agencies or departments thereof, or indirectly through subcontracts with U.S. Government contractors, the Company's results of operations could be materially affected by changes in Government expenditures for products using component parts which the Company produces. However, the Company believes that its exposure to such risk may be lessened by the broad number and diversity of its product applications and the strength of its engineering capabilities. BACKLOG; SEASONALITY. As of December 31, 1996 and 1995, the Company had a backlog of orders of $56.4 million and $28.0 million, respectively. Management believes that a substantial portion of the backlog of orders at December 31, 1996 will be shipped during fiscal 1997. Bookings and shipments, while subject to fluctuation due to the build-to-order nature of a substantial portion of the Company's business, are not subject to significant seasonal variations. RESEARCH AND DEVELOPMENT. The Company develops new component products and sub-systems and improves existing products in order to keep pace with the technological advances which generally characterize its markets. During fiscal 1996, 1995, and 1994, spending associated with research and development, before customer reimbursement, was $2.2 million, $1.2 million and $1.2 million, respectively. The Company recovered from customers approximately 17%, 38% and 33% of such spending during fiscal 1996, 1995 and 1994, respectively. RAW MATERIALS; OTHER SUPPLIERS. Raw materials and purchased components are generally available from multiple suppliers. However, beryllium, a material used extensively by the Precision Systems group, is almost exclusively available from one supplier. Historically, the operations using beryllium have had an excellent relationship with the key supplier of this material and have not encountered problems in obtaining their requirements. PATENTS, TRADEMARKS AND LICENSES. The Company's business is not dependent on any patent or trademark. ENVIRONMENTAL REGULATIONS. The Company does not believe that its compliance with federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to the protection of the environment has or will have any material effect upon its capital expenditures, earnings or competitive position. There can be no assurance, however, (i) that changes in federal, state or local laws or regulations, changes in regulatory policy or the discovery of unknown problems or conditions will not in the future require substantial expenditures, or (ii) as to the extent of the Company's liabilities, if any, for past failures, if any, to comply with applicable environmental laws, regulations and permits. EMPLOYEES. The Company employs approximately 800 persons, all in the United States. Approximately 40 of such employees are subject to union contracts. The Company considers its relations with its employees to be satisfactory. There has been no significant interruption of operations due to labor disputes. WORKING CAPITAL PRACTICES. The markets in which the Company competes are not characterized by any unusual inventory or collection practices. 4 ITEM 2. PROPERTIES The Company leases its executive office, located at 645 Madison Avenue, New York, New York. The principal plants and other materially important properties at December 31, 1996 are: OWNED OR TYPE OF SQUARE LEASED; LOCATION FACILITY FOOTAGE EXPIRATION - -------- -------- ------- ---------- St. Petersburg, FL Industrial 52,500 Owned San Diego, CA Industrial 60,100 Leased; 2000 Montville, NJ Industrial 76,200 Leased; 1999 Gilford, NH Industrial 84,250 Owned Irvine, CA Industrial 7,800 Leased; 2000 Cullman, AL Industrial 110,000 Owned Rochester Hills, MI Industrial 29,000 Leased, 1999 All of the facilities owned by the Company are subject to mortgages or security interests which secure the Company's obligations under its revolving credit facility or industrial development bonds (see Note 5 to the Financial Statements). The Company believes that its properties are suitable and adequate for its operations. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in various lawsuits, none of which is expected to have a material adverse effect on the Company's financial position, liquidity or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 5 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on the Nasdaq National Market tier of the Nasdaq Stock Market under the Symbol "AXYS". The following table sets forth the range of high and low sales prices for the fiscal quarters indicated: 1996 1995 --------------------- --------------------- High Low High Low --------- ---------- --------- ---------- Fiscal Years Ended December 31: First Quarter ..... $ 5 5/8 $4 3/8 $5 5/8 $2 1/2 Second Quarter..... 11 7/8 4 3/8 6 1/4 3 3/4 Third Quarter ..... 11 1/4 6 1/4 9 3/8 5 5/16 Fourth Quarter..... 11 1/2 9 6 7/8 5 The information presented above has been adjusted to reflect the July 1996 one-for-five reverse stock split (see Note 4 to the Financial Statements). On March 25, 1997, the high and low sales price was $12 1/2. On March 25, 1997, the approximate number of holders of record of the Common Stock was 1,100. The Company did not pay cash dividends on the Common Stock during the three years ended December 31, 1996. The Company's policy is to retain earnings for the foreseeable future. The Company's credit facility prohibits the payment of cash dividends. 6 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data for the five fiscal years presented below is derived from the audited Consolidated Financial Statements of the Company as adjusted to reflect the discontinuance of the Electronic Components group (see Note 2 to the Consolidated Financial Statements). The data should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto included elsewhere herein.
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------- ------------- ------------- ------------- ------------- (Dollars in thousands, except per share data) Net sales......................................... $ 91,301 $ 65,213 $ 62,132 $ 58,649 $ 62,912 Operating income (loss)........................... 7,107 3,695 2,362 (1,348) 1,595 Interest expense.................................. 2,343 1,994 2,264 2,437 2,597 Income (loss) from continuing operations.......... 2,855 884 27 (3,856) (1,042) Net income (loss) from continuing operations per common share..................................... 0.74 0.12 (0.20) (4.08) (1.15) Total assets ..................................... 62,171 40,485 42,197 47,261 52,247 Total debt (1) (2)................................ 26,155 11,513 12,363 26,470 26,920 Shareholders' equity (2).......................... 19,165 14,745 13,269 5,076 9,603
- --------------- (1) Includes short-term debt and current portion of long-term debt of $2,831,000 in 1996, $466,000 in 1995, $442,000 in 1994, $1,200,000 in 1993 and $1,000,000 in 1992. (2) On July 20, 1994, the Company repurchased its senior bank debt at a discount and recorded a pretax gain of $9.6 million. 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net sales by product group from continuing operations for the past three years are presented in the table below. On April 25, 1996, the Company acquired the stock of PAI and, on October 2, 1996, the Company acquired substantially all of the assets of LMBC. These acquisitions have been accounted for under the purchase method of accounting and, accordingly, the results of the continuing operations of PAI and LMBC (see Note 3 to the Consolidated Financial Statements) have been included in the Company's Consolidated Statement of Operations since their respective dates of acquisition. 1996 1995 1994 ------------ ------------ ------------ (Dollars in thousands) Precision Systems......... $ 48,579 $ 24,750 $ 26,052 Industrial Components..... 42,722 40,463 36,080 ------------ ----------- ------------ Net Sales................. $ 91,301 $ 65,213 $ 62,132 ============ =========== ============ 1996 VS. 1995 Net sales increased by $26.1 million, or 40% in 1996, compared to 1995. The acquisition of PAI accounted for $23.1 million of the increase. The Precision Systems group's sales increased by $23.8 million, or 96%, in 1996, as compared to 1995. The acquisition of PAI accounted for $23.1 million of the increase. The Industrial Components group's sales increased in 1996 by $2.3 million, or 6%, as compared to 1995. Sales of bearings were up by 9%, due to increased activity with both original equipment manufacturers and distributors for use in a variety of industries. The Company's backlog at December 31, 1996 of $56.4 million was $28.4 million, or 101%, higher than the 1995 year-end backlog. Of the $56.4 million backlog at December 31, 1996, $30.6 million relates to the PAI and LMBC product lines. Operating income in 1996 of $7.1 million was $3.4 million higher than in 1995. This increase was primarily due to the higher sales volume partially offset by a slightly unfavorable sales mix of lower margin products in both product groups. Overall, gross margin on sales was 26.1% in 1996, as compared to 26.4% in 1995. Selling, general and administrative expense, as a percentage of sales, declined to 18% in 1996 from 20% in 1995. Selling, general and administrative expense of $16.5 million in 1996 was $3.2 million higher than in 1995, primarily due to the acquisitions of PAI and LMBC. Interest expense increased by $.3 million in 1996 as a result of higher average borrowings due to the acquisition of PAI and LMBC. The effect of the higher average borrowings was substantially offset by the reduction of interest expense attributed to net assets held for disposal (see Note 3 to the Consolidated Financial Statements) and the effect of lower interest rates resulting from a lower prime rate and more favorable terms under the Company's new credit facility (see Note 5 to the Consolidated Financial Statements). At December 31, 1996, the Company had approximately $10 million of net operating loss carryforwards available to reduce future taxable income. 8 1995 VS. 1994 Net sales increased by $3.1 million, or 5%, in 1995, compared to 1994. The Precision Systems group's sales declined by $1.3 million, or 5%, in 1995, as compared to 1994, primarily as a result of lower shipments of synchros due to reduced Government spending on spare parts. The Industrial Components group's sales increased in 1995 by $4.4 million, or 12%, as compared to 1994. Sales of bearings and terminal blocks/connectors were up by 15% and 8%, respectively, primarily due to new and increased activity with original equipment manufacturers and the growing acceptance of new and/or enhanced products offered by the group. The Company's backlog at December 31, 1995 of $28.0 million was $5.0 million, or 22%, higher than 1994 year-end backlog, while bookings in 1995 of $70.2 million were $9.0 million, or 15%, higher than 1994. The higher backlog was primarily due to an increase of backlog in the Precision Systems group of $3.5 million resulting from the award of a large U.S. Government sub-contract for tactical weapon components and favorable industrial and defense related bookings resulting from a more focused approach to the European market. The Industrial Components group's backlog increased $1.5 million, due primarily to increased bookings from original equipment manufacturers. Operating income in 1995 of $3.7 million was substantially the same as the prior year, after excluding the restructuring/inventory writedown charges of $1.3 million in 1994. The gross margin earned on the incremental sales volume ($.7 million) and cost reductions in the Precision Systems group resulting from restructuring actions completed during 1994 ($.7 million), were offset by an unfavorable sales mix in both business groups ($1.0 million) and higher material costs in the Industrial Components group ($.2 million). Overall, gross margin on sales was 26.4% in 1995, as compared to 27.7% in 1994. Selling, general and administrative expense, as a percentage of sales, declined to 20.5% in 1995 from 21.5% in 1994. Selling, general and administrative expense of $13.3 million in 1995 was substantially the same as the prior year. Interest expense declined by $.3 million in 1995 as a result of lower average borrowings due primarily to the repurchase of the Company's bank indebtedness at a discount (see Note 5 to the Consolidated Financial Statements). This decrease was partially offset by higher interest rates. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by (used in) operations for the years ended 1996, 1995 and 1994 were $2.0 million, $(1.0) million and $1.4 million, respectively. The increase in cash provided by operations in 1996, as compared to 1995, was primarily due to higher cash earnings partially offset by reductions in accounts payable, accrued expenses and other long-term liabilities. Net cash provided by (used in) investing activities for the years ended 1996, 1995 and 1994 were $2.0 million, $1.9 million and $(.2) million, respectively. The cash provided by investing activities in 1996 was generated primarily from the sale of L&S Machine Company, Inc. ("L&S"), a subsidiary of PAI, for cash consideration of $11.3 million partially offset by the acquisitions of PAI and LMBC (see Note 3 to the Consolidated Financial Statements). The Company had no material commitments for capital expenditures as of December 31, 1996. It is anticipated that capital expenditures in 1997 could range from $4.0 million to $4.5 million as compared to the $2.7 million expended in 1996, including assets acquired under capital leases of $.8 million. The Company also anticipates that it will continue to finance a substantial portion of these capital expenditures through capital leases. As discussed in Note 5 to the Consolidated Financial Statements, the Company entered into a new $37 million senior secured credit facility in connection with its acquisition of PAI. The available credit under this facility has 9 been reduced to $25.2 million as of December 31, 1996 as a result of making scheduled term loan payments of $1.3 million and applying $10.5 million of the proceeds from the sale of L&S to prepay a portion of outstanding term loans under the facility. The Company believes that the remaining availability under the credit facility and cash generated from operations will be sufficient to meet the future capital expenditure and working capital requirements of the combined companies and required debt amortization. 10 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this Item is included in Item 14(a) of this Report. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. See Item 14(b) of this Report. PART III The information required by Part III is incorporated by reference to the Company's definitive proxy statement in connection with its 1997 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year ended December 31, 1996. If such proxy statement is not so filed, such information will be filed as an amendment to this Form 10-K within 120 days following the end of the Company's fiscal year ended December 31, 1996. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A)(1) AND (2) FINANCIAL STATEMENTS See accompanying index to consolidated financial statements and schedule. (A)(3) EXHIBITS See accompanying index to Exhibits. (B) REPORTS ON FORM 8-K During the quarter ended December 31, 1996, the Company filed one report on Form 8-K dated December 23, 1996, which disclosed the Company's sale of its wholly-owned subsidiary, L&S Machine Company, Inc., to Tru-Circle Manufacturing, Inc. 11 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 26, 1997 AXSYS TECHNOLOGIES, INC. (REGISTRANT) By /s/ STEPHEN W. BERSHAD ------------------------- STEPHEN W. BERSHAD CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated this 26th day of March, 1997. /s/ Stephen W. Bershad ---------------------- Chairman of the Board of STEPHEN W. BERSHAD Directors and Chief Executive Officer /s/ Raymond F. Kunzmann ----------------------- RAYMOND F. KUNZMANN Vice President - Finance, Controller and Chief Financial Officer /s/ Anthony J. Fiorelli, Jr. Director --------------------------- ANTHONY J. FIORELLI, JR. /s/ Eliot M. Fried Director ----------------------- ELIOT M. FRIED ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14(A)(1) AND (2) AND ITEM 14(D) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1996 AXSYS TECHNOLOGIES, INC. FORM 10-K -- ITEM 14(A)(1) AND (2) AND ITEM 14(D) AXSYS TECHNOLOGIES, INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE The following consolidated financial statements of Axsys Technologies, Inc., are included in Item 8: Consolidated Balance Sheets -- December 31, 1996 and 1995......................................... F-4 Consolidated Statement of Operations -- For the years ended December 31, 1996, 1995 and 1994...................................................... F-6 Consolidated Statement of Cash Flows -- For the years ended December 31, 1996, 1995 and 1994...................................................... F-7 Consolidated Statement of Shareholders' Equity -- For the years ended December 31, 1996, 1995 and 1994................................................ F-8 Notes to consolidated financial statements........................... F-9 The following consolidated financial statement schedule of Axsys Technologies, Inc., is included in Item 14(d): Schedule II -- Valuation and qualifying accounts......................F-19 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. F-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Axsys Technologies, Inc.: We have audited the accompanying consolidated balance sheets of Axsys Technologies, Inc. (formerly known as Vernitron Corporation), a Delaware corporation, and its subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 Axsys Technologies, Inc. and subsidiary, as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements and financial statement schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, New York March 21, 1997 F-3 AXSYS TECHNOLOGIES, INC. Consolidated Balance Sheets (Dollars in thousands) DECEMBER 31, --------------------- 1996 1995 --------- -------- ASSETS CURRENT ASSETS: Cash......................................... $ 2,691 $ 91 Accounts receivable, net of allowance for doubtful accounts of $385 in 1996 and $233 in 1995.............. 13,801 8,525 Inventories, net............................. 24,454 16,544 Other current assets......................... 850 651 --------- -------- TOTAL CURRENT ASSETS................... 41,796 25,811 NET PROPERTY, PLANT AND EQUIPMENT.............. 13,456 7,603 EXCESS OF COST OVER NET ASSETS ACQUIRED, net of accumulated amortization of $1,045 in 1996 and $836 in 1995............................. 6,415 6,624 OTHER ASSETS................................... 504 447 --------- ------- TOTAL ASSETS............................ $ 62,171 $40,485 ========= ======== See notes to consolidated financial statements. F-4 AXSYS TECHNOLOGIES, INC. Consolidated Balance Sheets (Dollars in thousands, except per share data)
DECEMBER 31, ------------------- 1996 1995 -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ...................................... $ 6,881 $ 5,315 Accrued expenses and other liabilities................. 7,290 5,696 Current portion of long-term debt and capital lease obligations .......................... 2,831 466 -------- -------- TOTAL CURRENT LIABILITIES............................ 17,002 11,477 LONG-TERM DEBT AND CAPITAL LEASES, less current portion... 23,324 11,047 OTHER LONG-TERM LIABILITIES............................... 2,293 2,697 DEFERRED INCOME........................................... 387 519 SHAREHOLDERS' EQUITY: $1.20 CUMULATIVE EXCHANGEABLE REDEEMABLE PREFERRED STOCK, $.01 PAR VALUE: authorized 1,400,000 shares, issued and outstanding 738,881 shares in 1996 and 781,642 shares in 1995............................. 7 8 COMMON STOCK, $.01 PAR VALUE: authorized 4,000,000 shares, issued and outstanding 2,568,940 in 1996 and 2,520,821 shares in 1995......... 26 25 CAPITAL IN EXCESS OF PAR................................. 17,297 14,712 RETAINED EARNINGS........................................ 1,835 -------- ------- TOTAL SHAREHOLDERS' EQUITY ......................... 19,165 14,745 -------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......... $62,171 $40,485 ======== =======
See notes to consolidated financial statements. F-5 AXSYS TECHNOLOGIES, INC. Consolidated Statement of Operations (Dollars in thousands, except per share data)
YEARS ENDED DECEMBER 31, ------------------------------------------ 1996 1995 1994 -------- ----------- ----------- NET SALES....................................... $ 91,301 $ 65,213 $ 62,132 Cost of sales................................... 67,483 47,973 44,903 Selling, general and administrative expenses.... 16,501 13,336 13,343 Restructuring/inventory writedown charges....... 1,315 Amortization of intangible assets............... 210 209 209 --------- ------------ --------- OPERATING INCOME.............................. 7,107 3,695 2,362 Interest expense............................... 2,343 1,994 2,264 Other expense.................................. 18 252 54 --------- ------------ --------- INCOME FROM CONTINUING OPERATIONS BEFORE TAXES AND EXTRAORDINARY ITEM................... 4,746 1,449 44 Provision for income taxes...................... 1,891 565 17 --------- ------------ --------- INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM........................... 2,855 884 27 DISCONTINUED OPERATIONS: Loss from operations, net of tax benefit of $92 (143) Loss on disposal, net of tax benefit of $1,317 (2,059) --------- ------------ -------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ........ 2,855 884 (2,175) Extraordinary gain (charge), net of taxes....... (173) 5,856 --------- ------------ -------- NET INCOME .................................... 2,682 884 3,681 Preferred stock dividends...................... 847 574 355 --------- ------------ -------- NET INCOME APPLICABLE TO COMMON SHAREHOLDERS................................. $1,835 $ 310 $3,326 ========= ============ ======== NET INCOME (LOSS) PER COMMON SHARE: Continuing operations ................... $ 0.74 $ 0.12 $(0.20) Discontinued operations ................. (1.29) Extraordinary item ...................... (0.06) 3.44 --------- ------------ ----------- Total ................................... $ 0.68 $ 0.12 $ 1.95 ========== ============ =========== Weighted average common shares outstanding ... 2,690,843 2,511,074 1,701,801 ========== ============ ===========
See notes to consolidated financial statements. F-6 AXSYS TECHNOLOGIES, INC. Consolidated Statement of Cash Flows (Dollars in thousands)
YEARS ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 -------- -------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................. $ 2,682 $ 884 $3,681 Adjustments to reconcile net income to cash provided by (used in) operating activities: Extraordinary item, net of taxes.................... 173 (5,856) Loss on disposal of discontinued operations, net of taxes..................................... 2,059 Utilization of pre quasi-reorganization tax benefits..................................... 1,435 519 16 Depreciation and amortization....................... 2,722 1,622 1,742 (Increase) decrease in accounts receivable.......... 13 768 (970) (Increase) decrease in inventories.................. (831) (2,017) 682 (Increase) decrease in other current assets......... 166 (183) 498 Increase (decrease) in accounts payable, accrued expenses and other liabilities .......... (2,564) (1,324) 349 Decrease in other long-term liabilities............. (404) (882) (461) Other -- net........................................ (1,411) (343) (349) ------- -------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES........................... 1,981 (956) 1,391 ------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures.................................... (1,878) (1,026) (797) Proceeds from sale of assets............................ 11,532 2,896 605 Acquisition of businesses, net of cash acquired......... (7,611) --------- -------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES........................... 2,043 1,870 (192) --------- -------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings................................ 75,891 69,614 45,665 Repayment of borrowings................................. (76,895) (70,464) (49,272) Net proceeds from common stock rights offering.......... 2,332 Other................................................... (420) --------- --------- ---------- NET CASH USED IN FINANCING ACTIVITIES........... (1,424) (850) (1,275) --------- --------- ---------- NET INCREASE (DECREASE) IN CASH................. (2,600) 64 (76) CASH AT BEGINNING OF YEAR ................................. 91 27 103 --------- --------- ---------- CASH AT END OF YEAR ....................................... $2,691 $ 91 $ 27 ========= ========= ==========
See notes to consolidated financial statements. F-7 AXSYS TECHNOLOGIES, INC. Consolidated Statement of Shareholders' Equity (Dollars in thousands, except per share data)
Preferred Stock Common Stock Capital Retained ------------------- ------------------- In Excess Earnings Shares Amount Shares Amount of Par (Deficit) --------- ------- ----------- ------- -------- -------- Balance at December 31, 1993 577,946 $ 6 1,037,014 $10 $ 9,586 $ (4,526) --------- ----- ----------- ------- -------- -------- Net Income.............................. 3,681 Dividends (a)........................... 94,398 1 354 (355) Transfer to Capital in Excess of Par (b) (355) 355 Common Stock rights offering............ 1,470,588 15 2,317 Amount realized from utilization of pre quasi-reorganization tax benefits.. 2,182 Other................................... (2) --------- ----- ----------- --------- --------- --------- Balance at December 31, 1994 672,344 7 2,507,602 25 14,082 (845) --------- ----- ----------- --------- --------- --------- Net Income.............................. 884 Dividends (a)........................... 109,298 1 573 (574) Transfer to Capital in Excess of Par (b) (535) 535 Contribution to 401(k) plan............. 11,619 67 Amount realized from utilization of pre quasi-reorganization tax benefits.. 519 Other................................... 1,600 6 --------- ----- ----------- --------- --------- --------- Balance at December 31, 1995 781,642 8 2,520,821 25 14,712 - --------- ----- ----------- --------- --------- --------- Net Income............................... 2,682 Dividends (a)........................... 27,611 847 (847) Contribution to 401(k) plan............. 47,671 1 311 Amount realized from utilization of pre quasi-reorganization tax benefits.. 1,345 Odd-lot redemption ..................... (70,372) (1) (420) Issuance of warrants to purchase Common Stock........................... 500 Other................................... 448 2 --------- ----- ----------- --------- --------- --------- Balance at December 31, 1996 738,881 $ 7 2,568,940 $ 26 $ 17,297 $ 1,835 ========= ===== =========== ========= ========= =========
(A) Represents a 15% dividend paid in additional shares and valued at the average of the closing bid and ask price as of the dividend record date. The Company's right to pay dividends in additional shares of Preferred Stock instead of cash expired on February 22, 1996, although cash dividends continue to accumulate. Since February 22, 1996, the Company has not declared or paid any dividends on the Preferred Stock. The per share amounts of dividends, including the accumulated but unpaid cash portion, were $.57, $.79 and $1.11 per share of Preferred Stock in 1994, 1995 and 1996, respectively. The amount of unpaid but accumulated dividends at December 31, 1996 was $1.02 per share. (b) Represents transfer of the excess of Preferred Stock dividends over Retained Earnings. See notes to consolidated financial statements. F-8 AXSYS TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 (Dollars in thousands, except per share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements include the accounts of Axsys Technologies, Inc., and its wholly-owned subsidiary (collectively the "Company"). All material intercompany transactions and balances have been eliminated in consolidation. Revenue is recognized upon the shipment of product or when services are rendered. Inventories are priced at the lower of cost (principally first-in, first-out, or average) or market. Deferred financing costs are amortized ratably over the life of the corresponding debt or commitment. The excess of cost over net assets acquired is being amortized over thirty-five years using the straight-line method. The Company continually reviews goodwill to assess recoverability from future operations using undiscounted cash flows. Impairments would be recognized in operating results if a permanent diminution in value occurred. Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is provided primarily by the straight-line method using estimated lives for buildings and improvements of 20 years and for machinery and equipment using estimated useful lives ranging from 3 to 8 years. Certain items in the 1995 and 1994 financial statements have been reclassified to conform to the 1996 presentation. Earnings per share data for each period was computed by dividing net income applicable to common shareholders by the weighted average number of shares of common stock outstanding during each period. The calculation of weighted average number of shares assumes the conversion of those common stock equivalents which have a dilutive effect on earnings for the period presented. Common stock equivalents consist of warrants and employee stock options. 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. NOTE 2 - DISCONTINUED OPERATIONS In September 1994, the Company disposed of all of its Electronic Components business which was comprised of the trimmer, transformer and microwave component product lines. The disposal was accounted for as a discontinued operation and, accordingly, the related net assets and operating results are reported separately from continuing operations. The loss on disposal of the Electronic Components business for the year ended December 31, 1994 is comprised of the loss on disposal of the net assets of the business and operating losses until disposal. During 1994, the Company sold a portion of the assets of its Electronic Components business for $605. During 1995, the Company sold the remaining discontinued business assets for $1,500. F-9 AXSYS TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - DISCONTINUED OPERATIONS (CONT'D) Revenues applicable to the discontinued business for the years ended December 31, 1995 and 1994 were $290 and $6,897, respectively. The losses from operations of the discontinued Electronic Components business from September 30, 1994 to December 31, 1994 and through the date of disposal in 1995, were $326 and $40, respectively, net of related tax benefits. These losses were charged to a reserve established in 1994 as part of the loss on disposal. NOTE 3 - ACQUISITIONS AND DIVESTITURE On April 25, 1996, the Company acquired all of the outstanding shares of Precision Aerotech, Inc., ("PAI") for $4,728, net of cash acquired. In addition, the Company repaid $12 million of borrowings under PAI term loans. Precision Aerotech designs, manufactures and markets laser scanners, precision metal optics, high performance air bearings and precision machined parts sold predominantly in commercial markets. The acquisition of PAI was accounted for under the purchase method of accounting and, accordingly, the results of operations of PAI have been included in the accompanying consolidated financial statements since the date of acquisition. The cost of the acquisition was allocated on the basis of the estimated fair market value of the assets acquired and liabilities assumed. The purchase price allocation has been completed on a preliminary basis. Management does not believe that changes in the purchase price allocation will be material. During the acquisition process, the Company determined that L&S Machine Company, Inc. ("L&S"), a wholly-owned subsidiary of PAI which manufactures structural components for the aerospace industry, did not fit its long-term strategy and would be subsequently sold. As a result, L&S was accounted for as a net asset held for disposal as of the PAI acquisition date. The portion of the PAI acquisition cost allocated to this asset represents the net proceeds expected to be realized upon sale, which includes an amount for estimated results of operations of the L&S business during the holding period. On December 12, 1996, the Company completed the sale of L&S to Tru-Circle Manufacturing, Inc. for an aggregate purchase price of approximately $13,100 subject to a post-closing adjustment. The price included the assumption of approximately $1,800 in long-term capitalized leases. The Company used $10,500 of the $11,300 cash proceeds from the sale to pre-pay term indebtedness under its Credit Facility (See Note 5). Summarized below are the unaudited pro forma results of operations of the Company as if PAI had been acquired on January 1, 1995: Pro Forma Year Ended December 31, ----------------------- 1996 1995 ---- ---- Net Sales ........................ $100,764 $92,332 Income before extraordinary item 3,102 1,396 Net Income ..................... 2,929 1,396 Earnings per share: Income before extraordinary item 0.83 0.33 Net income ..................... 0.77 0.33 F-10 AXSYS TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - ACQUISITIONS AND DIVESTITURE (CONT'D) The pro forma financial information presented is not necessarily indicative of either the results of operations that would have occurred had the acquisition of PAI taken place at the beginning of fiscal 1995 or the future operating results of the combined companies. Pro forma income before extraordinary item and net income for the year ended December 31, 1996 include certain special charges totaling approximately $400. No such charges have been recorded for the year ended December 31, 1995. On October 2, 1996, the Company acquired substantially all of the assets of Lockheed Martin Beryllium Corporation ("LMBC") for $2,883 subject to post-closing adjustments. LMBC's operations consist primarily of precision machining of beryllium and other exotic material components. This acquisition has also been accounted for under the purchase method of accounting and, accordingly, the results of operations of LMBC have been included in the accompanying consolidated financial statements since the date of acquisition. The cost of the acquisition has been allocated on the basis of the estimated fair market value of the assets acquired and liabilities assumed. The purchase price allocation has been completed on a preliminary basis. Management does not believe that changes in the purchase price allocation will be material. NOTE 4 - SHAREHOLDERS' EQUITY COMMON STOCK - In July 1994, the Company completed a rights offering of Common Stock in which 1,470,588 shares were issued for gross proceeds of $2,500 ($2,332, net of expenses). On July 25, 1996, the Company completed a one-for-five reverse stock split of its $0.01 par value common stock following approval by the Company's stockholders at the Company's 1996 Annual Meeting of Stockholders. In conjunction with the split, the Company's Certificate of Incorporation has been amended to reduce the number of shares of Common Stock authorized for issuance to 4,000,000. The stated par value of each share was not changed from $0.01. All share and per share data presented in this report has been restated to reflect the reverse stock split. PREFERRED STOCK - The certificate of designation setting forth the amended terms of the Company's $1.20 Cumulative Exchangeable Redeemable Preferred Stock provides for, among other things, (1) a liquidation preference of $8 per share, (2) an annual dividend of $1.20 per share, and (3) the ability to pay dividends thereon in additional shares instead of cash up to March 1, 1996. Under the certificate of designation, the right to receive cash dividends is expressly subject to, among other things, any provision contained from time to time in the Company's financing agreements prohibiting the payment of cash dividends. The Company's Credit Facility prohibits the payment of cash dividends (see Note 5). The Company at its option may redeem the Preferred Stock at a price of $8.00 per share, or an amount per share equal to the product of 1.1 and the fair value per share (as determined by the Company's Board of Directors), in each case together with all unpaid but accumulated dividends to the redemption date. From August, 1991 through February 22, 1996, the Company paid quarterly dividends on the Preferred Stock in additional shares at an annual rate of 15% based on the shares outstanding. On February 22, 1996, the Company's right to pay dividends in additional shares of Preferred Stock expired. Since February 22, 1996, the Company has not declared or paid any dividends on the Preferred Stock, although they have continued to accumulate. The amount of unpaid but accumulated dividends at December 31, 1996 was $757 or, $1.02 per share. F-11 AXSYS TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - SHAREHOLDERS' EQUITY (CONT'D) PREFERRED STOCK (CONT'D) On February 14, 1997, the Company commenced an offer to exchange 0.75 shares of its Common Stock for each outstanding share of its Preferred Stock. On March 17, 1997, the Exchange Offer terminated and the Company accepted for exchange all shares of Preferred Stock validly tendered as of that time. Approximately 530,000 shares of Preferred Stock were exchanged for 397,500 shares of Common Stock. Holders of shares of Preferred Stock accepted for exchange will not receive any separate payment in respect of dividends not paid subsequent to February 22, 1996, the last date on which dividends were paid on the Preferred Stock. For the year ended December 31, 1996, on a pro forma basis, assuming the Exchange Offer had been consummated on January 1, 1996, earnings per share data would have been as follows: Net income (loss) per common share: Continuing operations.......... $ 0.85 Extraordinary item............. (0.06) --------- Total............................. $ 0.79 ========= Weighted average common shares outstanding ................... 3,088,343 ========= NOTE 5 - LONG-TERM DEBT 1996 1995 -------- --------- Credit Facility.................... $ 22,285 $ 9,643 Industrial Revenue Bond............ 1,870 1,870 Capital Lease Obligations.......... 2,000 - -------- -------- 26,155 11,513 Less current portion............... 2,831 466 -------- -------- $ 23,324 $11,047 ========= ======= In order to obtain the funds necessary to finance the Company's acquisition of PAI (see Note 3), to refinance PAI's and the Company's existing debt and pay the fees and expenses related to the acquisition and refinancing, Axsys entered into a Credit Agreement, dated April 25, 1996 (and subsequently amended as of September 25, 1996), between the Company, the various banks named therein and Banque Paribas, as agent, providing for borrowings under a $37 million senior secured credit facility (the "Credit Facility"). During 1996, the total facility was reduced by $10.5 million as a result of a prepayment of term debt using proceeds from the sale of L&S (see Note 3) and by $1.3 million as a result of scheduled term payments. The remaining Credit Facility of $25.2 million is comprised of (i) a term loan in the principal amount of $7.3 million payable in installments and maturing on April 25, 2000, (ii) a term loan in the principal amount of $6.9 million payable in installments and maturing on April 25, 2002 and (iii) a revolving credit line in an aggregate principal amount of up to the lesser of $11 million or the borrowing base in effect from time to time, maturing on April 25, 2000. F-12 AXSYS TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - LONG-TERM DEBT (CONT'D) Borrowings under the Credit Facility bear interest at a fluctuating rate per annum equal to the rate of interest publicly announced by Chase Manhattan Bank, N.A. as its prime rate (the prime rate was 8.25% at December 31, 1996), plus a margin ranging from 1.75% to 2.25%, or the London Interbank Offered Rate (LIBOR), plus a margin ranging from 3.25% to 3.75%. A commitment fee of .5% is payable on any unused amount of the Credit Facility. The Credit Facility contains certain restrictive covenants which, among other things, impose limitations with respect to the incurrence of additional liens and indebtedness, mergers, consolidations and specified sale of assets and requires the Company to meet certain financial tests including minimum levels of earnings and net worth and various other financial ratios. In addition, the Credit Facility prohibits the payment of cash dividends. Borrowings under the Credit Facility are secured by substantially all of the assets of the Company and its subsidiary. The Company had outstanding at December 31, 1996, industrial development revenue bonds (the "Bonds") in the amount of $1,870 secured by its Gilford, NH manufacturing facility which has a net carrying amount of approximately $2,100. The Bonds, which bear interest at a fixed rate of 13%, are payable in 2005. The Company, however, may make optional prepayments of $250 annually. Scheduled debt maturities during the next five years, which are comprised of payments under the Company's Credit Facility and capital lease obligations are $2,831 (1997), $3,023 (1998), $3,105 (1999), $11,428 (2000) and $3,277 (2001). In 1994, the Company recorded an extraordinary gain of, $5,856, net of a charge in lieu of taxes of $3,744, in connection with the repurchase of bank indebtedness. F-13 AXSYS TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - BALANCE SHEET INFORMATION The details of certain balance sheet accounts are as follows: 1996 1995 --------- --------- Inventories: Raw materials......................... $ 8,033 $ 7,203 Work-in-process....................... 12,942 5,293 Finished goods........................ 10,118 9,255 --------- --------- 31,093 21,751 Less reserves......................... 6,639 5,207 --------- --------- $24,454 $ 16,544 ========= ========= Work-in-process inventory at December 31, 1996 is recorded net of $1,576 of progress payments received from customers on uncompleted contracts. Net property, plant and equipment: Land.................................. $ 891 $ 600 Buildings and improvements............ 5,994 3,923 Machinery and equipment............... 14,029 8,155 --------- --------- 20,914 12,678 Less accumulated depreciation and amortization................ 7,458 5,075 --------- --------- $13,456 $ 7,603 ========= ========= Accrued expenses and other liabilities: Compensation and related benefits..... $ 3,741 $ 2,180 Other................................. 3,549 3,516 --------- --------- $ 7,290 $ 5,696 ========= ========= NOTE 7 - INCOME TAXES At December 31, 1996, the Company has net operating loss carryforwards of approximately $10,000 which expire in the years 2005 through 2009 and alternative minimum tax credit carryforwards of approximately $340. In addition, the Company has approximately $7,600 of previously unrecognized tax benefits, principally related to inventories. As the portion of the loss carryforwards and deferred tax benefits originating prior to the 1991 quasi-reorganization are realized, the corresponding tax effect will be credited to Capital in Excess of Par under quasi-reorganization accounting principles rather than reducing the Provision for Taxes. In 1996, $1,345 was credited to Capital in Excess of Par representing the utilization of such pre quasi-reorganization tax benefits to offset current year tax expense. As of December 31, 1996, $3,181 of the pre quasi-reorganization tax effected benefits remain unutilized. The utilization and realization of the carryforwards and future tax benefits will substantially reduce the amount of cash taxes payable on taxable income in the future. F-14 AXSYS TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - INCOME TAXES (CONT'D) The Company utilizes the liability method (SFAS No. 109) in accounting for income taxes. Income from continuing operations before taxes is from domestic sources only for each of the three years ended December 31, 1996. The provision for taxes on income from continuing operations consists of: 1996 1995 1994 ---------- --------- --------- Current taxes-charge in lieu of taxes and taxes: U.S. Federal ......................... $ 1,579 $ 454 $ 14 State and local....................... 312 111 3 --------- --------- --------- 1,891 565 17 --------- --------- --------- Deferred taxes: U.S. Federal.......................... --------- --------- --------- $ 1,891 $ 565 $ 17 ========= ========= ========= The reasons for the difference between the provision for taxes and the amount computed by applying the statutory federal income tax rate to income before taxes are as follows: 1996 1995 1994 --------- --------- ---------- U.S. federal statutory rate............ 34% 34% 34% Computed expected tax provision ....... $ 1,614 $ 493 $ 15 Increase (decrease) in taxes resulting from: State and local taxes, net of federal tax benefit........... 206 72 2 Amortization of goodwill.......... 71 71 71 Other............................. (71) (71) --------- --------- --------- Actual tax provision.................. $ 1,891 $ 565 $ 17 ========= ========= ========= Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows: December 31, --------------------- 1996 1995 --------- --------- Tax net operating loss carryforwards..... $ 3,740 $ 4,794 Inventory valuation differences.......... 2,002 2,070 Other, net............................... 606 389 --------- --------- Sub-Total 6,348 7,253 Valuation allowance..................... (6,348) (7,253) --------- --------- Total deferred taxes.................... $ - $ - ========= ========= The net change in the valuation allowance in 1996 and 1995 was a decrease of $905 and an increase of $330, respectively. F-15 AXSYS TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - PENSION ARRANGEMENTS The Company has two pension plans for which benefits and participation have been frozen. Pension benefits under these plans are generally based upon years of service and compensation. The Company's funding policy is to contribute amounts to these plans sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Company may determine to be appropriate from time to time. Multi-employer plans covering certain union members generally provided benefits of stated amounts for each year of service. During 1994, in connection with the restructuring of the Precision Systems group, the employment of the union members participating in these multi-employer plans ended and, as a result, contributions to these plans ceased. As of December 31, 1996, there were no unpaid contributions to multi-employer plans. A summary of components of net periodic pension cost for the defined benefit plans and the total contribution charged to pension expense for the multi-employer plans follows: 1996 1995 1994 ------- ------- ------- Defined benefit plans: Service cost-benefits earned during the period.. $ - $ - $ - Interest cost on projected benefit obligation... 71 74 73 Actual return on plan assets.................... (46) (25) 1 Net amortization and deferral.................. 26 17 (5) ------- ------- -------- Net pension cost of defined benefit plans...... 51 66 69 Multi-employer plans........................... 59 ------- -------- -------- Total pension expense.......................... $ 51 $ 66 $ 128 ======= ======== ======== Assumptions used in accounting for the defined benefit plans as of the plans' measurement dates were: 1996 1995 1994 -------- ------- ------- Weighted-average discount rate.............. 7.5% 7.5% 7.5% Expected long-term rate of return on assets. 6.0% 6.0% 6.0% F-16 AXSYS TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - PENSION ARRANGEMENTS, (CONT'D) The following table sets forth the funded status and amount recognized in the consolidated balance sheets for the Company's defined benefit pension plans: 1996 1995 1994 --------- --------- --------- Actuarial present value of benefit obligations: Vested benefit obligation..................... $ 1,053 $ 1,116 $ 1,026 ========= ========= ========= Accumulated benefit obligation................ $ 1,053 $ 1,116 $ 1,026 ========= ========= ========= Projected benefit obligations................. $ 1,053 $ 1,116 $ 1,026 Less plan assets at fair market value......... 451 231 32 --------- --------- --------- Projected benefit obligation in excess of plan assets........................... 602 885 994 Unrecognized net gain......................... 151 98 83 --------- --------- --------- Net pension liability recognized in the balance sheet............................ $ 753 $ 983 $ 1,077 ========= ========= ========= Unrecognized net gains and losses are amortized over the average future service lives of participants. Plan assets are invested in a managed portfolio consisting primarily of equity securities. The Company also sponsors 401(k) plans under which eligible employees may elect to contribute a percentage of their earnings. The Company has matched employee contributions to these plans in amounts ranging from up to 3% to 5% of the employees' gross earnings over the three years ended December 31, 1996. Company matching contributions were $709 in 1996, $325 in 1995 and $363 in 1994. NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information for the years ended December 31, 1996, 1995 and 1994 is summarized as follows: 1996 1995 1994 --------- --------- ---------- Cash paid during the year for: Interest................................. $2,586 $ 1,989 $ 1,883 Income tax payments (refunds)............ 441 52 (9) Noncash investing activities: Equipment acquired under capital leases.. $ 786 $ - $ - F-17 AXSYS TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - OTHER INFORMATION RESTRUCTURING PLAN - In connection with a restructuring of the Precision Systems Group initiated in 1993, the Company recorded a $1.3 million charge in 1994, of which $1.0 million related to the write-down of slow moving and excess inventory to net realizable value and $.3 million to adjust the carrying value of an idle Deer Park, New York facility. In September 1995, the Company sold the idle Deer Park, New York facility for net proceeds of $1,401. Included in other expense in 1995 is a loss on the sale of this facility of $233. STOCK OPTIONS AND WARRANTS- Options to purchase up to 38,600 shares of Axsys common stock, with exercise prices of $3.75 - $4.15 per share, have been granted to certain key employees of the Company. Of that amount, 32,840 options are vested, with the balance becoming vested in 1997. These options are exercisable for up to seven years from the date of grant. There are 49,800 shares available for future grant. There were no stock options granted to employees in 1996 or 1995. During 1996, a warrant to acquire up to 133,263 shares of Common Stock at an exercise price of $.05 per share and warrants to acquire up to 175,278 shares of Common Stock at an exercise price of $6.25 per share, were issued. NOTE 11 - COMMITMENTS AND CONTINGENCIES Future minimum payments under noncancellable operating leases (exclusive of property expenses and net of sublease rental income), as of December 31, 1996, are as follows: 1997.................. $ 1,604 1998.................. 1,361 1999.................. 1,243 2000.................. 162 2001.................. 38 2002 and thereafter... 206 ------- $ 4,614 ======== Rent expense under such leases, net of sublease rental income, amounted to $1,589 in 1996, $1,539 in 1995 and, $1,379 in 1994. In February 1990, the Company sold and leased back its San Diego, California facility under an operating lease. The Company has a deferred gain as of December 31, 1996 on this transaction of $387, which is being amortized to income over the ten year lease term as a reduction of annual rent expense. The Company has various lawsuits, claims, commitments and contingent liabilities arising from the ordinary conduct of its business; however, they are not expected to have a material adverse effect on the Company's financial position or results of operations. F-18 AXSYS TECHNOLOGIES, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E COL. F - ------ ------- ------ ------ ------ ------ Additions -------------------------- Balance at Charged to Charged to Beginning Costs and Other Balance at Classification of Period Expenses Accounts Deductions End of Period -------------- --------- -------- -------- ---------- ------------- Allowance for doubtful accounts Year ended December 31, 1996: $233 $ 93 $100 (a) $ 41(b) $385 Year ended December 31, 1995: $345 $106 $ 218(b) $233 Year ended December 31, 1994: $278 $124 $ 57(b) $345
- ---------------- (a) Includes $100 associated with acquisition of business. (b) Uncollectible accounts written off, net of recoveries. F-19 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION SEQ. PG. NO. - ------ ----------- ------------ 2(1) Agreement and Plan of Merger, dated as of February 16, 1996, between the Registrant, PA Acquisition Corporation and Precision Aerotech, Inc. (filed as Exhibit 10(40) to Registrant's Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference). 2(2) Stock Purchase Agreement, dated as f November 26, 1996, as amended December 11, 1996, between Registrant, Precision Aerotech, Inc., Tru-Circle Corporation and Tru-Circle Manufacturing, Inc. (filed as Exhibit 2 to the Registrant's Form 8-K, dated December 23, 1996 (the "December 23, 1996 Form 8-K") and incorporated herein by reference). 3(1) Certificate of Incorporation of the Registrant (filed as Exhibit 1 to the Form 8-A, filed on August 8, 1991 (the "Form 8-A") and incorporated herein by reference). 3(2) Amendment to Certificate of Incorporation (filed as Exhibit 3 to the Form 10- QA-1, dated December 20, 1996, for the quarter ended September 30, 1996 (the "September 30, 1996 Form 10-Q") and incorporated herein by reference). 3(3) Amendment to Certificate of Incorporation (filed as Exhibit 3(i) to the December 23, 1996 Form 8-K and incorporated herein by reference). 3(4) By-Laws of the Registrant (filed as Exhibit 2 to the Form 8-A and incorporated herein by reference). 4(1) Certificate of the Designation, Powers, Preferences and Rights of the $3.75 Cumulative Exchangeable Redeemable Preferred Stock ("Preferred Stock") (filed as Exhibit 4(2) to the Registrant's Registration Statement on Form S-4 (Registration Number 33-16310), filed on August 6, 1987 (the "Registration Statement") and incorporated herein by reference). 4(2) Certificate of Amendment of Certificate of Incorporation Effecting the Amendment and Restatement of the Certificate of the Designation, Powers, Preferences and Rights of the Preferred Stock, dated as of August 14, 1991 (filed as Exhibit 4(2) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 (the "1991 Form 10-K") and incorporated herein by reference). 4(3) Form of Indenture between Registrant and the Bank of Montreal Trust Company, as Trustee, relating to the 15% Subordinated Debentures of the Registrant, issuable at the option of the Registrant in exchange for the Preferred Stock (filed as Exhibit 4(1) to the Registration Statement and incorporated herein by reference).
EXHIBIT NUMBER DESCRIPTION SEQ. PG. NO. - ------ ----------- ------------ 4(4) Warrant, dated as of July 20, 1994, granted by the Company in favor of The CIT Group/Credit Finance, Inc. (filed as Exhibit 10(9) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1994 (the "1994 Second Quarter Form 10-Q") and incorporated herein by reference). 4(5) Warrant, dated April 25, 1996, granted to Banque Paribas (filed as Exhibit 4.1 to the Form 8-K, dated May 7, 1996 (the "May 7, 1996 Form 8-K) and incorporated herein by reference). 4(6) Warrant, dated April 25, 1996, granted to Paribas Principal, Inc. (filed as Exhibit 4.2 to the May 7, 1996 Form 8-K and incorporated herein by reference). 4(7) Warrant Purchase Agreement, dated April 25, 1996, between the Registrant, Paribas Principal, Inc. and Banque Paribas (filed as Exhibit 4.3 to the May 7, 1996 Form 8-K and incorporated herein by reference). 4(8) Warrant, dated April 25, 1996, granted to Donaldson, Lufkin & Jenrette Securities. 10(1) Indenture of Trust by and between the Industrial Development Authority of the State of New Hampshire and Laconia Peoples National Bank and Trust Company for $3,000,000 principal amount of Industrial Development Authority of the State of New Hampshire Floating Rate Monthly Demand Industry Facility Bonds (filed as Exhibit 10(18) to the Registrant's Annual Report or Form 10-K for the fiscal year ended December 28, 1985, filed on April 15, 1986 (the "1985 Form 10-K") and incorporated herein by reference). 10(2) Loan Agreement by and among the Industrial Development Authority of the State of New Hampshire, the Registrant and V Land Corporation for $3,000,000 principal amount of Industrial Development Authority of the State of New Hampshire Floating Rate Monthly Demand Industry Facility Bonds (filed as Exhibit 10(19) to the 1985 Form 10-K and incorporated herein by reference). 10(3) Form of Indemnification Agreement (filed as Exhibit 10(16) to the Form 10-K for the fiscal year ended December 30, 1990, filed on March 28, 1991 (the "1990 Form 10-K") and incorporated herein by reference). 10(4) Vernitron Corporation Long-Term Stock Incentive Plan (filed as Exhibit 10(16) to the 1991 Form 10-K and incorporated herein by reference). 10(5) Form of Stock Option Agreement, dated as of September 30, 1991 (filed as Exhibit 10(17) to the 1991 Form 10-K and incorporated herein by reference).
EXHIBIT NUMBER DESCRIPTION SEQ. PG. NO. - ------ ----------- ------------ 10(6) Credit Agreement, dated April 25, 1996, between the Registrant, various banks named therein and Banque Paribas, as Agent (filed as Exhibit 10.1 to the May 7, 1996 Form 8-K and incorporated herein by reference). 10(7) Security Agreement, dated April 25, 1996, between the Registrant, various subsidiaries of the Registrant and Banque Paribas, as Collateral Agent (filed as Exhibit 10.2 to the May 7, 1996 Form 8-K and incorporated herein by reference). 10(8) Pledge Agreement, dated April 25, 1996, between the Registrant, various subsidiaries of the Registrant and Banque Paribas as Collateral Agent (filed as Exhibit 10.3 to the May 7, 1996 Form 8-K and incorporated herein by reference). 10(9) Subsidiaries guaranty, dated April 25, 1996, by various subsidiaries of the Registrant (filed as Exhibit 10.4 to the May 7, 1996 Form 8-K and incorporated herein by reference). 10(10) Amendment No. 1 to the Credit Agreement (filed as Exhibit 10 to the September 30, 1996 Form 10Q and incorporated herein by reference). 21 Subsidiaries of the Registrant. 27 Financial Data Schedule.
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ated: April 25, 1996 WARRANT To Purchase 100,000 Shares of Common Stock VERNITRON CORPORATION Expiring April 25, 2006 THIS IS TO CERTIFY THAT, for value received, DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION (the "Original Holder"), and its permitted designees, successors or assigns (collectively, together with the Original Holder, the "Holder") is entitled to purchase from VERNITRON CORPORATION, a Delaware corporation (the "Company"), at any time or from time to time after 9:00 a.m., New York City time, on the date hereof and prior to 5:00 p.m., New York City time, on April 25, 2006 (the "Expiration Date"), at the place where a Warrant Agency (as hereinafter defined) is located, at the Exercise Price (as hereinafter defined), 100,000 shares of Common Stock, $0.01 par value (the "Common Stock"), of the Company, all subject to adjustment and upon the terms and conditions as hereinafter provided, and is entitled also to exercise the other appurtenant rights, powers and privileges hereinafter described. Such shares of Common Stock purchasable under this Warrant, less any such shares actually purchased hereunder shall be referred to as "Shares." Certain terms used in this Warrant are defined in Article IV. This Warrant is one of three Warrants issued by the Company in connection with the acquisition of Precision Aerotech, Inc. The Warrants are being issued as of the date hereof to Banque Paribas, Paribas Principal, Inc. and to Donaldson, Lufkin & Jenrette Securities Corporation. In the aggregate, as of the date of issuance of such Warrants, the Warrants will be exercisable into 1,542,700 shares of Common Stock of the Company. ARTICLE I EXERCISE OF WARRANTS 1.1 Method of Exercise. To exercise this Warrant in whole or in part with respect to any Shares, the Holder shall deliver to the Company, at the Warrant Agency, (a) this Warrant, (b) a written notice, in substantially the form of the Subscription Notice attached hereto, of such Holder's election to exercise this Warrant, which notice shall specify the number of Shares of Common Stock to be purchased, the denominations of the share certificate or certificates desired and the name or names in which such certificates are to be registered and (c) payment of the Exercise Price with respect to such Shares or cancellation of this Warrant with respect to a number of Shares. If the Holder elects to pay the Exercise Price in money, such payment may be made, at the election of the Holder, by cash, money order, certified or bank cashier's check or wire transfer of immediately available funds. If the Holder elects to pay the Exercise Price by cancelling this Warrant with respect to Shares, the Exercise Price may be paid by cancelling this Warrant with respect to that number of Shares whose aggregate Current Market Price minus the aggregate Exercise Price is equal to the aggregate Exercise Price with respect to the number of Shares to be received upon exercise of this Warrant. The Company shall, as promptly as practicable and in any event within seven days thereafter, execute and deliver or cause to be executed and delivered, in accordance with such notice, a certificate or certificates, representing the aggregate number of Shares specified in said notice. The share certificate or certificates so delivered shall be in such denominations as may be specified in such notice or, if such notice shall not specify denominations, in a denomination equal to the aggregate number of Shares specified in said notice, and shall be issued in the name of 2 the Holder or such other name or names as shall be designated in such notice, subject to any restrictions contained hereinbelow. Such certificate or certificates shall be deemed to have been issued, and such Holder or, subject to any restrictions contained hereinbelow, any other Person so designated to be named therein shall be deemed for all purposes to have become a holder of record of such shares, as of the date the aforementioned notice and the Exercise Price is received by the Company. If this Warrant shall have been exercised only in part, the Company shall, at the time of delivery of the certificate or certificates, deliver to the Holder a new Warrant evidencing the rights to purchase the remaining shares of Common Stock called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant, or, at the request of the Holder, appropriate notation may be made on this Warrant which shall then be returned to the Holder. The Company shall pay all expenses, taxes and other charges payable in connection with the preparation, issuance and delivery of share certificates and new Warrants, except that, if share certificates or Warrants shall be registered in a name or names other than the name of the Holder, funds sufficient to pay all transfer taxes payable as a result of such transfer shall be paid by the Holder at the time of delivering the aforementioned notice of exercise or promptly upon receipt of a written request of the Company for payment. 1.2 Shares To Be Fully Paid and Nonassessable. All shares of Common Stock issued upon the exercise of this Warrant ("Warrant Common Stock") shall be validly issued, fully paid and nonassessable, free of all liens, taxes and other charges, and, if the Common Stock of any class is then listed on any national securities exchange (as such term is used in the Exchange Act) or quoted on NASDAQ, shall be duly listed or quoted thereon, as the case may be. 1.3 No Fractional Shares To Be Issued. The Company shall not be required to issue fractions of shares of Common Stock upon exercise of this Warrant. If any fraction of a share would, but for this Section, be issuable upon any exercise of this Warrant, in lieu of such fractional share the Company shall pay to the Holder, in cash, an amount equal to the same fraction of the Current Market Price per share of outstanding Common Stock on the Business Day immediately prior to the date of such exercise. 1.4 Share Legend. Each certificate for shares of Common Stock issued upon exercise of this Warrant, 3 unless at the time of exercise such shares are registered under the Securities Act, shall bear the following legend: This security has not been registered under the Securities Act of 1933, as amended, and must be held indefinitely unless subsequently registered under said Act or an exemption from such registration is available. This security may not be sold, pledged, hypothecated or otherwise transferred unless such sale, pledge, hypothecation or other disposition shall have been registered under said act or such disposition is made in reliance upon an exemption from registration under said act. Any certificate issued at any time in exchange or substitution for any certificate bearing such legend (except a new certificate issued upon completion of a public distribution pursuant to a registration statement under the Securities Act covering such Shares) shall also bear such legend unless, in the opinion of counsel selected by the holder of such certificate and reasonably acceptable to the Company (who may be an employee of such holder), the securities represented thereby need no longer be subject to restrictions on resale under the Securities Act. 1.5 Authorized Shares; Reservation of Shares for Issuance. At all times while this Warrant is outstanding, the Company shall maintain its corporate authority to issue, and shall reserve for issuance upon exercise of this Warrant, such number of shares of Common Stock as shall be sufficient to perform its obligations under this Warrant (after giving effect to any adjustments to the number of Shares purchasable upon exercise of this Warrant pursuant to Article III hereof). 1.6 Notification By The Company. In case at any time: (i) the Company shall declare any dividend or make any distribution upon its Common Stock; or (ii) the Company shall offer for sale, or shall otherwise issue (except upon exercise of the Existing Warrants), any additional shares of stock of any class or any other securities convertible into or exchangeable for shares of stock or any rights or options to subscribe thereto; or (iii) the Board of Directors of the Company shall authorize any capital reorganization, reclassification 4 or similar transaction involving the capital stock of the Company, or a sale or conveyance of all or substantially all of the assets of the Company, or a consolidation, merger or business combination of the Company with another Person; or (iv) actions or proceedings shall be authorized or commenced for a voluntary or involuntary dissolution, liquidation or winding-up of the Company; then, in any one or more of such cases, the Company shall give written notice to the Holder, at the earliest time legally practicable (and not less than 30 days before any record date or other date set for definitive action) of the date on which (A) the books of the Company shall close or a record shall be taken for such dividend, distribution or sale or other issuance or (B) such reorganization, reclassification, sale, conveyance, consolidation, merger, dissolution, liquidation or winding-up shall take place or be voted on by stockholders of the Company, as the case may be. Such notice shall also specify the date as of which the holders of the Common Stock of record shall participate in said dividend, distribution, sale or other issuance or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, sale, conveyance, consolidation, merger, dissolution, liquidation or winding-up, as the case may be. If the action in question or the record date is subject to the effectiveness of a registration statement under the Securities Act or to a favorable vote of stockholders, the notice required by this Section 1.6 shall so state. ARTICLE II WARRANT AGENCY; TRANSFER, EXCHANGE AND REPLACEMENT OF WARRANTS 2.1 Warrant Agency. The Company shall maintain, at its own expense, an agency (the "Warrant Agency"), for certain purposes specified herein and shall cause such Warrant Agency to remain open during normal business hours on each Business Day in connection with the performance of its obligations hereunder. The Company shall perform the obligations of the Warrant Agency provided herein at its address at 645 Madison Avenue, New York, New York 10022 or such other address as the Company shall specify by notice to all Warrantholders. 5 2.2 Ownership of Warrant. The Company may deem and treat the Person in whose name this Warrant is registered as the holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by any Person other than the Company) for all purposes and shall not be affected by any notice to the contrary, until presentation of this Warrant for registration of transfer as provided in this Article II. 2.3 Transfer of Warrant. The Company agrees to maintain at the Warrant Agency books for the registration of transfers of this Warrant and all rights hereunder shall be registered, in whole or in part, on such books, upon surrender of this Warrant at the Warrant Agency, together with a written assignment of this Warrant duly executed by the Holder or its duly authorized agent or attorney and funds sufficient to pay any transfer taxes payable upon such transfer. Upon surrender the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denominations specified in the instrument of assignment, and this Warrant shall promptly be canceled. Notwithstanding the foregoing, a Warrant may be exercised by a new holder without having a new Warrant issued. 2.4 Division or Combination of Warrants. Subject to restrictions contained hereinbelow, this Warrant may be divided or combined with other Warrants upon surrender hereof and of any Warrant or Warrants with which this Warrant is to be combined at the Warrant Agency, together with a written notice specifying the names and denominations in which the new Warrant or Warrants are to be issued, signed by the holders hereof and thereof or their respective duly authorized agents or attorneys. Subject to compliance with Section 2.3 as to any permitted transfer which may be involved in the division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. 2.5 Loss, Theft, Destruction of Warrant Certificates. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction, upon receipt of indemnity or security reasonably satisfactory to the Company (the Original Holder's or any institutional Warrantholder's indemnity being satisfactory indemnity in the event of loss, theft or destruction of any Warrant owned by such institutional holder), or, in the case of any such 6 mutilation, upon surrender and cancellation of such Warrant, the Company will make and deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant of like tenor and representing the right to purchase the same aggregate number of shares of Common Stock. 2.6 Expenses of Delivery of Warrants. The Company shall pay all expenses, taxes (other than transfer taxes) and other charges payable in connection with the preparation, issuance and delivery of Warrants and Common Stock hereunder. 2.7 Restrictions on Transfer. (a) The Holder, by acceptance hereof, represents and warrants that this Warrant, and upon exercise hereof the holder of any Warrant Common Stock will represent and warrant, that any shares of Warrant Common Stock are being acquired for its own account for investment without any intent to make a public distribution thereof in violation of the securities laws and that this Warrant and such Warrant Common Stock may not be sold, encumbered or otherwise transferred except pursuant to an effective Registration Statement under the Act or an exemption from such registration requirement and, if an exemption shall be applicable, the Holder or the holder of Warrant Common Stock shall have delivered an opinion of counsel reasonably satisfactory to the Company that such registration is not required under the Act. (b) The Holder acknowledges that the Company may direct the transfer agent for the Warrant and the Warrant Common Stock to note a stop transfer order upon its records in respect of this Warrant and any certificates evidencing shares of the Warrant Common Stock and that in the event of any permitted sale, transfer or exchange of this Warrant, any Warrant certificate issued by the Company shall bear the legend obtained on the front part of this Warrant. (c) As a condition to any sale, transfer or other disposition of this Warrant, the transferee shall be required to make the representations and warranties contained in Section 2.7(a) hereof and acknowledge the stop transfer order and consent to the legend contained in Section 2.7(b) hereof. The Warrant shall not be sold, pledged, transferred or otherwise disposed of except in whole to an entity controlled by Donaldson, Lufkin & Jenrette Securities Corporation. 7 ARTICLE III ANTIDILUTION PROVISIONS 3.1 Adjustment of Exercise Price and Number of Warrant Shares. The number and kind of shares purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment and reset from time to time upon the happening of certain events, as hereinafter described. 3.2 Mechanical Adjustments. The number of Shares and the Exercise Price shall be subject to adjustment as follows: (a) In case the Company shall at any time after the date of this Agreement (i) declare or pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to all holders of its Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (iv) issue any shares of its capital stock in a reclassification or reorganization of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing entity), this Warrant shall be adjusted to the number of Shares and amount of any other securities, cash or other property of the Company which such Holder would have owned or have been entitled to receive after the happening of any of the events described above had this Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) Any Shares purchasable as a result of such adjustment shall not be issued prior to the effective date of such event. Other than if resulting in an adjustment pursuant to Section 3.2(a), in case the Company shall issue rights, options or warrants to subscribe for or purchase, or other securities exchangeable for or convertible into, shares of Common Stock (any such rights, options, warrants or other securities being herein called "Rights") to all holders of shares of its Common Stock whether or not such Rights are immediately exercisable or convertible, the Company shall issue 8 such Rights to each Holder on the same basis as such Holder would have been entitled to receive such Rights if the Warrants had been exercised immediately prior to the happening of such event or the record date with respect thereto and no adjustment in the number and kind of Shares or Exercise Price shall be made under this Warrant in such circumstance. (c) Whenever the numbers of Shares are adjusted as herein provided, the Exercise Price payable upon exercise of this Warrant shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Shares immediately prior to such adjustment, and of which the denominator shall be the number of Shares immediately thereafter. (d) No adjustment in the number of Shares shall be required hereunder unless such adjustment would result in an increase or decrease of at least one percent (1%) of the Exercise Price; provided, however, that any adjustments which by reason of this paragraph (d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations shall be made to the nearest one-hundredth of a cent or to the nearest one-thousandth of a Share, as the case may be. (e) No adjustment shall be made pursuant to this Article III in respect of the issuance of shares of Common Stock pursuant to the Existing Warrants. No adjustment need be made for a change in the par value of the Common Stock. (f) For the purpose of this subsection 3.2, the term "shares of Common Stock" shall mean (i) the classes of stock designated as Common Stock at the date of this Agreement, (ii) any other class of stock resulting from successive changes or reclassifications of such shares consisting solely of changes in par value, or from par value to no par value, or from no par value to par value or (iii) any other capital stock of the Company which is not by its terms restricted in amount or timing to the entitlement to dividends. In the event that at any time, as a result of an adjustment made pursuant to this Section 3.2, the Holders shall become entitled to receive any securities of the Company other than shares of Common Stock, thereafter the number of such other securities so receivable upon exercise of this Warrant and the 9 Exercise Price of such shares shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Shares contained in this Article III. 3.3 Voluntary Adjustment by the Company. The Company may at its option, at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company, including such reductions in the Exercise Price as the Company considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients; provided, however, that no such adjustment in Exercise Price shall affect the number of Shares. 3.4 Notice of Adjustment. Whenever the number of Shares or the Exercise Price is required to be adjusted, as herein provided, the Company promptly shall mail by first class, postage prepaid, to each Holder, notice of such adjustment or adjustments setting forth the number of Shares and the Exercise Price after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. 3.5 Dividends and Distributions. Other than if resulting in an adjustment pursuant to Section 3.2(a) or issuance covered by 3.2(b), in case the Company shall declare a dividend or make any other distribution upon Common Stock (other than in shares of Common Stock), the Company shall hold any property (including cash) paid in respect of such dividend or distribution that the Holder would have received if the Holder had theretofore exercised the Warrant for the benefit of the Holder and promptly pay same over to the Holder. 3.6 Preservation of Purchase Rights upon Merger, Consolidation, etc. In case of any consolidation of the Company with or merger of the Company with or into another Person or in case of any sale, transfer or lease to another Person of all or substantially all the assets of the Company, the Company or such successor or purchasing Person, as the case may be, shall agree (and such merger, consolidation or transfer of assets shall not be consummated without such agreement) that each Holder thereafter shall have the right only to receive, and such Warrant shall only represent the right to receive, upon 10 payment of the Exercise Price in effect immediately prior to such action, the kind and amount of shares and other securities, cash and other property which he would have been entitled to receive after the happening of such con solidation, merger, sale, transfer or lease had this Warrant been exercised immediately prior to such action (provided that if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer is not the same for each share of Common Stock of the Company, then for the purpose of this Section the kind and amount of securities, cash and other property receivable upon exercise of this Warrant immediately after such consolidation, merger, sale or transfer shall be the kind and amount so receivable per share by a majority of the holders of Common Stock), and if the successor or purchasing Person is not a corporation, such person shall provide appropriate tax indemnification with respect to such shares and other securities and property so that upon exercise of the Warrant, the Holder would have the same benefits it otherwise would have had if such successor or purchasing Person were a corporation. Such agreement shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article III and that such adjustments shall similarly apply to successive consolidations, mergers, sales, transfers or leases. 3.7 Statement on Warrant Certificates. Irrespective of any adjustments in the Exercise Price or the number or kind of Shares, this Warrant may continue to express the same price and number and kind of shares as are stated on the front page hereof. ARTICLE IV REGISTRATION RIGHTS 4.1 Registration Rights. If at any time or from time to time: (a) the Company shall determine to register any of its securities (other than by means of a registration statement on a form (e.g., Form S-8 or Form S-4 or successor forms) which by its terms could not be used for the sale and distribution of any Warrant Common Stock) the Company will: (i) promptly (but not less than thirty (30) days prior to the filing of any registration statement) give written notice thereof (which shall include a list of the 11 jurisdictions, if any, in which the Company intends to register or qualify such securities under the applicable blue sky or other state securities laws) to each holder of Warrant Common Stock; (ii) if so requested in writing by any holder of Warrant Common Stock, use its best efforts to effect such registration and any qualification any compliance relating thereto, including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with the Securities Act and any other governmental requirements or regulations as would permit or facilitate the sale and distribution of all Warrant Common Stock, unless, in the opinion of counsel to the Company reasonably acceptable to the holder of the Warrant Common Stock who wishes to have them included in such registration statement, registration under the Act is not required for the sale of such Warrant Common Stock in the manner proposed by such holders. Notwithstanding the foregoing, if any managing underwriter of the Company's offering shall advise the Company in writing that, in its opinion, the distribution of all or a portion of the Warrant Common Stock (the "Piggy-back Shares") requested to be included in the registration statement currently with the securities being registered by the Company would materially adversely affect the distribution of such securities by the Company for its own account, then the holders of such Warrant Common Stock shall delay their offering and sale of Warrant Common Stock (or the portions thereof so designated by such managing underwriter) for such period, not to exceed 180 days, as the managing underwriter shall request. In the event of such delay, the Company shall file such supplements, post-effective amendments or separate registration statement, and take any such other steps as may be necessary to permit such holders to make their proposed offering and sale for a period of 90 days immediately following the end of such period of delay ("Piggy-back Termination Date"); provided, however, that if at the Piggyback Termination Date the Piggy-back Shares are covered by a registration statement which is, or is required to remain, in effect beyond the Piggy-back Termination Date, the Company shall maintain in effect the registration statement as it relates to the Piggy-back Shares for so long as such registration statement remains or is required to remain in effect for any other such securities. (iii) bear all expenses in connection with such registration, qualification and compliance, including, without limitation, all registration and filing fees, 12 printing expenses, fees and disbursements of the Company's counsel (but exclusive of the fees and disbursements of legal counsel retained by holders of Warrant Common Stock) and expenses of any audits incident to or required by any such registration, qualification or compliance, provided, that the Company shall not, in any event, be required to bear the cost of any commissions and compensation paid, and concessions and discounts allowed to, underwriters, dealers or others performing similar functions in connection with the sale and distribution of the Warrant Common Stock sold by any holders thereof. 4.2 No Additional Liability. Notwithstanding anything to the contrary contained in this Section IV or elsewhere herein, the Company will not, in any event, be obligated to qualify any Warrant Common Stock covered by a registration statement under any blue sky or other state securities law if the Company would by reason thereof be required to qualify to do business in any jurisdiction where it is not then so qualified. 4.3 Notification; Continuation of Effectiveness. In the case of each registration, qualification and compliance pursuant to this Section IV, the Company will keep the holder of Warrant Common Stock promptly advised in writing as to the initiation of proceedings for such registration, qualification and compliance and as to the completion thereof, and will advise, upon request, of the progress of such proceedings. The Company will, at its expense, keep such registration, qualification and compliance effective for a period of 90 days after the later of (x) the effective date of such registration statement or (y) the last day on which the holder of this Warrant is restricted in selling Warrant Common Stock, as set forth in Section 4.1(a)(ii) hereof. 4.4 Information from Holders. The Company may require the holder of Warrant Common Stock, as a condition to having the Warrant Common Stock included among the securities as to which any registration, qualification or compliance referred to in this Section IV is being effected, to furnish to the Company such reasonable information regarding the proposed distribution of the Warrant Common Stock as the Company may request in writing and as shall be required in connection with such registration, qualification or compliance. 4.5 Prospectuses, etc. The Company will, at its expense, furnish to each holder of Warrant Common Stock with respect to which registration has been effected, such number 13 of prospectuses, offering circulars and other documents incident to such registration and related qualification or compliance as such holder from time to time may reasonably request. 4.6 Indemnification. The Company will indemnify each holder of Warrant Common Stock (and each person, if any, who or which controls such holder) and each underwriter of the Warrant Common Stock held by or issuable to such holder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any registration, qualification or compliance referred to in this section IV, or arising out of or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each such holder of Warrant Common Stock (and each person, if any, who or which controls such holder of Warrant Common Stock) and each such underwriter for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided, that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by an instrument duly executed by such holder of Warrant Common Stock (and each person, if any, who or which controls such holder of Warrant Common Stock) or underwriter and stated specifically to be for use therein. The Company may require of such holder of Warrant Common Stock, as a condition to having such Warrant Common Stock held or issuable to holder of Warrant Common included among the securities as to which such registration, qualification or compliance is being effected, that each such holder of Warrant Common Stock and underwriter will indemnify the Company, its directors, and its officers who sign the registration statement in respect of such registration against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any written information furnished by such holder for inclusion in the registration statement by such 14 holder of Warrant Common Stock or underwriter, as the case may be, or an omission (or alleged omission) to state in any such written information a material fact required to be stated therein or necessary to make the statement therein not misleading. 4.7 Notice of Claim, etc. Each party entitled to indemnification hereunder (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party shall be acceptable to the Indemnified Party (which acceptance shall not be unreasonably withheld), and provided further, that the failure of any Indemnified Party to give notice as provided in this Section 4.7 shall not relieve the Indemnifying Party of its obligation under Section 4.6. 4.8 Listing on Securities Exchanges, etc. The Company will, at its expense, promptly list on each national securities exchange or quotation system on which Common Stock is a the time listed, upon official notice of issuance upon the exercise of the Warrant, all Warrant Common Stock, provided that the Warrant Common Stock is registered under the Securities Act of 1933. 4.9 Right to Deliver Cash. Notwithstanding the provisions of this Warrant, the Company shall have the right, in lieu of including the shares of Warrant Stock in a registration statement pursuant to Section 4.1(a) to elect to purchase the Warrant Common Stock to be included in such registration statement by delivering to a holder of Warrant Common Stock cash in the amount ("Repurchase Amount") equal to the number of shares of Warrant Common Stock to be included in such registration statement multiplied by an amount equal to the closing price (or, if applicable, the average of the closing bid and asked prices) of the Company's Common Stock on the last trading day immediately preceding the day of notice by the Company pursuant to Section 4.1(a)(i). If the Company elects to exercise its rights hereunder, it should so notify the holders of Warrant Common Stock within 10 business days of such notice. The holders shall thereupon promptly deliver the certificates evidencing shares of Warrant Common Stock to be sold at the time and place designated in the Company's notice, in duly transferable form, together with a representation and warranty of good title free and clear of all liens and 15 encumbrances against receipt from the Company of a bank or certified check payable to the respective order of such holders in the Repurchase Amount ARTICLE V DEFINITIONS The following terms, as used in this Warrant, have the following respective meanings: "Business Day" means each Monday, Tuesday, Wednesday, Thursday, and Friday which is not a day on which banking institutions in the City of New York are authorized or obligated by law or executive order to close. "Commission" shall mean the Securities and Exchange Commission or any other Federal agency then administering the Securities Act and other Federal securities laws. "Common Stock" shall have the meaning set forth in the first paragraph of this Warrant, subject to adjustment pursuant to Article III. "Company" shall have the meaning set forth in the first paragraph of this Warrant. "Current Market Price" shall mean at any date the average of the daily closing prices for the 10 consecutive trading days prior to the date as of which the market price is to be computed on the principal national securities exchange or in the NASDAQ-National Market System on which the shares of Common Stock are listed or to which such shares are admitted to trading, or, if not listed or admitted to trading, the average of the closing bid and asked prices of the Common Stock in the over-the-counter market as reported by NASDAQ or any comparable system, or if the Common Stock is not listed on NASDAQ or a comparable system, the average of the closing bid and asked prices as furnished by two members of the National Association of Securities Dealers, Inc. selected from time to time by the Board of Directors of the Company for that purpose. In the absence of the foregoing, the appropriate Current Market Price per share shall be the fair market value thereof as determined by Board of Directors of the Company in good faith. 16 "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder. "Exercise Price" means $1.25 per share of Common Stock, subject to adjustment pursuant to Article III. "Existing Warrants" shall mean the Warrants other than this Warrant, the warrant issued to CIT entitling CIT to purchase 31,345 Shares of Common Stock on the date hereof and the Management Options. "Expiration Date" shall have the meaning set forth in the first paragraph of this Agreement. "Holder" shall have the meaning set forth in the first paragraph of this Warrant. "Management Options" shall mean the options to acquire up to 193,000 shares of Common Stock issued pursuant to the Company's Long Term Stock Incentive Plan and any other options granted to employees of the Company or any of its Subsidiaries having an exercise price equal to or in excess of the Current Market Price. "NASDAQ" means the National Association of Securities Dealers, Inc. Automated Quotation System. "Original Holder" shall have the meaning set forth in the first paragraph of this Warrant. "Person" means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Rights" shall have the meaning set forth in Section 3.2(b). "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder. "Shares" shall have the meaning set forth in the first paragraph of this Warrant. "Subsidiary" means, with respect to any Person, (i) a corporation a majority of whose capital stock with voting power, under ordinary circumstances, to elect 17 directors is at the time, directly or indirectly, owned by such Person, by one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries thereof or (ii) any other Person (other than a corporation) in which such Person, one or more Subsidiaries thereof or such Person and one or more Subsidiaries thereof, directly or indirectly, at the date of determination thereof, has at least majority ownership interest or, if such other Person is a partnership, a majority ownership interest in the general partner thereof. "Warrant shall mean this Warrant as this Warrant may be amended, modified or supplemented from time to time. "Warrant Agency" shall have the meaning set forth in Section 2.1. "Warrantholder" means a holder of any Warrant issued by the Company on the date hereof and such holder's permitted designees, successors and permitted assigns. ARTICLE V1 MISCELLANEOUS 6.1 Notices. Any notice or other communication to be given shall be in writing and may be personally served, telexed or sent by United States mail and shall be deemed to have been given when delivered in person, upon receipt of telex or four Business Days after deposit in the United States mail, registered or certified, with postage prepaid and properly addressed. In the case of the Original Holder, such notices and communications shall be addressed to its address set forth below, unless the Original Holder shall notify the Company that notices and communications should be sent to a different address (or telex number), in which case such notices and communications shall be sent to the address (or telex number) specified by the Holder. In the case of other Holders, such notices and communications shall be addressed to such address as such other Holder shall specify to the Company. In the case of the Company, such notices and communications shall be addressed as follows (until notice of a change is given as provided herein): Vernitron Corporation 645 Madison Avenue New York, New York 10022 Telecopy: (212) 754-6348 Attention: General Counsel 18 If to the Original Holder: Donaldson, Lufkin & Jenrette Securities Corporation 2121 Avenue of the Stars Los Angeles, CA 90067 Telecopy: (310) 282-6178 Attention: Peter J. Nolan 6.2 Waivers; Amendments. No failure or delay of the Holder in exercising any power or right hereunder shall operate as a waiver thereof (except for a failure to exercise this Warrant prior to the Expiration Date), nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Holder are cumulative and not exclusive of any rights or remedies which it would otherwise have. The provisions of this Warrant may be amended, modified or waived with (and only with) the written consent of the Company and the holder of this Warrant. 6.3 Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE LAWS OF DELAWARE SHALL BE MANDATORILY APPLICABLE HERETO. 6.4 Covenants To Bind Successors and Assigns. All covenants, stipulations, promises and agreements in this Warrant contained by or on behalf of the Company shall bind its successors and permitted assigns, whether so expressed or not. 6.5 Severability. In case any one or more of the provisions contained in this Warrant shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 6.6 Construction. The definitions in this Warrant shall apply equally to both the singular and the plural forms of the terms defined. Wherever the context 19 may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The Section headings used herein are for convenience of reference only, are not part of this Warrant and are not to affect the construction of or be taken into consideration in interpreting this Warrant. 6.7 No Rights as Stockholder. This Warrant shall not entitle the Holder to any rights as a stockholder of the Company until such time as this Warrant shall have been exercised. 20 IN WITNESS WHEREOF, VERNITRON CORPORATION has caused this Warrant to be executed in its corporate name by one of its officers thereunto duly authorized, attested by its Secretary or an Assistant Secretary, all as of the day and year first above written. VERNITRON CORPORATION By ....................... Title: Attest: ...................... Assistant Secretary 21 SUBSCRIPTION NOTICE (To be executed upon exercise of Warrant) To VERNITRON CORPORATION The undersigned hereby irrevocably elects to exer cise the right of purchase represented by the attached Warrant for, and to purchase thereunder, shares of Common Stock as provided for therein, and tenders herewith payment of the Exercise Price in full in the form of cash, money order, certified or bank cashier's check or wire transfer or by cancellation of the Warrant with respect to shares of Common Stock subject to the Warrant. Please issue a certificate or certificates for such shares of Common Stock in the following name and names and denominations: If said number of shares shall not be all the shares issuable upon exercise of the attached Warrant, a new Warrant is to be issued in the name of the undersigned for the balance remaining of such shares less any fraction of a share paid in cash. Dated: ..........., ...... ....................................... NOTE: The above signature should correspond exactly with the name on the face of the attached Warrant or with the name of the assignee appearing in the assignment form below. ASSIGNMENT (To be executed upon assignment of Warrant) For value received, ___________________________ hereby sells, assigns and transfers unto _________________ the attached Warrant, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _________________________ attorney to transfer said Warrant on the books of VERNITRON CORPORATION, a Delaware corporation, with full power of substitution in the premises. ---------------------------------- NOTE: The above signature should correspond exactly with the name on the face of the attached Warrant. Dated: __________, ____ EX-21 3 SUBSIDIARIES EXHIBIT 21 Subsidiaries Name State of Incorporation -------------------------------- ---------------------- Precision Aerotech, Inc. Delaware Speedring, Inc. Delaware Speedring Systems, Inc. Delaware EX-27 4 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1996 DEC-31-1996 2,691 0 14,186 385 24,454 41,796 20,914 7,458 62,171 17,002 23,324 0 7 26 19,132 62,171 91,301 91,301 67,483 67,483 16,636 93 2,343 4,746 1,891 2,855 0 (173) 0 2,682 .68 .68
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