SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
X ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from____ to____
Commission File No.: 0-13992
CYBER DIGITAL, INC.
(Name of small business issuer in its charter)
New York 11-2644640
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Oser Avenue, Hauppaupge, New York 11788
------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (516) 231-1200
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares of stock outstanding at June 30, 1999: 18,247,283 shares of
Common Stock; par value $.01 per share.
2
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CYBER DIGITAL, INC.
BALANCE SHEETS
June 30, March 31,
1999 1999
(Unaudited) (Audited)
----------- ---------
Current Assets
Cash and cash equivalents $ 107,290 $ 246,832
Accounts Receivable -0- -0-
Inventories 484,686 482,633
Prepaid and other current assets 34,763 29,190
----------- ------------
Total Current Assets $ 626,739 $ 758,655
----------- ------------
Property and Equipment, Net
Equipment $ 368,484 $ 366,396
Furniture and Fixtures 68,271 68,271
Leasehold Improvements 4,786 4,786
----------- ------------
$ 441,541 $ 439,453
Accumulated depreciation 207,043 188,644
----------- ------------
Total Property and Equipment $ 234,498 $ 250,809
----------- ------------
Other Assets $ 4,800 $ 14,350
----------- ------------
$ 866,037 $ 1,023,814
=========== ============
The accompanying notes are an integral part of these statements
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CYBER DIGITAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
(Unaudited) (Audited)
----------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
<S> <C> <C>
Accounts payable, accrued expenses, and taxes $ 74,059 $ 123,981
---------- ----------
Total Current Liabilities $ 74,059 $ 123,981
---------- ----------
Commitments and Contingencies
Shareholders' Equity
Preferred stock - $.05 par value; cumulative, convertible and
participating; authorized 10,000,000 shares
Series A; issued and outstanding - none at June 30, 1999
and March 31, 1999 -0- -0-
Series B-1 issued and outstanding none at June 30, 1999
and 2,420 shares at March 31, 1999 -0- 121
Series B-2 issued and outstanding - none at June 30, 1999
and March 31, 1999 -0- -0-
Series C issued and outstanding - 210 shares at June 30,
1999 and none March 31, 1999 10 -0-
Common stock - $.01 par value; authorized 30,000,000
shares; issued and outstanding 18,247,283 shares
at June 30, 1999 and 17,386,053 at March 31, 1999,
respectively 182,473 173,861
Additional paid-in capital 14,363,263 14,161,764
Accumulated deficit (13,753,768) (13,435,913)
---------- ----------
$ 791,978 $ 899,833
----------- ----------
$ 866,037 $1,023,814
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements
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CYBER DIGITAL, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
June 30,
1999 1998
--------------- -------------
<S> <C> <C>
Net Sales $ -0- $ 81,380
Cost of Sales 16,481 130,750
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Gross Loss $ (16,481) $ (49,370)
--------------- --------------
Operating Expenses
Selling, general and administrative expenses $ 200,969 $ 527,121
Research and development 101,692 107,982
-------------- --------------
Total Operating Expenses $ 302,661 $ 635,103
-------------- --------------
Loss from Operations $ (319,142) $ (684,473)
Other Income, net 1,285 26,357
-------------- --------------
Net Loss $ (317,857) $ (658,116)
-------------- -------------
Earnings (loss) per common and common equivalent
share Net earnings (loss) per common and common
equivalent share $ (0.02) $ (0.04)
============= =============
Weighted average number of common shares outstanding 18,247,283 17,312,550
============= =============
</TABLE>
The accompanying notes are an integral part of these statements
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CYBER DIGITAL, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
June 30,
1999 1998
----------------- --------------
Cash Flows from Operating Activities
<S> <C> <C>
Net loss $ (317,857) $ (658,116)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 18,314 14,996
Amortization 85 -0-
(Increase) decrease in operating assets:
Accounts receivable (800) (19,577)
Inventories (2,053) -0-
Prepaid expenses 4,777 15,129
Other assets -0- (649)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (49,922) (88,222)
------------- --------------
Net Cash Used in Operating Activities $ (347,456) $ (736,439)
-------------- --------------
Cash Flows from Investing Activities
Purchase of equipment $ (2,088) $ (16,890)
-------------- --------------
Net Cash Used in Investing Activities $ (2,088) $ (16,890)
-------------- --------------
Cash Flows from Financing Activities
Issuance of preferred stock $ 210,000 $ -0-
------------- --------------
Net Cash Provided by Financing Activities $ 210,000 $ -0-
------------- --------------
Net Decrease in Cash and Cash Equivalents $ (139,544) $ (753,329)
Cash and Cash Equivalents at Beginning of Period 246,834 2,436,473
------------- -------------
Cash and Cash Equivalents at End of Period $ 107,290 $ 1,683,144
============= =============
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Income taxes $ 4,424 $ 4,140
============= =============
</TABLE>
The accompanying notes are an integral part of these statements
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CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending March 31,
2000. For further information, refer to the financial statements and footnotes
thereto included in the Company's Form 10-KSB for the fiscal year ended March
31, 1999.
NOTE 2 - INVENTORIES
Inventory of purchased parts for eventual resale to customers are valued at the
lower of cost or market, as determined by the first-in, first-out (FIFO) method
and consisted of the following:
June 30, 1999 March 31, 1999
------------- --------------
Raw Materials $ 347,077 $ 345,024
Finished Goods 137,609 137,609
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$ 484,686 $ 482,633
======= =======
NOTE 3 - FINANCING ACTIVITY
On April 14, 1999, all of the Company's outstanding Series B-1 Preferred Stock
was converted into 861,230 shares of the Company's Common Stock at a conversion
price of $2.89 per share. During the period ended June 30, 1999, the Company
concluded a private placement of its Series C Preferred Stock and accompanying
warrants to accredited investors and received net proceeds of approximately
$210,000. The Series C Preferred Stock was issued without registration in
reliance on Section 4(2) of the Securities Act of 1933, as amended.
NOTE 4 - SUBSEQUENT EVENTS
On July 12, 1999, the Company closed on a private placement of an additional 100
shares of Series C Preferred Stock and accompanying warrants to an accredited
investor priced at $1,000 per share for a total of $100,000. As of July 12, 1999
there were 310 shares of Series C Preferred Stock issued and outstanding. The
Series C Preferred Stock was issued without registration in reliance on Section
4(2) of the Securities Act of 1933, as amended.
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PART 1
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
Overview
During the year ended March 31, 1999 ("Fiscal 1999"), we made a strategic shift
to enter the fast growing, lucrative high-speed internet access market. We
rapidly developed our Cyber Business Internet Gateway (CBIG) and Cyber Internet
Access Network (CIAN) switch. We forged an alliance with AT&T Corporation to
become a provider of high-speed internet access and to create Virtual Private
Networks (VPN) for businesses using our Internet Protocol (IP) Frame Relay based
"broadband" technology. We have recently developed our Internet Protocol (IP)
Frame Relay infrastructure equipment to piggyback on AT&T's rapid deployment of
an Internet Protocol (IP) Frame Relay based "broadband" internet backbone. For
further information, refer to the financial statements and footnotes thereto
included in the Company's Form 10-KSB for the fiscal year ended March 31, 1999.
Readers are cautioned not to place undue reliance on these forward-looking
statements, as refered to in the annual Form 10-KSB for the fiscal year ended
March 31, 1999, which speak only as of the date hereof.
Results of Operations
Net sales for the quarter ended June 30, 1999 were zero as compared to $81,380
for the quarter ended June 30, 1998. The Company discontinued direct sales in
connection with its strategic shift to the high speed internet access and
Virtual Private Network (VPN) service provision business. The Company's shift in
business focus was in process during the quarter ended June 30, 1999 and
produced no sales. Gross profit (loss) for the quarter ended June 30, 1999 was
$(16,481) or (100%) of net sales as compared to $(49,370) or (61%) of net sales
for the quarter ended June 30, 1998. Fluctuations in gross profit margins are
primarily attributable to price changes, changes in sales mix by product or
distribution channel. Selling, general and administrative expenses decreased by
$326,152 or 62% to $200,969 in the quarter ended June 30, 1999 as compared to
$527,121 in the quarter ended June 30, 1998, primarily due to decreases in sales
and service expenses. This has resulted from the Company's recent decision to
grow its business through strategic alliances and indirect sales channel
distribution. Research and development expenses for the quarter ended June 30,
1999 were $101,692 as compared to $107, 982 for the quarter ended June 30, 1998.
Net loss for the quarter ended June 30, 1999 was $(317,857) or $(.02) per share
as compared to $(658,116) or $(.04) per share for the quarter ended June 30,
1998.
Liquidity and Capital Resources
Total working capital decreased by $81,994 to $552,680 for the quarter ended
June 30, 1999 from $634,674 for the period ended March 31, 1999. The current
ratio, which is a ratio of current assets to current liabilities, increased to
8.4 to 1 as at June 30, 1999 from 6.1 to 1 as at March 31, 1999. Current levels
of inventory are adequate to meet short-term sales. There were no significant
capital expenditures in the quarter ended June 30, 1999, and none are planned
for the next quarter. Due to the completion of the Series A, Series B and Series
C Preferred Stock transactions, and together with expected cash flow from
operations, the Company believes its liquidity will be sufficient to meets its
needs for the next 12 months.
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The Company believes that, if needed, it will be able to obtain additional funds
required for future needs.
Impact of the Year 2000 ("Y2K") Issue
The Company conducted a review of its operating and computer systems to identify
the areas, which could be affected by the Y2K issue. The Company presently
believes the Year 2000 problem will not pose significant operational problems
for the Company and the estimated cost of achieving compliance is minimal and is
not expected to have a material adverse effect on the financial condition,
liquidity or results of operations of the Company.
The Company's internet gateway, digital voice switching and networking systems
which it designs, develops, manufactures, markets and services have been
designed to be Y2K compliant and the Y2K issue is not expected to have a
material effect on the Company's ability to serve its customers.
As part of the Company's assessment of the Y2K issue, consideration was given to
the possible impact upon the Company from using purchased software, suppliers
and outside service providers. The Company's efforts with regard to Y2K issues
are dependent in part on information received from such suppliers and vendors
upon which the Company has relied. While it is not possible for the Company to
predict all future outcomes and events, the Company is not aware, at this time,
of any Y2K non-compliant situations with regard to any of its purchased software
or its use of suppliers and outside service providers.
PART II
ITEM 1. Legal Proceedings.
On or about August 5, 1996, Brockington Securities, Inc. ("Brockington")
commenced an action, in the Supreme Court of the State of New York, County of
Suffolk, against the Company for wrongful termination of a purported agreement
for investment banking services. Brockington is seeking damages in the amount of
(1) $775,000 based upon the alleged net aggregate value of the shares of the
Company's common stock, par value $.01 per share (the "Common Stock"), upon
which Brockington alleges it had option and (2) $1 million for the alleged
wrongful termination.
The Company has asserted counterclaims based upon Brockington's wrongful conduct
and is seeking damages in the amount of $428,000 or, in the alternative,
recission of the alleged contract and the return of the 100,000 shares
previously issued Brockington.
The Company believes that Brockington's claims are without merit and intends to
vigorously defend its position.
ITEM 2. Changes in Securities and Use of Proceeds.
As of the date hereof, the Company sold 310 shares of its Series C Preferred
Stock, par value $.05 per share, and accompanying warrants to accredited
investors at $1,000 per share for an aggregate proceeds of $310,000. In
connection with this placement, the Company issued warrants to accredited
investors to purchase an aggregate of 12,710 shares of the Company's Common
Stock, par value $.01 per share, at an exercise price of $6.00 per share. The
Series C Preferred Stock was issued without registration in reliance on Section
4(2) of the Securities Act of 1933, as amended.
The Company intends to use the proceeds received from this placement for working
capital purposes.
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ITEM 3. Defaults on Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
ITEM 6. Exhibits and Reports in Form 8-K.
A) Exhibits
3.3 Certificate of Amendment of the Certificate of Incorporation of
Cyber Digital, Inc. filed on June 17, 1999 with the Secretary of
State of the State of New York.
27 Financial Data Schedule.
B) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant for the three months
ended June 30, 1999.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CYBER DIGITAL, INC.
DATED: August 6, 1999 By: \s\ J.C. Chatpar
------------------------------
Chairman of the Board,
President, Principal Financial
Officer and Chief Executive Officer
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
CYBER DIGITAL, INC.
(Under Section 805 of the Business Corporation Law)
Cyber Digital, Inc. a corporation organized and existing under the laws
of the State of New York (the "Corporation"), does hereby certify as follows:
1. The name of the corporation is Cyber Digital, Inc.
2. The Certificate of Incorporation of the Corporation was filed with the
Secretary of State of the State of New York on April 4, 1983.
3. The amendment of the Certificate of Incorporation of the Corporation
effected by this certificate of amendment is as follows:
To add provisions stating the number, designation, relative
rights, preferences, and limitations of the shares of the
Series C Preferred Stock, as fixed by the Board of Directors
of the Corporation.
4. To accomplish the foregoing amendment, Article Fourth of the
Certificate of Incorporation of the Corporation, relating to the
aggregate number of shares which the Corporation is authorized to issue
and classes thereof, is hereby amended as follows:
(i) A new Part C shall be added to Article Fourth, after
the end of Section 12 of Part B of such Article
Fourth, which new Part C shall read in its entirety
as follows:
Part C. Series C Preferred Stock.
One Thousand Two Hundred (1,200) of the Ten Million (10,000,000)
authorized shares of Preferred Stock of the Corporation are hereby designated
Series C Preferred Stock, par value $.05 per share. (References to section
numbers in this Part C of Article FOURTH of the Certificate of Incorporation
("Part C") shall refer only to such sections in this Part C of Article
<PAGE>
FOURTH, unless otherwise expressly stated herein.) The Series C Preferred Stock
shall possess the rights and preferences set forth below:
Section 1. Designations and Amounts. The shares of such series shall
have a par value of $.05 per share and shall be designated as Series C Preferred
Stock (the "Series C Preferred Stock") and the number of shares constituting the
Series C Preferred Stock shall be One Thousand (1,000). The Series C Preferred
Stock shall be offered at a purchase price of One Thousand Dollars ($1,000.00)
per share (the "Original Series C Issue Price").
Section 2. Rank. The Series C Preferred Stock shall rank: (a) junior to
any other class or series of capital stock of the Corporation hereafter created
specifically ranking by its terms senior to the Series C Preferred Stock
(collectively, the "Senior Securities"); (b) prior to all of the Corporation's
Common Stock, $.01 par value per share ("Common Stock"); (c) prior to any class
or series of capital stock of the Corporation hereafter created not specifically
ranking by its terms senior to or on parity with any Series C Preferred Stock of
whatever subdivision (collectively, with the Common Stock, "Junior Securities");
and (d) on parity with the Series A Preferred Stock and Series B Preferred Stock
and any class or series of capital stock of the Corporation hereafter created
specifically ranking by its terms on parity with the Series C Preferred Stock
("Parity Securities") in each case as to distributions of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary (all such distributions being referred to collectively as
"Distributions") and as to dividends.
Section 3. Dividends.
3.1 Cumulative Dividends. The holders of Series C
Preferred Stock (the "Series C Holders") shall be entitled to receive, out of
funds legally available therefor, cumulative annual dividends at an annual rate
per share equal to six percent (6%) of the Original Series C Issue Price. Such
dividends shall accrue on each share of Series C Preferred Stock from day to day
from the date of issue and shall be cumulative until paid upon liquidation,
dissolution or winding up of the Corporation within the meaning of Section 4
hereof or upon redemption as provided in Section 6 hereof or until such share is
converted into Common Stock as provided in Section 5 hereof, and such dividends
shall so accrue whether or not earned or declared and whether or not there are
profits, surplus or other funds of the Corporation legally available for the
payment of dividends. If such cumulative dividends in respect of any prior or
current annual dividend period shall not have been declared and paid, then the
deficiency shall first be fully paid before any dividend or other distribution
shall be paid or declared and set apart with respect to any class of the
Corporation's capital stock, now or hereafter outstanding. Cumulative dividends
with respect to shares of Series C Preferred Stock which are accrued, payable
and/or in arrears shall be paid on May 21 of each year commencing on May 21,
2000 and each May 21 thereafter being referred to herein as a "Dividend Payment
Date"), to the extent assets are legally available therefor and any amounts for
which assets are not legally available shall be paid promptly thereafter as
assets become legally available therefor; any partial payment will be made to
the Series C Holders pro rata in accordance with their holdings of such shares.
On any Dividend Payment Date dividends on shares of Series C Preferred Stock may
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be paid through the issuance of additional shares of Series C Preferred Stock
equal in number to the amount of such dividends divided by $1,000.
3.2 Reservation of Stock Issuable as Dividends. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
payment of dividends on the Series C Preferred Stock as provided in Section 3.1,
such number of shares of Series C Preferred Stock as shall from time to time be
sufficient to effect such payment on all outstanding shares of Series C
Preferred Stock. If at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect such payment on all outstanding
shares of Series C Preferred Stock, the Corporation will take such corporate
action as may be necessary to increase its authorized but unissued shares of
such number of shares as shall be sufficient for such purpose.
Section 4. Liquidation Preference.
4.1 In the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or involuntary, the holders of
shares of Series C Preferred Stock shall be entitled to receive, immediately
after any distributions to Senior Securities required by the Corporation's
Certificate of Incorporation, and prior in preference to any distribution to
Junior Securities but in parity with any distribution to Parity Securities, an
amount per share equal to the sum of (a) the Original Series C Issue Price for
each outstanding share of Series C Preferred Stock and (b) an amount equal to
all accrued and unpaid dividends thereon, whether or not declared, since the
date of issue up to and including the date full payment shall have been tendered
to the Series C Holders with respect to such liquidation, dissolution or winding
up (collectively, the "Series C Liquidation Amount"). If, after the occurrence
of any such liquidation, dissolution or winding up and payment in full of the
preferential amounts with respect to the Senior Securities, the assets and funds
available to be distributed among the holders of the Series C Preferred Stock
and Parity Securities shall be insufficient to permit the payment to such
holders of the full preferential amounts due to the holders of the Series C
Preferred Stock and the Parity Securities, respectively, then the entire assets
and funds of the Corporation legally available for distribution shall be
distributed among the holders of the Series C Preferred Stock and the Parity
Securities, pro rata, based on the respective liquidation amounts to which each
such series of stock is entitled by the Corporation's Certificate of
Incorporation.
4.2 Upon the completion of the distribution required
by Section 4.1, if assets remain in the Corporation, they shall be distributed
to holders of Junior Securities in accordance with the Corporation's Certificate
of Incorporation.
Section 5. Conversion. The Series C Holders shall have conversion
rights as follows (the "Conversion Rights"):
5.1 Holders' Right to Convert. Each holder of any
share of Series C Preferred Stock shall be entitled to convert such share of
Series C Preferred Stock, at any time after the issuance of such share by the
Corporation, into a number of fully-paid and non-
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assessable shares of Common Stock of the Corporation equal to the quotient that
is obtained when the Original Series C Issue Price for such share plus any
accrued and unpaid dividends on such share is divided by the applicable
Conversion Price. As used herein, the phrase "Conversion Price" shall mean
either of the following: (1) where the Notice of Conversion with respect to such
share is delivered to the Corporation not more than ninety calendar days after
the issuance of such share by the Corporation, $6.00 (the "Fixed Conversion
Price"); or (2) where the Notice of Conversion with respect to such share is
delivered to the Corporation more than ninety calendar days after the issuance
of such share by the Corporation, the lesser of (x) the Fixed Conversion Price
and (y) eighty-five percent (85%) of the average Closing Price of the
Corporation's Common Stock for the five trading days immediately preceding the
Date of Conversion, but not less than fifty percent (50%) of the Fixed
Conversion Price (the "Variable Conversion Price").
The phrase "Closing Price," as used with reference to
shares of Common Stock on any specified date, shall mean (a) the last reported
sale price per share of Common Stock on such date on the OTC Electronic Bulletin
Board, or if no longer traded thereon, on the Nasdaq Small Cap Market or the
Nasdaq National Market, or if not traded on the Nasdaq Small Cap Market or the
Nasdaq National Market, the last reported sale price on the principal national
securities exchange or the automated quotation system on which the Common Stock
is so traded or (b) if such OTC Electronic Bulletin Board or Nasdaq or other
automated quotation system shall report only asked and bid prices, or if there
shall have been no sale of Common Stock on such date so reported, then the
average of the last reported asked price and the last reported bid price of
Common Stock. The Conversion Price shall be adjusted from time to time in
accordance with this Section 5.
5.2 Automatic Conversion. Each share of Series C Preferred
Stock shall, on the third anniversary of the issuance of such share by the
Corporation, be automatically converted into that number of fully-paid and
non-assessable shares of Common Stock of the Corporation equal to the quotient
that is obtained when the Original Series C Issue Price for such share plus any
accrued and unpaid dividends on such share is divided by the Variable Conversion
Price. Such date shall be deemed the Date of Conversion with respect to such
conversion.
5.3 Mechanics of Conversion.
5.3.1 General. In order to convert any shares of
Series C Preferred Stock into shares of Common Stock, the holder of such shares
shall (a) telecopy, at or prior to 11:59 p.m., New York City time (the
"Conversion Notice Deadline") on the date of conversion, a copy of the fully
executed notice of conversion ("Notice of Conversion") to the Corporation at the
office of the Corporation or its designated Transfer Agent for the Series C
Preferred Stock stating that such holder elects to convert, which notice shall
specify the date of conversion, the number of shares of Series C Preferred Stock
to be converted, the applicable Conversion Price and a calculation of the number
of shares of Common Stock issuable upon such conversion (together with a copy of
the front page of each certificate to be converted) and
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(b) surrender to a common carrier or the United States Postal Service, for
delivery to the office of the Corporation or the Transfer Agent, the original
certificates representing the shares of Series C Preferred Stock being converted
(the "Preferred Stock Certificates"), duly endorsed for transfer to the
Corporation; provided, however, that the Corporation shall not be obligated to
issue certificates evidencing the shares of Common Stock issuable upon such
conversion unless either the Preferred Stock Certificates are delivered to the
Corporation or its Transfer Agent as provided above, or such holder notifies the
Corporation or its Transfer Agent that such certificates have been lost, stolen
or destroyed (subject to the requirements of Section 5.3.2). Upon receipt by the
Corporation of a telecopy of a Notice of Conversion, the Corporation shall
within three business days send, via telecopier, a confirmation of receipt of
the Notice of Conversion to such holder which shall specify that the Notice of
Conversion has been received and the name and telephone number of a contact
person at the Corporation whom such holder should contact regarding information
related to the conversion. In the case of a dispute as to the calculation of the
Conversion Rate, the Corporation shall promptly issue to such holder the number
of Shares that are not disputed and shall submit the disputed calculations to
its outside accountant (the "Accountant") via telecopier within five business
days of receipt of such holder's Notice of Conversion. The Corporation shall
cause the Accountant to perform the calculations and notify the Corporation and
such holder of the results no later than 48 hours from the time it receives the
disputed calculations. The Accountant's calculation shall be deemed conclusive
absent manifest error.
5.3.2 Lost, Stolen, Destroyed or Mutilated
Certificates. Upon receipt by the Corporation of evidence of the loss, theft,
destruction or mutilation of any Preferred Stock Certificate(s) representing
shares of Series C Preferred Stock, and (in the case of loss, theft or
destruction) of indemnity or security reasonably satisfactory to the
Corporation, and upon surrender and cancellation of the Preferred Stock
Certificate(s), if mutilated, the Corporation shall execute and deliver new
Preferred Stock Certificate(s) of like tenor and date. However, the Corporation
shall not be obligated to re-issue such lost, stolen, destroyed or mutilated
Preferred Stock Certificate(s) if the holder thereof contemporaneously requests
the Corporation to convert such Series C Preferred Stock into Common Stock.
5.3.3 Delivery of Common Stock Upon Conversion. The
Corporation or the Transfer Agent (as applicable) shall, no later than the close
of business on the fourth business day (the "Deadline") after receipt by the
Corporation or Transfer Agent of a telecopy of a Notice of Conversion and
receipt by the Corporation or the Transfer Agent of all necessary documentation
duly executed and in proper form required for conversion, including the original
Preferred Stock Certificates to be converted (or after provision for
indemnification or security in the case of lost, stolen or destroyed
certificate(s), if required), issue and surrender to a common carrier or the
United States Postal Service for either overnight or (if delivery is outside the
United States) two day delivery (or the shortest period of time in which a
recognized international carrier can deliver) to the converting holder at the
address of such holder as shown on the stock records of the Corporation a
certificate for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid.
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5.3.4 Cash in Lieu of Fractional Shares. The
Corporation may, if it so elects, issue fractional shares of Common Stock or
scrip representing fractional shares upon the conversion of shares of Series C
Preferred Stock. If the Corporation does not elect to issue fractional shares,
the Corporation shall pay to the holder of the shares of Series C Preferred
Stock which were converted a cash adjustment in respect of such fractional
shares in an amount equal to the same fraction of the Closing Price on the Date
of Conversion. The determination as to whether or not any fractional shares are
issuable shall be based upon the total number of shares of Series C Preferred
Stock being converted at any one time by any holder thereof, not upon each share
of Series C Preferred Stock being converted.
5.3.5 Date of Conversion. The date on which a
conversion occurs (the "Date of Conversion") shall be deemed to be the date set
forth in the Notice of Conversion, provided (a) that the copy of the Notice of
Conversion is sent by telecopier to the Corporation at or prior to 11:59 p.m.,
New York City time, on the Date of Conversion, and (b) that the original
Preferred Stock Certificates representing the shares of Series C Preferred Stock
to be converted are surrendered by depositing such certificates with a common
carrier or the United States Postal Service, for delivery to the office of the
Corporation or the Transfer Agent and/or, if any of such Preferred Stock
Certificates have been lost, stolen or destroyed, the holder of such shares
complies with Section 5.3.2. The person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock on the
Date of Conversion. If the original Preferred Stock Certificates representing
the shares of Series C Preferred Stock to be converted are not received by the
Corporation or the Transfer Agent, or if such holder fails to comply with
Section 5.3.2, as the case may be, within ten business days after the Date of
Conversion, or if the telecopy of the Notice of Conversion is not received by
the Corporation or its Transfer Agent prior to the Conversion Notice Deadline,
the Notice of Conversion, at the Corporation's option, may be declared null and
void.
5.4 Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the Series C Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
then outstanding shares of Series C Preferred Stock. If at any time the number
of authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of Series C Preferred
Stock, the Corporation will take such corporate action as may be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose; provided, however, that the
taking of such action shall not affect the Corporation's liability, if any, for
damages arising as a result of its failure to have a sufficient number of shares
reserved.
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5.5 Adjustment of Common Stock Issuable Upon Conversion.
5.5.1 Adjustment Due to Stock Split, Stock Dividend,
Etc. If the number of outstanding shares of Common Stock is increased by a stock
split, stock dividend, subdivision of shares or other similar event, the Fixed
Conversion Price and Conversion Price shall each be proportionately reduced, or
if the number of outstanding shares of Common Stock is decreased by a
combination or reclassification of shares, or other similar event, the Fixed
Conversion Price and the Conversion Price shall each be proportionately
increased. In addition, if any such event shall have taken place during the
reference period for determination of the Variable Conversion Price, then the
Variable Conversion Price shall be calculated giving appropriate effect to the
stock split, stock dividend, combination, reclassification or other similar
event for all five trading days immediately preceding the Date of Conversion.
5.5.2 Adjustment Due to Merger, Consolidation, Etc.
If, at any time when any shares of Series C Preferred Stock are outstanding,
there shall be any merger, consolidation, exchange of shares, recapitalization,
reorganization, or other similar event, as a result of which shares of Common
Stock of the Corporation shall be changed into the same or a different number of
shares of the same or another class or classes of stock or securities of the
Corporation or another entity or there is a sale of all or substantially all the
Corporation's assets or there is a change of control transaction not deemed to
be a liquidation pursuant to Section 4.3, then each Series C Holder shall
thereafter have the right to receive upon conversion of Series C Preferred
Stock, upon the basis and upon the terms and conditions specified herein and in
lieu of the shares of Common Stock immediately theretofore issuable upon
conversion, such stock, securities and/or other assets which such Series C
Holder would have been entitled to receive in such transaction had the Series C
Preferred Stock been converted immediately prior to such transaction, and in any
such case appropriate provisions shall be made with respect to the rights and
interests of the holders of the Series C Preferred Stock to the end that the
provisions hereof (including, without limitation, provisions for the adjustment
of the Series C Conversion Price and of the number of shares issuable upon
conversion of the Series C Preferred Stock) shall thereafter be applicable, as
nearly as may be practicable in relation to any securities thereafter
deliverable upon the exercise hereof. The Corporation shall not effect any
transaction described in this Section 5.6.2 unless (a) it first uses its best
efforts to give notice thereof to each Series C Holder 30 days prior to, and in
any event gives notice thereof to each Series C Holder at least 5 days prior to,
the record date of such merger, consolidation, exchange of shares,
recapitalization, reorganization, or other similar event (during which time each
Series C Holder shall be entitled to convert its shares of Series C Preferred
Stock into Common Stock) and (b) the resulting successor or acquiring entity (if
not the Corporation) assumes by written instrument the obligations of the
Corporation under this Part C, including this Section 5.6.2.
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5.5.3 Calculation of Adjustments. In computing each
adjustment to the Conversion Price, the result shall be rounded to the nearest
thousandth of a cent, and such adjustment shall be made separately in each
instance, and in the event the adjustment therefrom results in a change of the
Conversion Price of less than $0.01, then no adjustment to such then applicable
Conversion Price shall be made, but the amount of said adjustment calculated
thereby shall be carried forward to successive occasions until such adjustments
in the aggregate equal or exceed $0.01.
Section 6. Redemption.
6.1 Corporation's Right to Redeem Generally.
6.1.1 General Redemption Right. The Corporation shall
have the right, in its sole discretion, to redeem, from time to time, any or all
of the Series C Preferred Stock pursuant to this Section 6.1 (any such
redemption being referred to herein as a "General Redemption") at a redemption
price for each such share so redeemed equal to its Redemption Price, as defined
in Section 6.2; provided, that the Corporation shall deliver, at least 10
trading days advance written notice of such redemption as provided in Section
6.2.2. If the Corporation elects to redeem some, but not all, of the shares of
Series C Preferred Stock, the Corporation shall redeem a pro rata amount from
each holder of the Series C Preferred Stock, and each such holder may
specifically designate which of its shares of such Series C Preferred Stock
shall be so redeemed.
6.1.2 Mechanics of Redemption at Corporation's
Election. If the Corporation desires to effect a redemption pursuant to this
Section 6.1, it shall deliver prior written notice of such redemption ("Notice
of General Redemption") to the holders of the Series C Preferred Stock, at the
address and telecopier number of such holder appearing in the Corporation's
register for the Series C Preferred Stock and (b) the Transfer Agent, which
Notice of General Redemption shall be deemed to have been delivered three
business days after the Corporation's mailing (by overnight or two day carrier),
with a copy sent by telecopier to each such holder on the date of such mailing,
of such Notice of General Redemption. Such Notice of General Redemption shall
indicate (a) the number of shares of Series C Preferred Stock that have been
selected for redemption, (b) the date which such redemption is to become
effective (the "Date of General Redemption"), which shall be a date not less
than 10 trading days following the date such Notice of General Redemption is
delivered and (c) the applicable Redemption Price.
6.1.3 Holder's Right to Block Redemption.
Notwithstanding the foregoing provisions of this Section 6.1, each Series C
Holder may, by delivering a Notice of Conversion pursuant to Section 5.3 within
seven trading days following such holder's receipt of a Notice of General
Redemption, convert any or all of such holder's shares selected for redemption.
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6.2 Redemption Price. The redemption price payable by the
Corporation upon redemption of any share of Series C Preferred Stock pursuant to
Section 6.1 shall be an amount (the "Redemption Price") equal to 120% of the
Original Series C Issue Price, plus all unpaid dividends on such share accrued
from the date of issuance to the date of such redemption.
6.3 Payment of Redemption Price.
6.3.1 Each holder of any shares of Series C Preferred
Stock being redeemed under this Section 6 shall send Preferred Stock
Certificates evidencing such shares to the Corporation or its Transfer Agent,
and the Corporation shall cause the applicable Redemption Price for each such
share to be paid to such holder, in full, on the Date of Redemption, provided
that the Corporation shall not be obligated to deliver the Redemption Price for
any such share until the Preferred Stock Certificate evidencing such share is
delivered to the Corporation or its Transfer Agent, or, in the event such
certificate has been lost, stolen, mutilated or destroyed, until the holder of
such share has complied with Section 5.3.2.
Section 7. Voting Rights. Except as otherwise provided by New York law,
the holders of the Series C Preferred Stock shall have no voting power
whatsoever, and shall not be entitled, as such, to vote or otherwise participate
in any proceeding in which actions shall be taken by the Corporation or the
shareholders thereof or be entitled, as such, to receive notice of any meeting
of the shareholders.
To the extent that under New York law the vote of the holders of Series
C Preferred Stock, voting separately as a class, is required to authorize a
given action of the Corporation, the affirmative vote or consent of the holders
of at least a majority of the outstanding shares of Series C Preferred Stock, as
the case may be, represented at a duly held meeting at which a quorum is present
or by written consent of a majority of the outstanding shares of Series C
Preferred Stock, as the case may be, (except as otherwise may be required under
New York law) shall constitute the approval of such action by the class. To the
extent that under New York law the holders of the Series C Preferred Stock are
entitled to vote on a matter with holders of Common Stock, voting together as
one class, each share of Series C Preferred Stock shall be entitled to a number
of votes equal to the number of shares of Common Stock into which it is then
convertible using the record date for the taking of such vote of shareholders as
the date on which a Conversion Price is calculated. Holders of the Series C
Preferred Stock also shall be entitled to notice of all shareholder meetings or
written consents with respect to which they would be entitled to vote, which
notice would be provided pursuant to the Corporation's ByLaws and applicable
statutes.
Section 8. Status of Redeemed or Converted Stock. In the event any
shares of Series C Preferred Stock shall be redeemed or converted, the shares so
converted or redeemed shall be canceled, shall return to the status of
authorized but unissued Preferred Stock of no designated series and shall not be
issuable by the Corporation as Series C Preferred Stock.
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7. The foregoing amendments to the Certificate of Incorporation were
authorized at a duly-held meeting of the Board of Directors of the
Corporation, pursuant to the authority expressly vested in it in the
Corporation's Certificate of Incorporation.
IN WITNESS WHEREOF, this Certificate of Amendment of the Certificate of
Incorporation has been executed this 28 day of May, 1999, by the undersigned
who affirms that the statements stated herein are true under penalties of
perjury.
/s/ J.C. Chatpar
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J.C. Chatpar, President
/s/ Jack P. Dorfman
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Jack P. Dorfman, Secretary
