-----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, ODb6pBjCZe11lc7P/J/JgWRq7qSJVzFq5NyxWgBoOlprBRsARoXv0Y4IOV6gIJ6j XVYIjsu/kFZEBP8gOEt/QA== 0000950124-95-003533.txt : 19951103 0000950124-95-003533.hdr.sgml : 19951103 ACCESSION NUMBER: 0000950124-95-003533 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19951102 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CODE ALARM INC CENTRAL INDEX KEY: 0000821509 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 382334698 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-2 SEC ACT: 1933 Act SEC FILE NUMBER: 033-63929 FILM NUMBER: 95586887 BUSINESS ADDRESS: STREET 1: 950 E WHITCOMB CITY: MADISON HEIGHTS STATE: MI ZIP: 48071 BUSINESS PHONE: 8105839620 MAIL ADDRESS: STREET 1: 950 E WHITCOMB CITY: MADISON HEIGHTS STATE: MI ZIP: 48071 S-2 1 FORM S-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 2, 1995 REGISTRATION NO. 33- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 CODE-ALARM, INC. (Exact name of registrant as specified in its charter) MICHIGAN 38-2334698 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 950 E. WHITCOMB MADISON HEIGHTS, MICHIGAN 48071 (810) 583-9620 (Address, including zip code, and telephone number, including area code, of registrant's principal executive office) ROBERT V. WAGNER CODE-ALARM, INC. 950 E. WHITCOMB MADISON HEIGHTS, MICHIGAN 48071 (810) 583-9620 (Name, address, including zip code, and telephone number, including area code, of agent for service) WITH COPIES TO: D. KERRY CRENSHAW, ESQ. DAVID FOLTYN, ESQ. CLARK, KLEIN & BEAUMONT, P.L.C. HONIGMAN MILLER SCHWARTZ AND COHN 1600 FIRST FEDERAL BUILDING 2290 FIRST NATIONAL BUILDING DETROIT, MICHIGAN 48226-1962 DETROIT, MICHIGAN 48226 (313) 965-8266 (313) 256-7763 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933, check the following box: / / If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: / / CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED PER DEBENTURE OFFERING PRICE REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------- % Convertible Subordinated Debentures due 2002.................................. $11,500,000(1) 100%(2) $11,500,000(1)(2) $3,965.52 - ---------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
(1) Includes $1,500,000 principal amount of Debentures issuable upon exercise of the Underwriters' overallotment option. (2) Plus accrued interest, if any. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH THE PROVISIONS OF SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-2
FORM S-2 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS - -------------------------------------------------- ------------------------------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus... Front Cover Page of Prospectus; Cross Reference Sheet; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus............................ Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............. Prospectus Summary; Risk Factors; Selected Consolidated Financial Data 4. Use of Proceeds............................ Use of Proceeds 5. Determination of Offering Price............ Not Applicable 6. Dilution................................... Not Applicable 7. Selling Security Holders................... Not Applicable 8. Plan of Distribution....................... Outside Front Cover Page of Prospectus; Underwriting 9. Description of Securities to be Registered............................... Description of Debentures; Description of Capital Stock 10. Interests of Named Experts and Counsel..... Legal Matters; Experts 11. Information with Respect to the Registrant............................... Prospectus Summary; Risk Factors; Capitalization; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Changes in Company's Certifying Accountant; Business; Description of Capital Stock; Shares Eligible for Future Sale; Consolidated Financial Statements 12. Incorporation of Certain Information by Reference................................ Incorporation of Certain Information by Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. Not Applicable
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED NOVEMBER 2, 1995 PROSPECTUS $10,000,000 [CODE-ALARM, INC. LOGO] % CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002 ------------------------ The Debentures offered hereby are convertible at any time prior to maturity, unless previously redeemed or repurchased, into shares of Common Stock of Code-Alarm, Inc. (the "Company") at a conversion price of $ per share, subject to adjustment in certain events. On October 31, 1995, the last reported sale price of the Company's Common Stock, as reported on the Nasdaq National Market under the symbol CODL was $7.375 per share. See "Price Range of Common Stock." Interest on the Debentures is payable semi-annually on June 1 and December 1, commencing June 1, 1996, and the Debentures will mature on December 1, 2002, unless previously redeemed. The Debentures are redeemable at the option of the Company, at any time in whole or in part, at the redemption prices set forth herein, plus accrued interest; provided, however, that prior to December 1, 1998, the Debentures may not be redeemed unless the closing sales price of the Common Stock equals or exceeds 140% of the then current conversion price for at least 20 trading days within 30 consecutive trading days ending not more than ten trading days prior to the date of the notice of redemption. In the event of a Repurchase Event (as herein defined), each holder of Debentures may require the Company to repurchase the Debentures, in whole or in part, for cash, at 101% of the principal amount thereof, plus accrued interest. The Debentures will be unsecured general obligations of the Company subordinated to all existing and future Senior Indebtedness (as herein defined). See "Description of Debentures." ------------------------ THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 4. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ----------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3) - ----------------------------------------------------------------------------------------------- Per Debenture............................ % % % - ----------------------------------------------------------------------------------------------- Total(4)................................. $ $ $ - ----------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from date of issuance. (2) See "Underwriting" for information concerning indemnification of the Underwriters and other matters. (3) Before deducting other expenses of issuance and distribution estimated at $405,000. (4) The Company has granted the Underwriters a 30-day option to purchase up to an additional $1,500,000 in principal amount of the Debentures on the same terms and conditions to cover over-allotments, if any. If the entire additional principal amount of the Debentures is purchased, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $11,500,000, $ and $ , respectively. See "Underwriting." ------------------------ The Debentures are offered severally by the Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of the Debentures will be made against payment therefor on or about , 1995. ------------------------ RONEY&CO. THE OHIO COMPANY , 1995. 4 [ARTWORK] CODE-ALARM SUPPLIES THE FOLLOWING VEHICLE SECURITY SYSTEMS TO AUTOMAKERS AT BOTH THE DEALERSHIP AND FACTORY-FLOOR LEVEL. THE COMPANY MARKETS ITS PRODUCTS TO GENERAL MOTORS, CHRYSLER, FORD, MITSUBISHI, SUBARU, AND VOLKSWAGEN IN THE U.S., AS WELL AS INTERNATIONAL AUTOMAKERS PEUGEOT, RENAULT, VOLKSWAGEN-AUDI GROUP FRANCE, TOYOTA, NISSAN, FORD OF VENEZUELA AND FORD-MEXICO. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DEBENTURES OFFERED HEREBY OR THE COMMON STOCK OF THE COMPANY, OR BOTH, AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 5 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents, heretofore filed by the Company with the Securities and Exchange Commission (the "Commission") (File No. 0-16441) pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"), are hereby incorporated by reference, except as superseded or modified herein: 1. The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 2. The Company's Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 1995, June 30, 1995 and September 30, 1995. 3. The Company's Current Report on Form 8-K filed with the Commission on July 22, 1995. 4. The Company's First Amendment to its Current Report on Form 8-K/A#1 filed with the Commission on August 25, 1995. 5. The Company's Second Amendment to its Current Report on Form 8-K/A#2 filed with the Commission on September 1, 1995. Each document filed subsequent to the date of this Prospectus pursuant to Sections 13(a), 13(c), 14 or 15(d) of the 1934 Act prior to the termination of this Offering shall be deemed to be incorporated by reference in this Prospectus. Any statement incorporated herein shall be deemed to have been modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which is or is deemed to be incorporated herein by reference modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL OWNER TO WHOM A COPY OF THIS PROSPECTUS IS DELIVERED, UPON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF ANY AND ALL OF THE INFORMATION THAT HAS BEEN INCORPORATED BY REFERENCE IN THIS PROSPECTUS (NOT INCLUDING EXHIBITS TO THE INFORMATION THAT IS INCORPORATED BY REFERENCE UNLESS SUCH EXHIBITS ARE EXPRESSLY INCORPORATED BY REFERENCE INTO THE INFORMATION THAT THIS PROSPECTUS INCORPORATES). REQUESTS SHOULD BE DIRECTED TO ROBERT V. WAGNER, VICE PRESIDENT OF FINANCE, CODE-ALARM, INC., 950 E. WHITCOMB, MADISON HEIGHTS, MICHIGAN 48071, TELEPHONE (810) 583-9620. ------------------------ 6 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Company's Consolidated Financial Statements and Notes thereto, appearing elsewhere in or incorporated by reference into this Prospectus. Except as otherwise noted, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. THE COMPANY The Company is a leading U.S.-based manufacturer of vehicle security systems and is recognized as a technology leader in remote control vehicle security systems, keyless entry systems and security sensor products. The Company categorizes sales of its vehicle security systems as pre-delivery and post-delivery sales. Pre-delivery sales are products sold in the original equipment manufacturer ("OEM") market, for installation before delivery of a new vehicle to the purchaser (either through factory installation by the automaker or as a dealer-installed option or through contract installers known as "expediters"). Post-delivery sales are products sold for installation on a vehicle already owned by the customer (generally through retail specialty stores and mass merchandisers). The Company's products are marketed and sold in U.S. and Canada primarily to General Motors, Ford and Chrysler primarily through more than 9,000 automobile dealers pursuant to private label purchase agreements with these manufacturers; more than 1,200 independent retail specialty stores; automotive expediters; and mass merchandisers such as Sears and Best Buy. International companies to whom the Company sells its vehicle security products are Peugeot, Volkswagen-Audi Group France, Renault, Mitsubishi, Subaru, Toyota and Nissan as well as to independent retail specialty stores, expediters and mass merchandisers. In addition, the Company recently began supplying vehicle security systems to Ford of Venezuela and Ford-Mexico. The Company sells its vehicle security systems under several brand names including Code-Alarm(R), Mirage(TM), Chapman(R) and Anes(R), and sells its products as private label lines under automakers' brand names, including, for example, Mr. Goodwrench(TM) in the case of General Motors. The Company offers basic security systems and accessory products which a customer may use to tailor a security system to the customer's specific requirements. Products are actively promoted to dealers and retailers. The Company also provides support services to dealers, including technical and installation service. The Company's primary business objective is to expand as a leading designer, manufacturer and marketer of vehicle security systems, through further penetration of its existing customer base as well as the addition of new customers and by expanding its presence in the European market. Key elements of the Company's business strategy include: (i) focusing on its OEM customers through distribution to dealers, direct sales to manufacturers for factory floor installation and strategic alliances with other OEM suppliers; (ii) continuing its sales to independent retail specialty stores and mass merchandisers; (iii) expanding its European presence; (iv) enhancing its engineering capabilities; and (v) shortening its product development and introduction cycles while maintaining high quality standards. The Company is a Michigan corporation, its executive offices are located at 950 E. Whitcomb, Madison Heights, Michigan 48071 and its telephone number is (810) 583-9620. THE OFFERING Securities Offered......... $10,000,000 ($11,500,000 if the Underwriters' over-allotment option is exercised in full) principal amount of % Convertible Subordinated Debentures due December 1, 2002 (the "Debentures"). Payments of Interest....... Semi-annually on each June 1 and December 1, commencing June 1, 1996, with interest accruing from the date of issuance. 1 7 Conversion Rights.......... The Debentures are convertible into shares of the Company's common stock, no par value (the "Common Stock") at any time prior to maturity, unless previously redeemed or repurchased, at a conversion price of $ per share, subject to adjustment in certain events as described herein. Accordingly, each $1,000 principal amount of Debentures is convertible into shares of Common Stock, subject to adjustment, for an aggregate of shares, representing approximately % of the Common Stock on a fully diluted basis. See "Description of Debentures -- Conversion of Debentures" and "Capitalization." Optional Redemption........ Redeemable at the Company's option, at any time in whole or in part, at the redemption price set forth herein, plus accrued interest; provided, however, that prior to December 1, 1998, the Debentures may not be redeemed unless the closing sale price of the Common Stock equals or exceeds 140% of the then current conversion price for at least 20 trading days within 30 consecutive trading days ending not more than ten trading days prior to the date of the notice of redemption. See "Description of Debentures -- Optional Redemption." Repurchase at Option of Holders upon Certain Events................... Upon a Repurchase Event (as defined herein), the Company is required to repurchase, at the option of the holders, any Debentures delivered to it for redemption at 101% of the principal amount thereof plus accrued interest. A Repurchase Event is generally defined to include: (i) certain acquisitions of the Company voting stock such that a person (other than a present holder of 5% or more of the Company's capital stock) owns more than 50% of the outstanding Company capital stock; (ii) a change in the composition of the Board of Directors such that there is a shift of a majority of its members; (iii) certain consolidations, mergers or sales of assets of the Company to a person (other than a present holder of 5% or more of Company capital stock) who, as a result, owns more than 50% of the outstanding Company capital stock; (iv) the acquisition by the Company of more than 30% of its outstanding shares of capital stock in any 12-month period; and (v) certain Company acquisitions and distributions in respect to its capital stock in excess of 30% of the values of such stock. See "Description of Debentures -- Repurchase Event." Subordination.............. The Debentures will be subordinated to all existing and future Senior Indebtedness (as defined herein) of the Company. There is no limitation on the amount of Senior Indebtedness that may be incurred by the Company. See "Description of Debentures -- Subordination of Debentures." Use of Proceeds............ The net proceeds from the sale of the securities will be used to reduce bank indebtedness, and for working capital and general corporate purposes. See "Use of Proceeds." Common Stock Outstanding... 2,320,361 shares. NASDAQ National Market Symbol................... CODL. 2 8 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT FOR PER SHARE AND RATIO DATA)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- ------------------- 1992 1993 1994 1994 1995 ------- ------- ------- ------- ------- INCOME STATEMENT DATA: Net sales.................................. $45,685 $50,110 $73,508 $56,435 $54,825 Gross profit............................... 13,389 19,920 27,622 21,083 19,541 Income (loss) from operations.............. (3,655) 2,366 3,043 2,713 2,072 Litigation expense......................... -- -- 4,386 -- 1,825 Net income (loss).......................... (2,902) 1,536 (1,376)(1) 1,426 (735)(1) Net income (loss) per common share......... $ (1.16) $ 0.63 $ (0.58) $ 0.60 $ (0.32) Weighted average common shares outstanding.............................. 2,495 2,445 2,376 2,392 2,320 Ratio of earnings to fixed charges(2)...... -- 5.38x -- 4.57x 0.30x Ratio of earnings to fixed charges(3)...... -- 5.38x 3.55x 4.57x 1.91x
SEPTEMBER 30, 1995 ------------------------ ACTUAL AS ADJUSTED(4) ------- -------------- BALANCE SHEET DATA: Working capital....................................................... $13,734 $ 14,284 Total assets.......................................................... 42,471 43,471 Current portion of long-term debt..................................... 2,431 1,881 Long-term debt, net of current portion................................ 10,085 11,635 Reserve for litigation(5)............................................. 5,440 5,440 Shareholders' equity.................................................. 10,482 10,482
- --------------- (1) Includes patent infringement settlement costs in the amount of $4.4 million for the year ended December 31, 1994 and $1.8 million for the nine months ended September 30, 1995. (2) The ratio of earnings to fixed charges was computed by dividing earnings by fixed charges. For this purpose "earnings" consists of earnings before income taxes and "fixed charges," and "fixed charges" consists of interest on indebtedness and the portion of rental expense which is deemed to be representative of the interest component. For the years ended December 31, 1992 and December 31, 1994, earnings were not sufficient to cover fixed charges by $3.4 million and $1.2 million, respectively. (3) Adjusted to reflect ratio of earnings to fixed charges excluding litigation expense. (4) Adjusted to give effect to the sale of $10,000,000 principal amount of % Convertible Subordinated Debentures due 2002, and the application of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization." (5) See Note 9 of Notes to Consolidated Financial Statements. 3 9 RISK FACTORS Prior to purchasing the Debentures offered hereby, prospective investors should carefully consider, together with the other information contained herein, each of the following risk factors which could, individually or in the aggregate, have a material adverse effect on the Company's business and financial condition, including working capital, and results of operations. Litigation. The Company historically has been involved in a number of legal disputes, many of which have resulted in litigation, both as plaintiff and as defendant, including a number of proceedings currently pending. Damages sought against the Company in these pending proceedings exceed in the aggregate the entire shareholders' equity of the Company, and an unfavorable result in one or more of these cases or in any proceeding which might arise in the future could adversely affect the value of the Debentures and could cause the holders of Debentures to lose their entire investment. The cost of legal proceedings and settlements of lawsuits involving the Company was a principal cause of the Company's lack of profitability in 1994 and has had a substantial negative impact on the Company's results of operations in 1995 to date. As of October 26, 1995, reserved for but yet unpaid judgments against the Company amounted to an aggregate of approximately $5.9 million; approximately $5.4 million of this amount has been reserved for and the Company has posted a $5.9 million letter of credit as security for this amount. See "Legal Proceedings" and Note 9 of Notes to Consolidated Financial Statements. International Operations. The Company began conducting European operations in 1994 through its acquisition of Europe Auto Equipement, S.A. ("EAE"). Its European operations expanded rapidly, with European net sales for 1994 reaching 23.8% of the Company's total 1994 net sales (28.6% of the Company's total 1994 net sales were attributable to international sales, excluding North American but including European sales), and the Company intends to continue expanding its international (primarily European) sales efforts and believes that such international sales will continue to represent a significant and increasing portion of its total sales. In addition to the other risks associated with its business (which apply both to the Company's domestic and international efforts), the Company's international operations, particularly its expansion into the European market, present a number of risks to the Company's future, including the following: - Prior to 1994, when it began conducting its European operations, the Company had virtually no experience manufacturing, assembling or marketing its products in any market outside of North America. Accordingly, it is subject to the normal risks associated with a new business endeavor, including operating losses, financial reporting, financial controls and financial forecasting. - The Company currently supplies automobile alarm systems to Peugeot, with sales in 1994 to Peugeot constituting 29.8% of the Company's European sales (and 22.9% and 7.1% of its international sales and total sales, respectively). Peugeot has recently advised the Company that it is in the process of consolidating its supplier base, and there is no assurance that Peugeot will continue to purchase automobile alarm systems from the Company. The loss of Peugeot sales could have a material adverse effect on the Company's business and financial condition, including working capital and results of operations. - The Company supplies its European customers with products manufactured in its U.S. plants. Most of the Company's European customers operate with low inventories or on a "just in time" basis; consequently, as product volumes increase, it will become increasingly difficult and costly to supply these customers from the Company's U.S. plants. See "Business." - In order to market its products in Europe, the Company must meet applicable government-imposed frequency requirements, as well as obtain insurance industry certifications and approvals of its products. While the Company has obtained such approvals in some countries, it has not obtained them in others. In the event these requirements change, there can be no assurance that the Company will be able to meet such requirements. There are also various other risks associated with such regulation. See "Risk Factors -- Regulation." The Company is also subject to certain risks associated with intellectual property rights. See "Risk Factors -- Intellectual Property." Suppliers. The Company's products include a number of high-technology components that are available from only a few suppliers and, in some cases, a single supplier. The Company frequently requires large 4 10 volumes of such components. If the Company's suppliers are unable to fulfill the Company's needs for such components, the Company may be unable to fill customer orders and its business and financial condition, including working capital and results of operations, may be materially and adversely affected. Since part of the Company's strategy is to shorten product development and introduction cycles, occasions may arise in the future where the Company's ability to produce products may outpace its suppliers' ability to supply components. There can be no assurance that the Company can continue to obtain adequate supplies or obtain such supplies at their historical cost levels. The Company has no guaranteed supply arrangements with any of its sole or limited source suppliers, does not maintain an extensive inventory of components, and customarily purchases sole or limited source components pursuant to purchase orders placed in the ordinary course of business. Moreover, the Company's suppliers may, from time to time, experience production shortfalls or interruptions which could impair the supply of components to the Company. There can be no assurance that such shortages will not occur in the future and adversely affect the Company's business and financial condition, including working capital and results of operations. See "Business -- Suppliers." Competition. All markets in which the Company participates are highly competitive, and many current or prospective competitors, including several of the Company's OEM customers, are substantially larger and possess significantly greater financial, marketing and technical resources than the Company. An increase in factory-installed security systems purchased by automotive manufacturers or the introduction of other dealer-installed security systems and remote keyless entry systems by OEMs or existing and potential competitors could have a material adverse effect on the Company's business and financial condition, including working capital and results of operations. See "Business -- Competition." Reliance on Major Customers; Cyclical Industries. The Company supplies its products to a number of automobile companies for installation both during the manufacturing process and by their respective dealers. Sales to General Motors Corporation, Ford Motor Company and Peugeot, S.A., including their retail dealers, accounted for 10.8%, 10.9% and 8.4%, respectively, of the Company's net sales for the year ended December 31, 1994. The Company receives payment from General Motors, Ford and Peugeot for goods and services purchased under blanket purchase orders covering these sales. The loss of any of these contracts could have a material adverse effect on the Company's business and financial condition, including working capital and results of operations. Peugeot recently advised the Company that it is in the process of consolidating its supplier base, and there is no assurance that Peugeot will continue to purchase automobile alarm systems from the Company. All of these contracts are terminable by the OEM companies at their discretion on short notice. The Company believes the majority of its products are installed in new automobiles within a few months of purchase. As a result, the Company's sales are highly dependent upon the level of new automobile sales. Reductions in the sales of new automobiles due to economic conditions, labor disturbances or other reasons could have a material adverse effect on the Company's business and financial condition, including working capital and results of operations. See "Business -- Customers." Negative Interest Coverage; Leverage; Subordination. The Company's "fixed charges" (which consist of interest on indebtedness and the portion of rental expense which is deemed to be representative of the interest component) have exceeded its earnings before income taxes and fixed charges by $156,000, $3.4 million and $1.2 million, respectively, in 1991, 1992 and 1994 (there was no coverage deficiency in 1990 and 1993). As of September 30, 1995, as adjusted for the issuance of the Debentures and the application of the estimated net proceeds therefrom, the Company's total long-term debt and shareholders' equity would have been approximately $11.6 million (not including the $5.9 million letter of credit for a litigation appeal bond) and $10.5 million, respectively, and the Company's earnings before fixed charges and litigation expense would have been $2.2 million, which exceeded fixed charges by $1.0 million for the nine months ended September 30, 1995. The Company expects to incur, from time to time, additional borrowings or other obligations which would be Senior Indebtedness, as defined. The debt service requirements of any such additional indebtedness could make it more difficult for the Company to make principal and interest payments on the Debentures. The Company's ability to satisfy its obligations will be dependent upon its future performance, which is subject to prevailing economic conditions and financial, business and other factors, including factors beyond the Company's control. There can be no assurance that the Company's operating cash flow will be sufficient to meet its debt service requirements or to repay the Debentures at maturity or that the Company will be able to refinance the Debentures or other indebtedness at maturity. The current Senior Indebtedness is guaranteed by 5 11 the Company's domestic subsidiaries and is secured by substantially all current and future assets of the Company, including the capital stock of the Company's subsidiaries. Any additional Senior Indebtedness is likely to require additional security. The Debentures will be subordinated to all current and future Senior Indebtedness of the Company. At October 26, 1995, Senior Indebtedness of the Company was approximately $18.3 million (including a $5.9 million letter of credit), and will be approximately $9.3 million after giving effect to the application of the net proceeds of this Offering. There are no restrictions in the Indenture on the incurrence of additional Senior Indebtedness. By reason of such subordination, in the event of any insolvency, receivership, liquidation or other reorganization of the Company, holders of Senior Indebtedness must be paid in full before the holders of the Debentures may be paid. Accordingly, there may be insufficient assets remaining after payment of prior claims to pay amounts due on the Debentures. See "Description of Debentures." Short Product Life Cycles. The market for the Company's products is characterized by frequent new product introductions and rapid product obsolescence. These factors typically result in short product life cycles. The Company must continually monitor industry trends and develop new technologies and features to incorporate into its products. Each new product cycle presents opportunities for current or prospective competitors of the Company to gain market share. Life cycles of individual products are typically characterized by steep declines in unit sales, pricing and margins toward the end of a product's life, the precise timing of which may be difficult to predict. As new products are planned and introduced, the Company attempts to monitor closely the inventory of older products and to phase out their manufacture in an orderly manner. Nevertheless, the Company could experience unexpected reductions in sales volume and prices of older generation products as customers anticipate new products. These reductions could give rise to charges for obsolete or excess inventory. To the extent that the Company is unsuccessful in managing product transitions, its business and financial condition, including working capital and results of operations, could be materially and adversely affected. See "Business -- Business Strategy." Intellectual Property. Although the Company has sought to protect and believes it has protected its technologies and products by patent, copyright, trademark and trade secret laws to the extent that it believes necessary, the Company's intellectual property rights may be subject to infringement. There can be no assurance that the Company's measures to protect its proprietary rights will deter or prevent unauthorized use of the Company's technology. Furthermore, the laws of certain countries may not protect the Company's proprietary rights to the same extent as do the laws of the United States. The Company has applied for patents on certain inventions in Europe; however, none of these patents has yet been granted nor is there any assurance that patents will be granted in the future. In addition, the Company may, from time to time, become subject to legal claims asserting that the Company has violated intellectual property rights of third parties. In the event a third party were to sustain a valid claim against the Company and in the event any required license were not available on commercially reasonable terms, the Company's business and financial condition, including working capital and results of operations, could be materially and adversely affected. Litigation, which could result in substantial costs to and diversion of resources of the Company, may also be necessary to enforce intellectual property rights of the Company or to defend the Company against claimed infringement of the rights of others. The Company is currently engaged as a defendant in a number of patent infringement suits. The Company is also seeking damages and injunctive relief against a number of competitors for allegedly infringing its U.S. patents. See "Legal Proceedings." The Company's failure or inability to protect its existing intellectual property rights could have a material adverse effect on the Company's business and financial condition, including working capital and results of operations. See "Business -- Trademarks and Patents." Regulation. The Federal Communications Commission ("FCC") regulates the assignment of frequencies for manufacture and sale of vehicle security remote systems and remote keyless entry systems in the U.S. The Company has received FCC authorization to manufacture and sell the devices it currently sells in the U.S. In Europe, similar government agencies regulate the assignment of frequencies; and the Company has generally been able to meet the applicable frequency requirements. However, because insurance industry accreditation of vehicle security systems is, in certain European countries, a prerequisite to an automobile owner's ability to obtain vehicle theft coverage, the Company's ability to market its products in such countries is dependent upon obtaining such insurance industry approvals and certificates. The Company has received French and Belgian insurance industry accreditation to manufacture and sell electronic security systems. To 6 12 date, the Company has been unable to secure German insurance industry accreditation required to sell its products in Germany. The Company is currently selling its products in Spain where no insurance industry certifications are required. European insurance industry accreditation standards are subject to change without notice; and in 1994, significant changes in industry standards required the development and introduction of new products for 1995. The loss of such regulatory approvals and insurance industry accreditation or failure to obtain these in the future could have a material adverse effect on the Company's business and financial condition, including working capital and results of operations. See "Business -- Regulation." Concentration on One Product Line. The Company's concentration on the single product line of vehicle security systems increases its vulnerability to changes in automobile design, procurement practices of OEMs, product substitution, consumer preferences, insurance underwriting practices and the historical cyclicality of the motor vehicle market. As a result, a significant change in any of the foregoing factors could have a material adverse effect on the Company's business and financial condition, including working capital and results of operations. Dependence on Existing Management. Rand W. Mueller has been primarily responsible for the development of many of the Company's products and markets. The loss or interruption of the continued full-time services of Mr. Mueller could have a material adverse effect on the Company. The Company has entered into an employment agreement with Mr. Mueller which is effective through May 29, 1998, which shall be extended for additional consecutive twelve-month periods unless terminated by the Company upon 24 months prior written notice. Shares Eligible for Sale; Demand Registration Rights. As of October 30, 1995, the Company had 2,320,361 shares of Common Stock outstanding of which 795,612 shares were beneficially owned by executive officers and directors of the Company. Subsequent to the Company's acquisition of EAE and Code-Alarm Europe, Ltd. ("Code-Alarm Europe") the Company offered certain selling shareholders of EAE and Code-Alarm Europe one-time demand registration rights, at the Company's expense, exercisable upon 90 days' written notice to the Company at any time before December 31, 1996, for up to 90,000 shares of the Company's Common Stock held by them. The offers were made orally, and the Company believes that it is unclear whether or not they constitute enforceable obligations. If the offers are enforceable, up to 90,000 shares of Common Stock would be subject to such registration rights on the terms described above or as may otherwise be determined. To date, the Company has received no notice requesting such registration. Sales of substantial amounts of such shares held by directors or the EAE shareholders in the public market could adversely affect the market price of the Common Stock and the Company's ability to raise additional capital at a price favorable to the Company. See "Shares Eligible for Future Sale." Absence of Financial Covenants. The Indenture does not contain any financial performance covenants. Consequently, the Company is not required under the Indenture to meet any financial tests such as those that measure the Company's working capital, interest coverage, fixed charge coverage or net worth in order to maintain compliance with the terms of the Indenture. See "Description of Debentures." No Assurance of a Public Market. No assurance can be given that an active market for the Debentures will develop or, if developed, will continue. If no active market develops, it may be difficult for purchasers to resell their Debentures. The Underwriters have advised the Company that they intend to make a market for the Debentures although they are under no obligation to continue to do so and if such market making were to be discontinued, investors would encounter difficulty effecting purchase or sale transactions in the absence of alternative market makers. COMPANY HISTORY The Company was founded as a Michigan corporation in 1979 under the name Fluidics Manufacturing Company and began operations in early 1980. In 1986, the Company changed its name to Code-Alarm, Inc. In October, 1987, the Company successfully completed its initial public offering of Common Stock. The Company has experienced growth through a combination of internal growth and acquisitions. The Company's subsidiaries include Tessco Group, Inc., Chapman Security Systems, Inc., Anes Security, Inc. and Intercept Systems, Inc. 7 13 The Company's acquisitions have also resulted in its growing presence in Europe. On January 1, 1994, the Company acquired the interest of its joint venture partner in Code-Alarm Europe, which distributes vehicle security systems in the United Kingdom. On February 10, 1994, the Company acquired substantially all of the outstanding capital stock of EAE, a French company having its principal place of business near Paris, France. EAE markets and distributes vehicle security products in Europe, primarily in France. In addition to its vehicle security systems, the Company has a contract manufacturing operation which concentrates on cables, wire harnesses and printed circuit board operations and also manufactures and sells, on a limited basis, certain home security products. Neither contract manufacturing nor home security has historically been, or is expected to be, material to the Company. USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the Debentures offered hereby are estimated to be $9.0 million after deducting underwriting discounts and commissions and estimated offering expenses. The Company intends to use $9.0 million of the net proceeds to partially repay the outstanding indebtedness under its bank credit facility (which was approximately $18.3 million, including security for a $5.9 million letter of credit for a litigation appeal bond, at October 26, 1995). This indebtedness bears interest at the prime rate (8.75% at October 26, 1995), or at the Company's option, at the London Inter-Bank Offered Rate ("LIBOR") plus 2.5% for maturities ranging from one to six months (8.125% and 8.375%, respectively, on October 26, 1995), and was incurred for working capital purposes. The amounts due under the bank credit facility mature on May 23, 1997. PRICE RANGE OF COMMON STOCK The Common Stock is traded on the Nasdaq National Market under the symbol CODL. The following table sets forth for the period indicated the high and low sales prices for the Common Stock as last reported on the Nasdaq National Market:
HIGH LOW ---- --- 1993 First Quarter.......................................................... $ 6 $ 4 1/2 Second Quarter......................................................... 9 1/4 5 Third Quarter.......................................................... 13 3/4 7 Fourth Quarter......................................................... 13 1/4 10 1/2 1994 First Quarter.......................................................... $12 $ 8 5/8 Second Quarter......................................................... 11 7/8 8 3/8 Third Quarter.......................................................... 12 3/8 8 3/4 Fourth Quarter......................................................... 11 5/8 8 1/2 1995 First Quarter.......................................................... $10 1/4 $ 7 Second Quarter......................................................... 9 3/8 6 3/8 Third Quarter.......................................................... 7 6 1/2 Fourth Quarter (through October 31, 1995).............................. 7 3/8 6 1/4
On October 31, 1995, the last reported sale price of the Common Stock as reported on the Nasdaq National Market was $7.375 per share. As of October 27, 1995, there were approximately 309 shareholders of record of the Company's Common Stock. DIVIDEND POLICY Historically, the Company has not paid any cash or other dividend. The Company does not expect to pay dividends in the foreseeable future but currently intends to retain any earnings to finance operations and future growth. Furthermore, the Company's bank credit facility agreement prohibits the payment of dividends. 8 14 CAPITALIZATION The following table sets forth the unaudited capitalization of the Company at September 30, 1995 and as adjusted to give effect to the receipt by the Company of $9.0 million of net proceeds from the issuance and sale of the Debentures offered by the Company hereby and the proposed application of the estimated net proceeds therefrom. See "Use of Proceeds." This table should be read in conjunction with the Company's Consolidated Financial Statements and related notes thereto included elsewhere in this Prospectus.
SEPTEMBER 30, 1995 -------------------- AS ACTUAL ADJUSTED ------- -------- (IN THOUSANDS) Short-term debt(1)(3): Current portion of long-term debt(1)................................... $ 2,431 $ 1,881 ======= ======== Reserve for litigation................................................... $ 5,440 $ 5,440 ======= ======== Long-term debt, less current maturities: Bank notes(1)(2)(3).................................................... $10,085 $ 1,635 % Convertible Subordinated Debentures due 2002....................... -- 10,000 ------- -------- Total long-term debt........................................... $10,085 $ 11,635 Shareholders' equity: Preferred stock, no par value; 1,000,000 shares authorized, none issued or outstanding...................................................... -- -- Common stock, no par value; 5,000,000 shares authorized, 2,320,361 shares issued and outstanding(4).................................... 12,210 12,210 Accumulated deficit.................................................... (1,777) (1,777) Foreign currency translation adjustment................................ 49 49 ------- -------- Total shareholders' equity..................................... 10,482 10,482 ------- -------- Total capitalization......................................... $20,567 $ 22,117 ======= ========
- --------------- (1) On May 23, 1995, the Company secured credit of $16.5 million from NBD Bank. The outstanding balance of this loan at October 26, 1995 was approximately $12.4 million (exclusive of the $5.9 million letter of credit for a litigation appeal bond) and is to be partially repaid with the net proceeds of this Offering. See "Use of Proceeds." (2) The bank line of credit and the bank notes are secured by all of the Company's assets. (3) See Note 4 of Notes to Consolidated Financial Statements. (4) Excludes 265,775 shares issuable upon the exercise of options granted under the Company's stock option plans and shares, subject to adjustment, issuable upon conversion of the Debentures. 9 15 SELECTED CONSOLIDATED FINANCIAL DATA The selected historical consolidated financial data for the fiscal years 1990 through 1994 are derived from the Company's audited consolidated financial statements. The selected consolidated income and balance sheet data as of September 30, 1995 and 1994 and for the nine months then ended, are derived from unaudited financial statements but, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, except for an additional adjustment for the patent infringement settlement of $1,825,000 in 1995, necessary for a fair statement of the financial position and results of operations for such periods and as of such dates. The results of operations for the nine months ended September 30, 1995 are not necessarily indicative of the results to be expected for the full year. The Company did not pay any cash or other dividends in the periods presented below. The information below should be read in conjunction with the Consolidated Financial Statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------------- ----------------- 1990 1991 1992 1993 1994(1) 1994 1995(1) ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA) INCOME STATEMENT DATA: Net sales....................... $44,521 $43,571 $45,685 $50,110 $73,508 $56,435 $54,825 Cost of sales................... 29,805 29,247 32,296 30,190 45,886 35,352 35,284 ------- ------- ------- ------- ------- ------- ------- Gross profit.................. 14,716 14,324 13,389 19,920 27,622 21,083 19,541 Engineering..................... 1,149 1,069 1,617 1,688 2,696 1,892 2,317 Sales and marketing............. 7,379 8,187 9,791 9,346 13,955 9,984 8,845 General and administrative...... 5,694 5,632 5,636 6,520 7,928 6,494 6,307 ------- ------- ------- ------- ------- ------- ------- Total operating expenses........ 14,222 14,888 17,044 17,554 24,579 18,370 17,469 Income (loss) from operations... 494 (564) (3,655) 2,366 3,043 2,713 2,072 Litigation expense.............. -- -- -- -- 4,386 -- 1,825 Other income (expense).......... (128) (308) (421) (222) (743) (513) (1,042) ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes......................... 366 (872) (4,076) 2,144 (2,086) 2,200 (795) Income taxes (benefits)......... 155 (250) (1,174) 608 (710) 774 (60) ------- ------- ------- ------- ------- ------- ------- Net income (loss)............... $ 211 $ (622) $(2,902) $ 1,536 $(1,376) $ 1,426 $ (735) ======= ======= ======= ======= ======= ======= ======= Net income (loss) per common share......................... $ 0.08 $ (0.24) $ (1.16) $ 0.63 $ (0.58) $ 0.60 $ (0.32) ======= ======= ======= ======= ======= ======= ======= Weighted average number of common shares outstanding..... 2,586 2,553 2,495 2,445 2,376 2,392 2,320 Ratio of earnings to fixed charges(2).................... 1.75x -- -- 5.38x -- 4.57x 0.30x BALANCE SHEET DATA: Working capital................. $ 8,034 $11,626 $ 9,983 $ 8,164 $12,716 $11,023 $13,734 Total assets.................... 25,265 25,439 25,136 24,135 38,221 34,954 42,471 Long-term obligations........... 151 4,483 5,417 3,867 13,640 6,960 15,525 Shareholders' equity............ 16,670 15,439 12,512 13,280 11,215 14,583 10,482
- --------------- (1) The results of operations includes patent infringement settlement costs in the amount of $4.4 million for the year ended December 31, 1994 and $1.82 million for the nine months ended September 30, 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Legal Proceedings." (2) The ratio of earnings to fixed charges was computed by dividing earnings by fixed charges. For this purpose "earnings" consist of earnings before income taxes and "fixed charges," and "fixed charges" consist of interest on indebtedness and the portion of rental expense which is deemed to be representative of the interest component. For the years ended December 31, 1991, 1992 and 1994 earnings were not sufficient to cover fixed charges by $156,000, $3.4 million and $1.2 million, respectively. 10 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Since its founding in 1979, the Company has evolved into a leading U.S.-based manufacturer of vehicle security systems. Since 1990, the Company has realized substantial growth in net sales primarily as a result of internal growth and acquisitions. The Company's acquisition of Code-Alarm Europe and EAE in early 1994 has resulted in a significant and growing presence in Europe. The Company is involved in a patent infringement suit involving a shock sensing device. The damage portion of the trial was completed in January 1995 and at December 31, 1994, the Company recorded an accrual for damages of approximately $4.2 million. In June 1995, the Company received information from the United States District Court that the damages would total $6.0 million. Accordingly, the Company recorded an additional accrual for damages of $1.8 million in 1995. The following table sets forth, for the periods indicated, earnings data as a percentage of net sales of the Company:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------------- ------------- 1990 1991 1992 1993 1994 1994 1995 ---- ---- ---- ---- ---- ---- ---- Net sales............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Costs of sales....................... 66.9% 67.1% 70.7% 60.2% 62.4% 62.6% 64.4% ---- ---- ---- ---- ---- ---- ---- Gross profit......................... 33.1% 32.9% 29.3% 39.8% 37.6% 37.4% 35.6% Engineering.......................... 2.6 2.5 3.5 3.4 3.7 3.4 4.2 Sales and marketing.................. 16.6 18.8 21.4 18.7 19.0 17.7 16.1 General and administration........... 12.8 12.9 12.3 13.0 10.8 11.5 11.5 Total operating expenses............. 31.9 34.2 37.3 35.0 33.4 32.6 31.9 Income (loss) from operations........ 1.1 (1.3) (8.0) 4.7 4.1 4.8 3.8 Litigation expense................... -- -- -- -- 6.0 -- 3.3 Other income (expense)............... (0.3) (0.7) (0.9) (0.4) (1.0) (0.9) (1.9) Income (loss) before income taxes.... 0.8 (2.0) (8.9) 4.3 (2.8) 3.9 (1.5) Income taxes (benefits).............. 0.3 (0.6) (2.6) 1.2 (1.0) 1.4 (0.1) Net income (loss).................... 0.5 (1.4) (6.4) 3.1 (1.9) 2.5 (1.3)
Nine Months Ended September 30, 1995 Compared to Nine Months Ended September 30, 1994 The Company's consolidated net sales increased $93,000, or less than 1.0%, for the quarter ended September 30, 1995 as compared to the quarter ended September 30, 1994. For the nine months ended September 30, 1995, consolidated net sales decreased $1.6 million, or 2.8%, to $54.8 million as compared to $56.4 million for the nine months ended September 30, 1994. The decrease is attributable to a decline of $1.6 million, or 7.9%, in the quarter ended June 30, 1995. The nine month results were primarily due to a decrease in sales to mass merchandisers and independent dealers in the quarter ended June 30, 1995 and were partially offset by increases in OEM and expediter sales in the quarter ended September 30, 1995. The Company expects sales in the quarter ended December 31, 1995 to be slightly below sales for the comparable period in 1994, with higher OEM sales in Europe being offset by a decrease in domestic OEM and independent dealer sales. The Company's consolidated gross profit increased $102,000, or 1.5%, for the quarter ended September 30, 1995, as compared to the quarter ended September 30, 1994. For the nine months ended September 30, 1995, consolidated gross profit decreased $1.5 million, or 7.3%, to $19.5 million as compared to $21.0 million for the nine months ended September 30, 1994. As a percentage of consolidated sales, gross profit decreased to 35.6% in the nine months ended September 30, 1995 from 37.4% in the comparable period 11 17 of 1994. The decrease was due to the Company's emphasis on OEM sales in both Europe and the United States primarily due to start up manufacturing problems with the Company's European products production in the United States in the first two quarters of 1995. The OEM sales have lower profit margins, but are generally characterized by lower selling costs, than retail sales. The Company expects continued lower gross profit margin in the remainder of 1995 due to continued emphasis on OEM sales. Consolidated operating expenses increased $145,000, or 2.5%, for the quarter ended September 30, 1995 as compared to the quarter ended September 30, 1994. For the nine months ended September 30, 1995, consolidated operating expenses decreased $901,000, or 4.9%, to $17.5 million as compared to $18.4 million for the nine months ended September 30, 1994. The decrease in consolidated operating expense was attributable to decreased sales and marketing expenses, partially offset by increases in engineering and product development costs. The Company expects to sustain decreases in marketing and administration expenses as a result of continued emphasis on OEM sales, but expects engineering and product development costs to level off for the remainder of the year. As a result of the foregoing, the Company earned consolidated income from operations of $996,000 in the quarter ended September 30, 1995 compared to $1.0 million in the quarter ended September 30, 1994. Consolidated income from operations declined $641,000, or 23.6%, for the nine months ended September 30, 1995, to $2.1 million as compared to $2.7 million for the nine months ended September 30, 1994. Interest expense increased $531,000 in the nine months ended September 30, 1995, or 124.9%, to $956,000 as compared to $425,000 for the nine months ended September 30, 1994. Increases are attributable to higher interest rates and increased indebtedness associated with European Operations. Other expenses for the nine months ended September 30, 1995 increased by $1.8 million, to $1.9 million as compared to $88,000 for the nine months ended September 30, 1994. The increase was attributable to the accrual in the first half of the year of an additional $1.8 million for damages, including interest and costs, related to a patent infringement judgment on the ETC litigation. The Company had an effective domestic income tax rate of 34% on current operating income. Income taxes on foreign operations were approximately 33%. In the third quarter of 1995, the Company charged off state and foreign tax refunds determined to be uncollectable in the amount of $210,000. As a result of the foregoing, the Company earned consolidated net income of $430,000 in the quarter ended September 30, 1995 compared to $467,000 in the quarter ended September 30, 1994. The Company recorded a net loss of $735,000, or $0.32 per share, for the nine months ended September 30, 1995, compared to net earnings of $1.4 million, or $.60 per share, for the nine months ended September 30, 1994. Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 The Company's consolidated net sales for 1994 increased $23.4 million, or 46.7%, to $73.5 million as compared to $50.1 million in 1993. Excluding the effect of acquisitions ("EAE" and the remaining interest in Code-Europe, Ltd.), consolidated net sales increased $5.9 million, or 11.8%, in 1994. The non-acquisition related sales increases resulted primarily from increases in expediters, retail and General Motors/Ford sales volumes. The Company's consolidated gross profit for 1994 increased $7.7 million, or 38.7%, to $27.6 million as compared to $19.9 in 1993. Excluding the effect of acquisitions, consolidated gross profit for 1994 increased $1.4 million, or 7.0%. As a percentage of consolidated sales, gross profit decreased to 37.6% in 1994 from 39.8% in 1993. Such decreases were primarily due to launch costs associated with the introduction of the Euro Alarm in the fourth quarter of 1994. Consolidated operating expenses for 1994 increased $7.0 million, or 39.8%, to $24.6 million as compared to $17.6 million in 1993. Excluding the effect of acquisitions, consolidated operating expenses for 1994 increased $1.1 million, or 6.3%. Increases in consolidated operating expenses are attributable to acquisitions as well as other sales, marketing and product development efforts. 12 18 As a result of the foregoing, consolidated income from operations for 1994 increased $677,000, or 28.6%, to $3.1 million as compared to $2.4 million for 1993. The increase was due to the acquisition of EAE and increased volume through General Motors and Ford. Interest expense for 1994 increased $367,000, or 131.6%, to $646,000 as compared to $279,000 for 1993. The increase was due to increased interest rates, the acquisition of EAE and debt incurred in connection with the following items: (i) financing sales increases, (ii) the acquisition of an important patent and (iii) the Company's decision to repurchase stock held by two former directors at below market prices as of the date of repurchase. Other expenses/(income) for 1994 increased $156,000, or 274.5%, to $99,000 as compared to income of $57,000 for 1993. Other expenses consisted of estimated costs associated with a judgment to be entered against the Company in the patent infringement lawsuit, Code-Alarm v. Electromotive Technologies Corporation, United States District Court, Eastern Division, 87-CV-74022-DT. The amount recorded included the Company's estimate at that time of damages, interest and legal fees to be awarded the Plaintiff, as well as expenses that the Company had already incurred, and estimated expenses that might be incurred in an appeal of the judgment. The Company's effective income tax rate for the year ended 1994 was 34.0%. As a result of the foregoing, the Company incurred a consolidated net loss of $1.4 million, or $0.58 per share, for the year ended December 31, 1994, compared to a net profit of $1.5 million, or $0.63 per share, for the year ended December 31, 1993. Excluding non-recurring expenses related to litigation, the Company earned a profit of $1.5 million or $0.64 per share for the year ended December 31, 1994. Year Ended December 31, 1993 Compared to Year Ended December 31, 1992 The Company's consolidated net sales for 1993 increased $4.4 million, or 9.7% to $50.1 million as compared to $45.7 million in 1992. This increase was primarily due to increases in sales of private label vehicle security products to General Motors, Ford and Chrysler dealerships. Sales figures were also affected by a price increase on vehicle security products in the first quarter of 1993. The Company's consolidated gross profit for 1993 increased $6.5 million, or 48.8%, to $19.9 million as compared to $13.4 million in 1992. Such increases were primarily due to cost efficiencies related to increases in volume in the vehicle security product sales area. Consolidated operating expenses for 1993 increased $510,000, or 3.0%, to $17.5 million as compared to $17.0 million in 1992. The relatively small amount of operating expense increase resulted from the Company completing its efforts to consolidate its operations by eliminating separate business units and closing operations of the facility located at 32380 Edward, Madison Heights, Michigan. Such measures helped to reduce operating expenses during the year by eliminating duplicate administrative functions. Also in 1993, the Company implemented several measures to reduce overall operating costs, including cost savings policies on travel and entertainment costs and sales and marketing projects. These savings were partially offset by increased costs associated with litigation expenses. Higher than normal litigation expenses are expected to continue until cases currently in litigation are completed. As a result of the foregoing, consolidated income from operations for 1993 increased $6.0 million, or 154.5%, to $2.4 million as compared to a loss from operations of $3.6 million for 1992. Interest expense for 1993 decreased $146,000, or 34.5%, to $279,000 as compared to $425,000 for 1992. Increased cash flow from operations, primarily due to profits, contributed to a reduction of borrowing during 1993. The Company's effective income tax rate for the year ended 1993 was approximately $28.0%. That effective income tax rate differed from the statutory rate of 34.0% principally as a result of the utilization of an operating loss carry-forward of approximately $479,000. 13 19 As a result of the foregoing factors, the Company reported consolidated net income for the year ended December 31, 1993 of $1.5 million, or $0.63 per share, as compared to a net loss of $2.9 million, or $1.16 per share, for 1992. EFFECT OF INFLATION The Company does not believe that inflation has had a material impact on its operations over the past three years. QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited quarterly financial information for the past eight quarters (in thousands except for per share data and as a percentage of net sales):
QUARTER ENDED --------------------------------------------------------------------------------------------------------- DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, 1993 1994 1994 1994 1994 1995 1995 1995 ------------ --------- -------- ------------- ------------ --------- -------- ------------- Net sales.............. $ 12,581 $17,238 $ 20,534 $18,663 $ 17,073 $17,159 $ 18,910 $18,756 Gross profit........... 5,258 6,639 7,627 6,816 6,539 5,941 6,682 6,918 Operating income....... 702 715 958 1,039 331 92 985 996 Net income (loss)...... 439 439 520 467 (2,803) (1,070) (95) 430 Net income (loss) per share................ 0.15 0.18 0.22 0.20 (1.18) (0.46) (0.04) 0.19 Net sales.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit........... 41.8 38.5 37.1 36.5 38.3 34.6 35.3 36.9 Operating income....... 5.6 4.2 4.7 5.6 1.9 0.5 5.2 5.3 Net income (loss)...... 3.5 2.6 2.5 2.5 (16.4) (6.2) (0.5) 2.3
Quarterly earnings per share calculations for the periods indicated are based on the weighted average number of shares outstanding for the quarter then ended. Annual earnings per share calculations are based on weighted average number of shares outstanding for the twelve month period then ended. Due to fluctuations in the weighted average number of shares outstanding, the sum of the earnings per share calculations for each quarter will not necessarily equal the calculated earnings per share for the twelve month period. LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated working capital was $13.7 million at September 30, 1995 compared to $12.7 million at December 31, 1994. The current ratio (current assets divided by current liabilities) as of September 30, 1995 is 1.83 to 1, compared to 1.95 to 1 at December 31, 1994. Net cash used in operating activities for the first nine months of 1995 was $406,000, including $1.3 million of depreciation and amortization charged during the nine months ended September 30, 1995. Cash consumed during the first nine months reflect an increase in inventories and accounts receivable of approximately $3.5 million. The Company experienced a $3.7 million increase in finished goods inventory in Europe, most of which was attributable to the Company's efforts to meet expected customer requirements. Lower than anticipated European sales volumes also contributed to this higher than normal inventory level. This increase was partially offset by an increase of accounts payable in the amount of $2.5 million. As of October 26, 1995, $1.4 million of the $13.8 million revolving credit facility was unused and available. Additionally, $7.0 million and $1.0 million of amounts outstanding under the revolving line of credit were borrowed under the LIBOR option available to the Company at interest rates of 8.375% and 8.125%, respectively. During the first nine months of 1995, the Company concluded a loan agreement with NBD Bank. Under the terms of the agreement, the Company has secured a $13.8 million revolving credit facility, $1.3 million in secured notes and $2.2 million in unsecured notes. The Company has used these facilities for operating capital and to provide financing for an appeal bond in the amount of $5.9 million for the patent infringement litigation. 14 20 The Company historically has been involved in a number of legal disputes, many of which have resulted in litigation, both as plaintiff and as defendant, including a number of proceedings currently pending. The cost of legal proceedings and settlements of lawsuits involving the Company has been a principal cause of the Company's lack of profitability in 1994 and has had a substantial negative impact on the Company's results of operations in 1995 to date. See "Risk Factors -- Litigation" and "Legal Proceedings." CHANGES IN COMPANY'S CERTIFYING ACCOUNTANT Effective July 24, 1995 the Board of Directors of the Company, based on the recommendation of the Audit Committee, appointed Deloitte & Touche LLP as the independent accountants of the Company. Deloitte & Touche LLP replaced Coopers & Lybrand L.L.P. (dismissed July 19, 1995) the Company's previous independent accountants. The reports of Coopers & Lybrand L.L.P. on the financial statements of the Company during the past two years was unqualified. During the Company's two most recent fiscal years and the subsequent interim period from the date of the last audited financial statement through July 19, 1995, there were no disagreements with Coopers & Lybrand L.L.P. on any matter of accounting principles or practices, financial statement disclosure, audit scope or procedures. 15 21 BUSINESS The Company is a leading designer, manufacturer and marketer of vehicle security systems including alarm and remote keyless entry systems. The Company's products are marketed and sold through automobile dealerships, independent retail specialty stores, automotive expediters and mass merchandisers. The Company believes that it has growth opportunities as a niche supplier to U.S. and international OEM markets and to its existing customer base. MARKET DESCRIPTION AND INDUSTRY OVERVIEW Theft of vehicles and vehicle contents is a widespread problem in the U.S. and most European countries. According to industry sources, in the United States, the theft of vehicles and vehicle contents, including repair and replacement costs, recovery costs, loss of productivity, etc., resulted in losses of approximately $7.5 billion in 1994 and the car theft rate in Germany, France and other affluent Western European countries was 13 per 1,000 vehicles, compared to 8 per 1,000 in the United States. Traditionally, vehicle security systems have been sold mainly in the aftermarket. However, automakers are beginning to offer vehicle security systems as installed options, either at the factory or at the dealership. Although most anti-theft devices are not offered as standard equipment on vehicles, the Company believes that the general trend is toward vehicle security systems that are either OEM-approved or installed on the assembly line. The Company also believes that demand by European consumers for anti-theft devices is stimulated by rising insurance premiums and incentives offered by some European insurance companies for using vehicle security systems. These incentives are typically in the form of lower premiums for suitably equipped cars and lower claim payouts for those that are not. In certain European countries, automobiles above a specific monetary value cannot be insured against theft without an approved anti-theft system installed. The Company believes that the foregoing factors will continue to increase both domestic and European demand for vehicle security systems and that it is in the process of effectively positioning itself to take advantage of these growing global markets for vehicle security systems. BUSINESS STRATEGY Key elements of the Company's business strategy include the following: - Focus Sales Efforts to OEM customers. The Company intends to focus its sales and marketing efforts toward the OEM market primarily through the following: Auto Brand Distribution to Dealers -- The Company presently markets its products to more than 9,000 automobile dealers in North America pursuant to private label purchase agreements with General Motors, Ford and Chrysler under the automakers' brand names including Mr. Goodwrench(TM), Ford Remote Systems(TM) and Mopar(TM), respectively, and it believes that additional growth opportunities are available through such dealers. The Company expects to pursue these opportunities by continuing to promote its sales to dealers through personal calls on dealers by the Company's sales staff, dealer education programs, seminars, product literature and manuals and on-site promotional items such as signs. To support such sales efforts, the Company intends to continue to offer technical support service and toll-free telephone lines to answer questions and help with problems. Direct Sales to Manufacturers for Factory Floor Installation -- The Company believes that there is potential for expanding its sales to OEMs for such items as remote keyless entry systems, basic alarm systems and sensors. In light of increased consumer demand for systems offered in top-of-the-line models, OEMs are increasingly offering such systems. It is the Company's intent to capture a larger share of this market, which is currently supplied by more traditional OEM electronic suppliers such as TRW, Motorola and United Technologies. The Company's efforts in this regard currently consist of direct sales calls to automobile manufacturers by the Company's sales personnel and independent manufacturers representatives, and are focused on obtaining long-term supply contracts. 16 22 Strategic Alliances -- The Company is exploring opportunities to enter into strategic relationships with other suppliers to deliver to the OEMs a product which incorporates the Company's systems or technologies. For example, the Company has recently entered into development projects with both Lear Seating Corp. and Gentex Corp. to supply parts to these two manufacturers for use in their end products sold to OEMs. The Company believes that the multiplexing systems (which consist of a sophisticated computer processor located in the vehicle, connected to various electrical systems of the vehicle by a single wire, which allows simultaneous communication between multiple vehicle systems) now being employed by automakers offer a particular opportunity for such strategic alliances. See "Business Strategy-Enhanced Engineering Capability" and "Engineering, Research and Development." - Continue Sales to Post-Delivery Market Historically, the Company has successfully marketed to independent retailers and mass merchandisers. Currently, the Company sells to more than 1,200 independent retail specialty stores; automotive expediters; and mass merchandisers. The Company intends to continue its focus on this market. - Expand European Presence The Company believes that it has significant growth opportunities both in the OEM and retail markets in Europe. Recognizing this, the Company acquired EAE as of January 1, 1994. The Company is currently concentrating its European sales efforts in France. Further expansion into other European markets is complicated by certain factors such as government approvals and insurance industry accreditation required to sell its products. In certain European countries, insurance industry certification of a vehicle security system is a prerequisite to obtaining theft insurance for most motor vehicles. The Company has received French and Belgian insurance industry accreditation for its electronic security systems, but to date has been unable to secure German insurance industry accreditation required to sell its products in Germany. European insurance industry standards are subject to change without notice; and, in 1994, significant changes in industry standards required the development and introduction of new products for 1995. The Company is currently seeking accreditation in several major European countries in an effort to take advantage of the growing market for vehicle security systems. - Enhance Engineering Capability In order to stay competitive and deliver high quality, consumer-friendly vehicle security systems, the Company plans to continue to enhance its engineering and product testing capabilities. The Company believes that multiplexing systems planned for some top-of-the-line automobiles will allow more efficient access to a larger number of vehicle operations than present conventional wire harness electrical systems, and that the presence of these multiplexing systems will present potential growth opportunities for the Company over the next decade. The Company believes that it is favorably positioned to increase its business opportunities for interfacing with multiplexing systems because of the Company's reputation for technical innovation, quality, reliability and competitive pricing. See "Engineering, Research and Development." - Shorten Product Development and Introduction Cycles The Company believes that short product development cycles are essential to its success. Such cycles enable the Company to capitalize upon the higher margins that are associated with the introduction of new products and positions the Company to establish itself as a leader in its existing as well as its new markets. The Company's efforts in this area include simultaneous engineering which utilizes product teams from the engineering and manufacturing divisions of the Company whose function is to streamline product development and introduction cycles. PRODUCTS The Company's vehicle security systems utilize low power radio frequency technology and are operated by remote micro-transmitters. Frequencies and the manufacture of transmitters and receivers used in the Company's remote systems are different in European countries than in the U.S. and are regulated separately in each country in which the Company does business. 17 23 The Company's vehicle security systems fall into two broad categories: alarm systems and remote keyless entry systems. Alarm Systems -- In general, the Company's alarm systems contain two major components: an immobilizer circuit and a siren. The immobilizer circuit prevents the automobile from being started unless the alarm system has been turned off. Each system automatically resets itself after the siren has been sounded for a predetermined period. Many of these systems allow the operator to choose between manually setting the alarm upon leaving the vehicle and having the alarm automatically set one minute after the keys are removed from the ignition switch. Various other components, such as hood locks and intrusion sensors, can generally be added to the alarm system. Historically, most of the Company's sales have consisted of remote alarm systems, with a basic unit consisting of a remote micro-transmitter, which can be attached to the operator's keychain, and a control unit, which is located inside the automobile. The remote micro-transmitter is used to turn the alarm system on and off. This basic unit is typically sold as part of a system which is configured in various ways based upon the customer preferences and distribution channels. In addition to remote alarm systems, the Company also produces digital and passive alarm systems which offer a lower level of protection. Digital systems, unlike remote systems, do not offer a way to turn the alarm system on and off from outside the vehicle. Instead, upon entering the vehicle, the operator has a fixed period of time to turn off the alarm system by entering the proper numerical sequence on a keypad. Passive alarm systems are much like digital systems, except that the operator only needs to insert the key in the ignition switch of the automobile to turn off the alarm. Remote Keyless Entry Systems -- The Company's remote keyless entry system enables the operator to use the remote micro-transmitter to lock and unlock the doors or open the trunk from outside the vehicle without having to use keys, to turn on the interior light to see if anyone is waiting inside the vehicle and to set off the siren in the event of a personal emergency. The Company's vehicle security systems, most of which are now remote systems, include Code-Alarm(R), Scorpion(R), Chapman(R) and Anes(R) brands in the U.S. and Dragon, Jack-Code, Codalarme(R) and Euro-Alarm in Europe. The Company's products are sold into two categories: pre-delivery and post-delivery. Pre-delivery includes those products sold in the OEM market for vehicle installation before delivery of a new vehicle to the purchaser (either through installation by the automaker or as a dealer-installed option or by an automotive expediter). Post-delivery includes those products which are installed on a vehicle already owned by the customer (generally through retail specialty stores and mass merchandisers).
NINE MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, ------------------------------- ------------------------------------------------- SEPTEMBER 30, SEPTEMBER 30, 1992 1993 1994 1994 1995 ------------- ------------- ------------- ------------- ------------- NET NET NET NET NET SALES PCT. SALES PCT. SALES PCT. SALES PCT. SALES PCT. ------- --- ------- --- ------- --- ------- --- ------- --- U.S. Pre-delivery(1)........... $19,049 42% $23,391 47% $27,367 37% $20,735 37% $22,926 42% Post-delivery(2).......... 16,190 35 20,210 40 23,832 32 18,138 32 13,063 24 Europe(3) Pre-delivery.............. -- -- -- -- 8,031 11 6,877 12 5,909 11 Post-delivery............. -- -- -- -- 9,430 13 6,872 12 9,767 18 Other(4).................... 10,446 23 6,509 13 4,848 7 3,813 7 3,160 5 ------- --- ------- --- ------- --- ------- --- ------- --- Total.............. $45,685 100% $50,110 100% $73,508 100% $56,435 100% $54,825 100% ======== ==== ======== ==== ======== ==== ======== ==== ======== ====
- --------------- (1) Pre-delivery includes sales to OEMs and expediters. (2) Post-delivery includes all other vehicle security system sales. (3) The Company acquired EAE and Code-Alarm Europe on January 1, 1994. (4) Includes contract manufacturing, home security systems and discontinued operations, including mechanical security devices. 18 24 CUSTOMERS The Company's primary OEM customers consist of Ford, General Motors, Peugeot, Volkswagen-Audi Group France, Chrysler, Subaru and Renault. Historical sales by the Company to these customer groups and to other OEMs and expediters are set forth below.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, ------------------------------------- --------------------------------------------------------- SEPTEMBER 30, SEPTEMBER 30, 1992 1993 1994 1994 1995 ----------------- ----------------- ----------------- ----------------- ----------------- AS A AS A AS A AS A AS A PERCENT PERCENT PERCENT PERCENT PERCENT OF OF OF OF OF NET TOTAL NET TOTAL NET TOTAL NET TOTAL NET TOTAL OEM NET OEM OEM NET OEM OEM NET OEM OEM NET OEM OEM NET OEM SALES SALES SALES SALES SALES SALES SALES SALES SALES SALES ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (AMOUNT IN THOUSANDS) Ford.................... $ 7,121 37% $ 7,853 34% $ 8,010 23% $ 5,800 21% $ 6,471 22% General Motors.......... 6,705 35 7,809 33 7,964 22 6,127 22 6,761 23 Peugeot................. -- -- -- -- 5,207 15 4,438 16 5,045 18 Volkswagen.............. -- -- -- -- 3,277 9 2,851 10 896 3 Chrysler................ 1,315 7 2,029 9 2,057 6 1,514 6 2,359 8 Subaru.................. -- -- -- -- -- -- -- -- 443 2 Renault................. -- -- -- -- -- -- -- -- 279 1 Other OEMs.............. 3,908 21 5,700 24 8,883 25 6,882 25 6,581 23 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total OEM Sales......... $19,049 100% $23,391 100% $35,398 100% $27,612 100% $28,835 100% ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
With the exception of sales to dealers of General Motors and Ford, no single customer accounted for more than 10% of the Company's total net sales during the year ended December 31, 1994. Sales to Ford, General Motors and Peugeot accounted for 10.9%, 10.8% and 7.1%, respectively, of the Company's total net sales for the year ended December 31, 1994. Pursuant to its agreements with General Motors and Ford, the Company's direct sales personnel and independent manufacturer's representatives engaged by the Company call on, and solicit orders directly from, General Motors and Ford dealers. The Company views individual dealers as its customers. The Company historically has placed and expects to continue to place a strong emphasis on its retail customers. The Company believes that accelerated growth in the OEM market for vehicle security systems offers the Company an opportunity to increase future sales and, therefore, its expansion into the OEM market, as well as its continued presence in the retail market, is important to the Company's future success. The increase in pre-delivery installation could have a detrimental effect on the retail market. The following table shows the percentage of the Company's total net sales attributable to the OEM and retail market in both Europe and North America for the periods set forth below. This table does not include all other sales for the periods set forth below, which include contract manufacturing, home security systems and discontinued operations and sales to countries outside of North America and Europe:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, ------------------------------- ------------------------------------------------ SEPTEMBER 30, SEPTEMBER 30, 1992 1993 1994 1994 1995 -------------- -------------- -------------- -------------- -------------- OEM RETAIL OEM RETAIL OEM RETAIL OEM RETAIL OEM RETAIL ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ North America............ 50% 50% 52% 48% 39% 37% 38% 36% 44% 27% Europe................... --% --% --% --% 11% 13% 13% 13% 11% 18%
MARKETING Sales of the Company's products to OEMs are made directly by the Company's sales and marketing personnel located at the Company's Madison Heights, Michigan headquarters and its European offices located in Paris, Brussels, Madrid and Birmingham, England. Through these sales and marketing offices, the Company services its OEM customers. These sales efforts are supported by a field force of 62 salespersons 19 25 who call directly on dealers to explain and promote the ordering of the Company's products through the OEMs. In promoting sales of vehicle security systems that require professional installation, the Company emphasizes dealer education programs, sales and installation seminars, product literature and technical manuals. Educational and marketing efforts are supplemented by direct mail campaigns, technical bulletins, advertising support, sales literature, newsletters, product displays and dealer signs. To promote quality, customer satisfaction and relationships with dealers and installers, the Company maintains technical support and consumer support services and toll-free telephone lines to answer questions and to help solve problems with installation or operation of the Company's products. ENGINEERING, RESEARCH AND DEVELOPMENT The Company employs 20 full-time engineers and 31 full-time technicians in its engineering and research and development programs. This staff is divided into three main groups responsible for: (a) providing technical and support services to its customers, (b) improving manufacturing processes, and (c) developing new products. The Company's expenditures for engineering, research and development were approximately 3.5%, 3.4% and 3.7% of revenues in 1992, 1993 and 1994, respectively. The Company conducts a variety of research and product development projects designed to achieve improvements in vehicle security systems through the development of new technologies. The Company's products include a number of innovative circuits and features developed by the Company. Past research and development efforts have produced consumer installable vehicle security systems that incorporate many of the features typically found on more expensive professionally-installed systems, as well as the circuitry designed to prevent use of devices designed to search signals to deactivate its alarms. The technological innovations of the Company's customers presents both challenges and opportunities for the Company. The Company's products must be advanced enough to efficiently interface with its customer's vehicles. One new innovation which has recently been introduced on certain high-end vehicles is the multiplexing system. The multiplexing system consists of a sophisticated computer processor located in the vehicle, connected to various electrical systems of the vehicle by a single wire, which allows simultaneous communication between multiple vehicle systems. As a result, the vehicle can accommodate more sophisticated operations and technologically complex accessories such as security systems. Multiplexing systems allow security systems more efficient access to a larger number of vehicle operations than do conventional wire harness electrical systems. The Company believes that the presence of multiplexing systems present potential growth opportunities for the Company over the next decade. The Company believes that it is positioned to increase its business opportunities for connecting its products to the multiplexing systems because of the Company's reputation for technical innovation, quality, reliability and competitive pricing. MANUFACTURING The Company produces electronic products at facilities located in Madison Heights, Michigan and Georgetown, Texas. Automated and manual assembly methods are used to produce circuit boards, which are key components of many of the Company's products. The Company is expanding the use of automation in its manufacturing operations. The Company's electronic security systems are designed around the Company's manufacturing processes, which particularly emphasize surface mount technology ("SMT"). SMT is the automated manufacturing process used to place micro electronic components on printed circuit boards with a high level of accuracy and at high speed. The use of SMT enables the Company to design and manufacture products that are compact, portable and reliable and to achieve manufacturing efficiencies that result in lower costs. The Company believes that it will have a competitive advantage as a result of its recent development and on-going construction of an on-premises test and validation laboratory and its lower labor costs for U.S. operations. In addition, the Company is in the process of seeking approval for QS 9000 accreditation and 20 26 hopes to obtain such accreditation during 1996, which, if granted, could result in an additional competitive advantage. While the Company currently does not manufacture its products in Europe, the Company does assemble some of its final products in Europe. At this time the Company is considering various alternatives for manufacturing its products overseas. The Company attempts to fill its U.S. orders for vehicle security systems within 48 hours. Current U.S. product backlog, therefore, is not an important indicator of long-term sales trends. However, since European operations are currently supplied from U.S. manufacturing plants, additional inventory requirements necessary to achieve the 48-hour shipment goal have significantly increased working capital requirements and management attention to order and production planning. SUPPLIERS The Company's products include a number of high-technology components that are available from only a few suppliers and, in some cases, a single supplier. The Company frequently requires large volumes of such components. If the Company's suppliers are unable to fulfill the Company's needs for such components, the Company may be unable to fill customer orders and its business and financial condition, including working capital and results of operations, may be materially and adversely affected. Since part of the Company's strategy is to shorten product development and introduction cycles, occasions may arise in the future where the Company's ability to produce products outpaces its suppliers' ability to supply components. There can be no assurance that the Company can continue to obtain adequate supplies or obtain such supplies at their historical cost levels. The Company has no guaranteed supply arrangements with any of its sole or limited source suppliers, does not maintain an extensive inventory of components, and customarily purchases sole or limited source components pursuant to purchase orders placed in the ordinary course of business. Moreover, the Company's suppliers may, from time to time, experience production shortfalls or interruptions which impair the supply of components to the Company. There can be no assurance that such shortages will not occur in the future and adversely affect the Company's business and financial condition, including working capital, and results of operations. See "Risk Factors -- Suppliers." PRODUCT WARRANTY The Company provides original purchasers of most vehicle security systems with a limited warranty. Scorpion(R) brand products have a one-year limited warranty and Anes(R) brand carries a limited two-year warranty. Dragon, Jack-Code and Codalarme(R) products sold in Europe have a limited one-year repair and replacement warranty. Warranties are customarily limited to replacement of defective parts to the original purchaser. The Company has several disputes pending with customers who claim that its home security and Intercept(TM) systems manufactured by the Company were faulty or inoperable. The Company also offers a "Theft Protection Guarantee" for certain Code-Alarm(R) and Anes(R) brand products, where the Company will pay the consumer a specified amount (depending on the product purchased) if the consumer's vehicle is stolen within one year of purchasing the Company's product. Claims experienced as to this warranty have been $37,000, $33,000, $51,000 in 1992, 1993 and 1994, respectively, and $19,000 for the first nine months of 1995. The Company generally warrants contract manufactured products for 60 days. The warranty is limited to replacement of defective material or a price allowance at the Company's option. COMPETITION All markets in which the Company participates are highly competitive, and many current or prospective competitors, including several of the Company's significant OEM customers, are substantially larger and possess significantly greater financial, marketing and technical resources than the Company. An increase in factory-installed vehicle security systems or the introduction of other dealer-installed security systems and 21 27 remote keyless entry systems by OEM customers or existing and potential competitors could have a material adverse effect on the Company. See "Risk Factors -- Competition." There are a number of other well-known companies manufacturing and distributing electronic components for the automotive after-market which could become effective competitors should they choose to enter the vehicle security market. Many of these companies are much larger and better capitalized than the Company and have established distribution channels. While offshore producers of competing systems have not captured significant market share, these companies could also become significant competitors. Competing manufacturers have developed vehicle recovery systems designed to locate stolen automobiles. Sales of other companies' automobile recovery systems could have a material adverse effect on sales of the Company's products. The Company also faces competition from certain mechanical devices such as The Club(TM). TRADEMARKS AND PATENTS The Company markets its vehicle security systems under several registered trademarks. The Company also has patents and patent applications pending for certain of its products and components. The Company considers its trademarks, patents and patent applications to be valuable, and has defended, and intends to continue vigorously defending, its patented and proprietary technology from infringement or misappropriation. There can be no assurance that the Company's measures to protect its proprietary rights will deter or prevent unauthorized use of the Company's technology. Furthermore, the laws of certain countries may not protect the Company's proprietary rights to the same extent as do the laws of the United States. The Company has applied for patents on certain inventions in Europe; however, none of these patents has yet been granted nor is there any assurance that patents will be granted in the future. In addition, the Company may, from time to time, become subject to legal claims asserting that the Company has violated intellectual property rights of third parties. In the event a third party were to sustain a valid claim against the Company and in the event any required license were not available on commercially reasonable terms, the Company's business and financial condition, including working capital and results of operations, could be materially and adversely affected. See "Risk Factors -- Intellectual Property." Also, see "Legal Proceedings" for a more complete description of the legal proceedings involving the Company and its proprietary technology. REGULATION The FCC regulates the assignment of frequencies for manufacture and sale of remote vehicle security systems and remote keyless entry systems in the U.S. The Company has received FCC authorization to manufacture and sell the devices it currently sells in the U.S. In Europe, similar government agencies in each country regulate the assignment of frequencies and the Company has generally been able to meet the applicable frequency requirements. However, because insurance industry accreditation of vehicle security systems is, in most European countries, a prerequisite to an automobile owner's ability to obtain vehicle theft coverage, the Company's ability to market its products in such countries is dependent upon obtaining such insurance industry approvals and certifications. The Company has received French and Belgian insurance industry accreditation to manufacture and sell electronic security systems. To date, the Company has been unable to secure German insurance industry accreditation required to sell its products in Germany. The Company is selling its products in Spain where no insurance industry certifications are required. European insurance industry accreditation standards are subject to change without notice; and, in 1994, significant changes in industry standards required the development and introduction of new products for 1995. The Company's U.S. vehicle security systems are also affected by state insurance laws. The Company is aware of some states that mandate insurance discounts on comprehensive coverage for policyholders who have installed certain types of vehicle security systems. The Company is also aware of at least one state which provides additional discounts for policyholders who have installed vehicle recovery systems. The loss of regulatory and insurance industry approvals or failure to obtain necessary authorizations in the future could have a material adverse effect on the Company. See "Risk Factors -- Regulation." 22 28 EMPLOYEES As of October 30, 1995, the Company employed approximately 550 full-time persons. None of the Company's employees are represented by a labor union or other collective bargaining representative. The Company believes that relations with its employees are good. PROPERTIES The following table sets forth certain information concerning the principal properties leased by the Company:
APPROX. APPROX. LEASE TERM LOCATION USE SIZE (SQ. FT.) MONTHLY RENT EXPIRES ------------------------ ------------------------ -------------- ------------ ---------- 950 E. Whitcomb Office and manufacturing 42,000 $ 18,800 1997 Madison Heights, MI 1000 E. Whitcomb Office and warehouse 20,000 8,300 1997 Madison Heights, MI 16742 Burke Lane Office and warehouse 10,000 4,200 2000 Huntington Beach, CA 300 Industrial Ave. Office and manufacturing 60,000 7,200 2004 Georgetown, TX 32, Rue Delizy Office and manufacturing 18,000 29,218* 1997 93694 Pantin Cedex Paris, France
- --------------- * Amounts payable under the lease are payable in French francs. This table assumes an exchange rate of 4.89 francs to 1.00 US dollar. Management believes that the facilities presently occupied are adequate to meet the Company's requirements for the foreseeable future. All buildings and equipment are in good working condition. LEGAL PROCEEDINGS PATENT INFRINGEMENT LITIGATION In November 1987, the Company filed a declaratory judgment action against Electromotive Technology Corporation ("ETC") in the United States District Court for the Eastern District of Michigan seeking a declaration that ETC's U.S. Patent No. 4,585,569 (the " '569 Patent") was invalid or not infringed by the Company. Subsequently, Directed Electronics ("Directed") acquired an interest in the '569 Patent and was made a party to the lawsuit. A judgment as to liability was entered against the Company in 1992 and, after that judgment was sustained on appeal, a bench trial was held as to damages in 1993, but no final ruling was made until May 23, 1995, when a judgment was awarded against the Company in the amount of $5.5 million for infringement. The Company is now appealing (1) the inclusion of unpatented components of the Company's security system in the damage calculation and (2) the doubling of "actual damages" after November, 1990 based upon a holding of "willful patent infringement." In the course of preparing the appeal brief, it was discovered that ETC had failed to timely pay the first maintenance fee in April, 1990 to maintain the patent-in-suit with the U.S. Patent and Trademark Office (the "Patent Office"). The Company subsequently filed a motion with the United States District Court for the Eastern District of Michigan, Southern Division requesting certification for remand of the case for consideration of (1) the Company's intervening rights for the ten month lapse in the patent-in-suit, (2) reconsideration of the award of enhanced damages and attorney fees in view of ETC's failure to notify the Company and the court of the lapse, and (3) an appeal of the Patent Office's decision to reinstate the patent-in-suit. This motion was denied without prejudice by the United States District Court and the Company is preparing to file motions with the Court of Appeals for the Federal Circuit for remand or dismissal of the appeal based upon lack of jurisdiction for consideration by the District Court of the motion. Both ETC and Directed are asserting patent infringement 23 29 claims against two other shock sensor embodiments, one of which is the Company's principal shock sensor unit. The Company has posted a letter of credit in lieu of an appeal bond in the amount of $5.9 million, representing the amount of the judgment, including interest. LITIGATION INVOLVING ACQUISITIONS On January 19, 1990, Chapman Security Systems, Inc. ("Chapman Security"), a wholly-owned subsidiary of the Company, purchased certain of the assets of Chapman Products, Inc. ("Chapman Products") from LaSalle National Bank in a private sale in accordance with Section 9-504 of the Illinois Uniform Commercial Code. On August 17, 1990, Aureo Rivera Davila and Aureo E. Rivera ("Plaintiffs") filed a complaint against Asset Conservation, Inc. (a distributor of the now defunct Chapman Industries Corporation ("Chapman Industries")), Gabriel Guijarro Brunet and Iris Nieves De Guijarro and their marital conjugalship, in the United States District Court for the District of Puerto Rico (Case No. 90-2118 (SEC)) alleging infringement of United States Patent No. 3,548,373 (the " '373 Patent"). Asset Conservation filed a third-party complaint in the same court on June 16, 1992 against Chapman Industries, Chapman Products, the Company and Chapman Security alleging that they have a duty to indemnify Asset Conservation for all damages sustained by it in the litigation based upon Asset Conservation's previous distributor and indemnification agreement with Chapman Industries, which Asset Conservation claims was assumed by Chapman Products and Chapman Security. Plaintiffs have a default judgment in the amount of about $19.3 million, in addition to interest, entered by the United States District Court for the Northern District of Illinois in 1990 against Chapman Industries Corporation for infringement of the '373 Patent. Subsequently, the Plaintiffs added Chapman Products, the Company and its subsidiary, Chapman Security, as principal defendants in the case and are attempting to assert their default judgment against the Company and Chapman Security on a theory that the Company is the sole owner of Chapman Security and operates Chapman Security as its alter ego and, therefore, that the Company is a successor in interest to Chapman Industries. Plaintiffs also allege that the asset purchases by Chapman Products and then by Chapman Security were fraudulent conveyances. The Company believes that the allegations asserted by Asset Conservation and the plaintiffs are unlikely to succeed. The Company has tendered defense of the complaint to LaSalle National Bank, which is defending the fraudulent conveyance claims as well as certain of the successor liability claims brought by Plaintiffs under a reservation of rights against the Company and Chapman Security. This proceeding is in the early stages of discovery, and is not likely to be resolved in the near future. The size of this judgment (which, with interest, is currently estimated to be approximately $28.6 million, is so large that if it is enforced against the Company and Chapman Security, the likely award would exceed the Company's shareholders' equity, in which case the purchasers of the Debentures could lose their entire investment. M. and Mme. Sydney Drahy, from whom the Company purchased shares of its French subsidiary EAE, filed suit against the Company in the Commercial Court in Paris, France on August 1, 1995, seeking FF3,160,000 (approximately $645,000) based on disputed price adjustment provisions in the purchase agreement. The Company believes that there are offsets to the disputed adjustments under the purchase agreement, some of which have been acknowledged by the Drahys, and that no additional amounts are owed the Drahys in respect of the purchase price. A decision on this case is not expected to be rendered before mid-1996. Mme. Drahy brought a separate action in the Industrial Court of Paris against EAE, filed June 20, 1995, seeking damages of FF1,268,800 (approximately $260,000) for alleged wrongful termination of her employment and breach of an employment contract. The case is in the early stages of document production and the Company is unable at this time to assess its exposure, if any, to Mme. Drahy. PRODUCT WARRANTY LITIGATION On July 19, 1995, Intercept Security Corporation, a Canadian distributor of the Company's home security systems ("Intercept"), filed suit in the United States District Court, Eastern District of Michigan, Southern Division, alleging that certain home security products manufactured and sold by the Company failed to perform in a manner consistent with the alleged representations of the Company. The complaint alleges that the Company committed fraud, misrepresentation, and breached an implied warranty emanating from the sale 24 30 of these goods to Intercept. The Company denies these allegations and intends to defend against these charges. The Company has not, as yet, answered the complaint and the case remains in the early stages of discovery. The exposure, if any, to the Company cannot be ascertained at this time; however, an adverse judgment could materially adversely affect the Company's business and financial condition, including working capital and results of operations. LITIGATION COMMENCED BY THE COMPANY AGAINST ALLEGED PATENT INFRINGERS During 1995, the Company brought the following actions seeking to enforce its patents against alleged infringers. All of these lawsuits are in various stages of discovery and are subject to various affirmative defenses and counterclaims. While the Company believes that these actions are meritorious, the outcomes cannot be predicted at this early stage. It is the Company's policy to pursue infringers of its patents vigorously in an effort to preclude the manufacture and sale of infringing inventions or, alternatively, to seek payment of royalties on the Company's patented inventions manufactured, sold or used by others. - Code-Alarm, Inc. v. Magnadyne Corporations, et al, filed March 21, 1995 in the United States District Court for the District of Columbia and Transferred on April 6, 1995 to the United States District Court for the Central District of California sitting in Los Angeles, California. - Code-Alarm, Inc. v. Sherwood, Inc. et al, filed on July 20, 1995 in the United States District Court for the Central District of California sitting in Los Angeles, California. - Code-Alarm, Inc. v. Clifford Electronics, Inc., filed October 12, 1995 in the United States District Court for the Central District of California sitting in Los Angeles, California. - In the matter of Certain Starter Kill Security Systems, filed October 18, 1995 with the International Trade Commission against Directed Electronics, Inc. of Vista, California and Nutek Company of Taipei, Taiwan. In addition to claims of patent infringement, the Company seeks in this action to halt the importation and sale of the alleged infringing goods into the United States. 25 31 MANAGEMENT The directors and executive officers of the Company and its wholly-owned subsidiaries are listed below:
NAME AGE POSITION(1) ------------------------- --- -------------------------------------------------------------- Rand W. Mueller(2)....... 45 Director, President and Chairman of the Board Alan H. Foster........... 69 Director Kenneth M. Mueller(2).... 73 Director William S. Pickett....... 75 Director Marshall J. Mueller(2)... 46 Director Jack D. Rutherford....... 61 Director Robert V. Wagner......... 60 Vice President of Finance, Chief Financial Officer, Secretary and Treasurer David L. Etienne......... 35 Principal Accounting Officer John G. Chupa............ 37 Vice President, General Counsel Peter J. Stouffer........ 34 Vice President, Engineering Alain Lombard............ 40 Vice President European Operations Richard Wierzbicki....... 39 Executive Vice President and General Manager -- Tessco Group, Inc. John C. Moffat........... 35 Vice President, OEM Development and Marketing Michael Schroeder........ 33 Vice President, Sales, North America
- --------------- (1) Positions within the Company, except as otherwise indicated. (2) Rand W. Mueller and Marshall J. Mueller are brothers, and Kenneth M. Mueller is their father. Rand W. Mueller has been a full-time employee of the Company since January 1985 and has been the President since May 1986. Alan H. Foster has been a consultant to various government agencies, corporations and financial institutions for the last five years. He is also an adjunct professor at the School of Business Administration of the University of Michigan. From 1967 to 1978, Mr. Foster served as Vice President and Treasurer of American Motors Corporation. Kenneth M. Mueller is retired. He has served as a consultant to the Company since August 1987. Mr. Mueller was a consultant to the Ministry of Agriculture and Food, Government of Ontario, Canada from August 1985 to June 1987. Prior to 1985, he was President of Agribusiness Council, Inc., a not-for-profit corporation assisting lesser-developed countries in developing profitable agricultural ventures. William S. Pickett is retired. He was the President and General Manager of American Motors (Canada) Inc. prior to his retirement in 1982. Marshall J. Mueller is a former executive officer of the Company. From May 1980 to January 1990, Mr. Mueller held senior management positions, including President and Executive Vice President of the Company. Mr. Mueller resigned the Company in 1990, was reelected to the Company's Board of Directors in May 1991, and has served continuously since then. Jack D. Rutherford is Chairman and Chief Executive Officer of ICM Industries, Inc., a holding company for basic manufacturing companies serving the automotive, construction equipment and capital goods industries. Prior to co-founding ICM Industries, Inc. in 1985, Mr. Rutherford was employed by International Harvester Corporation in senior management capacities, including Vice Chairman and President and Chief Operating Officer. Prior to that time, Mr. Rutherford held operations management and manufacturing positions with Ford Motor Company. Robert V. Wagner joined the company as a Division Controller in January 1993, and was elected Vice President of Finance and Chief Financial Officer, Secretary and Treasurer in August 1993. Prior to joining the Company, he held a senior finance position with MLX Corp., was Chief Financial Officer of General Automotive Corporation, Operations Controller for Volkswagen of America, Chief Financial Officer of 26 32 American Sunroof Corp. (ASC), held several senior finance and treasury positions with American Motors Corporation, and was on the Finance Staff at several Ford Motor Co. divisions. Richard Wierzbicki joined the Company as Vice President of Finance in July 1990, and was later appointed Secretary and Treasurer. In August 1993 he became Executive Vice President and General Manager of the Company's Tessco Group, Inc., subsidiary. Prior to July 1990, he was a Senior Manager in the National Office, Corporate Finance Group, of Deloitte & Touche. Mr. Wierzbicki earned the designation Certified Public Accountant in 1982 while employed by Touche Ross & Co. David L. Etienne has been the Company's Principal Accounting Officer since March 1990. He was Assistant Controller of the Company from June 1989 to March 1990. From August 1986 to June 1989, Mr. Etienne was employed as a Certified Public Accountant with Laventhol & Horwath. Prior to 1986, he was a Staff Accountant with Roslund, Prestage & Company. Peter J. Stouffer was appointed Vice President of Engineering in January 1993. From August 1990 through December 1992, Mr. Stouffer served as Executive Vice President and General Manager of the Company's Intercept Systems, Inc. subsidiary from May 1989 through September 1990, served as the Company's Vice President of Engineering. From December 1986 to May 1989, he was the Company's Manager of Engineering. Prior to December 1986, he was an engineer at the Pontiac Motor Division of General Motors Corporation. John G. Chupa joined the Company as General Counsel in November 1993, and was appointed Vice President in December of 1994. Prior to joining the Company, he was associated with the law firms of Dykema Gossett and Harness Dickey and Pierce, specializing in the practice of intellectual property law. From 1985 through 1988, he was a Senior Engineer with the Allen Bradley division of Rockwell International Corporation. Mr. Chupa is currently completing his doctorate in electrical engineering. Alain Lombard joined the Company in January 1994 as Vice President European Operations and Director General of the EAE subsidiary. Prior to joining the Company, he was President of Code-Alarm Europe Ltd., and Lombard Imports Corporation. From 1985 through 1989, Mr. Lombard was a Senior Financial Analyst with IBM's European Headquarters. John C. Moffat joined the Company in November 1987 as District Manager of the OEM Division. Mr. Moffat has since been promoted steadily through the Company; most recently as Vice President of OEM Development and Marketing in May 1994. Mr. Moffat was the Company's National Sales Manager from December 1990 until May 1994. Michael Schroeder joined the Company in March 1984 as Engineering Technician. Mr. Schroeder was promoted to Vice President of North American sales in March of 1995. From December 1992 to March 1995, Mr. Schroeder was the Company's National Sales Manager. Prior to December 1992, Mr. Schroeder was the Company's Director of Sales in the U.K. DESCRIPTION OF DEBENTURES The Debentures will be issued under an Indenture (the "Indenture") to be dated as of December , 1995, between the Company and State Street Bank and Trust Company, as Trustee (the "Trustee"). The Debentures will represent unsecured general obligations of the Company, subordinate in right of payment to certain other obligations of the Company as described under "Subordination of Debentures" and convertible into Common Stock as described under "Conversion of Debentures." The Debentures will be limited to $10,000,000 aggregate principal amount ($11,500,000 if the Underwriters' over-allotment option is exercised in full), will be issued in fully registered form only in denominations of $1,000 or any integral multiple thereof and will mature on December 1, 2002. The following statements are subject to the detailed provisions of the Indenture and are qualified in their entirety by reference to the Indenture, a copy of which is filed as an exhibit to the Registration Statement (as defined) and is also available for inspection at the office of the Trustee. Whenever particular provisions of the 27 33 Indenture are referred to, such provisions are incorporated by reference as a part of the statements made herein, and the statements are qualified in their entirety by such reference. Interest at the annual rate set forth on the cover page hereof is payable semi-annually on June 1 and December 1, commencing on June 1, 1996, to holders of record at the close of business on the preceding November 15 and May 15, respectively. Interest on the Debentures offered hereby will accrue from the date of initial issuance. Principal and premium, if any, and interest will be paid and the Debentures may be presented for conversion, registration of transfer, and exchange, without service charge, at the corporate trust office of the Trustee in Boston, Massachusetts. Interest will be paid by checks mailed to holders of record unless other arrangements are made. CONVERSION OF DEBENTURES The holders of Debentures will be entitled at any time prior to the close of business on December 1, 2002, subject to prior redemption, to convert the Debentures or portions thereof (which are $1,000 or integral multiples thereof) into shares of Common Stock of the Company, at the conversion price set forth on the cover page of this Prospectus, subject to adjustment as described below. Except as described below, no adjustment will be made on conversion of any Debenture for interest accrued thereon or for dividends on any shares of Common Stock issued. If any Debenture not called for redemption is converted between a record date for the payment of interest and the related interest payment date, the Debenture must be accompanied by funds equal to the interest payable on such interest payment date on the principal amount so converted. The Company is not permitted to issue fractional shares of Common Stock upon conversion of Debentures and, in lieu thereof, will pay a cash adjustment based upon the market price of the Common Stock on the last trading day prior to the date of conversion. In the case of Debentures called for redemption, conversion rights will expire at the close of business on the redemption date. Persons who may be deemed to be affiliates of the Company for purposes of the Securities Act of 1933 may be subject, as to any resales of shares of Common Stock acquired on conversion, to the restrictions of Rule 144 promulgated under the Act. The conversion price is subject to adjustment under formulas set forth in the Indenture in certain events, including: the issuance of shares of Common Stock of the Company as a dividend or distribution on the Common Stock; subdivisions, combinations, and reclassifications of the Common Stock; the issuance to all holders of Common Stock of certain rights or warrants entitling them for a period not exceeding 45 days to subscribe for Common Stock at less than the then current market price (as defined); and the distribution to all holders of Common Stock of any securities (other than Common Stock) or evidences of indebtedness of the Company or of assets (excluding cash dividends or distributions from retained earnings) or rights or warrants to subscribe for or purchase any of its securities (excluding those referred to above). No adjustment in the conversion price will be required unless such adjustment would require a change of at least 1% in the conversion price then in effect; provided, however, that any adjustment that would otherwise be required to be made shall be carried forward and taken into account in any subsequent adjustment. The Company reserves the right to make such reductions in the conversion price, in addition to those required by the foregoing provisions, as the Company in its discretion shall determine to be advisable in order that certain share-related distributions made by the Company to its shareholders after the date of this Prospectus will not be taxable. Except as stated above, the conversion price will not be adjusted for the issuance of shares of Common Stock or any securities convertible into or exchangeable for Common Stock, or carrying the right to purchase any of the foregoing, in exchange for cash, property, or services. In the case of a consolidation, merger or statutory share exchange involving the Company as a result of which holders of Common Stock will be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for shares of Common Stock or in the case of a sale or conveyance to another corporation of all or substantially all the property and assets of the Company, the holders of the Debentures then outstanding will be entitled thereafter to convert such Debentures into the kind and amount of shares of stock, other securities or other property or assets which they would have owned or been entitled to receive upon such consolidation, merger, statutory share exchange, sale or conveyance had 28 34 such Debentures been converted into shares of Common Stock immediately prior to such consolidation, merger, statutory share exchange, sale or conveyance. In the event of a taxable distribution to holders of Common Stock which results in an adjustment of the conversion price, the holders of Debentures may, in certain circumstances, be deemed to have received a distribution subject to United States income tax as a dividend; the absence of such an adjustment in certain other circumstances may also result in a taxable dividend to the holders of Common Stock. OPTIONAL REDEMPTION The Debentures will be redeemable on at least 45 and not more than 60 days' notice, at the option of the Company, as a whole or in part, at any time after issuance, at the following prices (expressed as percentages of the principal amount), together with accrued interest to the date fixed for redemption: If redeemed during the 12-month period beginning December 1:
YEAR PERCENTAGE -------------------------- ---------- 1996...................... % 1997...................... 1998...................... 1999...................... YEAR PERCENTAGE -------------------------- ---------- 2000...................... % 2001...................... 2002......................
and 100% if redeemed on or after December 1, 2002; provided, however, that the Debentures may not be redeemed prior to December 1, 1998, unless the last reported sales price (determined as provided in the Indenture) of the Common Stock equals or exceeds 140% of the then effective conversion price (as described above) for at least 20 trading days within a period of 30 consecutive trading days ending no earlier than ten trading days prior to the date of the notice of redemption. SUBORDINATION OF DEBENTURES The indebtedness evidenced by the Debentures is subordinate to the prior payment in full of all Senior Indebtedness (as defined). During the continuance beyond any applicable grace period of any default in the payment of principal, interest or lease payments on any Senior Indebtedness, no payment of principal of, premium, if any, or interest on the Debentures shall be made by the Company. In addition, upon any distribution of assets of the Company upon any dissolution, winding up, liquidation or reorganization, the payment of the principal of, premium, if any, and interest on the Debentures is to be subordinated to the extent provided in the Indenture in right of payment to the prior payment in full of all Senior Indebtedness. By reason of such subordination, in the event of the Company's dissolution, holders of Senior Indebtedness may receive more, ratably, and holders of the Debentures may receive less, ratably, than the other creditors of the Company or may receive no consideration at all. Such subordination will not prevent the occurrence of any Event of Default under the Indenture. The term "Senior Indebtedness" is defined to mean the following, whether outstanding on the date of execution of the Indenture or thereafter created, incurred, assumed or guaranteed: (a) Principal of and premium, if any, and interest on indebtedness of the Company for money borrowed (including any indebtedness secured by a mortgage or other lien which is (i) given to secure all or part of the purchase price of property subject thereof, whether given to the vendor of such property or to another, or (ii) existing on property at the time of the acquisition thereof) evidenced by notes or other written obligations; (b) Principal of and premium, if any, and interest on indebtedness of the Company evidenced by notes, debentures, bonds or other securities of the Company; (c) The amount of the Company's liability determined under generally accepted accounting principles under any lease required to be classified as a liability on the Company's balance sheet; 29 35 (d) Principal of and premium, if any, and interest on indebtedness of others of the kinds described in either of the preceding clauses (a) or (b), or, to the extent set forth in the preceding clause (c), leases of others of the kind described in the preceding clause (c) assumed by or guaranteed in any manner by the Company or in effect guaranteed by the Company through an agreement to purchase, contingent or otherwise; and (e) Principal of and premium, if any, and interest on renewals, extensions, or refundings of indebtedness of the kinds described in any of the preceding clauses (a), (b) or (d) or, to the extent set forth in the preceding clause (c), renewals or extensions of leases of the kinds described in either of the preceding clauses (c) or (d). unless, in the case of any particular indebtedness, lease, renewal, extension, or refunding, the instrument or lease creating or evidencing the same or the assumption or guarantee of the same expressly provides that such indebtedness, lease, renewal, extension, or refunding is not superior in right of payment to the Debentures. As of October 26, 1995, the Company had approximately $18.3 million of Senior Indebtedness, including security for a $5.9 million letter of credit for a litigation appeal bond, (approximately $9.3 million after giving effect to the application of the net proceeds of this Offering). The Indenture permits the Trustee to become a creditor of the Company and does not preclude the Trustee from enforcing its rights as a creditor, including rights as a holder of Senior Indebtedness. REPURCHASE EVENT Upon the occurrence of a Repurchase Event, each holder of Debentures shall have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's Debentures pursuant to the offer described below (the "Repurchase Offer") at a purchase price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (the "Repurchase Payment"). Within 30 days after the occurrence of a Repurchase Event, the Company shall mail a notice to each holder stating among other things: (a) the Repurchase Payment and the purchase date, which shall not be earlier than 45 days nor later than 60 days from the date such notice is mailed or such later date as may be necessary for the Company to comply with the requirements of the 1934 Act (the "Repurchase Date"); (b) that any Debenture not tendered will continue to accrue interest; (c) that, unless the Company defaults in the payment of the Repurchase Payment, all Debentures accepted for payment pursuant to the Repurchase Offer shall cease to accrue interest after the Repurchase Date; and (d) certain other procedures that a holder must follow to accept a Repurchase Offer or to withdraw such acceptance. The Company will comply with any applicable requirements of the 1934 Act and other securities laws, and the regulations thereunder, governing the repurchase of the Debentures in connection with a Repurchase Event and may modify a Repurchase Offer to effect such compliance. A Repurchase Event is generally defined to include (a) the acquisition of 50% or more of the Company's voting stock by a person or group, other than any current holder of 5% or more of the Company's Common Stock (or a group including such a holder); (b) a change, over a two-year period, in the composition of the Company's Board of Directors such that, with limited exceptions, the Board members at the beginning of the period no longer constitute a majority of the Board; (c) certain consolidations and mergers involving the Company or sales of assets of the Company, if the primary effect is that, after the transaction, a person or group, other than a current holder of 5% or more of the Company's Common Stock (or group including such a holder), has more than 50% of the ordinary voting power of the surviving corporation; (d) the acquisition by the Company of over 30% of the outstanding shares of its capital stock during any 12-month period; and (e) certain (1) distributions in respect of the Company's capital stock or (2) acquisitions by the Company of its capital stock, if, in either case, the sum of the (A) ratio of the fair market value of the price paid in the current distribution or acquisition to the then-fair market value of the Company's outstanding capital stock plus (B) the similar ratios for all other distributions or acquisitions, respectively, during the prior 12-month period, exceeds 30%. For purposes of the Repurchase Event tests, the Company's "voting stock" means the Common Stock plus any other class or classes of stock which may be issued and have general voting power in the election of the Company's Board of Directors. The Company's "capital stock" means any stock which does 30 36 not have divided or liquidation priority over other stock of the Company, irrespective of relative voting powers. Currently, the Company's only "voting stock" and "capital stock" is its Common Stock. On the Repurchase Date, the Company will deposit with the Trustee an amount equal to the Repurchase Payment in respect of all Debentures or portions thereof that have been tendered. The Trustee shall promptly mail to each holder of Debentures accepted for payment an amount equal to the Repurchase Price for such Debentures, and the Trustee shall promptly authenticate and mail to each holder a new Debenture equal in principal amount to pay unpurchased portion of the Debentures surrendered. Except as described above with respect to a Repurchase Event, the Indenture does not contain any other provisions that permit the holders of the Debentures to require that the Company repurchase or redeem the Debentures in the event of a takeover or similar transaction. The provisions of the Indenture relating to the purchase of Debentures upon a Repurchase Event may impede the completion of a merger, tender offer or other takeover attempt. See "Description of Capital Stock." Neither the Trustee nor the Company's Board of Directors may relieve the Company of its obligations to repurchase Debentures. Any future credit agreements or other agreements relating to Senior Indebtedness to which the Company becomes a party may prohibit the Company from purchasing any Debentures or may provide that certain change in control events with respect to the Company would constitute a default under such agreements. In the event a Repurchase Event occurs at a time when the Company is prohibited from purchasing Debentures, the Company could seek the consent of its lenders for the purchase of Debentures or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or repay such borrowings, the Company will remain prohibited from purchasing Debentures. In such case, the Company's failure to purchase tendered Debentures would constitute an Event of Default under the Indenture. In such circumstances, the subordination provisions in the Indenture would restrict payments to the holders of Debentures. EVENTS OF DEFAULT An Event of Default is defined in the Indenture as being: default in the payment of any installment of interest upon any of the Debentures as and when the same shall become due and payable, and continuance of such default for a period of 15 days; default in payment of principal or premium, if any, or interest, if any, on the Debentures when the same becomes due and payable at maturity, upon redemption or otherwise, whether or not prohibited by the subordination provisions of the Indenture; default by the Company for 30 days after notice in the observance or performance of any other covenant in the Indenture; default under any obligations for money borrowed aggregating $1,000,000 or more; or certain events involving bankruptcy, insolvency or reorganization of the Company. The Indenture will provide that the Trustee is required, within 90 days after the occurrence of a default which is known to the Trustee and is continuing, to give to the holders of the Debentures notice of such default; provided that, except in the case of default in the payment of principal or premium, if any, or interest on any of the Debentures, the Trustee shall be protected in withholding such notice if it in good faith determines that the withholding of such notice is in the interest of the holders of the Debentures. The Indenture will provide that if any Event of Default shall have occurred and be continuing, the Trustee or the holders of not less than 25% in principal amount of the Debentures then outstanding may declare the principal of all the Debentures to be due and payable immediately, but if the Company shall cure all defaults (other than the nonpayment of interest and premiums, if any, on and principal of any Debentures which shall have become due solely by reason of acceleration) and certain other conditions are met, such declaration may be annulled and past defaults may be waived by the holders of a majority in principal amount of the Debentures then outstanding. The holders of a majority in principal amount of the Debentures then outstanding will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee subject to certain limitations specified in the Indenture. 31 37 In certain cases, the holders of a majority in principal amount of the outstanding Debentures may on behalf of the holders of all Debentures waive any past default or Event of Default except, unless theretofore cured, a default in the payment of the principal of, premium, if any, or interest on any of the Debentures (other than the nonpayment interest and premium, if any, on and principal of any Debentures which shall become due by acceleration) or a default relating to an obligation of the Company which cannot be modified without the consent of the holder of each Debenture affected. MERGERS AND SALES OF ASSETS BY THE COMPANY Subject to the provisions described above under "Repurchase Event," the Company may consolidate with or merge into any other corporation, or sell or transfer all or substantially all of its assets to any corporation, provided that the successor corporation shall be a corporation organized and existing under the laws of the United States or any State thereof and shall assume all of the obligations of the Company under the Indenture. MODIFICATION OF THE INDENTURE The Indenture will contain provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in principal amount of the Debentures at the time outstanding, to modify the Indenture or any supplemental indenture or the rights of the holders of the Debentures except that no such modification shall, without the consent of the holder of each Debenture so affected (i) extend the fixed maturity of any Debenture, reduce the rate or extend the time of payment of interest thereon, reduce the principal amount thereof or redemption premium thereon, impair or affect the right of a holder to institute suit for the payment thereof, change the currency in which the Debentures are payable or impair the right to convert the Debentures into shares of Common Stock subject to the terms set forth in the Indenture, or (ii) reduce the aforesaid percentage of Debentures, the consent of the holders of which is required for any such modification. MISCELLANEOUS No holder of a Debenture may institute any action against the Company under the Indenture (except actions for payment of overdue principal, premium, if any, or interest or the conversion of the Debentures) unless the holders of at least 25% of the principal amount of Debentures then outstanding shall have requested the Trustee to institute such action, and the Trustee shall not have instituted such action within 60 days of such request. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Debentures or the Indenture, or for any claim based on, in respect of or by reason of, such obligations or their creation. Each holder of Debentures by accepting a Debenture waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Debentures. Whether or not required by the rules and regulations of the Commission, so long as any Debentures are outstanding, the Company will furnish holders of Debentures all quarterly and annual information that would be required to be furnished to its shareholders. CONCERNING THE TRUSTEE State Street Bank and Trust Company, the Trustee under the Indenture, may at times be a depository for funds of, make loans to or perform services for the Company and its subsidiaries in the normal course of business. The Indenture does not preclude the Trustee from enforcing its rights as a creditor, including rights as a holder of Senior Indebtedness. 32 38 DESCRIPTION OF CAPITAL STOCK GENERAL The capital stock provisions of the Company's Restated Articles of Incorporation are summarized below. COMMON STOCK The Company's Restated Articles of Incorporation authorize 5,000,000 shares of Common Stock, without par value, of which 2,320,361 shares are expected to be outstanding upon consummation of the Offering. The existence of authorized but unissued shares of the Common Stock could discourage unsolicited takeover bids by third parties. Except as otherwise required by law or by any amendment to the Restated Articles of Incorporation, each holder of Common Stock shall have one vote for each share of stock held of record on the books of the Company on all matters voted upon by the shareholders. Subject to the preferential dividend rights, if any, applicable to shares of Preferred Stock and subject to applicable requirements, if any, with respect to the setting aside of sums for purchase, retirement or sinking funds for Preferred Stock, the holders of Common Stock shall be entitled to receive, to the extent permitted by law, such dividends as may be declared from time to time by the Board of Directors. In the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the Company, after distribution in full of the preferential amounts, if any, to be distributed to the holders of shares of Preferred Stock, holders of Common Stock shall be entitled to receive all of the remaining assets of the Company of whatever kind available for distribution to shareholders ratably in proportion to the number of shares of Common Stock held by them respectively. The Board of Directors may distribute in kind to the holders of Common Stock such remaining assets of the Company or may sell, transfer or otherwise dispose of all or any part of such remaining assets to any other corporation, trust or entity, or any combination thereof, and may sell all or any part of the consideration so received and distribute any balance thereof in kind to holders of Common Stock. The merger or consolidation of the Company into or with any other corporation, or the merger of any other corporation into it, or any purchase or redemption of shares of stock of the Company of any class, shall not be deemed to be a dissolution, liquidation or winding up of the Company for the purposes of this paragraph. Such numbers of shares of Common Stock as may from time to time be required for such purposes shall be reserved for issuance (i) upon conversion of any shares of Preferred Stock or any obligation of the Company convertible into shares of Common Stock which is at the time outstanding or issuable upon exercise of any options or warrants at the time outstanding and (ii) upon exercise of any options, warrants or rights at the time outstanding to purchase shares of Common Stock. At October 27, 1995, there were 309 shareholders of the Common Stock of record. PREFERRED STOCK The Board of Directors has the authority, without further action by the Company's shareholders, to issue up to 500,000 shares of the Company's Preferred Stock in one or more series and to fix the voting powers, rights, preferences, privileges and restrictions thereof. The existence of authorized but unissued shares of the Preferred Stock and the issuance of shares of the Preferred Stock could have the effect of delaying, deferring or preventing a change in control of the Company. The Board of Directors, without shareholder approval, could issue shares of the Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of shares of the Common Stock and could adversely affect the value of the Debentures. In addition, such shares of the Preferred Stock could have other rights, including economic rights, senior to shares of the Common Stock, and, as a result, the issuance thereof could have a material adverse effect on the market value of shares of the Common Stock and 33 39 the Debentures. Currently there are no shares of the Preferred Stock outstanding, and the Company has no present plan to issue any shares of the Preferred Stock. SHAREHOLDER AGREEMENT Certain shareholders of the Company, which include Rand W. Mueller, Kenneth M. Mueller and Larry Vingelman (the "Principal Shareholders"), entered into a Shareholder Agreement dated May 29, 1987, as amended (the "Shareholder Agreement"), pursuant to which such shareholders vote their shares as a unit in accordance with the desires of a plurality of the shares held by the Principal Shareholders. The Principal Shareholders have voting control of 30.2% of the outstanding shares of Common Stock ( percent upon conversion of all of the Debentures offered herein). Any additional Common Stock acquired by the Principal Shareholders is subject to the voting provisions of the Shareholder Agreement. The shares held by the Principal Shareholders are subject to certain rights of first refusal among the Principal Shareholders prior to a third party sale and certain options to purchase shares upon the death of any Principal Shareholder. These rights and options may be waived by shareholders holding more than two-thirds of the shares subject to the Shareholder Agreement. The Shareholder Agreement terminates on the earlier of May 28, 1997 or a date selected by shareholders owning greater than two-thirds of the shares subject to the Shareholder Agreement. PROVISIONS AFFECTING BUSINESS COMBINATIONS Chapters 7A and 7B of the Michigan Business Corporation Act ("MBCA") may affect attempts to acquire control of the Company. In general, under Chapter 7A, "business combinations" (defined to include, among other transactions, certain mergers, dispositions of assets or shares and recapitalizations) between covered Michigan business corporations or their subsidiaries and an "interested shareholder" (defined as the direct or indirect beneficial owner of at least 10% of the voting power of a covered corporation's outstanding shares) can be consummated only if approved by at least 90% of the votes of each class of the corporation's shares entitled to vote and by at least two-thirds of such voting shares not held by the interested shareholder or such shareholder's affiliates, unless five years have elapsed after the person involved became an "interested shareholder" and unless certain price and other conditions are satisfied. The Board of Directors may exempt "business combinations" with a particular "interested shareholder" by resolution adopted prior to the time the "interested shareholder" attained that status. In general, under Chapter 7B of the MBCA, an entity that acquires "Control Shares" of the Company may vote the Control Shares on any matter only if a majority of all shares, and of all non-"Interested Shares," of each class of shares entitled to vote as a class, approve such voting rights. Interested Shares are shares owned by officers of the Company, employee-directors of the Company and the entity making the Control Share Acquisition. Control Shares are shares that, when added to shares already owned by an entity, would give the entity voting power in the election of directors over any of three thresholds: one-fifth, one-third and a majority. The effect of the statute is to condition the acquisition of voting control of a corporation on the approval of a majority of the pre-existing disinterested shareholders. The Board of Directors has the option of choosing to amend the Company's Bylaws before a Control Share Acquisition occurs to provide that Chapter 7B does not apply to the Company. The Company currently is subject to Chapters 7A and 7B of the MBCA. TRANSFER AGENT AND REGISTRAR Boston Financial Data Services is the transfer agent and registrar for shares of the Common Stock. 34 40 SHARES ELIGIBLE FOR FUTURE SALE The Company has 2,320,361 shares of Common Stock outstanding of which its executive officers and directors and principal shareholders beneficially own approximately 795,612 shares. These shares are eligible for sale subject to the restrictions and volume limitations of Rule 144 under the Securities Act of 1933. Sales of substantial amounts of such shares in the market could adversely affect the market price of the Common Stock and the Company's ability to raise additional capital at a price favorable to the Company. See "Risk Factors -- Shares Eligible for Sale; Demand Registration Rights." UNDERWRITING Roney & Co. and The Ohio Company (the "Underwriters") have individually agreed, subject to the terms and conditions contained in the Underwriting Agreement, to purchase from the Company the principal amounts of Debentures indicated below opposite their respective names at the public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of such Debentures if any are purchased.
NAME PRINCIPAL AMOUNT - ----------------------------------------------------------------------------- ---------------- Roney & Co................................................................... $ The Ohio Company............................................................. ------------ Total.............................................................. $ 10,000,000 ============
The Underwriters propose to offer the Debentures to the public initially at the offering price set forth on the coverage page of this prospectus and the certain broker-dealers at such offering price less a concession not to exceed % of the principal amount. The Underwriters may allow, and such broker dealers may reallow a concession, not to exceed % of the principal amount, on sales to other broker dealers. The offering price and concessions to broker dealers may be changed by the Underwriters after the public offering. The Company has granted to the Underwriters an option, exercisable no later than 30 days from the date of this Prospectus, to purchase up to an additional $1,500,000 principal amount of Debentures to cover over-allotments. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the $10,000,000 principal amount of Debentures offered hereby. If purchased, the Underwriters will sell such additional Debentures on the same terms on which the $10,000,000 principal amount of Debentures are being offered. The Company and all executive officers and directors have agreed that they will not, without the prior written consent of the Underwriters, sell, transfer, assign or otherwise dispose of any shares of Common Stock owned by them prior to the expiration of 120 days from the date of the Underwriting Agreement. The Company and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933. The Underwriting Agreement provides that the Underwriters will be obligated to purchase all of the Debentures offered hereby if any are purchased. The offering of Debentures is made for delivery when, as and if excepted by the Underwriters, subject to prior sale and withdrawal, cancellation of modification of the offer without notice. The Underwriters reserve the right to reject any offer for the purchase of Debentures in whole or in part. 35 41 AVAILABLE INFORMATION The Company is subject to the informational requirements of the 1934 Act and, in accordance therewith, files reports, proxy statements and other information with the Commission. Such reports, proxy and information statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: New York Regional Office, 7 World Trade Center, New York, NY 10048; and Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such reports, proxy and information statements and other information concerning the Company can also be inspected at the offices of the National Association of Securities Dealers at 1735 K Street, N.W., Washington, D.C. 20006. ADDITIONAL INFORMATION The Company has filed with the Commission, Washington, D.C., a registration statement on Form S-2 (the "Registration Statement") under the Securities Act of 1933 with respect to the Debentures offered hereby. This Prospectus, which is part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Debentures offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed as a part thereof. Statements contained herein concerning the provisions of any document are not necessarily complete and in each instance reference is made to the copy of such document filed as an exhibit or schedule to the Registration Statement, each such statement being qualified in all respects by reference to such exhibit or schedule. The Registration Statement, together with its exhibits and schedules, may be inspected, without charge, at the Commission's principal office at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and also at the following regional offices of the Commission: 7 World Trade Center, New York, NY 10048; and Suite 1400 Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois 60661-2511. Copies of such material may also be obtained from the Commission upon the payment of prescribed fees. LEGAL MATTERS Certain legal matters in connection with the issuance of the Common Stock offered hereby will be passed upon for the Company by Clark, Klein & Beaumont, P.L.C., Detroit, Michigan, and for the Underwriters by Honigman Miller Schwartz and Cohn, Detroit, Michigan. EXPERTS The consolidated financial statements of the Company as of December 31, 1993 and 1994 and for each of the three fiscal years in the period ended December 31, 1994 included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 36 42 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----------- Consolidated Financial Statements of Code-Alarm, Inc. and Subsidiaries: Report of Independent Public Accountants....................................... F-2 Consolidated Balance Sheet as of December 31, 1993 and 1994 and September 30, 1995 (unaudited)............................................................ F-3 Consolidated Statement of Operations for the Years Ended December 31, 1992, 1993 and 1994 and the Nine Months Ended September 30, 1994 and 1995 (unaudited)................................................................. F-4 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1992, 1993 and 1994 and the Nine Months Ended September 30, 1995 (unaudited)................................................................. F-5 Consolidated Statement of Cash Flows for the Years Ended December 31, 1992, 1993 and 1994 and the Nine Months Ended September 30, 1994 and 1995 (unaudited)................................................................. F-6 Notes to Consolidated Financial Statements..................................... F-7 - F-14 Financial Statement Schedule: II. Valuation and Qualifying Accounts and Reserves............................. F-15
F-1 43 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Code-Alarm, Inc. We have audited the accompanying consolidated balance sheets of Code-Alarm, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Code-Alarm, Inc. and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Detroit, Michigan November 1, 1995 F-2 44 CODE-ALARM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
DECEMBER 31, ------------------ SEPTEMBER 30, 1993 1994 1995 ------- ------- ------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents..................................... $ 227 $ 107 $ 261 Accounts receivable, less allowance for doubtful accounts (December 31, 1993 and 1994, $554,000 and $383,000, September 30, 1995, $462,000) (Note 4)...................... 6,468 11,530 13,104 Inventories (Notes 2 and 4)................................... 7,413 12,892 14,812 Refundable income taxes....................................... -- 323 634 Deferred income taxes......................................... 655 494 494 Other......................................................... 388 735 893 ------- ------- ------- Total current assets........................................ 15,151 26,081 30,198 Property and equipment, net of accumulated depreciation and amortization (Notes 3 and 4)................................ 3,355 4,130 4,484 OTHER ASSETS: Excess of cost over net assets acquired, net.................. 3,164 4,293 4,217 Other intangibles, net........................................ 810 1,272 992 Deferred income taxes......................................... -- 1,029 1,029 Other......................................................... 1,654 1,016 1,551 ------- ------- ------- Total other assets.......................................... 5,628 7,610 7,789 ------- ------- ------- Total assets................................................ $24,134 $37,821 $42,471 ======= ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt (Note 4).................... $ 105 $ 1,443 $ 2,431 Accounts payable.............................................. 5,251 8,791 11,258 Income tax payable............................................ 39 -- -- Accrued expenses.............................................. 1,592 3,131 2,775 ------- ------- ------- Total current liabilities................................... 6,987 13,365 16,464 Long-term debt (Note 4)....................................... 3,568 9,511 10,085 Reserve for litigation (Note 9)............................... -- 3,729 5,440 Deferred income taxes......................................... 299 -- -- ------- ------- ------- Total liabilities........................................... 10,854 26,605 31,989 ------- ------- ------- Commitments and contingencies (Notes 5, 8 and 9) SHAREHOLDERS' EQUITY (NOTE 6): Preferred stock, noncumulative; no par value; authorized 500,000 shares; none issued................................. -- -- -- Common stock, no par value; authorized 5,000,000 shares; issued and outstanding December 31, 1993, 2,395,845 shares, December 31, 1994, 2,319,961 shares, September 30, 1995, 2,320,361................................................... 12,946 12,209 12,210 Foreign currency translation adjustment....................... -- 49 49 Retained earnings (accumulated deficit)....................... 334 (1,042) (1,777) ------- ------- ------- 13,280 11,216 10,482 ------- ------- ------- $24,134 $37,821 $42,471 ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-3 45 CODE-ALARM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS)
NINE MONTHS FOR THE YEARS ENDED DECEMBER ENDED SEPTEMBER 31, 30, ----------------------------- ------------------ 1992 1993 1994 1994 1995 ------- ------- ------- ------- ------- (UNAUDITED) Net sales (Note 10)............................ $45,685 $50,110 $73,508 $56,435 $54,825 Cost of sales.................................. 32,296 30,190 45,886 35,352 35,284 ------- ------- ------- ------- ------- Gross profit................................... 13,389 19,920 27,622 21,083 19,541 ------- ------- ------- ------- ------- OPERATING EXPENSES: Sales and marketing............................ 9,791 9,346 13,955 9,984 8,845 Engineering.................................... 1,617 1,688 2,696 1,892 2,317 General and administrative..................... 5,636 6,520 7,928 6,494 6,307 ------- ------- ------- ------- ------- 17,044 17,554 24,579 18,370 17,469 ------- ------- ------- ------- ------- Income (loss) from operations.................. (3,655) 2,366 3,043 2,713 2,072 ------- ------- ------- ------- ------- OTHER INCOME (EXPENSE): Interest expense............................... (426) (279) (645) (425) (956) Litigation expense............................. -- -- (4,386) -- (1,825) Other, net..................................... 5 57 (98) (88) (86) ------- ------- ------- ------- ------- (421) (222) (5,129) (513) (2,867) ------- ------- ------- ------- ------- Income (loss) before income taxes.............. (4,076) 2,144 (2,086) 2,200 (795) ------- ------- ------- ------- ------- INCOME TAXES (BENEFITS) (NOTE 8): Current........................................ (925) 791 457 774 (60) Deferred....................................... (249) (183) (1,167) ------- ------- ------- ------- ------- (1,174) 608 (710) 774 (60) ------- ------- ------- ------- ------- Net income (loss).............................. $(2,902) $ 1,536 $(1,376) $ 1,426 $ (735) ======= ======= ======= ======= ======= Net income (loss) per common share............. $ (1.16) $ 0.63 $ (0.58) $ 0.60 $ (0.32) ======= ======= ======= ======= ======= Weighted average number of common shares outstanding.................................. 2,495 2,445 2,376 2,392 2,320 ======= ======= ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-4 46 CODE-ALARM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
CUMULATIVE RETAINED COMMON STOCK FOREIGN EARNINGS TOTAL ----------------- TRANSLATION (ACCUMULATED SHAREHOLDERS' SHARES AMOUNT ADJUSTMENT DEFICIT) EQUITY ------ ------- ---------- ------------ ------------ Balance, January 1, 1992.................. 2,500 $13,739 $ $ 1,700 $ 15,439 Purchase and retirement of common stock from a director......................... (5) (25) (25) Net loss for the year..................... (2,902) (2,902) ----- ------- ---- -------- -------- Balance, December 31, 1992................ 2,495 13,714 (1,202) 12,512 ----- ------- ---- -------- -------- Purchase and retirement of common stock, including 47,904 shares from a former director......................... (100) (776) (776) Stock issued under stock option plan...... 1 8 8 Net income for the year................... 1,536 1,536 ----- ------- ---- -------- -------- Balance, December 31, 1993................ 2,396 12,946 334 13,280 ----- ------- ---- -------- -------- Purchase and retirement of common stock from former directors................... (167) (1,561) (1,561) Stock issued under stock option plan...... 1 6 6 Stock issued for acquisitions............. 90 818 818 Cumulative foreign currency translation adjustment.............................. 49 49 Net loss for the year..................... (1,376) (1,376) ----- ------- ---- -------- -------- Balance, December 31, 1994................ 2,320 12,209 49 (1,042) 11,216 Net loss for nine months.................. (735) (735) Stock issued under stock option plan...... 1 1 ----- ------- ---- -------- -------- Balance, September 30, 1995 (unaudited)... 2,320 $12,210 $ 49 $ (1,777) $ 10,482 ===== ======= ==== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-5 47 CODE-ALARM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------- --------------------- 1992 1993 1994 1994 1995 ------- ------- ------- ------- ------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).......................................... $(2,902) $ 1,536 $(1,376) $ 1,426 $ (735) ------- ------- ------- ------- ------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization............................ 1,580 1,381 1,615 1,152 1,272 Gain on sale of equipment (70) (6) -- -- -- Provision for losses on accounts receivable.............. 1,085 726 83 436 Changes in assets and liabilities: Accounts receivable.................................... (146) (882) (131) (863) (1,561) Inventories............................................ (223) 743 (3,734) (1,837) (2,244) Refundable income taxes................................ (408) 1,191 (243) (244) (306) Deferred income taxes.................................. (341) 195 (1,167) -- -- Other assets........................................... (164) (841) 160 (644) (54) Accounts payable....................................... 2,466 (518) 488 508 1,617 Accrued expenses....................................... 181 295 (291) 285 (542) Reserve for litigation................................. -- -- 3,729 -- 1,711 ------- ------- ------- ------- ------- Total adjustments........................................ 3,960 2,284 509 (1,643) 329 ------- ------- ------- ------- ------- Net cash provided by (used in) operating activities...... 1,058 3,820 (867) (217) (406) ------- ------- ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equipment............................ 10 130 -- -- -- Purchases of property and equipment........................ (1,065) (981) (1,177) (1,246) (806) Purchase of Europe Auto Equipement, net of cash received... -- -- (931) 605 -- Payment for intangible assets.............................. -- (477) (905) (514) (37) ------- ------- ------- ------- ------- Net cash used in investing activities.................... (1,055) (1,328) (3,013) (1,155) (843) ------- ------- ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt............................... 398 -- 4,056 1,077 -- Reduction of long-term debt................................ (111) (141) (592) -- (3,359) Net borrowing (payment) under lines of credit.............. (212) (1,744) 1,851 257 4,761 Purchase and retirement of common stock.................... (25) (776) (1,561) (117) -- Issuance of stock options.................................. -- 8 6 -- 1 ------- ------- ------- ------- ------- Net cash provided by (used in) financing activities...... 50 (2,653) 3,760 1,217 1,403 ------- ------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents....... 53 (161) (120) (155) 154 Cash and cash equivalents, beginning of year............... 335 388 227 227 107 ------- ------- ------- ------- ------- Cash and cash equivalents, end of year..................... $ 388 $ 227 $ 107 $ 72 $ 261 ======= ======= ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest................................................. $ 355 $ 288 $ 581 $ 204 $ 814 ======= ======= ======= ======= ======= Income taxes, net........................................ $ (466) $ 887 $ 881 $ 200 $ 150 ======= ======= ======= ======= =======
CODE-EUROPE, ----------------------------------- TOTAL LTD. EAE ------- ------- ------- SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES FOR 1994: Fair value of assets acquired...................................................... $ 8,766 $ 660 $ 8,106 Amounts paid for net assets acquired............................................... 2,377 380 1,997 ------- ------- ------- Liabilities assumed................................................................ $ 6,389 $ 280 $ 6,109 ======= ======= =======
During 1992, the Company acquired approximately $1,082,500 in leasehold improvements and other property in exchange for land, building and improvements with a net value of approximately $518,500, a mortgage obligation of $450,000 and approximately $114,000 cash. The Company received a $116,000 equity investment in a corporation during 1992 as proceeds due from the sale of certain equipment and accounts receivable. During 1994, the Company entered into a $500,501 capital lease obligation for machinery and equipment. During 1995, the Company entered into a $565,000 capital lease obligation for computer equipment, of which $80,000 has been paid. Also, during 1995, the Company exchanged inventory for a $616,000 note which may be used to reduce the cost of various goods and services received during the next five years. The accompanying notes are an integral part of the consolidated financial statements. F-6 48 CODE-ALARM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS OPERATIONS The Company designs, manufactures, imports and markets automobile and home security systems, keyless entry systems and related products. The Company is also a contract manufacturer of electronic cable, wire harness and printed circuit board assemblies. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an initial maturity of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market. The cost of substantially all inventories is determined on the first-in, first-out ("FIFO") method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is being provided using the straight-line and accelerated methods over the estimated useful lives of the related assets. Upon retirement or disposal of property or equipment, the cost and accumulated depreciation are removed from the accounts, and any gain or loss is included in income. INTANGIBLE ASSETS The excess of acquisition cost over net assets acquired is amortized on a straight-line basis over 40 years. The costs of all other intangible assets, comprised primarily of covenants-not-to-compete and patents and trademarks, are amortized on a straight-line basis over their respective estimated useful lives, generally five years. Accumulated amortization of intangible assets amounted to approximately $1,100,000, $1,643,000 and $1,499,000 at December 31, 1993 and 1994 and September 30, 1995, respectively. REVENUE RECOGNITION Revenues are recognized from sales when a product is shipped. The Company provides an accrual for future product return and warranty costs based upon the relationship of prior years' sales to costs incurred. Accrued warranty costs amounted to approximately $400,000, $300,000 and $355,000 at December 31, 1993 and 1994 and September 30, 1995, respectively. RESEARCH AND DEVELOPMENT COSTS Expenditures for the research and development of new and improved products are charged to operations as incurred and aggregated approximately $342,000, $358,000 and $572,000 for the years ended December 31, 1992, 1993 and 1994 and $429,000 and $454,000 for the nine months ended September 30, 1994 and 1995. F-7 49 CODE-ALARM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS 109, deferred taxes are recorded based upon differences between the financial statement and tax basis of assets and liabilities. EARNINGS PER COMMON SHARE Shares issuable under employee stock options were excluded from the computation of the weighted average number of common shares since they were either antidilutive or their dilutive effect was not material. FOREIGN CURRENCY TRANSLATION The functional currency for the majority of the Company's foreign operations is the French franc. The translation from the franc to U. S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The gains or losses, net of applicable deferred income taxes, resulting from translation are included in shareholders' equity, gains or losses resulting from foreign currency transactions are included in the statement of operations. 2. INVENTORIES Inventories consist of the following:
SEPTEMBER 30, 1993 1994 1995 ------ ------- ------------- (IN THOUSANDS) Raw materials............................................... $5,138 $ 7,217 $ 6,793 Work in process............................................. 1,083 1,552 173 Finished goods.............................................. 1,192 4,123 7,846 ------ ------- ------- $7,413 $12,892 $14,812 ====== ======= =======
3. PROPERTY AND EQUIPMENT Property and equipment are summarized by the following major classifications:
SEPTEMBER 30, 1993 1994 1995 ------ ------ ------------- (IN THOUSANDS) Machinery and equipment...................................... $5,715 $7,704 $ 8,325 Leasehold improvements....................................... 1,303 1,312 1,312 Furniture and fixtures....................................... 500 663 1,267 ------ ------ ------- 7,518 9,679 10,904 Less accumulated depreciation.............................. 4,163 5,549 6,420 ------ ------ ------- $3,355 $4,130 $ 4,484 ====== ====== =======
Depreciation expense was approximately $1,313,000, $1,064,000 and $1,093,000 for the years ended December 31, 1992, 1993 and 1994, respectively, and $798,000 and $879,000 for the nine months ended September 30, 1994 and 1995, respectively. F-8 50 CODE-ALARM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. LONG-TERM DEBT
SEPTEMBER 1993 1994 1995 ------ ------- --------- (IN THOUSANDS) Revolving credit agreement.................................... $3,000 $ 4,851 $ 6,024 Term loans.................................................... -- 3,606 3,225 Working capital facilities.................................... -- 1,445 2,505 Notes payable................................................. 265 185 Mortgage note................................................. 408 383 363 Capital lease obligations..................................... -- 484 399 ------ ------- ------- 3,673 10,954 12,516 Less current portion..................................... 105 1,443 2,431 ------ ------- ------- $3,568 $ 9,511 $10,085 ====== ======= =======
In 1994 the Company had a loan agreement with Comerica Bank. The $7,500,000 revolving credit provision of the loan agreement was due June 30, 1997 and was collateralized by accounts receivable, inventory and property and equipment. At the Company's option, the interest rate was at Comerica Bank's prime rate or at fixed interest rates equal to the London Interbank Offered Rate ("LIBOR"). The Company also agreed to pay a commitment fee equal to three-eighths of one percent per annum on the difference between $6,000,000 and the outstanding balance. This loan agreement was subject to covenants for maintenance of certain debt and cash flow ratios and minimum levels of current assets and tangible net worth. At December 31, 1994, the Company was not in compliance with certain covenants; however, Comerica Bank, at the Company's request, waived the covenant violations. Term loans were payable in equal quarterly installments of $209,000 through 1999. At the Company's option, the interest rate was at the Comerica Bank's prime rate (8.5% at December 31, 1994) or at fixed interest rates ranging from one to one and three-quarter percent above LIBOR on a designated portion of the outstanding loan. In May 1995 the above described loan agreement was replaced with a new credit arrangement with NBD Bank. The new credit arrangement provides for a $13.75 million revolving credit facility for working capital requirements, $1.3 million secured non-amortizing notes and $2.2 million unsecured in 4 year term notes. The revolving credit facility expires in May 1997 and bears interest at NBD Bank's prime rate (8.75% at October 31, 1995) or at the Company's option at the London InterBank Offered Rate (LIBOR) plus 2.5% for maturities ranging from one to six months (8.332% and 8.375%, respectively, at October 31, 1995). At September 30, 1995 a standby letter of credit in the amount of $5.9 million has been issued under the revolving credit facility in conjunction with the appeal of the patent infringement settlement as discussed in Note 9. The credit facility is subject to covenants which require certain debt and cash flow ratios, minimum levels of current assets and tangible net worth, restrict the payment of dividends and is collateralized by substantially all the assets of the Company and its domestic subsidiaries. Total credit available under the arrangement is subject to a formula of accounts receivable, inventories and appraised value of property and equipment assets. As of September 30, 1995, the Company was in default with certain of the covenants. NBD Bank has agreed to amend the credit agreement as of September 30, 1995. Such amendment, when effective, will place the Company in compliance. F-9 51 CODE-ALARM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A foreign subsidiary of the Company has a credit arrangement with its commercial bank which includes term loans totaling approximately $2.1 million, with interest rates ranging from 8% to 11%. Payments are due monthly, with final payments due in 1996. The Company has working capital facilities with three French lenders. These loans bear interest at rates of 8.8 percent to 11.5 percent and require quarterly principal payments of approximately $125,000 through 1997. The mortgage note is payable to the City of Georgetown, Texas, in monthly installments of $4,401, including interest at seven percent per annum, through January of 2005, and is collateralized by the leasehold improvements. The following table sets forth aggregate maturities of long-term debt (excluding capital lease obligations) at September 30, 1995: 1995................................................................. $2,699 1996................................................................. 1,350 1997................................................................. 7,999 1998................................................................. 126 1999................................................................. 102 Thereafter........................................................... 240
Minimum lease payments on capital lease obligations at December 31, 1994 are: 1995................................................................... $124 1996................................................................... 124 1997................................................................... 124 1998................................................................... 124 1999................................................................... 97 ---- Total minimum lease payments......................................... 593 Less amount representing interest.................................... 109 ---- Present value of net minimum lease payments.......................... $484 ====
5. COMMITMENTS LEASES The Company leases certain property and equipment under various operating leases through 2000. Future minimum rental payments required for all noncancelable operating leases are as follows for the years ending December 31: 1995................................................................... $732 1996................................................................... 719 1997................................................................... 444 1998................................................................... 122 1999................................................................... 122
Rent expense under all operating leases was approximately $682,200, $637,000 and $769,000 for the years ended December 31, 1992, 1993 and 1994 and $576,000 and $602,000 for the nine months ended September 30, 1994 and 1995, respectively. F-10 52 CODE-ALARM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. CAPITAL STOCK STOCK OPTION PLAN The Company has adopted a Stock Option Plan ("Plan") for its key employees and reserved 280,000 shares of common stock for issuance under the Plan. The Plan authorizes the Company to issue Incentive Stock Options and Non-Qualified Stock Options. The Company may grant such options concurrently with Stock Appreciation Rights, which entitle the Company to accept surrender of an option by paying the employee an amount equal to the increase in the price of the Company's common stock from the option date. Incentive Stock Options may be issued at a price not less than fair market value as of the grant date. For any employee holding more than 10 percent of the voting stock of the Company, the option price is 110 percent of fair market value at the grant date. Non-Qualified Stock Options may be issued at a price not less than 85 percent of fair market value at the grant date. Options are generally exercisable for a ten-year period; however, options granted to any employee holding more than 10 percent of the voting stock of the Company are exercisable over five years. No Non-Qualified Stock Options have been granted. The following is a summary of Incentive Stock Options, with Stock Appreciation Rights, granted under the Plan:
NUMBER OF SHARES DECEMBER 31, ----------------------------- 1992 1993 1994 ------- ------- ------- Balance, beginning.............................................. 141,200 104,550 125,875 Granted......................................................... 10,500 46,000 102,000 Exercised....................................................... (1,000) (6,815) (1,200) Canceled or terminated.......................................... (46,150) (17,860) (10,300) ------- ------- ------- Balance, ending................................................. 104,550 125,875 216,375 ======= ======= =======
These options and rights were issued at various prices ranging from $4.25 per share to $22.28 per share. At December 31, 1994, 61,175 options were exercisable at prices ranging from $4.25 to $20.25 per share. In 1994, 1,200 Stock Options and Stock Appreciation Rights were exercised at $4.25 to $5.00 per share. 7. ACQUISITIONS Effective January 1, 1994, the Company purchased Europe Auto Equipement Company ("EAE"), a French based distributor of vehicle security products. Consideration included $1.6 million and 50,000 shares of the Company's common stock. Also, effective January 1, 1994, the Company purchased Code-Europe, Ltd., a distributor of vehicle security products in the United Kingdom, for 40,000 shares of the Company's common stock. These acquisitions were accounted for as purchases, with the results of their operations included from January 1, 1994. The fair value of assets acquired, including goodwill, was $8,766,000, and liabilities assumed totaled $6,389,000. Goodwill of $1,230,000 is being amortized over 40 years on a straight-line basis. As part of the consideration given in the acquisition of EAE, the Company may pay the sellers up to 2,000,000 French francs ($1 U. S. equals 5.355 French franc at December 31, 1994) based upon EAE's 1994 sales and satisfaction of certain other conditions. Any additional payments will be treated as additional purchase considerations in 1995, increasing intangible assets. F-11 53 CODE-ALARM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The pro forma results listed below are unaudited and reflect adjustments assuming the acquisition occurred January 1, 1993:
1993 -------------- (IN THOUSANDS) Net sales..................................................... $ 60,768 Operating earnings............................................ 2,540 Net earnings.................................................. 1,526 Earnings per share............................................ 0.62
8. INCOME TAXES The effective income tax rates differed from the statutory income tax rate due to the following:
SEPTEMBER 30, -------------- 1992 1993 1994 1994 1995 ---- ---- ---- ---- ---- Statutory rate....................... 34% 34% 34% 34% 34% Differences resulting from: Goodwill amortization.............. (1) 1 1 1 (1) Effect of lower foreign tax rates........................... -- -- (1) -- -- Effect of net operating loss carryforwards................... (4) (7) -- -- -- Charge off of state and foreign tax refunds receivable.............. -- -- -- -- (25) ---- ---- ---- ---- ---- Effective income tax rates........... 29% 28% 34% 35% 8% ==== ==== ==== ==== ====
Current income tax expense for 1994 includes $73,000 of foreign income taxes. There were no foreign income taxes for 1993 or 1992. Deferred tax assets and liabilities as of December 31 consisted of the following:
1993 1994 ---- ------ (IN THOUSANDS) Expenses deductible earlier for financial statement purposes than for tax purposes.......................... $515 $ 324 Litigation loss not deductible for tax purposes........... -- 1,462 Expense included in inventory for tax purposes............ 168 181 ---- ------ Total deferred tax assets............................... 683 1,967 ---- ------ Net value of fixed assets................................. 188 272 Capitalization of assets expensed for tax purposes........ 139 172 ---- ------ Total deferred tax liabilities.......................... 327 444 ---- ------ Net deferred tax assets................................. $356 $1,523 ==== ======
The Company does not provide U. S. income taxes on the undistributed earnings of foreign subsidiaries, as such earnings are intended to be reinvested in these operations. Accumulated undistributed earnings, net, of the foreign subsidiaries are approximately $121,000, which would have resulted in federal income taxes of approximately $41,000 at December 31, 1994. F-12 54 CODE-ALARM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred income tax benefits for 1992, using the deferred method under Accounting Principles Board Opinion No. 11, resulted from:
(IN THOUSANDS) Expenses deductible earlier for financial statement purposes than for tax purposes....................................... $ (49) Consulting fees............................................... (48) Deficit of tax over book depreciation......................... (138) Expenses included in inventory for tax purposes............... (6) Sale of property, plant and equipment......................... (95) Deferred tax charges not recognized due to loss carryforwards............................................... 163 Other, net.................................................... (76) ------ $ (249) ======
9. LITIGATION The Company is involved in a patent infringement suit involving a shock sensing device. During 1993, an appeals court found the Company to be in violation of the patent. The damage portion of the trial was completed in January 1995 and at December 31, 1994, the Company recorded an accrual for damages, including interest and costs, of approximately $4.2 million. In June 1995 the Company received from the United States District Court information that the damages would total $6.0 million. Accordingly the Company has recorded an additional accrual for damages of $1.8 million in 1995. The Company believes that any amount paid will be paid after 1995, or it will be financed with long-term debt. The Company's reserve for litigation and litigation expense include this estimate of damages and incidental professional fees and costs. During 1993, the Company became involved in several legal proceedings following the Company's decision to aggressively defend its patent rights. The Company is asserting its patent rights against the defendants in these cases, and such defendants have made claims against the Company. The outcome of these cases cannot be reasonably estimated. Various legal actions and other claims are pending or could be asserted against the Company. Litigation is subjected to many uncertainties; the outcome of individual litigated matters is not predictable with assurance, and it is reasonably possible that some of these matters may be decided unfavorably to the Company. It is the opinion of management that the ultimate liability, if any, with respect to these matters will not materially affect the financial position of the Company. 10. SIGNIFICANT CUSTOMERS The Company operates primarily in one business segment -- vehicle security systems. This segment represents more than 90 percent of consolidated revenue, operating profit and identifiable assets. With the exception of sales to dealers of General Motors Corporation ("GM") and Ford Motor Company ("Ford"), no single customer accounted for more than 10 percent of revenue.
PERCENT OF TOTAL SALES ---------------------- 1992 1993 1994 ---- ---- ---- Ford.................................................... 15% 16% 11% GM...................................................... 16% 16% 11%
With the acquisition of EAE, the Company expanded its European distribution. During the year ended December 31, 1994, the Company's European operations accounted for $17.5 million of revenues and $420,000 of Operating Income. During the nine months ended September 30, 1995 the Company's European F-13 55 CODE-ALARM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) operations accounted for $15.7 million of revenues and operating losses of $725,000. The Company has approximately $7.3 million in European Assets, principally Inventories and Accounts Receivable. 11. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS (UNAUDITED) During the fourth quarter of 1992, charges of approximately $1.4 Million (pretax) were recorded relating to the valuation and disposal of obsolete inventory. F-14 56 CODE-ALARM, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
COLUMN B COLUMN C COLUMN D COLUMN E ---------- ------------------------ ----------- ---------- ADDITIONS ------------------------ (1) CHARGED TO BALANCE AT CHARGED TO OTHER BALANCE AT BEGINNING COST AND ACCOUNTS, DEDUCTIONS, END OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD ---------- ---------- ---------- ----------- ---------- Allowance for doubtful accounts: Year ended December 31, 1994......... $ 554,000 -- -- $ 171,000 $ 383,000 Year ended December 31, 1993......... 416,000 $ 726,000 -- 588,000 554,000 Year ended December 31, 1992......... 673,000 1,085,000 -- 1,342,000 416,000
- ------------------------- Note: (1) Write-off uncollectible accounts, net of recoveries F-15 57 ------------------------------------------------------- ------------------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE DEBENTURES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE DEBENTURES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. --------------------------- TABLE OF CONTENTS
PAGE ---- Incorporation of Certain Documents by Reference............................ ii Prospectus Summary..................... 1 Risk Factors........................... 4 Company History........................ 7 Use of Proceeds........................ 8 Price Range of Common Stock............ 8 Dividend Policy........................ 8 Capitalization......................... 9 Selected Consolidated Financial Data... 10 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 11 Changes in Company's Certifying Accountant........................... 15 Business............................... 16 Legal Proceedings...................... 23 Management............................. 26 Description of Debentures.............. 27 Description of Capital Stock........... 33 Shares Eligible for Future Sale........ 35 Underwriting........................... 35 Available Information.................. 36 Additional Information................. 36 Legal Matters.......................... 36 Experts................................ 36 Index to Consolidated Financial Statements........................... F-1
------------------------------------------------------- ------------------------------------------------------- ------------------------------------------------------- ------------------------------------------------------- $10,000,000 [CODE-ALARM LOGO] % CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002 ------------------------------ P R O S P E C T U S ----------------------------- RONEY & CO. THE OHIO COMPANY , 1995 ------------------------------------------------------- ------------------------------------------------------- _ 58 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses incurred in connection with the offering of the Common Stock are as follows: SEC registration fees................................................... $ 3,965.52 National Association of Securities Dealers, Inc. filing fee............. 1,650.00 Printing and engraving.................................................. 75,000.00 Legal fees and expenses................................................. 150,000.00 Blue Sky fees and expenses.............................................. 10,000.00 Accounting fees and expenses............................................ 150,000.00 Trustee fees and expenses............................................... 10,000.00 Miscellaneous........................................................... 4,384.48 ----------- Total......................................................... $405,000.00 ===========
Each amount set forth above, except for the SEC registration fee and the NASD filing fee, is estimated. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Michigan Business Corporation Act. The Registrant is organized under the MBCA which, in general, empowers Michigan corporations to indemnify a person who was or is a party or threatened to be made a party to any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal other than actions by or in the right of the corporation, by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, whether for profit or not, against expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if the person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation or its shareholder, and with respect to any criminal action or proceeding, if the person had no reasonable cause to believe his or her conduct was unlawful. The MBCA also empowers Michigan corporations to provide similar indemnity to such a person for expenses and amounts paid in settlement, actually and reasonably incurred, in actions or suits by or in the right of the corporation except in respect of any claim, issue or matter as to which such person has been found liable to the corporation, unless and only to the extent that a court determines that, despite the adjudication of the liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity. The MBCA also empowers Michigan corporations to pay or reimburse the reasonable expenses incurred by such persons in advance of a final disposition of the proceeding; provided, among other things, that the person undertake to repay the amount advanced if it is ultimately determined that he or she did not meet the necessary standard of conduct. Articles of Incorporation and Bylaws. The Registrant's Restated Articles of Incorporation and Restated Bylaws generally provide that directors and officers will be indemnified to the fullest extent permissible under Michigan law against all expenses (including amounts paid in settlement) incurred in any proceeding (whether or not such proceeding was by or in the right of the Registrant) in which they were a party because of their position as a director or officer of the Registrant or because they served at the request of the Registrant as a director, officer, employee or agent of another corporation or entity. The provisions also provide for the advancement of litigation expenses. The Registrant has the burden of proof to show such indemnification to be improper. II-1 59 Indemnification Agreements. The Registrant has entered into indemnification agreements in the form incorporated by reference as Exhibit 10.4 to this Registration Statement, with each of its officers and members of its Board of Directors. The indemnification agreements contain the same general provisions as the indemnification provision in the Restated Articles of Incorporation and Bylaws but establishes a separate contractual basis for such indemnification and contains an undertaking to repay by the indemnitee any amounts advanced if it is determined that such advance was improper. Reference is also made to the Undertaking contained in Item 17 of this Registration Statement. ITEM 16. (A) EXHIBITS 1 -- Form of Underwriting Agreement between the Company, Roney & Co. and The Ohio Company 4 -- Form of Indenture 5 -- Legal Opinion of Clark, Klein & Beaumont, P.L.C.(2) 9 -- Shareholder Agreement, as amended, incorporated by reference to Exhibit 9 to the Company's Form 10-K for the year ended December 31, 1989 ("1989 Form 10-K")(1) 10.2 -- Employment Agreement with Rand W. Mueller, as amended, incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1, as amended, Registration No. 33-31356 ("Form S-1"), as further amended by Amendment No. 2 to Employment Agreement incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended September 30, 1992 ("September 1992 10-Q")(1) 10.3 -- 1987 Stock Option Plan, incorporated by reference to Exhibit 10.3 to Form S-18, and amendment thereto, incorporated by reference to Exhibit 10.3 to the Company's Form 10-K for the year ending December 31, 1990 ("1990 Form 10-K")(1) 10.4 -- Indemnification Agreement with Rand W. Mueller, incorporated by reference to Exhibit 10.4 to the Company's Form S-18, Registration No. ("Form S-18")(1) The Company has entered into the same form of agreement with the following directors and executive officers as of the dates indicated: Marshall J. Mueller Kenneth M. Mueller Jack C. Chilingirian William S. Pickett Alan H. Foster David L. Etienne Richard Wierzbicki Peter J. Stouffer Jack D. Rutherford Robert V. Wagner John G. Chupa Michael P. Schroeder John C. Moffat 10.6 -- Consulting and Non-Compete Agreement with David L. Skinner, incorporated by reference to Exhibit 10.6 to 1990 Form 10-K(1) 10.7 -- Non-Compete Agreement with David L. Skinner and Shirley A. Skinner, incorporated by reference to Exhibit 10.9 to Form S-1(1) 10.8 -- Mortgage Agreement with Rand W. Mueller, incorporated by reference to Exhibit 10.8 to the Company's Form 10-K for the year ending December 31, 1992 ("1992 Form 10-K")(1) 10.9 -- Consulting Agreement with Kenneth M. Mueller, incorporated by reference to Exhibit 10.9 to Form S-18(1) 10.10 -- Lease of real property at 950 E. Whitcomb, Madison Heights, Michigan, incorporated by reference to Exhibit 10.10 to 1992 Form 10-K(1) 10.11 -- Lease of real property at 300 Industrial Avenue, Georgetown, Texas, incorporated by reference to Exhibit 10.11 to 9 to the Company's Form 10-K for the year ended December 31, 1991 ("1991 Form 10-K")(1)
II-2 60 10.13 -- Lease of real property at 32, Rue Delizy, Pantin Cedex, France, incorporated by reference to Exhibit 10.13 to the Company's Form 10-K for the year ended December 31, 1994 ("1994 Form 10-K")(1) 10.14 -- Lease of real property at 16742 Burke Lane, Huntington Beach, California, incorporated by reference to Exhibit 14 to 1994 Form 10-K(1) 10.19 -- General Motors Corporation contract, incorporated by reference to Exhibit 10.19 to Form S-1 as amended by amendments incorporated by reference to Exhibit 10.19 to 1994 Form 10-K(1) 10.20 -- Ford Motor Corporation contract, incorporated by reference to Exhibit 10.20 to Form S-1 as amended by amendments incorporated by reference to Exhibit 10.20 to 1994 Form 10-K(1) 10.21 -- Chrysler Corporation contract, incorporated by reference to Exhibit 10.21 to Form S-1 as amended by amendments to Exhibit 10.21 to 1994 Form 10-K(1) 10.22 -- Purchase Agreement with Mitsubishi Motor Sales of America, Inc., incorporated by reference to Exhibit 10.22 to 1992 Form 10-K(1) 10.23 -- Development Agreement by and between the City of Georgetown, Texas and Tessco Group, Inc. concerning redevelopment of real property at 300 Industrial Avenue, Georgetown, Texas, incorporated by reference to Exhibit 10.23 to 1991 Form 10-K(1) 10.27 -- Amended and Restated Loan Agreement with Comerica Bank as of March 31, 1991, incorporated by reference to Exhibit 10.27 to the Company's March 1991 Form 10-Q, as further amended by First and Second Amendments to Amended and Restated Loan Agreement with Comerica Bank as of March 31, 1991, incorporated by reference to Exhibit 10.27 to 1991 Form 10-K, as further amended by Third Amendment to Amended and Restated Loan Agreement with Comerica Bank as of March 31, 1991, incorporated by reference to Exhibit 10.27 to the Company's September 1992 10-Q, and as further amended by the Fourth Amendment to Amended and Restated Loan Agreement with Comerica Bank as of March 31, 1991, incorporated by reference to Exhibit 10.27 to 1992 Form 10-K(1) 10.27.3 -- Ninth Amendment to Amended and Restated Loan Agreement with Comerica Bank as of March 31, 1991, incorporated by reference to Exhibit 10.27.3 to 1994 Form 10-K(1) 10.28 -- Commitment Letter from NBD Bank, April 7, 1995, incorporated by reference to Exhibit 10.28 to 1994 Form 10-K, incorporated by reference to Exhibit 10.28 to 1994 Form 10-K, Loan Agreement with NBD Bank as of May 23, 1995; incorporated by reference to Exhibit 10.28 to the Company's Form 10-Q for the quarter ended June 30, 1995; and First Amendment dated June 30, 1995, Waiver Letter dated October 3, 1995, Second Amendment dated October 17, 1995 and Letter Agreeing to Amend dated November 1, 1995 to Loan Agreement with NBD Bank as of May 23, 1995, incorporated by reference to Exhibit 10.28 to the Company's Form 10-Q for the quarter ended September 30, 1995(1) 10.29 -- Purchase Agreement with Subaru of America, Inc., incorporated by reference to Exhibit 10.29 to the Company's Form 10-Q for the quarter ended September 30, 1995(1) 11 -- Statement regarding computation of per share earnings 12 -- Statement re computation of ratios 16 -- Letter re change in certifying accountant, incorporated by reference to Exhibit 16.1 to Current Report on Form 8-K dated as of July 22, 1995(1) 23.1 -- Consent of Deloitte & Touche LLP 23.2 -- Consent of Clark, Klein & Beaumont, P.L.C.(3) 24 -- Powers of Attorney(4) 25 -- Statement of Eligibility of Trustee of Form T-1
- --------------- (1) Previously filed. (2) To be filed by amendment. (3) Contained in Exhibit 5. (4) Included on the signature page of this Form S-2. II-3 61 ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 62 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Madison Heights, State of Michigan, on November 2, 1995. CODE-ALARM, INC. By: /s/ RAND W. MUELLER -------------------------------- Rand W. Mueller President POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Rand W. Mueller, Robert V. Wagner and David L. Etienne, and each of them individually, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments or post-effective amendments to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities act of 1933, as amended, this registration statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ---------------------------------------- ----------------------------- ------------------ /s/ RAND W. MUELLER President (Principal October 31, 1995 - ---------------------------------------- Executive Officer) and Rand W. Mueller Director /s/ ROBERT V. WAGNER Secretary, Treasurer, Vice November 2, 1995 - ---------------------------------------- President of Finance Robert V. Wagner (Principal Financial Officer) /s/ MARSHALL J. MUELLER Director November 2, 1995 - ---------------------------------------- Marshall J. Mueller /s/ KENNETH M. MUELLER Director November 2, 1995 - ---------------------------------------- Kenneth M. Mueller /s/ JACK D. RUTHERFORD Director November 2, 1995 - ---------------------------------------- Jack D. Rutherford /s/ WILLIAM S. PICKETT Director November 2, 1995 - ---------------------------------------- William S. Pickett /s/ ALAN H. FOSTER Director October 30, 1995 - ---------------------------------------- Alan H. Foster
63 INDEX TO EXHIBITS
DESCRIPTION ------------------------------------------------------------------------------- EXHIBIT NUMBER PAGE - ------ ----- 1 -- Form of Underwriting Agreement between the Company, Roney & Co. and The Ohio Company 4 -- Form of Indenture 5 -- Legal Opinion of Clark, Klein & Beaumont, P.L.C.(2) 9 -- Shareholder Agreement, as amended, incorporated by reference to Exhibit 9 to the Company's Form 10-K for the year ended December 31, 1989 ("1989 Form 10-K")(1) 10.2 -- Employment Agreement with Rand W. Mueller, as amended, incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1, as amended, Registration No. 33-31356 ("Form S-1"), as further amended by Amendment No. 2 to Employment Agreement incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended September 30, 1992 ("September 1992 10-Q")(1) 10.3 -- 1987 Stock Option Plan, incorporated by reference to Exhibit 10.3 to Form S-18, and amendment thereto, incorporated by reference to Exhibit 10.3 to the Company's Form 10-K for the year ending December 31, 1990 ("1990 Form 10-K")(1) 10.4 -- Indemnification Agreement with Rand W. Mueller, incorporated by reference to Exhibit 10.4 to the Company's Form S-18, Registration No. ("Form S-18")(1) The Company has entered into the same form of agreement with the following directors and executive officers as of the dates indicated: Marshall J. Mueller May 29, 1987 Kenneth M. Mueller May 29, 1987 Jack C. Chilingirian May 29, 1987 William S. Pickett May 29, 1987 Alan H. Foster May 17, 1988 David L. Etienne March 16, 1990 Richard Wierzbicki July 16, 1990 Peter J. Stouffer March 22, 1991 Jack D. Rutherford May 21, 1991 Robert V. Wagner August 3, 1993 John G. Chupa December 9, 1994 Michael P. Schroeder March 24, 1995 John C. Moffat March 24, 1995 10.6 -- Consulting and Non-Compete Agreement with David L. Skinner, incorporated by reference to Exhibit 10.6 to 1990 Form 10-K(1) 10.7 -- Non-Compete Agreement with David L. Skinner and Shirley A. Skinner, incorporated by reference to Exhibit 10.9 to Form S-1(1) 10.8 -- Mortgage Agreement with Rand W. Mueller, incorporated by reference to Exhibit 10.8 to the Company's Form 10-K for the year ending December 31, 1992 ("1992 Form 10-K")(1) 10.9 -- Consulting Agreement with Kenneth M. Mueller, incorporated by reference to Exhibit 10.9 to Form S-18(1) 10.10 -- Lease of real property at 950 E. Whitcomb, Madison Heights, Michigan, incorporated by reference to Exhibit 10.10 to 1992 Form 10-K(1) 10.11 -- Lease of real property at 300 Industrial Avenue, Georgetown, Texas, incorporated by reference to Exhibit 10.11 to 9 to the Company's Form 10-K for the year ended December 31, 1991 ("1991 Form 10-K")(1) 10.13 -- Lease of real property at 32, Rue Delizy, Pantin Cedex, France, incorporated by reference to Exhibit 10.13 to the Company's Form 10-K for the year ended December 31, 1994 ("1994 Form 10-K")(1) 10.14 -- Lease of real property at 16742 Burke Lane, Huntington Beach, California, incorporated by reference to Exhibit 14 to 1994 Form 10-K(1)
64
DESCRIPTION ------------------------------------------------------------------------------- EXHIBIT NUMBER PAGE - ------ ----- 10.19 -- General Motors Corporation contract, incorporated by reference to Exhibit 10.19 to Form S-1 as amended by amendments incorporated by reference to Exhibit 10.19 to 1994 Form 10-K(1) 10.20 -- Ford Motor Corporation contract, incorporated by reference to Exhibit 10.20 to Form S-1 as amended by amendments incorporated by reference to Exhibit 10.20 to 1994 Form 10-K(1) 10.21 -- Chrysler Corporation contract, incorporated by reference to Exhibit 10.21 to Form S-1 as amended by amendments to Exhibit 10.21 to 1994 Form 10-K(1) 10.22 -- Purchase Agreement with Mitsubishi Motor Sales of America, Inc., incorporated by reference to Exhibit 10.22 to 1992 Form 10-K(1) 10.23 -- Development Agreement by and between the City of Georgetown, Texas and Tessco Group, Inc. concerning redevelopment of real property at 300 Industrial Avenue, Georgetown, Texas, incorporated by reference to Exhibit 10.23 to 1991 Form 10-K(1) 10.27 -- Amended and Restated Loan Agreement with Comerica Bank as of March 31, 1991, incorporated by reference to Exhibit 10.27 to the Company's March 1991 Form 10-Q, as further amended by First and Second Amendments to Amended and Restated Loan Agreement with Comerica Bank as of March 31, 1991, incorporated by reference to Exhibit 10.27 to 1991 Form 10-K, as further amended by Third Amendment to Amended and Restated Loan Agreement with Comerica Bank as of March 31, 1991, incorporated by reference to Exhibit 10.27 to the Company's September 1992 10-Q, and as further amended by the Fourth Amendment to Amended and Restated Loan Agreement with Comerica Bank as of March 31, 1991, incorporated by reference to Exhibit 10.27 to 1992 Form 10-K(1) 10.27.3 -- Ninth Amendment to Amended and Restated Loan Agreement with Comerica Bank as of March 31, 1991, incorporated by reference to Exhibit 10.27.3 to 1994 Form 10-K(1) 10.28 -- Commitment Letter from NBD Bank, April 7, 1995, incorporated by reference to Exhibit 10.28 to 1994 Form 10-K, incorporated by reference to Exhibit 10.28 to 1994 Form 10-K, Loan Agreement with NBD Bank as of May 23, 1995; incorporated by reference to Exhibit 10.28 to the Company's Form 10-Q for the quarter ended June 30, 1995; and First Amendment dated June 30, 1995, Waiver Letter dated October 3, 1995, Second Amendment dated October 17, 1995 and Letter Agreeing to Amend dated November 1, 1995 to Loan Agreement with NBD Bank as of May 23, 1995, incorporated by reference to Exhibit 10.28 to the Company's Form 10-Q for the quarter ended September 30, 1995(1) 10.29 -- Purchase Agreement with Subaru of America, Inc., incorporated by reference to Exhibit 10.29 to the Company's Form 10-Q for the quarter ended September 30, 1995(1) 11 -- Statement regarding computation of per share earnings 12 -- Statement re computation of ratios 16 -- Letter re change in certifying accountant, incorporated by reference to Exhibit 16.1 to Current Report on Form 8-K dated as of July 22, 1995(1) 23.1 -- Consent of Deloitte & Touche LLP 23.2 -- Consent of Clark, Klein & Beaumont, P.L.C.(3) 24 -- Powers of Attorney(4) 25 -- Statement of Eligibility of Trustee of Form T-1
- --------------- (1) Previously filed. (2) To be filed by amendment. (3) Contained in Exhibit 5. (4) Included on the signature page of this Form S-2. EX-1 2 EXHIBIT 1 1 EXHIBIT 1 CODE-ALARM, INC. $10,000,000 Principal Amount of ___% Convertible Subordinated Debentures Due December 1, 2002 UNDERWRITING AGREEMENT DRAFT RONEY & CO. THE OHIO COMPANY c/o Roney & Co. One Griswold Detroit, Michigan 48226 Ladies and Gentlemen: Code-Alarm, Inc., a Michigan corporation (the "Company"), hereby confirms its agreement with Roney & Co. and The Ohio Company (the "Underwriters") as set forth below. 1. Securities. Subject to the terms and conditions herein contained, the Company proposes to issue and sell to the Underwriters an aggregate of $10,000,000 principal amount of ____% Convertible Subordinated Debentures due December 1, 2002. Such $10,000,000 principal amount of Debentures are referred to in this Agreement as the "Firm Debentures". The Company also proposes to issue and sell to the Underwriters not more than an aggregate of $1,500,000 principal amount of additional Debentures if requested by the Underwriters as provided in Section 3 of this Agreement. Any and all Debentures to be purchased by the Underwriters pursuant to such options are referred to in this Agreement as the "Option Debentures," and the Firm Debentures and any Option Debentures are collectively referred to in this Agreement as the "Debentures." The Debentures are to be issued pursuant to an indenture to be dated as of ___________, 1995 (the "Indenture") between the Company and State Street Bank and Trust Company (the "Trustee"). 2. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, each of the Underwriters that: (a) The Company meets the requirements for use of Form S-2 under the Securities Act of 1933, as amended, and the rules and regulations of the Securities and Exchange Commission (the "Commission") thereunder (collectively, the "Act"). A registration statement on such Form (File No. 33-________) with respect to the Debentures, which may be converted into Common Shares, without par value, of the Company (the "Common Shares") as provided in the Indenture (the "Underlying Common Shares") (together, the "Securities"), including a prospectus subject to completion, has been prepared and filed by the Company with the 2 Commission in accordance with the provisions of the Act, and one or more amendments to such registration statement may have been so filed. As soon as practicable after the execution of this Agreement, the Company will file with the Commission either (1) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed, in such registration statement), with such changes or insertions as are required by Rule 430A under the Act or permitted by Rule 424(b) under the Act and as have been provided to and approved by the Underwriters prior to the execution of this Agreement, or (2) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by the Underwriters prior to the execution of this Agreement. As used in this Agreement, the term "Registration Statement" means such registration statement, as amended at the time when it was or is declared effective, and, in the event of any amendment to such registration statement after the effective date and before the Firm Closing Date and any Option Closing Date (as defined in Sections 3(a) and 3(b), respectively), such registration statement as so amended, but only from and after the effectiveness of such amendment, including (1) all financial statements, schedules and exhibits thereto, (2) all documents (or portions thereof) incorporated by reference therein filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (3) any information omitted therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as hereinafter defined). As used in this Agreement, the term "Preliminary Prospectus" means each prospectus subject to completion filed with such registration statement or any amendment thereto (including the prospectus subject to completion, if any, included in the Registration Statement or any amendment thereto at the time it was or is declared effective), including all documents (or portions thereof) incorporated by reference therein filed under the Exchange Act. As used in this Agreement, the term "Prospectus" means the prospectus first filed with the Commission pursuant to Rule 424(b) under the Act or, if no prospectus is required to be filed pursuant to said Rule 424(b), such term means the prospectus included in the Registration Statement, at the time the Registration Statement or any amendment thereto became effective, and, in the event of any supplement or amendment to such prospectus before the Firm Closing Date and any Option Closing Date, such prospectus as so supplemented or amended but only from and after the filing with the Commission of such supplement or the effectiveness of such amendment, in any case including all documents (or portions thereof) incorporated by reference therein filed under the Exchange Act. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus. When any Preliminary Prospectus was filed with the Commission, it (1) contained all statements required to be stated therein in accordance with, and complied in all material respects with the requirements of, the Act, the Exchange Act, the Trust Indenture Act of 1939 as amended, if required (the "Trust Indenture Act"), and the respective rules and regulations of the Commission thereunder and (2) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. When the Registration Statement or any amendment thereto was or is declared effective and at all times 2 3 subsequent thereto up to and including the Firm Closing Date and any Option Closing Date, it (1) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act, the Trust Indenture Act, if required, the Exchange Act and the respective rules and regulations of the Commission thereunder and (2) did not or will not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. When the Prospectus or any amendment or supplement thereto is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective), on the date when the Prospectus is otherwise amended or supplemented and at all times subsequent thereto up to and including the Firm Closing Date and any Option Closing Date (as defined in Sections 3(a) and 3(b), respectively), the Prospectus, as amended or supplemented at any such time, (1) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act, the Trust Indenture Act, if required, the Exchange Act and the respective rules and regulations of the Commission thereunder and (2) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (b) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by you specifically for use therein. (c) The Company's only subsidiaries are listed on Schedule 1 to this Agreement. The Company and each of its subsidiaries have been duly organized and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation and are duly qualified to transact business as foreign corporations and are in good standing under the laws of all other jurisdictions where the ownership or leasing of their respective properties or the nature or conduct of their respective businesses requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. (d) The Company and each of its subsidiaries have full power (corporate and other) to own or lease their respective properties and conduct their respective businesses as described in the Registration Statement and the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus; and the Company has full power (corporate and other) to enter into this Agreement and to carry out all the terms and provisions of this Agreement to be carried out by it. (e) The authorized, issued and outstanding shares of capital stock of each of the Company's subsidiaries are set forth on Schedule 2 to this Agreement. Such issued and outstanding shares have been duly authorized and validly issued, are fully paid and nonassessable 3 4 and are all owned beneficially by the Company free and clear of all restrictions on transfer (other than those imposed by the Act and the securities or Blue Sky laws of various jurisdictions) and any security interests, liens, encumbrances, equities and claims. (f) The Company has an authorized, issued and outstanding capitalization as set forth in the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus, under the caption "Capitalization." All of the issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable and free of preemptive rights and contractual rights to purchase other than the Company's stock option plan and except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). The Underlying Common Shares have been duly authorized and duly reserved for issuance and, upon issuance in accordance with the terms of the Debentures and the Indenture, the Underlying Common Shares will be duly authorized, validly issued, fully paid and nonassessable. No holder of outstanding shares of capital stock of the Company is entitled as such to any preemptive or other rights to subscribe for any of the Securities, and no holder of securities of the Company has any right which has not been fully exercised or waived to require the Company to register the offer or sale of any securities owned by such holder under the Act in the public offering contemplated by this Agreement. (g) The capital stock of the Company conforms to the description thereof contained in the Registration Statement and the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus. (h) The Indenture has been duly authorized, and when duly executed and delivered by the Company, will constitute the valid and binding obligation of the Company, enforceable in accordance with its terms. (i) The Debentures have been duly authorized for issuance and sale pursuant to this Agreement and, when duly executed, authenticated and delivered to the Underwriters against payment therefor pursuant to the provisions of the Indenture and this Agreement, will be valid and binding obligations of the Company enforceable in accordance with their terms, and will be entitled to the benefits of the Indenture, which will be substantially in the form previously delivered to you; and the Debentures and the Indenture conform to all statements relating thereto contained in the Registration Statement and Prospectus (or if the Prospectus is not in existence, the most recent Preliminary Prospectus). (j) The consolidated financial statements and schedules of the Company and its consolidated subsidiaries included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present the financial condition of the Company and its consolidated subsidiaries and the results of operations and cash flows as of the dates and periods therein specified. Such financial statements and schedules have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved (except as otherwise noted therein). The selected financial data 4 5 set forth under the caption "Selected Consolidated Financial Data" in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present, on the basis stated in the Prospectus (or such Preliminary Prospectus), the information included therein. (k) Deloitte & Touche LLP, who have certified certain financial statements of the Company and its consolidated subsidiaries and delivered their report with respect to the audited consolidated financial statements and schedules included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), are independent public accountants as required by the Act, the Exchange Act and the related published rules and regulations thereunder. (l) The execution and delivery of this Agreement have been duly authorized by the Company. This Agreement has been duly executed and delivered by the Company, and assuming due execution by the other parties to this Agreement, is the legal, valid and binding agreement of the Company, enforceable by any such party against the Company in accordance with its terms. (m) No legal or governmental proceedings are pending to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not described therein (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and no such proceedings have been threatened against the Company or any of its subsidiaries or with respect to any of their respective properties. No contract or other document is required to be described in the Registration Statement or the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) or to be filed as an exhibit to the Registration Statement that is not described therein or filed as required. (n) The execution and delivery of this Agreement, the issuance, offering and sale of the Debentures to the Underwriters by the Company pursuant to this Agreement, the compliance by the Company with the other provisions of this Agreement and the consummation of the other transactions contemplated by this Agreement do not (1) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained, such as may be required under state securities or blue sky laws and, if the registration statement (as amended) filed with respect to the Securities is not effective under the Act as of the time of execution of this Agreement, such as may be required (and shall be obtained as provided in this Agreement) under the Act or the Trust Indenture Act, or (2) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their respective properties are bound, or the Articles of Incorporation or other charter documents, Code of Regulations or bylaws of the Company or any of its subsidiaries, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator or any other laws applicable to the Company, any of its subsidiaries or any of their respective properties. 5 6 (o) The Company has not, directly or indirectly, (1) taken any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Debentures or (2) since the filing of the registration statement originally filed with respect to the Securities (A) sold, bid for, purchased, or paid anyone any compensation for soliciting purchases of, the Debentures or the Common Shares or (B) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company other than as herein provided. (p) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), (1) the Company and its subsidiaries have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (2) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock; and (3) there has not been any change in the capital stock, short-term debt or long-term debt of the Company and its consolidated subsidiaries or any material loss or damage to the property of the Company or any of its subsidiaries, any material adverse change in the condition (financial or otherwise), business, results of operations, cash flows or prospects of the Company and its subsidiaries, taken as a whole, except in each case as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (q) The Company and each of its subsidiaries have good and marketable title in fee simple to all items of real property and good and marketable title to all personal property owned by each of them or described in the Prospectus as owned by them, in each case free and clear of any security interests, liens, encumbrances, equities, claims, charges, restrictions and other defects, except the pledge of the capital stock of the Company's subsidiaries to NBD Bank to secure the Company's current senior indebtedness and except such as do not materially and adversely affect the value of such property and do not interfere with the use made or proposed to be made of such property by the Company or such subsidiary, and any real and personal property and buildings held under lease by the Company or any such subsidiary are held under valid, subsisting and enforceable leases, with such exceptions as are not material and do not interfere with the use made or proposed to be made of such property and buildings by the Company or such subsidiary, in each case mentioned in this paragraph except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). The Company and its subsidiaries own or lease all properties as are necessary to its operations as now conducted and, except as otherwise stated in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), as proposed to be conducted as set forth in the Prospectus. (r) No labor dispute with the employees of the Company or any of its subsidiaries exists or is threatened or imminent that could result in a material adverse change in the condition (financial or otherwise), business prospects, net worth, results of operations or cash 6 7 flows of the Company and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (s) The Company and its subsidiaries own or possess, or can acquire on reasonable terms, all material patents, patent applications, trademarks, service marks, trade names, licenses, copyrights and proprietary or other confidential information currently employed by them in connection with their respective businesses, and neither the Company nor any such subsidiary has received any notice of infringement of or conflict with asserted rights of any third party with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse change in the condition (financial or otherwise), business prospects, net worth, results of operations or cash flows of the Company and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). The expiration of any trademarks, copyrights or patents held or used by the Company or any of its subsidiaries would not materially adversely affect the condition (financial or otherwise), business prospects, net worth, results of operations or cash flows of the Company and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (t) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged. Neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for, and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), business prospects, net worth, results of operations or cash flows of the Company and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (u) No subsidiary of the Company is currently prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such subsidiary's capital stock, from repaying to the Company any loans or advances to such subsidiary from the Company or from transferring any of such subsidiary's property or assets to the Company or any other subsidiary of the Company, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and except to the extent that the Company has pledged the capital stock of the Company's subsidiaries to NBD Bank to secure the Company's current senior indebtedness. (v) The Company and its subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such 7 8 certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse change in the condition (financial or otherwise), business prospects, net worth, results of operations or cash flows of the Company and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (w) The Company will conduct its operations in a manner that will not subject it to registration as an investment company under the Investment Company Act of 1940, as amended, and this transaction will not cause the Company to become an investment company subject to registration under such Act. (x) The Company has filed all foreign, federal, state and local tax returns that are required to be filed or has requested extensions thereof (except in any case in which the failure so to file would not have a material adverse effect on the Company and its subsidiaries) and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable, except for any such assessment, fine or penalty that is currently being contested in good faith or as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (y) Neither the Company nor any of its subsidiaries is in violation of any federal, state or foreign law or regulation relating to occupational safety and health or to the storage, handling or transportation of hazardous or toxic materials, and the Company and its subsidiaries have received all permits, licenses or other approvals required of them under applicable federal, state and foreign occupational safety and health and environmental laws and regulations to conduct their respective businesses, and the Company and each such subsidiary is in compliance with all terms and conditions of any such permit, license or approval, except any such violation of law or regulation, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals which would not, singly or in the aggregate, result in a material adverse change in the condition (financial or otherwise), business prospects, net worth, results of operations or cash flows of the Company and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (z) Each certificate signed by any officer of the Company and delivered to the Underwriters or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters covered thereby. (aa) Except for the shares of capital stock of each of the subsidiaries owned by the Company and such subsidiaries, neither the Company nor any such subsidiary owns any shares of stock or any other equity securities of any corporation or has any equity interest in any firm, partnership, association or other entity, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). 8 9 (bb) There is no holder of securities of the Company, who, by reason of the filing of the Registration Statement, has the right to request the Company to register under the Act, or to include in the Registration Statement, securities held by such holder, except to the extent such holder has waived such rights in writing or except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (cc) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (1) transactions are executed in accordance with management's general or specific authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (3) access to assets is permitted only in accordance with management's general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (dd) No default exists, and no event has occurred which, with notice or lapse of time or both, would constitute a default, in the due performance and observance of any term, covenant or condition of any bond, debenture, indenture, note, evidence of indebtedness, mortgage, deed of trust, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their respective properties is bound or may be affected in any material adverse respect with regard to property, business or operations of the Company and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). Neither the Company nor any of its subsidiaries is in violation of its Articles of Incorporation or bylaws. (ee) None of the Company, its subsidiaries or any employee of the Company or its subsidiaries has made any payment of funds of the Company or its subsidiaries prohibited by law and no funds of the Company or its subsidiaries have been set aside to be used for any payment prohibited by law. 3. Purchase, Sale and Delivery of the Debentures. (a) On the basis of the representations, warranties, agreements and covenants contained in this Agreement and subject to the terms and conditions set forth in this Agreement, the Company agrees to sell to each of the Underwriters, and each of the Underwriters, individually and not jointly, agrees to purchase from the Company, at a purchase price equal to ____% of the principal amount, the respective principal amount of Firm Debentures set forth opposite the name of such Underwriter in Schedule 3 to this Agreement. One or more certificates in definitive form for the Firm Debentures that the several Underwriters have agreed to purchase under this Agreement, and in such denomination or denominations and registered in such name or names as you request upon notice to the Company at least 48 hours prior to the Firm Closing Date, shall be delivered by or on behalf of the Company to you on the Closing Date for the 9 10 respective accounts of the several Underwriters, against payment by or on behalf of the Underwriters of the purchase price therefor by certified or official bank checks drawn upon or by a New York Clearing House bank and payable in next-day funds to the order of the Company or at the option of the Underwriters, by wire transfer to the account of the Company in same-day funds. Such delivery of, and payment for, the Firm Debentures shall be made at the offices of Clark, Klein & Beaumont P.L.C., 1600 First Federal Building, Detroit, Michigan 48226, at 9:30 A.M., Detroit time, on ______________, 1995, or at such other place, time or date as you and the Company may agree upon or as you may determine pursuant to Section 9 of this Agreement, such time and date of delivery against payment being referred to in this Agreement as the "Firm Closing Date". The Company will make such certificate or certificates for the Firm Debentures available to you for inspection at the offices in Madison Heights, Michigan of the Company's transfer agent or registrar or of Roney & Co. at least 24 hours prior to the Firm Closing Date. (b) For the purpose of covering any over-allotments in connection with the distribution and sale of the Firm Debentures as contemplated by the Prospectus, the Company hereby grants to the Underwriters options to purchase, individually and not jointly, the Option Debentures. The purchase price to be paid for any Option Debentures shall be the same as the price for the Firm Debentures set forth above in paragraph (a) of this Section 3, plus accrued interest from ______________, 1995 to the Option Closing Date. The options granted hereby may be exercised as to all or any part of the Option Debentures from time to time within 30 days after the date of the Prospectus (or, if such 30th day shall be a Saturday or a Sunday or a holiday, on the next business day thereafter when the New York Stock Exchange is open for trading). The Underwriters shall not be under any obligation to purchase any of the Option Debentures prior to the exercise of such options. The Underwriters may from time to time exercise the options granted hereby by giving notice in writing or by telephone (confirmed in writing) to the Company setting forth the aggregate principal amount of Option Debentures as to which the Underwriters are then exercising the options and the date and time for delivery of and payment for such Option Debentures. Any such date of delivery shall be determined by the Underwriters but shall not be earlier than two business days or later than seven business days after such exercise of the options and, in any event, shall not be earlier than the Firm Closing Date. The time and date set forth in such notice, or such other time, date or both as the Underwriters and the Company may agree upon or as the Underwriters may determine pursuant to Section 9 of this Agreement, are called the "Option Closing Date" in this Agreement with respect to such Option Debentures. Upon exercise of the options as provided in this Agreement, the Company shall become obligated to sell to each of the Underwriters, and, on the basis of the representations and warranties contained in this Agreement and subject to the terms and conditions set forth in this Agreement, each of the Underwriters, individually and not jointly, shall become obligated to purchase from the Company, the same percentage of the total principal amount of the Option Debentures as to which the Underwriters are then exercising the options as such Underwriter is obligated to purchase of the aggregate number of Firm Debentures (subject to such adjustments to provide for purchases of Debentures in principal amounts that are even multiples of $1,000 as you may determine). If the options are exercised as to all or any portion of the Option Debentures, one or more certificates in definitive form for such Option Debentures, 10 11 and payment therefor, shall be delivered on the related Option Closing Date in the manner, and upon the terms and conditions, set forth in paragraph (a) of this Section 3, except that reference therein to the Firm Debentures and the Firm Closing Date shall be deemed, for purposes of this paragraph (b), to refer to such Option Debentures and Option Closing Date, respectively. 4. Offering by the Underwriters. Upon our authorization of the release of the Firm Debentures, the Underwriters propose to offer their respective portions of the Firm Debentures for sale to the public upon the terms set forth in the Prospectus. 5. Covenants. Covenants of the Company. The Company covenants and agrees with each of the Underwriters that: (a) The Company will use its best efforts to cause the Registration Statement, if not effective at the time of execution of this Agreement, and any amendments thereto, to become effective as promptly as possible. If required, the Company will file the Prospectus and any amendment or supplement thereto with the Commission in the manner and within the time period required by Rule 424(b) under the Act. During any time when a prospectus relating to the Securities is required to be delivered under the Act (or until the Firm Closing Date and any Option Closing Date, if later), the Company (1) will comply with all requirements imposed upon it by the Act, the Trust Indenture Act, the Exchange Act and the respective rules and regulations of the Commission thereunder to the extent necessary to permit the continuance of sales of or dealings in the Securities in accordance with the provisions of this Agreement and of the Prospectus, as then amended or supplemented, and (2) will not file with the Commission the Prospectus or the amendment referred to in the third sentence of Section 2(a) of this Agreement, any amendment or supplement to such Prospectus or any amendment to the Registration Statement of which the Underwriters shall not previously have been advised and furnished with a copy a reasonable period of time prior to the proposed filing or as to which filing you shall not have given your consent. The Company will prepare and file with the Commission, in accordance with the Act and the rules and regulations on the Commission, promptly upon request by the Underwriters or counsel for the Underwriters, any amendments to the Registration Statement or amendments or supplements to the Prospectus that may be necessary or advisable in connection with the distribution of the Securities by the Underwriters, and will use its best efforts to cause any such amendment to the Registration Statement to be declared effective by the Commission as promptly as possible. The Company will advise you, promptly after receiving notice thereof, of the time when the Registration Statement or any amendment thereto has been filed or declared effective or the Prospectus or any amendment or supplement thereto has been filed and will provide evidence satisfactory to you of each such filing or effectiveness. (b) The Company will advise the Underwriters, promptly after receiving notice or obtaining knowledge thereof, of (1) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or any order directed at any document incorporated by reference in the Registration Statement or the Prospectus or any amendment or supplement thereto or any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or any amendment or 11 12 supplement thereto, (2) the suspension of the qualification of the Securities for offering or sale in any jurisdiction, (3) the institution, threatening or contemplation of any proceeding for any such purpose or (4) any request made by the Commission for amending the Registration Statement, for amending or supplementing any Preliminary Prospectus or the Prospectus or for additional information. The Company will use its best efforts to prevent the issuance of any such stop order and, if any such stop order is used, to obtain the withdrawal thereof as promptly as possible. (c) The Company will arrange for the registration or qualification of the Securities for offering and sale under the securities or blue sky laws of such jurisdictions as you may designate and will continue such qualifications in effect for as long as may be necessary to complete the distribution of the Securities, provided, however, that in connection with such qualification the Company shall not be required to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction. (d) If, at any time prior to the later of (1) the final date when a prospectus relating to the Securities is required to be delivered under the Act or (2) the Firm Closing Date and any Option Closing Date, any event occurs as a result of which the Prospectus, as then amended or supplemented, would include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, or if for any other reason it is necessary at any time to amend or supplement the Prospectus to comply with the Act, the Exchange Act, the Trust Indenture Act, the respective rules or regulations of the Commission thereunder or any other law, the Company will promptly notify the Underwriters thereof and, subject to Section 5(a) of this Agreement, will prepare and file with the Commission, at the Company's expense, an amendment to the Registration Statement or an amendment or supplement to the Prospectus that corrects such statement or omission or effects such compliance. (e) The Company will, without charge, provide (1) to each of the Underwriters and to counsel for the Underwriters a signed copy of the registration statement originally filed with respect to the Securities and each amendment thereto (in each case including exhibits thereto), and a conformed copy of such registration statement and each amendment thereto (in each case without exhibits thereto) and (2) so long as a prospectus relating to the Securities is required to be delivered under the Act, as many copies of each Preliminary Prospectus or the Prospectus or any amendment or supplement thereto as the Underwriters, counsel for the Underwriters or any dealer may reasonably request. (f) The Company, as soon as practicable, will make generally available to its security holders and to the Underwriters a consolidated earnings statement of the Company and its subsidiaries that satisfies the provisions of Section 11(a) of the Act and Rule 158 thereunder. (g) The Company will apply the net proceeds from the sale of the Securities sold by the Company as set forth under "Use of Proceeds" in the Prospectus. 12 13 (h) The Company will not, directly or indirectly, without your prior written consent, offer, sell, offer to sell, contract to sell, grant any option to purchase or otherwise sell or dispose of (or announce any offer, sale, offer of sale, contract of sale, grant of any option to purchase or other sale or other disposition of) any Common Shares or any securities convertible into, or exchangeable or exercisable for, Common Shares for a period of 120 days after the date of this Agreement except for (1) issuances pursuant to the exercise of warrants outstanding on the date of this Agreement or pursuant to the exercise of employee stock options outstanding on the date of this Agreement, or (2) the grant of employee stock options pursuant to the Company's stock option plans in effect on the date of this Agreement, provided that any employee stock options so granted after the date of this Agreement are not exercisable prior to 120 days after the date of this Agreement, or (3) issuances of Common Shares pursuant to the Company's Employee Stock Purchase Plan, as such plan exists on the date of this Agreement, or (4) issuances and sales of the Debentures to the Underwriters pursuant to this Agreement, or (5) issuances of Common Shares upon conversion of the Debentures. (i) The Company will not, directly or indirectly, (1) take any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or (2) (A) sell, bid for, purchase, attempt to induce any person to purchase, or pay anyone any compensation for soliciting purchases of, the Securities or (B) pay or agree to pay to any person any compensation for soliciting another to purchase any other securities of the Company. (j) If at any time during the 25-day period after the Registration Statement becomes effective or the period prior to the Option Closing Date, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Common Shares has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of, and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (k) At all times prior to the conversion of the Debentures, the Underlying Common Shares shall remain duly authorized and duly reserved for issuance. (l) For a period of three years from the effective date of the Registration Statement, the Company shall furnish to you copies of all public reports filed by the Company and all reports and financial statements furnished by the Company to its shareholders, The Nasdaq Stock Market, any stock exchange upon which the Company's securities are traded, or to the Commission pursuant to the Exchange Act or any rule or regulation of the Commission under the Exchange Act (except for exhibits, which, however, will be furnished upon request). 13 14 6. Expenses. (a) The Company will pay all costs, expenses, fees and taxes incident to the performance of its obligations under this Agreement, whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated pursuant to Section 11 of this Agreement, including all costs, expenses fees and taxes incident to (1) the preparing, printing or other production and filing of documents with respect to the transactions, including any costs of printing the registration statement originally filed with respect to the Securities and any amendment thereto (including, without limitation, the Registration Statement), any Preliminary Prospectus and the Prospectus and any amendment or supplement thereto, this Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, the Underwriters' Questionnaire and Power of Attorney, any blue sky memoranda and all other agreements, memoranda, correspondence and other documents printed and delivered in connection with the offering of the Securities, (2) all arrangements relating to the delivery to the Underwriters of copies of the foregoing documents, (3) the fees and disbursements of the counsel, the accountants and any other experts or advisors retained by the Company, (4) preparation, issuance and delivery to the Underwriters of any certificates evidencing the Securities, including transfer agent's and registrar's fees, (5) the registration or qualification of the Securities under state securities and blue sky laws, including filing fees and the reasonable legal fees and disbursements of counsel for the Underwriters relating thereto or to the "Blue Sky" survey, which filing fees and counsel fee shall not exceed $15,000, (6) the filing fees of the Commission and the National Association of Securities Dealers, Inc. relating to the Securities and any listing fees relating to the Securities, (7) the fees and expenses of the Trustee, and (8) advertising relating to the offering of the Securities (other than as shall have been specifically approved by the Underwriters to be paid for by the Underwriters). If the sale of the Securities provided for in this Agreement is not consummated because any condition to the obligations of the Underwriters set forth in Section 7 of this Agreement is not satisfied, because this Agreement is terminated pursuant to Section 11 of this Agreement, because of any failure, refusal or inability on the part of the Company to perform all obligations and satisfy all conditions on its or their part to be performed or satisfied under this Agreement (other than by reason of a default by any of the Underwriters) or for any other reason (other than because of the Underwriters' refusal (except for bona fide reasons related to the Company, its officers, directors, employees or agents or market conditions) or inability to perform), the Company will reimburse the Underwriters individually upon demand for all out-of- pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the proposed purchase and sale of the Securities. The Company shall not in any event be liable to any of the Underwriters for the loss of anticipated profits from the transactions covered by this Agreement. (b) The provisions of paragraph 10 of the letter of intent dated August 16, 1995 among the Company and the Underwriters, a copy of which is attached as Exhibit 6(b) to this Agreement (the "Letter of Intent"), which provisions provide for payments of fees and reimbursement of expenses incurred in connection with the Underwriters' engagement by the Company, are incorporated into, and are a part of, this Agreement in their entirety; such provisions will continue to apply as if they were set forth in this Agreement. 14 15 7. Conditions of the Underwriters' Obligations. The several obligations of each of the Underwriters to purchase and pay for the Firm Debentures shall be subject, in the Underwriters' sole discretion, to the accuracy of the representations and warranties of the Company contained in this Agreement as of the date of this Agreement and as of the Firm Closing Date, as if made on and as of the Firm Closing Date, to the accuracy of the statements of the Company's officers made pursuant to the provisions of this Agreement, to the performance by the Company of its covenants and agreements under this Agreement and to the following additional conditions: (a) If the Registration Statement or any amendment to the Registration Statement filed prior to the Firm Closing Date has not been declared effective as of the time of execution of this Agreement, the Registration Statement or such amendment shall have been declared effective not later than 11:00 A.M., New York City time, on the date on which an amendment to the registration statement originally filed with respect to the Securities or to the Registration Statement, as the case may be, containing information regarding the initial public offering price of the Securities has been filed with the Commission, or such later time and date as shall have been consented to by you. If required, the Prospectus and any amendment or supplement thereto shall have been filed with the Commission in the manner and within the time period required by Rule 424(b) under the Act. No stop order suspending the effectiveness of the Registration Statement or any post-effective amendment to the Registration Statement and no order directed at any document incorporated by reference in the Registration Statement or the Prospectus or any amendment or supplement thereto shall have been issued and no proceedings for that purpose shall have been instituted or threatened or, to the knowledge of the Company or the Underwriters, shall be contemplated by the Commission. The Company shall have complied with any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise). (b) You shall have received on the Firm Closing Date an opinion addressed to the Underwriters (satisfactory to you and counsel for the Underwriters), dated the Firm Closing Date, of Clark, Klein & Beaumont, P.L.C., counsel for the Company, to the effect that: (1) the Company and each of its subsidiaries listed in Schedule 1 to this Agreement (the "Subsidiaries") have been duly organized and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation and are duly qualified to transact business as foreign corporations and are in good standing under the laws of all other jurisdictions where the ownership or leasing of their respective properties or the conduct of their respective businesses requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the Company and its Subsidiaries, taken as a whole; (2) the Company and each of the Subsidiaries have corporate power to own or lease their respective properties and conduct their respective businesses as described in the Registration Statement and the Prospectus, and the Company has corporate power to enter into 15 16 this Agreement and to carry out all the terms and provisions of this Agreement to be carried out by it; (3) the issued and outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and are owned beneficially by the Company free and clear of any adverse claim, as defined in the applicable Uniform Commercial Code, or, to the best knowledge of such counsel, any other security interests, liens, encumbrances, equities or claims except to the extent that the Company has pledged such securities to NBD Bank to secure the Company's current senior indebtedness; (4) the Indenture (A) has been duly and validly authorized, executed and delivered by the Company, (B) is duly qualified under the Trust Indenture Act or such qualification is not required under the provisions of the Trust Indenture Act and (C) constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as (i) enforcement thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting enforcement of creditors' rights generally and (ii) enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law); (5) the Debentures (A) are in the form contemplated by the Indenture, (B) have been duly and validly authorized for issuance and sale by all necessary corporate action, and (C) constitute the valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as (a) enforcement thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting enforcement of creditors' rights generally and (b) enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law); (6) the Debentures and the Indenture conform in all material respects to the descriptions thereof contained in the Registration Statement and the Prospectus and the form of certificate used to evidence the Debentures is in the form required by law and by the Indenture; (7) the authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization"; all of the issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all applicable federal and state securities laws and were not issued in violation of, or subject to, any preemptive rights or other rights to subscribe for or purchase securities; the certificates for such outstanding capital stock are valid and in proper legal form; the Underlying Common Shares have been duly authorized and duly reserved for issuance by all necessary corporate action of the Company and, when issued and delivered in accordance with the terms of the Debentures and the Indenture, will be validly issued, fully paid and nonassessable; no holders of outstanding shares of capital stock of the Company are entitled as such to any preemptive or other rights to subscribe for any of the Securities; and no holders of securities of the Company are entitled to have such securities 16 17 registered under the Registration Statement, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus); (8) the statements set forth under the headings "Description of Debentures" and "Description of Capital Stock" in the Prospectus, insofar as such statements purport to summarize certain provisions of the Debentures and capital stock of the Company, provide a fair summary of such provisions; and the statements set forth under the headings "Business" and "Legal Proceedings" in the Prospectus, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to under such headings, provide a fair summary of such legal matters, documents and proceedings discussed under such headings; (9) the execution and delivery of this Agreement have been duly authorized by all necessary corporate action of the Company and this Agreement has been duly executed and delivered by the Company; (10) after due inquiry and to the best knowledge of such counsel, no legal or governmental proceedings are pending to which the Company or any of the Subsidiaries is a party or to which the property of the Company or any of the Subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and that are not described therein, and, to the best knowledge of such counsel, no such proceedings have been threatened against the Company or any of the Subsidiaries or with respect to any of their respective properties; and no contract or other document is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described therein or filed as required; (11) the issuance, offering and sale of the Debentures to the Underwriters by the Company pursuant to this Agreement, the execution and delivery of this Agreement, the compliance by the Company with the other provisions of this Agreement and the consummation of the other transactions contemplated by this Agreement do not (A) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained and such as may be required under state securities or blue sky laws, or (B) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument, known to such counsel, to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries or any of their respective properties are bound, or the charter documents, Code of Regulations or bylaws of the Company or any of the Subsidiaries, or any statute or any judgment, decree, order, rule, regulation or other law of any court or other governmental authority or any arbitrator known to such counsel and applicable to the Company or any of the Subsidiaries; (12) the Registration Statement is effective under the Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment to the Registration Statement and no order directed 17 18 at any document incorporated by reference in the Registration Statement or the Prospectus or any amendment or supplement thereto has been issued, and no proceedings for that purpose have been instituted or threatened or, to the best knowledge of such counsel, are contemplated by the Commission; (13) the registration statement originally filed with respect to the Securities and each amendment thereto (including, without limitation, the Registration Statement) and the Prospectus and any supplement or amendment thereto (in each case, including the documents incorporated by reference therein but not including the financial statements and other financial information contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the applicable requirements of the Act, the Exchange Act, the Trust Indenture Act and the respective rules and regulations of the Commission thereunder and the Indenture and the Statement of Eligibility and Qualification of the Trustee on Form T-1, if required to be filed with the Commission as part of the Registration Statement, comply as to form in all material respects to the requirements of the Trust Indenture Act of 1939, as amended, and the rules and regulations of the Commission thereunder; (14) the Company and the Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses; and (15) this transaction will not cause the Company to become an investment company subject to registration under the Investment Company Act of 1940. Such counsel shall also state that they have no reason to believe that the Registration Statement or any amendment to the Registration Statement, as of its effective date or as of the date of such opinion, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any amendment or supplement thereto, as of its date or the date of such opinion, included or includes any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (except that such counsel need not express any belief as to financial statements and other financial information contained in the Registration Statement or Prospectus). In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deems reasonable, on certificates of responsible officers of the Company and public officials and, as to matters involving the application of laws of any jurisdiction other than the State of Michigan or the United States, to the extent satisfactory in form and scope to counsel for the Underwriters, upon the opinion of local counsel reasonably satisfactory to counsel for the Underwriters, and copies of such opinion shall be delivered to the Underwriters and counsel for the Underwriters. 18 19 References to the Registration Statement and the Prospectus in this paragraph (b) shall include any amendment or supplement thereto at the date of such opinion. (c) You shall have received on the Firm Closing Date an opinion addressed to the Underwriters, dated the Firm Closing Date, of Honigman Miller Schwartz and Cohn, counsel for the Underwriters, with respect to the issuance and sale of the Firm Debentures, the Registration Statement and the Prospectus, and such other related matters as the Underwriters may reasonably require, and the Company shall have furnished to such counsel such documents as they may reasonably request for the purpose of enabling them to pass upon such matters. In rendering such opinion, such counsel may rely as to all matters involving the application of laws of any jurisdiction other than the State of Michigan or the United States upon the opinion of Clark, Klein & Beaumont, P.L.C. referred to in paragraph (b) above. (d) You shall have received letters, on and as of the date of this Agreement and on and as of the Firm Closing Date, from Deloitte & Touche LLP, certified public accountants for the Company, in form and substance satisfactory to the Underwriters, to the effect that: (1) they are independent public accountants with respect to the Company and its consolidated subsidiaries within the meaning of the Act, the Exchange Act and the applicable rules and regulations thereunder; (2) in their opinion, the consolidated financial statements and schedules of the Company and its consolidated subsidiaries examined by them and included or incorporated by reference in the Registration Statement and the Prospectus comply as to form in all material respects with the applicable accounting requirements of the Act, the Exchange Act, the related published rules and regulations thereunder and Staff Accounting Bulletins with respect to registration statements on Form S-2 and the Exchange Act documents and filings incorporated by reference therein; (3) on the basis of a reading of the September 30, 1995 unaudited consolidated financial statements and schedules of the Company and its consolidated subsidiaries included or incorporated by reference in the Registration Statement and the Prospectus, a reading of the latest interim unaudited consolidated financial statements of the Company and its consolidated subsidiaries, a reading of the minutes of the meetings of the shareholders, the board of directors and any committees thereof of the Company and each of its consolidated subsidiaries, inquiries of certain officials of the Company and its consolidated subsidiaries who have responsibility for financial and accounting matters, such limited review and auditing procedures and inquiries as may be in accordance with standards for such reviews promulgated by the American Institute of Certified Public Accountants and other specific procedures and inquiries, nothing came to their attention that caused them to believe that: 19 20 (A) the unaudited consolidated financial statements and schedules of the Company and its consolidated subsidiaries included or incorporated by reference in the Registration Statement and the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act, the Exchange Act and the related published rules and regulations thereunder and Staff Accounting Bulletins with respect to registration statements on Form S-2 and the Exchange Act documents and filings incorporated by reference therein or such unaudited consolidated financial statements are not fairly presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited consolidated financial statements included or incorporated by reference in the Registration Statement and the Prospectus or such unaudited schedules, when considered in relation to the unaudited financial statements included or incorporated by reference in the Prospectus, do not present fairly in all material respects the information shown therein; (B) at the date of the latest balance sheet read by them and at a subsequent specific date not more than five business days prior to the date of such letter, there were any changes in the capital stock or long-term debt of the Company and its consolidated subsidiaries or any decreases in net current assets or shareholders' equity of the Company and its consolidated subsidiaries, in each case compared with amounts shown on the September 30, 1995 unaudited consolidated balance sheet included or incorporated by reference in the Registration Statement and the Prospectus, except for changes which the Prospectus discloses have occurred or may occur or which are described in the letter; (C) at the date of the latest consolidated balance sheet read by them and at a subsequent specific date not more than five business days prior to the date of such letter there were any decreases, as compared with amounts shown in the unaudited consolidated balance sheet as of September 30, 1995 included or incorporated by reference in the Prospectus, in consolidated total assets, working capital, long-term debt or shareholders' equity of the Company and its consolidated subsidiaries, except for decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; (D) for the period from September 30, 1995 to the date of the latest consolidated income statement read by them, and for the period from September 30, 1995 to a subsequent specified date not more than five business days prior to the date of such letter, there were any decreases, as compared with the corresponding period of the preceding year in consolidated revenues, gross profit, operating income, earnings before income taxes or the total or per share amounts of income before extraordinary items or of net income or of the Company 20 21 and its consolidated subsidiaries, except for decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (4) on the basis of their examinations referred to in their report contained or incorporated by reference in the Prospectus, the limited procedures referred to in (3) above and the carrying out of certain other specified procedures, not constituting an audit, they have compared certain specified amounts, percentages and financial information included in the Registration Statement and the Prospectus, in Exhibits 11 and 12 to the Registration Statement or in the Company's Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 1995, June 30, 1995 and September 30, 1995 incorporated by reference in the Registration Statement and Prospectus with the underlying accounting records of the Company and its consolidated subsidiaries and with information derived from such records and have found them to be in agreement, excluding any questions of legal interpretation. (e) If the letters referred to in paragraph (d) above set forth any such changes, decreases or increases, it shall be a further condition to the obligations of the Underwriters that (1) such letters shall be accompanied by a written explanation of the Company as to the significance thereof, unless the Underwriters deem such explanation unnecessary, and (2) such changes, decreases or increases do not, in the sole judgment of the Underwriters, make it impractical or inadvisable to proceed with the purchase and delivery of the Debentures as contemplated by the Registration Statement. References to the Registration Statement and the Prospectus in paragraph (d) and this paragraph (e) with respect to the letters referred to above shall include any amendment or supplement thereto at the date of such letter. (f) You shall have received on the Firm Closing Date a certificate, dated the Firm Closing Date, of the Chief Executive Officer and the Chief Financial Officer of the Company to the effect that: (1) the representations and warranties of the Company in this Agreement are true and correct as if made on and as of the Firm Closing Date; the Registration Statement, as amended as of the Firm Closing Date, does not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented as of the Firm Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company has performed all covenants and agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Firm Closing Date; (2) no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto and no order directed at any document incorporated by reference in the Registration Statement or the Prospectus or any amendment or supplement thereto has been issued, and no proceedings for that purpose 21 22 have been instituted or threatened or, to the best of the Company's knowledge, are contemplated by the Commission; and (3) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) neither the Company nor any of its subsidiaries has sustained any material loss or interference with their respective businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, and (ii) there has not been any material adverse change, or any development involving a prospective material adverse change, in the condition (financial or otherwise), management, business, net worth, cash flows or results of operations of the Company or any of its subsidiaries, except in each case as described in or contemplated by the Prospectus, and (iii) there has not been any change in the capital stock or a material increase in the long-term debt of the Company and its subsidiaries, except in each case as described in or contemplated by the Prospectus, and (iv) the Company has not incurred any liability or obligation, direct or contingent, which is material to the Company and its subsidiaries taken as a whole, except in each case as described in or contemplated by the Prospectus. (g) On or before the Firm Closing Date, the Underwriters and counsel for the Underwriters shall have received such further certificates, documents or other information as they may have reasonably requested from the Company. All opinions, certificates, letters and documents delivered pursuant to this Agreement will comply with the provisions of this Agreement only if they are reasonably satisfactory in all material respects to the Underwriters and counsel for the Underwriters. The Company shall furnish to the Underwriters such conformed copies of such opinions, certificates, letters and documents in such quantities as the Underwriters and counsel for the Underwriters shall reasonably request. The several obligations of each of the Underwriters to purchase and pay for any Option Debentures shall be subject, in their discretion, to each of the foregoing conditions to purchase the Firm Debentures, except that all references to the Firm Debentures and the Firm Closing Date shall be deemed to refer to such Option Debentures and the related Option Closing Date, respectively. 8. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Underwriter, their respective directors, officers, partners, agents and employees and each other person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act (collectively, "Indemnitees") against any losses, claims, damages or liabilities, joint or several, to which such Indemnitee may become subject under the Act, the Exchange Act or 22 23 otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of, relate to, or are caused by or based upon: (1) any untrue statement or alleged untrue statement made by the Company in this Agreement, (2) any untrue statement or alleged untrue statement of any material fact contained in (A) the Registration Statement or any amendment thereto or any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto or (B) any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Securities under the securities or blue sky laws thereof or filed with the Commission or any securities association or securities exchange (each an "Application"), (3) any omission or alleged omission to state in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or (4) any untrue statement or alleged untrue statement of any material fact contained in any audio or visual materials prepared by the Company and used in connection with the marketing of the Securities, including, without limitation, slides, videos, films, and tape recordings, and will reimburse, as incurred, each Indemnitee for any legal or other expenses reasonably incurred by such Indemnitee in connection with investigating, defending against, or appearing as a third-party witness in connection with, any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of, is related to, or is caused by or based upon, any untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or any Application in reliance upon, and in conformity with, written information furnished to the Company by any Underwriter expressly for use therein; and provided, further, that the Company will not be liable to any Indemnitee with respect to any such untrue statement or omission made in any Preliminary Prospectus that is corrected in the Prospectus (or any amendment or supplement thereto) if the person asserting any such loss, claim, damage or liability purchased Debentures from such Underwriter but was not sent or given a copy of the Prospectus (as amended or supplemented), other than the documents incorporated by reference therein, at or prior to the written confirmation of the sale of such Debentures to such person in any case where such delivery of the Prospectus (as amended or supplemented) is required by the Act and where delivery of such Prospectus (as amended or supplemented) would 23 24 have cured the defect giving rise to such loss, claim, damage or liability, unless such failure to deliver the Prospectus (as amended or supplemented) was a result of noncompliance by the Company with Section 5(d) or 5(e) of this Agreement. This indemnity agreement will be in addition to any liability which the Company may otherwise have. The Company will not, without the prior written consent of the Underwriters, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not any such Indemnitee is a party to such claim, action, suit or proceeding), unless (1) such settlement, compromise or consent includes an unconditional release of all of the Indemnitees from all liability arising out of such claim, action, suit or proceeding and (2) the entire settlement amount and all costs of settlement and all related costs are borne by the Company. (b) The Company hereby expressly and irrevocably waives any and all rights and objections which it may have against any Indemnitee in respect of any liabilities arising out of, or relating to, this Agreement or the offering contemplated by this Agreement, except to the extent such liabilities are determined, by a final order of a court of competent jurisdiction, to be the direct and primary result from the Underwriters' gross negligence or willful misconduct. Each Underwriter, individually and not jointly, will indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any losses, claims, damages or liabilities to which the Company, any such director or officer of the Company, or any such controlling person of the Company may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) are determined, by a final order of a court of competent jurisdiction, to be the direct and primary result of (1) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or (2) the omission or the alleged omission to state therein a material fact required to be stated in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application, or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission is determined by such court to have been made in reliance upon, and in conformity with, written information furnished to the Company by such Underwriter expressly for use therein; and, subject to the limitation set forth immediately preceding this clause, will reimburse, as incurred, any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating, defending against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. The Underwriters will not, without the prior written consent of the Company, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not any such Indemnitee is a party to such claim, action, suit or proceeding), unless (1) such settlement, compromise or consent includes an unconditional release of all of the Indemnitees from all liability arising out of such claim, action, suit or proceeding and (2) the entire settlement amount and all costs of settlement and all related costs are borne by the Underwriters. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action (including any governmental investigation), such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party 24 25 under this Section 8, notify the indemnifying party of the commencement of such action; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8 and will not relieve it from any liability under this Section 8 except to the extent the indemnifying party is actually prejudiced by the failure to give such notice. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, that if the parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party or any officers, directors or controlling persons of such indemnifying party and the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnifying party shall not have the right to direct the defense of such action on behalf of such indemnified party or parties and such indemnified party or parties shall have the right to select separate counsel to defend such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof, unless (1) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel (in addition to local counsel) in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, which counsel shall be designated by you in the case of indemnification under paragraph (a) of this Section 8 and by us in the case of indemnification under paragraph (b) of this Section 8, representing the indemnified parties under such paragraphs (a) or (b), as the case may be, who are parties to such action or actions) or (2) the indemnifying party does not promptly retain counsel reasonably satisfactory to the indemnified party or (3) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. After such notice from the indemnifying party to such indemnified party, the indemnifying party will not be liable for the costs and expenses of any settlement of such action effected by such indemnified party without the written consent of the indemnifying party. (d) If the indemnity agreement provided for in the preceding paragraphs of this Section 8 is unavailable or insufficient, for any reason, to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof), each indemnifying party, in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect (1) the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party on the other from the offering of the Securities or (2) if the allocation provided 25 26 by the foregoing clause (1) is not permitted by applicable law, not only such relative benefits but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth on the cover page of the Prospectus. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the parties' relative intents, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. The Company and the Underwriters agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to above in this paragraph (d). Notwithstanding any other provision of this paragraph (d), no Underwriter shall be obligated to make contributions under this paragraph (d) that in the aggregate exceed the total public offering price of the securities purchased by such Underwriter under this Agreement, less the aggregate amount of any damages that such Underwriter has otherwise been required to pay in respect of such untrue or alleged untrue statement or omission or alleged omission, and no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute under this paragraph (d) are individual in proportion to their respective underwriting obligations and not joint. For purposes of this paragraph (d), each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall have the same rights to contribution as the Company. 9. Default of Underwriters. If one of the Underwriters shall fail or refuse to purchase Firm Debentures or Option Debentures under this Agreement and if arrangements satisfactory to the non-defaulting Underwriter are not made within 36 hours after such default for the purchase by other persons (who may include the non-defaulting Underwriter) of the Debentures with respect to which such default occurs, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company other than as provided in Section 10 of this Agreement. In any such case which does not result in the termination of this Agreement, the non-defaulting Underwriter shall have the right to postpone the Firm Closing Date or the Option Closing Date, as the case may be, established as provided in Section 3 of this Agreement for not more than seven business days in order that any necessary changes may be made in the 26 27 Registration Statement, the Prospectus, the other documents and the arrangements for the purchase and delivery of the Firm Debentures or Option Debentures, as the case may be. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section 9. Nothing herein shall relieve any defaulting Underwriter from liability for its default. 10. Survival. The respective representations, warranties, agreements, covenants, indemnities, contribution agreements and other statements of the Company and the several Underwriters set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force and effect, regardless of (1) any investigation made by or on behalf of the Company, any of its officers or directors, any Underwriter or any controlling person referred to in Section 8 of this Agreement and (2) delivery of and payment for the Securities. The respective agreements, covenants, indemnities and other statements set forth in Sections 6 and 8 of this Agreement shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. 11. Termination. (a) This Agreement may be terminated with respect to the Firm Debentures or any Option Debentures in your sole discretion by notice to the Company given prior to the Firm Closing Date or the related Option Closing Date, respectively, in the event that the Company shall have failed, refused or been unable to perform all obligations on its part to be performed under this Agreement on or before the Firm Closing Date or the Option Closing Date, as applicable, or if any of the conditions in Section 7 shall not have been fulfilled when and as required by this Agreement to be fulfilled, or if, at or prior to the Firm Closing Date or such Option Closing Date, respectively: (1) the Company or any of its subsidiaries shall have, in your sole judgment, sustained any material loss or interference with their respective businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding or there shall have been any material adverse change, or any development involving a prospective material adverse change (including without limitation a change in management or control of the Company), in the condition (financial or otherwise), management, business, net worth, cash flows or results of operations of the Company or any of its subsidiaries, except in each case as described in or contemplated by the Prospectus (exclusive of any amendment or supplement thereto); (2) trading in the Common Shares shall have been suspended by the Commission or The Nasdaq National Market or trading in securities generally on the New York Stock Exchange or The Nasdaq National Market shall have been suspended or minimum or maximum prices shall have been established on such exchange or market system; 27 28 (3) a banking moratorium shall have been declared by Michigan, New York or United States authorities; (4) there shall have been (A) an outbreak or escalation of hostilities between the United States and any foreign power, (B) an outbreak or escalation of any other insurrection or armed conflict involving the United States or (C) any other calamity or crisis or material adverse change in the general economic, political or financial conditions having an effect on the U.S. financial markets that, in your sole judgment, makes it impractical or inadvisable to proceed with the public offering or the delivery of the Securities as contemplated by the Registration Statement, as amended as of the date of this Agreement; (5) the shall have been enacted, published, decreed or promulgated any federal, state or local statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects or will materially and adversely affect the business or operations of the Company; or (6) any actions shall have been taken by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your opinion has a material adverse effect on the securities markets in the United States. (b) Termination of this Agreement pursuant to this Section 11 shall be without liability of any party to any other party except as provided in Section 6 (including the provisions of the Letter of Intent which are incorporated in this Agreement) and Section 8 of this Agreement. 12. Information Supplied by Underwriters. The statements set forth in the last paragraph on the front cover page and under the heading "Underwriting" in any Preliminary Prospectus or the Prospectus (to the extent such statements relate to the Underwriters) constitute the only information furnished by any Underwriter to the Company for the purposes of Section 8 of this Agreement. The Underwriters confirm that such statements (to such extent) are correct. 13. Notices. All communications under this Agreement shall be in writing and delivered or sent by mail, telex or facsimile transmission and confirmed in writing as follows: (a) to the Underwriters: to Roney & Co., One Griswold, Detroit, Michigan 48226, Attention: Dan B. French, Jr.; and to The Ohio Company, 155 East Broad Street, 20th Floor, Columbus, Ohio 43215, Attention: Curtis D. Milner. (b) To the Company, 950 E. Witcomb Avenue, Madison Heights, Michigan 48071, Attention: President. 14. Successors. This Agreement shall inure to the benefit of and shall be binding upon the Underwriters and the Company, and their respective successors, assigns and legal 28 29 representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions contained in this Agreement, this Agreement and all conditions and provisions of this Agreement being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person except that (i) the indemnities of the Company contained in Section 8 of this Agreement shall also be for the benefit of the Indemnitees, including, without limitation, any person or persons who control any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters contained in Section 8 of this Agreement shall also be for the benefit of the directors of the Company, the officers of the Company who have signed the Registration Statement and any person or persons who control the Company within the meaning of Section 5 of the Act or Section 20 of the Exchange Act. No purchaser of Securities from any Underwriter shall be deemed a successor because of such purchase. 15. Applicable Law. The validity and interpretation of this Agreement, and the terms and conditions set forth in this Agreement, shall be governed by and construed in accordance with the laws of the State of Michigan, without giving effect to any provisions relating to conflicts of laws. 16. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 17. Entire Agreement. This Agreement and the Letter of Intent provisions which are incorporated in this Agreement are the parties' entire agreement concerning its subject matter, and supersede all prior undertakings and agreements. If the foregoing correctly sets forth our understanding, please indicate your acceptance of this Agreement in the space provided below for that purpose, whereupon this letter shall constitute an agreement binding the Company and each of the Underwriters. Very truly yours, CODE-ALARM, INC. By: ___________________________________________ Rand W. Mueller, President 29 30 The foregoing Agreement is hereby confirmed and accepted as of the date first above written: RONEY & CO. By: ___________________ Name: _________________ Title: ________________ THE OHIO COMPANY By: ___________________ Name: _________________ Title: ________________ 30 31 SCHEDULE 1 SUBSIDIARIES Name Jurisdiction of - ---- Incorporation --------------- 31 32 SCHEDULE 2 SUBSIDIARY OWNERSHIP 32 33 SCHEDULE 3 Principal Amount of Firm Debentures Underwriter to be Purchased - ----------- ------------------- RONEY & CO. THE OHIO COMPANY $10,000,000 =========== 33 EX-4 3 EXHIBIT 4 1 EXHIBIT 4 CODE-ALARM, INC. AND STATE STREET BANK AND TRUST COMPANY as Trustee ----------------------------------------------------- INDENTURE Dated as of October __, 1995 ------------------------------------------------------ ____% Convertible Subordinated Debentures Due December 1, 2002 2 TABLE OF CONTENTS
Page ARTICLE 1 Definitions and Other Provisions of General Application . . . . . . . . . . . . . . . . . 1 Section 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.2 Compliance Certificates and Opinions . . . . . . . . . . . . . . . . . . . . . . 10 Section 1.3 Form of Documents Delivered to Trustee . . . . . . . . . . . . . . . . . . . . . 11 Section 1.4 Acts of Holders; Record Dates . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 1.5 Notices, etc., to Trustee and Company . . . . . . . . . . . . . . . . . . . . . . 13 Section 1.6 Notices to Holders; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 1.7 Conflict with Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 1.8 Effect of Headings and Table of Contents . . . . . . . . . . . . . . . . . . . . 14 Section 1.9 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 1.10 Separability Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 1.11 Benefits of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 1.12 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 1.13 Limitation on Liability of Company Officers . . . . . . . . . . . . . . . . . . . 15 Section 1.14 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE 2 Debenture Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 2.1 Forms Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE 3 The Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 3.1 Title and Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 3.2 Denominations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 3.3 Execution, Authentication, Delivery and Dating . . . . . . . . . . . . . . . . . 17 Section 3.4 Temporary Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 3.5 Registration, Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . . . 18 Section 3.6 Mutilated, Destroyed, Lost and Stolen Debentures . . . . . . . . . . . . . . . . 19 Section 3.7 Payment of Interest; Interest Rights Preserved . . . . . . . . . . . . . . . . . 20 Section 3.8 Persons Deemed Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 3.9 Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 3.10 Authentication and Delivery of Original Issue . . . . . . . . . . . . . . . . . . 22 Section 3.11 Computation of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3 ARTICLE 4 Satisfaction and Discharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 4.1 Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . . . . . . . . 23 Section 4.2 Application of Trust Money . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE 5 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 5.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 5.2 Acceleration of Maturity; Rescission and Annulment . . . . . . . . . . . . . . . 26 Section 5.3 Collection of Indebtedness and Suits for Enforcement by Trustee . . . . . . . . . 27 Section 5.4 Trustee May File Proofs of Claim . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 5.5 Trustee May Enforce Claims Without Possession of Debentures . . . . . . . . . . . 28 Section 5.6 Application of Money Collected . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 5.7 Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 5.8 Unconditional Right of Holders to Receive Principal, Premium and Interest and to Convert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 5.9 Rights and Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 5.10 Delay or Omission Not Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 5.11 Control by Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 5.12 Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 5.13 Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 5.14 Waiver of Usury, Stay and Extension Laws . . . . . . . . . . . . . . . . . . . . 33 ARTICLE 6 The Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 6.1 Certain Duties and Responsibilities . . . . . . . . . . . . . . . . . . . . . . . 33 Section 6.2 Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 6.3 Certain Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 6.4 Not Responsible for Recitals or Issuance of Debentures . . . . . . . . . . . . . 36 Section 6.5 May Hold Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 6.6 Money Held in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 6.7 Compensation and Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 6.8 Disqualification; Conflicting Interests . . . . . . . . . . . . . . . . . . . . . 37 Section 6.9 Corporate Trustee Required; Eligibility . . . . . . . . . . . . . . . . . . . . . 37 Section 6.10 Resignation and Removal; Appointment of Successor . . . . . . . . . . . . . . . . 37 Section 6.11 Acceptance of Appointment by Successor . . . . . . . . . . . . . . . . . . . . . 39 Section 6.12 Merger, Conversion, Consolidation or Succession to Business . . . . . . . . . . . 39 Section 6.13 Preferential Collection of Claims Against Company . . . . . . . . . . . . . . . . 40
ii 4 ARTICLE 7 Holders' Lists and Reports by Company . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 7.1 Preservation of Information; Company to Furnish Trustee Names and Addresses of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 7.2 Communications Among Holders . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 7.3 Reports by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 7.4 Reports by Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 ARTICLE 8 Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 8.1 Supplemental Indentures Without Consent of Holders . . . . . . . . . . . . . . . 42 Section 8.2 Supplemental Indentures With Consent of Holders . . . . . . . . . . . . . . . . . 42 Section 8.3 Execution of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . 43 Section 8.4 Effect of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 8.5 Reference in Debentures to Supplemental Indentures . . . . . . . . . . . . . . . 44 Section 8.6 Effect on Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 8.7 Conformity with Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . 44 ARTICLE 9 Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 9.1 Payment of Principal and Interest . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 9.2 Payment of Taxes and Other Claims . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 9.3 Company Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 9.4 Company May Consolidate, etc. Only on Certain Terms . . . . . . . . . . . . . . . 45 Section 9.5 Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 9.6 Money for Debentures Payments to Be Held in Trust . . . . . . . . . . . . . . . . 47 Section 9.7 Statement by Officers as to Default . . . . . . . . . . . . . . . . . . . . . . . 48 Section 9.8 Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 9.9 Purchase of Debentures upon a Repurchase Event . . . . . . . . . . . . . . . . . 49 Section 9.10 Waiver of Certain Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 ARTICLE 10 Redemption of Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 10.1 Right of Redemption by Company . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 10.2 Election to Redeem; Notice to Trustee . . . . . . . . . . . . . . . . . . . . . . 53 Section 10.3 Selection by Trustee of Debentures to be Redeemed at the Election of the Company . . . . . . . . . . . . . . . . . . . . . . . . . 53 Section 10.4 Notice of Redemption at the Election of the Company . . . . . . . . . . . . . . . 53 Section 10.5 Deposit of Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 10.6 Debentures Payable on Redemption Date . . . . . . . . . . . . . . . . . . . . . . 55 Section 10.7 Debentures Redeemed in Part . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
iii 5 ARTICLE 11 Conversion of Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 11.1 Conversion Privileges and Conversion Price . . . . . . . . . . . . . . . . . . . 55 Section 11.2 Exercise of Conversion Privilege . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 11.3 Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 11.4 Adjustment of Conversion Price . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 11.5 Notice of Adjustments of Conversion Price . . . . . . . . . . . . . . . . . . . . 60 Section 11.6 Notice of Certain Corporation Action . . . . . . . . . . . . . . . . . . . . . . 60 Section 11.7 Company to Reserve Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . 61 Section 11.8 Taxes on Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 11.9 Covenant as to Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 11.10 Cancellation of Converted Debentures . . . . . . . . . . . . . . . . . . . . . . 62 Section 11.11 Effect of Reclassification, Consolidation, Merger, Share Exchange or Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 ARTICLE 12 Subordination of Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 12.1 Agreement to Subordinate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 12.2 No Payment on Securities in Certain Circumstances . . . . . . . . . . . . . . . . 63 Section 12.3 Debentures Subordinated to Prior Payment of All Senior Indebtedness on Dissolution, Liquidation or Reorganization . . . . . . . . . . . 64 Section 12.4 Payments by Trustee or Holder to Holders of Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Section 12.5 Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 12.6 Obligation of Company Unconditional . . . . . . . . . . . . . . . . . . . . . . . 65 Section 12.7 Payments on Debentures Permitted . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 12.8 Effectuation of Subordination by Trustee . . . . . . . . . . . . . . . . . . . . 66 Section 12.9 Knowledge of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 12.10 Trustees May Hold Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . 66 Section 12.11 Rights of Holders of Senior Indebtedness Not Impaired . . . . . . . . . . . . . . 66 Section 12.12 Rights and Obligations Subject to Power of Court . . . . . . . . . . . . . . . . 67
iv 6 Reconciliation and tie between Trust Indenture Act of 1939 and Indenture, dated as of September __, 1995*
Trust Indenture Indenture Act Section Section - ---------------- ---------- Section 310 (a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9 (a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8, 6.10 Section 311 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.13 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.13 Section 312 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Section 313 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 Section 314 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 (a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.7 (c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 (c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Section 315 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1(a) (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1(b) (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1(c) (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.13 Section 316 (a) (last sentence) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 ("Outstanding") Section 316 (a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2, 5.11 (a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.12 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.11 Section 317 (a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.6 Section 318 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7
* This reconciliation and tie shall not, for any purpose, be deemed to be part of the Indenture. v 7 THIS INDENTURE, dated as of October __, 1995, between CODE-ALARM, INC., a Michigan corporation, having its principal office at 950 E. Whitcomb, Madison Heights, Michigan 48071 (the "Company"), and STATE STREET BANK AND TRUST COMPANY, having its principal Corporate Trust Office at Two International Place, Corporate Trust Department, 4th Floor, Boston, Massachusetts 02110 (the "Trustee"). RECITALS OF THE COMPANY: The Company has duly authorized the creation, execution and delivery of its Debentures, to be known as its ___% Convertible Subordinated Debentures Due November 1, 2002 (hereinafter referred to as the "Debentures"), the amount and terms of which are hereinafter provided; and, to provide the terms and conditions upon which the Debentures are to be authenticated, issued and delivered, the Company has duly authorized the execution of this Indenture. All acts and things necessary to make the Debentures, when executed by the Company and authenticated and delivered by the Trustee as in this Indenture provided, the valid, binding and legal obligations of the Company, and to constitute these presents as a valid indenture and agreement according to its terms, have been done and performed, and the execution of this Indenture and the issue hereunder of the Debentures have in all respects been duly authorized, and the Company, in the exercise of the legal rights and power vested in it, executes this Indenture and proposes to make, execute and deliver the Debentures. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in the consideration of the premises and the purchase of the Debentures by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Debentures, as follows: ARTICLE 1 DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.1 Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: 8 (a) all references in this instrument to designated "Articles," "Sections" and other subdivisions are to designated articles, sections or other subdivisions of this instrument as originally executed. The words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular article, section or other subdivision; (b) the terms defined in this Article have the meaning assigned to them in this Article, and include the plural as well as the singular; (c) all other terms herein which are defined in the Trust Indenture Act of 1939, as amended, either directly or by reference therein, have the meanings assigned to them therein; and (d) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, which, with respect to any computation required of permitted hereunder, shall mean, except as otherwise herein expressly provided, such accounting principles as are generally accepted at the date or time of such computation. "Act" when used with respect to any Holder has the meaning specified in Section 1.4. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. The Trustee may obtain and rely upon the certificate of any person to determine whether such person is an affiliate of another. "Authorized Newspaper" means a newspaper of general circulation in Detroit, Michigan, or in such other geographic area in which the office or agency (maintained by the Company pursuant to Section 9.5) where Debentures may be presented or surrendered for payment is located, printed in the English language and customarily published on each Business Day, whether or not published on Saturdays, Sundays and holidays. Whenever successive weekly publications in an Authorized Newspaper are required hereunder they may be made, unless otherwise expressly provided herein, on the same or different days in the week and in the same or in different Authorized Newspapers. 2 9 "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday, which is not a day upon which banking institutions in the City of Boston, Massachusetts or Detroit, Michigan, are authorized or required by law to close. "Capital Stock" means capital stock of the Company that does not rank prior, as to the payment of dividends or distribution of asserts upon liquidation, to any other shares of capital stock of the Company. "Closing Price" for any date means the last reported sale price of the Common Stock regular way on such day or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way on such day, in either case on the New York Stock Exchange or, if the Common Stock is not listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the NASDAQ National Market System or, if the Common Stock is not listed or admitted to trading on any national securities exchange or quoted on such National Market System, the average of the closing bid and asked prices in the over-the-counter market as furnished by the New York Stock Exchange member firm selected from time to time by the Company for that purpose. If the Common Stock is not listed or admitted to trading in any national securities exchange, quoted on such National Market System or listed in any list of bid and asked prices in the over-the-counter market, "Closing Price" shall mean the fair market value of the Common Stock as determined in good faith by the Board of Directors. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act. "Common Stock" means the Company's Common Stock, no par value, authorized at the date of this Indenture as originally executed, and shares of any class or classes resulting from any reclassification thereof which have no preference in respect of dividends or dissolution or winding-up of the Company and which are not subject to redemption by the Company; provided, however, that warrants or other rights to purchase Common Stock will not be deemed to be Common Stock. 3 10 "Company" means Code-Alarm, Inc., a Michigan corporation, until a successor shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall means such successor. "Company Request," "Company Order" and "Company Consent" mean, respectively, a written request, order or consent signed in the name of the Company by its President or a Vice President, and by its Treasurer or Secretary and delivered to the Trustee. "Conversion Price" has the meaning specified in Section 11.1. "Corporate Trust Office" means the office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office at the date of execution of this Indenture is located at Two International Place, Corporate Trust Department, 4th Floor, Boston, Massachusetts 02110. "Date of Issue" as to any Debenture, means the date as of which such Debenture originally issued by the Company to the initial purchaser thereof shall be dated, which shall be the date upon which it was originally sold to such initial purchaser as designated by the Company Order requesting authentication and delivery thereof. "Debenture Register" and "Debenture Registrar" have the respective meanings specified in Section 3.5. "Event of Default" has the meaning specified in Article 5. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute thereto. "Holder" when used with respect to any Debenture, means a Person in whose name a Debenture is registered in the Debenture Register. "Indebtedness" with respect to any Person at any date means and includes all items of indebtedness or liability which, in accordance with generally accepted accounting principles, would be included in determining total liabilities as shown on the liabilities side of the balance sheet of such Person at such date, and shall include (i) all indebtedness guaranteed or endorsed (other than for purposes of collection in the ordinary course of business), directly or indirectly, in any manner, by such Person, and contingent obligations of such Person in respect of, or to purchase or otherwise acquire, indebtedness of others, and (ii) all indebtedness secured by any mortgage, lien, pledge, 4 11 charge or encumbrance upon property owned by such Person, whether or not the indebtedness so secured has been assumed by such Person. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Interest Payment Date" means the Stated Maturity of an installment of interest in the Debentures. "Maturity" when used with respect to any Debenture means the date on which the principal of such Debenture or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or repurchase, or otherwise. "Officers' Certificate" means a certificate signed by the President or a Vice President, and by the Treasurer, the Controller or the Secretary of the Company, and delivered to the Trustee. Wherever this Indenture requires that an Officers' Certificate be signed also by an accountant or other expert, such accountant or other expert, except as otherwise expressly provided in this Indenture, may be in the employ of the Company, but must have been approved by the Trustee. "Opinion of Counsel" means a written opinion of counsel, who may, except as otherwise expressly provided in this Indenture, be counsel for the Company, who is acceptable to the Trustee. "Outstanding" when used with respect to Debentures means, as of the date of determination, all Debentures theretofore authenticated and delivered under this Indenture, except: (1) Debentures theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (2) Debentures for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Debentures; provided that, if such Debentures are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and 5 12 (3) Debentures in exchange for or in lieu of which other Debentures have been authenticated and delivered pursuant to this Indenture unless proof satisfactory to the Company and the Trustee is presented that any such Debentures are held by a bona fide purchaser; provided, however, that in determining whether the Holders of the requisite principal amount of Debentures outstanding have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Debentures owned by the Company or any other obligor upon the Debentures or any Affiliates of the Company or such other obligor shall be disregarded and deemed not to be outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Debentures which the Trustee knows to be so owned shall be so disregarded. Debentures so owned that have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Debentures and that the pledgee is not the Company or any other obligor upon the Debentures or any Affiliates of the Company or such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of, the premium, if any, or interest on any Debenture on behalf of the Company. The initial Paying Agent shall be the Trustee. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Debentures" of any particular Debenture means every previous Debenture evidencing all or a portion of the same debt as that evidenced by such particular Debenture; and, for the purposes of this definition, any Debenture authenticated and delivered under Section 3.6 in exchange for or in lieu of a lost, destroyed or stolen Debenture shall be deemed to evidence the same debt as the lost, destroyed or stolen Debenture. "Redemption Date" when used with respect to any Debenture to be redeemed means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price" when used with respect to any Debenture to be redeemed means the price at which it is to be redeemed pursuant to this Indenture. "Regular Record Date" for the interest payable on any Interest Payment Date means the date specified in Article 3. 6 13 "Repurchase Event" means (a) such time as a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act), other than any holder on the date hereof of five percent (5%) or more of the outstanding Common Stock or any group including such holder, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than fifty percent (50%) of the total voting power of the then outstanding Voting Stock of the Company; or (b) a change in the composition of the Board of Directors of the Company in which individuals who, at the beginning of the two- year period immediately preceding such change, constituted the Board of Directors of the Company (together with any other director whose election by the Board of Directors of the Company or whose nomination for election by the shareholders of the Company was approved by a vote of at least two-thirds of the directors then in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors then in office; or (c) any consolidation of the Company with, or merger of the Company into, any Person, any merger of another Person into the Company, or any sale or transfer of 66 2/3% or more of the assets of the Company to another Person (other than (i) a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Capital Stock (as defined below), (ii) a merger which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of Common Stock, (iii) any consolidation with or merger of the Company into a Wholly Owned Subsidiary of the Company, or any sale or transfer by the Company of 66 2/3% or more of its assets to one or more of its Wholly Owned Subsidiaries, in any one transaction or a series of transactions; provided, in any such case, that the resulting corporation or each such Wholly Owned Subsidiary assumes the Company's obligations under the Debentures and provides for appropriate conversion rights or (iv) any such transaction where (y) the outstanding Voting Stock of the Company is reclassified or changed into or exchanged for Voting Stock of the surviving corporation and (z) no "person" or "group," other than any holder on the date hereof of five percent (5%) or more of the outstanding Common Stock or any group including such holder, is or becomes the "beneficial owner" of more than fifty percent (50%) of the total voting power of the Voting Stock of the surviving corporation immediately after such transaction); or 7 14 (d) the purchase or other acquisition by the Company, directly or indirectly, of beneficial ownership of its Capital Stock if the sum of the percentage of the total Capital Stock acquired in such acquisition and the like percentages of the Capital Stock acquired in all other such acquisitions effected after the date of original issue of the Debentures and within the 12-month period ending on the date of such acquisition exceeds thirty percent (30%); or (e) either (i) the distribution by the Company, directly or indirectly, of cash, securities to other property in respect of its Capital Stock (other than a distribution paid solely in Capital Stock or rights to acquire Capital Stock), or (ii) the purchase or other acquisition by the Company, directly or indirectly, of any Capital Stock (other than an acquisition of Capital Stock solely in exchange for or upon conversion of Capital Stock or rights to acquire Capital Stock), if the sum of the Applicable Equity Percentages (as defined below) for such distribution or acquisition and all other such distributions and acquisitions effected after the date of original issue of the Debentures and during the 12-month period ending on the date of which such distribution or acquisition is effected exceeds thirty percent (30%). For purposes of this definition, "Applicable Equity Percentage" means, for any distribution or acquisition, the percentage obtained by dividing (A) the fair market value on the Valuation Date (as defined below) of the cash, securities and other property distributed in respect of, or paid or otherwise exchanged to acquire, Capital Stock in such distribution or acquisition, by (B) the fair market value on the Reference Date (as defined below) of the Capital Stock outstanding on such Reference Date; and "Valuation Date" means (A) for any distribution, the record date therefor or (B) for any acquisition, the date thereof; "Reference Date" means (A) for any distribution, the day before the earlier of the record date for such distribution or the first date on which the Capital Stock trades without the right to receive such distribution or (B) for any acquisition, the day before the date of such acquisition. "Responsible Officer" when used with respect to the Trustee means any officer in its Corporate Trust Department or similar group and also means, with respect to the particular corporate trust matter, any other officer to whom such matter is referred because of his or her knowledge of and familiarity with the particular subject. "Senior Indebtedness" means the following, whether outstanding on the date of execution of this Indenture or thereafter created, incurred, assumed or guaranteed: (a) Principal of and premium, if any, and interest on Indebtedness of the Company for money borrowed (including any Indebtedness secured by a mortgage or other lien which is (i) given to secure all or part of the purchase price of the property 8 15 subject thereof, whether given to the vendor of such property or to another, or (ii) existing on property at the time of acquisition thereof) evidenced by notes or other written obligations; (b) Principal of and premium, if any, and interest on Indebtedness of the Company evidenced by notes, debentures, bonds or other securities of the Company other than the Debentures; (c) The amount of the Company's liability determined under generally accepted accounting principles under any lease required to be classified as a liability on the Company's balance sheet prepared in accordance with generally accepted accounting principles; (d) Principal of and premium, if any, and interest on Indebtedness of others of the kinds described in either of the preceding clauses (a) or (b), or, to the extent set forth in the preceding clause (c), leases of others of the kind described in the preceding clause (c), assumed by or guaranteed by the Company through an agreement to purchase, contingent or otherwise; and (e) Principal of and premium, if any, and interest on renewals, extensions, or refundings of Indebtedness of the kinds described in any of the preceding clauses (a), (b) or (d) or, to the extent set forth in the preceding clause (c), renewals or extensions of leases of the kinds described in either of the preceding clauses (c) or (d); unless, in the case of any particular Indebtedness, lease, renewal, extension, or refunding, the instrument or lease creating or evidencing the same or the assumption or guarantee of the same expressly provides that such Indebtedness, lease, renewal, extension, or refunding is subordinate to any other Indebtedness of the Company or that such Indebtedness, lease, renewal, extension, or refunding is not superior in right of payment to the Debentures. "Special Record Date" for the payment of any Defaulted Interest, as defined in Section 3.7, means a date fixed by the Trustee pursuant to Section 3.7. "Stated Maturity" when used with respect to any Debenture or any installment of principal thereof or interest thereon means the date specified in such Debenture as the fixed date on which the principal of such Debenture or such installment of principal or interest is due and payable. "Subsidiary" means any corporation of which at least a majority of the outstanding stock having ordinary voting power to elect a majority of the directors of 9 16 such corporation, irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency, is at the time directly or indirectly owned by the Company, by one or more Subsidiaries of the Company, or by the Company and one or more Subsidiaries. The term "Wholly Owned Subsidiary" means a Subsidiary of which all of the outstanding voting stock (other than directors' qualifying shares) is at the time directly or indirectly owned by the Company, or by one or more Wholly Owned Subsidiaries, or by the Company and one or more Wholly Owned Subsidiaries. "Trading Day" means, with respect to the Common Stock, each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on which securities are not traded on the exchange or market on which the Common Stock is traded. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this Indenture was executed, except as provided in Section 8.7 hereof and except that any rules and regulations subsequently prescribed by the Commission pursuant to Section 314(a) of the Act shall apply. "Voting Stock" means stock of the class or classes having general voting power under ordinary circumstances to elect the board of directors, managers or trustees of a corporation (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). Section 1.2 Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such Counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. 10 17 Every Officers' Certificate or Opinion of Counsel with respect to compliance with a condition or covenant provided for in this Indenture (other than certificates provided pursuant to Section 314(a)(4) of the Trust Indenture Act) shall include: (a) a statement that each individual signing such Officers' Certificate or Opinion of Counsel has read such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such Officers' Certificate or Opinion of Counsel are based; (c) a statement that, in the opinion of each such individual, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. Section 1.3 Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of any officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his or her certificate or opinion is based are erroneous. Any certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. 11 18 In the event that any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. Section 1.4 Acts of Holders; Record Dates. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee, and, if it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and, subject to Section 6.1, conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by the certificate of any notary public or other officer authorized by law to take acknowledgement of deeds, certifying that the individual signing such instrument or writing acknowledgement to him or her the execution thereof. Where such execution is by a signer acting in a capacity other than his or her individual capacity, such certificate or affidavit shall also constitute sufficient proof of his or her authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner that the Trustee deems sufficient. (c) The ownership of Debentures shall be proved by the Debenture Register. (d) Any request, demand, authorization, direction, notice, consent, waiver or other Act by the Holder of any Debenture shall bind every future Holder of the same Debenture and the Holder of every Debenture issued upon the transfer thereof or in exchange therefor or in lieu thereof, in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Debenture. Without limiting the foregoing, a Holder entitled hereunder to give or take any action hereunder with regard to any particular Debenture may do so with regard to all 12 19 or any part of the principal amount of such Debenture or by one or more duly appointed agents each of whom may do so pursuant to such appointment with regard to all or any different part of such principal amount. Section 1.5 Notices, etc., to Trustee and Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (a) the Trustee by any Holder shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its principal Corporate Trust Office. (b) the Trustee by the Company shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first class postage prepaid, to the Trustee addressed to it at the Corporate Trust Office, or (c) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first class postage prepaid, to the Company addressed to it to the attention of its Treasurer at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company. Section 1.6 Notices to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his or her address as it appears in the Debenture Register, not later than the latest date, and not earlier than the earliest date, if any, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. In any case where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. 13 20 In case, by reason of the suspension of regular mail service, or by reason of any other cause, it shall be impractical to give such notice by mail as required by this Indenture, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. Section 1.7 Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with the duties imposed by any of Sections 310 through Section 317, inclusive, of the Trust Indenture Act through the operation of Section 318(c) thereof, such imposed duties shall control. Section 1.8 Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction thereof. Section 1.9 Successors and Assigns. All covenants and agreement in this Indenture by the Company shall bind its successors and assigns, whether or not so expressed. Section 1.10 Separability Clause. In case any provision in this Indenture or in the Debentures shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions hereof or thereof shall not in any way be affected or impaired thereby. Section 1.11 Benefits of Indenture. Nothing in this Indenture or in the Debentures, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, the holders of Senior Indebtedness and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture. Section 1.12 Governing Law. This Indenture and the Debentures shall be governed by and construed in accordance with the laws of the State of Michigan, but without regard to principles of conflicts of laws. 14 21 Section 1.13 Limitation on Liability of Company Officers. No recourse shall be had for the payment of the principal, interest or premium, if any, on the Debentures or for any claim based thereon or otherwise in respect thereof or based on or in respect of this Indenture against any shareholder, officer, director, agent or employee of the Company. Section 1.14 Counterparts. This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same instrument. ARTICLE 2 DEBENTURE FORMS Section 2.1 Forms Generally. The Debentures and the certificates of authentication thereon shall be in substantially the form set forth in Exhibit A, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange, or as may, consistently herewith, be determined by the officers executing such Debentures, as evidenced by their execution of the Debentures. Any portion of the text of any Debenture may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Debenture. The definitive Debentures shall be printed, lithographed or engraved or produced by any combination of these methods on steel engraved borders or in such other manner as the Company may deem appropriate, all as determined by the officers executing such Debentures, as evidenced by their execution of such Debentures. 15 22 ARTICLE 3 THE DEBENTURES Section 3.1 Title and Terms. The aggregate principal amount of Debentures which may be authenticated and delivered under this Indenture is limited to $11,500,000, except for Debentures authenticated and delivered upon transfer of, or in exchange for, or in lieu of other Debentures pursuant to Sections 3.4, 3.5, 3.6, 8.5, 10.7 and 11.2. The Debentures shall be known and designated as the ___% Convertible Subordinated Debentures Due December 1, 2002 of the Company. The Debentures shall bear interest from the date and at the rate per annum and such interest shall be payable on the dates, specified in the form of Debenture set forth in Exhibit A, until the principal thereof is paid or made available for payment. All interest payments to be made to registered Holders of Debentures shall be paid directly by the Company to the Trustee, and, unless otherwise arranged by the Company with the concurrence of the Trustee, the Trustee shall mail those interest payments to the Holders that are listed in the Debenture Register by the Interest Payment Date. The principal of and premium, if any, on the Debentures shall be payable at the office or agency of the Company maintained pursuant to Section 9.5 for such purposes in Boston, Massachusetts, or at such other office or agency as may be established by the Company. The Debentures shall be redeemable as provided in Article 10. The Debentures shall be convertible as provided in Article 11. The Debentures shall be subordinated in right of payment to Senior Indebtedness of the Company as provided in Article 12. Section 3.2 Denominations. The Debentures shall be issuable only in fully registered form, without coupons and only in denominations of $1,000 and integral multiples thereof. 16 23 Section 3.3 Execution, Authentication, Delivery and Dating. The Debentures shall be executed on behalf of the Company by its Chairman, President or a Vice President and attested by its Secretary, Treasurer, or one of its Assistant Secretaries or Assistant Treasurers. The signature of any of these officers on the Debentures may be manual or facsimile. Debentures bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Debentures or did not hold such offices at the date of such Debentures. Upon the original issuance of the Debentures by the Company and authentication by the Trustee, the Trustee shall deliver the Debentures to the Holders. All Debentures authenticated for original issuance by the Company to the initial purchaser thereof shall be dated as of their respective Date of Issue. All Debentures authenticated for any other purpose hereunder shall be dated the date of their authentication. No Debenture shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose, unless there appears on such Debenture a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Debenture has been duly authenticated and delivered hereunder. Section 3.4 Temporary Debentures. Pending the preparation of definitive Debentures, the Company may execute and upon Company Order the Trustee shall authenticate and deliver, temporary Debentures which are printed, lithographed, typewritten, mimeographed or otherwise produced in any denomination, substantially of the tenor of the definitive Debentures in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Debentures may determine, as evidenced by their execution of such Debentures. If temporary Debentures are issued, the Company will cause definitive Debentures to be prepared without unreasonable delay. After the preparation of definitive Debentures, the temporary Debentures shall be exchangeable for definitive Debentures upon surrender of the temporary Debentures at the office or agency or the 17 24 Company designated for such purpose pursuant to Section 9.5, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Debentures, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Debenture of authorized denominations. Until so exchanged the temporary Debentures shall in all respects be entitled to the same benefits under this Indenture as definitive Debentures. Section 3.5 Registration, Transfer and Exchange. The Company shall cause to be kept at the Corporate Trust Office of the Trustee (or at any other office or agency maintained by the Company pursuant to Section 9.5) a register (herein sometimes referred to as the "Debenture Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Debentures and of transfers of Debentures. The Trustee is hereby initially appointed "Debenture Registrar" for the purpose of registering Debentures and transfers of Debentures as herein provided. The Holder may surrender the Debentures for transfer at the Corporate Trust Office or at such other office or agency of the Company designated for such purpose pursuant to Section 9.5. The Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Debentures of any authorized denominations, of a like aggregate principal amount. At the option of the Holder, Debentures may be exchanged for other Debentures of any authorized denominations, of a like aggregate principle amount, upon surrender of the Debentures to be exchanged at such office or agency. Whenever any Debentures are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Debentures which the Holder making the exchange is entitled to receive. All Debentures issued upon any transfer or exchange of Debentures shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Debentures surrendered upon such transfer or exchange. Every Debenture presented or surrendered for transfer or exchange shall, if so required by the Company or the Trustee, be duly endorsed or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Debenture Registrar, duly executed by the Holder thereof or by his or her attorney duly authorized in writing. 18 25 No service charge shall be made for any transfer or exchange of Debentures by any Holder, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any transfer or exchange of Debentures, other than exchanges pursuant to Sections 3.4, 8.5, 10.7 or 11.2 not involving any transfer. The Company shall not be required (a) to issue, transfer or exchange any Debenture during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Debentures selected for redemption under Section 10.3 and ending at the close of business on the day of such mailings, or (b) to transfer or exchange any Debenture so selected for redemption in whole or in part, except for the unredeemed portion of any Debenture being redeemed in part. Section 3.6 Mutilated, Destroyed, Lost and Stolen Debentures. If (a) any mutilated Debenture is surrendered to the Trustee, or the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Debenture, and (b) there is delivered to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Trustee that such Debenture has been acquired by a bona fide purchaser, the Company shall execute and upon its request the Trustee shall execute and upon its request the Trustee shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Debenture, a new Debenture of like tenor and principal amount, bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Debenture has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Debenture, pay such Debenture. Upon the issuance of any new Debenture under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses, including the fees and expenses of the Trustee, connected therewith. Every new Debenture issued pursuant to this Section in lieu of any mutilated, destroyed, lost or stolen Debentures shall constitute an original, additional contractual obligation of the Company, whether or not the mutilated, destroyed, lost or stolen Debenture shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Debentures duly issued hereunder. 19 26 The provisions of this Section are exclusive and shall preclude, to the extent lawful, all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debentures. Section 3.7 Payment of Interest; Interest Rights Preserved. Interest on any Debenture that is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Debenture (or one or more Predecessor Debentures) is registered at the close of business on the Regular Record Date, which shall be the 15th day of the month preceding any Interest Payment Date whether or not such day is a Business Day. Any interest on any Debenture that is payable, but is not punctually paid or duly provided for, on any Interest Payment Date shall accrue from such Interest Payment Date at a rate per annum that is equal to one percent (1%) per annum plus the interest rate stated in the Debenture until all unpaid and accrued interest is paid in full (herein called "Defaulted Interest"). The Defaulted Interest shall forthwith cease to be payable to the registered Holder on the relevant Regular Record Date by virtue of having been such Holder; and, except as hereinafter provided, such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Section 3.7(a) or 3.7(b) below: (a) The Company may elect to make payment of any Defaulted Interest to the Persons in whose name the Debenture (or their respective Predecessor Debentures) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Debenture and the date of the proposed payment (which shall be not less than 30 days from such notice), and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest that shall be not more than 15 nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first class postage prepaid, to each Holder at his or her address as it appears in the Debenture Register, not less than 10 days prior to 20 27 such Special Record Date. The Trustee may, in its discretion, in the name and at the expense of the Company, cause a similar notice to be published at least once in an Authorized Newspaper, but such publication shall not be a condition precedent to the establishment of such Special Record Date. Notice of proposed payment of such Defaulted Interest and of the Special Record Date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose name the Debentures (or their respective Predecessor Debentures) are registered on such Special Record Date and shall not longer be payable pursuant to the following Section 3.7(b). (b) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Debentures may be listed, and upon such notice as may be required by such exchange, if, after notice is given by the Company to the Trustee of the proposed payment pursuant to this Clause, such payment shall be deemed practicable by the Trustee. If any installment of interest which has a Stated Maturity on or prior to the Redemption Date for any Debentures called for redemption at the election of the Company or requested to be redeemed by a deceased Holder's authorized representative pursuant to Article 10 is not paid or duly provided for on or prior to the Redemption Date in accordance with the foregoing provisions of this Section, such interest shall be payable as part of the Redemption Price of such Debentures. Subject to the foregoing provisions of this Section, each Debenture delivered under this Indenture upon transfer of or in exchange for or in lieu of any other Debenture shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Debenture. All payments of interest on the Debentures to the Persons entitled thereto, whether made by the Company, the Trustee or any Paying Agent, as authorized pursuant to this Indenture, shall be made (subject to collection) by check mailed to the address of the Person entitled thereto, as such address shall appear on the Debenture Register, unless the Trustee determines such method of payment to be inappropriate in the circumstances. In the case of any Debenture that is converted after any Regular Record Date and on or prior to the next succeeding Interest Payment Date (other than any Debenture whose Maturity is prior to such Interest Payment Date), interest shall be payable on such Interest Payment Date notwithstanding such conversion, and such interest (whether or not punctually paid or duly provided for) shall be paid to the Person in whose name that Debenture (or one or more Predecessor Debentures) is registered at the close of 21 28 business on such Regular Record Date. Except as otherwise expressly provided in the immediately preceding sentence, in the case of any debenture that is converted, interest after the date of conversion of such Debenture shall not be payable. Section 3.8 Persons Deemed Owners. The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name any Debenture is registered as the owner of such Debenture for the purpose of receiving payment of principal of, and (subject to Section 3.7) interest on, such Debenture and for all other purposes whatsoever, whether or not such Debenture is overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. Section 3.9 Cancellation. All Debentures surrendered for payment, conversion, redemption, transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and, if not already cancelled, shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Debentures previously authenticated and delivered hereunder that the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Debentures previously authenticated hereunder that the Company has not issued and sold, and all Debentures so delivered shall be promptly cancelled by the Trustee. No Debentures shall be authenticated in lieu of or in exchange for any Debentures cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Debentures held by the Trustee shall be disposed of as directed by a Company Order. Section 3.10 Authentication and Delivery of Original Issue. Forthwith upon the execution and delivery of this Indenture, or from time to time thereafter, Debentures up to the aggregate principal amount of $11,500,000 may be executed by the Company and delivered to the Trustee for authentication, and shall thereupon be authenticated and delivered by the Trustee upon Company Order, without any further action by the Company. Section 3.11 Computation of Interest. Interest on the Debentures shall be computed on the basis of a 360 day year of twelve 30-day months. 22 29 ARTICLE 4 SATISFACTION AND DISCHARGE Section 4.1 Satisfaction and Discharge of Indenture. The Indenture shall cease to be of further effect (except as to any surviving rights of conversion, transfer or exchange of Debentures herein expressly provided for), and the Trustee, on demand of and at the expense of the Company, shall execute the proper instrument acknowledging satisfaction and discharge of this Indenture, when (a) either (1) all Debentures theretofore authenticated and delivered, other than Debentures which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 3.6, have been cancelled by the Trustee or delivered for cancellation to the Trustee; or (2) all such Debentures not theretofore cancelled or delivered to the Trustee for cancellation (A) have become due and payable, or (B) will become due and payable at their Stated Maturity within one year, or (C) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company and the Company, in the case of Sections 4.1(a)(2)(A), 4.1(a)(2)(B) or 4.1(a)(2)(C) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on such Debentures not theretofore cancelled or delivered to the Trustee for cancellation, for principal and any premium and interest to the date of such deposit, in the case of Debentures which have become due and payable, or to the Stated Maturity or Redemption Date, as the case may be; 23 30 (b) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (c) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 6.7 and, if money shall have been deposited with the Trustee pursuant to Section 4.1(a)(2), the obligations under Section 4.2 and Section 9.6 shall survive. Section 4.2 Application of Trust Money. Subject to the provisions of the last paragraph of Section 9.6, all money deposited with the Trustee pursuant to Section 4.1 shall be held in trust and applied by it, in accordance with the provisions of the Debentures and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and interest for whose payment such money has been deposited with the Trustee; but such money need not be segregated from other funds except to the extent required by law. ARTICLE 5 REMEDIES Section 5.1 Events of Default. "Event of Default," wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of the principal of (or premium, if any, on) any Debenture at its Maturity whether or not such payment is prohibited by the provisions of Article 12 hereof; or 24 31 (b) default in the payment of any interest upon any Debenture when it becomes due and payable, and continuance of such default for a period of 15 days; or (c) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture, other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with, and continuance of such default or breach for a period of 30 days after there has been given, by registered or certified mail, to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Debentures, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (d) default under any obligations for money borrowed by the Company and its Subsidiaries aggregating $1,000,000 or more in principal amounts outstanding, whether such obligations now exist or shall hereafter be created, which default(s) shall constitute failure to pay any portion of the principal of such obligations when due and payable after the expiration of any applicable grace period(s) with respect thereto or shall have resulted in such obligations becoming or being declared due and payable prior to the date on which it or they would otherwise have become due and payable, without such obligations having been discharged, or such acceleration having been rescinded or annulled; or (e) entry of a decree or order by a court having jurisdiction in the premises adjudging the Company or any Subsidiary insolvent, or approving as properly filed an involuntary petition seeking reorganization, readjustment, arrangement, composition or similar relief for the Company under the federal bankruptcy laws, or any other similar applicable law of any governmental unit, domestic or foreign, and such decree or order shall have continued undischarged or unstayed for a period of 60 days; or a decree or order or other decision of a court or agency of the appointment of a receiver or conservator or liquidator or trustee or assignee in bankruptcy or insolvency of the Company or of a substantial part of its property, or for the involuntary winding down or liquidation of the Company's affairs, shall have been entered and such decree or order shall have remained in force undischarged and unstayed for a period of 60 days; or, under the provisions of any insolvency, bankruptcy or other law for the relief or aid of creditors, any court shall assume custody or control of the Company or of a substantial part of its property, and such custody and control shall not be terminated or stayed within 60 days from the date of assumption of such custody or control; or (f) institution of proceedings by the Company or any Subsidiary to be adjudicated insolvent, or the consent to the filing of an insolvency proceeding against the Company, or the filing of a petition or answer or consent seeking reorganization, 25 32 readjustment, arrangement, composition, appointment of a receiver or conservator or similar relief under the federal insolvency laws, or any other similar applicable law of any governmental unit, domestic or foreign, or the consent to the filing of any such petition or the consent to the appointment of a receiver or conservator or liquidator or trustee or assignee in insolvency of the Company or of a substantial part of the Company's property, or the making of an assignment for the benefit of creditors, or the admission by the Company in writing of its inability to pay its debts generally as they become due, or the voluntarily suspending transaction of its business (other than in connection with a labor dispute), or any corporate action taken by the Company in furtherance of any of the aforesaid purposes. Section 5.2 Acceleration of Maturity; Rescission and Annulment. If an Event of Default occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in aggregate principal amount of the Debentures Outstanding may declare the principal amount of all the Debentures to be due and payable immediately, by a notice in writing to the Company, and to the Trustee if given by Holders, and upon any such declaration such principal amount shall become immediately due and payable. At any time after such declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of 50% in aggregate principal amount of the Debentures Outstanding, by written notice to the Company and Trustee, may rescind and annul such declaration and its consequences if: (a) the Company has paid or deposited with the Trustee a sum sufficient to pay (1) all overdue installments of interest on all Debentures, (2) the principal of (and premium, if any, on) any Debentures which have become due (otherwise than by such declaration of acceleration) and interest thereon at the rate borne by the Debentures, (3) to the extent that payment of such interest is lawful, interest upon overdue installments of interest at the rate borne by the Debentures, and (4) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and 26 33 (b) all Events of Default, other than the non-payment of the principal of and premium, if any, and interest on the Debentures that has become due solely by such acceleration, have been cured or waived as provided in Section 5.12. No such rescission shall affect any subsequent default or impair any right consequent thereon. Section 5.3 Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if: (a) default is made in the payment of the principal of (or premium, if any, on) any Debenture at the Maturity thereof, or (b) default is made in the payment of any installment of interest on any Debenture when such interest becomes due and payable and such default continues for a period of 15 days, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Debentures, the whole amount then due and payable on such Debentures for principal, premium, if any, and interest, with interest upon the overdue principal and, to the extent that payment of such interest shall be legally enforceable, upon overdue installments of interest, at the rate borne by the Debentures; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amount forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, and may prosecute such proceeding to judgment or final decree, and may enforce the same against the Company or any other obligor upon the Debentures and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Debentures, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other property remedy. 27 34 Section 5.4 Trustee May File Proofs of Claim. In case of the pendency of any receivership, conservatorship, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or relative to any other obligor upon the Debentures or the property of the Company or of such other obligor or their creditors, irrespective of whether the principal of the Debentures shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal and interest owing and unpaid in respect of the Debentures, to file such other papers or documents and to take such other actions as the Trustee may deem necessary or advisable in order to have the claims of the Trustee, including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any receiver, assignee, trustee, liquidator, sequestrator, or other similar official, in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.7. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Debentures or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding; provided, however, that the Trustee may, on behalf of the Holders, vote for the election of a trustee in bankruptcy or similar official and be a member of a creditors' or other similar committee. Section 5.5 Trustee May Enforce Claims Without Possession of Debentures. All rights of action and claims under this Indenture or the Debentures may be prosecuted and enforced by the Trustee without the possession of any of the Debentures 28 35 or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Debentures in respect of which such judgment has been recovered. Section 5.6 Application of Money Collected. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (and premium, if any) or interest, upon presentation of the Debentures and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 6.7; SECOND: In case the principal of the Debentures shall not have become due, to the payment of interest on the Debentures, in the order of the maturity of the installments of such interest, with interest, to the extent that such interest has been collected by the Trustee, upon the overdue installments of interest at the rate borne by the Debentures, such payments to be made ratably to the Persons entitled thereto, without discrimination or preference; THIRD: In case the principal of the Debentures shall have become due, by declaration or otherwise, to the payment of the whole amount then owing and unpaid upon the Debentures for principal (and premium, if any) and interest, with interest on the overdue principal (and premium, if any) and, to the extent that such interest has been collected by the Trustee, upon overdue installments of interest at the rate borne by the Debentures; and in case such monies shall be insufficient to pay in full the whole amount so due and unpaid upon the Debentures, then to the payment of such principal (and premium, if any) and interest, without preference or priority of principal (and premium, if any), or of any installment of interest over any other installment of interest, or of any Debenture over any other Debenture, ratably to the aggregate of such principal (and premium, if any) and accrued and unpaid interest; and FOURTH: The remainder, if any, shall be paid to the Company, its successors or assigns, or to whomsoever may be lawfully entitled to receive the same, or as a court of competent jurisdiction may direct. 29 36 Section 5.7 Limitation on Suits. No Holder of any Debenture shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (a) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (b) the Holders of not less than 25% in aggregate principal amount of the Outstanding Debentures shall have made a written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (c) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Debentures; it being understood and intended that no one or more Holders of Debentures shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders of Debentures, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders of Debentures. Section 5.8 Unconditional Right of Holders to Receive Principal, Premium and Interest and to Convert. Notwithstanding any other provision in this Indenture, the Holder of any Debenture shall have the right, which is absolute and unconditional, to receive payment of the principal of and any premium and, subject to Section 3.7, interest on such Debenture on the respective Stated Maturities expressed in such Debenture (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and the right to convert such Debenture in accordance with Article 30 37 11 and to institute suit for its enforcement, and such rights shall not be impaired without the consent of such Holder. Section 5.9 Rights and Remedies Cumulative. Except as provided in Section 3.6, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Section 5.10 Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Debenture to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. Section 5.11 Control by Holders. The Holders of a majority in aggregate principal amount of the Outstanding Debentures shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee, provided that: (a) such direction shall not be in conflict with any rule of law or with this Indenture, (b) the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction, and (c) the Trustee shall not, in its sole discretion, determine that the action so directed would be unduly prejudicial to the Holders not taking part in such direction or shall not have reasonable cause to believe adequate indemnity against risk or liability is not reasonably assured to it. 31 38 The Company may set a record date for purposes of determining the identity of Holders of Outstanding Debentures entitled to vote or consent to any action as authorized or permitted by Section 316(a) of the Trust Indenture Act. Such record date shall be the later of 30 days prior to the first solicitation of such consent or the date of the most recent list of Holders of Debentures furnished to the Trustee pursuant to Section 7.1 of this Indenture prior to such solicitation. Section 5.12 Waiver of Past Defaults. The Holders of not less than a majority in aggregate principal amount of the Debentures Outstanding may, on behalf of the Holders of all the Debentures, waive any past default hereunder and its consequences, except, unless theretofore cured, a default: (a) in the payment of the principal of, premium, if any, or interest on any Debenture (other than any non-payment of the principal of and premium, if any, and interest on the Debentures that has become due solely by acceleration), or (b) in respect of a covenant or provision hereof that under Article 8 cannot be modified or amended without the consent of the Holder of each Outstanding Debenture affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. Section 5.13 Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Debenture by his or her acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Debentures, or to any suit instituted by a Holder for the enforcement of the payment of the principal of, premium, if any, or interest on any Debenture on or after any applicable Stated Maturity thereof (or, in the 32 39 case of redemption, on or after the Redemption Date) or for the enforcement of the right to convert any Debenture in accordance with the provisions of Article 11. Section 5.14 Waiver of Usury, Stay or Extension Laws. The Company covenants, to the extent that it may lawfully do so, that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any usury, stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company, to the extent that it may lawfully do so, hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE 6 THE TRUSTEE Section 6.1 Certain Duties and Responsibilities. (a) Except during the continuance of an Event of Default: (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of actual knowledge or bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements, and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which are specifically required to be furnished to the Trustee by any provision hereof, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. (b) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent individual would exercise or use under the circumstances in the conduct of his or her own affairs. 33 40 (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or it own willful misconduct, except that: (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (3) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a majority in principal amount of the Outstanding Debentures relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under the Indenture; and (4) whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. Section 6.2 Notice of Defaults. Within 90 days after the occurrence of any default hereunder which is known to the Trustee, the Trustee shall transmit by mail to all Holders, as their names and addresses appear in the Debenture Register, notice of such default, unless such default shall have been cured or waived; provided, however, that, except in the case of a default in the payment of the principal of, or premium, if any, or interest on any Debenture, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interests of the Holders; and provided, further, that in the case of any default of the character specified in Section 5.1(c) no such notice to Holders shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default. 34 41 Section 6.3 Certain Rights of Trustee. Except as otherwise provided in Section 6.1: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, security or other paper or document believed by it to be genuine and to have been signed by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of actual knowledge of bad faith on its part, rely upon an Officers' Certificate; (d) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, security or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys; and 35 42 (h) the Trustee shall not be deemed to know of any default or of any fact upon the occurrence of which it may be required to take action unless one or more of its Responsible Officers has actual knowledge of such default or fact. Section 6.4 Not Responsible for Recitals or Issuance of Debentures. The recitals contained herein and in the Debentures, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Debentures. The Trustee shall not be accountable for the use or application by the Company of the Debentures or the proceeds thereof. Section 6.5 May Hold Debentures. The Trustee, any Paying Agent, any Debenture Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Debentures and, subject to Section 6.8 and 6.13 may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Debenture Registrar or such other agent. Section 6.6 Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. Section 6.7 Compensation and Reimbursement. The Company agrees: (a) to pay to the Trustee from time to time such reasonable compensation as the Company and the Trustee shall from time to time agree upon in writing for all services rendered to it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), 36 43 except any such expense, disbursement or advance as may be attributable to its negligence, willful misconduct or bad faith; and (c) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence, willful misconduct or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligations of the Company under this Section shall not be subordinated to the payment of Senior Indebtedness pursuant to Article 12. As security for the performance of the obligations of the Company under this Section, the Trustee shall have a lien prior to the Debentures upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of (and premium, if any) or interest on Debentures. Section 6.8 Disqualifications; Conflicting Interests. The Trustee shall be subject to and comply with the provisions of Section 310(b) of the Trust Indenture Act regarding the disqualification of the Trustee in the event that it acquires any conflicting interest as therein defined. Nothing herein shall prevent the Trustee from filing with the Commission the application referred to in the penultimate paragraph of Section 310(b) of the Trust Indenture Act. Section 6.9 Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which satisfies the requirements of Trust Indenture Act Sections 310(a)(1) and 310(a)(5), has a combined capital and surplus of at least $10,000,000, and is subject to supervision or examination by Federal, State or District of Columbia authority. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. Section 6.10 Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 6.11. 37 44 (b) The Trustee may resign at any time by giving written notice thereof to the Company. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of a majority in principal amount of the Outstanding Debentures, delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with Section 310(b) of the Trust Indenture Act pursuant to Section 6.8 hereof after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Debenture for at least six months unless the Trustee's duty to resign is stayed in accordance with Section 310(b) of the Trust Indenture Act, or (2) the Trustee shall cease to be eligible under Section 6.9 and shall fail to resign after written request therefor by the Company or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged as bankrupt or insolvent or a receiver or conservator of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Company by a Board Resolution may remove the Trustee, or (ii) subject to Section 5.14, any Holder who has been a bona fide Holder of a Debenture for at least six months may, on behalf of himself or herself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Debentures delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such 38 45 appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided, any Holder who has been a bona fide Holder of a Debenture for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee by mailing written notice of such event within 30 days of the date thereof by first-class mail, postage prepaid, to the Holders of Debentures as their names and addresses appear in the Debenture Register. Each notice shall include the name of the successor Trustee and the address of its principal corporate trust office. Section 6.11 Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, upon request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee, and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder, subject nevertheless to its lien, if any, provided for in Section 6.7. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainty vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. Section 6.12 Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided the Company has approved such successor in a Company Consent and such corporation shall be otherwise qualified and eligible 39 46 under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Debentures shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Debentures so authenticated with the same effect as if such successor Trustee had itself authenticated such Debentures. Section 6.13 Preferential Collection of Claims Against Company. The Trustee shall comply with Section 311(a) of the Trust Indenture Act, excluding any creditor relationship listed in Section 311(b) of that Act. If the present or any future Trustee shall resign or be removed, it shall be subject to Section 311(a) of the Trust Indenture Act to the extent provided therein. ARTICLE 7 HOLDERS' LISTS AND REPORTS BY COMPANY Section 7.1 Preservation of Information; Company to Furnish Trustee Names and Addresses of Holders. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders. Neither the Company nor the Trustee shall be under any responsibility with regard to the accuracy of such list. The Company, in furnishing information concerning Holders to the Trustee, and the Trustee will satisfy the requirements imposed upon each of them by Section 312(a) of the Trust Indenture Act. Section 7.2 Communications Among Holders. A Holder may communicate with other Holders with respect to their rights under this Indenture or under the Debentures pursuant to Section 312(b) of the Trust Indenture Act. The Company and the Trustee and any and all other Persons benefitted by this Indenture shall have the protection afforded by Section 312(c) of the Trust Indenture Act. Section 7.3 Reports by Trustee. Within 60 days after each October 15, commencing October 15, 1996, the Trustee shall mail to Holders a brief report dated as of such October 15 that complies 40 47 with Section 313(a) of the Trust Indenture Act, but only if such report is required in any year under such Section 313(a) of the Trust Indenture Act. The Trustee shall also comply with Sections 313(b) and 313(c) of the Trust Indenture Act. At the time of its mailing to Holders, a copy of each report shall be filed with the Commission and with any stock exchange on which the Debentures are listed. The Company shall notify the Trustee if and when the Debentures are listed on any stock exchange. Section 7.4 Reports by Company. (a) The Company shall file such annual and/or periodic reports and certificates with the Trustee and/or with the Commission and/or with the Holders as are required by the provisions of Section 314(a) of the Trust Indenture Act. (b) If the Company is not required to file such reports and other information referred to in Section 7.4(a) with the Commission, the Company shall nevertheless file with the Trustee (i) within 135 days after the end of each fiscal year, annual reports containing the information required to be contained in Form 10-K promulgated under the Exchange Act, or the information required to be contained in any successor form thereto, (ii) within 60 days after the end of each of the first three fiscal quarters of each fiscal year, quarterly reports containing the information required to be contained in Form 10-Q promulgated under the Exchange Act, or the information required to be contained in any successor form thereto, and (iii) promptly from the time after the occurrence of an event required to be therein reported, such other reports containing information required to be contained in Form 8-K promulgated under the Exchange Act, or the information required to be contained in any successor form thereto. (c) So long as any Debentures remain Outstanding, the Company shall cause its annual reports to shareholders and any quarterly or other financial reports furnished by it to shareholders generally to be mailed to the Holders (no later than the date such materials are mailed to the Company's shareholders) at their addresses appearing in the Debenture Register. In the event that the Company is no longer required to furnish annual reports to its shareholders pursuant to the Exchange Act, it shall cause copies of all reports and information filed with the Trustee pursuant to Section 7.4(b) to be so mailed to the Holders within 15 days after the filing thereof with the Trustee. 41 48 ARTICLE 8 SUPPLEMENTAL INDENTURES Section 8.1 Supplemental Indentures Without Consent of Holders. Without the consent of the Holders of any Debentures, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (a) to evidence the succession of another entity to the Company, and the assumption by any such successor of the covenants of the Company herein and in the Debentures; or (b) to add to the covenants of the Company, for the benefit of the Holders of the Debentures, or to surrender any right or power herein conferred upon the Company; or (c) to add any additional Events of Default; or (d) to cure any ambiguity, to correct or supplement any provision herein that may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture, provided such action shall not adversely affect the interest of the Holders of the Debentures; or (e) to add to or change or eliminate any provisions of this Indenture as shall be necessary or desirable in accordance with any amendments to the Trust Indenture Act. Section 8.2 Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than a majority in principal amount of the Outstanding Debentures, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of the Debentures under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Debenture affected thereby, 42 49 (a) extend the Stated Maturity of the principal of, or any installment of interest on, any Debenture, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof or change the coin or currency in which any Debenture or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof, or, in the case of redemption pursuant to Article 10, on or after the Redemption Date, or (b) reduce the percentage in principal amount of the Outstanding Debentures, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with provisions of this Indenture or defaults hereunder and their consequences provided for in this Indenture, or (c) modify any of the provisions of this Section, Section 5.12 or Section 9.10, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Debenture affected thereby, or (d) subordinate the Indebtedness evidenced by the Debentures to any Indebtedness of the Company other than Senior Indebtedness, as provided in Article 12, or (e) impair or restrict the rights of the Holders of the Debentures to redemption of Debentures prior to the Stated Maturity thereof under the circumstances set forth in, and in accordance with the provisions of, Article 10, or (f) impair or restrict the conversion rights provided in Article 11. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. Section 8.3 Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and, subject to Section 6.1, shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee 43 50 may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture of otherwise. Section 8.4 Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Debentures theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. Section 8.5 Reference in Debentures to Supplemental Indentures. Debentures authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Debentures so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Debentures. Section 8.6 Effect on Senior Indebtedness. No supplemental indenture shall adversely affect the rights of any holder of Senior Indebtedness under Article 12 without the consent of such holder. Section 8.7 Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect. ARTICLE 9 COVENANTS Section 9.1 Payment of Principal and Interest. The Company covenants and agrees that it will duly and punctually pay the principal of and any premium and interest on the Debentures in accordance with the terms of the Debentures and this Indenture. 44 51 Section 9.2 Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary and (b) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Company or any Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. Section 9.3 Company Existence. Subject to Section 9.4, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence, its rights (charter and statutory) and its franchises; provided, however, that the Company shall not be required to preserve any right or franchise, if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that net effect of the loss thereof is not disadvantageous in any material respect to the Holders. Section 9.4 Company May Consolidate, etc. Only on Certain Terms. The Company shall not, and shall not allow any Subsidiary to, consolidate with or merge into any other Person or convey, transfer or lease all or substantially all its properties and assets to any Person, and the Company shall not, and shall not allow any Subsidiary to, permit any Person to consolidate with or merge into the Company (or any Subsidiary) or convey, transfer or lease all or substantially all its properties and assets to the Company (or any Subsidiary), unless: (a) in case the Company (or, if applicable, Subsidiary) shall consolidate with or merge into another Person or convey, transfer or lease all or substantially all its properties and assets to any Person, the Person formed by such consolidation or into which the Company (or Subsidiary) is merged or the Person that acquires by conveyance or transfer or lease all or substantially all the properties and assets of the Company (or Subsidiary) shall be a corporation, partnership or trust organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form reasonably satisfactory to the Trustee, the due and punctual payment of the principal of and any premium and interest on all 45 52 the Debentures, the performance or observance of every covenant of this Indenture on the part of the Company to be performed or observed and every other obligation of the Company under this Indenture and shall have provided for conversion rights in accordance with Article 11; (b) immediately after giving effect to such transaction and treating any Indebtedness that becomes an obligation of the Company or Subsidiary as a result of such transaction as having been incurred by the Company or such Subsidiary at the time of such transaction, no Event of Default, and no event that, after such notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; (c) if, as a result of any such consolidation or merger or such conveyance, transfer or lease, properties or assets to the Company (or Subsidiary) would become subject to a mortgage, pledge, lien, security interest or other encumbrance that would not be permitted by this Indenture, the Company or such successor Person, as the case may be, shall take such steps as shall be necessary effectively to secure the Debentures equally and ratably with (or prior to) all Indebtedness secured thereby; and (d) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer or lease of all or substantially all of the properties and assets of the Company in accordance with this Section, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Debentures. Section 9.5 Maintenance of Office or Agency. The Company will maintain an office or agency where Debentures may be presented or surrendered for payment, where Debentures may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Debentures and this Indenture may be served. The office of 46 53 Boston Financial Data Services in Boston, Massachusetts shall be such office or agency of the Company, unless the Company shall designate and maintain some other office or agency for one or more of such purposes. The Company will give prompt written notice to the Trustee of any change in the location of any such office or agency. If at any time the Company shall fail to maintain any such office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. Section 9.6 Money for Debenture Payments to be Held in Trust. If the Company shall at any time act as its own Paying Agent with respect to the Debentures, it will, on or before each due date of the principal or any premium or interest on the Debentures, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal and any premium and interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall utilize a Paying Agent for the Debentures, it will, prior to each due date of the principal of or any premium or interest on the Debentures, deposit with the Paying Agent a sum sufficient to pay such amount, such sum to be segregated and held in trust for the benefit of the Persons entitled thereto, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act. The Company will cause the Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will (a) comply with the provisions of this Indenture applicable to it as a Paying Agent and (b) during the continuance of any default by the Company in the making of any payment in respect of the Debentures, and upon the written request of the Trustee, forthwith pay to the Trustee all sums held in the trust by such Paying Agent for payment in respect of the Debentures. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. 47 54 Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of or any premium or interest on any Debenture and remaining unclaimed for two years after such principal, premium or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Debenture shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in an Authorized Newspaper, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. Section 9.7 Statement by Officers as to Default. The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers' Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. Section 9.8 Maintenance of Properties. The Company will: (a) cause its properties and the properties of its Subsidiaries used or useful in the conduct of the business of the Company and its Subsidiaries to be maintained and kept in good condition, repair and working order and supplied with all necessary facilities and equipment and will cause to be made all necessary repairs, renewals, replacements, betterments, and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however that nothing in this Subsection shall prevent the Company or a Subsidiary from discontinuing the operation and maintenance of any of its properties if such discontinuation is, in the judgment of the Company, desirable in the conduct of its business and not disadvantageous in any material respect to the Holders, and 48 55 (b) take all appropriate steps to preserve, protect and maintain the trademarks, trade names, copyrights, licenses and permits used in the conduct of the business of the Company and its Subsidiaries; provided, however, that nothing in this Subsection shall prevent the Company or a Subsidiary from selling, abandoning or otherwise disposing of any such trademark, trade name, copyright, license or permit if such sale, abandonment or disposition is, in the judgment of the Company, desirable in the conduct of its business and not disadvantageous in any material respect to the Holders. Section 9.9 Purchase of Debentures upon a Repurchase Event. (a) If there shall have occurred a Repurchase Event, the Company shall make an offer to purchase all the Outstanding Debentures. Such offer shall expire on a date that is not earlier than 45 days nor later than 60 days from the date the Repurchase Event Notice referred to below is mailed to Holders or such later date as may be necessary for the Company to comply with requirements under the Exchange Act (such date, or such later date, being the "Repurchase Date"), at a purchase price in cash (the "Repurchase Price") equal to 101% of the principal amount of such Debentures, plus accrued and unpaid interest (including any Defaulted Interest), if any, to the Repurchase Date, subject to satisfaction by or on behalf of the Holder of the requirements set forth in this Section 9.9. (b) Within 30 days after the occurrence of a Repurchase Event, the Company shall give written notice of such Repurchase Event (a "Repurchase Event Notice") and of its offer (the "Repurchase Offer") to purchase Debentures as specified herein to the Trustee, and to each Holder of the Debentures at his address appearing on the Debenture Register, by first-class mail, postage prepaid. The Trustee shall be under no obligation to ascertain the occurrence of a Repurchase Event. The Repurchase Event Notice shall contain all instructions and materials necessary to enable such Holders to tender Debentures, shall include a form of Repurchase Notice (as defined in Section 9.9(c)) to be completed by the Holder and shall state: (1) the events causing the Repurchase Event and the date such Repurchase Event is deemed to have occurred for purposes of this Section 9.9, accompanied by a description of any material developments in the Company's business since the latest annual or quarterly report filed with the Trustee and, if material, any appropriate pro forma financial information; (2) the date by which a Holder must give a Repurchase Notice; (3) the Repurchase Price; 49 56 (4) the Repurchase Date; (5) that any Debenture not purchased will continue to accrue interest; (6) that Debentures accepted for payment shall, on the Repurchase Date, become due and payable at the Repurchase Price and from and after such date (unless the Company shall default in the payment of the Repurchase Price) such Debentures shall cease to accrue interest; and (7) the procedures a Holder must follow to exercise rights under this Section 9.9 and a brief description of those rights and the procedures for withdrawing a Repurchase Notice. (c) A Holder may exercise its rights specified in Section 9.9(a) upon (1) delivery to the Trustee of a written notice (a "Repurchase Notice") at any time prior to the close of business on the Repurchase Date, stating (A) the certificate number of the Debenture that the Holder will deliver to be purchased and (B) the portion of the principal amount of the Debenture that the Holder will deliver to be purchased, which portion must be $1,000 or an integral multiple thereof and (2) delivery, within the time limits specified in the Repurchase Event Notice, of such Debenture to such Paying Agent at such office (together with all necessary endorsements) and a copy of the Repurchase Notice, such delivery being a condition to receipt by the Holder of the Repurchase Price therefor. If a Holder has elected to deliver to the Company for purchase a portion of a Debenture, and if the principal amount of such portion is $1,000 or an integral multiple of $1,000, the Company shall purchase such portion from the Holder thereof pursuant to this Section 9.9. Provisions of this Indenture that apply to the purchase of all of a Debenture also apply to the purchase of a portion of such Debenture. The Trustee shall promptly notify the Company of the receipt by the former of any and all Repurchase Notices and any and all written notices of withdrawal thereof. (d) Upon receipt by any Paying Agent of a Repurchase Notice, the Holder of the Debenture in respect of which such Repurchase Notice was given shall (unless such Repurchase Notice is validly withdrawn pursuant to Section 9.9(i)) thereafter be entitled to receive solely the Repurchase Price with respect to such Debenture. Such Repurchase Price shall be paid to such Holder promptly following the later of the Business Day following the Repurchase Date (provided the conditions in Section 9.9(c) have been satisfied) and the time of delivery of such Debenture to the relevant Paying Agent at the office of such Paying Agent by the Holder thereof in the manner required by Section 9.9(c). 50 57 (e) On or prior to the Repurchase Date, the Company shall deposit with the Trustee an amount of money in same day funds sufficient to pay the Repurchase Price of all the Debentures or portion thereof which are to be purchased on that date. (f) Upon a Repurchase Notice having been given as aforesaid, Debentures validly tendered, not withdrawn and accepted for payment shall, on the Repurchase Date, become due and payable at the Repurchase Price and from and after such date (unless the Company shall default in the payment of the Repurchase Price) such Debentures shall cease to bear interest. Upon surrender of any such Debenture for purchase in accordance with the foregoing provisions, such Debenture shall be paid by the Company at the Repurchase Price; provided, however, that installments of interest whose Stated Maturity is on or prior to the Repurchase Date shall be payable to the Holders of such Debentures, or one or more Predecessor Debentures, registered as such on the relevant Regular Record Dates. If any Debenture tendered for purchase shall not be paid in accordance with the provisions of this Section 9.9 upon surrender thereof, the principal thereof (and premium, if any, thereon) shall, until paid, bear interest from the Repurchase Date at the rate borne by such Debenture. (g) Any Debenture that is to be purchased only in part shall be surrendered to a Paying Agent at the office of such Paying Agent (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing), and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Debenture, without service charge, one or more new Debentures of any authorized denomination as requested by such Holder in an aggregate principal amount equal to, and in exchange for, the portion of the principal amount of the Debenture so surrendered that is not purchased. (h) The Company shall comply with applicable tender offer rules, including Rule 14e-1 under the Exchange Act, in connection with a Repurchase Offer and may modify a Repurchase Offer to so comply. (i) A Repurchase Notice may be withdrawn before or after delivery by the Holder to the Trustee by means of a written notice of withdrawal (by facsimile transmission or letter) received by the Trustee at the office of the Trustee not later than three Business Days prior to the Repurchase Date, specifying, as applicable: (1) the certificate number of the Debenture with respect of which such notice of withdrawal is being submitted; 51 58 (2) the principal amount of the Debenture with respect to which such notice of withdrawal is being submitted; and (3) the principal amount, if any, of the Debenture that remains subject to the original Repurchase Notice and that has been or will be delivered for purchase by the Company. Each Paying Agent will promptly return to the prospective Holders thereof any Debentures with respect to which a Repurchase Notice has been withdrawn in compliance with this Indenture. Section 9.10 Waiver of Certain Covenants. Without limiting the rights of the Holders and the Company with respect to waivers and amendments set forth in Section 5.12 and 8.2 the Company may omit in any particular instance to comply with any covenant or condition set forth in Sections 9.2 through 9.4, if before or after the time for such compliance the Holders of at least a majority in aggregate principal amount of the Debentures at the time Outstanding shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect. ARTICLE 10 REDEMPTION OF DEBENTURES Section 10.1 Right of Redemption by Company. The Company may, at its option, redeem all or any part of the Debentures at any time prior to December 1, 1998 if the Closing Price per share of the Company's Common Stock has equalled or exceeded 140% of the then effective Conversion Price per share of Common Stock for at least 20 Trading Days within 30 consecutive Trading Days ending not more than ten Trading Days prior to the date of a notice of redemption. Such redemption will be in cash and will be at the Redemption Prices set forth in the Debentures together with accrued interest (including any Defaulted Interest) to the Redemption Date. The Debentures are subject to redemption by the Company, at its option, at any time on or after December 1, 1998 at the Redemption Prices set forth 52 59 in the Debentures, together with accrued interest (including any Defaulted Interest) to the Redemption Date. Section 10.2 Election to Redeem; Notice to Trustee. The election of the Company to redeem any Debentures shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company of all or less than all of the Debentures, the Company shall, at least 60 days prior to the Redemption Date (unless a shorter notice shall be satisfactory to the Trustee) notify the Trustee of such Redemption Date and of the principal amount of Debentures to be redeemed. Section 10.3 Selection by Trustee of Debentures to be Redeemed at the Election of the Company. If less than all the Debentures are to be redeemed at the election of the Company, the particular Debentures to be redeemed shall be selected not more than 45 days prior to the Redemption Date by the Trustee, from the Outstanding Debentures not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and that may provide for the selection for redemption of portions (equal to $1,000 or any integral multiple thereof) of the principal of Debentures of a denomination larger than $1,000. If any Debenture selected for partial redemption is converted in part before the termination of the conversion right resulting from such selection, the converted portion of such Debenture shall be deemed (so far as may be possible) to be the portion selected for redemption. Debentures that have been converted during a selection of Debentures to be redeemed shall be treated by the Trustee as Outstanding for the purposes of such selection. The Trustee shall promptly notify the Company in writing of the Debentures selected for redemption and in the case of any Debentures selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Debentures shall relate, in the case of any Debenture redeemed or to be redeemed only in part, to the portion of the principal of such Debenture which has been or is to be redeemed. Section 10.4 Notice of Redemption at the Election of the Company. Notice of redemption at the election of the Company shall be given by the Company, or at the Company's request, by the Trustee in the name and at the expense 53 60 of the Company by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Debentures to be redeemed, at his or her address appearing in the Debenture Register. Each notice of redemption shall state: (a) the Redemption Date, (b) the Redemption Price, (c) if less than all Outstanding Debentures are to be redeemed, the identification (and, in the case of partial redemption, the respective principal amounts) of the Debentures to be redeemed, (d) that on the Redemption Date the Redemption Price will become due and payable upon each such Debenture, and that interest thereon shall cease to accrue from and after said date, (e) the Conversion Price, the date on which the right to convert the principal of the Debentures to be redeemed will terminate and the place or places where such Debentures may be surrendered for conversion, (f) the place or places where such Debentures are to be surrendered for payment of the Redemption Price, and (g) the CUSIP numbers of the Debentures to be redeemed. Section 10.5 Deposit of Redemption Price. Prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 9.6) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Debentures that are to be redeemed on that date. If any Debenture called for redemption is converted pursuant to Article 11, any money deposited with the Trustee or so segregated and held in trust for the redemption of such Debenture shall (subject to the right of the Holder of such Debenture or any Predecessor Debenture to receive interest as provided in the last paragraph of Section 3.7) be paid to the Company on Company Request, or if then held by the Company, shall be discharged from such trust. 54 61 Section 10.6 Debentures Payable on Redemption Date. Notice of redemption at the election of the Company having been given as aforesaid, the Debentures so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified and from and after such date, unless the Company shall default in the payment of the Redemption Price, such Debentures shall cease to bear interest. Upon surrender of such Debentures for redemption in accordance with said notice, such Debentures shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date. Installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Debentures, or one or more Predecessor Debentures, registered as such on the relevant Record Dates according to their terms and the provisions of Section 3.7. If any Debenture called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate borne by the Debenture. Section 10.7 Debentures Redeemed in Part. Any Debenture which is to be redeemed only in part shall be surrendered at a location specified in the notice of redemption with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his or her attorney duly authorized in writing, and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Debenture without service charge, a new Debenture or Debentures, of any authorized denominations as requested by such Holder in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Debenture so surrendered. ARTICLE 11 CONVERSION OF DEBENTURES Section 11.1 Conversion Privileges and Conversion Price. Subject to and upon compliance with the provisions of this Article, at the option of the Holder thereof, any Debenture or any portion of the principal amount thereof that is $1,000 or an integral multiple of $1,000 may be converted at the principal amount thereof, or of such portion thereof, into fully paid and non-assessable shares (calculated 55 62 as to each conversion to the nearest 1/100 of a share) of Common Stock of the Company, at the Conversion Price, determined as hereinafter provided, in effect at the time of conversion. Such conversion right shall expire at the close of business on November 1, 2002. In case a Debenture or portion thereof is called for redemption or is repurchased upon the occurrence of a Repurchase Event, such conversion right in respect of the Debenture or portion so called shall expire at the close of business on the Redemption Date or the Repurchase Date, unless the Company defaults in making the payment due upon redemption or repurchase. The price at which shares of Common Stock shall be delivered upon conversion (herein called the "Conversion Price") shall be initially [$_______] per share of Common Stock. Effective [____________, 199_,] this Conversion Price shall be adjusted from time to time as provided in this Article 11. Section 11.2 Exercise of Conversion Privilege. In order to exercise the conversion privilege, the Holder of any Debenture to be converted shall surrender such Debenture, duly endorsed or assigned to the Company or in blank at any office or agency of the Company maintained for that purpose pursuant to Section 9.5, accompanied by written notice to the Company at such office or agency that the Holder elects to convert such Debenture or, if less than the entire principal amount thereof is to be converted, the portion thereof to be converted. Debentures surrendered for conversion during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date shall (except in the case of Debentures or portions thereof that have been called for redemption, or are to be repurchased, on such Interest Payment Date or on a Redemption Date or a Repurchase Date within the period beginning on such Regular Record Date and ending on such Interest Payment Date) be accompanied by payment to the Company by wire transfer or certified check or other funds acceptable to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount of Debentures being surrendered for conversion. Subject to the provisions of Section 3.7 relating to the payment of Defaulted Interest by the Company, the interest payment with respect to a Debenture called for redemption on a Redemption Date during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date shall be payable on such Interest Payment Date to the Holder of such Debenture at the close of business on such Regular Record Date notwithstanding the conversion of such Debenture after such Regular Record Date and prior to such Interest Payment Date, and the Holder converting such Debenture need not include a payment of such interest payment amount upon surrender of such Debenture for conversion. Except as provided in the preceding sentence and 56 63 subject to the final paragraph of Section 3.7, no payment or adjustment shall be made upon any conversion on account of any interest accrued on the Debentures surrendered for conversion or on account of any dividends on the Common Stock issued upon conversion. Debentures shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Debentures for conversion in accordance with the foregoing provisions, and at such time the rights of the Holder of such Debentures as Holders shall cease, and the Person or Persons entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Stock at such time. As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver at such office or agency a certificate or certificates for the number of full shares of Common Stock issuable upon conversion, together with payment in lieu of any fraction of a share, as provided in Section 11.3. In the case of any Debenture that is converted in part only, upon such conversion the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Debenture or Debentures of authorized denominations in aggregate principal amount equal to the unconverted portion of the principal amount of such Debenture. Section 11.3 Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of Debentures. If more than one Debenture shall be surrendered for conversion at one time by the same Holder, the number of full shares that shall be issuable upon conversion thereof shall be computed on the basis of the aggregate principal amount of the Debentures (or, specified portions thereof) so surrendered. Instead of any fractional share of Common Stock that would otherwise be issuable upon conversion of any Debenture or Debentures (or, specified portions thereof), the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the Closing Price on the last Trading Day prior to the date of conversion. Section 11.4 Adjustment of Conversion Price. The Conversion Price shall be adjusted from time to time as follows: (a) In case the Company shall (i) pay a dividend or make a distribution in shares of its Common Stock; (ii) subdivide its outstanding Common Stock into a greater number of shares, or (iii) combine its outstanding Common Stock into a smaller number 57 64 of shares, the Conversion Price in effect immediately prior thereto shall be adjusted so that the Holder of any Debenture thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock of the Company which he would have owned or have been entitled to receive after the happening of any of the events described above had such Debenture been converted immediately prior to the happening of such event. An adjustment made pursuant to this subsection (a) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of subdivision or combination. (b) In case the Company shall issue rights or warrants to all holders of its Common Stock entitling them (for a period expiring within 45 days after the record date mentioned below) to subscribe for or purchase Common Stock at a price per share less than the current market price per share of Common Stock (as defined in subsection (d) below) at the record date for the determination of shareholders entitled to receive such rights and warrants, the Conversion Price in effect immediately prior thereto shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date of issuance of such rights and warrants by a fraction of which the numerator shall be the number of shares of Common Stock outstanding on the date of the issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such current market price, and of which the denominator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase. Such adjustment shall be made successively whenever any such rights or warrants are issued, and shall become effective immediately after such record date. In determining whether any rights or warrants entitle the holder to subscribe for or purchase shares of Common Stock at less than such current market price, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received by the Company for such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors. (c) In case the Company shall distribute to all holders of its Common Stock and securities of the Company (other than Common Stock) or evidences of its indebtedness or assets (excluding cash dividends or distributions paid from retained earnings of the Company) or any rights or warrants to subscribe for or purchase any of its securities (excluding those referred to in subsection (b) above, then in each such case the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date of such distribution by a fraction of which the numerator shall be the current market price per 58 65 share (as defined in subsection (d) below) of the Common Stock on the record date mentioned below less the then fair market value (as determined by the Board of Directors of the Company, whose determination shall be conclusive, and described in a certificate filed with the Trustee) of the capital stock or assets or evidences of indebtedness so distributed or of such rights or warrants applicable to one share of Common Stock and the denominator shall be the current market price per share (as defined in subsection (d) below) of the Common Stock. Such adjustment shall become effective immediately after the record date for the determination of shareholders entitled to receive such distribution. (d) For the purpose of any computation under subsections (b) and (c) above, the current market price per share of the Common Stock at any date shall be deemed to be the average of the closing prices for the twenty consecutive Trading Days next preceding the day in question. The closing price for each day shall be (i) the last reported sale price of the Common Stock on the National Market of the National Association of Securities Dealers, Inc., Automated Quotation System, or any similar system of automated dissemination of quotations of securities prices then in common use, if so quoted, or (ii) if not quoted as described in clause (i), the mean between the higher bid and low asked quotations for the Common Stock as reported by the National Quotation Bureau Incorporated if at least two securities dealers have inserted both bid and asked quotations for the Common Stock on at least 5 of the 10 preceding days, or (iii) if the Common Stock is listed or admitted for trading on any national securities exchange, the last sale price, or the closing bid price if no sale occurred, of the Common Stock on the principal securities exchange on which the Common Stock is listed. If the Common Stock is quoted on a national securities or central market system, in lieu of a market or quotation system described above, the closing price shall be determined in the manner set forth in clause (ii) of the preceding sentence if bid and asked quotations are reported but actual transactions are not, and in the manner set forth in clause (iii) of the preceding sentence if actual transactions are reported. If none of the conditions set forth above is met, the closing price of the Common Stock on any day or the average of such closing price for any period shall be the fair market value of the Common Stock as determined by a member firm of the New York Stock Exchange, Inc. selected by the Company. (e) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this subsection (e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article 11 shall be made to the nearest cent or to the nearest one hundredth of a share, as the case may be. Anything in this Section 11.4 to the contrary notwithstanding, the Company shall be entitled to make such 59 66 reductions in the Conversion Price, in addition to those required by this Section 11.4, as it in its discretion shall determine to be advisable in order that any stock dividends, subdivision of shares, distribution of rights to purchase stock or securities, or a distribution of securities convertible into or exchangeable for stock hereafter made by the Company to its shareholders shall not be taxable. (f) In any case in which this Section 11.4 provides that an adjustment shall become effective immediately after a record date for an event, the Company may defer until the occurrence of such event (i) issuing to the Holder of any Debenture converted after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the Common Stock issuable upon such conversion before giving effect to such adjustment and (ii) paying to such Holder any amount in cash in lieu of any fractional share pursuant to Section 11.3. (g) The Trustee shall not be responsible for any calculation made under this section. Section 11.5 Notice of Adjustments of Conversion Price. Whenever the Conversion Price is adjusted as herein provided: (a) the Company shall compute the adjusted Conversion Price in accordance with Section 11.4 and shall prepare a certificate signed by the Treasurer of the Company setting forth the adjusted Conversion Price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be delivered to the Trustee and filed at each office or agency maintained for the purpose of conversion of Debentures pursuant to Section 9.5; and (b) a notice setting forth that the Conversion Price has been adjusted and setting forth the adjusted Conversion Price shall forthwith be prepared by the Company and mailed to all Holders of Debentures at their last addresses as they shall appear in the Debenture Register. Section 11.6 Notice of Certain Corporation Action. In case: (a) the Company shall declare a dividend (or any other distribution) on its Common Stock payable otherwise than in cash out of its retained earnings; or 60 67 (b) the Company shall authorize the granting to the holders of its Common Stock generally of rights or warrants to subscribe for or purchase any shares of Capital Stock of any class or of any other rights; or (c) of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding shares of Common Stock), or of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (e) the Company or any subsidiary shall commence a tender offer for all or a portion of the Company's outstanding shares of Common Stock (or shall amend any such tender offer); then the Company shall notify the Trustee and cause to be filed at each office or agency maintained for the purpose of conversion of Debentures pursuant to Section 9.5, and shall cause to be mailed to all Holders of Debentures at their last addresses as they shall appear in the Debenture Register, at least 20 days (or 10 days in any case specified in Section 11.6(a) or 11.6(b) above) prior to the applicable record date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purposes of such dividends, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer, liquidation or winding up is expected to become effective, and the date on which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up, or (z) the date on which such tender offer commenced, the date on which such tender offer is scheduled to expire unless extended, the consideration offered and the material terms thereof (or the material terms of any amendment thereto). Section 11.7 Company to Reserve Common Stock. The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of Debentures, the full number of shares of Common Stock then issuable upon the conversion of all Outstanding Debentures. 61 68 Section 11.8 Taxes on Conversion. The Company will pay any and all taxes, other than any franchise or income taxes, that may be payable in respect of the issue or delivery of stock certificates representing shares of Common Stock on conversion of Debentures pursuant hereto. The Company shall not, however, be required to pay any tax that may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that of the Holder of the Debenture or Debentures to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid. Section 11.9 Covenant as to Common Stock. The Company covenants that all shares of Common Stock that may be issued upon conversion of Debentures will upon issue be fully paid and non-assessable and, except as provided in Section 11.8, the Company will pay all taxes, liens and charges with respect to the issue thereof. Section 11.10 Cancellation of Converted Debentures. All Debentures delivered for conversion shall be delivered to the Trustee to be canceled by or at the direction of the Trustee, which shall dispose of the same as provided in Section 3.9. Section 11.11 Effect of Reclassification, Consolidation, Merger, Share Exchange or Sale. If any of the following event occur, namely (i) any reclassification or change of outstanding shares of Common Stock issuable upon conversion of the Debentures (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), (ii) any consolidation or merger of the Company with another corporation shall be effected as a result of which holders of Common Stock issuable upon conversion of the Debentures shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock or (iii) any sale or conveyance of all or substantially all of the properties and assets of the Company to any other corporation, then the Company or such successor or purchasing corporation, as the case may be, shall execute with the Trustee a supplemental indenture providing that each Debenture shall be convertible into the kind and amount of shares of stock and other securities or property or assets (including cash) receivable upon such reclassification, change, 62 69 consolidation, merger, sale or conveyance by a holder of a number of shares of Common Stock issuable upon conversion of such Debentures immediately prior to such reclassification, change, consolidation, merger, statutory share exchange, sale or conveyance. Such supplemental indenture shall provide adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. The Company shall cause notice of the execution of such supplemental indenture to be mailed to each Holder of Debentures, at his address appearing on the Debenture Register. The above provisions of this Section shall similarly apply to successive reclassifications, consolidations, mergers and sales. ARTICLE 12 SUBORDINATION OF DEBENTURES Section 12.1 Agreement to Subordinate. The Company covenants and agrees, and each Holder of Debentures, by his or her acceptance thereof, likewise covenants and agrees, that the Indebtedness represented by the Debentures and the payment of the principal of and premium, if any, and interest on each and all of the Debentures are hereby expressly subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of all Senior Indebtedness as provided in this Article 12. Section 12.2 No Payment on Securities in Certain Circumstances. Unless Section 12.3 shall be applicable, after the occurrence of a default in the payment of the principal of, premium, if any, or interest on any Senior Indebtedness, no payment or distribution of any assets of the Company or of any Subsidiary of any kind or character shall be made by the Company or the Trustees on account of or with respect to the Debentures, whether of principal, premium, if any, or interest thereon, or on account of the purchase, redemption, defeasance or other acquisition of Debentures, unless and until such payment default shall have been cured or waived or shall have ceased to exist, or such Senior Indebtedness shall have been discharged or paid in full in cash, after which the Company shall resume making any and all required payments in respect of the Debentures, including any missed payments. 63 70 Section 12.3 Debentures Subordinated to Prior Payment of All Senior Indebtedness on Dissolution, Liquidation or Reorganization. Upon any distribution of assets of the Company upon any dissolution, winding-up, liquidation or reorganization of the Company (pursuant to or following bankruptcy, insolvency, reorganization or receivership proceedings), or upon an assignment for the benefit of creditors or any other marshalling of the asserts and liabilities of the Company, (a) the holders of all Senior Indebtedness shall first be entitled to receive payment in full of the principal thereof and premium, if any, and interest due thereon, or adequate provision shall be made for such payment, before the Holders of the Debentures are entitled to receive any payment on account of the principal of, premium, if any, or interest on indebtedness evidenced by the Debentures; and (b) any payment by, or distribution of assets of, the Company of any kind or character, whether in cash, property or securities, to which the Holders of the Debentures or the Trustee would be entitled except for the provision of this Article 12 shall be paid or delivered by the Person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly to the holders of Senior Indebtedness or their representative or to the trustee of trustees under any indenture under which any instruments evidencing any of such Senior Indebtedness may have been issued, ratably according to the aggregate amounts remaining unpaid on account of the Senior Indebtedness held or represented by each, to the extent necessary to make payment in full of all Senior Indebtedness remaining unpaid after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness or provision thereof. Section 12.4 Payments by Trustee or Holders to Holders of Senior Indebtedness. In the event that any payment by, or distribution of assets of, the Company of any kind or character, whether in cash, property or securities, shall be received by the Trustee or the Holders of the Debentures before all Senior Indebtedness is paid in full, contrary to the provisions of Sections 12.2 or 12.3, such payment or distribution shall be paid over to the holders of such Senior Indebtedness or their representative or representatives or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Indebtedness may have been issued, ratably as aforesaid, for application to the payment of all Senior Indebtedness remaining unpaid until all such Senior Indebtedness shall have been paid in full, after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness or provision therefor. 64 71 Section 12.5 Subrogation. Subject to the payment in full of all Senior Indebtedness, the Holders of the Debentures shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company applicable to the Senior Indebtedness until all amounts owing on the Debentures shall be paid in full, and, as between the Company, its creditors other than holders of Senior Indebtedness, and the Holders of the Debentures, no such payment or distribution made to the holders of Senior Indebtedness by virtue of this Article 12 which otherwise would have been made to the Holders of the Debentures shall be deemed to be a payment by the Company on account of the Senior Indebtedness, it being understood that the provisions of this Article 12 are and are intended solely for the purpose of defining the relative rights of the Holders of the Debentures, on the one hand, and the holders of Senior Indebtedness, on the other hand. Section 12.6 Obligations of Company Unconditional. Nothing contained in this Article 12 or elsewhere in this Indenture or in the Debentures is intended to or shall impair, as between the Company, its creditor other than the holders of Senior Indebtedness, and the Holders of the Debentures, the obligation of the Company, which is absolute and unconditional, to pay to the Holders of the Debentures the principal of and any premium and interest on the Debentures as and when the same shall become due and payable in accordance with their terms, or affect the relative rights of the Holders of the Debentures and creditors of the Company other than the holders of Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the Holder of any Debenture from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article 12 of the holders of Senior Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Company referred to in this Article 12, the Trustees and the Holders of the Debentures shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which any such dissolution, winding-up, liquidation or reorganization proceeding affecting the affairs of the Company is pending or upon a certificate of the liquidating trustee or agent or other Person making any payment or distribution to the Trustee or to the Holders of the Debentures for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Senior Indebtedness and other Indebtedness of the Company, the amount thereof or payable thereon, the amount paid or distributed therein and all other facts pertinent thereto or to this Article 12. 65 72 Section 12.7 Payments on Debentures Permitted. Nothing contained in this Article 12 or elsewhere in this Indenture, or in any of the Debentures, shall affect the obligation of the Company to make, or prevent the Company from making, at any time except during the pendency of any dissolution, winding-up, liquidation or reorganization proceeding, payments at any time of principal of and any premium and interest on the Debentures. Section 12.8 Effectuation of Subordination by Trustee. Each Holder of Debentures, by his or her acceptance thereof, authorizes and directs the Trustee on such Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article 12 and appoints the Trustee such Holder's attorney-in-fact for any and all such purposes. Section 12.9 Knowledge of Trustee. Notwithstanding the provisions of this Article 12 or any other provisions of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment of moneys to or by the Trustee, or the taking of any action by the Trustee, unless and until the Trustee shall have received at its principal Corporate Trust Office written notice thereof referencing this Indenture from the Company, any Holder, any Paying Agent or the holder or representative of any class of Senior Indebtedness. Section 12.10 Trustee May Hold Senior Indebtedness. The Trustee shall be entitled to all the rights set forth in this Article 12 with respect to any Senior Indebtedness at the time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in Section 6.13 or elsewhere in this Indenture shall deprive the Trustee of any of its rights as such holder. Section 12.11 Rights of Holders of Senior Indebtedness Not Impaired. No right of any present or future holder of any Senior Indebtedness to enforce the subordination herein shall at any time or in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. 66 73 Section 12.12 Rights and Obligations Subject to Power of Court. The rights of the holders of Senior Indebtedness and the obligations of the Trustee and the Holders set forth in this Article 12 are subject to the power of a court of competent jurisdiction to make other equitable provision reflecting the rights conferred in this Indenture upon the Senior Indebtedness and the holders thereof with respect to the Debentures and the Holders thereof by a plan of reorganization under applicable bankruptcy law. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective seals to be hereunto affixed and attested, all as of the day and year first above written. ATTEST: CODE-ALARM, INC. ___________________________ By:___________________________ Its:__________________________ STATE STREET BANK AND TRUST COMPANY ___________________________ By:____________________________ Its:___________________________
67 74 EXHIBIT A FORM OF DEBENTURE __% CONVERTIBLE SUBORDINATED DEBENTURE DUE DECEMBER 1, 2002 No. ________-___________ $______________ CUSIP #________ Code-Alarm, Inc., a corporation duly organized and existing under the laws of Michigan (the "Company," which term includes any successor to the Company under the Indenture hereinafter referred to), for value received, promises to pay to _________________________________, or registered assigns, in lawful money of the United States of America, the principal sum of ________________ Dollars ($_____________) on December 1, 2002, and to pay interest thereon from December 1, 1995 or the most recent Interest Payment Date to which interest has been paid or duly provided for semi-annually on June 1 and December 1 of each year, commencing June 1, 1996, at the rate of __% per annum, until the principal hereof is paid or made available for payment. Interest on this Debenture shall be computed on the basis of a 360 day year of twelve 30-day months. Certain capitalized terms used in this Debenture which are defined in the Indenture have the meanings set forth herein. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture hereinafter referred to, be paid to the Person in whose name this Debenture (or one or more Predecessor Debentures) is registered at the close of business on the Regular Record Date for such interest, which shall be May 15 or November 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the registered Holder on such Regular Record Date, and may be paid to the Person in whose name this Debenture (or one or more Predecessor Debentures) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to the Holders not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Debentures may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of interest on this Debenture will be made by check mailed to the address of the Person entitled thereto as such address shall appear on the Debenture Register. Payment of the principal of this Debenture will be made at the office or agency of the Trustee maintained for that purpose in Boston, 75 Massachusetts, or at such other office or agency as may be established by the Company pursuant to said Indenture in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Reference is hereby made to the further provisions of this Debenture set forth on the reverse side hereof and such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Debenture shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been manually signed by the Trustee under the Indenture. IN WITNESS WHEREOF, the Company has caused this Debenture to be signed in its name by the manual or facsimile signature of its President or one of its Vice Presidents, attested by the manual or facsimile signature of its Secretary or one of its Assistant Secretaries. DATED:_______________ CODE-ALARM, INC. By:____________________________ Its: President ATTEST: ________________________________ Its: Secretary CERTIFICATE OF AUTHENTICATION This is one of the Debentures referred to in the within mentioned Indenture. STATE STREET BANK AND TRUST COMPANY, as Trustee ______________________ Authorized Signer 2 76 FORM OF REVERSE SIDE OF DEBENTURE CODE-ALARM, INC. __% CONVERTIBLE SUBORDINATED DEBENTURE DUE DECEMBER 1, 2002 This Debenture is one of a duly authorized issue of Debentures of the Company designated as its ___% Convertible Subordinated Debentures due December 1, 2002 (herein called the "Debentures"), limited in aggregate principal amount to $11,500,000 issued and to be issued under an Indenture dated as of October _, 1995 (herein called the "Indenture"), between the Company and State Street Bank and Trust Company, as Trustee (herein called the "Trustee," which term includes any successor Trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights thereunder of the Company, the Trustee and the Holders of the Debentures, and the terms upon which the Debentures are, and are to be, authenticated and delivered. The indebtedness evidenced by this Debenture is, to the extent provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness, and this Debenture is issued subject to the provisions of the Indenture with respect thereto. Each Holder of a Debenture, by acceptance hereof, (a) agrees to and shall be bound by such provisions of the Indenture and all other provisions of the Indenture; (b) authorizes and directs the Trustee to take such action on his or her behalf as may be necessary or appropriate to acknowledge or effectuate, as between the Holders and the holders of the Senior Indebtedness, the subordination of this Debenture as provided in the Indenture; and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each Holder of this Debenture, by accepting the same, agrees that each holder of Senior Indebtedness, whether created or acquired before or after the issuance of the Debentures, shall be deemed conclusively to have relied on such provisions in acquiring and continuing to hold such Senior Indebtedness. The Debentures are subject to redemption prior to December 1, 1998 at the option of the Company at any time upon not less than 30 nor more than 60 days' notice by first class mail, as a whole or in part, only if the Closing Price per share of the Company's Common Stock has equalled or exceeded 140% of the then effective Conversion Price per share of Common Stock for at least 20 Trading Days within 30 consecutive Trading Days ending not more than ten Trading Days prior to the date of a notice of redemption. On or after December 1, 1998 the Debentures are subject to redemption at any time upon not less than 30 nor more than 60 days' notice by first class mail, as a whole or in part, at the election of the Company. Any redemption 3 77 payment will be made in cash and will be at the Redemption Prices (expressed as percentages of the principal amount) set forth in the table below: If redeemed during the 12-month period beginning December 1 of the years indicated,
Year Redemption Price ---- ---------------- 1995 % 1996 % 1997 % 1998 % 1999 % 2000 % 2001 %
and thereafter at a Redemption Price equal to 100% of the principal amount, together in the case of any such redemption with accrued interest to the Redemption Date. If less than all Debentures are redeemed, the Trustee will select the Debentures to be redeemed by such method as the Trustee may deem appropriate and fair. If this Debenture (or a portion thereof) is duly called for redemption and funds for payment duly provided, this Debenture (or such portion thereof) shall cease to bear interest from and after such Redemption Date. Interest installments with a Stated Maturity on the Redemption Date will be payable to the Holders of such Debentures, or one or more Predecessor Debentures, of record at the close of business on the relevant Record Date referred to on the face hereof, all as provided in the Indenture. In the event of redemption or repayment of this Debenture in part only, a new Debenture or Debentures for the unredeemed or unpaid portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof. Subject to and upon compliance with the provisions of the Indenture, the Holder of this Debenture is entitled, (a) at his or her option, at any time on or before the close of business on December 1, 2002, or (b) in case this Debenture or a portion hereof is called for redemption or is repurchased upon the occurrence of a Repurchase Event, then in respect of this Debenture or such portion hereof until and including, but (unless the Company defaults in making the payment due upon redemption or repurchase, as the case may be) not after, the close of business on the Redemption Date or the Repurchase Date, to convert this Debenture (or any portion of the principal amount 4 78 hereof which is $1,000 or an integral multiple thereof), at the principal amount hereof, or such portion, into fully paid and non-assessable shares (calculated as to each conversion to the nearest 1/100 of a share) of Common Stock of the Company at a Conversion Price equal to $____ aggregate principal amount of Debentures for each share of Common Stock (or at the then-current adjusted Conversion Price if an adjustment has been made as provided in the Indenture) by surrender of this Debenture, duly endorsed or assigned to the Company or in blank, to the Company at its office or agency in Boston, Massachusetts accompanied by written notice to the Company that (i) the Holder hereof elects to convert this Debenture, or if less than the entire principal amount hereof is to be converted, the portion hereof to be converted, and (ii) the name or names (with addresses) in which the certificate shall be issued. In case such surrender shall be made during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date (unless this Debenture or the portion thereof being converted has been called for redemption, or is to be repurchased, on such Interest Payment Date or on a Redemption Date or a Repurchase Date within such period), this Debenture shall also be accompanied by payment in the form of a certified check or other funds acceptable to the Trustee of an amount equal to the interest payable on such Interest Payment Date on the principal amount of this Debenture then being converted. Subject to the aforesaid requirement for payment and, in the case of a conversion after the Regular Record Date next preceding any Interest Payment Date and on or before such Interest Payment Date, to the right of the Holder of this Debenture (or any Predecessor Debenture) of record at such Regular Record Date to receive an installment of interest (with certain exceptions provided in the Indenture), no payment or adjustment is to be made on conversion for interest accrued hereon or for dividends on the Common Stock issued on conversion. No fractions of shares or scrip representing fractions of shares will be issued on conversion, but instead of any fractional interest the Company shall pay a cash adjustment as provided in the Indenture. The Conversion Price is subject to adjustment as provided in the Indenture. In the case of a consolidation, merger or statutory share exchange involving the Company as a result of which holders of Common Stock will be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for shares of Common Stock or in the case of a sale or conveyance to another corporation of all or substantially all the property and assets of the Company, the Holders of the Debentures then Outstanding will be entitled thereafter to convert such Debentures into the kind and amount of shares of stock, other securities or other property or assets which they would have owned or been entitled to receive upon such consolidation, merger, statutory share exchange, sale or conveyance had such Debentures been converted to shares of Common Stock immediately prior to such consolidation, merger, statutory share exchange, sale or conveyance. 5 79 If an Event of Default as defined in the Indenture shall occur and be continuing, the principal of all the Debentures may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture provides that such declaration and its consequences may, in certain events, be annulled by Holders of a majority in aggregate principal amount of the outstanding Debentures at the time of such Event of Default. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Debentures under the Indenture at any time by the Company with the consent of the Holders of a majority in aggregate principal amount of the Debentures at the time Outstanding, as defined in the Indenture. The Indenture also contains provisions permitting the Holders of a majority in aggregate principal amount of the Debentures at the time Outstanding to waive, on behalf of the Holders of all the Debentures, compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Debenture shall be conclusive and binding upon such Holder and upon all future Holders of this Debenture and of any Debenture issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether not notation of such consent or waiver is made upon this Debenture. No reference herein to the Indenture and to provisions of this Debenture or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Debenture at the times, places and rate, and in the coin or currency, herein prescribed or to convert this Debenture as provided in the Indenture. As provided in the Indenture and subject to certain limitations therein set forth, this Debenture is transferable on the Debenture Register of the Trustee, upon surrender of this Debenture for registration of transfer at the office or agency of the Trustee to be maintained for that purpose in Boston, Massachusetts, or at such other office or agency as may be established by the Company for such purpose pursuant to the Indenture duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Debenture Registrar duly executed by, the Holder hereof or his or her attorney duly authorized in writing, and thereupon one or more new Debentures, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Debentures are issuable only in registered form, without coupons, in denominations of $1,000 and integral multiples thereof. As provided in the Indenture and subject to certain limitations therein set forth, Debentures are exchangeable for a 6 80 like aggregate principal amount of Debentures of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Debenture is registered as the owner hereof for all purposes, whether or not this Debenture be overdue, and neither the Company, the Trustee, nor any such agent shall be affected by notice to the contrary. The Debenture is unsecured by any collateral, including the assets of the Company, or any of its Affiliate or Subsidiaries, and is not eligible as collateral for any loan by the Company. CONVERSION NOTICE The undersigned Holder of this Debenture hereby irrevocably exercises the option to convert this Debenture, or the portion hereof (which is $1,000 or an integral multiple thereof) below designated, into shares of Common Stock in accordance with the terms of the Indenture, and directs that the shares issuable and deliverable upon such conversion, together with any check in payment for fractional shares and any Debentures representing any unconverted principal amount hereof, be issued and delivered to the undersigned unless a different name has been indicated below. If shares or Debentures are to be issued in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Any amount required to be paid by the undersigned on account of interest accompanies this Debenture. Dated:__________________ ____________________________ Signature If shares or Debentures are ____________________________ to be registered in the name Social Security or other of a Person other than the Taxpayer Identification Number 7 81 Holder, please print such Person's name and address: Principal amount to be converted (if less than all): $______________,000 _____________________________ Name _____________________________ Street Address _____________________________ City, State and Zip Code ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ____________________________________ ________________________________________________________________________________ (Name and Address of Assignee Including Zip Code Must be Printed or Typewritten) _______________________________________________________________________ the within instrument, and all rights thereunder, hereby irrevocably constituting and appointing ________________________________________________________________________ ATTORNEY TO TRANSFER said instrument on the books of the Company, with full power of substitution in the premises. Dated:________________________ _________________________________ Signature NOTICE: The signature to this assignment must correspond with the name as it appears upon the face of the within instrument in every particular without alteration, enlargement, or any change whatever. 8 82 Signature Guaranteed: _________________________________ Signature must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank or trust company bank or trust company The transfer agent will not effect transfer of this Debenture unless the information concerning the transferee requested above is provided. ANY TRANSFER OR ASSIGNMENT IS SUBJECT TO THE PRESENTATION OF SUCH PROOF OF VALID AND LEGAL TRANSFER OR ASSIGNMENT AS THE COMPANY MAY REQUIRE. 9 EX-11 4 EXHIBIT 11 1 EXHIBIT 11 Statement regarding computation of per share earnings: Warrants issued to purchase common stock and shares issuable under employee stock options were excluded from the computation of weighted average number of shares outstanding since such shares were either anti-dilutive or their dilutive effect was not material. EX-12 5 EXHIBIT 12 1 EXHIBIT 12 CODE-ALARM, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------------ ---------------- 1990 1991 1992 1993 1994 1994 1995 ---- ----- ------- ------ ------- ------ ------ Earnings (loss) Before Taxes.... $366 $(872) $(4,075) $2,144 $(2,086) $2,200 $ (795) Interest........................ 212 399 425 278 646 425 956 Portion of rent expense representing interest......... 279 317 227 212 256 192 181 ---- ----- ------- ------ ------- ------ ------ 857 (156) (3,423) 2,634 (1,184) 2,817 342 Add Litigation Expense.......... 4,386 1,825 ------- ------ 3,202 2,167 Fixed Charges................... 491 716 652 490 902 617 1,137 Ratio/(Deficiency).............. 1.75 $(156)(1) $(3,423)(1) 5.38 $(1,184)(1) 4.57 0.30 Ratio after add back of litigation expense....................... 3.55 1.91
- ------------------------- (1) Represents amount by which interest is not sufficient to cover fixed charges. EX-23.1 6 EXHIBIT 23.1 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement for $10,000,000 Convertible Subordinated Debentures due 2002 of Code-Alarm, Inc. on Form S-2 of our report dated November 1, 1995, appearing in the Prospectus, which is part of this Registration Statement and to the reference to us under the heading "Experts" in such Prospectus. Our audits of the consolidated financial statements referred to in our aforementioned report also included the financial statement schedule, Schedule II -- Valuation and Qualifying Accounts and Reserves, of Code-Alarm, Inc. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Detroit, Michigan November 1, 1995 EX-25 7 T-1 1 EXHIBIT 25 SECURITIES AND EXCHANGE COMMISSION Washington D. C 20549 ------ FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2)__ STATE STREET BANK AND TRUST COMPANY (Exact name of trustee as specified in its charter) Massachusetts 04-1867445 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. national bank) Identification No.) 225 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive offices) (Zip code) John R. Towers, Senior Vice President 225 Franklin Street, Boston, Massachusetts 02110 (617) 654-3253 (Name, address and telephone number of agent for service) ---------- CODE-ALARM, INC. (Exact name of obligor as specified in its charter) Michigan 38-2334698 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 950 E. Whitcomb Madison Heights, Michigan 48071 (Address of principal executive offices) (Zip code) ---------- ____% Convertible Subordinated Debentures (Title of indenture securities) 2 GENERAL ITEM 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT IS SUBJECT. Department of Banking and Insurance of The Commonwealth of Massachusetts, 100 Cambridge Street, Boston, Massachusetts. Board of Governors of the Federal Reserve System, Washington, D.C., Federal Deposit Insurance Corporation, Washington, D.C. (B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. The trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The obligor is not an affiliate of the trustee or of its parent, State Street Boston Corporation. (See Note on page 6.) ITEM 3. VOTING SECURITIES OF THE TRUSTEE. FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF VOTING SECURITIES OF THE TRUSTEE: As of: September 18, 1995 Col. A Col. B Title of Class Amount outstanding
Not applicable. ITEM 4. TRUSTEESHIPS UNDER OTHER INDENTURES. IF THE TRUSTEE IS A TRUSTEE UNDER ANOTHER INDENTURE UNDER WHICH ANY OTHER SECURITIES, OR CERTIFICATES OF INTEREST OR PARTICIPATION IN ANY OTHER SECURITIES, OF THE OBLIGOR ARE OUTSTANDING, FURNISH THE FOLLOWING INFORMATION: (A) TITLE OF THE SECURITIES OUTSTANDING UNDER EACH SUCH OTHER INDENTURE. Not applicable. (B) A BRIEF STATEMENT OF THE FACTS RELIED UPON AS A BASIS FOR THE CLAIM THAT NO CONFLICTING INTEREST WITHIN THE MEANING OF SECTION 310(B)(1) OF THE ACT ARISES AS A RESULT OF THE TRUSTEESHIP UNDER ANY SUCH OTHER INDENTURE, INCLUDING A STATEMENT AS TO HOW THE INDENTURE SECURITIES WILL RANK AS COMPARED WITH THE SECURITIES ISSUED UNDER SUCH OTHER INDENTURE. Not applicable. 1 3 ITEM 5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR OR UNDERWRITERS. IF THE TRUSTEE OR ANY OF THE DIRECTORS OR EXECUTIVE OFFICERS OF THE TRUSTEE IS A DIRECTOR, OFFICER, PARTNER, EMPLOYEE, APPOINTEE OR REPRESENTATIVE OF THE OBLIGOR OR OF ANY UNDERWRITER FOR THE OBLIGOR, IDENTIFY EACH SUCH PERSON HAVING ANY SUCH CONNECTION AND STATE THE NATURE OF EACH SUCH CONNECTION. Not applicable. ITEM 6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS OFFICIALS. FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF THE TRUSTEE OWNED BENEFICIALLY BY THE OBLIGOR AND EACH DIRECTOR, PARTNER AND EXECUTIVE OFFICER OF THE OBLIGOR: As of: September 18, 1995 Col. A Col. B Col. C Col. D Name of Title of Amount owned Percentage of voting owner class beneficially securities represented by amount given in Col. C
Not applicable. ITEM 7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR OFFICIALS. FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF THE TRUSTEE OWNED BENEFICIALLY BY EACH UNDERWRITER FOR THE OBLIGOR AND EACH DIRECTOR, PARTNER AND EXECUTIVE OFFICER OF EACH SUCH UNDERWRITER: As of: September 18, 1995 Col. A Col. B Col. C Col. D Name of Title of Amount owned Percentage of voting owner class beneficially securities represented by amount given in Col. C
Not applicable. ITEM 8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE. FURNISH THE FOLLOWING INFORMATION AS TO SECURITIES OF THE OBLIGOR OWNED BENEFICIALLY OR HELD AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT BY THE TRUSTEE: 2 4 As of: September 18, 1995 Col. A Col. B Col. C Col. D Title of Whether Amount owned Percent of class the securities beneficially class repre- are voting or or held as sented by non-voting collateral security amount given securities for obligations in Col. C in default
Not applicable. ITEM 9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE. IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT ANY SECURITIES OF AN UNDERWRITER FOR THE OBLIGOR, FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF SECURITIES OF SUCH UNDERWRITER ANY OF WHICH ARE SO OWNED OR HELD BY THE TRUSTEE: As of: September 18, 1995 Col. A Col. B Col. C Col. D Title of Amount Amount owned Percent of issuer outstanding beneficially class represented and title or held as by amount of class collateral security given in Col. C for obligations in default by trustee
Not applicable. ITEM 10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF CERTAIN AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR. IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT VOTING SECURITIES OF A PERSON WHO, TO THE KNOWLEDGE OF THE TRUSTEE (1) OWNS 10 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR OR (2) IS AN AFFILIATE, OTHER THAN A SUBSIDIARY, OF THE OBLIGOR, FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF SUCH PERSON: As of: September 18, 1995 Col. A Col. B Col. C Col. D Title of Amount Amount owned Percent of issuer outstanding beneficially class represented and title or held as by amount of class collateral security given in Col. C for obligations in default by trustee
Not applicable. ITEM 11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON OWNING 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR. IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT ANY SECURITIES OF A PERSON WHO, TO THE KNOWLEDGE OF THE TRUSTEE, OWNS 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR, FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF SECURITIES OF SUCH PERSON ANY OF WHICH ARE SO OWNED OR HELD BY THE TRUSTEE: 3 5 As of: September 18, 1995 Col. A Col. B Col. C Col. D Title of Amount Amount owned Percent of issuer outstanding beneficially class represented and title or held as by amount of class collateral security given in Col. C for obligations in default by trustee
Not applicable. ITEM 12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE. EXCEPT AS NOTED IN THE INSTRUCTIONS, IF THE OBLIGOR IS INDEBTED TO THE TRUSTEE, FURNISH THE FOLLOWING INFORMATION: As of: September 18, 1995 Col. A Col. B Col. C Nature of Amount Date due indebtedness outstanding
Not applicable. ITEM 13. DEFAULTS BY THE OBLIGOR. (A) STATE WHETHER THERE IS OR HAS BEEN A DEFAULT WITH RESPECT TO THE SECURITIES UNDER THIS INDENTURE. EXPLAIN THE NATURE OF ANY SUCH DEFAULT. Not applicable. (B) IF THE TRUSTEE IS A TRUSTEE UNDER ANOTHER INDENTURE UNDER WHICH ANY OTHER SECURITIES, OR CERTIFICATES OF INTEREST OR PARTICIPATION IN ANY OTHER SECURITIES, OF THE OBLIGOR ARE OUTSTANDING, OR IS A TRUSTEE FOR MORE THAN ONE OUTSTANDING SERIES OF SECURITIES UNDER THE INDENTURE, STATE WHETHER THERE HAS BEEN A DEFAULT UNDER ANY SUCH INDENTURE OR SERIES, IDENTIFY THE INDENTURE OR SERIES AFFECTED, AND EXPLAIN THE NATURE OF ANY SUCH DEFAULT. To the best of the knowledge of the Trustee, there has not been a default under any such indenture or series. ITEM 14. AFFILIATIONS WITH THE UNDERWRITERS. IF AN UNDERWRITER IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. Not applicable. ITEM 15. FOREIGN TRUSTEE. IDENTIFY THE ORDER OR RULE PURSUANT TO WHICH THE FOREIGN TRUSTEE IS AUTHORIZED TO ACT AS SOLE TRUSTEE UNDER INDENTURES QUALIFIED OR TO be QUALIFIED UNDER THE ACT. Not applicable. 4 6 ITEM 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS A PART OF THIS STATEMENT OF ELIGIBILITY. 1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN EFFECT. A copy of the Articles of Association of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION. A copy of a Statement from the Commissioner of Banks of Massachusetts that no certificate of authority for the trustee to commence business was necessary or issued is on file with the Securities and Exchange Commission as Exhibit 2 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS SPECIFIED IN PARAGRAPH (1) OR (2) ABOVE. A copy of the authorization of the trustee to exercise corporate trust powers is on file with the Securities and Exchange Commission as Exhibit 3 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS CORRESPONDING THERETO. A copy of the By-Laws of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 4 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with Registration Statement of Eastern Edison Company (File No. 33-37823) and is incorporated herein by reference thereto. 5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4, IF THE OBLIGOR IS IN DEFAULT. Not applicable. 6. THE CONSENTS OF THE UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY SECTION 321(B) OF THE ACT. The consent of the trustee required by Section 321(b) of the Act is annexed hereto as Exhibit 6 and made a part hereof. 7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING AUTHORITY. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority is annexed hereto as Exhibit 7 and made a part hereof. 5 7 8. A COPY OF ANY ORDER PURSUANT TO WHICH THE FOREIGN TRUSTEE IS AUTHORIZED TO ACT AS SOLE TRUSTEE UNDER INDENTURES QUALIFIED OR TO BE QUALIFIED UNDER THE ACT. Not applicable. 9. FOREIGN TRUSTEES ARE REQUIRED TO FURNISH A CONSENT TO SERVICE OF PROCESS. Not applicable. NOTE The answers to this statement insofar as such answers relate to persons who are affiliates of the obligors are based upon information furnished to the trustee by the obligors. While the trustee has no reason to doubt the accuracy of any such information, it cannot accept any responsibility therefor. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, State Street Bank and Trust Company, a banking corporation organized and existing under the laws of The Commonwealth of Massachusetts, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Boston and The Commonwealth of Massachusetts, on the 19th day of September, 1995. STATE STREET BANK AND TRUST COMPANY By: /s/ Brian J. Curtis ------------------------------- Brian J. Curtis, Assistant Vice President 6 8 EXHIBIT 6 CONSENT OF TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939 in connection with the proposed issuance by CODE-ALARM, INC. of its Convertible Subordinated Debentures, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. STATE STREET BANK AND TRUST COMPANY By: /s/ Brian J. Curtis ------------------------------- Brian J. Curtis, Assistant Vice President Dated: September 19, 1995 7 9 EXHIBIT 7 Consolidated Report of Condition of State Street Bank and Trust Company of Boston, Massachusetts and foreign and domestic subsidiaries, a state banking institution organized and operating under the banking laws of this commonwealth and a member of the Federal Reserve System, at the close of business December 31, 1995, published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act and in accordance with a call made by the Commissioner of Banks under General Laws, Chapter 172, Section 22(a).
THOUSANDS OF DOLLARS ------- ASSETS Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin . . . . . . . . . . . . . . . 942,661 Interest-bearing balances . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,843,628 Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,410,339 Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and of its Edge subsidiary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,240,374 Loans and lease financing receivables: Loans and leases, net of unearned income . . . . . . . . 3,257,795 Allowance for loan and lease losses . . . . . . . . . . . 38,184 Loans and leases, net of unearned income and allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,199,611 Assets held in trading accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 825,549 Premises and fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375,086 Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,359 Investments in unconsolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . 25,051 Customers' liability to this bank on acceptances outstanding . . . . . . . . . . . . . . . . . 55,358 Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,862 Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 653,750 ---------- Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,610,628 ========== LIABILITIES Deposits: In domestic offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,946,262 Noninterest-bearing . . . . . . . . . . . . 4,175,167 Interest-bearing . . . . . . . . . . . . . 1,771,095 In foreign offices and Edge subsidiary . . . . . . . . . . . . . . . . . . . . 8,147,182 Noninterest-bearing . . . . . . . . . . . . . 44,817 Interest-bearing . . . . . . . . . . . . . 8,102,365 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,912,704 Demand notes issued to the U.S. Treasury and Trading Liabilities. . . . . . . . . . . . . . 423,324 Other borrowed money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 386,049 Bank's liability on acceptances executed and outstanding . . . . . . . . . . . . . . . . . 55,621 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 530,536 ---------- Total liabilities: 20,401,678 ========== EQUITY CAPITAL Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,043 Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177,736 Undivided profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,003,171 ---------- Total equity capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,208,950 ---------- Total liabilities and equity capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,610,628 ==========
I, Rex S. Schuette, Senior Vice President and Comptroller of the above named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Rex S. Schuette We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. David A. Spina Marshall N. Carter Charles F. Kaye 8 -----END PRIVACY-ENHANCED MESSAGE-----