SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
[x] Definitive Proxy Statement Commission Only (as permitted
[ ] Definitive Additional Materials by Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
Karts International Incorporated
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE>
KARTS INTERNATIONAL INCORPORATED
P.O. Box 695
Roseland, Louisiana 70456
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held on August 31, 1999
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Stockholders (the
"Meeting") of Karts International Incorporated (the "Company") will be held at
14160 Dallas Parkway, Suite 950, Dallas, Texas 75240, on Tuesday, August 31,
1999, at 2:00 p.m., local time, for the following purposes:
(1) To elect five members of the Board of Directors for the term
of one year or until the next Annual Meeting of Stockholders.
(2) To ratify and confirm the Company's issuance in a private
placement of 1,550,000 shares of its 9% Cumulative Convertible
Preferred Stock (the "Preferred Stock"), and to approve the
issuance of up to 6,200,000 shares of common stock of the
Company, subject to adjustment, upon conversion of the
Preferred Stock.
(3) To ratify and confirm the $1.5 million convertible term loan
to the Company by The Schlinger Foundation, and to approve the
issuance of up to 4,000,000 shares of common stock, subject to
adjustment, upon the conversion of the principal balance of
the loan.
(4) To approve an amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of
common stock, par value $.001 per share, from 14,000,000
shares to 35,000,000 shares.
(5) To approve an amendment to the Company's Articles of
Incorporation to effect a three (3) for one (1) reverse stock
split of the Company's outstanding common stock.
(6) To approve the appointment of S.W. Hatfield + Associates as
independent public accountants of the Company.
(7) To transact such other business as may properly come before
the Meeting or any adjournments thereof.
The close of business on August 4, 1999 has been fixed as the record
date for determining stockholders entitled to notice of and to vote at the
Meeting or any adjournments thereof. For a period of at least 10 days prior to
the Meeting, a complete list of stockholders entitled to vote at the Meeting
will be open to the examination of any stockholder during ordinary business
hours at the offices of the Chairman of the Board and Secretary of the Company
located at 14160 Dallas Parkway, Suite 950, Dallas, Texas 75240.
Information concerning the matters to be acted upon at the Meeting is
set forth in the accompanying Proxy Statement.
STOCKHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING IN PERSON
ARE URGED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE
ACCOMPANYING ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
By Order of the Board of Directors
Timothy P. Halter
Secretary
Dallas, Texas
August 6, 1999
<PAGE>
KARTS INTERNATIONAL INCORPORATED
P.O. Box 695
Roseland, Louisiana 70456
PROXY STATEMENT
For
ANNUAL MEETING OF STOCKHOLDERS
To Be Held on August 31, 1999
This Proxy Statement is being first mailed on August 6, 1999 to
stockholders of Karts International Incorporated (the "Company") by the Board of
Directors (the "Board") to solicit proxies (the "Proxies") for use at the Annual
Meeting of Stockholders (the "Meeting") to be held at 14160 Dallas Parkway,
Suite 950, Dallas, Texas 75240, at 2:00 p.m., local time, on Tuesday, August 31,
1999, or at such other time and place to which the Meeting may be adjourned.
All shares represented by valid Proxies, unless the stockholder
otherwise specifies, will be voted (1) FOR the election of the persons named
herein under "Proposal 1 -- Election of Directors" as nominees for election as
directors of the Company for the term described therein, (2) FOR the proposal to
ratify and confirm the Company's issuance in a private placement of 1,550,000
shares of its 9% Cumulative Convertible Preferred Stock (the "Preferred Stock"),
and to approve the issuance of up to 6,200,000 shares of common stock (the
"Preferred Conversion Shares"), subject to adjustment, upon the conversion of
the Preferred Stock; (3) FOR the proposal to ratify and confirm the $1.5 million
convertible term loan to the Company by The Schlinger Foundation (the "Schlinger
Loan"), and to approve the issuance of up to 4,000,000 shares of common stock
(the "Schlinger Conversion Shares"), subject to adjustment, upon the conversion
of the principal balance of the Schlinger Loan; (4) FOR the proposal to approve
an amendment to the Company's Articles of Incorporation to increase the number
of authorized shares of common stock, par value $.001 per share (the "Common
Stock"), of the Company from 14,000,000 shares to 35,000,000 shares; (5) FOR the
proposal to approve an amendment to the Company's Articles of Incorporation to
effect a three (3) for one (1) reverse stock split of the Company's outstanding
Common Stock; (6) FOR the proposal to approve the appointment of S.W. Hatfield +
Associates as independent public accountants to audit the Company's consolidated
financial statements for the fiscal year ending December 31, 1999, and (7) at
the discretion of the Proxy holders with regard to any other matter that may
properly come before the Meeting or any adjournments thereof.
Where a stockholder has appropriately specified how a Proxy is to be
voted, it will be voted accordingly. The Proxy may be revoked at any time by
providing written notice of such revocation to the Company at 14160 Dallas
Parkway, Suite 950, Dallas, Texas 75240, Attention: Timothy P. Halter. If notice
of revocation is not received by the date of the Meeting, a stockholder may
nevertheless revoke a Proxy if he attends the Meeting and desires to vote in
person.
RECORD DATE AND VOTING SECURITIES
The record date for determining the stockholders entitled to vote at
the Meeting is August 4, 1999 (the "Record Date"), at which time the Company had
issued and outstanding 5,574,298 shares of Common Stock. Common Stock is the
only class of outstanding voting securities of the Company.
<PAGE>
QUORUM AND VOTING
The presence at the Meeting, in person or by proxy, of the holders of a
majority of the issued and outstanding shares of Common Stock is necessary to
constitute a quorum to transact business. Each share represented at the Meeting
in person or by proxy will be counted toward a quorum. In deciding all questions
and other matters, a holder of Common Stock on the Record Date shall be entitled
to cast one vote for each share of Common Stock registered in his or her name.
In order to be elected a director, a nominee must receive the affirmative vote
of the holders of a majority of the shares of Common Stock present in person or
by proxy at the Meeting. Abstentions and broker non-votes will not be counted in
the election of directors.
PROPOSAL 1 -- ELECTION OF DIRECTORS
The Board presently consists of five directors, all of whom have been
nominated and agreed to stand for re-election. Each director shall serve until
the next Annual Meeting of Stockholders and until his successor is elected and
qualified.
It is expected that the nominees named below will be able to accept
such nominations. If any of the below nominees for any reason is unable or is
unwilling to serve at the time of the Meeting, the Proxy holders will have
discretionary authority to vote the Proxy for a substitute nominee or nominees.
The following sets forth information as to the nominees for election at the
Meeting, including their ages, present principal occupations, other business
experience during the last five years, memberships on committees of the Board
and directorships in other publicly-held companies.
<TABLE>
Year First Elected
Name Age Position Director or Officer
---- --- -------- -------------------
<S> <C> <C> <C>
Charles Brister(1)(2) 46 Chief Executive Officer, President and Director 1996
Timothy P. Halter(1) 32 Chairman of the Board, Secretary and Director 1996
Gary C. Evans(1) 42 Director 1996
Joseph R. Mannes(2) 40 Director 1996
Ronald C. Morgan(1)(2) 51 Director 1996
- -----------------
</TABLE>
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Charles Brister is Chief Executive Officer and President of the Company
and has served in this capacity since January 1999. He previously served as
President and Chief Executive Officer of Brister's Thunder Karts, Inc. from 1986
to April 1996. He has been a director of the Company since March 1996.
Timothy P. Halter has been Secretary and a director of the Company
since February 1996, and Chairman since February 1998. Since May 1995, Mr.
Halter has served as President of Halter Financial Group, Inc., a Dallas, Texas
based financial consulting firm. From 1991 to 1995, Mr. Halter was President of
Halter Capital Corporation, a diversified holding company. Mr. Halter also
serves on the Board of Directors of Duncanville National Bank, located in
Duncanville, Texas.
Gary C. Evans has been a director of the Company since July 1996. Mr.
Evans has served as President, Chief Executive Officer and a director of Magnum
Hunter Resources, Inc. ("Magnum"), an American Stock Exchange oil and gas
exploration and development company, since December 1995. Mr. Evans previously
served as Chairman, President and Chief Executive Officer of Hunter Resources,
Inc. ("Hunter") from September 1992 until its merger with Magnum. From December
1990 to September 1992, he served as President and Chief Operating Officer of
-2-
<PAGE>
Hunter. From 1985 to 1990, he was the founder and President of Sunbelt Energy,
Inc., prior to its merger with Hunter. From 1981 to 1985, Mr. Evans was
associated with the Mercantile Bank of Canada where he held various positions
including Vice President and Manager of the Energy Division of the southwestern
United States. From 1977 to 1981, he served in various capacities with National
Bank of Commerce (currently BankTexas, N.A.)
including Credit Manager and Credit Officer.
Joseph R. Mannes has been a director of the Company since July 1996,
and since October 1998 has been Chief Financial Officer and Secretary of
Clearwire Technologies, Inc., a company offering broadband wireless Internet
connectivity. From February 1996 until October 1998 Mr. Mannes was the Chief
Financial Officer, Secretary and Treasurer of Interactive Creations Incorporated
("ICI"), and subsequently was General Manager of I-Magic Online (its successor
company) a corporation offering real-time internet gaming services. From 1987
until joining ICI, Mr. Mannes was First Vice President in the Corporate Finance
Department of Rauscher Pierce Refsnes, Inc., a Dallas, Texas stock brokerage
company. From 1982 to 1987, Mr. Mannes was in the commercial lending division of
the First National Bank of Boston, where he attained the position of Assistant
Vice President. Mr. Mannes worked in both the Special Industry Group and the
High Technology Group at First National Bank of Boston. Mr. Mannes graduated
with an MBA in Accounting and Finance from the Wharton School, Graduate
Division, of the University of Pennsylvania in 1982 and an A.B. from Dartmouth
College in 1980. Mr. Mannes is a Chartered Financial Analyst.
Ronald C. Morgan has been a director of the Company since July 1996.
Since June 1980, Mr. Morgan has served as Chief Operating Officer, Executive
Vice President and Director of The Leather Factory, Inc., an AMEX listed company
("TLF"). Mr. Morgan was a co-founder of TLF. Mr. Morgan was employed by the
Tandy Leather Company for ten years prior to 1980, eventually attaining the
position of Vice-President -- Eastern Division. Mr. Morgan received a B.S.
degree from West Texas State University.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR
EACH NOMINEE FOR THE BOARD.
Meetings; Committees of the Board of Directors; Recent Developments
The business of the Company is managed under the direction of the
Board. The Board meets on a regularly scheduled basis to review significant
developments affecting the Company and to act on matters requiring Board
approval. It also holds special meetings when an important matter requires Board
action between scheduled meetings. The Board met three times during the calendar
year ended December 31, 1998 and acted by unanimous consent in lieu of special
meeting on six occasions during the identical period.
The Board has two standing committees: the Compensation Committee
and the Audit Committee. The functions of these committees and the number of
meetings held during 1998 are described below.
The Compensation Committee was established to fix the annual salaries
and other compensation for the officers and key employees of the Company. The
Compensation Committee also approves grants under and administers the Company's
1998 Stock Compensation Plan. The Compensation Committee met four times in 1998.
The Audit Committee was established to review the professional
services and independence of the Company's independent auditors, and the
Company's accounting, procedures and internal controls. The Audit Committee met
two times in 1998.
-3-
<PAGE>
The Company does not have a nominating committee. The functions
customarily performed by a nominating committee are performed by the Board as a
whole.
Compensation of Directors
Each outside director of the Company is entitled to receive annual
compensation of $6,000 for attendance of meetings of the Board and for serving
on any committees of the Board. The Chairman of the Board of Directors of the
Company is also entitled to receive monthly compensation of $5,000 for every
month in which such individual serves in such capacity. The Company will
reimburse directors for out-of-pocket expenses incurred for attending meetings.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
ownership of the Company's shares of Common Stock as of August 4, 1999 by each
of its directors, executive officers and persons known by the Company to
beneficially own 5% or more of the outstanding shares of the Common Stock and
all executive officers and directors as a group.
<TABLE>
Shares Beneficially Percentage of Shares
Name(1) Owned Beneficially Owned
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles Brister(2) ................................. 516,668 9.3
Richard N. Jones(3)................................. 19,459 *
Lawrence E. Schwall, III(4)......................... 6,667 *
Joseph R. Mannes(5)................................. 63,734 1.1
Ronald C. Morgan(5)................................. 3,334 *
Gary C. Evans(6).................................... 51,114 *
Timothy P. Halter(7)................................ 374,630 6.7
Halter Financial Group, Inc.(7)..................... 374,630 6.7
The Schlinger Foundation(8)......................... 665,200 11.9
Linda S. Neubauer(9)................................ 337,838 6.1
Officers and directors as a group (7 persons)(10)... 1,035,606 18.5
</TABLE>
- -------------------
*Less than 1%.
(1) Unless otherwise indicated, each person named in the table has sole voting
and investment power with respect to the shares beneficially owned. Also,
unless otherwise indicated, the address of each beneficial owner
identified below is: c/o Karts International Incorporated, 62204
Commercial Street, P.O. Box 695, Roseland, Louisiana 70456.
(2) Mr. Brister is the Chief Executive Officer, President and a director of
the Company. See "Certain Relationships and Related Transactions."
(3) Mr. Jones is the Vice President, Administration and Chief Financial
Officer of the Company. Includes options to purchase 10,000 shares of
Common Stock at an exercise price of $1.50 per share exercisable until
September 30, 2003.
(4) Includes options to purchase 6,667 shares of Common Stock at an exercise
price of $4.875 per share exercisable until January 30, 2002. Mr. Schwall
is Vice President, Sales and Marketing of the Company.
(5) Messrs. Mannes and Morgan are directors of the Company.
(6) Mr. Evans is a director of the Company. Includes 20,001 shares of Common
Stock underlying warrants owned by Mr. Evans.
(7) Mr. Halter, the Chairman of the Board, Secretary and director of the
Company, is the sole stockholder, director and president of Halter
Financial Group, Inc. ("HFG") and is therefore deemed to have beneficial
-4-
<PAGE>
ownership of the shares of Common Stock held by HFG. HFG and Mr. Halter's
address is 14160 Dallas Parkway, Suite 950, Dallas, Texas 75240. See
"Certain Relationships and Related Transactions."
(8) The Schlinger Foundation's address is c/o Evert Schlinger, Trustee, 1944
Edison Street, Santa Ynez, California 93460. See "Proposal 3 -
Ratification of The Schlinger Note and Approval of the Issuance of the
Schlinger Conversion Shares."
(9) Ms. Neubauer's address is 487 John Anderson Drive, Ormond Beach, Florida
32174.
(10) Includes 20,001 shares of Common Stock underlying warrants owned by
Mr. Evans, options to purchase 10,000 shares of Common Stock granted to
Mr. Jones, and options to purchase 6,667 shares of Common Stock granted to
Mr. Schwall.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth, for the years
indicated, all cash compensation paid, distributed or accrued for services,
including salary and bonus amounts, by the Company to its Chief Executive
Officer. No other executive officer of the Company received remuneration in
excess of $100,000 during the referenced periods. Certain compensation related
tables required to be reported have been omitted since no applicable
compensation was awarded to, earned by or paid to any of the Company's executive
officers in any fiscal year to be covered by such tables.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
----------------------------- ------------------------------
Awards
------------------------------
Securities
Other Annual Restricted Underlying
Name/Title Year Salary/Bonus Compensation Stock Awards Options/SARs
- ---------- ---- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert M. Aubrey, former Chief 1998 $140,625 $22,825(2) -0- 200,000
Executive Officer and President(1)
V. Lynn Graybill, former Chairman of 1997 $131,250 $ -0- -0- -0-
the Board, Chief Executive Officer 1996 $121,731 $15,000(4) -0- -0-
and President(3)
</TABLE>
- ---------------
(1) Effective January 13, 1999, Robert M. Aubrey resigned as Chief Executive
Officer, President and as a director of the Company. See "-- Employment
Agreements and Related Matters."
(2) Principally housing and transportation allowance.
(3) Effective January 15, 1998, V. Lynn Graybill resigned as Chairman of the
Board, Chief Executive Officer and President of the Company. See "--
Employment Agreements and Related Matters."
(4) Represents a signing bonus equal to 10% of Mr. Graybill's base salary,
which was paid by issuing Mr. Graybill 140,000 restricted shares of Common
Stock of the Company.
Employment Agreements and Related Matters
In January 1999, Charles Brister was elected Chief Executive Officer
and President of the Company. He will receive an annual salary of $150,000 to be
paid at the end of the year in shares of the Company's Common Stock based on a
formula to be determined by the Board. Timothy P. Halter, Chairman of the Board,
has agreed to defer his $5,000 monthly compensation until year end. Mr. Halter
may accept payment of his compensation in shares of Common Stock, subject to the
approval of the Board.
Effective January 30, 1998, the Company entered into three-year
Employment Agreement (the "Employment Agreement") with Robert M. Aubrey, whereby
Mr. Aubrey agreed to serve as President and Chief Executive Officer of the
Company. The Employment Agreement provided Mr. Aubrey with an annual base salary
of $150,000 and options to purchase 200,000 shares of Common Stock at an
exercise price of $3.25 per share. See "-- Stock Options."
-5-
<PAGE>
Effective January 13, 1999, Robert M. Aubrey resigned as Chief
Executive Officer, President and as a director of the Company. On January 20,
1999, the Company and Mr. Aubrey entered into a Settlement Agreement and Full
and Final Release of All Claims (the "Aubrey Agreement") for the purpose of
satisfying and discharging all obligations of the Company to Mr. Aubrey under
the Employment Agreement. The Aubrey Agreement provides that the Company shall
forgive up to $19,000 of non-reimbursable expenses incurred by Mr. Aubrey and
pay to Mr. Aubrey one week of earned vacation. In consideration for the
foregoing, Mr. Aubrey must to adhere to the non-competition and non-solicitation
covenants set forth in the Employment Agreement until January 13, 2001. As part
of his separation from the Company, the Company issued to Mr. Aubrey options to
purchase 15,000 shares of Common Stock at an option exercise price of $1.06 per
share, which options were granted to replace the options to purchase 200,000
shares of Common Stock that were canceled at separation. The options are vested
and expire on January 20, 2004.
In January 1998, V. Lynn Graybill resigned as Chairman of the Board,
Chief Executive Officer and President of the Company. The Company and Mr.
Graybill entered into a Mutual Release and Separation Agreement, dated January
15, 1998 (the "Graybill Agreement"), for the purpose of satisfying and
discharging all obligations of the Company to Mr. Graybill under the terms of
Mr. Graybill's Employment Agreement, dated March 15, 1996. Under the terms of
the Graybill Agreement, the Company paid to Mr. Graybill a one time payment of
$208,100 (the "Severance Amount"). As additional consideration for the Severance
Amount, Mr. Graybill agreed to adhere to the non-competition and
non-solicitation covenants contained in his Employment Agreement until January
15, 2001.
To provide for continuity of management, the Company may enter into
employment agreements with other members of its executive management staff.
Stock Options
In July 1996, the Company issued to 30 employees, who were neither
officers nor directors of the Company, options to purchase an aggregate of
59,355 shares of Common Stock at an exercise price of $5.63 per share, which
options are currently exercisable and expire at various times during 2001.
In January 1997, the Company issued to an officer of the Company
options to purchase 6,667 shares of Common Stock at an exercise price of $4.875
per share, which options are exercisable and expire on January 30, 2002. The
Company also issued to employees, who were neither officers nor directors of the
Company, options to purchase an aggregate of 52,670 shares of Common Stock at an
exercise price of $4.875 per share, which options are also exercisable and
expire on January 30, 2002.
During the fiscal year ended December 31, 1998, the Company granted to
certain of its employees options to purchase an aggregate of 265,000 shares of
Common Stock at exercise prices ranging from $1.06 to $3.50 per share, which
options expire periodically from January 31 to December 31, 2003. Of the total
number of options issued during fiscal 1998, options to purchase 200,000 shares
of Common Stock were issued to Robert M. Aubrey, which options were canceled
upon Mr. Aubrey's resignation as an officer and director of the Company in
January 1999, and an aggregate of 45,000 options were granted pursuant to the
Company's 1998 Stock Compensation Plan. See "-- 1998 Stock Compensation Plan."
-6-
<PAGE>
<TABLE>
<CAPTION>
Option/Grants in Last Fiscal Year
Number of Securities Percent of Total Options
Underlying Options Granted to Employees Exercise Price
Name/Title Granted in Fiscal 1998 ($/sh) Expiration Date
- -------------------------------------- -------------------- ------------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Robert M. Aubrey, former President and 200,000 75.5 $3.25 See footnote(1)
Chief Executive Officer...............
- ------------
(1) The options to purchase 200,000 shares of Common Stock granted to Mr.
Aubrey were canceled immediately upon his resignation as an officer and
director of the Company in January 1999.
Aggregate Fiscal Year-End Option Values
Number of Securities Underlying Value of Unexercised No Market
Unexercised Options at Fiscal Year-End Value Options at Fiscal Year End
Name/Title Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------- -------------------------------------- ------------- ---------------
Robert M. Aubrey, former President and -0- 200,000 -0- $212,000
Chief Executive Officer..................
</TABLE>
The exercise price per share of all options issued by the Company was
based on the closing bid price of the Company's Common Stock as quoted on either
the NASD Electronic Bulletin Board or The Nasdaq SmallCap Market ("Nasdaq"), as
applicable, on the date of grant of such options.
1998 Stock Compensation Plan
On May 27, 1998, the stockholders of the Company approved the 1998
Stock Compensation Plan of Karts International Incorporated (the "1998 Plan")
and reserved 1,000,000 shares of Common Stock for issuance under the plan. The
1998 Plan terminates on April 1, 2008 unless previously terminated by the Board.
The 1998 Plan is administered by the Compensation Committee (the "Committee") or
the entire Board.
Eligible participants in the 1998 Plan include full time employees,
directors and advisors of the Company and its subsidiaries. Options granted
under the 1998 Plan are intended to qualify as "incentive stock options"
pursuant to the provisions of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), or options which do not constitute incentive stock
options ("nonqualified options") as determined by the Committee.
Under the 1998 Plan the Company may also grant "Restricted Stock"
awards. "Restricted Stock" represents shares of Common Stock issued to eligible
participants under the 1998 Plan subject to the satisfaction by the recipient of
certain conditions and enumerated in the specific Restricted Stock grant.
Conditions which may be imposed include, but are not limited to, specified
periods of employment, attainment of personal performance standards or the
overall performance of the Company. The granting of Restricted Stock represents
an additional incentive for eligible participants under the 1998 Plan to promote
the development of the Company, and may be used by the Company as another means
of attracting and retaining qualified individuals to serve as employees of the
Company or its subsidiaries.
Incentive stock options may be granted only to employees of the Company
or a subsidiary who, in the judgment of the Committee, are responsible for the
management or success of the Company or a subsidiary and who, at the time of the
granting of the incentive stock option, are either an employee of the Company or
a subsidiary. No incentive stock option may be granted under the 1998 Plan to
any individual who would, immediately before the grant of such incentive stock
option, directly or indirectly, own more than ten percent (10%) of the total
-7-
<PAGE>
combined voting power of all classes of stock of the Company unless (i) such
incentive stock option is granted at an option price not less than one hundred
ten percent (110%) of the fair market value of the shares on the date the
incentive stock option is granted and (ii) such incentive stock option expires
on a date not later than five years from the date the incentive stock option is
granted.
The purchase price of the shares of the Common Stock offered under the
1998 Plan must be one hundred percent (100%) of the fair market value of the
Common Stock at the time the option is granted or such higher purchase price as
may be determined by the Committee at the time of grant; provided, however, if
an incentive stock option is granted to an individual who would, immediately
before the grant, directly or indirectly own more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company, the purchase
price of the shares of the Common Stock covered by such incentive stock option
may not be less than one hundred ten percent (110%) of the fair market value of
such shares on the day the incentive stock option is granted. If the Common
Stock is listed upon an established stock exchange or exchanges, the fair market
value of the Common Stock shall be the highest closing price of the Common Stock
on the day the option is granted or, if no sale of the Common Stock is made on
an established stock exchange on such day, on the next preceding day on which
there was a sale of such stock. If there is no market price for the Common
Stock, then the Board and the Committee may, after taking all relevant facts
into consideration, determine the fair market value of the Common Stock.
Options are exercisable in whole or in part as provided under the terms
of the grant, but in no event shall an option be exercisable after the
expiration of ten years from the date of grant. Except in case of disability or
death, no option shall be exercisable after an optionee ceases to be an employee
of the Company, provided that the Committee has the right to extend the right to
exercise for a period not longer than three months following the date of
termination of an optionee's employment. If an optionee's employment is
terminated by reason of disability, the Committee may extend the exercise period
for a period not in excess of one year following the date of termination of the
optionee's employment. If an optionee dies while in the employ of the Company
and shall not have fully exercised his options, the options may be exercised in
whole or in part at any time within one year after the optionee's death by the
executors or administrators of the optionee's estate or by any person or persons
who acquired the option directly from the optionee by bequest or inheritance.
Under the 1998 Plan, an individual may be granted one or more options,
provided that the aggregate fair market value (determined at the time the option
is granted) of the shares covered by incentive options which may be exercisable
for the first time during any calendar year shall not exceed $100,000. There
presently are outstanding options to purchase 45,000 shares of Common Stock at
prices ranging from $1.06 to $2.98 per share.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 1996, the Company in a private sale sold 233,333 shares of
Common Stock to 13 investors (the "Investors") for $525,000 (the "March 1996
Offering"). In connection with the March 1996 Offering, the Company and HFG
agreed to issue additional shares of Common Stock to the Investors if on March
31, 1998 (the "Offering Valuation Date") the average closing bid price of the
Common Stock for the 10 trading days prior to and including the Offering
Valuation Date (the "Stock Market Value") did not equal or exceed $4.50 per
share, such that each Investor would receive for no additional consideration an
additional number of shares of Common Stock necessary to increase the Stock
Market Value per share of the Common Stock acquired to $4.50 per share. HFG
placed into escrow 233,333 shares of Common Stock (the "HFG Escrow Shares") to
be issued to Investors if an adjustment was required. Based upon the Stock
Market Value of the Company Stock on the Offering Valuation Date, Investors
received an aggregate of 95,624 HFG Escrow Shares. The remaining 137,709 HFG
Escrow Shares were released from escrow and delivered to HFG.
-8-
<PAGE>
The Company and Charles Brister, the Chief Executive Officer and
President of the Company, have entered into a Real Estate Option Right of First
Refusal Agreement for the Roseland facility. Under the terms of this agreement,
the Company may, at its sole option, purchase the real property and improvements
for $550,000. The option expires on December 31, 2000. The Company and Mr.
Brister have also entered into a lease agreement for the Roseland manufacturing
facility, including the corporate offices, which expires in 2000. The monthly
lease payment for the Roseland facility is $6,025 with certain adjustments. The
Company believes these terms are comparable to existing market rates in the
region.
The Company has executed five promissory notes in the principal amounts
of $54,623.09, $75,000, $75,000, $25,000 and $6,849.13, respectively, payable to
Charles Brister. Interest on each note accrues at a rate of 12% per annum and is
payable monthly, with the principal balance of each note being due at the
earlier of receipt by the Company of at least $1.5 million from the sale of
equity securities or September 30, 1999. Proceeds from the loans were used to
reduce Company indebtedness and to provide working capital.
On June 3, 1999, the Company consummated a $1.5 million convertible
loan transaction with The Schlinger Foundation. For a detailed discussion of
this transaction, please see "Proposal 3 -- Ratification of The Schlinger Loan
and Approval of the Issuance of the Schlinger Conversion Shares."
The Schlinger Foundation also purchased 500,000 shares of Preferred
Stock, at a price of $1.00 per share, in the Company's private offering
consummated on June 30, 1999. See "Proposal 2 -- Ratification of the Issuance of
the Preferred Stock and Approval of the Issuance of the Preferred Conversion
Shares."
The Company believes that all the foregoing related-party transactions
were on terms no less favorable to the Company than could reasonably be obtained
from unaffiliated third parties. All future transactions with affiliates will be
approved by a majority of disinterested directors of the Company and on terms no
less favorable to the Company than those that are generally available from
unaffiliated third parties.
PROPOSAL 2 -- RATIFICATION OF THE ISSUANCE OF THE
PREFERRED STOCK AND APPROVAL OF THE ISSUANCE
OF THE PREFERRED CONVERSION SHARES
Description of the Proposal
The Board is requesting that the stockholders ratify and confirm the
Company's issuance of 1,550,000 shares of its 9% Cumulative Convertible
Preferred Stock (the "Preferred Stock") to participants in its private offering
consummated on June 30, 1999 (the "Private Placement"). The Board is also
-9-
<PAGE>
requesting that the stockholders approve the issuance of up to 6,200,000 shares
of Common Stock (the "Preferred Conversion Shares"), subject to adjustment, to
the holders of the Preferred Stock who wish to convert such securities into
shares of Common Stock at the conversion rate described below. The Preferred
Stock was sold to investors, which included officers and directors of the
Company who purchased an aggregate of 520,000 shares of Preferred Stock on the
same terms as other investors. See "Certain Relationships and Related
Transactions." The Private Placement closed on June 30, 1999. The material terms
of the Private Placement and the Preferred Stock, respectively, are summarized
below.
Summary of the Private Placement and the Preferred Stock
The Private Placement. Pursuant to the terms and conditions set forth
in the Company's private placement memorandum dated March 31, 1999, the Company
sold an aggregate of 1,550,000 shares of Preferred Stock for aggregate offering
proceeds of $1,550,000 or a per share purchase price of $1.00. The Private
Placement was consummated on June 30, 1999. The proceeds from the sale of the
Preferred Stock are being used by the Company for working capital and payment of
trade debt.
The Preferred Stock. The Preferred Stock constitutes a single series of
preferred stock. The shares of Preferred Stock are fully paid and
non-assessable. The following summary of the terms and provisions of the
Preferred Stock does not purport to be complete and is qualified in its entirety
by reference to the pertinent sections of the Company's Articles of
Incorporation and the Certificate of Designation, Preferences and Rights of 9%
Cumulative Convertible Preferred Stock (the "Certificate of Designation)" which
is on file with the U.S. Securities and Exchange Commission as an exhibit to the
Company's current Report on Form 8-K dated July 28, 1999.
Dividends. Holders of shares of the Preferred Stock are entitled to
receive, out of funds legally available therefor, a dividend at the rate of $.09
per share per annum, payable in semi-annual installments on June 30 and December
31, commencing December 31, 1999. Such dividends may be paid in cash or shares
of Common Stock, at the Company's option. The number of shares of Common Stock
to be issued as a stock dividend shall be determined by the current market price
of a share of Common Stock on the record date for such stock dividend. The
current market price of a share of Common Stock on the record date shall be the
closing sale price on such day as reported by Nasdaq or on any other exchange on
which the shares of Common Stock may be traded. No fractional shares will be
issued for dividends. The amount of any dividends represented by such fractional
shares will be payable by rounding up to the next whole number for such stock
dividend. Dividends on the Preferred Stock will be cumulative from the date of
initial issuance of the Preferred Stock. Dividends will be payable to holders of
record as they appear on the stock books of the Company on such record dates,
not more than 60 days nor less than 10 days preceding the payment dates, as
shall be fixed by the Board.
If dividends are not paid in full upon the Preferred Stock and any
other preferred stock ranking on a parity as to dividends with the Preferred
Stock, all dividends declared upon shares of Preferred Stock and such other
preferred stock will be declared pro rata so that in all cases the amount of
dividends declared per share on the Preferred Stock and such other preferred
stock bear the same ratio to each other that accumulated dividends per share on
the shares of the Preferred Stock and such other preferred stock bear to each
other. Except as set forth above, unless full cumulative dividends on the
Preferred Stock have been paid, dividends (other than in Common Stock) may not
be paid or declared and set aside for payment and other distributions may not be
made upon the Common Stock or on any other stock of the Company ranking junior
to or on a parity with the Preferred Stock as to dividends, nor may any Common
Stock or any other stock of the Company ranking junior to or on a parity with
the Preferred Stock as to dividends be redeemed, purchased or otherwise acquired
for any consideration (or any payment made to or available for a sinking fund
for the redemption of any shares of any shares of such stock) by the Company
(except by conversion into or exchange for stock of the Company ranking junior
to the Preferred Stock as to dividends). The Company has agreed not to declare
or pay any cash dividend on its Common Stock during such period that the
Preferred Stock remains outstanding.
Conversion Rights. The holder of any shares of the Preferred Stock will
have the right, at the holder's option, to convert any or all such shares into
Common Stock at any time during the period commencing on June 30, 1999 and
expiring on the fourth anniversary of such date (the "Conversion Period").
Subject to certain adjustments as described below, the Preferred Stock is
convertible at the rate of one share of Common Stock for each $.25 in Face
Amount of the Preferred Stock converted (initially four shares of Common Stock
for each share of Preferred Stock converted). If the Preferred Stock is not
-10-
<PAGE>
voluntarily converted prior to the expiration of the Conversion Period, each
share of Preferred Stock then outstanding shall be automatically converted at
the rate of one share of Common Stock for each $.25 in Face Amount of the
Preferred Stock converted, subject to certain adjustments described below. The
Company shall also be required to pay all accrued but unpaid dividends due and
owing to the holders of the Preferred Stock as of expiration date of the
Conversion Period. The holders of the Preferred Stock have contractually agreed
to suspend their right to convert their shares of Preferred Stock into shares of
Common Stock until such time as the matters contemplated by this proposal and
Proposal 4 below have been ratified and/or approved by the stockholders.
In the event the Preferred Stock is called for redemption, the
conversion right will terminate at the close of business on the fifth business
day prior to the date fixed for redemption. Payment shall be made upon a
resulting conversion of any share of Preferred Stock and shall be adjusted to
account for any unpaid and accrued dividends on the shares surrendered for
conversion. No fractional shares of Common Stock will be issued upon conversion
but, in lieu thereof, the Company shall round up the fractional share.
The conversion rate will be subject to adjustment upon the occurrence
of the following events: (i) stock split, recapitalization, combination of
shares of the Company, or other similar event or (ii) the sale or other issuance
of shares of Common Stock at a price less than the then applicable conversion
rate. If during the Conversion Period the Company sells or issues shares of
Common Stock at less than the then applicable conversion rate, the conversion
rate shall then become the price at which such securities were sold on a per
share basis. The conversion rate will not be adjusted upon (i) the issuance of
Common Stock as dividends on either the outstanding Common Stock, the Preferred
Stock or other duly issued securities of the Company; (ii) the issuance of
shares of Common Stock upon the exercise of outstanding options or warrants;
(iii) the issuance of shares of Common Stock upon the exercise of options
granted under the 1998 Plan; (iv) any issuance of shares of Common Stock to
Charles Brister, Chief Executive Officer and President of the Company, or any
other executive officer of the Company in lieu of compensation during calendar
year 1999; and (v) an issuance or distribution of Common Stock, rights or
warrants to subscribe for shares of Common Stock, or other securities or debt
instruments convertible into Common Stock, subject only to the requirement that
such securities be sold at a price per share or be convertible into Common Stock
at a price in excess of the then applicable conversion rate of the Preferred
Stock.
In case of any reclassification of the Common Stock, any consolidation
of the Company with, or merger of the Company into, any other entity, any merger
of any entity into the Company (other than a merger which does not result in any
reclassification, conversion, exchange or cancellation of outstanding shares of
Common Stock), any sale or transfer of all or substantially all of the assets of
the Company or any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or other property, then provision shall be
made such that the holder of each share of Preferred Stock then outstanding
shall have the right thereafter, during the period such share of Preferred Stock
shall be convertible, to convert such share only into the kind and amount of
securities, cash and other property receivable upon such reclassification,
consolidation, merger, sale, transfer or share exchange by a holder of the
number of shares of Common Stock into which such shares of Preferred Stock might
have been converted immediately prior to such reclassification, consolidation,
merger, sale, transfer or share exchange.
Holders of Preferred Conversion Shares will be entitled to the same
rights applicable at the time of conversion to other holders of Common Stock.
The holders of the shares of the Preferred Stock have no preemptive rights with
respect to any securities of the Company.
Liquidation Rights. In the event of any liquidation, dissolution or
winding up of the Company, the holders of shares of the Preferred Stock are
entitled to receive out of assets of the Company available for distribution to
stockholders, before any distribution of assets is made to holders of Common
Stock or any other junior stock, liquidating distributions in the amount of
$1.00 per share plus accumulated and unpaid dividends. If upon any liquidation,
dissolution or winding up of the Company, the assets distributable to the
holders of the Preferred Stock and any other preferred stock ranking as to any
-11-
<PAGE>
such distribution on a parity with the Preferred Stock are insufficient to fully
pay the preferential amount, the holders of the Preferred Stock and of such
other preferred stock will share ratably in such distribution of assets in
proportion to the full respective preferential amounts to which they are
entitled. After payment of the full amount of the liquidating distribution to
which they are entitled, the holders of shares of the Preferred Stock will not
be entitled to any further participation in any distribution of assets by the
Company. Neither a consolidation or merger of the Company with another
corporation nor a sale or transfer of all or part of the Company's assets for
cash or securities will be considered a liquidation, dissolution or winding up
of the Company.
The right of the Company, and the rights of its creditors and
stockholders (including holders of the Preferred Stock), to participate in the
distribution of the assets of any subsidiary of the Company upon any liquidation
or reorganization of such subsidiary, or otherwise, will be subject to the prior
claims of creditors of such subsidiary (except to the extent the Company may
itself be a creditor with recognized claims against such subsidiary).
Redemption at the Option of Company. The Preferred Stock may not be
redeemed prior to March 31, 2000. The Preferred Stock is redeemable thereafter
for cash, in whole or in part, at any time at the option of the Company at $1.09
per share.
If less than all of the outstanding shares of the Preferred Stock are
to be redeemed, the Company will select those shares to be redeemed pro rata or
by lot or in such other manner as the Board may determine. There is no mandatory
redemption or sinking fund obligation with respect to the Preferred Stock. In
the event the Company has failed to pay accrued and unpaid dividends on the
Preferred Stock, it may not redeem any of the then outstanding shares of
Preferred Stock until all such accrued and unpaid dividends have been paid in
full.
In the event the Preferred Stock is called for redemption, the
conversion right will terminate at the close of business on the fifth business
day prior to the date fixed for redemption. After the redemption date, dividends
will cease to accrue on the shares of the Preferred Stock called for redemption
and all rights of the holders of such shares will terminate except the right to
receive the redemption price without interest (unless the Company defaults in
the payment of the redemption price).
Voting Rights. Except as indicated below, the holders of shares of
Preferred Stock have no voting rights. If the equivalent of two consecutive
semi-annual (one year) dividends payable on the Preferred Stock or on any other
preferred stock is in arrears, the number of directors of the Company will be
increased by two and the holders of all outstanding shares of the Preferred
Stock and any other preferred stock ranking on a parity as to dividends or upon
liquidation with the Preferred Stock, voting as a single class without regard to
series, will be entitled to elect two additional directors until all cumulative
dividends in arrears have been paid in full and until any non-cumulative
dividends payable on all preferred stock have been paid regularly for at least
one year.
In addition, without the vote or consent of the holders of at least a
majority of the number of then outstanding shares of the Preferred Stock and any
other preferred stock ranking on a parity as to dividends or upon liquidation
with the Preferred Stock, the Company shall not (i) create, or increase the
authorized number of shares of, any series or class of stock ranking prior to
the Preferred Stock either as to dividends or upon liquidation, (ii) amend,
alter or repeal any of the rights and preferences of the Preferred Stock or
(iii) authorize any reclassification of the Preferred Stock. Accordingly, the
voting rights of the holders of the Preferred Stock could under certain
circumstances operate to restrict the flexibility the Company would otherwise
have in connection with future changes to its capital structure.
-12
<PAGE>
Rationale for the Proposal
The Company's Common Stock and Redeemable Common Stock Purchase
Warrants (the "Warrants") are currently traded on Nasdaq. Nasdaq Marketplace
rules require that the Company obtain stockholder approval prior to the issuance
of securities convertible into Common Stock, if the number of shares of Common
Stock to be issued upon such conversion equals or exceeds 20% of the number of
shares of Common Stock outstanding before the issuance of the convertible
securities. The conversion of all of the outstanding shares of Preferred Stock
would result in the issuance of 6,200,000 Preferred Conversion Shares, which
number of Preferred Conversion Shares represents greater than 20% of the number
of shares of Common Stock outstanding on the date the Preferred Stock was
issued. Since the Company faced a cash flow and working capital deficit and an
immediate need for cash to meet production schedules of its products, it did not
have sufficient time to obtain stockholder approval prior to the issuance of the
Preferred Stock. The Company has received notice from Nasdaq that as a result of
the sale of the Preferred Stock, it is in violation of Nasdaq's Marketplace
rules and is therefore subject to having its securities delisted from Nasdaq
unless the Company is either able to obtain stockholder approval of this
proposal or able to obtain an agreement from all Preferred Stockholders to
modify the terms of the Preferred Stock, which is unlikely. If the Company does
not obtain stockholder ratification of the sale of the Preferred Stock and
approval of the issuance of the Preferred Conversion Shares, the Company's
securities will be delisted from Nasdaq and the Company will likely be in
default of the terms of the Preferred Stock.
To assist the Company in avoiding delisting from Nasdaq, the holders of
the Preferred Stock have agreed not to convert their shares of Preferred Stock
until such time as the stockholders have ratified the Private Placement and
approved the issuance of the Preferred Conversion Shares. However, if
stockholder approval of this proposal is not obtained, the Company does not
believe that holders of the Preferred Stock will agree to a modification of the
current conversion rate to one that would result in the issuance of Preferred
Conversion Shares representing less than 20% of the outstanding Common Stock.
Therefore, the Board is seeking ratification of the Private Placement and
approval of the issuance of the Preferred Conversion Shares.
If the stockholders do not approve this proposal, the Company will
continue to be in violation of Nasdaq's Marketplace rules, which will subject
the Company's securities to delisting. In such event, the holders of the
Preferred Stock may seek, among other legal remedies, recission of the Private
Placement. If the Company is delisted, the securities will likely be traded on
the Pink Sheets maintained by the National Quotation Service Bureau, Inc. as the
Company will be ineligible to trade its securities on the OTC Electronic
Bulletin Board or any other national exchange as the rules of such institutions
are identical or similar to those of Nasdaq. If the Company's securities are
traded on the Pink Sheets, the market value of such securities may be adversely
effected given that the sale of the Company's securities would become subject to
certain regulations adopted by the U.S. Securities and Exchange Commission (the
"Commission") which impose sales practice requirements on broker-dealers. For
example, broker-dealers selling such securities must, prior to effecting the
transaction, provide their customers with a document which discloses the risks
of investing in the Company's securities. Furthermore, if the person purchasing
the securities is someone other than an accredited investor or an established
customer of the broker-dealer, the broker-dealer must also approve the potential
customer's account by obtaining information concerning the customer's financial
situation, investment experience and investment objectives. The broker-dealer
must also make a determination whether the transaction is suitable for the
customer and whether the customer has sufficient knowledge and experience in
financial matters to be reasonably expected to be capable of evaluating the risk
of transactions in the security. Accordingly, the Commission's rules may limit
the number of potential purchasers of the Company's securities.
If the Preferred Stockholders seek recission of the Private Placement,
the Company does not possess or have access to the funds required to be paid to
such holders upon an action for recission. The Company may then be subject to
-13-
<PAGE>
litigation by the Preferred Stockholders which would have a material adverse
effect upon the Company and its operations and may force the Company to seek
protection under federal bankruptcy laws.
Effect of the Adoption of the Proposal
The issuance of the Preferred Conversion Shares would be dilutive to
the interests of the holders of the currently outstanding shares of Common
Stock. If the stockholders approve this proposal, the Preferred Stock may be
converted into an aggregate of 6,200,000 shares of Common Stock at the current
conversion rate. Such Preferred Conversion Shares would represent 53% of the
shares of Common Stock outstanding upon conversion. The dilutive effect of such
conversion may also negatively effect the market price of the Common Stock.
Recommendation of The Board of Directors
The Board unanimously recommends that each stockholder vote in favor of
this proposal. A majority of the votes entitled to be cast by the holders of all
shares of Common Stock that are present at the Meeting and entitled to vote will
be necessary to adopt Proposal No. 2. Charles Brister, Chief Executive Officer
and President of the Company, Timothy P. Halter, Chairman of the Board and
Secretary of the Company, and The Schlinger Foundation have entered into a
Voting Agreement (the "Voting Agreement") whereby each party has agreed to vote
the shares of Common Stock over which they have voting control for this
proposal. The parties to the Voting Agreement have voting control over an
aggregate of 1,556,498 shares of Common Stock representing approximately 28% of
the Common Stock outstanding as of the date of this Proxy Statement.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE
FOR THE RATIFICATION OF THE ISSUANCE
OF PREFERRED STOCK AND FOR APPROVAL OF THE
ISSUANCE OF THE PREFERRED CONVERSION SHARES
PROPOSAL 3 -- RATIFICATION OF THE SCHLINGER LOAN
AND APPROVAL OF THE ISSUANCE OF THE
SCHLINGER CONVERSION SHARES
Description of the Proposal
The Board is requesting that the stockholders approve a proposal to
ratify and confirm the $1.5 million convertible term loan to the Company by The
Schlinger Foundation (the "Schlinger Loan") and to approve the issuance of up to
4,000,000 shares of Common Stock (the "Schlinger Conversion Shares"), subject to
adjustment, upon the conversion by The Schlinger Foundation (the "Foundation")
of the principal balance of the term loan.
Description of Loan Transaction
On June 3, 1999, the Company concluded the Schlinger Loan, whereby the
Company borrowed from the Foundation the principal amount of $1.5 million as
evidenced by the $1.5 million Convertible Term Note (the "Term Note") executed
by the Company in favor of the Foundation. The Term Note requires that interest
on the principal balance be paid monthly commencing June 30, 1999, with the
principal of the loan plus accrued but unpaid interest being due and payable in
one installment, on May 31, 2004. The principal balance of the Term Note bears
interest at the rate of twelve percent (12%) per annum. The principal balance of
the Term Note is convertible, in whole or in part (in integral multiples of
$500,000), into the Schlinger Conversion Shares. The number of Schlinger
Conversion Shares to be issued upon conversion is equal to the amount of unpaid
-14-
<PAGE>
principal converted divided by the conversion price of $.375. The conversion
price is subject to adjustment upon the occurrence of certain events, including
stock splits and combinations, dividends or distributions, and
reclassifications, exchanges and substitutions.
The Term Note is subject to the terms and conditions set forth in the
Loan Agreement dated June 3, 1999 (the "Loan Agreement") by and between the
Company and the Foundation. The Loan Agreement imposes upon the Company
affirmative, negative and financial covenants customary in this type of loan
transaction. Specifically, under the affirmative covenants, the Company must
maintain adequate books and records, remain in compliance with applicable laws,
satisfy all tax obligations, maintain proper insurance and advise the Foundation
of certain corporate changes or events. A further affirmative covenant requires
that the Company effect an amendment to its Articles of Incorporation to
increase its authorized shares of Common Stock within 120 days of the date of
the Loan Agreement. See "Proposal 4 -- Increase in the Number of Authorized
Shares of Common Stock." The negative covenants to which the Company is subject
prohibit the Company from changing the nature of its business, liquidating,
merging, consolidating or selling substantially all of its assets, or incurring
any additional debt obligations without the prior written consent of the
Foundation. The financial covenants require that the Company (i) maintain a
monthly ratio of current assets to current liabilities of not less than 1.5 to
1.0, (ii) maintain a total liabilities to tangible net worth ratio of 2.5 to 1.0
and (iii) have a monthly tangible net worth of $2.5 million. Failure by the
Company to abide by or satisfy any of the foregoing covenants will result in an
event of default under the Term Note. Upon an event of default, the Foundation
may declare the unpaid principal balance plus accrued and unpaid interest
immediately due and payable or foreclose on all liens granted to the Foundation.
The Term Note is secured by all of the accounts, inventory and
equipment of the Company and each of its wholly-owned subsidiaries. Furthermore,
the obligations of the Company under the Term Note are guaranteed by each of the
Company's wholly-owned subsidiaries.
On July 12, 1999, the Company and the Foundation executed the Waiver
and First Amendment to Loan Agreement (the "Amended Loan Agreement") whereby the
Company agreed to obtain stockholder ratification and approval of the matters
contemplated in this Proposal 3 on or before September 30, 1999. The failure of
the Company to obtain stockholder ratification of the Schlinger Loan and
approval of the issuance of the Schlinger Conversion Shares will constitute an
event of default under the Loan Agreement.
Rationale For the Proposal
The Company is seeking ratification of the Schlinger Loan and approval
of the issuance of up to 4,000,000 Schlinger Conversion Shares, subject to
adjustment, to comply with Nasdaq's Marketplace rules and to avoid an event of
default under the Amended Loan Agreement. As discussed in Proposal 2 above,
Nasdaq requires that a listed company obtain stockholder approval prior to
issuing debt or equity securities convertible into Common Stock, if the number
of shares of Common Stock to be issued upon conversion equals or exceeds 20% of
the shares of Common Stock outstanding at the time the convertible securities
are issued. The Company did not seek stockholder approval prior to entering the
Schlinger Loan transaction since the Company had an immediate need for capital
to meet production schedules for its products and is therefore in violation of
the afore-referenced Nasdaq Marketplace rules. The Foundation has however agreed
to forbear from converting the Term Loan until such time as stockholder
ratification and approval of this proposal are obtained. However, if
ratification and approval of this proposal are not obtained by September 30,
1999, the Company will be in default under the terms of the Amended Loan
Agreement.
Absent the Company's ability to negotiate a modified conversion price
for the Term Note, failure to obtain stockholder approval of this proposal will
likely subject the Company's securities to delisting. If the Company's
securities are delisted from Nasdaq, it is likely the Common Stock and Warrants
-15-
<PAGE>
will be traded on the Pink Sheets as they will be ineligible to trade on the OTC
Electronic Bulletin Board or any other national exchange as the rules of such
institutions are identical or similar to those of Nasdaq., If the Company's
securities are traded on the Pink Sheets, the market value of such securities
may be adversely effected. See "Proposal 2 -- Ratification of the Issuance of
the Preferred Stock and Approval of the Issuance of the Preferred Conversion
Shares."
Approval of this proposal is also necessary to avoid an event of
default under the Amended Loan Agreement. The Company is obligated to obtain
stockholder ratification of the loan transaction and approval of the issuance of
the Schlinger Conversion Shares on or before September 30, 1999. If this
proposal is not approved by the stockholders, the Foundation can declare the
entire outstanding principal balance of the Term Note immediately due and
payable and foreclose upon the collateral securing the obligation if the Company
is unable to repay the Term Note in full upon an event of default. The Company
does not currently have the funds to pay the Term Loan in full. Therefore, the
ability of the Company to continue as a going concern would be adversely
affected by an event of default which could not be cured by the Company. Failure
to cure an event of default could result in the Company seeking protection under
federal bankruptcy laws.
Effect of the Adoption of the Proposal
The issuance of Schlinger Conversion Shares would be dilutive to the
interests of the holders of the currently outstanding shares of Common Stock. If
the stockholders approve this proposal, the Term Note may be converted into
4,000,000 shares of Common Stock at the current conversion rate. Such Schlinger
Conversion Shares would represent approximately 42% of the shares of Common
Stock then outstanding. The dilutive affect of such conversion may also
negatively affect the market price of the Common Stock. If the Schlinger
Conversion Shares and Preferred Conversion Shares are all issued, the Company
would have approximately 15,774,298 outstanding shares of Common Stock of which
the Schlinger Conversion Shares would represent approximately 25% and the
Preferred Conversion Shares would represent approximately 39%.
Recommendation of the Board of Directors
The Board unanimously recommends that each stockholder vote in favor of
this proposal. A majority of the votes entitled to be cast by the holders of all
shares of Common Stock that are present at the Meeting and entitled to vote will
be necessary to adopt Proposal No. 3. The parties to the Voting Agreement have
agreed to vote their shares of Common Stock for this proposal.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
RATIFICATION OF THE SCHLINGER LOAN AND FOR APPROVAL OF
THE ISSUANCE OF THE SCHLINGER CONVERSION SHARES
PROPOSAL 4 -- INCREASE IN THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK
Description of the Proposal
On June 29, 1999, the Board approved, subject to the consideration and
approval of the stockholders of the Company, a proposed amendment to the
Company's Articles of Incorporation to increase the authorized capital stock of
the Company by increasing the number of shares of Common Stock available for
issuance from 14,000,000 shares to 35,000,000 shares. The number of shares of
Preferred Stock available for issuance shall remain at 10,000,000 shares.
-16-
<PAGE>
Rationale for the Proposal
The principal reason for recommending approval of this proposal is to
accommodate the potential conversion of the Preferred Stock and the Term Note
into shares of Common Stock. Presently, the outstanding total number of
authorized but unissued shares is inadequate to satisfy the possible conversion
of all of the Preferred Stock and the Term Note.
As of the Record Date, a total of 4,569,511 shares of Common Stock were
authorized but not issued or reserved for issuance. On the Record Date, a total
of 5,574,298 shares of Common Stock were issued and outstanding and a total of
3,856,191 shares of Common Stock, not including the Preferred Conversion Shares
or the Schlinger Conversion Shares, were reserved or otherwise committed for
possible issuance by the Company to the holders of various warrants and to
employees pursuant to various benefit plans of the Company.
The proposal to increase the Company's authorized Common Stock is thus
intended to ensure that the Company has sufficient Common Stock to meet the
foregoing obligations and to provide additional authorized shares that could be
issued in connection with exercise of stock options, possible future stock
splits, stock dividends and mergers and acquisitions and to raise additional
capital, which could include public offerings or private placements of Common
Stock or securities convertible into Common Stock.
While the Board believes it important that the Company have the
flexibility that would be provided by having available additional authorized
Common Stock, the Company does not now have any commitments, arrangements or
understandings which would require the issuance of such additional shares of
Common Stock other than the shares reserved for issuance pursuant to the terms
of the Private Placement and the Schlinger Loan. The availability of additional
authorized shares of Common Stock would simply permit the Board to respond in a
timely manner to future opportunities and business needs of the Company as they
may arise and would avoid the possible necessity and expense of a special
meeting of stockholders to increase the authorized Common Stock.
If this proposal is not approved by the stockholders, the Company will
be in default of the terms and conditions of the Preferred Stock as well as the
Loan Agreement and Term Note related to the Schlinger Loan transaction as it
will not have enough shares of Common Stock to issue upon either the conversion
of the Preferred Stock or the Term Note. As this proposal relates to the Private
Placement and the issuance of the Preferred Conversion Shares, such a violation
could result in the participants in the Private Placement seeking recission of
the offering. The Company has utilized all of the proceeds from the Private
Placement for working capital and payment of trade debt and would therefore be
unable to satisfy a claim for recission. Any action for recission would have a
material adverse effect upon the business operations of the Company to the
extent that the Company could be forced to seek protection under federal
bankruptcy laws.
Furthermore, if the stockholders do not approve this proposal, the
Company will be in default of certain provisions of the Term Note. The Loan
Agreement requires that an amendment to the Articles of Incorporation of the
Company to increase the Company's authorized Common Stock be approved by the
stockholders on or before October 1, 1999. Upon an event of default, the
Foundation may declare the unpaid principal balance of the Term Note immediately
due and payable or foreclose on the collateral securing the obligation. If the
Foundation exercises its remedies upon an event of default under the Loan
Agreement, the Company may be forced to seek protection under federal bankruptcy
laws, absent its ability to negotiate a resolution to the event of default with
the Foundation.
Effects of the Adoption of the Proposal
If the authorized shares of Common Stock are increased as proposed, the
authorized shares of Common Stock would be available for issuance from time to
-17-
<PAGE>
time upon such terms and for such purposes as the Board may deem advisable
without further action by the stockholders of the Company except as may be
required by law or the rules of any stock exchange on which the Common Stock may
be listed. Such an issuance may decrease or increase the book value per share of
Common Stock presently issued and outstanding, depending upon whether the
consideration paid for such newly issued shares is less or more than the book
value per share prior to such issuance. The issuance of additional shares could
dilute the voting power and equity of the holders of outstanding Common Stock
and may have the effect of discouraging attempts by a person or group to take
control of the Company.
Recommendation of the Board of Directors
Adoption of the proposal to increase the number of authorized shares of
Common Stock requires the affirmative vote of the holders of the majority the
shares of the Common Stock outstanding on the Record Date. If approved by the
stockholders, such increase in the number of authorized shares will become
effective on the filing with the Secretary of State of Nevada of an amendment to
the Company's Articles of Incorporation setting forth such increase in the
outstanding shares Common Stock. The parties to the Voting Agreement have agreed
to vote their respective shares of Common Stock for this proposal.
THE BOARD RECOMMENDS A VOTE FOR THE INCREASE IN THE
NUMBER OF AUTHORIZED SHARES OF THE COMPANY'S
COMMON STOCK TO 35,000,000 SHARES.
PROPOSAL 5 -- APPROVAL OF AMENDMENT TO ARTICLES
OF INCORPORATION TO EFFECT A REVERSE STOCK
SPLIT OF THE COMMON STOCK
Description of the Proposal
The Board is also hereby soliciting stockholder approval of, in the
form provided for in the Certificate of Amendment attached hereto as Exhibit
"A", a reverse stock split with respect to all issued shares of Common Stock. As
a result of the reverse stock split, every three (3) shares of existing Common
Stock outstanding ("Old Common Stock") as of the time of filing of the
Certificate of Amendment with the Secretary of State of Nevada (the "Effective
Date") would be automatically converted into one (1) new share of Common Stock
("New Common Stock").
In order to effect the reverse split, the stockholders are being asked
to approve the Certificate of Amendment, a copy of which is attached hereto as
Exhibit "A". The form of Certificate of Amendment attached hereto contemplates
approval of Proposal 4. If this proposal is, but Proposal 4 is not, approved the
Certificate of Amendment shall be revised accordingly. The Board believes that
the reverse split is in the best interests of both the Company and its
stockholders and has approved the reverse split. The Board reserves the right,
notwithstanding stockholder approval and without further action by the
stockholders, to decide not to proceed with the reverse split if at any time
prior to its effectiveness it determines, in its sole discretion, that the
reverse split is no longer in the best interests of the Company and its
stockholders.
Effects of the Reverse Split
If effected, the reverse split would reduce the number of outstanding
shares of Old Common Stock from 5,574,298 shares as of August 4, 1999 to
approximately 1,858,099 shares of New Common Stock as of the Effective Date. The
reverse split would have no effect on the number of authorized shares of Common
Stock or preferred stock or the par value of the stock. All outstanding options,
warrants, rights and convertible securities that include provisions for
-18-
<PAGE>
adjustment in the number of shares covered thereby, and the exercise or
conversion price thereof, would be proportionately adjusted for the reverse
split automatically on the Effective Date. The reverse split would not effect
any stockholders proportionate equity interest in the Company except for those
stockholders who would receive an additional share of Common Stock, or cash if
the Company so elects, in lieu of fractional shares. None of the rights
currently accruing to holders of the Company's Common Stock will be effected by
the reverse split. The reverse split will result in some stockholders holding
old-lots of the Company's Common Stock (blocks of less than one hundred shares).
Because broker-dealers typically charge a higher commission to complete trades
in odd-lots of securities, the transaction costs may increase for the
stockholders who will hold odd-lots after the reverse split. Although the Board
believes as of the date of this Proxy Statement that the reverse split is
advisable, the reverse split may be abandoned by the Board at any time before,
during or within 180 days after the meeting and prior to the Effective Date.
Dissenting stockholders have no appraisal rights under Nevada law or
under the Company's Articles of Incorporation or Bylaws in connection with the
reverse split.
The Board may make any and all changes to the form of Certificate of
Amendment, a copy of which is attached hereto as Exhibit "A", that it deems
necessary in order to file such Certificate of Amendment with the Secretary of
State of Nevada and give effect to the reverse split under Nevada law.
After the Effective Date of the reverse stock split, the current
stockholders would own approximately 1,858,099 shares of New Common Stock. If
the Preferred Stock and Term Loan are fully converted, there would be
approximately 5,258,100 outstanding shares of New Common Stock of which current
stockholders would own approximately 35%, and the Preferred Conversion Shares
and Schlinger Conversion Shares would represent 39% and 25%, respectively, of
the outstanding New Common Stock.
Rationale for the Proposal
On February 17, 1999, Nasdaq advised the Company that as the bid price
of the Common Stock had been below $1.00 per share for a prolonged period of
time, the Common Stock failed to meet a continued listing requirement and the
Company's securities were subject to delisting. To avoid delisting, the Company
proposes that its stockholders approve the reverse stock split to facilitate the
Company's satisfaction of the continued listing requirements of Nasdaq. By
effecting the reverse stock split, the Company's trading price may be increased
which would in part facilitate maintaining listing on Nasdaq and in turn enhance
liquidity of the Common Stock.
While the Board believes that the Common Stock would trade at higher
prices than those which have prevailed in recent months, there can be no
assurance that such increase in the trading price will occur or, if it does
occur, that it will equal or exceed the direct arithmetical results of the
reverse split since there are numerous factors and contingencies which could
effect such price. No assurance can be given that the Company will meet or
maintain the minimum bid pricing list for the Nasdaq following the reverse
split.
Mechanics of the Reverse Split
If the reverse split is approved by the requisite vote of the Company's
stockholders, the Effective Date shall be no later than February 26, 2000 unless
abandoned by the Board as described above. Upon filing of the Certificate of
Amendment every three (3) issued and outstanding shares of Old Common Stock will
be automatically and without any action on the part of the stockholders
converted into and constituted as one (1) share of New Common Stock. As soon as
practicable after the Effective Date, the Company will forward a letter of
transmittal to each holder of record of shares of Old Common Stock outstanding
as of the Effective Date. The letter of transmittal will set forth instructions
for the surrender of certificates representing shares of Old Common Stock to the
Company's transfer agent in exchange for certificates representing the number of
-19-
<PAGE>
whole shares of New Common Stock into which the shares of Old Common Stock have
been converted as a result of the reverse split. Certificates should not be sent
to the Company or the transfer agent prior to the receipt of such letter of
transmittal from the Company.
Until a stockholder forwards a completed letter of transmittal together
with certificates representing his shares of Old Common Stock to the transfer
agent and receives a certificate representing shares of New Common Stock, such
stockholder's Old Common Stock shall be deemed equal to the number of whole
shares of New Common Stock to which each stockholder is entitled as a result of
the reverse split.
No scrip or fractional certificates will be issued in the reverse
split. Instead, the Company will issue one additional share of New Common Stock,
or cash if it so elects, in lieu of fractional shares. If the Company elects to
make a cash payment in lieu of fractional shares, such payment will be based on
the average closing bid price of the New Common Stock on the Nasdaq, or the
exchange or quotation service on which the New Common stock is then listed, for
the five trading days preceding the Effective Date. Such cash payment, if
elected by the Company, would be made upon surrender to the Company's transfer
agent of stock certificates representing a fractional share interest. The
ownership of fractional interests will not give the holder thereof any voting,
dividend or other rights except the right to receive payment therefor as
described herein.
Federal Income Tax Consequences of the Reverse Split
The following is a summary of the material anticipated federal income
tax consequences of the reverse split to stockholders of the Company. This
summary is based on the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), the Treasury Department Regulations (the "Regulations")
issued pursuant thereto, and published rulings and court decisions in effect as
of the date hereof, all of which are subject to change. This summary does not
take into account possible changes in such laws or interpretations, including
amendments to the Code, Regulations, federal statutes or changes in judicial or
administrative rulings, some of which may have retroactive effect. No assurance
can be given that any such changes will not adversely effect the discussion in
this summary.
THIS SUMMARY IS PROVIDED FOR GENERAL INFORMATION ONLY AND DOES NOT
PURPORT TO ADDRESS ALL ASPECTS OF THE POSSIBLE FEDERAL INCOME TAX CONSEQUENCES
OF THE REVERSE SPLIT AND IS NOT INTENDED AS TAX ADVICE TO ANY PERSON. IN
PARTICULAR, AND WITHOUT LIMITING THE FOREGOING, THIS SUMMARY DOES NOT CONSIDER
THE FEDERAL INCOME TAX CONSEQUENCES TO STOCKHOLDERS OF THE COMPANY IN LIGHT OF
THEIR INDIVIDUAL INVESTMENT CIRCUMSTANCES OR TO HOLDERS SUBJECT TO SPECIAL
TREATMENT UNDER THE FEDERAL INCOME TAX LAWS (FOR EXAMPLE, LIFE INSURANCE
COMPANIES, REGULATED INVESTMENT COMPANIES AND FOREIGN TAXPAYERS). IN ADDITION,
THIS SUMMARY DOES NOT ADDRESS ANY CONSEQUENCES OF THE REVERSE SPLIT UNDER ANY
STATE, LOCAL OR FOREIGN TAX LAWS. AS A RESULT, IT IS THE RESPONSIBILITY OF EACH
STOCKHOLDER TO OBTAIN AND RELY ON ADVICE FROM HIS OR HER PERSONAL TAX ADVISOR AS
TO: (I) THE EFFECT ON HIS OR HER PERSONAL TAX SITUATION OF THE REVERSE SPLIT,
INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX LAWS; (II) THE EFFECT OF POSSIBLE FUTURE LEGISLATION OR REGULATIONS;
AND (III) THE REPORTING OF INFORMATION REQUIRED IN CONNECTION WITH THE REVERSE
SPLIT ON HIS OR HER OWN TAX RETURNS. IT WILL BE THE RESPONSIBILITY OF EACH
STOCKHOLDER TO PREPARE AND FILE ALL APPROPRIATE FEDERAL, STATE AND LOCAL TAX
RETURNS.
-20-
<PAGE>
No ruling from the Internal Revenue Service ("Service") or opinion of
counsel will be obtained regarding the federal income tax consequences to the
stockholders of the Company as a result of the reverse split. Accordingly, each
stockholder is encouraged to consult his or her tax advisor regarding the
specific tax consequences of the proposed transaction to such stockholder,
including the application and effect of state, local and foreign income and
other tax laws.
The Company believes that the reverse split will qualify as a
recapitalization under Section 368(a)(1)(E) of the Code. As a result, no gain or
loss will be recognized by the Company or its stockholders in connection with
the reverse split, except with respect to any cash received in lieu of
fractional shares. The stockholder of the Company who exchanges his or her Old
Common Stock for shares of New Common Stock will recognize no gain or loss for
federal income tax purposes. A stockholder's aggregate tax basis in his or her
shares of New Common Stock received from the Company will be the same as his or
her aggregate tax basis in the Old Common Stock exchanged therefor. The holding
period of the New Common Stock received by such holder will include the period
during which the Old Common Stock surrendered in exchange therefor was held,
provided that all such Common Stock was held as a capital asset on the date of
the exchange. Each stockholder who will receive cash, if any, in lieu of
fractional shares of New Common Stock will recognize capital gain or loss equal
to the difference between the amount of cash received and the stockholder's tax
basis allocable to such fractional shares.
Vote Required
The approval of the Certificate of Amendment to the Company's Articles
of Incorporation effecting the reverse split requires the affirmative vote of a
majority of the outstanding shares of the Common Stock entitled to vote thereon
at the Meeting. The parties to the Voting Agreement have agreed to vote their
shares of Common Stock for this proposal.
THE BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
AMENDMENT OF THE COMPANY'S ARTICLES OF INCORPORATION
TO EFFECT THE REVERSE STOCK SPLIT.
PROPOSAL 6 -- APPROVAL OF THE APPOINTMENT
OF INDEPENDENT AUDITORS
The Board has appointed, subject to the approval of the stockholders,
the firm of S.W. Hatfield + Associates ("Hatfield + Associates") as independent
public accountants to audit the Company's consolidated financial statements for
the fiscal year ending December 31, 1999. Hatfield + Associates has served as
the Company's independent public accountants since 1996 and audited the books
and records of the Company for its fiscal year ended December 31, 1998. To the
knowledge of management of the Company, neither Hatfield + Associates nor any of
their members has any direct or material indirect financial interest in the
Company, nor any connection with the Company in any capacity other than as
independent public accountants.
Stockholder approval of this appointment is not required; however, as a
matter of good corporate governance, the Board is seeking approval of this
appointment. If the appointment is not approved, the Board must then determine
whether to appoint other auditors prior to the end of the current fiscal year,
and in such case, the opinions of stockholders will be taken into consideration.
-21-
<PAGE>
The following resolution concerning the appointment of independent
auditors will be offered at the Meeting:
RESOLVED, that the appointment by the Board of Directors of
S.W. Hatfield + Associates to audit the consolidated financial
statements and related books, records and accounts of the Company and
its subsidiaries for fiscal year 1999 at a remuneration to be
determined by the Board of Directors of the Company is hereby ratified.
The enclosed Proxy will be voted as specified, but if no specification
is made, it will be voted in favor of the adoption of the resolution of approval
of Hatfield + Associates as the Company's independent public accountants to
audit the Company's financial statements for the fiscal year ending December 31,
1999.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE
FOR THE APPOINTMENT OF S.W. HATFIELD + ASSOCIATES AS THE
COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS TO AUDIT
THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999.
STOCKHOLDER PROPOSALS
If a stockholder wishes to have a proposal considered for inclusion in
the Company's proxy materials for the next annual meeting of stockholders, the
proposal must comply with the proxy rules promulgated by the United States
Securities and Exchange Commission, be stated in writing and be submitted on or
before May 3, 2000. Any proposals should be mailed to the Company at 14160
Dallas Parkway, Suite 950, Dallas, Texas 75240, Attention:
Timothy P. Halter.
OTHER MATTERS
The Board is not aware of any other matters to be brought before the
Meeting. If any other matters, however, are properly brought before the Meeting,
the persons named in the enclosed Proxy will have discretionary authority to
vote all Proxies with respect to such matters in accordance with their best
judgment.
MISCELLANEOUS
All costs incurred in the solicitation of Proxies will be borne by the
Company. In addition to solicitation by mail, the officers and employees of the
Company may solicit Proxies by telephone, telegraph or personally, without
additional compensation. The Company may also make arrangements with brokerage
houses and other custodians, nominees and fiduciaries for the forwarding of
solicitation materials to the beneficial owners of shares of Common Stock held
of record by such persons, and the Company may reimburse such brokerage houses
and other custodians, nominees and fiduciaries for their out-of-pocket expenses
incurred in connection therewith.
The Company has not engaged a proxy solicitor.
Upon the written request of any holder of the Company's Common Stock
entitled to vote at the Annual Meeting of Stockholders, the Company will
furnish, without charge, a copy of the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998, including financial statements
thereto, as filed with the Securities and Exchange Commission. Requests should
be directed to Karts International Incorporated, 14160 Dallas Parkway, Suite
950, Dallas, Texas 75240, (972) 233-0300; Attention: Timothy P. Halter.
By Order of the Board of Directors
Timothy P. Halter
Chairman of the Board
-22-
<PAGE>
EXHIBIT "A"
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
KARTS INTERNATIONAL INCORPORATED ("the Corporation"), a corporation
organized and existing under and by virtue of the Nevada General Corporation
Law, DOES HEREBY CERTIFY:
FIRST: The name of the Corporation is Karts International Incorporated.
SECOND: The Board of Directors of the Corporation adopted a resolution
to amend the Articles of Incorporation as amended. Article FOURTH of the
Articles of Incorporation of the Corporation is hereby amended and restated in
its entirety to read as follows:
"FOURTH. The Corporation shall have authority to issue two
classes of shares to be designated, respectively, "Common Stock" and
"Preferred Stock." The aggregate number of shares of capital stock that
the Corporation will have authority to issue is Forty-Five Million
(45,000,000) shares, Thirty-Five Million (35,000,000) of which will be
shares of Common Stock, having a par value of $.001 per share, and Ten
Million (10,000,000) of which will be shares of Preferred Stock, having
a par value of $.001 per share. Upon the amendment of this Article,
every three (3) issued and outstanding shares of Common Stock $.001 par
value per share ("Old Common Stock"), shall be automatically and
without any action on the part of the stockholders converted into and
reconstituted as one (1) share of Common Stock $.001 par value per
share ("New Common Stock"), subject to the treatment of fractional
interest as described below. Each holder of a certificate or
certificates which immediately prior to the Amendment of the Articles
of Incorporation becoming effective, pursuant to the Nevada General
Corporation Law (the "Effective Date"), represented outstanding shares
of Old Common Stock shall be entitled to receive a certificate for the
number of shares of New Common Stock they own by presenting their old
certificate(s) to the Corporation's transfer agent for cancellation and
exchange.
No scrip or fractional certificates will be issued. In lieu of
fractional shares, the Corporation will issue one additional share of
New Common Stock, or cash if it so elects. If the Corporation elects to
make a cash payment in lieu of fractional shares, such payment will be
based on the average closing price of the New Common Stock on the
Nasdaq market for the five trading days preceding the Effective Date.
Such cash payment if elected by the Corporation, would be made upon
surrender to the Corporations's transfer agent of stock certificates
representing a fractional share interest. The ownership of a fractional
interest will not give the holder thereof any voting, dividend or other
-1-
<PAGE>
rights except the right to receive payment therefor as described
herein.
Preferred Stock may be issued in one or more series as may be
determined from time to time by the Board of Directors. All shares of
any one series of Preferred Stock will be identical except as to the
date of issue and the dates from which dividends on shares of the
series issued on different dates will cumulate, if cumulative.
Authority is hereby expressly granted to the Board of Directors to
authorize the issuance of one or more series of Preferred Stock, and to
fly by resolution or resolutions providing for the issue of each such
series the voting powers, designations, preferences, and relative,
participating, optional, redemption, conversion, exchange or other
special rights, qualifications, limitations or restrictions of such
series, and the number of shares in each series, to the full extent now
or hereafter permitted by law."
THIRD: This certificate of Amendment of Articles of Incorporation shall
be effective as of __________________, 1999.
FOURTH: The number of shares of the Corporation outstanding and
entitled to vote on an amendment to the Articles of Incorporation is
______________; that the said change and amendment have been consented to and
approved by a majority vote of the stockholders holding at least a majority of
each class of stock outstanding and entitled to vote thereon.
KARTS INTERNATIONAL INCORPORATED
--------------------------------
Charles Brister, President
--------------------------------
Timothy M. Halter, Secretary
State of ________________. ss.
ss.
County of ______________. ss.
On _______________________, personally appeared before me, a Notary
Public, Charles Brister and Timothy M. Halter who acknowledged that they
executed the above instrument.
--------------------------------
Notary Public
-2-
<PAGE>
KARTS INTERNATIONAL INCORPORATED
ANNUAL MEETING OF STOCKHOLDERS
AUGUST 31, 1999
The undersigned hereby appoints Timothy P. Halter and Charles Brister
or either of them, with power of substitution, as proxies to vote all stock of
Karts International Incorporated (the "Company") owned by the undersigned at the
Annual Meeting of Stockholders to be held at 14160 Dallas Parkway, Suite 950,
Dallas, Texas 75240, at 2:00 p.m., Central Standard Time on August 31, 1999, and
any adjournment thereof, on the following matters as indicated below and such
other business as may properly come before the meeting.
1. [ ] FOR the election as director of all nominees listed below (except as
marked to the contrary below)
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below:
Charles Brister, Gary C. Evans, Timothy P. Halter,
Joseph R. Mannes and Ronald C. Morgan.
INSTRUCTION: To withhold authority to vote for individual nominees, write their
names in the space provided below.
2. Proposal to ratify the issuance of the 9% Cumulative Convertible Preferred
Stock and approve the issuance of shares of common stock upon conversion
thereof.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Proposal to ratify the $1.5 million convertible term loan and approve the
issuance of shares of common stock upon the conversion of the principal
balance of the loan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Proposal to increase the number of authorized shares of common stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. Proposal to approve an amendment to the Articles of Incorporation to effect a
reverse stock split of the common stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. Proposal to approve the appointment of S.W. Hatfield + Associates as the
Independent Public Accountants of the Company for fiscal 1999, at a
remuneration to be determined by the Board of Directors of the Company.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
7. To transact such other business as may properly come before the meeting or
any adjournments thereof.
THIS PROXY MUST BE DATED AND SIGNED ON THE REVERSE SIDE
<PAGE>
This Proxy is solicited on behalf of the Company's Board of Directors.
This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this Proxy will
be voted FOR all nominees as directors, FOR the proposal to ratify the issuance
of the 9% Cumulative Convertible Preferred Stock and approve the issuance of
shares of common stock upon conversion thereof, FOR the proposal to ratify the
$1.5 million convertible term loan and approve the issuance of shares of common
stock upon the conversion of the principal balance of the loan, FOR the proposal
to increase the number of authorized shares of common stock, FOR the proposal to
approve an amendment to the Articles of Incorporation to effect a reverse stock
split of the common stock, and FOR the proposal to certify the appointment of
S.W. Hatfield + Associates as independent public accountants.
Please sign exactly as your name appears on this Proxy Card. When signing
as attorney, executor, administrator, trustee or guardian, please give full
title as such. If a corporation, please sign in full corporate name by President
or other authorized officer. If a partnership, please sign in partnership name
by authorized person.
DATED: _________________________ , 1999
-----------------------------------------
Signature of Stockholder
-----------------------------------------
Signature if held jointly
PLEASE mark, sign, date and return the Proxy Card promptly using the enclosed
envelope.
