<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Period Ended June 30, 1998
Commission File #0-11321
UNIVERSAL AMERICAN FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
NEW YORK 11-2580136
---------------------- ------------------------
(State of Incorporation) (I.R.S. Employer I.E. No.)
Six International Drive, Suite 190, Rye Brook, NY 10573
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 934-5200
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of each of the Registrant's Common
Stock and Common Stock Warrants as of July 31, 1998 were 7,615,759 and 663,081,
respectively.
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
FORM 10-Q
CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets at June 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the six months
ended June 30, 1998 and June 30, 1997 4
Consolidated Statements of Operations for the three months
ended June 30, 1998 and June 30, 1997 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and June 30,1997 6
Notes to Consolidated Financial Statements 7-13
Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-20
PART II - OTHER INFORMATION 21
Signature 21
2
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
June 30, December 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Investments
Cash and cash equivalents $18,924,346 $ 25,014,019
Fixed maturities available for sale, at fair value (amortized
cost $123,619,385 and $121,119,346, respectively) 126,752,120 123,585,708
Equity securities, at fair value (cost $987,045 and 974,127 945,116
$987,081,respectively)
Policy loans 7,216,387 7,185,014
Property tax liens 70,963 136,713
Mortgage loans 4,873,256 2,562,008
------------ ------------
Total investments 158,811,199 159,428,578
Accrued investment income 3,759,391 3,357,624
Deferred policy acquisition costs 22,058,166 20,832,060
Amounts due from reinsurers 88,689,916 76,576,040
Due and unpaid premiums 667,668 548,271
Deferred income tax asset - 105,413
Goodwill 4,431,590 4,508,596
Present value of future profits 1,605,583 1,281,807
Other assets 8,287,077 5,936,947
------------ ------------
Total assets 288,310,590 272,575,336
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policyholder account balances 155,332,649 145,085,687
Reserves for future policy benefits 39,731,420 38,327,612
Policy and contract claims - life 1,764,271 1,167,213
Policy and contract claims - health 22,982,643 22,592,441
Loan payable 3,150,000 3,500,000
Amounts due to reinsurers 17,917,228 17,769,695
Deferred income tax liability 681,508 -
Deferred revenues 233,067 264,745
Other liabilities 13,459,712 12,743,775
------------ ------------
Total liabilities 255,252,498 241,451,168
------------ ------------
Series C Preferred Stock (Issued and outstanding, 51,680 and 5,168,000 5,168,000
51,680, respectively) ------------ ------------
Redemption accrual on Series C Preferred Stock 466,502 249,790
------------ ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Series B Preferred Stock (Issued and outstanding 400 and 400,
respectively) 4,000,000 4,000,000
Common stock (Authorized, 20,000,000 issued and outstanding
7,488,184 and 7,325,860 respectively) 74,882 73,259
Common stock warrants (Authorized, issued and outstanding 667,381
and 668,481, respectively) - -
Additional paid-in capital 16,396,025 15,992,497
Accumulated other comprehensive income 1,027,739 841,620
Retained earnings 5,924,944 4,799,002
------------ ------------
Total stockholders' equity 27,423,590 25,706,378
------------ ------------
Total liabilities, Series C preferred stock, redemption
accrual on Series C preferred stock and stockholders' equity $288,310,590 $272,575,336
============ ============
</TABLE>
See notes to unaudited consolidated financial statements
3
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
Six Months Ended June 30,
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Total premium and policyholder fees
Gross premium and policyholder fees earned $63,680,168 $48,961,072
Reinsurance premiums assumed 439,996 176,024
Reinsurance premiums ceded (42,808,210) (29,478,447)
----------- -----------
Net premium and policyholder fees earned 21,311,954 19,658,649
Net investment income 5,369,475 5,017,283
Realized gains on investments 216,775 145,455
Fee income 1,215,659 1,291,499
Amortization of deferred revenue 31,678 46,606
----------- -----------
Total revenues 28,145,541 26,159,492
----------- -----------
Benefits, claims and expenses:
Increase in future policy benefits 764,950 29,420
Claims and other benefits 14,522,561 12,530,379
Interest credited to policyholders 3,533,614 3,055,932
Increase in deferred acquisition costs (1,639,628) (1,409,355)
Amortization of present value of future profits 113,418 -
Amortization of goodwill 77,006 55,909
Commissions 13,015,982 9,357,565
Commission and expense allowances on reinsurance ceded (14,590,433) (8,687,518)
Other operating costs and expenses 10,313,746 9,958,272
----------- -----------
Total benefits, claims and other deductions 26,111,216 24,890,604
----------- -----------
Operating income before taxes 2,034,325 1,268,888
Federal income tax expense 691,670 431,423
----------- -----------
Net income 1,342,655 837,465
Redemption accrual on Series C Preferred Stock 216,712 55,200
=========== ===========
Net income applicable to common shareholders
$ 1,125,943 $ 782,265
=========== ===========
Earnings per common share:
Basic $ 0.15 $ 0.11
=========== ===========
Diluted $ 0.10 $ 0.07
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements
4
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
Three Months Ended June 30,
1998 1997
---------- -----------
<S> <C> <C>
Revenues:
Total premium and policyholder fees
Gross premium and policyholder fees earned $32,274,977 $24,366,679
Reinsurance premiums assumed 236,488 86,482
Reinsurance premiums ceded (21,683,792) (14,503,205)
---------- -----------
Net premium and policyholder fees earned 10,827,673 9,949,956
Net investment income 2,661,237 2,519,040
Realized gains on investments 243,338 103,946
Fee income 582,738 678,548
Amortization of deferred revenue 15,839 23,303
---------- -----------
Total revenues 14,330,825 13,274,793
---------- -----------
Benefits, claims and expenses:
Increase (decrease) in future policy benefits 445,075 (89,684)
Claims and other benefits 7,634,077 6,321,982
Interest credited to policyholders 1,790,738 1,511,024
Increase in deferred acquisition costs (1,153,593) (668,007)
Amortization of present value of future profits 56,709 -
Amortization of goodwill 38,503 27,954
Commissions 7,866,154 4,856,806
Commission and expense allowances on reinsurance ceded (8,708,928) (4,319,982)
Other operating costs and expenses 5,102,179 4,925,440
---------- -----------
Total benefits, claims and other deductions 13,070,914 12,565,533
---------- -----------
Operating income before taxes 1,259,911 709,260
Federal income tax expense 450,309 241,410
---------- -----------
Net income 809,602 467,850
Redemption accrual on Series C Preferred Stock 108,356 55,200
---------- -----------
Net income applicable to common shareholders $ 701,246 $ 412,650
========== ===========
Earnings per common share:
Basic $ 0.09 $ 0.06
========== ===========
Diluted $ 0.06 $ 0.04
========== ===========
</TABLE>
See notes to unaudited consolidated financial statements
5
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
Six Months Ended June 30,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,342,655 $ 837,465
Adjustments to reconcile net income to net cash used by
operating activities:
Deferred income taxes 691,670 431,423
Change in reserves for future policy benefits (783,601) (2,160,795)
Change in policy and contract claims (2,152,740) (5,138,311)
Change in deferred policy acquisition costs (1,639,627) (1,409,355)
Change in deferred revenue (31,678) (46,606)
Amortization of present value of future profits 113,418 -
Amortization of goodwill 77,006 55,909
Change in policy loans (31,373) (251,116)
Change in accrued investment income (401,767) (71,510)
Change in reinsurance balances (8,672,653) (1,155,202)
Change in due and unpaid premium (119,397) 1,292,364
Realized gains on investments (216,775) (145,455)
Other, net (1,608,091) 2,851,354
----------- -----------
Net cash used by operating activities (13,432,953) (4,909,835)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of fixed maturities available for sale 13,229,218 20,900,642
Proceeds from redemption of fixed maturities available for sale 2,449,780 4,024,026
Cost of fixed maturities purchased available for sale (17,975,832) (26,652,146)
Change in amounts held in trust by reinsurer (2,303,753) (2,358,963)
Change in amounts held for reinsurer (989,937) (1,754,276)
Proceeds from sale of equity securities 343,102 95,396
Cost of equity securities purchased (356,128) (724,552)
Change in other invested assets 1,186,984 (1,346,182)
Purchase of business, net of cash acquired 1,457,733 -
----------- -----------
Net cash used by investing activities (2,958,833) (7,816,055)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 405,151 170,425
Net proceeds from insurance of Series C Preferred Stock - 3,833,426
Increase (decrease) in policyholder account balances 10,246,962 4,054,132
Principal payment on notes payable (350,000) -
----------- -----------
Net cash provided from financing activities 10,302,113 8,057,983
----------- -----------
Net decrease in cash and cash equivalents (6,089,673) (4,667,907)
Cash and cash equivalents at beginning of period 25,014,019 15,403,450
----------- -----------
Cash and cash equivalents at end of period $18,924,346 $10,735,543
=========== ===========
Supplemental cash flow information:
Cash paid during the period for interest $ 141,094 $ 37,292
=========== ===========
Cash paid during the period for income taxes $ - $ 61,515
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements
6
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles and consolidate the accounts of
Universal American Financial Corp. ("Universal" or the "Parent Company") and its
subsidiaries (collectively the "Company"), American Progressive Life & Health
Insurance Company of New York ("American Progressive"), American Pioneer Life
Insurance Company ("American Pioneer"), American Exchange Life Insurance Company
("American Exchange"), WorldNet Services Corp. ("WorldNet") and Quincy Coverage
Corp.
("Quincy").
The interim financial information herein is unaudited, but in the
opinion of management, includes all adjustments (consisting of normal, recurring
adjustments) necessary to present fairly the financial position and results of
operations for such periods. The results of operations for the three months
ended June 30, 1998 are not necessarily indicative of the results to be expected
for the full year. The consolidated financial statements should be read in
conjunction with the Form 10-K for the year ended December 31, 1997. Certain
reclassifications have been made to prior year's financial statements to conform
with current period classifications.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is required to be adopted
in years beginning after June 15, 1999. Because of the Company's minimal use of
derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial position
of the Company.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("Statement 131"), effective for years
beginning after December 15, 1997. Statement 131 requires that a public company
report financial and descriptive information about its reportable operating
segments pursuant to criteria that differ from current accounting practice.
Operating segments, as defined, are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources and in
assessing performance and will be implemented by the Company starting with
December, 1998 financial statements. The financial information to be reported
includes segment profit and loss, certain revenue and expense items and segment
assets and reconciliations to corresponding amounts in the general purpose
financial statements. Statement 131 also requires information about revenues
from products or services, countries where the company has operations or assets
and major customers. The adoption of Statement 131 will not affect results of
operations or financial position.
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income". Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the requirements
of Statement 130.
7
<PAGE>
The components of comprehensive income, net of related tax, for the
six-month periods ended June 30, 1998 and 1997 are as follows:
For the Six Months
Ended June 30,
---------------------------------
1998 1997
------------- --------------
Net income $1,342,655 $ 837,465
Unrealized gain on securities 186,119 172,803
------------- --------------
Comprehensive income $1,528,774 $1,010,268
============= ==============
The components of comprehensive income, net of related tax, for the
six-month periods ended June 30, 1998 and 1997 are as follows:
For the Three Months
Ended June 30,
--------------------------------------
1998 1997
---------------- -----------------
Net income $809,602 $ 467,850
Unrealized gain on securities 61,887 1,527,438
---------------- -----------------
Comprehensive income $871,489 $1,995,288
================ =================
2. Recent Acquisitions
Dallas General Life Insurance Company
On March 19, 1998, the Company acquired a $12.6 million block of annual
premiums in force of Medicare Supplement business from Dallas General, effective
January 1, 1998. This business was assumed by American Pioneer, with the
approval of the Texas and Florida Departments of Insurance. The Dallas General
block has approximately 10,000 policies in force produced by approximately 400
agents, all in Texas. In addition, the principals of Dallas General have entered
into a contract to continue to produce business for American Pioneer through an
agency relationship. In connection with this acquisition, American Pioneer
entered into a 75% quota share reinsurance agreement with an unaffiliated
reinsurer. For the six months ended June 30, 1998, net premium earned on this
block amounted to $1,704,903.
3. Federal Income Taxes
The Company files a consolidated return for Federal income tax purposes,
in which American Pioneer and American Exchange are not currently permitted to
be included. American Pioneer and American Exchange file a separate consolidated
Federal income tax return.
4. Earnings Per Share
The Company adopted FASB Statement No. 128, "Earnings per Share",
("Statement No. 128") as of December 31, 1997 and restated the prior period
earnings per share ("EPS") amounts. Statement No. 128 replaced primary EPS with
basic EPS. Basic EPS excludes dilution and is computed by dividing income
available to common shareholders, (after deducting the redemption accrual on the
Series C Preferred Stock), by the weighted average number of shares outstanding
for the period. Diluted EPS gives the dilutive effect of the stock options,
8
<PAGE>
warrants and Series B and C Preferred Stock outstanding during the year. A
reconciliation of the numerators and the denominators of the basic and diluted
EPS for the six months ended June 30, 1998 and 1997 is as follows:
<TABLE>
For the Six Months Ended June 30, 1998
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- -------------- -----------
<S> <C> <C> <C>
Net income $1,342,655
Less: Redemption accrual on Series C
Preferred Stock (216,712)
-------------
Basic EPS
Net income applicable to common shareholders 1,125,943 7,442,146 $ 0.15
===========
Effect of Dilutive Securities
Series B Preferred Stock 1,777,777
Series C Preferred Stock 216,712 2,176,000
Non-registered warrants 2,015,760
Registered warrants 667,381
Incentive stock options 293,000
Director stock option 24,000
Treasury stock purchased from proceeds of
options and warrants (1,248,607)
------------- --------------
Diluted EPS
Net income applicable to common
shareholders plus assumed conversions $1,342,655 13,147,457 $ 0.10
============= ============== ===========
</TABLE>
<TABLE>
For the Six Months Ended June 30, 1997
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- -------------- -----------
<S> <C> <C> <C>
Net income $837,465
Less: Redemption accrual on Series C
Preferred Stock (55,200)
-------------
Basic EPS
Net income applicable to common shareholders 782,265 7,284,824 $ 0.11
===========
Effect of Dilutive Securities
Series B Preferred Stock 1,777,777
Series C Preferred Stock 55,200 579,649
Non-registered warrants 2,015,760
Registered warrants 668,481
Incentive stock options 415,000
Director stock option 9,000
Treasury stock purchased from proceeds of
options and warrants (1,445,342)
------------- --------------
Diluted EPS
Net income applicable to common
shareholders plus assumed conversions $837,465 11,305,149 $ 0.07
============= ============== ===========
</TABLE>
9
<PAGE>
A reconciliation of the numerators and the denominators of the basic and
diluted EPS for the three months ended June 30, 1998 and 1997 is as follows:
<TABLE>
For the Three Months Ended June 30, 1998
-----------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------- ----------------- -------------
<S> <C> <C> <C>
Net income $809,602
Less: Redemption accrual on Series C Preferred Stock (108,356)
---------------
Basic EPS
Net income applicable to common shareholders 701,246 7,466,336 $ 0.09
=============
Effect of Dilutive Securities
Series B Preferred Stock 1,777,777
Series C Preferred Stock 108,356 2,176,000
Non-registered warrants 2,015,760
Registered warrants 667,381
Incentive stock options 293,000
Director stock option 24,000
Treasury stock purchased from proceeds of (1,283,717)
options and warrants
--------------- -----------------
Diluted EPS
Net income applicable to common
shareholders plus assumed conversions $809,602 13,136,537 $ 0.06
=============== ================= =============
</TABLE>
<TABLE>
For the Three Months Ended June 30, 1997
-----------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------- ----------------- -------------
<S> <C> <C> <C>
Net income $467,850
Less: Redemption accrual on Series C Preferred Stock (55,200)
---------------
Basic EPS
Net income applicable to common shareholders 412,650 7,287,949 $ 0.06
=============
Effect of Dilutive Securities
Series B Preferred Stock 1,777,777
Series C Preferred Stock 55,200 1,159,298
Non-registered warrants 2,015,760
Registered warrants 668,481
Incentive stock options 415,000
Director stock option 9,000
Treasury stock purchased from proceeds of (1,445,342)
options and warrants
--------------- -----------------
Diluted EPS
Net income applicable to common
shareholders plus assumed conversions $467,850 11,887,923 $ 0.04
=============== ================= =============
</TABLE>
10
<PAGE>
5. Investments
As of June 30, 1998 and December 31, 1997, fixed maturity securities are
classified as investments available for sale and are carried at fair value, with
the unrealized gain or loss, net of tax and other adjustments (deferred policy
acquisition costs), included in stockholders' equity.
<TABLE>
June 30, 1998
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Classification Cost Gains Losses Value
- ---------------------------- ------------------ ------------------- ------------- ---------------
<S> <C> <C> <C> <C>
US Treasury securities
and obligations of
US government $ 10,296,076 $ 275,676 $ (13,415) $ 10,558,337
Corporate debt securities 55,459,257 1,718,929 (151,804) 57,026,382
Mortgage-backed securities 57,864,052 1,720,614 (417,265) 59,167,401
------------------ ------------------- ------------- ---------------
$123,619,385 $3,715,219 $(582,484) $126,752,120
================== =================== ============= ===============
</TABLE>
<TABLE>
December 31, 1997
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Classification Cost Gains Losses Value
- ---------------------------- ------------------ ------------------------------- --------------
<S> <C> <C> <C> <C>
US Treasury securities
and obligations of
US government $10,821,981 $ 224,552 $ (20,088) $ 11,026,445
Corporate debt securities 52,427,251 1,668,511 (261,644) 53,834,118
Mortgage-backed securities 57,870,114 1,506,116 (651,085) 58,725,145
------------------ ------------------ ------------ --------------
$121,119,346 $3,399,179 $(932,817) $123,585,708
================== ================= ============= ==============
</TABLE>
The amortized cost and fair value of fixed maturities at June 30, 1998
by contractual maturity are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
--------------- --------------
Due in 1 year or less $ 4,703,888 $ 4,703,497
Due after 1 year through 5 years 24,159,205 24,672,934
Due after 5 years through 10 years 20,807,993 21,616,979
Due after 10 years 13,269,469 13,644,967
Mortgage-backed securities 60,678,830 62,113,743
--------------- --------------
$123,619,385 $126,752,120
=============== ==============
11
<PAGE>
6. Series C Preferred Stock
The Company has outstanding 51,680 shares (par value $100) of
Series C Preferred Stock. Unless converted or called earlier, the Series C
Preferred Stock will be redeemed on December 31, 2002, at a per share redemption
price (the "Redemption Price") equal to par, increased by a redemption accrual
at the rate of 8% per annum. The redemption accrual is not payable upon any
conversion. No dividends will be paid on the Series C Preferred Stock, unless
dividends are paid on the common stock, in which case the Series C Preferred
Stock will participate as if converted. For the six months ended June 30, 1998
and 1997 $216,712 and $55,200 of redemption accruals was accumulated,
respectively, and cumulatively as of June 30, 1998, $466,502 of redemption
accruals has been accumulated.
7. Stockholders' Equity
Preferred Stock
The Company has 2,000,000 authorized shares of preferred stock to be
issued in series with 52,080 shares issued and outstanding at June 30, 1998 and
December 31, 1997, respectively, of which 400 shares are Series B and 51,680
shares are Series C (see Note 6 for a discussion of Series C Preferred Stock).
Series B Preferred Stock
The Company has 400 shares of Series B Preferred Stock issued and outstanding,
with a par value of $10,000 per share, which are held by Wand/Universal
Investments L.P. I and II ("Wand"). The Series B Preferred Stock is convertible
into Common Stock at $2.25 per share (subject to adjustment) and is entitled to
dividends as if already converted, only when and if dividends are declared on
the Common Stock. The holders of the Series B Preferred Stock may not require
the Company to redeem it unless the Company engages in certain defined
transactions. The Company has the right to require a conversion if it raises
additional equity from the public on pricing terms that meet certain criteria
Common Stock
The par value of common stock is $.01 per share with 20,000,000 shares
authorized for issuance. The shares issued and outstanding at June 30, 1998 and
December 31, 1997 were 7,488,184, and 7,325,860, respectively. During the six
months ended June 30, 1998, the Company issued 162,324 shares of its common
stock for $405,151.
Common Stock Warrants
The Company had 667,381 common stock warrants issued and outstanding at
June 30, 1998 and 668,481 issued and outstanding at December 1997, which are
registered under the Securities Exchange Act of 1934. At June 30, 1998 and
December 31, 1997, the Company had 2,015,760 warrants outstanding which are not
registered under the Securities Exchange Act of 1934. The warrants have no par
value, have an exercise price to purchase common stock on a one to one basis at
$1.00 and expire on December 31, 1999.
8. Intercompany Sale of American Pioneer
When American Pioneer was acquired in 1993, it became a wholly-owned
subsidiary of American Progressive. Pursuant to an agreement, dated June, 1996,
between Universal and American Progressive, Universal was obligated to purchase
all of the outstanding stock of American Pioneer from American Progressive over
12
<PAGE>
a five-year period for a total purchase price of $15,800,000. Under the terms of
the agreement, the purchase was to be implemented in segments with the purchase
price of the shares included in each segment being paid one half in cash and one
half in five-year debentures, The debentures are payable by Universal to
American Progressive with interest at 8.5% per annum..
The first segments of the unstacking were consummated in September and
December of 1997. In the aggregate for 1997, Universal acquired 75% of American
Pioneer from American Progressive for $11,850,000 consisting of $5,925,000 in
cash and $5,925,000 in debentures.
In May 1998, Universal purchased the remaining 25% of American Pioneer
for $3,950,000 consisting of $1,975,000 in cash and $1,975,000 in debentures.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this section is to discuss and analyze the company's
consolidated results of operations, financial condition, and liquidity and
capital resources. This analysis should be read in conjunction with the
consolidated financial statements and related notes, which appear elsewhere in
this report and are also contained in the 1997 Form 10-K.
The Company cautions readers regarding certain forward-looking
statements contained in the following discussion and elsewhere in this report
and in any other oral or written statements, either made by, or on behalf of,
the Company, whether or not in future filings with the Securities and Exchange
Commission ("SEC"). Forward-looking statements are statements not based on
historical information. They relate to future operations, strategies, financial
results or other developments. In particular, statements using verbs such as
"expect," "anticipate," "believe" or similar words generally involve
forward-looking statements. Forward-looking statements include statements that
represent the Company's products, investment spreads or yields, or the earnings
or profitability of the Company's activities.
Forward-looking statements are based upon estimates and assumptions that
are subject to significant business, economic and competitive uncertainties,
many of which are beyond the Company's control and are subject to change. These
uncertainties can affect actual results and could cause actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company. Whether or not actual results differ materially from
forward-looking statements may depend on numerous foreseeable and unforeseeable
events or developments, some of which may be national in scope, such as general
economic conditions and interest rates. Some of these events may be related to
the insurance industry generally, such as pricing competition, regulatory
developments and industry consolidation. Others may relate to Universal
specifically, such as credit, volatility and other risks associated with the
Company's investment portfolio, and other factors. Universal disclaims any
obligation to update forward-looking information.
Liquidity and Capital Resources
Parent Company
In December, 1997, the Company entered into an agreement with Chase
Manhattan Bank for a $3,500,000 five-year, secured term loan and during the six
months ended June 30, 1998, the Company began the repayment of the loan by
making principal payments totaling $350,000. The loan agreement calls for
interest at the London Interbank Offered Rate ("LIBOR") plus 200 basis points.
However, the Company entered into a three-year interest rate swap agreement,
(the "Swap Agreement") with Chase Securities Corp., effective January 1, 1998,
to lock in a fixed rate of 8.19% for a three year period. During the six months
ended June 30, 1998, the Company paid $155,000 in interest for the period
December 4, 1997 to June 30, 1998. The Company believes that the cash flow from
WorldNet will be able to sufficiently service the installment payments required
by the loan agreement.
Insurance Subsidiaries
American Progressive, American Pioneer and American Exchange (the
"Insurance Subsidiaries") are required to maintain minimum amounts of capital
and surplus as determined by statutory accounting. The minimum statutory capital
and surplus requirements of American Progressive, American Pioneer and American
Exchange as of June 30, 1998, for the maintenance of authority to do business,
were $2,500,000, $2,696,000 and $770,000 respectively, but substantially more
than such minimum amounts are needed to support the current level of the
Company's operations. At June 30, 1998 the adjusted statutory capital and
14
<PAGE>
surplus, including asset valuation reserve, of American Progressive, American
Pioneer and American Exchange was $9,785,000, $10,411,000 and $4,236,000
respectively
At June 30, 1998, the investment portfolios of the insurance
subsidiaries included cash and short-term investments totaling $18,147,000, as
well as fixed maturity securities carried at their fair values which amounted to
$126,752,000 and equity securities carried at fair values which amounted to
$974,000, that could be readily converted to cash. The fair value of these
liquid investments totaled more than $145,873,000 and constituted approximately
92% of the insurance subsidiaries' investments at June 30, 1998.
Investments
The Company's investment policy is to balance the portfolio between
long-term and short-term investments so as to achieve investment returns
consistent with the preservation of capital and maintenance of liquidity
adequate to meet the payment of policy benefit and claims. The Company invests
in assets permitted under the insurance laws of the various states in which it
operates; such laws generally prescribe the nature, quality of, and limitations
on, various types of investments that may be made. The Company currently engages
the services of an unaffiliated investment advisor, Asset Allocation and
Management Company, to manage the Company's fixed maturity portfolio, under the
direction and management of the Insurance Subsidiaries and in accordance with
guidelines adopted by their respective Boards of Directors.
The Company has invested in a limited number of non-investment grade
securities that provide higher yields than investment grade securities. As of
June 30, 1998 and December 31, 1997, the Company held unrated or
less-than-investment grade corporate debt securities of approximately $2,120,000
and $2,616,000, respectively. These holdings amounted to 1.3% of total
investments and 0.7% of total assets at June 30, 1998 compared to 1.6% of total
investments and 1.0% of total assets at December 31, 1997.
At June 30, 1998, all of the Company's investments were income producing
and current in interest and principal payments. In addition, the Company has no
investment in any derivative instruments or other hybrid securities that contain
any off balance sheet risk.
Results of Operations
Six Months Ended June 30, 1998
For the six months ended June 30, 1998, the Company earned net income
after Federal income taxes of $1,343,000 ($0.10 per diluted share) compared to
$837,000 ($0.07 per diluted share) in the year ago period. Operating income
before Federal income taxes amounted to $2,034,000 for the six months ended June
30, 1998 compared to $1,269,000 in the year ago period.
Revenues. Total revenues increased approximately $1,986,000 to
approximately $28,146,000 for the six months ended June 30, 1998 compared to
total revenues of approximately $26,160,000 in the year ago period. In the six
months ended June 30, 1998, the Company's gross premium and policyholder fees
earned (including reinsurance premiums assumed) amounted to $64,110,000, a
$14,983,000 increase over the $49,137,000 amount in 1997. This gross premium
increase is primarily related to the Company's acquisitions of the stock of
American Exchange Life Insurance Company in December 1997 and a Medicare
Supplement block of business from Dallas General Life Insurance Company
effective January 1, 1998, which premiums, in total, amounted to $14,822,000. In
addition, the gross premiums on the Company's following currently marketed
programs increased as follows:
15
<PAGE>
<TABLE>
Product Premium Increase 1998 Total
Premium Earned
------------------------------------ ------------------- ------------------
<S> <C> <C>
Senior market accident and health $4,353,000 $9,113,000
Senior market life insurance 497,000 1,528,000
Specialty life insurance 313,000 687,000
Specialty medical 1,501,000 2,862,000
Group life insurance 13,000 1,713,000
------------------- ------------------
Totals $6,677,000 $15,903,000
=================== ==================
</TABLE>
These increases totaled $21,499,000 and were offset by the decrease in
premiums on the products terminated and not currently marketed by the Company as
follows:
<TABLE>
Product Premium Decrease 1998 Total
Premium Earned
------------------------------------ ------------------- -------------------
<S> <C> <C>
First National assumed business $2,674,000 $24,033,000
Non-marketed life insurance 291,000 3,587,000
Non-marketed accident & health 86,000 5,775,000
Group dental insurance 3,465,000 -
------------------- -------------------
Totals $6,516,000 $33,395,000
=================== ===================
</TABLE>
In continuation of its restructuring activity the Company executed an
agreement, with an unaffiliated insurer, to 100% reinsure its group dental block
of business effective September 1, 1997. The Company will continue to perform
the administration on the business for a fee.
While the Company was able to increase its gross premium revenue from
its core products, it continues to reinsure a portion of these risks to
unaffiliated reinsurers. Reinsurance premiums ceded for the six months ended
June 30, 1998 amounted to $42,808,000, a $13,330,000 increase from the 1997
amount of $29,478,000. Details of the changes in reinsurance premiums ceded is
as follows:
<TABLE>
Premium 1998 Total
Product Increase (Decrease) Premium Ceded
------------------------------------ -------------------- ----------------
<S> <C> <C>
Business acquired
American Exchange $ 7,634,000 $ 7,634,000
Dallas General 4,340,000 4,340,000
Senior market accident and health 2,122,000 4,115,000
Senior market life insurance 147,000 753,000
Specialty life insurance 164,000 505,000
Specialty medical 1,317,000 2,554,000
First National assumed business (2,400,000) 19,336,000
Other lines 6,000 3,571,000
-------------------- ----------------
Totals $13,330,000 $42,808,000
==================== ================
</TABLE>
Net investment income of the Company increased $352,000 to $5,369,000
for the six months ended June 30, 1998, compared to $5,017,000 in the year ago
period. This increase is attributable to the increase in invested assets
outstanding during the six month period in 1998 compared to 1997. Realized gains
on investments amounted to $217,000 for the six months ended June 30, 1998
compared to a gain of $145,000 in the year ago period.
16
<PAGE>
Fee income amounted to $1,216,000 for the six months ended June 30,
1998, a decrease of $76,000 from the $1,292,000 amount for the year ago period.
The amortization of deferred revenue amounted to $32,000 for the six months
ended June 30, 1998 compared to $46,000 in the year ago period.
Benefits, Claims and Other Deductions. Total benefits, claims and other
deductions increased approximately $1,221,000 to $26,111,000 for the six months
ended June 30, 1998, compared to $24,890,000 in the year ago period.
Claims and other benefits increased $1,992,000 to $14,522,000 for the
six months ended June 30, 1998 compared to $12,530,000 in the year ago period.
The change in reserves for the six months ended June 30, 1998 amounted to an
increase of $765,000 compared to an increase of $29,000 in the year ago period
generating a variance of $736,000. These increases in claims and change in
reserves are the result of the $1,653,000 increase in net premiums earned for
the six months ended June 30, 1998 discussed above.
Interest credited to policyholders increased $478,000 to $3,534,000,
which increase is the result of more interest sensitive account values in force,
primarily from the sale of the Asset Enhancer product.
The change in deferred acquisition costs increased by $230,000 for the
six months ended June 30, 1998 compared to 1997. The amount of acquisition costs
capitalized increased $693,000 from $3,342,000 in 1997 to $4,035,000 in 1998 and
represents primarily an increase in commissions paid in the generation of new
business. Non-commission expenses deferred increased $362,000 to $1,794,000 in
1998 compared to $1,433,000 in 1997. The overall increase in capitalized costs
is the result of the increase in new premium production in the six months ended
June 30, 1998 compared to the year ago period. The amortization of deferred
acquisition costs increased $463,000 from $1,933,000 in 1997 to $2,396,000 in
1998. This increase is the result of the increase in the asset balance. In the
six months ended June 30, 1998, the Company amortized $77,000 of goodwill
generated in the acquisitions of First National ($56,000) and American Exchange
($21,000). In the six months ended June 30, 1998, the Company amortized $113,000
of present value of future profits generated in the acquisitions of American
Exchange and Dallas General.
Commissions increased $3,658,000 in the six months ended June 30, 1998
to $13,016,000, compared to $9,358,000 in the year ago period. This increase is
the direct result of the $14,983,000 increase in total premium discussed above.
Commissions and expense allowances on reinsurance ceded increased $5,902,000 in
the six months ended June 30, 1998 to $14,590,000, compared to $8,688,000 in the
year ago period. This increase is the direct result of the $13,330,000 increase
in reinsurance premium ceded discussed above.
Other operating costs and expenses increased $356,000 in the six months
ended June 30, 1998 to $10,314,000, compared to $9,958,000 in the year ago
period. The insurance companies' expenses amounted to $8,752,000 for the six
months ended June 30, 1998 compared to $8,573,000 in the year ago period, an
increase of $179,000. This increase is the result of an increase of expenses
incurred in generating new business ($362,000) and the result of expenses
incurred at American Exchange ($407,000), which was not owned by the Company in
the 1997 period. These increases were offset by decreases in expenses incurred
on exited businesses ($141,000) and the decrease in the general overhead
incurred at the insurance companies ($449,000). The non-insurance companies'
expenses increased $176,000 to $1,562,000 for the six months ended June 30,
1998. This increase is the result of additional expenses incurred by the Parent
Company of $292,000, which is primarily the interest expense on the new loan
outstanding and increased activity of the public company operations in 1998
relative to 1997. This increase was offset by a decrease of $116,000 in expenses
incurred at WorldNet Miami.
17
<PAGE>
Results of Operations
Three Months Ended June 30, 1998
For the three months ended June 30, 1998, the Company earned net income
after Federal income taxes of $810,000 ($0.06 per diluted share) compared to
$468,000 ($0.04 per diluted share) in the year ago period. Operating income
before Federal income taxes amounted to $1,260,000 for the three months ended
June 30, 1998 compared to $709,000 in the year ago period.
Revenues. Total revenues increased approximately $1,056,000 to
approximately $14,331,000 for the three months ended June 30, 1998, compared to
total revenues of approximately $13,275,000 in the year ago period. In the three
months ended June 30, 1998, the Company's gross premium and policyholder fees
earned (including reinsurance premiums assumed) amounted to $32,511,000, a
$8,058,000 increase over the $24,453,000 amount in 1997. This gross premium
increase is primarily related to the Company's acquisitions of the stock of
American Exchange Life Insurance Company in December 1997 and a Medicare
Supplement block of business from Dallas General Life Insurance Company
effective January 1, 1998, which premiums, in total, amounted to $7,029,000 for
the three month period ended June 30, 1998. In addition, the gross premiums on
the Company's following currently marketed programs increased as follows:
<TABLE>
1998 Total
Product Premium Increase Premium Earned
------------------------------------ ------------------- ----------------
<S> <C> <C>
Senior market accident and health $2,424,000 $5,229,000
Senior market life insurance 205,000 789,000
Specialty life insurance 125,000 416,000
Specialty medical 1,043,000 1,839,000
Group life insurance 6,000 851,000
------------------- ----------------
Totals $3,803,000 $9,124,000
=================== ================
</TABLE>
These increases totaled $10,832,000 and were offset by the decrease in
premiums on the products terminated and not currently marketed by the Company as
follows:
<TABLE>
1998 Total
Product Premium Decrease Premium Earned
------------------------------------ ------------------- -------------------
<S> <C> <C>
First National assumed business $747,000 $11,716,000
Non-marketed life insurance 253,000 1,719,000
Non-marketed accident & health 17,000 2,923,000
Group dental insurance 1,757,000 -
------------------- -------------------
Totals $2,774,000 $16,358,000
=================== ===================
</TABLE>
In continuation of its restructuring activity the Company executed an
agreement, with an unaffiliated insurer, to 100% reinsure its group dental block
of business effective September 1, 1997.
While the Company was able to increase its gross premium revenue from
its core products, it continues to reinsure a portion of these risks to
unaffiliated reinsurers. Reinsurance premiums ceded for the three months ended
June 30, 1998 amounted to $21,684,000, a $7,181,000 increase from the 1997
amount of $14,503,000. Details of the changes in reinsurance premiums ceded is
as follows:
18
<PAGE>
<TABLE>
Premium 1998 Total
Product Increase (Decrease) Premium Ceded
------------------------------------ -------------------- ----------------
<S> <C> <C>
Business acquired
American Exchange $3,737,000 $ 3,737,000
Dallas General 1,917,000 1,917,000
Senior market accident and health 1,229,000 2,416,000
Senior market life insurance 67,000 399,000
Specialty life insurance 72,000 287,000
Specialty medical 916,000 1,634,000
First National assumed business (712,000) 9,409,000
Other lines (45,000) 1,885,000
-------------------- ----------------
Totals $7,181,000 $21,684,000
==================== ================
</TABLE>
Net investment income of the Company increased $142,000 to $2,661,000
for the three months ended June 30, 1998, compared to $2,519,000 in the year ago
period. This increase is attributable to the increase in invested assets
outstanding during the three month period in 1998 compared to 1997. Realized
gains on investments amounted to $243,000 for the three months ended June 30,
1998 compared to a gain of $104,000 in the year ago period.
Fee income amounted to $583,000 for the three months ended June 30,
1998, a decrease of $96,000 over the $679,000 amount for the year ago period.
The amortization of deferred revenue amounted to $16,000 for the three months
ended June 30, 1998 compared to $23,000 in the year ago period.
Benefits, Claims and Other Deductions. Total benefits, claims and other
deductions increased approximately $505,000 to $13,070,000 for the three months
ended June 30, 1998, compared to $12,565,000 in the year ago period.
Claims and other benefits increased $1,312,000 to $7,634,000 for the
three months ended June 30, 1998 compared to $6,322,000 in the year ago period.
The change in reserves for the three months ended June 30, 1998 amounted to an
increase of $445,000 compared to an decrease of $90,000 in the year ago period
generating a variance of $535,000. These increases in claims and change in
reserves are the result of the $878,000 increase in net premiums earned for the
three months ended June 30, 1998 discussed above.
Interest credited to policyholders increased $280,000 to $1,791,000,
which increase is the result of more interest sensitive account values in force,
primarily from the sale of the Asset Enhancer product.
The change in deferred acquisition costs increased by $485,000 for the
three months ended June 30, 1998 compared to 1997. This increase is the result
of the increase in new premium production in the three months ended June 30,
1998 compared to the year ago period. In the three months ended June 30, 1998,
the Company amortized $38,000 of goodwill generated in the acquisitions of First
National ($28,000) and American Exchange ($10,000). In the three months ended
June 30, 1998, the Company amortized $57,000 of present value of future profits
generated in the acquisitions of American Exchange ($45,000) and Dallas General
($11,000).
Commissions increased $3,009,000 in the three months ended June 30, 1998
to $7,866,000, compared to $4,857,000 in the year ago period. This increase is
the direct result of the $8,058,000 increase in total premium discussed above.
Commissions and expense allowances on reinsurance ceded increased $4,389,000 in
the three months ended June 30, 1998 to $8,709,000, compared to $4,320,000 in
the year ago period. This increase is the direct result of the $7,181,000
increase in reinsurance premium ceded discussed above.
19
<PAGE>
Other operating costs and expenses increased $178,000 in the three
months ended June 30, 1998 to $5,102,000, compared to $4,925,000 in the year ago
period. The insurance companies' expenses amounted to $4,217,000 for the three
months ended June 30, 1998 compared to $4,227,000 in the year ago period, a
decrease of $10,000. This decrease is the result of decreases in the general
overhead incurred at the insurance companies ($414,000) offset by an increase of
expenses incurred in generating new business ($404,000). The non-insurance
companies' expenses increased $187,000 to $885,000 for the three months ended
June 30, 1998. This increase is the result of the increase in expenses incurred
by the Parent Company of $216,000, which increase is primarily the interest
expense on the new loan outstanding and increased activity of the public company
operations in 1998 relative to 1997. This increase was offset by a decrease of
$29,000 in expenses incurred at WorldNet Miami.
20
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters of Vote of Security Holders.
The company held its annual meeting of stockholders on May 28, 1998 at which two
matters were voted upon.
1. Election of Directors:
Marvin Barasch, Mark Harmeling and Bertram Harnett were re-elected as
directors to serve until annual meeting of stockholders in the year 2001
and Robert F. Wright was elected as director to serve until the annual
meeting of stockholders in the year 2000. In addition to these elected
directors, the following directors continue to serve as directors of the
Company: Richard Barasch, Harry B. Henshel and Patrick J. McLaughlin
(term expires in 2000); Michael A. Barasch, David F. Bolger, Walter L.
Harris and Richard Veed (terms expire in 1999).
2. Adoption of the 1998 Incentive Compensation Plan. The 1998 Incentive
Compensation Plan as described in the 1998 proxy statement, was approved
at the meeting as follows:
Votes Percent
-------------- ---------
For 7,563,535 67.7%
Against 216,393 1.9%
Abstain 43,304 0.4%
No Vote 3,353,584 30.0%
-------------- ---------
11,176,816 100.0%
============== =========
Item 7. Financial Statements and Exhibits.
3 (a). Restated Certificate of Incorporation, filed with the Secretary of
State of New York on April 29, 1998 is filed herewith as exhibit 1.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSAL AMERICAN FINANCIAL CORP.
By: /S/ Robert A. Waegelein
------------------------
Robert A. Waegelein
Senior Vice President
Chief Financial Officer
Date: August 13, 1998
21
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION OF
UNIVERSAL AMERICAN FINANCIAL CORP.
Under Section 807 of the Business Corporation Law
* * * * * * * * * *
WE, THE UNDERSIGNED, RICHARD A. BARASCH and JOAN FERRARONE, being
respectively the president and secretary of UNIVERSAL AMERICAN FINANCIAL CORP,
hereby certify:
A. The name of the Corporation is:
UNIVERSAL AMERICAN FINANCIAL CORP.
B. The Certificate of Incorporation of said Corporation was filed by the
Department of State on the 31st day of August, 1981, under the name "UNIVERSAL
HOLDING CORP.".
C. The Certificate of Incorporation is amended to:
(1) change the location of the Corporation's office in Article
THIRD; and
(2) change the post office address in Article SIXTH to which the
Secretary of State shall mail a copy of any process against the Corporation
served upon him.
D. The Amendments to Articles THIRD and SIXTH of the Restated
Certificate of Incorporation made hereby and the Restatement of the Certificate
of Incorporation were authorized by the vote of the majority of the Board of
Directors at a duly called meeting at which a quorum was present throughout.
E. The Certificate of Incorporation as heretofore and as hereby amended
is hereby restated as set forth below in full.
FIRST: The name of the Corporation is:
"UNIVERSAL AMERICAN FINANCIAL CORP."
SECOND:The purposes for which it is formed are: To purchase, own, and
hold the stock of other corporations; to direct the operations of other
corporations through the ownership of stock therein; to purchase, subscribe for,
acquire, own, hold, sell, exchange, assign, transfer, create security interests
in, pledge, or otherwise dispose of, shares or voting trust certificates for
1
<PAGE>
shares of the capital stock, or any bonds, notes, securities, or evidences of
indebtedness created by any other corporation or corporations organized under
the laws of this state or any other state or district or country, nation, or
government and also bonds or evidences of indebtedness of the United States or
of any state, district, territory, dependency or country or subdivision or
municipality thereof; to issue in exchange therefor shares of the capital stock,
bonds, notes or other obligations of the Corporation and while the owner
thereof, to exercise all the rights, powers and privileges of ownership,
including the right to vote on any shares of stock or voting trust certificates
so owned; to promote, lend money to, and guarantee the dividends, stocks, bonds,
notes, evidences of indebtedness, contracts, or other obligations of, and
otherwise aid in any manner which shall be lawful, any corporation or
association of which any bonds, stocks, voting trust certificates, or other
securities or evidences of indebtedness shall be held by or for this
Corporation, or in which, or in the welfare of which, this Corporation shall
have any interest, and to do any acts and things permitted by law and designed
to protect, preserve, improve, or enhance the value of any such bonds, stocks,
or other securities or evidences of indebtedness or the property of this
Corporation.
To engage in consultant and advisory work in connection with the
organization, financing, management, operation, and reorganization, of
industrial and commercial enterprises. To manage and to provide management for
and supervise all or part of any and every kind of investment or business
enterprise, and to contract or arrange with any corporation, association,
partnership, or individual for the management, conduct, operation, and
supervision of all kinds of investments and businesses. To advertise, promote,
merchandise, and otherwise purvey the services authorized herein; to negotiate
and contract with respect to furnishing of the same for or on behalf of any
person, firm or corporation, domestic or foreign; to enter into and carry out
agency or joint arrangements with other persons, firms, or corporations engaged
in like or similar activities; and generally to exploit the services and objects
of the Corporation by all lawful means.
The Corporation, in addition to and in furtherance of the corporate
powers above set forth, shall have all of the powers enumerated in Section 202
of the Business Corporation Law, subject to any limitation provided in the
Business Corporation Law or any other statute of the State of New York.
2
<PAGE>
THIRD: The office of the Corporation is to be located in the Village
of Rye Brook, County of Westchester and State of New York.
FOURTH:(a) The total number of shares which the Corporation is to be
authorized to issue is 22,000,000; consisting of 20,000,000 shares of Common
Stock of the par value of $.01 each, and 2,000,000 shares of Preferred Stock of
the par value of $1.00 each.
(b) The Preferred Stock may be issued in series,
and the number,designations, relative rights, preferences and limitations
of shares of eachseries of Preferred Stock, $1.00 par value, shall be
fixed by the Board of Directors.
FIFTH A: DESIGNATIONS, PREFERENCES AND SPECIAL RIGHTS OF SERIES B
PREFERRED STOCK
Designation, Amount and Rank. Five hundred (500) shares of a preferred
stock, $1.00 par value per share, shall constitute a series of such preferred
stock designated as "Series B Convertible Preferred Stock" (the "Series B
Preferred Stock"). With respect to dividend rights, redemption rights and rights
on liquidation, winding up and dissolution, the Series A Preferred Stock shall
rank prior to the Series B Preferred Stock. With respect to dividend rights, the
Series B Preferred Stock shall rank pari passu with the Common Stock and shall
rank prior to the Common Stock and any other class of capital stock or series of
preferred stock hereafter created with respect to redemption rights, rights on
liquidation, winding up and dissolution. The Series B Preferred Stock shall be
issued pursuant to the following additional terms and conditions:
1. Series B Convertible Preferred Stock.
1.1. Definitions.
As used herein, unless the context otherwise requires, the
following terms have the following meanings:
1.1.1. "Additional Shares of Common Stock" means all shares
(including treasury shares) of Common Stock issued or sold (or, pursuant to
Sections 1.7.2 or 1.7.3, deemed to be issued) by the Company after the date
hereof, whether or not subsequently reacquired or retired by the Company other
than (a) the issuance of shares upon conversion of the Series A Preferred Stock;
(b) shares issued upon the exercise of the Currently Outstanding Warrants; (c)
shares to be issued to directors and employees pursuant to Company sponsored
employee benefit and compensation arrangements, but not to exceed 650,000 shares
(subject to equitable adjustment in the event of any combination,
reclassification, stock split, dividend or recapitalization of the Company); and
(d) such additional number of shares, if any, as may become issuable upon the
conversion or exercise of any of the securities referred to in the foregoing
clauses (a) through (d) and by reason of adjustments required pursuant to
anti-dilution provisions applicable to such Series A Preferred Stock as in
effect on the date hereof, but only if and to the extent that such adjustments
are required as the result of the original issuance of such Series B Preferred
Stock.
3
<PAGE>
1.1.2. "Business Day" means any day other than a Saturday or a
Sunday or a day on which commercial banking institutions in the City of New York
are authorized by law or other governmental action to be closed. Any reference
to "days" (unless Business Days are specified) shall mean calendar days.
1.1.3. "Closing", means the date of closing of any
Triggering Event, as contemplated by Section 1.6.2 hereof.
1.1.4. "Common Stock" means the Company's Common Stock, $.0l par
value, such term to include any stock into which such Common Stock shall have
been changed or any stock resulting from any reclassification of such Common
Stock, and all other stock of any class or classes (however designated) of the
Company the holders of which have the right, without limitation as to amount,
either to all or to a share of the balance of current dividends and liquidating
dividends and distributions after the payment of dividends and distributions on
any shares entitled to preference.
1.1.5. "Conversion Price, means $2.25, subject to adjustment
pursuant to Sections 1.7 and 1.9 hereof.
1.1.6. "Convertible Securities" means any evidences of
indebtedness, shares of stock (other than Common Stock) or other securities
directly or indirectly convertible into or exchangeable for Additional Shares of
Common Stock.
1.1.7. "Current Market Price" means on any date specified herein,
the average daily Market Price during the period of the most recent twenty (20)
days, ending on such date, on which the national securities exchanges were open
for trading, except that if no Common Stock is then listed or admitted to
trading on any national securities exchange or quoted in the over-the-counter
market, the Current Market Price shall be the Market Price on such date.
1.1.8. "Currently Outstanding Warrants" means the currently
outstanding Common Stock Purchase Warrants designated on Schedule 1 hereto, for
the purchase of an aggregate of 2,115,760 shares of the Common Stock.
4
<PAGE>
1.1.9. "Market Price" means on any date specified herein, the
amount per share of the Common Stock, equal to (a) the last sale price of such
Common Stock, regular way, on such date or, if no such sale takes place on such
date, the average of the closing bid and asked prices thereof on such date, in
each case as officially reported on the principal national securities exchange
on which such Common Stock is then listed or admitted to trading, or (b) if such
Common Stock is not then listed or admitted to trading on any national
securities exchange but is designated as a national market system security by
the NASD, the last trading price of the Common Stock on such date, or (c) if
there shall have been no trading on such date or if the Common Stock is not so
designated, the average of the closing bid and asked prices of the Common Stock
on such date as shown by the NASD automated quotation system, or (d) if such
Common Stock is not then listed or admitted to trading on any national
securities exchange or quoted in the over-the-counter market, the value as
determined by any firm of independent public accountants of recognized national
standing selected by the Board of Directors of the Company (and approved by the
holders of a majority of the outstanding shares of Series B Preferred Stock) as
of the last day of any month ending within thirty (30) days preceding the date
as of which the determination is to be made.
1.1.10."Options" means rights, options or warrants to subscribe
for, purchase or otherwise acquire either Additional Shares of Common Stock or
Convertible Securities.
1.1.11."Other Securities" means any stock (other than Common
stock) and other securities of the company or any other Person (corporate or
otherwise) which the holders of Preferred Stock at any time shall be entitled to
receive, or shall have received, upon the conversion of Preferred Stock, in lieu
of or in addition to Common Stock, or which at any time shall be issuable or
shall have been issued in exchange for or in replacement of Common Stock or
other Securities.
1.1.12."Person" means a corporation, an association, a
partnership, an organization, a business, an individual, a government or
political subdivision thereof or a governmental agency.
1.1.13."Preferred Stock" means, collectively, the Series A
Preferred Stock and the Series B Preferred Stock.
1.1.14."Securities Act" means the Securities Act of 1933, as
amended.
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1.1.15."Series A Preferred Stock" means the Series A
Convertible Preferred Stock, $1.00 par value, of the Company created
pursuant to a Certificate of Amendment filed April 19, 1991 with the
Secretary of State of the State of New York.
1.1.16."Series B Preferred Stock" means the Series B Convertible
Preferred Stock, $1.00 par value, of the Company created pursuant to a
Certificate of Amendment filed December 21, 1994 with the Secretary of State of
the State of New York.
1.1.17."Special Redemption Date" means any date fixed for
redemption of shares of Series B Preferred Stock pursuant to the provisions of
Section 1.5.2 hereof.
1.1.18."Special Redemption Event" has the meaning set forth in
Section 1.5.4.
1.1.19."Stated Value" per share means with respect to the Series
B Preferred Stock, Ten Thousand Dollars ($10,000).
1.1.20."Triggering Event" means the consummation of a public
offering pursuant to an effective registration statement under the Securities
Act covering the offering and sale of shares of Common Stock (i) in which the
aggregate proceeds to the Company exceed $8,000,000 and (ii) in which the price
per share at which the Common Stock is initially offered to the public equals or
exceeds $2.25 per share (which amount shall be equitably adjusted to take into
account any changes in capitalization of the Company occurring after August 1,
1994).
1.1.21."Unpaid Dividends" means all dividends with respect to the
Series B Preferred Stock which have been declared but which have not been paid
in cash.
1.2. Dividends.
1.2.1. The holder of each issued and outstanding share of Series
B Preferred Stock shall be entitled to receive pari passu with holders of shares
of Common Stock any dividends or other distributions (including, without
limitation, any distribution of other Securities or property or options by way
of dividend, spinoff, reclassification, recapitalization or similar corporate
rearrangement) that are declared on the Common Stock by the Board of Directors
of the Company, assuming for purposes of this Section 1.2.1 that the Series B
Preferred Stock had been converted into Common Stock immediately prior to the
record date for such Common Stock dividend.
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1.3. Rights on Liquidation, Dissolution or Winding-Up.
1.3.1. In the event of any liquidation, dissolution or
winding-up of the Company (including, without limitation, a liquidation or
reorganization under Chapter 7 or 11 of Title 11 of the United States Code, as
amended), the holders of shares of the Series A Preferred Stock and Series B
Preferred Stock then issued and outstanding shall be entitled to be paid out
of the assets of the Company available for distribution to its stockholders,
before any payment shall be made to the holders of Common Stock or of shares
of any other class or series of stock of the Company. If, upon any
liquidation, dissolution or winding-up of the Company (including, without
limitation, a liquidation or reorganization under Chapter 7 or 11 of Title 11
of the United States Code, as amended), the assets of the Company available
for distribution to its stockholders shall be insufficient (a "Liquidation
Insufficiency") to pay the holders of shares of the Series A Preferred Stock
and the Series B Preferred Stock the full amounts to which they shall
respectively be entitled, the holders of shares of the Series A Preferred
Stock shall be entitled to receive all the assets of the Company until such
holders have received the full amounts to which they are entitled pursuant to
ARTICLE FIFTH of the Certificate of Incorporation. Thereafter the holders of
the Series B Preferred Stock shall be entitled to receive pro rata the
remaining assets of the Company. If there is no Liquidation Insufficiency and
payment shall have been made to the holders of shares of the Series A
Preferred Stock of the full amount to which they shall be entitled, then the
holders of shares of the Series B Preferred Stock shall be entitled to receive
the greater of (a) an amount equal to the Stated Value per share, plus an
amount equal to any Unpaid Dividends to and including the date of Distribution
with respect to such shares, and (b) the amount which would be distributed on
the shares of Common Stock into which the Series B Preferred Stock is
convertible at the date of the liquidation, dissolution or winding up of the
Company (including, without limitation, a liquidation or reorganization under
Chapter 7 or 11 of Title 11 of the United States Code, as amended).
1.4. Voting Power.
1.4.1. Except as otherwise expressly provided herein or as
required by law, (i) each holder of Series B Preferred Stock shall be entitled
to vote on all matters as to which stockholders of the Company are entitled to
vote, and (ii) each holder of Series B Preferred Stock shall be entitled to cast
a number of votes equal to the greatest number of whole shares of Common Stock
into which such holder's shares of Series B Preferred Stock could be converted,
pursuant to the provisions of Section 1.6 hereof, at the record date for the
determination of stockholders entitled to vote on such matter or, if no such
record date is established, at the date such vote is taken or any written
consent of stockholders is solicited. Except as otherwise expressly provided
herein or as required by law, the holders of shares of Series B Preferred Stock
and Common Stock shall be entitled to vote together as a class with respect to
all matters as to which stockholders of the Company are entitled to vote.
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1.4.2. The holders of Series B Preferred Stock shall have the
right, voting separately as a class, to elect one (1) director to the Board of
Directors of the Company, which, so long as any shares of Series B Preferred
Stock remain outstanding, shall be composed of no more than ten (10) directors.
1.4.3. At any meeting held for the purpose of electing directors
at which the holders of Series B Preferred Stock shall have the right to elect
directors as provided herein, the presence in person or by proxy of the holders
of twenty-five percent (25%) of the then outstanding shares of Series B
Preferred Stock shall be required and shall be sufficient to constitute a quorum
of such class for the election of directors by such class. In the absence of a
quorum of the holders of Series B Preferred Stock entitled to vote for the
election of directors, a majority of the holders present in person or by proxy
of such class shall have the power to adjourn the meeting for the election of
directors which the holders of such class are entitled to elect, from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
1.4.4. Unless the vote of the holders of a greater number of
shares of this Series B Preferred Stock shall then be required by law, the
consent of the holders of at least 66-2/3% of all of the shares of this Series B
Preferred Stock at the time outstanding, if any, voting together as a separate
class, shall be necessary for authorizing, effecting or validating any of the
following:
(a) the creation, authorization or issue of any shares of any
class or series of stock of the Company, other than the Common Stock, ranking
prior to, or pari passu with, the shares of this Series B Preferred Stock as to
dividends or upon liquidation or otherwise, or the reclassification of any
authorized stock of the Company into any such prior or pari passu shares, or the
creation, authorization or issue of any obligation or security convertible into
or evidencing the right to purchase any such prior or pari passu shares; and
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(b) the amendment, alteration or repeal of any of the provisions
of the Certificate of Incorporation or of any certificate amendatory thereof or
supplemental thereto so as to affect adversely the preferences, rights, powers
or privileges of this Series B Preferred Stock;
1.5. Special Redemption.
1.5.1. Upon the occurrence of a Special Redemption Event (as
hereinafter defined), each holder of Series B Preferred Stock has the right to
require that the Company redeem, to the extent the Company lawfully may do so,
all or a portion of the shares of Series B Preferred Stock held by such holder,
at a redemption price in cash equal to the Stated Value per share (plus all
Unpaid Dividends thereon to the Special Redemption Date).
1.5.2. At least 30 days before the consummation of any Special
Redemption Event (as hereinafter defined), the Company will mail to each holder
of Series B Preferred Stock a notice (the "Special Redemption Event Notice") (i)
stating that a Special Redemption Event is contemplated, (ii) setting forth a
purchase date (the "Special Redemption Date"), which shall be within five days
prior to or concurrently with the consummation of the Special Redemption Event;
(iii) setting forth the Conversion Price in effect with respect to such shares
of Preferred Stock, up to and including the date of consummation of the Special
Redemption Event; and (iv) setting forth the instructions reasonably determined
by the Company, consistent with this Section 1.5 and applicable law, that a
holder must follow in order to require the redemption of his Series B Preferred
Stock.
Any holder of Series B Preferred Stock seeking to require that
the Company redeem any shares will be required to (i) notify the Company
within fifteen days after receipt of the Special Redemption Event Notice
whether it will elect to redeem any shares and (ii) surrender their shares to
the Company prior to the close of business on the third Business Day prior to
consummation of the Special Redemption Date.
1.5.3. Upon the Special Redemption Date, the redemption price of
such shares shall be payable to the order of the person whose name
appears on the certificate or certificates representing such shares as
the owner thereof and each surrendered certificate shall be cancelled.
In case fewer than all the shares of Series B Preferred Stock
represented by any surrendered certificate are to be redeemed, a new
certificate representing the shares of Series B Preferred Stock not
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redeemed shall be issued without cost to the holder thereof. From and
after the date the Company shall irrevocably deposit an amount equal to
the redemption price of the shares of Series B Preferred Stock to be
redeemed in trust for the holders of such shares with a bank having
capital and surplus in excess of $100 million, which bank shall be named
in the redemption notice, all rights of the holders of such Series B
Preferred Stock, except the right to receive such redemption price
without interest upon surrender of their certificate or certificates,
shall cease with respect to such shares, and such shares shall not
thereafter be transferred on the books of the Company or be deemed to be
outstanding for any purpose whatsoever.
1.5.4. "Special Redemption Event" shall mean:
(i) consummation of any merger, reorganization or consolidation
transaction if consummation of such transaction results in another entity or the
stockholders of another entity having acquired voting securities of the Company
sufficient to elect a majority of the Board of Directors of the Company; or
(ii) the acquisition by purchase or otherwise of a controlling
interest in the business or assets of, or the stock or other evidence of
beneficial ownership of, any other Person if consummation of such transaction
results in a transfer of ownership of a majority of the voting securities of the
Company to such other Person or its stockholders; or
(iii) the sale, lease, conveyance, exchange, transfer,
encumbrance or other disposition, in one transaction or a series of related
transactions, of 40% or more of the assets of the Company; or
(iv) the sale, conveyance, exchange, transfer, encumbrance or
other disposition, in one transaction or a series of related transactions, of
40% or more of the outstanding Common Stock of the Company.
1.6. Conversion Rights.
1.6.1. Each holder of the shares of Series B Preferred Stock
shall have the right, at the election of such holder, exercised at any time and
from time to time, to convert, subject to the terms and provisions hereof, all
or any portion of such shares of Series B Preferred Stock into fully paid and
non-assessable shares of Common Stock of the Company or any capital stock or
other securities into which such Common Stock shall have been changed or any
capital stock or other securities resulting from a reclassification thereof.
Such conversion of Series B Preferred Stock to shares of Common Stock shall be
made at the Conversion Price, subject to adjustment from time to time as set
forth herein. Series B Preferred Stock may be converted by the holder thereof
during normal business hours on any Business Day by surrender of the required
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number of shares of Series B Preferred Stock, accompanied by written evidence
(in form reasonably satisfactory to the Company) of the holder's election to
convert such holder's Series B Preferred Stock or portion thereof, to the
Company at its principal executive offices. Payment of the Conversion Price for
the shares of Common Stock specified in such election shall be made by applying
shares of Series B Preferred Stock, valued at the Stated Value per share.
Payment of Unpaid Dividends, if any, applicable to such converted shares of
Series B Preferred Stock shall be made in accordance with Section 1.6.5.
1.6.2. All or part of the outstanding shares of Series B
Preferred Stock shall, at the option of the Company and upon written notice to
the holders thereof given not less than ten (10) days prior to the Closing of a
Triggering Event be converted, by applying shares of Series B Preferred Stock
valued at the Stated Value per share, into shares of Common Stock at the
Conversion Price as of the date and time of the Closing, automatically and
without any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Company or its
transfer agent. Payment of Unpaid Dividends, if any, applicable to such
converted shares of Series B Preferred Stock shall be made in accordance with
Section 1.6.5.
1.6.3. Upon the conversion of Series B Preferred Stock, the
holders of such Series B Preferred Stock shall surrender the certificates
representing such shares at the office of the Company. The Company shall not be
obligated to issue certificates evidencing the shares of Common Stock issuable
upon such conversion (or to pay any Unpaid Dividends in connection with such
conversion) unless certificates evidencing such shares of Series B Preferred
Stock being converted are either delivered to the Company or the holder notifies
the Company that such certificates have been lost, stolen, or destroyed and
delivers to the Company an agreement satisfactory to the Company, with a surety
satisfactory to the Company, to indemnify the Company from any loss incurred by
it in connection therewith.
1.6.4. Each conversion of Series B Preferred Stock shall be
deemed to have been effected immediately prior to the close of business on the
Business Day on which such Series B Preferred Stock shall have been surrendered
to the Company as provided herein (except that if such conversion is in
connection with a Triggering Event, then such conversion shall be deemed to have
been effected concurrently with the Closing of such Triggering Event), and such
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conversion shall be at the Conversion Price in effect at such time. On each such
day that the conversion of shares of Series B Preferred Stock is deemed
effected, the person or persons in whose name or names any certificate or
certificates for shares of Common Stock are issuable upon such conversion shall
be deemed to have become the holder or holders of record thereof.
1.6.5. As promptly as practical after the conversion of shares
of Series B Preferred Stock, in whole or in part, and in any event within five
(5) Business Days thereafter (unless such conversion is in connection with a
Triggering Event, in which event concurrently with such conversion), the
Company at its expense (including the payment by it of any applicable issue,
stamp or other taxes, other than any income taxes and other than any taxes
arising by reason of issuance of shares of Common Stock to any person other
than such holder) will cause to be issued in the name of and delivered to the
holder thereof or as such holder may direct, (i) a certificate or certificates
for the number of shares of Common Stock to which such holder shall be
entitled upon such conversion plus, in lieu of any fractional shares to which
such holder would otherwise be entitled, cash in an amount equal to the same
fraction of the Current Market Price per share of Common Stock and (ii) Unpaid
Dividends, if any, applicable as of the time of conversion to those shares of
Series B Preferred Stock which are converted. Such Unpaid Dividends shall be
paid in cash, without interest. In case fewer than all the shares of Series 3
Preferred Stock represented by any surrendered certificate are converted into
Common Stock, a new certificate representing the shares of Series B Preferred
Stock not converted shall be issued without cost to the holder thereof.
1.7. Anti-Dilution Adjustments. The number of shares of Common
Stock issuable upon any conversion provided for in Section 1.6 shall be
subject to adjustment, from time to time, in accordance with the following
provisions:
1.7.1. Issuance of Additional Shares of Common Stock. In case
the Company at any time or from time to time after the date hereof shall issue
or sell Additional Shares of Common Stock (including Additional Shares of Common
Stock deemed to be issued pursuant to Section 1.7.2 or 1.7.3) without
consideration or for a consideration per share less than the Conversion Price in
effect immediately prior to such issue or sale, then, in each such case, subject
to Section 1.7.7, such Conversion Price shall be reduced, concurrently with such
issue or sale, to a price (calculated to the nearest .001 of a cent) determined
by multiplying such Conversion Price by a fraction
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(a) the numerator of which shall be (i) the number of shares of
Common Stock into which the outstanding Series B Preferred Stock is
convertible immediately prior to such issue or sale plus (ii) the number
of shares of Common Stock which the aggregate consideration received by
the Company for the total number of such Additional Shares of Common
Stock so issued or sold would purchase at such Conversion Price, and
(b) the denominator of which shall be (i) the number of shares of
Common Stock into which the outstanding Series B Preferred Stock is
convertible immediately prior to such issue or sale plus (ii) the number
of Additional Shares so issued or sold immediately after such issue or
sale,
provided that, for the purposes of this Section 1.7.1,(x) immediately after
any Additional Shares of Common Stock are deemed to have been issued pursuant
to Section 1.7.2 or 1.7.3, such Additional Shares shall be deemed to be
outstanding and (y) treasury shares shall not be deemed to be outstanding.
This Section 1.7.1 shall not apply to dividends pursuant to Section 1.2.1 that
are payable in Additional Shares of Common Stock.
1.7.2. Treatment of Options and Convertible Securities. In case
the Company at any time or from time to time after the date hereof shall
issue, sell, grant or assume, or shall fix a record date for the determination
of holders of any class of securities entitled to receive, any options or
Convertible Securities, then and in each such case, the maximum number of
Additional Shares of Common Stock (as set forth in the instrument relating
thereto, without regard to any provisions contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such options or, in
the case of Convertible Securities and Options therefor, the conversion or
exchange of such Convertible Securities, shall be deemed to be Additional
Shares of Common Stock issued as of the time of such issue, sale, grant or
assumption or, in case such a record date shall have been fixed, as of the
close of business on such record date (or, if the Common Stock trades on an
ex-dividend basis, on the date prior to the commencement of ex-dividend
trading), provided that such Additional Shares of Common Stock shall not be
deemed to have been issued unless the consideration per share (determined
pursuant to Section 1.7.4) of such shares would be less than the Conversion
Price in effect on the date of and immediately prior to such issue, sale,
grant or assumption or immediately prior to the close of business on such
record date (or, if the Common Stock trades on an ex-dividend basis, on the
date prior to the commencement of ex-dividend trading), as the case may be,
and provided, further, that in any such case in which Additional Shares of
Common Stock are deemed to be issued
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(a) no further adjustment of the Conversion Price shall be made
upon the subsequent issue or sale of Convertible Securities or shares of
Common Stock upon the exercise of such options or the conversion or
exchange of such Convertible Securities;
(b) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Company, or decrease in the number of Additional
Shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof (by change of rate or otherwise), the conversion Price computed upon the
original issue, sale, grant or assumption thereof (or upon the occurrence of the
record date, or date prior to the commencement of ex-dividend trading, as the
case may be, with respect thereto), and any subsequent adjustments based
thereon, shall, upon any such increase or decrease becoming effective, be
recomputed to reflect such increase or decrease insofar as it affects such
Options, or the rights of conversion or exchange under such Convertible
Securities, which are outstanding at such time;
(c) upon the expiration (or purchase by the Company and
cancellation or retirement) of any such options which shall not have
been exercised or the expiration of any rights of conversion or exchange
under any such Convertible Securities which shall not have been
exercised (or purchase by the Company and cancellation or retirement of
any such Convertible Securities the rights of conversion or exchange
under which shall not have been exercised), the Conversion Price
computed upon the original issue, sale, grant or assumption (or upon the
occurrence of the record date, or date prior to the commencement of
ex-dividend trading, as the case may be, with respect thereto), and any
subsequent adjustments based thereon, shall, upon such expiration (or
such cancellation or retirement, as the case may be), be recomputed as
if:
(i) in the case of Options for Common Stock or Convertible
Securities, the only Additional Shares of Common Stock issued or sold
were the Additional Shares of Common Stock, if any, actually issued or
sold upon the exercise of such Options or the conversion or exchange of
such Convertible Securities and the consideration received therefor was
the consideration actually received by the Company for the issue, sale,
grant or assumption of all such options, whether or not exercised, plus
the consideration actually received by the Company upon such exercise,
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or for the issue or sale of all such Convertible Securities which were
actually converted or exchanged, plus the additional consideration, if
any, actually received by the Company upon such conversion or exchange,
and
(ii) in the case of Options for Convertible Securities,
only the Convertible Securities, if any, actually issued or sold upon
the exercise of such options were issued at the time of the issue,
sale, grant or assumption of such Options, and the consideration
received by the Company for the Additional Shares of Common Stock
deemed to have then been issued was the consideration actually received
by the Company for the issue, sale, grant or assumption of all such
Options, whether or not exercised, plus the consideration deemed to
have been received by the Company (pursuant to Section 1.7.4) upon the
issue or sale of such Convertible Securities with respect to which such
Options were actually exercised;
(d) no readjustment pursuant to subdivision (b) or (c) above
shall have-the effect of increasing the Conversion Price by an amount in
excess of the amount of the adjustment thereof originally made in
respect of the issue, sale, grant or assumption of such options or
Convertible Securities; and
(e) in the case of any such options which expire by their terms
not more than thirty (30) days after the date of issue, sale, grant or
assumption thereof, no adjustment of the Conversion Price shall be made
until the expiration or exercise of all such Options, whereupon such
adjustment shall be made in the manner provided in subdivision (c)
above.
<PAGE>
1.7.3. Treatment of Stock Dividends, Stock Splits, etc. In case
the Company at any time or from time to time after the date hereof shall declare
or pay any dividend on the Common Stock payable in Common Stock, or shall effect
a subdivision of the outstanding shares of Common Stock into a greater number of
shares of Common Stock (by reclassification or otherwise than by payment of a
dividend in Common Stock), then, and in each such case, Additional Shares of
Common Stock shall be deemed to have been issued (a) in the case of any such
dividend, immediately after the close of business on the record date for the
determination of holders of any class of securities entitled to receive such
dividend, or (b) in the case of any such subdivision, at the close of business
on the date immediately prior to the day upon which such corporate action
becomes effective.
1.7.4. Computation of Consideration. For the purposes of this
Section 1.7,
(a)the consideration for the issue or sale of any Additional Shares of
Common Stock shall, irrespective of the accounting treatment of such
consideration,
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(i) insofar as it consists of cash, be computed at the net
amount of cash received by the Company, without deducting any
expenses paid or incurred by the Company or any commissions or
compensation paid or concessions or discounts allowed to
underwriters, dealers or others performing similar services in
connection with such issue or sale,
(ii) insofar as it consists of property (including
securities) other than cash, be computed at the fair value
thereof at the time of such issue or sale, as determined in good
faith by the Board of Directors of the Company (subject to
confirmation by a firm of independent certified public
accountants of recognized national standing approved by the
holders of a majority of the Series B Preferred Stock), and
(iii) in case Additional Shares of Common Stock are issued
or sold together with other stock or securities or other assets
of the Company for a consideration which covers both, be the
portion of such consideration so received, computed as provided
in clauses (i) and (ii) above, allocable to such Additional
Shares of Common Stock, all as determined in good faith by the
Board of Directors of the Company (subject to confirmation by a
firm of independent certified public accountants of recognized
national standing approved by the holders of a majority of the
Series B Preferred Stock);
(b)Additional Shares of Common Stock deemed to have been
issued pursuant to Section 1.7.2, relating to Options and Convertible
Securities, shall be deemed to have been issued for a consideration per
share determined by dividing
(i) the total amount, if any, received and
receivable by the Company as consideration for the issue, sale,
grant or assumption of the options or Convertible Securities in
question, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a
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subsequent adjustment of such consideration to protect against
dilution) payable to the Company upon the exercise in full of
such Options or the conversion or exchange of such Convertible
Securities or, in the case of Options for Convertible Securities,
the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities, in each
case computing such consideration as provided in the foregoing
subdivision (a),
by
(ii) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such
number to protect against dilution) issuable upon the exercise of
such options or the conversion or exchange of such Convertible
Securities; and
(c) Additional Shares of Common Stock deemed to have been issued
pursuant to Section 1.7.3, relating to stock dividends, stock splits,
etc., shall be deemed to have been issued for no consideration.
1.7.5. Adjustments for Combinations, etc. In case the outstanding
shares of Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the Conversion Price
in effect immediately prior to such combination or consolidation shall,
concurrently with the effectiveness of such combination or consolidation, be
proportionately increased.
1.7.6. Dilution in Case of Other Securities. In case any Other
Securities shall be issued or sold or shall become subject to issue or sale upon
the conversion or exchange of any stock (or other Securities) of the Company (or
any issuer of other Securities or any other Person referred to in Section 1.8)
or to subscription, purchase or other acquisition pursuant to any options issued
or granted by the Company (or any such other issuer or Person) for a
consideration such as to dilute, on a basis consistent with the standards
established in the other provisions of this Section 1.7, the conversion rights
granted to holders of Series B Preferred Stock, then, and in each such case, the
computations, adjustments and readjustments provided for in this Section 1.7
with respect to the Conversion Price shall be made as nearly as possible in the
manner so provided and applied to determine the amount of other Securities from
time to time receivable upon the conversion of the shares of Series B Preferred
Stock, so as to protect the holders of the Series B Preferred Stock against the
effect of such dilution.
1.7.7. Minimum Adjustment of Conversion Price. If the amount of
any adjustment of the Conversion Price required pursuant to this Section 1.7
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would be less than five percent (5%) of the Conversion Price in effect at the
time such adjustment is otherwise so required to be made, such amount shall be
carried forward and adjustment with respect thereto made at the time of and
together with any subsequent adjustment which, together with such amount and any
other amount or amounts so carried forward, shall aggregate at least five
percent (5%) of such Conversion Price. Notwithstanding the foregoing, the
Conversion Price shall be adjusted at the time of, and be effective with respect
to, any conversion or redemption of any shares of Series B Preferred Stock.
1.8. Consolidation, Merger, etc.
1.8.1. Adjustments for Consolidation, Merger, Sale of Assets,
Reorganization, etc. In case the Company after the date hereof (a) shall
consolidate with or merge into any other Person and shall not be the continuing
or surviving corporation of such consolidation or merger, or (b) shall permit
any other Person to consolidate with or merge into the Company and the Company
shall be the continuing or surviving Person but, in connection with such
consolidation or merger, the Common Stock or Other Securities shall be changed
into or exchanged for stock or other securities of any Other Person or cash or
any other property, or (c) shall transfer 40% or more of its properties or
assets to any other Person in a single transaction or a related series of
transactions, or (d) shall effect a capital reorganization or reclassification
of the Common Stock or Other Securities (other than a capital reorganization or
reclassification resulting in the issue of Additional Shares of Common Stock for
which adjustment in the Conversion Price is provided in subsection 1.7.1), then,
and in the case of each such transaction (excluding any such transaction which
constitutes a Triggering Event and in connection with which the Company requires
conversion of the Series B Preferred Stock), proper provision shall be made so
that, upon the basis and the terms and in the manner provided herein, the
holders of shares of Series B Preferred Stock, upon the conversion thereof at
any time after the consummation of such transaction, shall be entitled to
receive (at the aggregate Conversion Price in effect at the time of such
consummation for all Common Stock or other Securities issuable upon such
exercise immediately prior to such consummation), in lieu of the Common Stock or
Other Securities issuable upon such exercise prior to such consummation, the
highest amount of securities, cash or other property to which such holder would
actually have been entitled as a stockholder upon such consummation if such
holder had exercised the conversion rights pertaining to the Series B Preferred
Stock immediately prior thereto.
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1.8.2. Assumption of Obligations. Notwithstanding anything to the
contrary herein provided, the Company will not effect any of the transactions
described in subsections (a) through (d) of Section 1.8.1 (excluding any such
transaction which constitutes a Triggering Event and in connection with which
the Company requires conversion of the Series B Preferred Stock) unless, prior
to the consummation thereof, each Person (other than the Company) which may be
required to deliver any stock, securities, cash or property upon the conversion
of shares of Series B Preferred Stock as provided herein shall assume, by
written instrument delivered to, and reasonably satisfactory to, the holders of
the Series B Preferred Stock (a) the obligations of the Company with respect to
the Series B Preferred Stock (and if the Company shall survive the consummation
of such transaction, such assumption shall be in addition to, and shall not
release the Company from, any continuing obligations of the Company with respect
to the Series B Preferred Stock), and (b) the obligation to deliver to such
holder such shares of stock, securities, cash or property as, in accordance with
the foregoing provisions of this Section 1.8, such holder may be entitled to
receive, and such Person shall have similarly delivered to such holders of
Series B Preferred Stock an opinion of counsel for such Person, which counsel
shall be reasonably satisfactory to such holders, stating that the rights and
privileges of the Series B Preferred Stock shall thereafter continue in full
force and effect and the terms thereof (including, without limitation, all of
the provisions of this Section 1.8) shall be applicable to the stock,
securities, cash or property which such Person may be required to deliver upon
any conversion of shares of Series B Preferred Stock or the exercise of any
rights pursuant hereto.
1.9. Other Dilutive Events. In case any event shall occur as to
which the provisions of Section 1.7 or Section 1.8 are not strictly applicable
but the failure to make any adjustment would not fairly protect the conversion
rights pertaining to shares of Series B Preferred Stock in accordance with the
essential intent and principles of such sections, then, in each such case, the
Company shall appoint a firm of independent certified public accountants of
recognized national standing (such firm to be subject to the approval of the
holders of a majority of the outstanding Series B Preferred Stock), which shall
give their opinion regarding the adjustment, if any, on a basis consistent with
the essential intent and principles established in Sections 1.7 and 1.8,
necessary to preserve, without dilution, the conversion rights of the Series B
Preferred Stock. Upon receipt of such opinion, the Company will promptly mail a
copy thereof to each holder of Series B Preferred Stock and shall make the
adjustments described therein.
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1.10. No Dilution or Impairment. The Company will not, by
amendment of its certificate of incorporation or by-laws or through any
consolidation, merger, reorganization, transfer of assets, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of the Series B Preferred Stock,
but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such action as may be necessary or appropriate in order
to protect the rights of the holders of shares of Series B Preferred Stock
against dilution or other impairment. Without limiting the generality of the
foregoing, the Company (a) will not permit the par value of any shares of stock
receivable upon the conversion of Series B Preferred Stock to exceed the amount
payable therefor upon such exercise, (b) will take all such action as may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and non-assessable shares of stock on the conversion of the shares of
Series B Preferred Stock from time to time outstanding, and (c) will not take
any action which results in any adjustment of the Conversion Price if the total
number of shares of Common Stock (or Other Securities) issuable after the action
upon the conversion of all of the outstanding shares of Series B Preferred Stock
would exceed the total number of shares of Common Stock (or Other Securities)
then authorized by the Company's certificate of incorporation and available for
the purpose of issue upon such exercise.
1.11. Accountants' Report as to Adjustments. In each case of any
adjustment or readjustment in the shares of Common Stock (or Other Securities)
issuable upon the conversion of shares of Series B Preferred Stock, the
Company at its expense will promptly compute such adjustment or readjustment
in accordance with the terms hereof and, if requested by the holders of 20% of
the outstanding shares of Series B Preferred Stock, cause independent
certified public accountants of recognized national standing (such firm to be
subject to the approval of the holders of a majority of the outstanding Series
B Preferred Stock) selected by the Company to verify such computation and
prepare a report setting forth such adjustment or readjustment and showing in
reasonable detail the method of calculation thereof and the facts upon which
such adjustment or readjustment is based, including a statement of (a) the
consideration received or to be received by the Company for any Additional
Shares of Common Stock issued or sold or deemed to have been issued, (b) the
number of shares of Common Stock outstanding or deemed to be outstanding, and
(c) the Conversion Price in effect immediately prior to such issue or sale and
as adjusted and readjusted (if required by Section 1.7) on account thereof.
The Company will forthwith mail a copy of each such report to each holder of
shares of Series B Preferred Stock and will, upon the written request at any
time of any holder of shares of Series B Preferred Stock, furnish to such
holder a like report setting forth the Conversion Price at the time in effect
and showing in reasonable detail how it was calculated. The Company will also
keep copies of all such reports at its principal office and will cause the
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same to be available for inspection at such office during normal business
hours by any holder of Series B Preferred Stock or any prospective purchaser
of Series B Preferred Stock designated by the holder thereof.
1.12. Notices of Corporate Action. In the event of
(a) any taking by the Company of a record of the holders of any
class of securities for the purpose of determining the holders thereof
who are entitled to receive any dividend or other distribution, or any
right to subscribe for, purchase or otherwise acquire any shares of
stock of any class or any other securities or property, or to receive
any other right, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the
Company or any consolidation or merger involving the Company and any
other Person or any transfer, in a single transaction or a related
series of transactions, of 40% or more of the assets of the Company to
any other Person or any sale or transfer, in a single transaction or a
related series of transactions, by the Company of Common Stock
amounting to 40% or more of the then outstanding Common Stock of the
Company, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company, the Company will mail to each holder of
shares of Series B Preferred stock a notice specifying (i) the date or
expected date on which any such record is to be taken for the purpose
of such dividend, distribution or right, and the amount and character
of such dividend, distribution or right, and (ii) the date or expected
date on which any such reorganization, reclassification,
recapitalization, consolidation, merger, transfer, dissolution,
liquidation or winding-up is to take place and the time, if any such
time is to be fixed, as of which the holders of record of Common Stock
(or other Securities) shall be entitled to exchange their shares of
Common Stock (or Other Securities) for the securities or other property
deliverable upon such reorganization, reclassification,
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recapitalization, consolidation, merger, transfer, dissolution,
liquidation or winding-up. Except for notices relating to mandatory
conversion in connection with a Triggering Event or to a Special
Redemption Event, such notices shall be mailed at least twenty (20)
Business Days prior to the date of the action therein specified.
1.13. Retirement of Converted or Redeemed Shares. No share or
shares of Series B Preferred Stock acquired by the Company by reason of
redemption, purchase, conversion or otherwise shall be re-issued and all such
shares shall be cancelled, retired and eliminated from the shares which the
Company shall be authorized to issue. The Company may from time to time take
such appropriate corporate action as may be necessary to reduce the authorized
number of shares of Series B Preferred Stock accordingly.
FIFTH-B: DESIGNATIONS, PREFERENCES AND SPECIAL RIGHTS OF
SERIES C PREFERRED STOCK.
Designation, Amount and Rank. One Hundred Thousand (100,000)
shares of a preferred stock, $1.00 par value per share, shall constitute a
series of such preferred stock designated as "Series C Convertible Preferred
Stock" (the "Series C Preferred Stock"). The Series C Preferred Stock will be
issued as one of two sub-series of preferred stock: Series C-1 Voting Preferred
Stock (the "Series C-1 Preferred Stock") and Series C-2 Non-Voting Preferred
Stock (the "Series C-2 Preferred Stock"), the number of shares of each such
series to be determined by resolution of the Board of Directors of the Company.
The respective rights and preferences of the Series C Preferred Stock, with
respect to dividend rights, redemption rights and rights on liquidation, winding
up and dissolution, shall be as set forth herein. The Series C Preferred Stock
shall be issued pursuant to the following additional terms and conditions:
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1. Series C Convertible Preferred Stock
1.1 Definitions. As used herein, unless the context otherwise
requires, the following terms have the following meanings:
1.1.1. "Additional Shares of Common Stock" means all
shares (including treasury shares) of Common Stock issued or sold (or,
pursuant to Sections 1.7.2 or 1.7.3, deemed to be issued) by the Company after
January 8, 1997, whether or not subsequently reacquired or retired by the
Company other than (i) the issuance of shares upon conversion of the Series B
Preferred Stock; (ii) shares issued upon the exercise of the Common Stock
Purchase Warrants outstanding on January 8, 1997; (iii) shares to be issued to
directors, employees, agents and others, pursuant to the Company's Incentive
Stock Option Plan for Employees, Stock Option Plan for Directors and Stock
Option Plan for Agents and Others, as in effect on January 8, 1997; and (iv)
such additional number of shares, if any, as may become issuable upon the
conversion or exercise of any of the securities referred to in the foregoing
clauses (i) through (iii) pursuant to the terms of the instruments governing
such securities as in effect on April 7, 1997.
1.1.2. "Adjusted Stated Value" shall mean the Stated Value,
increased at the rate of 8% per annum from the date of original issuance of each
share of Series C Preferred Stock, accruing daily, compounded annually. The date
on which the Company initially issues any share of Series C Preferred Stock will
be deemed to be its "date of issuance" regardless of the number of times
transfer of such share of Series C Preferred Stock is made on the stock records
maintained by or for the Company and regardless of the number of certificates
which may be issued to evidence such share of Series C Preferred Stock.
1.1.3. "Affiliate" as applied to any Person means any other
Person directly or indirectly controlling, controlled by, or under common
control with, that Person. The term "control" (including, with correlative
meanings, the terms "controlling," "controlled by" and "under common control
with"), as applied to any Person, means the possession, directly or indirectly,
of the power to vote 10% or more of the voting stock (or in the case of a Person
which is not a corporation, 10% or more of the ownership interest, beneficial or
otherwise) of such Person or otherwise to direct or cause the direction of the
management and policies of that Person, whether through the ownership of voting
stock or other ownership interest, by contract or otherwise. All of the
Company's executive officers, 10% stockholders, directors, Subsidiaries, joint
ventures and partners shall be deemed to be Affiliates of the Company for
purposes of this Agreement.
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1.1.4. "Business Day" means any day other than a Saturday or
a Sunday or a day on which commercial banking institutions in the City of New
York are authorized by law or other governmental action to be closed. Any
reference to "days" (unless Business Days are specified) shall mean calendar
days.
1.1.5. "Call Price" means the following price per share plus
eight percent (8%) accrued on the Stated Value thereof from the original date of
issuance of such Series C Preferred Stock through the applicable Redemption
Date, compounded annually.
--------------------------- --------------
Redemption Price
Date
--------------------------- --------------
Prior to or on December
31, 2000 $150
After December 31, 2000 $175
1.1.6. "Common Stock" means the Company's Common Stock, $.01
par value, such term to include any stock into which such Common Stock shall
have been changed or any stock resulting from any reclassification of such
Common Stock, and all other stock of any class or classes (however designated)
of the Company the holders of which have the right, without limitation as to
amount, either to all or to a share of the balance of current dividends and
liquidating dividends and distributions after the payment of dividends and
distributions on any shares entitled to preference.
1.1.7. "Conversion Event" shall mean (a) any public
offering, or public sale of securities of the Company (including a public
offering registered under the Securities Act of 1933 and a public sale pursuant
to Rule 144 of the Securities and Exchange Commission or any similar rule then
in force), (b) any sale of securities of the Company to a person or group of
persons (within the meaning of the Securities Exchange Act of 1934, as amended
(the "1934 Act")) if, after such sale, such person or group of persons in the
aggregate would own or control securities which possess in the aggregate the
ordinary voting power to elect a majority of the Company's directors (provided
that such sale has been approved by the Company's Board of Directors or
committee thereof, (c) any sale of securities of the Company to a person or
group of persons (within the meaning of the 1934 Act) if, after such sale, such
person or group of persons in the aggregate would own or control securities of
the Company (excluding any Series C-2 Preferred Stock being converted and
disposed of in connection with such Conversion Event) which possess in the
aggregate the ordinary voting power to elect a majority of the Company's
directors, (d) any sale of securities of the Company to a person or group of
persons (within the meaning of the 1934 Act) if, after such sale, such person or
group of persons would not, in the aggregate, own, control or have the right to
acquire more than two percent (2%) of the outstanding securities of any class of
voting securities of the Company and (e) a merger, consolidation or similar
transaction involving the Company if, after such transaction, a person or group
of persons (within the meaning of the 1934 Act) in the aggregate would own or
control securities which possess in the aggregate the ordinary voting power to
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elect a majority of the surviving corporation's directors (provided that the
transaction has been approved by the Company's Board of Directors or a committee
thereof).
1.1.8. "Conversion Price" means $2.375, subject to
adjustment from time to time pursuant to Section 1.7.
1.1.9. "Convertible Securities" means any evidences of
indebtedness, shares of stock (other than Common Stock) or other securities
directly or indirectly convertible into or exchangeable for Additional Shares of
Common Stock.
1.1.10. "Indebtedness" shall mean at a particular time,
without duplication, (i) indebtedness for borrowed money or for the deferred
purchase price of property or services in respect of which any Person is liable,
contingently or otherwise, as obligor or otherwise (other than trade payables
and other current liabilities incurred in the ordinary course of business) or
any commitment by which any Person assures a creditor against loss, including
contingent reimbursement obligations with respect to letters of credit, (ii)
indebtedness guaranteed in any manner by any Person, including guarantees in the
form of an agreement to repurchase or reimburse, (iii) obligations under
capitalized leases in respect of which obligations any Person is liable,
contingently or otherwise, as obligor, guarantor or otherwise, or in respect of
which obligations any Person assures a creditor against loss and (iv) any
unsatisfied obligation of any Person for "withdrawal liability" to a
"multiemployer plan" as such terms are defined under the Employee Retirement
Income Security Act of 1974, as amended.
1.1.11. "Junior Securities" means any of the Company's
equity securities other than the Series C Preferred Stock (including the Series
B Preferred Stock and the Common Stock) whether now outstanding or hereafter
issued.
1.1.12. "Liquidation" means liquidation, dissolution or
winding-up (including, without limitation, a liquidation or reorganization under
Chapter 7 or 11 of Title 11 of the United States Code, as amended).
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1.1.13. "Options" means rights, options or warrants to
subscribe for, purchase or otherwise acquire either Additional Shares of Common
Stock or Convertible Securities.
1.1.14. "Organic Change" means any capital reorganization,
reclassification, consolidation, merger, lease, or sale of all or substantially
all of the Company's assets to another Person which is effected in such a way
that holders of Common Stock are entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in
exchange for shares of Common Stock.
1.1.15. "Other Securities" means any stock (other than
Common Stock) and other securities of the Company or any other Person (corporate
or otherwise) which the holders of Series B Preferred Stock at any time shall be
entitled to receive, or shall have received, upon the conversion of Series B
Preferred Stock, in lieu of or in addition to Common Stock, or which at any time
shall be issuable or shall have been issued in exchange for or in replacement of
Common Stock or Other Securities.
1.1.16. "Person" means an individual, a partnership, a
corporation, a limited liability company, an association, a joint stock company,
a trust, a joint venture, an unincorporated organization or a governmental
entity or any department, agency or political subdivision thereof.
1.1.17. "Regulated Stockholder" means any Series C Preferred
Stockholder that is subject to the provisions of Regulation Y of the Board of
Governors of the Federal Reserve System, 12 C.F.R. Part 225 (or any successor to
such Regulation).
1.1.18. "Regulatory Problem" means any set of facts or
circumstances wherein it has been asserted by any governmental regulatory agency
(or a Regulated Stockholder reasonably believes that there is a risk of such
assertion) that such Regulated Stockholder is not entitled to acquire, own, hold
or control, or exercise any significant right (including the right to vote) with
respect to any securities of the Company or any subsidiary of the Company.
1.1.19. "Restricted Stock" means, with respect to any
Regulated Stockholder, any outstanding shares of stock ever held of record by
such Regulated Stockholder or its Affiliates, excluding treasury shares;
provided, however, that any such shares shall cease to be Restricted Stock with
respect to such Regulated Stockholder when such shares are transferred in a
transaction which is a Conversion Event or when such shares are acquired by the
Company or any subsidiary of the Company; and provided, further, that the
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Company shall have no responsibility for determining whether any outstanding
shares of stock constitute Restricted Stock with respect to a particular
Regulated Stockholder, but shall instead be entitled to receive, and rely
exclusively upon, a written notice provided by such Regulated Stockholder
designating such shares as Restricted Stock.
1.1.20. "Series B Preferred Stock" means the Series B
Convertible Preferred Stock, $1.00 par value, of the Company created pursuant to
a Certificate of Amendment filed December 21, 1994 with the Secretary of State
of the State of New York.
1.1.21. "Stated Value" per share means, with respect to the
Series C Preferred Stock, One Hundred Dollars ($100) per share, as adjusted for
any stock splits, stock combinations, stock dividends or reclassifications
affecting the Series C Preferred Stock after the date of filing of this
Certificate of Amendment.
1.1.22. "Subsidiary" means any corporation of which the
shares of stock having a majority of the general voting power in electing the
board of directors are, at the time as of which any determination is being made,
owned by the Company either directly or indirectly through Subsidiaries.
1.1.23. "Triggering Amount" means the following amount in
any 60-day period ending in the applicable calendar year:
Triggering Calendar
Amount Year
---------- -----------
$3.45 1999
$4.25 2000
$5.15 2001
in each case as adjusted for stock splits, stock combinations, stock dividends
or reclassifications affecting the Common Stock after the date of filing of this
Certificate of Amendment. If the sixty (60) day period includes portions in two
calendar years, the Triggering Amount applicable shall be the average of the
figures shown above for the two years, weighted to reflect in number the days in
each year included such sixty (60) day period.
1.1.24. "Triggering Bid Price" means that the average of the
high and low bid price reported on (i) the principal national securities
exchange on which the Common Stock is then listed or admitted to trading, or
(ii) if not so listed or admitted, the NASD automated quotation system, on those
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days on which a bid price was so reported during each period of sixty (60)
consecutive calendar days between January 1, 1999 and December 31, 2001.
1.1.25. "Triggering Event" means the consummation of a
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offering and sale of shares of
Common Stock or of securities convertible into Common Stock (i) in which the
aggregate proceeds to the Company exceed $10,000,000 and (ii) in which the price
per share at which the Common Stock is initially offered to the public equals or
exceeds $3.45 per share or the other securities are initially offered to the
public with a conversion price of $3.45 or more per share (in each case as
adjusted for stock splits, stock combinations, stock dividends or
reclassifications affecting the Common Stock after April 7, 1997).
1.2. Dividends.
The Company shall not, without the prior written
consent of the holders of a majority of the shares of Series C Preferred Stock
then outstanding, pay or declare any dividend or distribution on any Junior
Securities (other than on Common Stock, and on Series B Preferred Stock to the
extent of participation in dividends declared on the Common Stock). In the event
that the Company declares a dividend or distribution on the Common Stock, the
holders of the Series C Preferred Stock and the holders of the Series B
Preferred Stock and the Common Stock shall share pro rata (based, in the case of
holders of Series C and Series B Preferred Stock, on the number of shares of
Common Stock which each holder of Series C and Series B Preferred Stock would be
entitled to receive upon conversion of its Series C and Series B Preferred Stock
into Common Stock, respectively) in such dividend or distribution; provided,
that if the dividend consists of voting securities or options, warrants, or
rights to acquire such voting securities, or securities convertible into or
exchangeable for such voting securities (the "Voting Securities") of the
Company, the Company shall make available to each holder of Series C-2 Preferred
Stock, at such holder's request, dividends consisting of non-voting securities
or options, warrants or rights to acquire such non-voting securities, or
securities convertible into or exchangeable for such non-voting securities of
the Company which are otherwise identical to the Voting Securities and which are
convertible into or exchangeable for such Voting Securities.
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1.3. Rights on Liquidation.
In the event of any Liquidation, the holders of shares of the
Series C Preferred Stock then issued and outstanding shall be entitled to be
paid the amount specified below out of the assets of the Company available for
distribution to its stockholders, pari-passu with the holders of the Series B
Preferred Stock and before any payment shall be made to the holders of any other
Junior Securities. If, upon any Liquidation of the Company, the assets of the
Company available for distribution to its stockholders (the "Available Assets")
shall be insufficient (a "Liquidation Insufficiency") to pay the holders of
shares of the Series B Preferred Stock and Series C Preferred Stock the full
amounts to which they shall respectively be entitled, the holders of the Series
B Preferred Stock and Series C Preferred Stock shall be entitled to receive the
Available Assets as follows:
(i) the holders of Series C Preferred Stock shall be
entitled to receive (pro rata based on the number of
shares of Series C Preferred Stock held by them) an
amount equal to the Available Assets times the quotient
derived by dividing (x) the amount of the Available
Assets the holders of Series C Preferred Stock would be
entitled to upon Liquidation if there had been no
Liquidation Insufficiency by (y) the total amount of the
Available Assets the holders of Series B Preferred Stock
and Series C Preferred Stock would be entitled to upon
Liquidation if there had been no Liquidation
Insufficiency; and
(ii) the holders of Series B Preferred Stock shall be
entitled to receive (pro rata based on the number of
shares of Series B Preferred Stock held by them) an
amount equal to the Available Assets times the quotient
derived by dividing (x) the amount of the Available
Assets the holders of Series B Preferred Stock would be
entitled to upon Liquidation if there had been no
Liquidation Insufficiency by (y) the total amount of the
Available Assets the holders of Series B Preferred Stock
and Series C Preferred Stock would be entitled to upon
Liquidation if there had been no Liquidation
Insufficiency; and
if there is no Liquidation Insufficiency, then the holders of shares of the
Series C Preferred Stock shall be entitled to receive the greater of (a) an
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amount equal to the Adjusted Stated Value per share, calculated to and including
the date of Distribution with respect to such shares of Series C Preferred
Stock, or (b) the amount which would be distributed in such liquidation on the
shares of Common Stock into which the Series C Preferred Stock is convertible at
the date of the Liquidation of the Company, had such Series C Preferred Stock
been converted.
1.4. Voting Power.
1.4.1. Series C-1 Preferred Stock.
(a) In General. Except as otherwise expressly
provided herein or as required by law,
(i) the holders of shares of Series C-1 Preferred Stock
and Common Stock shall vote together as a single class
with respect to all matters as to which stockholders of
the Company are entitled to vote; provided, however, the
holders of the Series C-1 Preferred Stock shall not be
entitled to vote with respect to the election of
directors to the Board of Directors of the Company except
with respect to the election of the Series C Director as
set forth in Section 1.4.1(b);
(ii) each holder of Series C-1 Preferred Stock shall be
entitled to cast a number of votes equal to the greatest
number of whole shares of Common Stock into which such
holder's shares of Series C-1 Preferred Stock could be
converted, pursuant to the provisions of Section 1.6
hereof, at the record date for the determination of
stockholders entitled to vote on such matter or, if no
such record date is established, at the date such vote is
taken or any written consent of stockholders is first
solicited.
(b) Election of Directors.
As long as at least 20% of the shares of Series C
Preferred Stock originally issued are outstanding, the
holders of Series C-1 Preferred Stock shall have the
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right, voting separately as a class, unless waived in
writing by the holders of a majority of the outstanding
Series C-1 Preferred Stock, and to the exclusion of all
other classes of the Company's stock, to elect, remove and
replace (including the filling of a vacancy) one (1)
director to the Board of Directors of the Company (the
"Series C Director"), which, so long as the Series C-1
Preferred Stock has the right to elect a director, shall
be composed of no more than twelve (12) directors. Any and
all committees of the Board of Directors of the Company
shall have as a member the Series C Director, unless no
such director is willing or able to so serve. The special
right of the holders of Series C-1 Preferred Stock to
elect and remove the Series C Director contained in this
Section 1.4.1(b) may be exercised either at a special
meeting of the holders of Series C-1 Preferred Stock
called as provided below, at any annual or special meeting
of the stockholders of the Company, or by written consent
of the holders of Series C-1 Preferred Stock in lieu of a
meeting. At any time when the holders of Series C-1
Preferred Stock have the special rights set forth in this
Section 1.4.1(b), the secretary of the Company shall, upon
the written request of the holders of record of shares of
Series C-1 Preferred Stock having at least 10% of the
votes possessed by the then outstanding Series C-1
Preferred Stock, call a special meeting of the holders of
Series C-1 Preferred Stock for the purpose of electing or
removing the Series C Director. Such meeting shall be held
at the earliest practicable date at the Company's
principal office or at such other place designated by the
holders of Series C-1 Preferred Stock having at least 10%
of the votes possessed by the then outstanding Series C-1
Preferred Stock. If such meeting shall not be called by a
proper officer of the Company within ten (10) days after
personal service of said written request upon the
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secretary of the Company or within twenty (20) days after
mailing the same to the secretary of the Company at the
Company's principal office, then the holders of record of
Series C-1 Preferred Stock having at least 10% of the
votes possessed by the then outstanding Series C-1
Preferred Stock may designate in writing one of their
number to call such meeting at the expense of the Company,
and such meeting may be called by such persons so
designated upon the shortest legally permissible notice.
Any holders of Series C-1 Preferred Stock so designated
shall have reasonable access to the stock books of the
Company during regular business hours, at the principal
office of the Company or its transfer agent, for the
purpose of calling a meeting of the stockholders pursuant
to these provisions.
At any stockholders meeting at which the holders of
Series C-1 Preferred Stock shall have the special right to
elect or remove the Series C Director as provided in this
Section 1.4.1(b), the presence, in person or by proxy, of
the holders of record of shares of Series C-1 Preferred
Stock having a majority of the votes possessed by the then
outstanding Series C-1 Preferred Stock shall be required
to constitute a quorum of the Series C-1 Preferred Stock
for such election or removal. At any such meeting or
adjournment thereof, the absence of a separate quorum of
the Series C Preferred Stock shall not prevent the
election of those directors to be elected at such meeting,
other than the Series C Director. In the absence of a
separate quorum of the Series C-1 Preferred Stock, the
holders of record of shares representing a majority of the
voting power present in person or by proxy of the Series
C-1 Preferred Stock shall have power to adjourn the
meeting for the election of the Series C Director without
notice other than announcement at the meeting.
(c) Special Matters.
The Company shall not authorize, effect or validate any
of the following without (i) the consent in writing or by
votes at a meeting of the holders of at least 50% of all
of the shares of the Series C-1 Preferred Stock at the
time outstanding, if any, voting together as a separate
class and to the exclusion of all other classes of the
Company's stock or (ii) complying with the terms of
Section 1.5.3 below:
(i) Ten Percent Redemptions. Subject to Section 1.8
below, directly or indirectly redeem, purchase or
otherwise acquire, or permit any Subsidiary to directly
or indirectly redeem, purchase or otherwise acquire, ten
percent (10%) or more of any of the Company's, or any
Subsidiary's (except wholly-owned Subsidiary's),
outstanding equity securities except as required by the
terms of the Series C Preferred Stock and other than
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pursuant to the terms of the agreements with employees,
officers, directors and consultants of the Company,
pursuant to which the Company may repurchase such shares
upon the occurrence of certain events, in all cases as in
effect on April 7, 1997.
(ii) Security Issuances. Authorize, issue, or enter into
any agreement providing for the issuance (contingent or
otherwise) by the Company or any of its Subsidiaries of,
(x) any notes or debt securities convertible into or
exchangeable for equity securities, issued in connection
with the issuance of equity securities or containing
profit participation features or (y) any equity
securities (or any securities convertible into or
exchangeable for any equity securities), provided,
however, that this Section 1.4.1(c)(ii) shall not prevent
the issuance of Junior Securities, or securities
convertible or exchangeable for Junior Securities.
(iii)Mergers. Merge or consolidate with any Person or
permit any Subsidiary to merge or consolidate with any
Person except for (i) mergers of a wholly-owned
Subsidiary with or into the Company or any other
wholly-owned Subsidiary or (ii) mergers or consolidations
in which the Company or Subsidiary is the surviving
corporation and at the conclusion of which the
shareholders of the Company immediately preceding such
consolidation or merger own greater than fifty percent
(50%) of the equity securities of the surviving
corporation.
(iv) Liquidations. Liquidate, dissolve or effect a
recapitalization or reorganization in any form of
transaction or make an assignment for the benefit of
creditors or admit in writing the Company's or any
Subsidiary's inability to pay its debts generally as they
become due; or petition or apply to any tribunal for the
appointment of a custodian, trustee, receiver or
liquidator of the Company or a Subsidiary, or of any
substantial part of the assets of the Company or a
Subsidiary, or commence any proceeding (other than a
proceeding for the voluntary liquidation and dissolution
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of a Subsidiary) relating to the Company or a Subsidiary
under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or
liquidation law of any jurisdiction.
(v) Charter Amendments. Make or authorize any amendment
to the Company's articles of incorporation or by-laws, or
any Subsidiary's organizational documents, or file any
resolution of the Board of Directors of the Company or
any Subsidiary, with the Secretary of State or any other
incorporation agency in the state in which it is
organized, in each case which would have the effect of
amending, altering or changing the designations, powers,
preferences, rights, privileges or restrictions of the
Series C Preferred Stock or otherwise have an adverse
effect on the Series C Preferred Stock.
(vi) Affiliate Transactions. Enter into, or permit any
Subsidiary to enter into, any transaction with any of its
or any Subsidiary's Affiliates, except for (i) normal
employment arrangements and benefit programs on
reasonable terms, (ii) transactions among Universal
and/or one or more of its wholly-owned Subsidiaries, and
(iii) transactions not less favorable to Universal and
its Subsidiaries, taken as a whole, than would be one
entered into at arm's length with unaffiliated parties.
(vii)Sale of Assets. Sell, lease or otherwise dispose of,
all or substantially all assets of the Company,
directly or through a Subsidiary of the Company, in
any transaction or series of related transactions,
including the sale by the Company of any one of
American Pioneer Life Insurance Company or American
Progressive Life and Health Insurance Company of
New York (together, the "Insurance Company
Subsidiaries"). This Section 1.4.1(c)(vii) shall
not, however, prevent transactions in which
ownership of assets is transferred among Universal
and/or one or more of its wholly-owned
Subsidiaries.
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(viii)Indebtedness. Create, incur, assume or suffer to
exist, or permit the Company and its Subsidiaries,
taken as a whole, to create, incur, assume or
suffer to exist, Indebtedness in an aggregate
amount which result in the sum of (i) the aggregate
principal amount of all Indebtedness outstanding,
plus (ii) the par value of all Preferred Stock
outstanding, to exceed 80% of the statutory book
value (including "Asset Valuation Reserve" and
"Interest Maintenance Reserve") of both Insurance
Company Subsidiaries, except (x) trade debt
incurred in the normal course of business and (y)
Indebtedness, if any, provided for in the Company's
annual budget approved by the Board of Directors.
The taking by the Company of an action described in (i) through
(vi) above without obtaining the consent required by this Section 1.4.1(c) shall
be referred to as a "Call Price Action" and the taking by the Company of an
action described in (vii) and (viii) above without first obtaining the consent
required by this Section 1.4.1(c) shall be referred to as an "Adjusted Stated
Value Action."
1.4.2. Voting Rights of Series C-2 Preferred Stock. Except
as set forth herein or as otherwise required by law, no outstanding share of
Series C-2 Preferred Stock shall be entitled to vote on any matter on which the
stockholders of the Company shall be entitled to vote, and no shares of Series
C-2 Preferred Stock shall be included in determining the number of shares voting
or entitled to vote on any such matters; provided that the holders of Series C-2
Preferred Stock shall have the right to vote as a separate class on any merger
or consolidation of the Corporation with or into another entity or entities, or
any recapitalization or reorganization, in which shares of Series C-2 Preferred
Stock would receive or be exchanged for consideration different on a per share
basis from consideration received with respect to or in exchange for the shares
of Series C-1 Preferred Stock or would otherwise be treated differently from
shares of Series C-1 Preferred Stock in connection with such transaction, except
that if the consideration received with respect to, or in exchange for, Series
C-1 includes voting securities, shares of Series C-2 Preferred Stock may,
without such a separate class vote, receive or be exchanged for non-voting
securities which are otherwise identical on a per share basis in amount and form
to the voting securities received with respect to or exchanged for the Series
C-1 Preferred Stock so long as (i) such non-voting securities are convertible
into such voting securities on the same terms as the Series C-2 Preferred Stock
is convertible into voting stock and (ii) all other consideration is equal on a
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per share basis. Notwithstanding the foregoing, holders of shares of Series C-2
Preferred Stock shall be entitled to vote as a separate class on any amendment
to this paragraph (2) of this Section A and on any amendment, repeal or
modification of any provision of this Certificate of Incorporation that
adversely affects the powers, preferences or special rights of holders of the
Series C-2 Preferred Stock.
1.5. Redemption.
1.5.1 Fixed Redemption.
On December 31, 2002 (the "Fixed Redemption Date") all of
the then issued and outstanding Series C Preferred Stock shall be redeemed at a
redemption price (the "Fixed Redemption Price") equal to the Adjusted Stated
Value on December 31, 2002. One-half of the Fixed Redemption Price shall be paid
in cash to the person whose name appears in the records of the Company as the
owner of the shares redeemed, by check mailed to such person's address on such
records on the Fixed Redemption Date, and the other half shall be payable in the
same manner, on the first anniversary of the Fixed Redemption Date.
1.5.2. Call of the Company
The Series C Preferred Stock may be redeemed by the Company,
at its option, upon ninety (90) days prior written notice to the Holders, at the
Call Price then in effect.
Such redemption may be effected under this Section 1.5.2 at
any time after January 1, 2000 and before December 31, 2002. The conversion
right set forth in Section 1.6.1 shall not be affected by the giving of a
redemption notice hereunder until the close of business the Business Day prior
to the date specified in such notice as the proposed effective date of the
redemption.
1.5.3. Non-Compliance Provisions.
If the Company proposes to take any action which constitutes
either a Call Price Action or an Adjusted Stated Value Action without securing
the approval by vote or in writing required by Section 1.4.1(c) (each such
action or breach, an "Event of Non-Compliance") then each of the holders of the
Series C Preferred Stock may require redemption of all or any part of such
holder's Series C Preferred Stock at a redemption price in cash equal to (i) in
the event of a Call Price Action, the Call Price in effect on the Non-Compliance
Redemption Date and (ii) in the event of an Adjusted Stated Value Action, the
Adjusted Stated Value in effect on the Non-Compliance Redemption Date. In
implementation of this Section 1.5.3:
(a) At least 15 days before the consummation of any Event
of Non-Compliance, each holder of Series C Preferred
Stock will receive a notice from the Company (i) stating
that an Event of Non-Compliance is contemplated, (ii)
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setting forth a redemption date (the "Non-Compliance
Redemption Date"), which shall be the date of the Event
of Non-Compliance, (iii) setting forth the Conversion
Price in effect with respect to such shares of Series C
Preferred Stock, up to and including the date of
consummation of the Event of Non-Compliance, and (iv)
stating that during such 15-day period, each shareholder
wishing to require the Company to redeem all or any part
of its Series C Preferred Stock, pursuant to subsection
(b) below, must give the Company written notice of its
intention to require such redemption prior to the
consummation of the Event of Non-Compliance.
(b) Any holder of Series C-1 Preferred Stock that
withheld its consent to the Event of Non-Compliance and
any holder of Series C-2 Preferred Stock that has advised
the Company in writing prior to consummation of an Event
of Non-Compliance of its intention to require the Company
to redeem its shares, may require that the Company redeem
any shares hereunder by surrendering its shares to the
Company on the Non-Compliance Redemption Date or within
thirty (30) days thereafter and will be entitled to
payment therefor within ten (10) days of such surrender
in full satisfaction of such shares.
(c) Any holder of shares of Series C-1 Preferred Stock
that does not tender such shares pursuant to Section
1.5.3(b) above shall be deemed to have consented to the
subject Event of Non-Compliance.
(d) It is an express condition of this Series C Preferred
Stock that this Section 1.5.3 shall constitute the sole
remedy of the Series C Preferred Stockholders with
respect to the Company's failure to obtain the consent
otherwise required by Section 1.4.1(c) above. Without
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limitation, there shall be no right to injunctive or any
other kind of equitable relief, or to any other remedy at
law whatsoever, by virtue of the Company's failure to
obtain the consent otherwise required by Section 1.4.1(c)
above with respect to such Event of Non-Compliance.
1.5.4. Failure to Pay Redemption Price or Installment.
If payment of the Fixed Redemption Price is not made as
provided in Section 1.5.1 and said default is not cured within fifteen (15)
days, the holder of each share of Series C Preferred Stock which was redeemed
shall be entitled to require the Company to issue a promissory note for the
unpaid portion of the Fixed Redemption Price, including any amount which would
otherwise not have been payable until the first anniversary of the Fixed
Redemption Date, which note shall be due one year after the Fixed Redemption
Date (or the first anniversary thereof, whichever is applicable), together with
interest at twenty (20%) percent per annum until paid, subject to pre-payment at
any time, with interest accrued, without penalty. Any such promissory note shall
contain substantially the same terms and conditions of the Series C Preferred
Stock, including negative and affirmative covenants equal to the rights of the
holders of the Series C-1 Preferred Stock set forth in Section 1.4.1(c) and
board observation rights comparable to the rights of the holders of Series C-1
Preferred Stock set forth in Section 1.4.1(b).
<PAGE>
1.5.5. Legal Availablity.
If the funds of the Company legally available for redemption
of Series C Preferred Stock on any Redemption Date are insufficient to redeem
the total number of Series C Preferred Stock to be redeemed on such date, those
funds which are legally available shall be used to redeem the maximum possible
number of Series C Preferred Stock ratably among the holders of the Series C
Preferred Stock to be redeemed. At any time thereafter when additional funds of
the Company are legally available for the redemption of Series C Preferred
Stock, such funds shall immediately be used to redeem the balance of the Series
C Preferred Stock which the Company has become obligated to redeem on any
Redemption Date but which it has not redeemed. In case fewer than the total
number of Series C Preferred Shares represented by any certificate are redeemed,
a new certificate representing the number of unredeemed Series C Preferred Stock
shall be issued to the holder thereof without cost to such holder within three
Business Days after surrender of the certificate representing the redeemed
Series C Preferred Stock. In the event that any Series C Preferred Stock is
redeemed under Section 1.5.1, 1.5.2 or 1.5.3 and the certificates for the Series
C Preferred Stock to be redeemed have not been delivered to the Company, from
and after the date on which the Company makes the entire Fixed Redemption Price
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or Call Price, as the case may be, available or irrevocably deposits an amount
equal to such Fixed Redemption Price or Call Price, as the case may be, for the
shares of Series C Preferred Stock to be redeemed in trust for the holders of
such shares with a bank having capital and surplus in excess of $100 million,
which bank shall be named in the redemption notice, all rights of the holders of
such Series C Preferred Stock, except the right to receive the Fixed Redemption
Price or Call Price, as the case may be (whether in cash or in the form of the
promissory note provided for in Section 1.5.4, above, without interest except as
provided with respect to the promissory note), upon surrender of their
certificate or certificates, shall cease with respect to such shares, and such
shares shall not thereafter be transferred on the books of the Company or be
deemed to be outstanding for any purpose whatsoever.
1.5.6 Other Redemptions or Acquisitons.
Neither the Company nor any Subsidiary shall redeem or
otherwise acquire any share of Series C Preferred Stock, except as expressly
authorized herein or pursuant to a purchase offer made pro rata to all holders
of Series C Preferred Stock on the basis of the number of shares owned by each
such holder.
1.6. Conversion Rights.
1.6.1. At the Option of the Holder.
Each holder of the outstanding shares of Series C Preferred
Stock shall have the right to convert all or any portion of such shares of
Series C Preferred Stock into the number of fully paid and non-assessable shares
of Common Stock computed by multiplying the number of shares of Series C
Preferred Stock to be converted times the Stated Value and dividing the result
by the Conversion Price. Within 15 days of any such conversion of Series C-2
Preferred Stock into Common Stock, such converted shares may be converted back
into the same number of Series C-2 Preferred Shares, provided that such shares
were not voted following the initial conversion of Series C-2 Preferred Stock
into Common Stock. Series C Preferred Stock may be converted by the holder
thereof during normal business hours on any Business Day by surrender of the
required number of shares of Series C Preferred Stock, accompanied by written
evidence (in form reasonably satisfactory to the Company) of the holder's
election to convert such holder's Series C Preferred Stock or portion thereof,
to the Company at its principal executive offices.
1.6.2. At the Option of a Transferee of Series C-2 Preferred
Stock. Subject to Section 1.6.4, below, each outstanding share of Series C-2
Preferred Stock may be converted into one fully paid and nonassessable share of
Series C-1 Preferred Stock by any transferee of such shares of Series C-2
Preferred Stock, provided that each holder of Series C-2 Preferred Stock may
convert such shares into Series C-1 Preferred Stock if such holder reasonably
believes that such converted shares will be transferred within fifteen (15) days
pursuant to a Conversion Event and such holder agrees not to vote any such
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shares of Series C-1 Preferred Stock prior to such Conversion Event and
undertakes to promptly convert such shares back into Series C-2 Preferred Stock
if such shares are not transferred pursuant to a Conversion Event. Series C-2
Preferred Stock may be converted by the transferee during normal business hours
on any Business Day by surrender of the certificate or certificates representing
the Series C-2 Preferred Stock (or, if no stock certificate has yet been issued
to the holder of the Series C-2 Preferred Stock, a written statement that the
holder has not yet received a stock certificate and instructing the Company to
treat such certificate, when and if issued, as if such certificate had been
surrendered by the holder) to the Company at its principal executive offices.
The surrendered certificate or certificates shall be accompanied by written
evidence (in form reasonably satisfactory to the Company) of the transferee's
election to convert its Series C-2 Preferred Stock or portion thereof.
1.6.3 At the Option of the Company.
Upon the occurrence of a Triggering Event, or if the
Triggering Bid Price for any period of sixty (60) consecutive calendar days has
exceeded the Triggering Amount, the Company may require that each of the
outstanding shares of Series C Preferred Stock be converted into Common Stock
computed by multiplying the number of shares of Series C Preferred Stock to be
converted times the Stated Value and dividing the result by the Conversion Price
in effect at the time of such conversion. Such right may be exercised by written
notice to the holders thereof given (i) not less than ten (10) days prior to the
date of closing of a Triggering Event or (ii) within thirty (30) days after the
end of any sixty (60) day period in which the Triggering Bid Price has exceeded
the Triggering Amount, which notice shall specify the record date set for
conversion. Such conversion shall be effected, automatically and without any
further action by the holders of such shares and whether or not the certificates
representing such shares are surrendered to the Company or its transfer agent.
1.6.4. Restricted Stock. Series C-2 Preferred Stock
constituting Restricted Stock with respect to a particular Regulated Stockholder
may not be converted into Common Stock or Series C-1 Preferred Stock to the
extent that immediately prior thereto, or as a result of such conversion, the
number of shares of Common Stock or Series C-1 Preferred Stock which constitute
such Restricted Stock held by all holders thereof would exceed the number of
shares of Common Stock or Series C-1 Preferred Stock which such Regulated
Stockholder reasonably determines it and its Affiliates may own, control or have
the power to vote under any law, regulation, rule or other requirement of any
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governmental authority at the time applicable to such Regulated Stockholder or
its Affiliates. Each Regulated Stockholder may provide for further restrictions
upon the conversion of any shares of Restricted Stock by providing the Company
with signed, written instructions specifying such additional restrictions and
legending such shares as to the existence of such restrictions.
1.6.5. Conversion Procedure.
Upon the conversion of Series C Preferred Stock, the holders
of such Series C Preferred Stock shall surrender the certificates representing
such shares at the office of the Company. The Company shall not be obligated to
issue certificates evidencing the shares of stock issuable upon such conversion
unless certificates evidencing such shares of Series C Preferred Stock being
converted are either delivered to the Company or the holder notifies the Company
that such certificates have been lost, stolen, or destroyed and delivers to the
Company an agreement satisfactory to the Company, with a surety satisfactory to
the Company, to indemnify the Company from any loss incurred by it in connection
therewith.
1.6.6. Time of Conversion.
Each conversion of Series C Preferred Stock pursuant to
Sections 1.6.1 and 1.6.2 shall be deemed to have been effected immediately prior
to the close of business on the Business Day on which such Series C Preferred
Stock shall have been surrendered to the Company as provided herein (except
that, in the case of a conversion subject to Section 1.6.7 below, the conversion
shall be deemed to be effective upon the expiration of the Deferral Period
referred to therein). Each conversion pursuant to Section 1.6.3 shall be deemed
to have been effected as of the record date specified in the notice therefor,
and such conversion shall be at the Conversion Price in effect at such time
(except that, in the case of a conversion subject to Section 1.6.7 below, the
conversion shall be deemed to be effective upon the expiration of the Deferral
Period referred to therein). On each such day that the conversion of shares of
Series C Preferred Stock is deemed effected, the Person or Persons in whose name
or names any certificate or certificates for shares of stock are issuable upon
such conversion shall be deemed to have become the holder or holders of record
thereof.
1.6.7. Notice of Conversion to Regulated Stockholders. The
Company shall not convert or directly or indirectly redeem, purchase or
otherwise acquire any shares of any class of capital stock of the Company or
take any other action affecting the voting rights of such shares, if such action
will increase the percentage of any class of outstanding voting securities owned
or controlled by any Regulated Stockholder (other than any such stockholder
which requested that the Company take such action, or which otherwise waives in
writing its rights under this Section 1.6.7), unless the Company gives written
notice (the "Deferral Notice") of such action to each Regulated Stockholder. The
Company will defer making any such conversion, redemption, purchase or other
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acquisition, or taking any such other action for a period of twenty (20) days
(the "Deferral Period") after giving the Deferral Notice in order to allow each
Regulated Stockholder to determine whether it wishes to convert or take another
action with respect to the stock it owns, controls or has the power to vote, and
if any such Regulated Stockholder then elects to convert any shares of its
stock, it shall notify the Company in writing within ten (10) days of the
issuance of the Deferral Notice, in which case the Company shall (i) promptly
notify from time to time prior to the end of such 20-day period each other
Regulated Stockholder holding shares of each proposed conversion, and (ii)
effect the conversions requested by all Regulated Stockholders in response to
the notices issued pursuant to this Section 1.6.7 at the end of the Deferral
Period. Upon complying with the procedures hereinabove set forth in this Section
1.6.7, the Company may so convert or directly or indirectly redeem, purchase or
otherwise acquire any shares of any other class of capital stock of the Company
or take any other action affecting the voting rights of such shares.
1.6.8. Issuance of Certificate for Common Stock.
As promptly as practical after the conversion of shares of
Series C Preferred Stock, in whole or in part, and in any event within five (5)
Business Days thereafter, the Company at its expense (including the payment by
it of any applicable issue, stamp or other taxes, other than any income taxes
and other than any taxes arising by reason of issuance of shares of stock to any
Person other than such holder) will cause to be issued in the name of and
delivered to the holder thereof or as such holder may direct, a certificate or
certificates for the number of shares of stock to which such holder shall be
entitled upon such conversion; provided, however, that if such conversion is
subject to Section 1.6.7 above, the Company shall not issue such certificate or
certificates until the expiration of the Deferral Period referred to therein. In
case fewer than all the shares of Series C Preferred Stock represented by any
surrendered certificate are converted, a new certificate representing the shares
of Series C Preferred Stock not converted shall be issued without cost to the
holder thereof.
1.6.9. Books of Corporation.
The Company will not close its books against the transfer
of Series C Preferred Stock or of stock issued or issuable upon conversion of
Series C Preferred Stock in any manner which interferes with the timely
conversion of Series C Preferred Stock. The Company shall at all times reserve
and keep available out of its authorized but unissued shares of Common Stock and
Series C-1 Preferred stock, solely for the purpose of issuance upon the
conversion of the Series C Preferred Stock, such number of shares of Common
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Stock issuable upon the conversion of all outstanding Series C Preferred Stock
and such number of shares of Series C-1 Preferred Stock issuable upon the
conversion of all outstanding Series C-2 Preferred Stock. All shares of Common
Stock which are so issuable shall, when issued, be duly and validly issued,
fully paid and nonassessable and free from all taxes, liens and charges. The
Company shall take all such actions as may be necessary to assure that all such
shares of Common Stock and Series C-1 Preferred Stock may be so issued without
violation of any applicable law or governmental regulation or any requirements
of any domestic securities exchange upon which shares of Common Stock and Series
C-1 Preferred Stock may be listed (except for official notice of issuance which
shall be immediately delivered by the Corporation upon each such issuance).
1.7. Anti-Dilution Adjustments.
The number of shares of Common Stock issuable upon any
conversion provided for in Section 1.6 shall be subject to adjustment, from time
to time, in accordance with the following provisions:
1.7.1. Issuance of Additional Shares of Common Stock.
In case the Company at any time or from time to time after
the date hereof shall issue or sell Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to Section 1.7.2
or 1.7.3) without consideration or for a consideration per share less than the
Conversion Price in effect immediately prior to such issue or sale, then, in
each such case, subject to Section 1.7.7, such Conversion Price shall be
reduced, concurrently with such issue or sale, to a price (calculated to the
nearest .001 of a cent) determined by multiplying such Conversion Price by a
fraction
(a) the numerator of which shall be (i) the number of
shares of Common Stock into which the outstanding
Series C Preferred Stock is convertible immediately
prior to such issue or sale plus (ii) the number of
shares of Common Stock which the aggregate
consideration received by the Company for the total
number of such Additional Shares of Common Stock so
issued or sold would purchase at such Conversion
Price, and
(b) the denominator of which shall be (i) the number of
shares of Common Stock into which the outstanding
Series C Preferred Stock is convertible immediately
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prior to such issue or sale plus (ii) the number of
Additional Shares so issued or sold immediately
after such issue or sale,
provided that, for the purposes of this Section 1.7.1, (x) immediately after any
Additional Shares of Common Stock are deemed to have been issued pursuant to
Section 1.7.2 or 1.7.3, such Additional Shares shall be deemed to be outstanding
and (y) treasury shares shall not be deemed to be outstanding.
1.7.2. Treatment of Options and Convertible Securities.
In case the Company at any time or from time to time after
the date hereof shall issue, sell, grant or assume, or shall fix a record date
for the determination of holders of any class of securities entitled to receive,
any Options or Convertible Securities, then and in each such case, the maximum
number of Additional Shares of Common Stock (as set forth in the instrument
relating thereto, without regard to any provisions contained therein for a
subsequent adjustment of such number) issuable upon the exercise of such Options
or, in the case of Convertible Securities and Options therefor, the conversion
or exchange of such Convertible Securities, shall be deemed to be Additional
Shares of Common Stock issued as of the time of such issue, sale, grant or
assumption or, in case such a record date shall have been fixed, as of the close
of business on such record date (or, if the Common Stock trades on an
ex-dividend basis, on the date prior to the commencement of ex-dividend
trading), provided that such Additional Shares of Common Stock shall not be
deemed to have been issued unless the consideration per share (determined
pursuant to Section 1.7.4) of such shares would be less than the Conversion
Price in effect on the date of and immediately prior to such issue, sale, grant
or assumption or immediately prior to the close of business on such record date
(or, if the Common Stock trades on an ex-dividend basis, on the date prior to
the commencement of ex-dividend trading), as the case may be, and provided,
further, that in any such case in which Additional Shares of Common Stock are
deemed to be issued
(a) no further adjustment of the Conversion Price shall
be made upon the subsequent issue or sale of
Convertible Securities or shares of Common Stock
upon the exercise of such Options or the conversion
or exchange of such Convertible Securities;
(b) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for
any increase in the consideration payable to the Company,
or decrease in the number of Additional Shares of Common
Stock issuable, upon the exercise, conversion or exchange
thereof (by change of rate or otherwise), the Conversion
Price computed upon the original issue, sale, grant or
assumption thereof (or upon the occurrence of the record
date, or date prior to the commencement of ex-dividend
trading, as the case may be, with respect thereto), and
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any subsequent adjustments based thereon, shall, upon any
such increase or decrease becoming effective, be
recomputed to reflect such increase or decrease insofar
as it affects such Options, or the rights of conversion
or exchange under such Convertible Securities, which are
outstanding at such time;
(c) upon the expiration (or purchase by the Company and
cancellation or retirement) of any such Options which
shall not have been exercised or the expiration of any
rights of conversion or exchange under any such
Convertible Securities which shall not have been
exercised (or purchase by the Company and cancellation or
retirement of any such Convertible Securities the rights
of conversion or exchange under which shall not have been
exercised), the Conversion Price computed upon the
original issue, sale, grant or assumption (or upon the
occurrence of the record date, or date prior to the
commencement of ex-dividend trading, as the case may be,
with respect thereto), and any subsequent adjustments
based thereon, shall, upon such expiration (or such
cancellation or retirement, as the case may be), be
recomputed as if:
(i) in the case of Options for Common Stock
or Convertible Securities, the only Additional
Shares of Common Stock issued or sold were the
Additional Shares of Common Stock, if any, actually
issued or sold upon the exercise of such Options or
the conversion or exchange of such Convertible
Securities and the consideration received therefor
was the consideration actually received by the
Company for the issue, sale, grant or assumption of
all such options, whether or not exercised, plus
the consideration actually received by the Company
upon such exercise, or for the issue or sale of all
such Convertible Securities which were actually
45
<PAGE>
converted or exchanged, plus the additional
consideration, if any, actually received by the
Company upon such conversion or exchange, and
(ii) in the case of Options for Convertible
Securities, only the Convertible Securities, if
any, actually issued or sold upon the exercise of
such Options were issued at the time of the issue,
sale, grant or assumption of such Options, and the
consideration received by the Company for the
Additional Shares of Common Stock deemed to have
then been issued was the consideration actually
received by the Company for the issue, sale, grant
or assumption of all such Options, whether or not
exercised, plus the consideration deemed to have
been received by the Company (pursuant to Section
1.7.4) upon the issue or sale of such Convertible
Securities with respect to which such Options were
actually exercised;
(d) no readjustment pursuant to subdivision (b) or (c)
above shall have the effect of increasing the
Conversion Price by an amount in excess of the
amount of the adjustment thereof originally made in
respect of the issue, sale, grant or assumption of
such Options or Convertible Securities; and
(e) in the case of any such Options which expire by
their terms not more than thirty (30) days after
the date of issue, sale, grant or assumption
thereof, no adjustment of the Conversion Price
shall be made until the expiration or exercise of
all such Options, whereupon such adjustment shall
be made in the manner provided in subdivision (c)
above.
1.7.3 Treatment of Stock Dividends, Stock Splits, etc.
In case the Company at any time or from time to time after
the date hereof shall declare or pay any dividend on the Common Stock payable in
Common Stock, or shall effect a subdivision of the outstanding shares of Common
46
<PAGE>
Stock into a greater number of shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in Common Stock), then, and in each such
case, Additional Shares of Common Stock shall be deemed to have been issued (a)
in the case of any such dividend, immediately after the close of business on the
record date for the determination of holders of any class of securities entitled
to receive such dividend, or (b) in the case of any such subdivision, at the
close of business on the date immediately prior to the day upon which such
corporate action becomes effective.
1.7.4 Computation of Consideration.
For the purposes of this Section 1.7,
(a) the consideration for the issue or sale of any
Additional Shares of Common Stock shall,
irrespective of the accounting treatment of such
consideration,
(i) insofar as it consists of cash, be
computed at the net amount of cash received by the
Company, without deducting any expenses paid or
incurred by the Company or any commissions or
compensation paid or concessions or discounts
allowed to underwriters, dealers or others
performing similar services in connection with such
issue or sale,
(ii) insofar as it consists of property
(including securities) other than cash, be computed
at the fair value thereof at the time of such issue
or sale, as determined in good faith by the Board
of Directors of the Company (subject to
confirmation by a firm of independent certified
public accountants of recognized national standing
approved by either the holders of a majority of the
Series C Preferred Stock or the Series C Director),
and
(iii) in case Additional Shares of Common
Stock are issued or sold together with other stock
or securities or other assets of the Company for a
consideration which covers both, be the portion of
such consideration so received, computed as
provided in clauses (i) and (ii) above, allocable
to such Additional Shares of Common Stock, all as
determined in good faith by the Board of Directors
of the Company (subject to confirmation by a firm
47
<PAGE>
of independent certified public accountants of
recognized national standing approved by either the
holders of a majority of the Series C Preferred
Stock or the Series C Director);
(b) Additional Shares of Common Stock deemed to have
been issued pursuant to Section 1.7.2, relating to
Options and Convertible Securities, shall be deemed
to have been issued for a consideration per share
determined by dividing
(i) the total amount, if any, received and
receivable by the Company as consideration for the
issue, sale, grant or assumption of the Options or
Convertible Securities in question, plus the
minimum aggregate amount of additional
consideration (as set forth in the instruments
relating thereto, without regard to any provision
contained therein for a subsequent adjustment of
such consideration to protect against dilution)
payable to the Company upon the exercise in full of
such Options or the conversion or exchange of such
Convertible Securities or, in the case of Options
for Convertible Securities, the exercise of such
Options for Convertible Securities and the
conversion or exchange of such Convertible
Securities, in each case computing such
consideration as provided in the foregoing
subdivision (a),
by
(ii) the maximum number of shares of Common
Stock (as set forth in the instruments relating
thereto, without regard to any provision contained
48
<PAGE>
therein for a subsequent adjustment of such number
to protect against dilution) issuable upon the
exercise of such Options or the conversion or
exchange of such Convertible Securities; and
(c) Additional Shares of Common Stock deemed to have
been issued pursuant to Section 1.7.3, relating to
stock dividends, stock splits, etc., shall be
deemed to have been issued for no consideration.
1.7.5. Adjustments for Combinations, etc.
In case the outstanding shares of Common Stock shall be
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares of Common Stock, the Conversion Price in effect immediately prior to
such combination or consolidation shall, concurrently with the effectiveness of
such combination or consolidation, be proportionately increased.
1.7.6. Dilution in case of Other Securities
In case any Other Securities shall be issued or sold or
shall become subject to issue or sale upon the conversion or exchange of any
stock (or Other Securities) of the Company (or any issuer of Other Securities or
any other Person referred to in Section 1.9) or to subscription, purchase or
other acquisition pursuant to any Options issued or granted by the Company (or
any such other issuer or Person) for a consideration such as to dilute, on a
basis consistent with the standards established in the other provisions of this
Section 1.7, the conversion rights granted to holders of Series C Preferred
Stock, then, and in each such case, the computations, adjustments and
readjustments provided for in this Section 1.7 with respect to the Conversion
Price shall be made as nearly as possible in the manner so provided and applied
to determine the amount of Common Stock from time to time receivable upon the
conversion of the shares of Series C Preferred Stock, so as to protect the
holders of the Series C Preferred Stock against the effect of such dilution.
1.7.7. Minimum Adjustment of Conversion Price.
If the amount of any adjustment of the Conversion Price
required pursuant to this Section 1.7 would be less than five percent (5%) of
the Conversion Price in effect at the time such adjustment is otherwise so
required to be made, such adjustment shall not then be made and such amount
shall be carried forward and adjustment with respect thereto made at the time of
and together with any subsequent adjustment which, together with such amount and
any other amount or amounts so carried forward, shall aggregate at least five
49
<PAGE>
percent (5%) of such Conversion Price. Notwithstanding the foregoing, the
Conversion Price shall be adjusted at the time of, and be effective with respect
to, any conversion or redemption of any shares of Series C Preferred Stock.
1.7.8. Reorganization, Reclassification, Consolidation,
Merger or Sale
(a) Company Survives. Upon the consummation of an Organic
Change (other than a transaction in which the Company is
not the surviving entity) the terms of the Series C
Preferred Stock shall be deemed modified, without payment
of any additional consideration therefor, so as to
provide that upon the conversion of shares of Series C
Preferred Stock following the consummation of such
Organic Change, the holder of such shares of Series C
Preferred Stock shall have the right to acquire and
receive (in lieu of or in addition to the shares of
Common Stock acquirable and receivable prior to the
Organic Change) such shares of stock, securities or
assets as such holder would have received if such holder
had converted its shares of Series C Preferred Stock into
Common Stock immediately prior to such Organic Change, in
each case giving effect to any adjustment of the
Conversion Price made after the date of consummation of
the Organic Change. All other terms of the Series C
Preferred Stock shall remain in full force and effect
following such an Organic Change. The provisions of this
Section 1.7.8(a) shall similarly apply to successive
Organic Changes.
(b) Company Does Not Survive. No Organic Change that is a
transaction in which the Company is not the surviving
entity shall become effective unless the surviving entity
shall have issued new securities to the holders of shares
of Series C Preferred Stock, without payment of any
additional consideration therefor, with terms that
provide that upon the conversion of such securities
following the consummation of such Organic Change, the
holder of such securities shall have the right to acquire
and receive (in lieu of or in addition to the shares of
Common Stock acquirable and receivable prior to the
50
<PAGE>
Organic Change) such shares of stock, securities or
assets as such holder would have received if such holder
had converted its shares of Series C Preferred Stock into
Common Stock immediately prior to such Organic Change, in
each case giving effect to any adjustment of the
Conversion Price of such new securities made after the
date of consummation of the Organic Change on an
equivalent basis to the adjustments provided for the
Conversion Price herein. All other terms of the new
securities shall be equivalent to the terms of the Series
C Preferred Stock provided for herein. The provisions of
this Section 1.7.8(b) shall similarly apply to successive
Organic Changes.
1.8. Restrictions on Redemptions, Purchases and Acquisitions.
The Company shall not redeem, purchase, acquire or take any
other action affecting outstanding shares of stock if, after giving effect to
such redemption, purchase, acquisition or other action, a Regulated Stockholder
would own more than 4.99% of any class of voting securities of the Company
(other than any class of voting securities which is (or is made prior to any
such redemption, purchase, acquisition or other action) convertible into a class
of nonvoting securities which are otherwise identical to the voting securities
and convertible into such voting securities on terms reasonably acceptable to
such Regulated Stockholder) or more than 24.99% of the total equity of the
Company or more than 24.99% of the total value of all capital stock and
subordinated debt of the Company (in each case determined by assuming such
Regulated Stockholder (but no other holder) has exercised, converted or
exchanged all of its options, warrants and other convertible or exchangeable
securities). The Company shall not be a party to a merger, consolidation,
recapitalization, reorganization or other transaction pursuant to which a
Regulated Stockholder would be required to take any securities or subordinated
debt which might reasonably be expected to cause such person to have a
Regulatory Problem.
51
<PAGE>
1.9. Notices
(a) Immediately upon any adjustment of the Conversion
Price, the Company will give written notice thereof
to all holders of Series C Preferred Stock.
(b) The Company will give written notice to all holders
of Series C Preferred Stock at least twenty (20)
days prior to the date on which the Company closes
its books or takes a record (1) with respect to any
dividend or distribution upon Common Stock, (2)
with respect to any pro rata subscription offer to
holders of Common Stock or (3) for determining
rights to vote with respect to any Organic Change,
dissolution or liquidation.
(c) The Company will also give written notice to the
holders of Series C Preferred Stock at least twenty
(20) days prior to the date on which any Organic
Change will take place.
(d) All notices which are required or may be given
pursuant to the terms of this Article shall be in
writing and shall be delivered personally (and
receipted for) or by facsimile (provided receipt is
acknowledged in writing), certified mail, return
receipt requested, postage prepaid, or by Federal
Express or other recognized overnight courier, and
any such notice shall be deemed effective when
delivered.
1.10. Other Rights.
1.10.1. Purchase Rights.
If at any time the Company distributes, grants or sells
any Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property to all record holders of any class of Common Stock
(the "Purchase Rights"), then each holder of Series C Preferred Stock will be
entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such holder could have acquired if such holder
had held the number of shares of Common Stock acquirable upon conversion of such
holder's Series C Preferred Stock immediately before the date on which a record
is taken for the grant, issuance or sale of such Purchase Rights, or, if no such
52
<PAGE>
record is taken, the date as of which the record holders of Common Stock are to
be determined for the distribution, issue or sale of such Purchase Rights.
1.10.2. Pre-Emptive Rights.
If the Company authorizes the issuance and sale of any
Additional Shares of Common Stock, other than a sale to the public, the Company
will offer to sell to the holders of Series C Preferred Stock, and each holder
of Series C Preferred Stock may elect to purchase, up to that number of
Additional shares of Common Stock such that following such purchase, the holder
is able to maintain the same percentage ownership (on a fully-diluted basis) of
the outstanding shares of Common Stock of the Company which such holder
possessed by virtue of its ownership of shares of Series C Preferred Stock (or
Common Stock issued upon the conversion thereof) immediately prior to the
issuance and sale of the Additional Shares of Common Stock. Holders of Series C
Preferred Stock will be entitled to purchase the Additional Shares of Common
Stock at the same price and upon the same terms as such shares of Common Stock
are being offered to any other Persons; provided that, if such Persons are to
pay for such Additional Securities in whole or in part with consideration other
than cash, then the Board of Directors shall make a good faith determination of
the fair market value of such non-cash consideration and the holders of the
Series C Preferred Stock will be entitled to pay cash equal to the fair market
value of the non-cash consideration such holders would otherwise pay hereunder
in the purchase of such Additional Shares of Common Stock. Notwithstanding the
foregoing, a holder of Series C Preferred Stock will not be permitted to
exercise its rights under this Section 1.10.2 unless such holder agrees to
purchase all securities offered as a package or unit in the issuance of the
Additional Shares of Common Stock. The Company must give written notice of the
issuance of Additional Shares of Common Stock, which notice shall set forth the
price and other terms of such issuance, to the holders of Series C Preferred
Stock no later than thirty (30) days following the issuance date of the
Additional Shares of Common Stock (the "Issuance Date"). Upon receipt of such
notice, the holders may exercise the right granted by this Section 1.10.2 by
giving written notice to the Company within thirty (30) days following receipt
of the aforesaid notice, which written notice from a holder shall specify the
number of Additional Shares of Common Stock being purchased by such holder, and
be accompanied by a cashier's or certified check in the full amount of the price
for the Additional Shares of Common Stock being purchased. The Company shall
promptly make delivery to such holders of certificates for the Additional Shares
of Common Stock or other securities upon execution of such documents and
instruments as shall govern the issuance of such Additional Shares of Common
Stock or other securities. Notwithstanding the foregoing, if a holder of Series
C Preferred Stock shall exercise its rights under this Section 1.10.2 such
holder shall not be required to pay for the Additional Shares of Common Stock
53
<PAGE>
purchased by it unless and until all other parties have paid for their
Additional Shares of Common Stock. In addition, if a holder of Series C
Preferred Stock shall exercise its rights under this Section 1.10.2 following
the Issuance Date, then such holder shall be deemed to have owned the Additional
Shares of Common Stock purchased by it as of the Issuance Date for the purpose
of any benefits of ownership relating to such Additional Shares of Common Stock,
including the right to receive cash or stock dividends declared or other
distributions, to participate in a merger or reorganization or to reflect any
reclassification of Additional Shares of Common Stock between the Issuance Date
and the date upon which such holder purchases the Additional Shares of Common
Stock.
1.11. Registration of Transfer.
The Company will keep at its principal office or at the
principal office of its transfer agent a register for the registration of the
Series C Preferred Stock. Upon the surrender of any certificate representing
Series C Preferred Stock at such place, the Company will, at the request of the
record holder of such certificate, execute and deliver (at the Company's
expense) a new certificate or certificates in exchange therefor representing in
the aggregate the number of shares of Series C Preferred Stock represented by
the surrendered certificate. Each such new certificate will be registered in
such name and will represent such number of shares of Series C Preferred Stock
as is requested by the holder of the surrendered certificate and will be
substantially identical in form to the surrendered certificate; provided,
however, that any transfer shall be subject to any applicable restrictions on
the transfer of such shares and the payment of any applicable transfer taxes, if
any, by the holder thereof.
1.12. Replacement.
Upon receipt of evidence reasonably satisfactory to the Company
(an affidavit of the registered holder will be satisfactory) of the ownership
and the loss, theft, destruction or mutilation of any certificate evidencing
shares of Series C Preferred Stock, and in the case of any such loss, theft or
destruction, upon receipt of indemnity reasonably satisfactory to the Company
(provided that if the holder is an institutional investor its own agreement will
be satisfactory), or, in the case of any such mutilation, upon surrender of such
certificate, the Company will (at its expense) execute and deliver in lieu of
such certificate a new certificate of like kind representing the number of
shares of Series C Preferred Stock represented by such lost, stolen, destroyed
or mutilated certificate and dated the date of such lost, stolen, destroyed or
mutilated certificate.
1.13. Retirement of Converted or Redeemed Shares.
No share or shares of Series C Preferred Stock acquired by the
Company by reason of redemption, purchase, conversion or otherwise shall be
54
<PAGE>
re-issued and all such shares shall be canceled, retired and eliminated from the
shares which the Company shall be authorized to issue. The Company may from time
to time take such appropriate corporate action as may be necessary to reduce the
authorized number of shares of Series C Preferred Stock accordingly.
SIXTH: The Secretary of State is designated as the agent of the
Corporation upon whom process against the Corporation may be served. The post
office address to which the Secretary of State shall mail a copy of any process
against the Corporation served on him is: c/o Harnett Lesnick & Ripps P.A., 150
East Palmetto Park Road, Suite 500, Boca Raton, Florida, 33432.
SEVENTH: No director of the Corporation shall have any personal
liability of directors to the Corporation or its shareholders for damages for
any breach of duty as such director, provided that this provision shall not
eliminate or limit:
(1) the liability of any director if a judgment or other
final adjudication adverse to him establishes that his acts or omissions were in
bad faith, involved intentional misconduct or a knowing violation of law or that
he personally gained in fact a financial profit or other advantage to which he
was not legally entitled or that his acts violated Section 719 of the New York
Business Corporation Law, or
(2) the liability of any director for any act or omission
prior to the adoption of this Article.
Neither the amendment nor repeal of this Article, nor the
adoption of any provision of the Certificate of Incorporation inconsistent with
this Article, shall eliminate or reduce the effect of this Article in respect of
any matter occurring, or any cause of action, suit or claim that, but for this
Article would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
EIGHTH:The number of directors of the Corporation shall be not less than
three (3), and the number to be chosen shall be determined in the manner
prescribed by the by-laws of this Corporation. No director need be a stockholder
of the Corporation. Any director may be removed from office with cause at any
time by vote of a majority of the directors then in office or the affirmative
vote of stockholders of record holding a majority of the outstanding shares of
stock of the Corporation entitled to vote, given at a meeting of the
stockholders called for that purpose.
55
<PAGE>
The Board of Directors shall be divided into three (3)
classes as nearly equal in number as possible, and no class shall include
less than one (1) director. The terms of office of the directors initially
classified shall be as follows: that of Class I shall expire at the next annual
meeting of shareholders in 1983, Class II at the second succeeding annual
meeting of shareholders in 1984, and Class III at the third succeeding annual
meeting of shareholders in 1985. The foregoing notwithstanding, each director
shall serve until his successor shall have been duly elected and qualified,
unless he shall resign, become disqualified, disabled or shall otherwise be
removed. Whenever a vacancy occurs on the Board of Directors, a majority of the
remaining directors have the power to fill the vacancy by electing a successor
director to fill that portion of the unexpired term resulting from the vacancy.
At each annual meeting of shareholders after such initial
classification, directors chosen to succeed those whose terms then expire at
such annual meeting shall be elected for a term of office expiring at the third
succeeding annual meeting of shareholders after their election. When the number
of directors is increased by the Board of Directors and any newly created
directorships are filled by the Board of Directors, there shall be no
classification of the additional directors until the next annual meeting of
shareholders. Directors elected, whether by the Board of Directors or by the
shareholders, to fill a vacancy, subject to the foregoing, shall hold office for
a term expiring at the annual meeting at which the term of the Class to which
they shall have been elected expires. Any newly created directorships or any
decrease in directorships shall be so apportioned among the classes as to make
all classes as nearly equal in number as possible.
NINTH: In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized:
To make, alter or repeal the By-Laws of the Corporation.
To authorize and cause to be executed mortgages and liens
upon the real and personal property for the Corporation.
To set apart out of any of the funds of the Corporation
available for dividends a reserve or reserves for any proper purpose and to
abolish any such reserve in the manner in which it was created.
By a majority of the whole board, to designate one or more
committees, such committee to consist of one or more of the directors of the
Corporation. The Board may designate one or more directors as alternate members
56
<PAGE>
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. The By-Laws may provide that in the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
Board of Directors, or in the By-Laws of the Corporation, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation and may authorize the
seal of the Corporation to be affixed to all papers which may require it; but no
such committee shall have the power or authority in reference to amending the
Certificate of Incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders, the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, recommending to the
stockholders a dissolution of the Corporation of a revocation or a dissolution,
or amending the By-Laws for the Corporation; and, unless the resolution or
By-Laws expressly so provide, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock.
When and as authorized by the stockholders in accordance
with statute, to sell, lease or exchange all or substantially all of the
property and assets of the Corporation, including its goodwill and its corporate
franchises, upon such terms and conditions and for such consideration, which may
consist in whole or in part of money or property including shares of stock in,
and/or other securities of, any other corporation or corporations as its Board
of Directors shall deem expedient and for the best interests of the Corporation.
TENTH: No action required to be taken or which may be taken at any
annual or special meeting of stockholders of the Corporation may be taken
without a meeting, and the power of stockholders to consent in writing to the
taking of any action is specifically denied.
ELEVENTH: Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the Certificate of
Incorporation, may be called by the chairman of the board or the president and
shall be called by the chairman of the board of the president or secretary at
57
<PAGE>
the request in writing of a majority of the Board of Directors, or at the
request of stockholders owning sixty-six and two-thirds percent (66-2/3%) of the
entire capital stock of the Corporation issued and outstanding and entitled to
vote. Such request shall state the purpose or purposes of the proposed meeting.
TWELFTH: In the event that it is proposed that the Corporation enter
into a merger or consolidation with any other corporation and such other
corporation or its affiliates singly or in the aggregate own or control directly
or indirectly five percent (5%) or more of the outstanding voting power of the
capital stock of this corporation, or that the corporation shall sell
substantially all of its assets or business to such other corporation, the
affirmative vote of the holders of not less than sixty-six and two-thirds
percent (66-2/3%) of the total voting power of all outstanding shares of capital
stock of this Corporation shall be required for the approval of any such
proposal; provided, however, that the foregoing shall not apply to any such
merger, consolidation or sale of assets or business which was approved by
resolutions of the Board of Directors of this Corporation prior to the
acquisition of the ownership or control of five percent (5%) of the outstanding
shares of this Corporation by such other corporation or its affiliates, nor
shall it apply to any such merger, consolidation or sale of assets or business
between this Corporation and another corporation fifty percent (50%) or more of
the total voting power of which is owned by this Corporation. For the purposes
hereof, an "affiliate" is any person (including a corporation, partnership,
trust, estate or individual) who directly or indirectly, through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the person specified; and "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of management and
policies of a person, whether through the ownership of voting securities, by
contract or otherwise.
THIRTEENTH: Subject to the provisions contained in Article FOURTEENTH
hereof, the Corporation reserves the right to amend, alter, change or repeal any
provisions contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
FOURTEENTH: The provisions set forth in Articles EIGHTH and TENTH,
ELEVENTH and TWELFTH above may not be altered, amended or repealed in any
respect unless such alteration, amendment or repeal is approved by the
affirmative vote of the holders of not less than sixty-six and two-thirds
(66-2/3) of the total voting power of all outstanding shares of capital stock of
the Corporation.
58
<PAGE>
IN WITNESS WHEREOF, we have signed this Restated Certificate of
Incorporation on the _____ day of April, 1998, and we affirm that the statements
made herein are true under penalties of perjury.
Richard A. Barasch
President
Joan Ferrarone
Secretary
59
<PAGE>
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</TABLE>
