UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-17158
AMNEX, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
New York 11-2790221
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S Employer Identification No.)
Incorporation or Organization)
101 Park Avenue, New York, New York 10178
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(212) 867-0166
- --------------------------------------------------------------------------------
Registrant's Telephone Number, Including Area Code
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. (X) Yes ( ) No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. ( )Yes ( ) No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: Common Stock, $.001 par
value: 27,935,332 shares at March 31, 1997.
<PAGE>
AMNEX, INC.
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31,
1997 Dec. 31,
(unaudited) 1996
-----------------------------
Assets
Current assets:
<S> <C> <C>
Cash 1,863 $ 4,947
Trade receivables, less allowance for doubtful accounts of $2,568
as of March 31, 1997 and $2,757 as of December 31, 1996 23,503 19,311
Parts inventory 828 739
Deferred income taxes 1,791 1,791
Customer advances 1,014 2,414
Deposits and other current assets 981 861
-----------------------------
Total current assets 29,980 30,063
Investment in affiliates 5,091 ---
Property and equipment, net 25,215 23,851
Deposits and other 1,942 1,543
Intangible assets, net 9,133 5,947
Goodwill, net 30,144 29,955
-----------------------------
Total assets $101,505 $91,359
=============================
</TABLE>
F-1
<PAGE>
AMNEX, INC.
Consolidated Balance Sheets (continued)
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31,
1997 Dec. 31,
Liabilities and shareholders' equity (unaudited) 1996
----------------------------
Current liabilities:
<S> <C> <C>
Short-term debt $ 11,610 $ 11,498
Accounts payable 4,326 3,651
Accrued expenses 9,977 7,733
Accrued network expenses 3,096 1,975
Accrued commissions 3,899 3,169
Accrued taxes payable 1,210 1,406
Due to related party 1,198 1,198
Current portion of capital lease obligations 2,249 2,179
Current portion of long-term debt 2,323 2,248
----------------------------
Total current liabilities 39,868 35,057
Capital lease obligations 2,019 2,668
Long-term debt 13,674 13,530
Minority interest 441 10
Compensation payable 894 894
Obligations under renewal and modification agreement 1,125 ---
Obligations under non-compete agreement 1,314 2,630
Common stock subject to redemption 3,250 3,250
Commitments and contingencies
Shareholders' equity:
Voting Preferred Stock, $.001 par; authorized 5,000,000 shares: Series B
Preferred Stock, authorized 356,000 shares, issued and
outstanding 72,450 shares at March 31, 1997 and December 31,
1996 (liquidation preference $362) 362 362
Series D Preferred Stock, authorized 1,413,337 shares, issued and
outstanding 1,413,337 shares at March 31, 1997 and December
31, 1996 (liquidation preference $3,533) 3,533 3,533
Series E Preferred Stock, authorized 1,085,000 shares, issued and
outstanding 1,035,000 shares at March 31, 1997 and December
31, 1996 (liquidation preference $2,911) 2,911 2,911
Series F Preferred Stock, authorized 415,250 shares, issued and
outstanding 415,250 shares at March 31, 1997 and December
31, 1996 (liquidation preference $2,076) 2,076 2,076
Series G Preferred Stock, authorized 145,000 shares, issued and
outstanding 27,500 shares at March 31, 1997 and 78,750 shares at December
31, 1996 (liquidation preference $550 on March
31, 1997 and $1,575 at December 31, 1996) 441 1,179
Series L Preferred Stock, authorized 200,000 shares, issued and
outstanding 100,000 shares at March 31, 1997 (liquidation 3,636 ---
preference $4,545)
Common stock, $.001 par; authorized 40,000,000, issued 27,953,582
at March 31, 1997 and 26,897,892 shares at December 31, 1996 28 27
Capital in excess of par value 60,104 56,093
Accumulated deficit (33,695) (32,385)
----------------------------
39,396 33,796
Less 18,250 common shares held in treasury, at cost (476) (476)
----------------------------
Total shareholders' equity 38,920 33,320
----------------------------
Total liabilities and shareholders' equity $101,505 $91,359
============================
See accompanying notes.
</TABLE>
F-2
<PAGE>
AMNEX, INC.
Consolidated Statements of Operations
For the Three Months Ended March 31, 1997 and 1996
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenue $ 31,326 $ 22,832
------------------------------
Costs and expenses:
Cost of sales and service 25,789 19,411
Selling, general and administrative 2,556 2,576
Depreciation and amortization 2,011 1,144
Restructuring charge 1,400 ---
------------------------------
31,853 23,131
Operating loss (430) (299)
Interest expense 835 545
Other income (1,500)
Income (loss) before income taxes
and minority interest (1,265) 656
Minority interest in net income of unconsolidated
subsidiaries 5
------------------------------
Income (loss) before income taxes (1,260) 656
Provision for income taxes 50 135
------------------------------
Net income (loss) $ (1,310) $ 521
==============================
Preferred share dividend 154 154
------------------------------
Net income (loss) available for common shares $ (1,464) $ 367
==============================
Net income (loss) per common share $ ( 0.05) $ 0.02
==============================
Weighted average number of shares outstanding used in
computing net income (loss) per common share: 28,683,709 20,392,032
See accompanying notes.
</TABLE>
F-3
<PAGE>
AMNEX, INC.
Consolidated Statement of Shareholders' Equity
December 31, 1996 through March 31, 1997
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Preferred Preferred Preferred Preferred Preferred
$.001 Par Value Stock Stock Stock Stock Stock
Shares Amount Series B Series D Series E Series F Series G
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 26,897,892 $27.0 $362 $3,533 $2,911 $2,076 $1,179
Issuance of common shares 620,537 $ 1.0
Exercise of stock options 12,844
Issuance of preferred shares
and warrant for investment
Issuance of warrants
Conversion of preferred shares 422,309 - (738)
Net loss
--------------------------------------------------------------------------------------------------
Balance, March 31, 1997 27,953,582 $28.0 $362 $3,533 $2,911 $2,076 $ 441
==================================================================================================
Preferred Capital in Total
Stock Excess of Accumulated Treasury Shareholders
Series L Par Value Deficit Stock Equity
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ $56,093 ($32,385) ($476) $33,320
Issuance of common shares 1,581 1,582
Exercise of stock options 37 37
Issuance of preferred shares
and warrant for investment 3,636 1,455 5,091
Issuance of warrant to vendor 200 200
Conversion of preferred shares 738
Net loss (1,310) (1,310)
------------------------------------------------------------------------------
Balance, March 31, 1997 $3,636 $60,104 ($33,695) ($476) $38,920
==============================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
AMNEX, INC.
Consolidated Statements of Cash Flows
Three months ended March 31, 1997 and 1996
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
-----------------------
Cash flows from operating activities
<S> <C> <C>
Net income (loss) $(1,310) $ 521
Adjustments to reconcile net income (loss) to net
cash provided by (used) in operating activities:
Depreciation and amortization 2,011 1,144
Minority Interest (5)
Provision for losses on receivables (189) (370)
Gain on sale of assets (1,500)
Changes in assets and liabilities:
Trade receivables (4,003) (600)
Parts inventory (64) (65)
Note receivable 365
Customer advances, deposits and other current assets 566 184
Deposits and other assets (196) (115)
Accounts payable and other accrued expenses 3,219 (406)
-----------------------
Net cash provided by (used in) operating activities 29 (842)
-----------------------
Cash flows from investing activities
Purchase of business, net of cash acquired (880)
Purchase of phones (378)
Proceeds on sale of assets 2,375
Expenditures for property and equipment (884) (598)
-----------------------
Net cash provided by (used in) investing activities (2,142) 1,777
-----------------------
Cash flows from financing activities
Proceeds from the exercise of common stock options 37 44
Borrowings (repayments) under revolving credit, net 112 (562)
Payments on long-term debt (471) (180)
Principal payments under capital lease obligations (649) (192)
-----------------------
Net cash used in financing activities (971) (890)
-----------------------
Net increase (decrease) in cash (3,084) 45
Cash at beginning of period 4,947 94
-----------------------
Cash at end of period $1,863 $ 139
=======================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Supplemental disclosure of cash flow information:
(In thousands, except share data)
Three months ended March 31, 1997:
1. The Company issued 422,309 Common Shares pursuant to the conversion of
51,250 Series G Preferred Shares.
2. The Company issued 94,369 Common Shares for the acquisition of pay
telephones.
3. The Company issued 526,168 Common Shares pursuant to agreement with
Teleplus, Inc.
4. The Company issued 12,844 Common Shares pursuant to employee stock options.
5. Interest of approximately $983 was paid.
6. Income taxes of approximately $321 were paid.
Three months ended March 31, 1996:
1. The Company issued 75,000 Common Shares pursuant to an equity participation
agreement.
2. Interest of approximately $467 was paid.
3. Income taxes of approximately $44 were paid.
4. Capital lease obligations incurred to acquire property and equipment were
approximately $875.
F-6
<PAGE>
AMNEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information in response to the requirements of Article 10
of Regulation S-X. 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, the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the financial position as of March 31, 1997; results of operations
for the three months ended March 31, 1997 and 1996; cash flows for the
three months ended March 31, 1997 and 1996; and changes in shareholders'
equity for the three months ended March 31, 1997. For further information,
refer to AMNEX's financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 1996. The December 31,
1996 balance sheet has been derived from AMNEX's audited financial
statements as of that date. Certain prior year amounts were reclassified to
conform with the current year presentation.
2. Recently Issued Accounting Standards
In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share," which
is effective for financial statements issued for periods ending after
December 15, 1997. This pronouncement establishes standards for computing
and presenting earnings per share ("EPS") for entities with publicly-held
common stock or potential common stock. SFAS 128 simplifies the standards
for computing EPS and makes them comparable to international EPS standards.
Early application of this statement is not permitted. The Company intends
to adopt the provisions of SFAS 128 in 1998 and does not expect its
application to have a material impact on the financial statements of the
Company.
3. Preferred Stock
In January and February 1997, the holder of an aggregate of 51,250 shares
of the Company's Series G Preferred Stock elected to convert such shares
into 422,309 shares of the Company's Common Stock.
Pursuant to a Stock Exchange Agreement, dated January 7, 1997, between
AMNEX and Francesco Galesi, AMNEX acquired from Mr. Galesi 10% of the
outstanding capital stock of GTI, a telecommunications company controlled
by him. Pursuant to the terms of the Stock Exchange Agreement, (i) Mr.
Galesi was issued 100,000 Series L Preferred Shares of AMNEX which have the
following rights and preferences: (a) the right to receive dividends on an
equal basis with the holders of AMNEX's Common Shares; (b) voting rights
based on the number of Common Shares into which the Series L Preferred
Shares are convertible; (c) the mandatory conversion of the Series L
Preferred Shares into an aggregate of 1,500,000 Common Shares (the
"Conversion Shares") upon the filing of a Certificate of Amendment to the
Certificate of Incorporation of AMNEX pursuant to which there would be
authorized a sufficient number of Common Shares for issuance upon the
F-7
<PAGE>
conversion of the Series L Preferred Shares as well as upon the exercise of
all outstanding purchase, exchange or conversion rights for the acquisition
of Common Shares (the "Certificate of Amendment"); and (d) a liquidation
preference, on an equal basis with the holders of the other series of
Preferred Shares, of an aggregate of $4,545; (ii) Mr. Galesi was issued a
warrant for the purchase of 100,000 Series L Preferred Shares of AMNEX (the
"Warrant Preferred Shares") (or, if the Certificate of Amendment were
filed, 1,500,000 Common Shares (the "Warrant Common Shares")) for an
aggregate exercise price of $4,545 (subject to reduction to zero in the
event, during any continuous six month period commencing with January 1,
1997 and ending on December 31, 1999, the consolidated revenues from
operations of GTI are at least $12,500); (iii) Mr. Galesi was granted
certain registration rights with regard to the Conversion Shares and
Warrant Common Shares (or, if the Certificate of Amendment shall not have
theretofore been filed, the Series L Preferred Shares and Warrant Preferred
Shares); (iv) Peter M. Izzo, Jr., then Chief Executive Officer and a
Director of the Company, was elected a Director of GTI; (v) Mr. Galesi was
elected a Director of AMNEX; (vi) Mr. Galesi agreed that he would utilize
GTI as his sole vehicle with regard to the conduct of international
telecommunications business; (vii) Mr. Galesi agreed to a two year lock-up
with regard to any securities acquired from AMNEX pursuant to the
transaction; and (viii) Mr. Galesi granted AMNEX certain "tag along" rights
with regard to the sale of GTI capital stock acquired. On May 14, 1997, the
Certificate of Amendment was filed.
The Company's 10% investment in GTI is accounted for on the cost method and
the value of the investment has been based on a preliminary estimate of the
fair value of the Series L Preferred Stock and Warrant Preferred Shares
issued, based upon the market prices of AMNEX's stock at the date of
issuance, less a discount and using the Black-Scholes model to value the
Warrant Preferred Shares.
4. National Telecom USA, Inc. ("National") Renewal and Modification Agreement
On February 28, 1997, American Network Exchange, Inc. ("ANEI"), a
wholly-owned subsidiary of the Company, entered into a Renewal and
Modification Agreement (the "National Agreement") with National.
Pursuant to the National Agreement, as amended, among other matters, (i)
the term of the relationship between ANEI and National was extended through
February 28, 2007, subject to earlier termination under certain
circumstances, (ii) ANEI was engaged as the exclusive provider of direct
dial long distance and operator-assisted services to the payphones owned,
leased or otherwise controlled by National; (iii) ANEI assumed National's
obligation to provide certain services and administrative support, and pay
commissions and other compensation, to National's customers; (iv) ANEI was
given the exclusive right to manage the business and operations of
National; (v) ANEI agreed to pay to National a minimum amount of $2,250;
(vi) ANEI agreed to pay to National a reduced monthly payment equal to the
greater of $7.50 or .5% of Billed Revenues (as defined in the National
Agreement) during the initial three years of the National Agreement term,
subject to prospective adjustment at the end of such period; (vii) ANEI was
granted a right of first refusal by National's majority shareholder with
regard to business opportunities for the reselling of long distance and
operator-assisted traffic generated by private payphones; and (viii) the
parties settled all outstanding liabilities and obligations under a
previously executed Settlement Agreement. Costs of the agreement have been
capitalized, are included as intangibles, and will be amortized over the
life of the Agreement.
F-8
<PAGE>
5. Telecommunity Joint Venture
On February 25, 1997, the Company entered into a joint venture agreement
with Community Network Services Inc., MicroTel Communications Corporation
and other entities related to them for the purpose of conducting
telecommunications operations with regard to international 1+ calls among
other services. In connection with the transaction, the Company agreed to
make working capital loans to the joint venture entity in an approximate
aggregate amount of up to $1,200 during the initial six month term of the
agreement. As of March 31, 1997, $200 of advances had been made to the
joint venture.
6. Acquisition of Sun Tel, Inc. Assets
On March 1, 1997, the Company entered into an Asset Purchase Agreement with
Sun Tel, Inc. with regard to the acquisition of, among other assets, 610
pay telephones located in Florida. The Asset Purchase Agreement provides
for an aggregate purchase price for the assets acquired of $1,688,
including cash of $1,254, assumed debt of $309 and 49,604 shares of
unregistered common stock valued at $125, and the grant to the seller of a
20% interest in Sun Tel North America, Inc., the purchaser of the acquired
assets. The purchase price has been allocated $973 to payphones and
inventory and $715 to goodwill. This acquisition was recorded using the
purchase method of accounting and the operations of Sun Tel North America,
Inc. have been included in the accompanying statement of operations from
the date of acquisition.
7. Restructuring Charge
During the first quarter of 1997, the Company embarked on a plan of
restructuring and incurred a pre-tax restructuring charge of $1,400. This
restructuring plan, which resulted from an extensive strategic review of
the Company's assets, product offerings and competitive position in light
of the Telecommunications Act of 1996 and related regulatory action, is
designed to streamline the Company's provision of telecommunication
services, improve efficiencies and increase competitiveness. Such plan
contemplates the closure of certain of the Company's facilities located in
Austin, Texas, the elimination of redundant functions and the payment of
employee termination benefits. The Company believes that the implementation
of the plan will result in a significant reduction in future selling,
general and administrative expenses. The Company is also examining the
feasibility of outsourcing all or a significant portion of its switching
and network requirements to one or more unrelated third parties.
F-9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 Compared with
Three Months Ended March 31, 1996
Results of Operations
For the three months ended March 31, 1997, the Company had a net loss of
$1,310,000 as compared to net income of $521,000 for the three months ended
March 31, 1996. The 1997 period results include a restructuring charge of
$1,400,000 as more fully described in Note 7 to the Company's unaudited
consolidated financial statements included herein. These charges represent the
impact of the decision by Company's management to embark on a restructuring plan
that contemplates the closure of certain of the Company's facilities, the
elimination of certain redundant functions and the payment of employee
termination benefits. The Company believes that implementation of the plan will
result in a significant reduction in future selling, general and administrative
expenses. During the three months ended March 31, 1996, the Company sold certain
assets related to the validation and fraud management of its operator services
revenue base. This sale was part of the Company's plan of providing wholesale,
rather than retail, services to a certain group of operator services customers
and generated a gain on sale of $1,500,000 in the first quarter of 1996. Without
giving effect to the restructuring charge in the first quarter of 1997 or the
gain on sale in the first quarter of 1996, the Company's income before taxes for
the first quarter of 1997 would have been $135,000 as compared to a net loss of
$844,000 for the first quarter of 1996.
Total revenues for the three months ended March 31, 1997 and 1996 were
$31,326,000 and $22,832,000, respectively. The table below sets forth the
Company's revenues by product line.
For the three months ended
March 31,
1997 1996
(in thousands)
Domestic operator services $15,723 $19,449
International operator services 6,609 0
Long distance services 2,306 1,630
1+ Coin services 1,664 309
Payphone ownership and 4,013 1,138
operation
PBX program services 402 306
Billing services 609 0
------- ------
$31,326 $22,832
======= =======
<PAGE>
Consistent with management's plan of strategically positioning the Company
in new businesses which it believes offer the potential for increased earnings
and synergies with its existing businesses, both the volume of business and
revenue mix have changed from the first quarter of 1996. Domestic operator
services constituted 50.2% of total revenues in the first quarter of 1997 as
compared to 85.2% in the first quarter of 1996. In addition, international
operator services and billing services resulting from the acquisition of Capital
Network System Inc. in June 1996 and National Billing Exchange, Inc. in
September 1996, respectively, provided $7,218,000 of revenues. Revenues from
payphone operations increased over 250% and revenues from 1+ Coin services
increased over 400% in the first quarter of 1997 as compared to the first
quarter of 1996. The increased payphone operation revenues were primarily the
result of the acquisition by the Company of an aggregate of 5,561 payphones
during 1996 and the first quarter of 1997 and the increase in dial around
compensation payable to payphone owners effective November 6, 1996 from $6.00 to
$45.85 per payphone per month. The Company's 1+ Coin revenues increased
primarily due to an increase the number of local exchange carrier-owned
payphones under contract with the Company from approximately 350,000 on December
31, 1995 to approximately 600,000 on December 31, 1996. Although profit margins
for the domestic operator services line of business continued the anticipated
decline in the first quarter of 1997, the Company believes that, as a result of
its new ten year agreement to be the exclusive provider of operator services for
phones owned or controlled by National Telecom USA, Inc. (the "National
Agreement"), profit margins for this line of business may improve.
As a percentage of revenues, cost of sales and service decreased to 82.3%
for the first quarter of 1997 as compared to 85.0% for the first quarter of
1996. There were significant changes in certain of the components of cost of
sales and service between the periods. Network expenses increased to 20.1% of
revenues from 15.9% for the corresponding period of 1996 primarily due to the
significant costs of transmission of traffic out of Mexico for international
operator services. In addition, origination and termination costs were higher
due to increased direct dial long distance traffic. Approximately 90% of the
cost of delivering direct dial long distance revenues are network costs. The
Company continues to review network expenses and, as discussed in Note 7 to the
unaudited consolidated financial statements, is examining the feasibility of
outsourcing all or a significant portion of its switching and network
requirements. Commission expense decreased from 53.0% of total revenues for the
three months ended March 31, 1996 to 38.2% for the three months ended March 31,
1997. This expense, as a percentage of revenues from international operator
services, billing services, payphone operations and 1+ Coin services, is
considerably less than that for domestic operator services.
Selling, general and administrative expenses, as a percentage of revenues,
decreased from 11.3% for the first quarter of 1996 to 8.2% for the first quarter
of 1997. The decrease was primarily the result of the Company's implementation
of its restructuring plan discussed above. The Company believes that, as a
result of the restructuring, these expenses, as well as costs of sales and
service, will continue to decline as a percentage of revenues.
Interest expense increased from $545,000 in the first quarter of 1996 to
$835,000 for the current quarter primarily reflecting the cost of financing for
equipment purchased by the Company's PubCom Division during the last quarter of
1996. In addition, during the first quarter of 1997, the Company incurred
interest charges related to debt assumed in the Capital Network System Inc.
acquisition in June 1996.
2
<PAGE>
Liquidity and Capital Resources
The Company had a working capital deficiency of approximately $8,888,000 as
of March 31, 1997 as compared to a working capital deficiency of approximately
$4,994,000 as of December 31, 1996. This change was due to, among other things,
the acquisition of payphones and payphone businesses for an aggregate purchase
price of $1,528,000, obligations of $1,925,000 incurred in connection with the
National Agreement, expenditures for property, plant and equipment of $884,000
and the incurrence of restructuring charges, as described above, of $1,400,000.
Trade receivables at March 31, 1997 were $23,503,000 as compared to
$19,311,000 at December 31, 1996. Receivables consist of uncollected revenues
and surcharges which the Company bills and collects on behalf of itself and its
customers and uncollected revenues for services provided to other interexchange
carriers. Trade receivables increased between December 31, 1996 and March 31,
1997 primarily due to seasonality factors, particularly in the international
operator services line of business.
The Company currently has in place lending agreements with its billing and
collection agents pursuant to which it is provided advances of up to $27,600,000
at any one time outstanding based upon eligible receivables. Such eligible
receivables are purchased by the agents, with recourse, at the approximate rate
of 76% of the gross amount thereof. The Company generally pays interest for such
advances at an effective rate equal to the prime rate plus 2%. The lending
agreements extend through February 2000. The Company is currently negotiating a
more favorable billing and collection arrangement with one of its billing and
collection agents. No assurance can be given that the parties will enter into
such more favorable arrangement.
As of March 31, 1997, the Company had approximately 1,500 payphones that
were not subject to a security interest. The Company is currently seeking
additional debt financing to be secured by the unencumbered payphones. No
assurance can be given that any such financing will be obtained.
On February 25, 1997, the Company entered into a joint venture agreement
with Community Network Services Inc., MicroTel Communications Corporation and
other entities related to them for the purpose of conducting telecommunications
operations for international direct dial calls. In connection with the
transaction, the Company acquired a 50% interest in the joint venture entity and
agreed to make working capital loans in an aggregate amount of up to $1,200,000
during the initial six month term of the agreement.
The Company is a party to letters of intent for the purchase of
approximately 1,500 payphones for approximately $4,300,000. The Company is
currently seeking debt financing (separate and apart from the offering of
convertible subordinated debt securities discussed below) with respect to the
purchase of these payphones. No assurance can be given that any such financing
will be obtained or that such purchases will be consummated.
The Company is presently contemplating an offering of convertible
subordinated debt securities (the "Convertible Debt Securities") in the
approximate principal amount of $50,000,000 to certain institutional and
qualified investors in the United States and certain investors outside the
United States (the "Offering"). It is contemplated that, if the Offering is
undertaken, the securities offered will not be registered under the Securities
3
<PAGE>
Act of 1933, as amended (the "Securities Act"), and neither the Convertible Debt
Securities nor the common shares of the Company, par value $.001 per share (the
"Common Shares"), issuable upon the conversion of the Convertible Debt
Securities (the "Underlying Offering Shares") may be offered or sold in the
United States absent registration under the Securities Act or an exemption from
the registration requirements thereof. It is contemplated further that, in
connection with the Offering, the Company will agree to file a shelf
registration statement under the Securities Act with respect to the Convertible
Debt Securities and Underlying Offering Shares within a short period of time
after completion of the Offering so as to permit the purchasers of the
Convertible Debt Securities to resell such Convertible Debt Securities and the
Underlying Offering Shares pursuant to an effective registration statement. Any
such resale will only be made by means of a prospectus satisfying the
requirements of the Securities Act.
The exact aggregate principal amount of the Convertible Debt Securities,
interest rate on the Convertible Debt Securities, price and other provisions
relating to conversion of the Convertible Debt Securities into Common Shares and
the other terms of the Convertible Debt Securities and the terms of such
registration will be determined in light of market conditions at the time of the
Offering.
The Company has no firm commitment for the purchase of any of the
Convertible Debt Securities. No assurance can be given that the Company will
undertake the Offering or, if the Offering is undertaken, that the Company will
consummate the Offering in the amount or on the other terms anticipated or
otherwise.
The proceeds of any such Offering are intended to be used to repurchase
certain outstanding convertible promissory notes and preferred shares of the
Company, par value $.001 per share ("Preferred Shares"), and prepay certain
other outstanding promissory notes of the Company, held by clients of Friedli
Corporate Finance AG. The Company intends to use the balance of the proceeds to
provide funds for future acquisitions, any short-term working capital needs and
general corporate purposes. There are no definitive arrangements in place with
respect to acquisitions which would require the use of any such cash proceeds.
The principal amounts and maturity dates of, and conversion prices for, the
convertible promissory notes contemplated to be repurchased are as follows: (i)
$500,000 due within 90 days of demand, plus accrued interest (approximately
$147,500 through April 15, 1997), convertible at a price of $.20 per share into
approximately 3,237,500 Common Shares at April 15, 1997; and (ii) $325,000 due
May 1, 1997, plus accrued interest (approximately $50,900 through April 15,
1997), convertible at a price of $2.8125 per share into approximately 133,650
Common Shares at April 15, 1997. The series and liquidation values of, and
conversion prices for, the Preferred Shares contemplated to be repurchased are
as follows: (i) 72,450 Series B Preferred Shares, valued at $5.00 per Series B
Preferred Share, convertible at a price of $.50 per Common Share into 724,500
Common Shares; (ii) 1,413,337 Series D Preferred Shares, valued at $2.50 per
Series D Preferred Share, convertible at a price of $2.50 per Common Share into
1,413,337 Common Shares; (iii) 1,035,000 Series E Preferred Shares, valued at
$2.8125 per Series E Preferred Share, convertible at a price of $2.8125 per
Common Share into 1,035,000 Common Shares; and (iv) 415,250 Series F Preferred
Shares, valued at $5.00 per Series F Preferred Share, convertible at a price of
$5.00 per Common Share into 415,250 Common Shares. All such Preferred Shares
carry voting rights equal to the number of Common Shares into which they are
convertible, except that the Series D Preferred Shares have six-for-one voting
rights. It is anticipated that the convertible promissory notes, together with
accrued interest, and Preferred Shares would be repurchased at a purchase price
of $3.50 for each Common Share into which such promissory notes and Preferred
4
<PAGE>
Shares are convertible at the time of repurchase ("Underlying Repurchase
Shares") (except that, with respect to the Series F Preferred Shares, the
repurchase price would be equal to the face value thereof). Such aggregate
repurchase obligation with regard to the approximately 6,540,000 Underlying
Repurchase Shares and 415,250 Series F Preferred Shares would have been
approximately $26,600,000 had the repurchase occurred on April 15, 1997,
including the payment by the Company to the holders of the Preferred Shares of
an amount equal to accrued but unpaid dividends. Any acquired shares would
become treasury shares and, accordingly, would not be outstanding shares of the
Company.
The Company is seeking the agreement of the holders of the promissory notes
and Preferred Shares to the sale of such securities upon the above terms and
subject to the consummation of the contemplated Offering. In connection with
such agreement, it is contemplated that the Company will prepay the principal
amounts of, and accrued and unpaid interest on, certain promissory notes in the
aggregate outstanding principal amount of $1,400,000 that are currently due on
October 4, 1999. No definitive arrangements are in place with respect to the
repurchase of the outstanding promissory notes and Preferred Shares, and no
assurance can be given that such transaction will occur upon the terms
contemplated or otherwise.
5
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
(a) None.
(b) Reference is made to Note 3 to the consolidated financial statements of
the Company included in Part I, Item 1 hereof for a description of Series L
Preferred Shares issued by the Company effective January 7, 1997.
(c) During the quarter ended March 31, 1997, the Company issued or sold the
following equity securities other than in transactions registered under the
Securities Act:
(i) In January 1997 and February 1997, the Company issued an aggregate
of 422,309 Common Shares to Southbrook International Investments, Ltd. upon
the conversion of 51,250 Series G Preferred Shares. Such Common Shares were
issued pursuant to the exemption from registration provided by Section
3(a)(9) of the Securities Act as such Common Shares were securities
exchanged by the Company with its existing preferred shareholder and no
commission or other remuneration was paid or given, directly or indirectly,
for soliciting such exchange.
(ii) Effective January 1997, the Company issued 526,168 Common Shares
to Teleplus, Inc. in connection with the acquisition of certain contractual
rights. Such Common Shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act as a
transaction by an issuer not involving any public offering.
(iii) Effective January 1997, the Company issued an aggregate of
44,765 Common Shares to designees of Coastal Communications of America,
Inc. ("CCOA") in connection with the acquisition by Crescent Public
Communications Inc. ("Crescent"), a wholly-owned subsidiary of the Company,
of certain assets of CCOA. Such Common Shares were issued pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act
as a transaction by an issuer not involving any public offering.
(iv) Effective March 1997, the Company issued 49,604 Common Shares to
Sun Tel, Inc. ("Sun Tel") in connection with the acquisition by a
subsidiary of Crescent of certain assets of Sun Tel. Such Common Shares
were issued pursuant to the exemption from registration provided by Section
4(2) of the Securities Act as a transaction by an issuer not involving any
public offering.
Item 3. Defaults Upon Senior Securities.
(a) None.
(b) The following sets forth certain information with regard to accrued and
unpaid dividends on Preferred Shares of the Company:
6
<PAGE>
(i) There are currently 72,450 Series B Preferred Shares issued and
outstanding. The holders of the Series B Preferred Shares, in preference to
the holders of the Common Shares, are entitled to receive, when and as
declared by the Board of Directors, dividends at the rate of $.40 per share
per anum. Dividends on the Series B Preferred Shares have been paid through
April 30, 1995. Accrued and unpaid dividends with regard to the Series B
Preferred Shares as of March 31, 1997 were approximately $56,000.
(ii) There are currently 1,413,337 Series D Preferred Shares issued
and outstanding. The holders of the Series D Preferred Shares, in
preference to the holders of the Common Shares, are entitled to receive,
when and as declared by the Board of Directors, dividends at the rate of
$.25 per share per annum. No dividends have been paid to date on the Series
D Preferred Shares. Accrued and unpaid dividends with regard to the Series
D Preferred Shares as of March 31, 1997 were approximately $987,000.
(iii) There are currently 1,035,000 Series E Preferred Shares issued
and outstanding. The holders of the Series E Preferred Shares, in
preference to the holders of the Common Shares, are entitled to receive,
when and as declared by the Board of Directors, dividends at the rate of
$.225 per share per annum. No dividends on the Series E Preferred Shares
have been paid to date. Accrued and unpaid dividends with regard to the
Series E Preferred Shares as of March 31, 1997 were approximately $426,000.
(iv) There are currently 16,250 Series G Preferred Shares issued and
outstanding. The holders of the Series G Preferred Shares, in preference to
the holders of the Common Shares, are entitled to receive, when and as
declared by the Board of Directors, dividends at the rate of $1.00 per
share per annum. Dividends on the Series G Preferred Shares are payable at
the time of conversion of such shares into Common Shares. Accrued and
unpaid dividends with regard to the Series G Preferred Shares as of March
31, 1997 were approximately $8,000.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during the
quarter ended March 31, 1997. However, on May 14, 1997, at an annual meeting of
shareholders of the Company, the shareholders of the Company elected a Board of
three directors, consisting of Kenneth G. Baritz, Peter M. Izzo, Jr. and
Francesco Galesi, approved an amendment to the Company's Certificate of
Incorporation to increase the number of authorized Common Shares of the Company
from 40,000,000 to 70,000,000 and approved an amendment to the Company's 1992
Stock Option Plan to increase the number of Common Shares authorized to be
issued thereunder from 2,250,000 to 4,250,000. The number of affirmative votes
and negative votes with regard to the foregoing was as follows:
(i) Election of Directors
Votes for
Nominee Election
------- --------
Kenneth G. Baritz 26,545,944
Peter M. Izzo, Jr. 26,545,944
Francesco Galesi 17,400,044
7
<PAGE>
(ii) Approval of Amendment to Certificate of Incorporation
For: 26,503,798 Against: 45,769 Abstain: 2,697
(iii) Approval of Amendment to 1992 Stock Option Plan
For: 25,163,745 Against: 1,216,828 Abstain: 171,691
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Certificate of Amendment of Certificate of Incorporation
3.2 Restated Certificate of Incorporation, as amended
3.3 By-Laws, as amended(1)
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
- --------
(1) Denotes document filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 (File No. 0-17158) and
incorporated herein by reference.
8
<PAGE>
SIGNATURES
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.
AMNEX, INC.
May 15, 1997 By:/s/ Kenneth G. Baritz
---------------------
Kenneth G. Baritz
Chairman of the Board
and Chief Executive Officer
May 15, 1997 By:/s/ Richard L. Stoun
--------------------
Richard L. Stoun
Chief Accounting Officer
9
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
AMNEX, INC.
(Under Section 805 of the Business Corporation Law)
The undersigned, being the President and Secretary of AMNEX, Inc., do
hereby certify and set forth:
1. The name of the corporation is AMNEX, Inc. (the "Corporation"). The
Corporation was formed under the name NY-Tel Communications, Inc.
2. The Certificate of Incorporation of the Corporation was filed by the
Department of State on March 15, 1985.
3. The Certificate of Incorporation is hereby amended to increase the
number of common shares which the Corporation shall have authority to issue from
40,000,000 to 70,000,000.
4. Section 4(a) to the Certificate of Incorporation of the Corporation,
related to the number and kind of shares the Corporation is authorized to issue,
is hereby amended to read as follows:
"4(a). The aggregate number of shares of stock which the Corporation
shall have the authority to issue is Seventy- Five Million
(75,000,000) of which Seventy Million (70,000,000) are Common Shares,
$.001 par value per share, and Five Million (5,000,000) are Preferred
Shares, $.001 par value per share."
<PAGE>
5. The manner in which this Amendment of the Certificate of Incorporation
was authorized was by the vote of the Board of Directors of the Corporation
followed by the vote of the holders of a majority of the outstanding shares
entitled to vote thereon at a meeting of shareholders.
IN WITNESS WHEREOF, the undersigned have executed and signed this
Certificate this 14th day of May, 1997, and affirm the statements contained
herein as true under the penalties of perjury.
/s/ Kenneth G. Baritz
Kenneth G. Baritz, Chairman
/s/ Amy S. Gross
Amy S. Gross, Secretary
K:\WPDOC\CORP\AMNEX\CERTAMND\70MILL2.M97
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
AMNEX, INC.
(AS AMENDED THROUGH MAY 14, 1997)
(1) The name of the corporation is AMNEX, Inc. (the "Corporation").
(2) The Corporation is formed to engage in any act or activity for which
corporations may be organized under the Business Corporation Law of the State of
New York, provided that it is not formed to engage in any act or activity which
requires the consent or approval of any state official, department, board,
agency, or other body without such consent or approval first being obtained.
(3) The office of the Corporation in the State of New York shall be located
in the County of New York.
(4) (a) The aggregate number of shares of stock which the Corporation shall
have the authority to issue is Seventy-five Million (75,000,000) of which
Seventy Million (70,000,000) are Common Shares, $.001 par value per share, and
Five Million (5,000,000) are Preferred Shares, $.001 par value per share.
(b) The Board of Directors hereby is vested with the authority to provide
for the issuance of the Preferred Shares, at any time and from time to time, in
one or more series, each of such series to have such voting powers,
designations, preferences and
1
<PAGE>
relative participating, optional, conversion and other rights, and such
qualifications, limitations or restrictions thereon as expressly provided in the
resolution or resolutions duly adopted by the Board of Directors providing for
the issuance of such shares or series thereof. The authority which hereby is
vested in the Board of Directors shall include, but not be limited to, the
authority to provide for the following matters relating to each series of the
Preferred Shares:
(i) The designation of any series.
(ii) The number of shares initially constituting any
such series.
(iii) The increase, and the decrease, to a number not
less than the number of the outstanding shares of any such series, of the number
of shares constituting such series theretofore fixed.
(iv) The rate or rates and the times at which dividends
on the Preferred Shares or any series thereof shall be paid, and whether or not
such dividends shall be cumulative, and, if such dividends shall be cumulative,
the date or dates from and after which they shall accumulate.
(v) Whether or not the Preferred Shares or series
thereof shall be redeemable, and, if such shares shall be
2
<PAGE>
redeemable, the terms and conditions of such redemption, including but not
limited to the date or dates upon or after which such shares shall be redeemable
and the amount per share which shall be payable upon such redemption, which
amount may vary under different conditions and at different redemption dates.
(vi) The amount payable on the Preferred Shares or
series thereof in the event of the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; provided, however, that the
holders of shares ranking senior to other shares shall be entitled to be paid,
or to have set apart for payment, not less than the liquidation value of such
shares before the holders of the Common Shares or the holders of any other
series of Preferred Shares ranking junior to such shares.
(vii) Whether or not the Preferred Shares or series
thereof shall have voting rights, in addition to the voting rights provided
by law, and, if such shares shall have such voting rights, the terms and
conditions thereof, including but not limited to the right of the holders of
such shares to vote as a separate class either alone or with the holders of
shares of one or more other class or series of Preferred Shares and the right to
have more than one vote per share.
3
<PAGE>
(viii) Whether or not a sinking fund shall be provided for
the redemption of the Preferred Shares or series thereof, and, if such a sinking
fund shall be provided, the terms and conditions thereof.
(ix) Whether or not a purchase fund shall be provided
for the Preferred Shares or series thereof, and, if such a purchase fund shall
be provided, the terms and conditions thereof.
(x) Whether or not the Preferred Shares or series
thereof shall have conversion privileges, and, if such shares shall have
conversion privileges, the terms and conditions of conversion, including
but not limited to any provision for the adjustment of the conversion rate or
the conversion price.
(xi) Any other relative rights, preferences,
qualifications, limitations and restrictions.
(c) Series A Preferred Shares. A series of Preferred Shares is
hereby created, to be limited in amount to 30,000 of the 5,000,000 authorized
but unissued Preferred Shares. The designation, relative rights, powers,
preferences, qualifications and limitations are as follows:
(i) Designation of Series. The designation of the series of
Preferred Shares created hereby shall be Series A
4
<PAGE>
Preferred Shares (hereinafter the "Series A Preferred
Shares").
(ii) Dividends.
(A) The holders of Series A Preferred Shares, in preference to
the holders of Common Shares, shall be entitled to receive,
when and as declared by the Board of Directors, dividends at
the rate of eight dollars ($8.00) per share per annum, and no
more. Subject to the requirements of applicable law, dividends
on the Series A Preferred Shares shall be payable annually,
when and as declared by the Board of Directors, commencing in
1993. Such dividends on the Series A Preferred Shares shall be
cumulative so that if all or any part of such dividends shall
not have been paid or distributed in any year, or declared and
set apart, the amount of the deficiency (without interest)
shall be paid or distributed, or declared and set apart,
before any dividend or other distribution shall be paid upon,
or declared and set apart for, Common Shares. Declared but
unpaid dividends shall not bear interest.
(B) Except as hereinafter provided and subject to the
requirements of applicable law, including, without limitation,
the obtaining of any necessary approvals or consents from the
holders of the Common Shares of the Corporation, any dividend
declared on the Series A Preferred Shares shall be paid in
cash or, at the option of the Corporation, in Common Shares of
the Corporation having a market price, on the day immediately
preceding the date on which such dividend is declared (the
"Valuation Date"), equal to the amount of the dividend. As
used herein, the term "market price" shall mean the closing
selling price or, if not available, the mean of the closing
bid and asked prices, or, if not available, the mean of the
highest bid and lowest asked prices, of the Common Shares as
quoted on a national securities exchange, or in the
over-the-counter market as reported by NASDAQ or, if not
available, by the National Quotation Bureau, Incorporated, as
the case may be, or, if there is no selling or bid or asked
price on a particular day, then the closing selling price or,
if not available, the
5
<PAGE>
mean of the closing bid and asked prices, or, if not
available, the mean of the highest bid and lowest asked prices
on the nearest trading date before that day and for which such
prices are available, and if the Common Shares are not listed
on such an exchange or traded in such a market on the
Valuation Date, then the market price shall be determined by
the Board of Directors by taking into consideration all
relevant factors, including, but not limited to, the
Corporation's net worth, prospective earning power and
dividend paying capacity.
(iii) Voting Rights. The holders of the Series A Preferred Shares
shall be entitled to vote on all matters at all meetings of
the shareholders of the Corporation, and shall be entitled to
such number of votes for each Series A Preferred Share
entitled to vote at such meetings as is set forth below,
voting together with the holders of Common Shares, and other
Preferred Shares who are entitled to vote, if any such shares
are then outstanding, and not as a separate class, except as
required by law. The number of votes to which the holders of
the Series A Preferred Shares shall be entitled to vote for
each Series A Preferred Share shall equal the number of Common
Shares of the Corporation into which such Series A Preferred
Share shall be convertible on or after October 1, 1992
(without giving effect to any reductions in the Conversion
Price, as hereinafter defined, as provided for in subsection
(v) (A) hereof).
(iv) Redemption.
(A) In the event any holder or holders of Series A Preferred
Shares shall give written notice to the Corporation of an
election to convert such shares into Common Shares of the
Corporation as provided for in subsection (v)(B)(ii) hereof
(whether or not such holder shall have theretofore surrendered
the certificate(s) representing the Series A Preferred Shares
for conversion), the Corporation may elect, at its option, by
notice given prior to any Effective Conversion Date (as
hereinafter defined) as provided in (B) below, to redeem all
or any part of the outstanding Series A Preferred
6
<PAGE>
Shares with respect to which an election to convert has been
given to the Corporation at a price per share in cash equal to
one hundred thirty dollars ($130.00) (the "Redemption Price")
plus all accrued and unpaid dividends with respect to such
Series A Preferred Shares.
(B) Notice of every redemption shall be given by mailing the
same to every holder of record of any shares then to be
redeemed, prior to any Effective Conversion Date and not less
than ten (10) nor more than thirty (30) days prior to the date
fixed as the date for the redemption thereof (the "Redemption
Date"), at the respective addresses of such holders as the
same shall appear on the stock transfer books of the
Corporation. The notice described above shall state that the
shares specified in such notice will be redeemed by the
Corporation at the Redemption Price plus all accrued and
unpaid dividends on the Redemption Date, upon the surrender
for cancellation, at the place designated in such notice, of
the certificate(s) representing the shares so to be redeemed,
properly endorsed for transfer, or accompanied by a proper
instrument of assignment and transfer, and bearing all
necessary transfer tax stamps thereto affixed and cancelled
(provided, however, that such surrender shall not be required
if the holder of record shall have theretofore duly
surrendered the certificate(s) representing the Series A
Preferred Shares in accordance with the conversion provisions
set forth in subsection (v) hereof). On and after the
Redemption Date, each holder of shares called for redemption
shall be entitled to receive therefore, in cash, the
Redemption Price, plus accrued and unpaid dividends as of the
Redemption Date, upon presentation and surrender at the place
designated in such notice of the certificate(s) for shares
held by such holder and called for redemption, properly
endorsed for transfer or accompanied by proper instruments of
assignment or transfer, and bearing all necessary transfer tax
stamps thereto affixed and cancelled (provided, however, that
such surrender shall not be required if the holder of record
shall have theretofore surrendered the certificate(s)
representing the Series A Preferred Shares in accordance with
the conversion provisions set forth in subsection (v) hereof).
If the
7
<PAGE>
Corporation shall give notice of redemption as aforesaid (and
unless the Corporation shall fail to pay the Redemption Price
of the shares duly presented for redemption, plus all accrued
and unpaid dividends as of the Redemption Date, in accordance
with such notice), all shares called for redemption shall be
deemed to have been redeemed on the Redemption Date, whether
or not the certificates for said shares shall be surrendered
for redemption and cancellation, and said shares so called for
redemption shall from and after said date cease to represent
any interest whatever in the Corporation or its property, and
the holders thereof shall have no rights other than the right
to receive the Redemption Price, plus all accrued and unpaid
dividends as of the Redemption Date, but without any right to
receive dividends or interest thereon from or after said date.
All Series A Preferred Shares redeemed under the provisions of
this subsection shall be forthwith retired and cancelled.
(v) Conversion.
(A) Conversion Right and Price. Subject to the Corporation's
redemption right as provided for in subsection (iv) hereof,
each Series A Preferred Share shall be convertible, at the
option of the holder thereof, at any time on or after October
1, 1992, at the office of the Corporation, into such number of
Common Shares of the Corporation as is determined by dividing
one hundred dollars ($100.00) by the Conversion Price (as
hereinafter defined). For purposes hereof, the term
"Conversion Price" shall mean twenty six and two-thirds cents
($.26 - 2/3), subject to adjustment as hereinafter set forth;
provided, however, that, in the event the Corporation's
Pre-tax Net Income (as hereinafter defined) for the twelve
(12) month period ending June 30, 1993 (the "12 Month Period")
shall not exceed one million dollars ($1,000,000), then,
effective with the determination of the Corporation's Pre-tax
Net Income for the 12 Month Period (there being no retroactive
adjustment), the Conversion Price shall instead be as follows:
(i) if the Corporation attains a Pre-tax Net Income for the 12
Month Period, but such Pre-tax Net
8
<PAGE>
Income is equal to or less than one million dollars
($1,000,000), the Conversion Price shall be twenty cents
($.20); and (ii) if the Corporation does not attain a Pre-tax
Net Income for the 12 Month Period, the Conversion Price shall
be thirteen and one-third cents ($.13 - 1/3). For purposes
hereof, the terms "Pre-tax Net Income" and "Net Loss" shall
mean the Corporation's consolidated net income or loss before
all taxes determined in accordance with generally accepted
accounting principles, as calculated by the Company's Chief
Financial Officer, except that any pre-tax effect of certain
reductions in conversion prices provided for in that certain
Agreement dated as of March 11, 1992 by and among the Company,
David A. Lyons, Steven G. Chrust and Friedli Corporate Finance
AG, shall be excluded. For purposes hereof, the Corporation's
Pre-tax Net Income or Net Loss for the fiscal quarter ending
December 31, 1992 shall be deemed equal to the difference
between the Corporation's Pre-tax Net Income or Net Loss for
the fiscal year ending December 31, 1992, as audited and
reported upon by the independent auditors of the Corporation,
and the Corporation's Pre-tax Net Income or Net Loss for the
nine (9) month period ending September 30, 1992.
(B) Procedure. Before any holder of Series A Preferred Shares
shall be entitled to receive Common Shares upon conversion,
the holder shall (i)(a) surrender the certificate(s) therefor,
duly endorsed, at the office of the Corporation and (ii) shall
give written notice to the Corporation at such office that the
holder elects to convert the same into Common Shares and shall
further state therein the number of Series A Preferred Shares
being converted. Subject to the provisions hereof, effective
thirty (30) days following the later of the receipt by the
Corporation of the certificate(s) pursuant to and in
accordance with (i) above and the written notice pursuant to
and in accordance with (ii) above (such thirtieth (30th) day
being hereinafter referred to as the "Effective Conversion
Date"), the holder shall thereupon be deemed to be the holder
of record of the Common Shares issuable upon conversion,
notwithstanding that the stock transfer books of the
Corporation shall
9
<PAGE>
then be closed or that the certificate(s) representing such
Common Shares shall not then be actually delivered to the
holder. Subject to the provisions hereof, immediately
following the Effective Conversion Date, the Corporation shall
cause its transfer agent to issue and deliver to such holder
of Series A Preferred Shares a certificate(s) for the number
of Common Shares to which the holder shall be entitled.
Notwithstanding anything hereinabove to the contrary, in the
event the Corporation shall exercise its redemption rights
pursuant to subsection (iv) hereof, the Corporation shall be
under no obligation to issue Common Shares to the holder and
the holder's sole rights shall be as set forth under such
subsection (iv).
(C) Adjustment of Conversion Price.
(i) In the event that the Corporation shall (i) pay any
dividend on its capital stock payable in Common Shares (except
with respect to the dividend payable to the holders of the
Series A Preferred Shares); (ii) effect a subdivision of its
outstanding shares into a greater number of Common Shares (by
reclassification, stock split or otherwise than by payment of
a dividend in Common Shares); (iii) effect a combination or
consolidation of its outstanding Common Shares into a lesser
number of Common Shares (by reclassification, reverse split or
otherwise); (iv) issue by reclassification, exchange or
substitution of its Common Shares any shares of capital stock
of the Corporation or effect any other transaction having
similar effect, the Conversion Price in effect immediately
prior to such action shall be adjusted so that upon the
exercise of the conversion right hereof at any time after the
occurrence of any event described above, the holder shall be
entitled to receive the Common Shares to which such holder
would have been finally entitled, after giving effect to the
occurrence of such event, as if such holder had converted the
Series A Preferred Shares immediately prior to the occurrence
of such event. An adjustment made pursuant to this paragraph
(C) shall become effective immediately after the record date
in the case of a dividend and shall become effective
immediately after the effective date in
10
<PAGE>
the case of a subdivision, combination, reclassification,
exchange or substitution.
(ii) In case of any consolidation or merger to which the
Corporation is a party, other than a merger or consolidation
in which the Corporation is the surviving or continuing
corporation and which does not result in any reclassification
of, or change (other than a change in par value or from par
value to no par value or from no par value to par value, or as
a result of subdivision or combination) in, outstanding Common
Shares, then the Corporation, or such successor corporation,
as the case may be, shall make appropriate provision so that,
subject to the Corporation's redemption rights described
hereinabove, the holder of each Series A Preferred Share then
outstanding shall have the right to convert such share into
the kind and amount of shares or other securities and property
receivable upon such consolidation or merger by a holder of
the number of Common Shares into which such Series A Preferred
Shares might have been converted immediately prior to such
consolidation or merger.
(D) Fractional Shares. No fractional Common Shares shall be
issued upon conversion of Series A Preferred Shares. In lieu
of any fractional shares to which the holder would otherwise
be entitled, the Corporation shall pay, in cash, an amount
equal to the product of (1) such fraction of a share times (2)
the market price (as hereinabove defined) of one Common Share
on the Effective Conversion Date.
(E) Reservation of Shares Issuable Upon Conversion. The
Corporation shall at all times use its best efforts to reserve
and keep available out of its authorized but unissued Common
Shares, solely for the purpose of effecting the conversion of
the Series A Preferred Shares, such number of its Common
Shares as shall from time to time be sufficient to effect the
conversion of all outstanding Series A Preferred Shares, and
if at any time the number of authorized but unissued Common
Shares shall not be sufficient to effect the conversion of all
then outstanding Series A Preferred Shares, the
11
<PAGE>
Corporation will, as its sole obligation, subject to the
requirements of applicable state law, take such corporate
action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued Common Shares to such
number of shares as shall be sufficient for such purposes;
provided, however that nothing contained herein shall preclude
the Corporation from satisfying its obligations in respect of
the conversion of the Series A Preferred Shares by delivery of
purchased Common Shares which are held in the treasury of the
Corporation.
(F) Lost, Stolen or Destroyed Certificates. In the event that
the holder shall notify the Corporation that the
certificate(s) representing Series A Preferred Shares have
been lost, stolen or destroyed and either (i) provide a
letter, in form satisfactory to the Corporation, to the effect
that he will indemnify the Corporation from any loss incurred
by it in connection therewith, and/or (ii) provide an
indemnity bond in such amount as is reasonably required by the
Corporation, the Corporation having the option of electing
either (i) or (ii) or both, the Corporation may, in its sole
discretion, accept such letter and/or indemnity bond in lieu
of the surrender of the certificate(s) as required by
subsections (iv) and (v) hereof.
(G) Statutory Restrictions. The foregoing provisions
for conversion of the Series A Preferred Shares shall be
subject to all applicable statutory limitations and
restrictions.
(vi) Liquidation Preference. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Corporation, the holders of Series A Preferred Shares will be
entitled to receive, prior and in preference to any
distribution of the assets or surplus funds of the Corporation
to the holders of any Common Shares by reason of the ownership
thereof, an amount equal to (1) the fixed sum of one hundred
dollars ($100.00) per share and no more and (2) all accrued
and unpaid dividends due with respect to the Preferred Shares
(the "Preferential Amount"). If, upon the occurrence of such
an event, the
12
<PAGE>
assets and funds thus distributed among the holders of Series
A Preferred Shares shall be insufficient to permit the payment
to such holders of the full Preferential Amount, then, the
entire assets and funds of the Corporation legally available
for distribution shall be distributed ratably among the
holders of Series A Preferred Shares in accordance with the
respective amounts which would be payable on such shares if
all amounts payable thereon were paid in full. After the
payment or setting apart of the full Preferential Amounts
required to be paid to the holders of Series A Preferred
Shares, the holders of Common Shares or any other stock of the
Corporation ranking in liquidation junior to the Series A
Preferred Shares shall be entitled to receive ratably all
remaining assets or surplus funds of the Corporation. Neither
the merger or consolidation of the Corporation, nor the sale,
lease or conveyance of all or part of its assets, shall be
deemed to be a liquidation, dissolution or winding up of the
affairs of the Corporation, either voluntarily or
involuntarily, within the meaning of this section.
(vii) Sinking Fund. The Series A Preferred Shares shall not be
entitled to the benefit of any sinking fund to be applied to
their purchase or redemption.
(d) Series B Preferred Shares. A series of Preferred Shares is
hereby created, to be limited in amount to 356,000 of the 5,000,000 authorized
Preferred Shares. The designation, relative rights, powers, preferences,
qualifications and limitations are as follows:
(i) Designation of Series. The designation of the series of
Preferred Shares created hereby shall be Series B Preferred
Shares (hereinafter the "Series B Preferred Shares").
(ii) Dividends.
13
<PAGE>
(A) The holders of Series B Preferred Shares, in preference to
the holders of Common Shares and on a pari passu basis with
the holders of Series A Preferred Shares, if any, shall be
entitled to receive, when and as declared by the Board of
Directors, dividends at the rate of forty cents ($.40) per
share per annum, and no more. Subject to the requirements of
applicable law, dividends on the Series B Preferred Shares
shall be payable annually, when and as declared by the Board
of Directors, commencing in 1993. Such dividends on the Series
B Preferred Shares shall be cumulative so that if all or any
part of such dividends shall not have been paid or distributed
in any year, or declared and set apart, the amount of the
deficiency (without interest) shall be paid or distributed, or
declared and set apart, before any dividend or other
distribution shall be paid upon, or declared and set apart
for, Common Shares. Declared but unpaid dividends shall not
bear interest. For dividend purposes, Series B Preferred
Shares shall be deemed to have been issued as of the date of
issuance of the Series A Preferred Shares for which they were
exchanged.
(B) Except as hereinafter provided and subject to the
requirements of applicable law, including, without limitation,
the obtaining of any necessary approvals or consents from the
holders of the Common Shares and/or Series A Preferred Shares
of the Corporation, any dividend declared on the Series B
Preferred Shares shall be paid in cash or, at the option of
the Corporation, in Common Shares of the Corporation having a
market price, on the day immediately preceding the date on
which such dividend is declared (the "Valuation Date"), equal
to the amount of the dividend. As used herein, the term
"market price" shall mean the closing selling price or, if not
available, the mean of the closing bid and asked prices, or,
if not available, the mean of the highest bid and lowest asked
prices, of the Common Shares as quoted on a national
securities exchange, or in the over-the-counter market as
reported by NASDAQ or, if not available, by the National
Quotation Bureau, Incorporated, as the case may be, or, if
there is no selling or bid or asked price on a particular day,
then the closing selling price or, if not available, the mean
of the closing bid and asked
14
<PAGE>
prices, or, if not available, the mean of the highest bid and
lowest asked prices on the nearest trading date before that
day and for which such prices are available, and if the Common
Shares are not listed on such an exchange or traded in such a
market on the Valuation Date, then the market price shall be
determined by the Board of Directors by taking into
consideration all relevant factors, including, but not limited
to, the Corporation's net worth, prospective earning power and
dividend paying capacity.
(iii) Voting Rights. The holders of the Series B Preferred Shares
shall be entitled to vote on all matters at all meetings of
the shareholders of the Corporation, and shall be entitled to
such number of votes for each Series B Preferred Share
entitled to vote at such meetings as is set forth below,
voting together with the holders of Common Shares, and other
Preferred Shares who are entitled to vote, if any such shares
are then outstanding, and not as a separate class, except as
required by law. The number of votes to which the holders of
the Series B Preferred Shares shall be entitled to vote for
each Series B Preferred Share shall equal the number of Common
Shares of the Corporation into which such Series B Preferred
Share is convertible.
(iv) Redemption.
(A) In the event any holder or holders of Series B Preferred
Shares shall give written notice to the Corporation of an
election to convert such shares into Common Shares of the
Corporation as provided for in subsection (v)(B)(ii) hereof
(whether or not such holder shall have theretofore surrendered
the certificate(s) representing the Series B Preferred Shares
for conversion), the Corporation may elect, at its option, by
notice given prior to any Effective Conversion Date (as
hereinafter defined) as provided in (B) below, to redeem all
or any part of the outstanding Series B Preferred Shares with
respect to which an election to convert has been given to the
Corporation at a price per share in cash equal to six dollars
fifty cents ($6.50) (the
1 15
<PAGE>
"Redemption Price") plus all accrued and unpaid dividends with
respect to such Series B Preferred Shares.
(B) Notice of every redemption shall be given by mailing the
same to every holder of record of any shares then to be
redeemed, prior to any Effective Conversion Date and not less
than ten (10) nor more than thirty (30) days prior to the date
fixed as the date for the redemption thereof (the "Redemption
Date"), at the respective addresses of such holders as the
same shall appear on the stock transfer books of the
Corporation. The notice described above shall state that the
shares specified in such notice will be redeemed by the
Corporation at the Redemption Price plus all accrued and
unpaid dividends on the Redemption Date, upon the surrender
for cancellation, at the place designated in such notice, of
the certificate(s) representing the shares so to be redeemed,
properly endorsed for transfer, or accompanied by a proper
instrument of assignment and transfer, and bearing all
necessary transfer tax stamps thereto affixed and cancelled
(provided, however, that such surrender shall not be required
if the holder of record shall have theretofore duly
surrendered the certificate(s) representing the Series B
Preferred Shares in accordance with the conversion provisions
set forth in subsection (v) hereof). On and after the
Redemption Date, each holder of shares called for redemption
shall be entitled to receive therefor, in cash, the Redemption
Price, plus accrued and unpaid dividends as of the Redemption
Date, upon presentation and surrender at the place designated
in such notice of the certificate(s) for shares held by such
holder and called for redemption, properly endorsed for
transfer or accompanied by proper instruments of assignment or
transfer, and bearing all necessary transfer tax stamps
thereto affixed and cancelled (provided, however, that such
surrender shall not be required if the holder of record shall
have theretofore surrendered the certificate(s) representing
the Series B Preferred Shares in accordance with the
conversion provisions set forth in subsection (v) hereof). If
the Corporation shall give notice of redemption as aforesaid
(and unless the Corporation shall fail to pay the Redemption
Price of the shares duly presented for
16
<PAGE>
redemption, plus all accrued and unpaid dividends as of the
Redemption Date, in accordance with such notice), all shares
called for redemption shall be deemed to have been redeemed on
the Redemption Date, whether or not the certificates for said
shares shall be surrendered for redemption and cancellation,
and said shares so called for redemption shall from and after
said date cease to represent any interest whatever in the
Corporation or its property, and the holders thereof shall
have no rights other than the right to receive the Redemption
Price, plus all accrued and unpaid dividends as of the
Redemption Date, but without any right to receive dividends or
interest thereon from or after said date. All Series B
Preferred Shares redeemed under the provisions of this
subsection shall be forthwith retired and cancelled.
(v) Conversion.
(A) Conversion Right and Price. Subject to the Corporation's
redemption right as provided for in subsection (iv) hereof,
each Series B Preferred Share shall be convertible, at the
option of the holder thereof, at the office of the
Corporation, into such number of Common Shares of the
Corporation as is determined by dividing five dollars ($5.00)
by the Conversion Price (as hereinafter defined). For purposes
hereof, the term "Conversion Price" shall mean fifty cents
($.50), subject to adjustment as hereinafter set forth.
(B) Procedure. Before any holder of Series B Preferred Shares
shall be entitled to receive Common Shares upon conversion,
the holder shall (i)(a) surrender the certificate(s) therefor,
duly endorsed, at the office of the Corporation and (ii) shall
give written notice to the Corporation at such office that the
holder elects to convert the same into Common Shares and shall
further state therein the number of Series B Preferred Shares
being converted. Subject to the provisions hereof, effective
thirty (30) days following the later of the receipt by the
Corporation of the certificate(s) pursuant to and in
accordance with (i) above and the written
17
<PAGE>
notice pursuant to and in accordance with (ii) above, or such
shorter period of time as the Board of Directors shall
determine with respect to any particular conversion (such
thirtieth (30th) day or end of shorter period of time being
hereinafter referred to as the "Effective Conversion Date"),
the holder shall thereupon be deemed to be the holder of
record of the Common Shares issuable upon conversion,
notwithstanding that the stock transfer books of the
Corporation shall then be closed or that the certificate(s)
representing such Common Shares shall not then be actually
delivered to the holder. Subject to the provisions hereof,
immediately following the Effective Conversion Date, the
Corporation shall cause its transfer agent to issue and
deliver to such holder of Series B Preferred Shares a
certificate(s) for the number of Common Shares to which the
holder shall be entitled. Notwithstanding anything hereinabove
to the contrary, in the event the Corporation shall exercise
its redemption rights pursuant to subsection (iv) hereof, the
Corporation shall be under no obligation to issue Common
Shares to the holder and the holder's sole rights shall be as
set forth under such subsection (iv).
(C) Adjustment of Conversion Price.
(i) In the event that the Corporation shall (i) pay any
dividend on its capital stock payable in Common Shares (except
with respect to the dividend payable to the holders of the
Series B Preferred Shares); (ii) effect a subdivision of its
outstanding shares into a greater number of Common Shares (by
reclassification, stock split or otherwise than by payment of
a dividend in Common Shares); (iii) effect a combination or
consolidation of its outstanding Common Shares into a lesser
number of Common Shares (by reclassification, reverse split or
otherwise); (iv) issue by reclassification, exchange or
substitution of its Common Shares any shares of capital stock
of the Corporation or effect any other transaction having
similar effect, the Conversion Price in effect immediately
prior to such action shall be adjusted so that upon the
exercise of the conversion right hereof at any time after the
occurrence of any event described above, the holder shall be
entitled to receive the Common
18
<PAGE>
Shares to which such holder would have been finally entitled,
after giving effect to the occurrence of such event, as if
such holder had converted the Series B Preferred Shares
immediately prior to the occurrence of such event. An
adjustment made pursuant to this paragraph (C) shall become
effective immediately after the record date in the case of a
dividend and shall become effective immediately after the
effective date in the case of a subdivision, combination,
reclassification, exchange or substitution.
(ii) In case of any consolidation or merger to which the
Corporation is a party, other than a merger or consolidation
in which the Corporation is the surviving or continuing
corporation and which does not result in any reclassification
of, or change (other than a change in par value or from par
value to no par value or from no par value to par value, or as
a result of subdivision or combination) in, outstanding Common
Shares, then the Corporation, or such successor corporation,
as the case may be, shall make appropriate provision so that,
subject to the Corporation's redemption rights described
hereinabove, the holder of each Series B Preferred Share then
outstanding shall have the right to convert such share into
the kind and amount of shares or other securities and property
receivable upon such consolidation or merger by a holder of
the number of Common Shares into which such Series B Preferred
Shares might have been converted immediately prior to such
consolidation or merger.
(D) Fractional Shares. No fractional Common Shares shall be
issued upon conversion of Series B Preferred Shares. In lieu
of any fractional shares to which the holder would otherwise
be entitled, the Corporation shall pay, in cash, an amount
equal to the product of (i) such fraction of a share times
(ii) the market price (as hereinabove defined) of one Common
Share on the Effective Conversion Date.
(E) Reservation of Shares Issuable Upon Conversion. The
Corporation shall at all times use its best efforts to
reserve and keep available out of its authorized but
19
<PAGE>
unissued Common Shares, solely for the purpose of effecting
the conversion of the Series B Preferred Shares, such number
of its Common Shares as shall from time to time be sufficient
to effect the conversion of all outstanding Series B Preferred
Shares, and if at any time the number of authorized but
unissued Common Shares shall not be sufficient to effect the
conversion of all then outstanding Series B Preferred Shares,
the Corporation will, as its sole obligation, subject to the
requirements of applicable state law, take such corporate
action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued Common Shares to such
number of shares as shall be sufficient for such purposes;
provided, however that nothing contained herein shall preclude
the Corporation from satisfying its obligations in respect of
the conversion of the Series B Preferred Shares by delivery of
purchased Common Shares which are held in the treasury of the
Corporation.
(F) Lost, Stolen or Destroyed Certificates. In the event that
the holder shall notify the Corporation that the
certificate(s) representing Series B Preferred Shares have
been lost, stolen or destroyed and either (i) provide a
letter, in form satisfactory to the Corporation, to the effect
that he will indemnify the Corporation from any loss incurred
by it in connection therewith, and/or (ii) provide an
indemnity bond in such amount as is reasonably required by the
Corporation, the Corporation having the option of electing
either (i) or (ii) or both, the Corporation may, in its sole
discretion, accept such letter and/or indemnity bond in lieu
of the surrender of the certificate(s) as required by
subsections (iv) and (v) hereof.
(G) Statutory Restrictions. The foregoing provisions
for conversion of the Series B Preferred Shares shall be
subject to all applicable statutory limitations and
restrictions.
(vi) Liquidation Preference. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Corporation, the holders of Series B Preferred Shares
20
<PAGE>
will be entitled to receive, prior and in preference to any
distribution of the assets or surplus funds of the Corporation
to the holders of any Common Shares by reason of the ownership
thereof, and on a pari passu basis with the holders of the
Series A Preferred Shares, if any, an amount equal to (i) the
fixed sum of five dollars ($5.00) per share and no more and
(ii) all accrued and unpaid dividends due with respect to the
Series B Preferred Shares (the "Preferential Amount"). If,
upon the occurrence of such an event, the assets and funds
thus distributed among the holders of Series B Preferred
Shares shall be insufficient to permit the payment to such
holders of the full Preferential Amount, then, the entire
assets and funds of the Corporation legally available for
distribution to the holders of the Series B Preferred Shares
shall be distributed ratably among such holders in accordance
with the respective amounts which would be payable on such
shares if all amounts payable thereon were paid in full. After
the payment or setting apart of the full Preferential Amounts
required to be paid to the holders of Series A and Series B
Preferred Shares, the holders of Common Shares or any other
stock of the Corporation ranking in liquidation junior to the
Series A and Series B Preferred Shares shall be entitled to
receive ratably all remaining assets or surplus funds of the
Corporation. Neither the merger or consolidation of the
Corporation, nor the sale, lease or conveyance of all or part
of its assets, shall be deemed to be a liquidation,
dissolution or winding up of the affairs of the Corporation,
either voluntarily or involuntarily, within the meaning of
this section.
(vii) Sinking Fund. The Series B Preferred Shares shall not be
entitled to the benefit of any sinking fund to be applied to
their purchase or redemption.
(e) Series C Preferred Shares. A series of Preferred
Shares is hereby created, to be limited in amount to 1,090,910 of the 5,000,000
authorized Preferred Shares. The designation, relative rights, powers,
preferences, qualifications and limitations are as follows:
21
<PAGE>
(i) Designation of Series. The designation of the series of
Preferred Shares created hereby shall be Series C Preferred
Shares (hereinafter the "Series C Preferred Shares").
(ii) Dividends.
(A) The holders of Series C Preferred Shares, in preference to
the holders of Common Shares and on a pari passu basis with
the holders of Series A Preferred Shares and Series B
Preferred Shares, if any, shall be entitled to receive, when
and as declared by the Board of Directors, dividends at the
rate of twenty-seven and one-half cents ($.275) per share per
annum, and no more. Subject to the requirements of applicable
law, dividends on the Series C Preferred Shares shall be
payable annually, when and as declared by the Board of
Directors, commencing in 1994. Such dividends on the Series C
Preferred Shares shall be cumulative so that if all or any
part of such dividends shall not have been paid or distributed
in any year, or declared and set apart, the amount of the
deficiency (without interest) shall be paid or distributed, or
declared and set apart, before any dividend or other
distribution shall be paid upon, or declared and set apart
for, Common Shares. Declared but unpaid dividends shall not
bear interest.
(B) Except as hereinafter provided and subject to the
requirements of applicable law, including, without limitation,
the obtaining of any necessary approvals or consents from the
holders of the Common Shares and/or Series A Preferred Shares
and/or Series B Preferred Shares of the Corporation, any
dividend declared on the Series C Preferred Shares shall be
paid in cash or, at the option of the Corporation, in Common
Shares of the Corporation having a market price, on the day
immediately preceding the date on which such dividend is
declared (the "Valuation Date"), equal to the amount of the
dividend. As used herein, the term "market price" shall
22
<PAGE>
mean the closing selling price or, if not available, the mean
of the closing bid and asked prices, or, if not available, the
mean of the highest bid and lowest asked prices, of the Common
Shares as quoted on a national securities exchange, or in the
over-the-counter market as reported by NASDAQ or, if not
available, by the National Quotation Bureau, Incorporated, as
the case may be, or, if there is no selling or bid or asked
price on a particular day, then the closing selling price or,
if not available, the mean of the closing bid and asked
prices, or, if not available, the mean of the highest bid and
lowest asked prices on the nearest trading date before that
day and for which such prices are available, and if the Common
Shares are not listed on such an exchange or traded in such a
market on the Valuation Date, then the market price shall be
determined by the Board of Directors by taking into
consideration all relevant factors, including, but not limited
to, the Corporation's net worth, prospective earning power and
dividend paying capacity.
(iii) Voting Rights. The holders of the Series C Preferred Shares
shall be entitled to vote on all matters at all meetings of
the shareholders of the Corporation, and shall be entitled to
such number of votes for each Series C Preferred Share
entitled to vote at such meetings as is set forth below,
voting together with the holders of Common Shares, and other
Preferred Shares who are entitled to vote, if any such shares
are then outstanding, and not as a separate class, except as
required by law. The number of votes to which the holders of
the Series C Preferred Shares shall be entitled to vote for
each Series C Preferred Share shall equal the number of Common
Shares of the Corporation into which such Series C Preferred
Share is convertible multiplied by six (6).
(iv) Redemption. The Series C Preferred Shares shall not be
subject to mandatory redemption by either the Corporation
or the holders thereof.
23
<PAGE>
(v) Conversion.
(A) Conversion Right and Price. Each Series C Preferred Share
shall be convertible, at the option of the holder thereof, at
the office of the Corporation, into such number of Common
Shares of the Corporation as is determined by dividing two
dollars seventy-five cents ($2.75) by the Conversion Price (as
hereinafter defined). For purposes hereof, the term
"Conversion Price" shall mean two dollars seventy-five cents
($2.75), subject to adjustment as hereinafter set forth.
(B) Procedure. Before any holder of Series C Preferred Shares
shall be entitled to receive Common Shares upon conversion,
the holder shall (i)(a) surrender the certificate(s) therefor,
duly endorsed, at the office of the Corporation and (ii) shall
give written notice to the Corporation at such office that the
holder elects to convert the same into Common Shares and shall
further state therein the number of Series C Preferred Shares
being converted. Subject to the provisions hereof, effective
thirty (30) days following the later of the receipt by the
Corporation of the certificate(s) pursuant to and in
accordance with (i) above and the written notice pursuant to
and in accordance with (ii) above, or such shorter period of
time as the Board of Directors shall determine with respect to
any particular conversion (such thirtieth (30th) day or end of
shorter period of time being hereinafter referred to as the
"Effective Conversion Date"), the holder shall thereupon be
deemed to be the holder of record of the Common Shares
issuable upon conversion, notwithstanding that the stock
transfer books of the Corporation shall then be closed or that
the certificate(s) representing such Common Shares shall not
then be actually delivered to the holder. Subject to the
provisions hereof, immediately following the Effective
Conversion Date, the Corporation shall cause its transfer
agent to issue and deliver to such holder of Series C
Preferred Shares a certificate(s) for the number of Common
Shares to which the holder shall be entitled.
(C) Adjustment of Conversion Price.
(i) In the event that the Corporation shall (a) pay any
dividend on its Common Shares payable in Common Shares;
24
<PAGE>
(b) effect a subdivision of its outstanding shares into a
greater number of Common Shares (by reclassification, stock
split or otherwise than by payment of a dividend in Common
Shares); (c) effect a combination or consolidation of its
outstanding Common Shares into a lesser number of Common
Shares (by reclassification, reverse split or otherwise); (d)
issue by reclassification, exchange or substitution of its
Common Shares any shares of capital stock of the Corporation
or effect any other transaction having similar effect, the
Conversion Price in effect immediately prior to such action
shall be adjusted so that upon the exercise of the conversion
right hereof at any time after the occurrence of any event
described above, the holder shall be entitled to receive the
Common Shares to which such holder would have been finally
entitled, after giving effect to the occurrence of such event,
as if such holder had converted the Series C Preferred Shares
immediately prior to the occurrence of such event. An
adjustment made pursuant to this paragraph (C) shall become
effective immediately after the record date in the case of a
dividend and shall become effective immediately after the
effective date in the case of a subdivision, combination,
reclassification, exchange or substitution.
(ii) In case of any consolidation or merger to which the
Corporation is a party, other than a merger or consolidation
in which the Corporation is the surviving or continuing
corporation and which does not result in any reclassification
of, or change (other than a change in par value or from par
value to no par value or from no par value to par value, or as
a result of subdivision or combination) in, outstanding Common
Shares, then the Corporation, or such successor corporation,
as the case may be, shall make appropriate provision so that
the holder of each Series C Preferred Share then outstanding
shall have the right to convert such share into the kind and
amount of shares or other securities and property receivable
upon such consolidation or merger by a holder of the number of
Common Shares into which such Series C Preferred Shares might
have been converted immediately prior to such consolidation or
merger.
25
<PAGE>
(D) Fractional Shares. No fractional Common Shares shall be
issued upon conversion of Series C Preferred Shares. In lieu
of any fractional shares to which the holder would otherwise
be entitled, the Corporation shall pay, in cash, an amount
equal to the product of (i) such fraction of a share times
(ii) the market price (as hereinabove defined) of one Common
Share on the Effective Conversion Date.
(E) Reservation of Shares Issuable Upon Conversion. The
Corporation shall at all times use its best efforts to reserve
and keep available out of its authorized but unissued Common
Shares, solely for the purpose of effecting the conversion of
the Series C Preferred Shares, such number of its Common
Shares as shall from time to time be sufficient to effect the
conversion of all outstanding Series C Preferred Shares, and
if at any time the number of authorized but unissued Common
Shares shall not be sufficient to effect the conversion of all
then outstanding Series C Preferred Shares, the Corporation
will, as its sole obligation, subject to the requirements of
applicable state law, take such corporate action as may, in
the opinion of its counsel, be necessary to increase its
authorized but unissued Common Shares to such number of shares
as shall be sufficient for such purposes; provided, however
that nothing contained herein shall preclude the Corporation
from satisfying its obligations in respect of the conversion
of the Series C Preferred Shares by delivery of purchased
Common Shares which are held in the treasury of the
Corporation.
(F) Lost, Stolen or Destroyed Certificates. In the event that
the holder shall notify the Corporation that the
certificate(s) representing Series C Preferred Shares have
been lost, stolen or destroyed and either (i) provide a
letter, in form satisfactory to the Corporation, to the effect
that he will indemnify the Corporation from any loss incurred
by it in connection therewith, and/or (ii) provide an
indemnity bond in such amount as is reasonably required by the
Corporation, the Corporation having the option of electing
either (i) or (ii) or both, the Corporation may, in its sole
26
<PAGE>
discretion, accept such letter and/or indemnity bond in lieu
of the surrender of the certificate(s) as required by
subsections (iv) and (v) hereof.
(G) Statutory Restrictions. The foregoing provisions for
conversion of the Series C Preferred Shares shall be subject
to all applicable statutory limitations and restrictions.
(vi) Liquidation Preference. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Corporation, the holders of Series C Preferred Shares will be
entitled to receive, prior and in preference to any
distribution of the assets or surplus funds of the Corporation
to the holders of any Common Shares by reason of the ownership
thereof, and on a pari passu basis with the holders of the
Series A and Series B Preferred Shares, if
any, an amount equal to (i) the fixed sum of two dollars
seventy-five ($2.75) per share and no more and (ii) all
accrued and unpaid dividends due with respect to the Series C
Preferred Shares (the "Preferential Amount"). If, upon the
occurrence of such an event, the assets and funds thus
distributed among the holders of Series C Preferred Shares
shall be insufficient to permit the payment to such holders of
the full Preferential Amount, then, the entire assets and
funds of the Corporation legally available for distribution to
the holders of the Series C Preferred Shares shall be
distributed ratably among such holders in accordance with the
respective amounts which would be payable on such shares if
all amounts payable thereon were paid in full. After the
payment or setting apart of the full Preferential Amounts
required to be paid to the holders of Series A, Series B and
Series C Preferred Shares, the holders of Common Shares or any
other stock of the Corporation ranking in liquidation junior
to the Series A, Series B and Series C Preferred Shares shall
be entitled to receive ratably all remaining assets or surplus
funds of the Corporation. Neither the merger or consolidation
of the Corporation, nor the sale, lease or conveyance of all
or part of its assets, shall be deemed to be a liquidation,
dissolution or winding up of the
27
<PAGE>
affairs of the Corporation, either voluntarily or
involuntarily, within the meaning of this section.
(vii) Sinking Fund. The Series C Preferred Shares shall not be
entitled to the benefit of any sinking fund to be applied to
their purchase or redemption.
(f) Series D Preferred Shares. A series of Preferred Shares is
hereby created, to be limited in amount to 1,413,337 of the 5,000,000 authorized
Preferred Shares. The designation, relative rights, powers, preferences,
qualifications and limitations are as follows:
(i) Designation of Series. The designation of the series of
Preferred Shares created hereby shall be Series D Preferred
Shares (hereinafter the "Series D Preferred Shares").
(ii) Dividends.
(A) The holders of Series D Preferred Shares, in preference to
the holders of Common Shares and on a pari passu basis with
the holders of Series A Preferred Shares, Series B Preferred
Shares and Series C Preferred Shares, if any, shall be
entitled to receive, when and as declared by the Board of
Directors, dividends at the rate of twenty-five cents ($.25)
per share per annum, and no more. Subject to the requirements
of applicable law, dividends on the Series D Preferred Shares
shall be payable annually, when and as declared by the Board
of Directors, commencing in 1994. Such dividends on the Series
D Preferred Shares shall be cumulative so that if all or any
part of such dividends shall not have been paid or distributed
in any year, or declared and set apart, the amount of the
deficiency (without interest) shall be paid or distributed, or
declared and set apart, before any dividend or other
distribution shall be paid upon, or declared and set apart
for, Common Shares. Declared but unpaid dividends shall not
bear interest.
28
<PAGE>
For dividend purposes, in the event Series D Preferred Shares
are issued in exchange for Series C Preferred Shares, the
Series D Preferred Shares shall be deemed to have been issued
as of the date of issuance of the Series C Preferred Shares
for which they were exchanged.
(B) Except as hereinafter provided and subject to the
requirements of applicable law, including, without limitation,
the obtaining of any necessary approvals or consents from the
holders of the Common Shares and/or Series A Preferred Shares
and/or Series B Preferred Shares and/or Series C Preferred
Shares of the Corporation, any dividend declared on the Series
D Preferred Shares shall be paid in cash or, at the option of
the Corporation, in Common Shares of the Corporation having a
market price, on the day immediately preceding the date on
which such dividend is declared (the "Valuation Date"), equal
to the amount of the dividend. As used herein, the term
"market price" shall mean the closing selling price or, if not
available, the mean of the closing bid and asked prices, or,
if not available, the mean of the highest bid and lowest asked
prices, of the Common Shares as quoted on a national
securities exchange, or in the over-the-counter market as
reported by NASDAQ or, if not available, by the National
Quotation Bureau, Incorporated, as the case may be, or, if
there is no selling or bid or asked price on a particular day,
then the closing selling price or, if not available, the mean
of the closing bid and asked prices, or, if not available, the
mean of the highest bid and lowest asked prices on the nearest
trading date before that day and for which such prices are
available, and if the Common Shares are not listed on such an
exchange or traded in such a market on the Valuation Date,
then the market price shall be determined by the Board of
Directors by taking into consideration all relevant factors,
including, but not limited to, the Corporation's net worth,
prospective earning power and dividend paying capacity.
(iii) Voting Rights. The holders of the Series D Preferred
Shares shall be entitled to vote on all matters at all
meetings of the shareholders of the Corporation, and
29
<PAGE>
shall be entitled to such number of votes for each Series D
Preferred Share entitled to vote at such meetings as is set
forth below, voting together with the holders of Common
Shares, and other Preferred Shares who are entitled to vote,
if any such shares are then outstanding, and not as a separate
class, except as required by law. The number of votes to which
the holders of the Series D Preferred Shares shall be entitled
to vote for each Series D Preferred Share shall equal the
number of Common Shares of the Corporation into which such
Series D Preferred Share is convertible multiplied by six (6).
(iv) Redemption. The Series D Preferred Shares shall not be
subject to mandatory redemption by either the Corporation
or the holders thereof.
(v) Conversion.
(A) Conversion Right and Price. Each Series D Preferred Share
shall be convertible, at the option of the holder thereof, at
the office of the Corporation, into such number of Common
Shares of the Corporation as is determined by dividing two
dollars fifty cents ($2.50) by the Conversion Price (as
hereinafter defined). For purposes hereof, the term
"Conversion Price" shall mean two dollars fifty cents ($2.50),
subject to adjustment as hereinafter set forth.
(B) Procedure. Before any holder of Series D Preferred Shares
shall be entitled to receive Common Shares upon conversion,
the holder shall (i)(a) surrender the certificate(s) therefor,
duly endorsed, at the office of the Corporation and (ii) shall
give written notice to the Corporation at such office that the
holder elects to convert the same into Common Shares and shall
further state therein the number of Series D Preferred Shares
being converted. Subject to the provisions hereof, effective
thirty (30) days following the later of the receipt by the
Corporation of the certificate(s) pursuant to and in
accordance with (i) above and the written notice pursuant to
and in accordance with (ii) above, or such shorter period of
time as the Board of Directors
30
<PAGE>
shall determine with respect to any particular conversion
(such thirtieth (30th) day or end of shorter period of time
being hereinafter referred to as the "Effective Conversion
Date"), the holder shall thereupon be deemed to be the holder
of record of the Common Shares issuable upon conversion,
notwithstanding that the stock transfer books of the
Corporation shall then be closed or that the certificate(s)
representing such Common Shares shall not then be actually
delivered to the holder. Subject to the provisions hereof,
immediately following the Effective Conversion Date, the
Corporation shall cause its transfer agent to issue and
deliver to such holder of Series D Preferred Shares a
certificate(s) for the number of Common Shares to which the
holder shall be entitled.
(C) Adjustment of Conversion Price.
(i) In the event that the Corporation shall (a) pay any
dividend on its Common Shares payable in Common Shares; (b)
effect a subdivision of its outstanding shares into a greater
number of Common Shares (by reclassification, stock split or
otherwise than by payment of a dividend in Common Shares); (c)
effect a combination or consolidation of its outstanding
Common Shares into a lesser number of Common Shares (by
reclassification, reverse split or otherwise); (d) issue by
reclassification, exchange or substitution of its Common
Shares any shares of capital stock of the Corporation or
effect any other transaction having similar effect, the
Conversion Price in effect immediately prior to such action
shall be adjusted so that upon the exercise of the conversion
right hereof at any time after the occurrence of any event
described above, the holder shall be entitled to receive the
Common Shares to which such holder would have been finally
entitled, after giving effect to the occurrence of such event,
as if such holder had converted the Series D Preferred Shares
immediately prior to the occurrence of such event. An
adjustment made pursuant to this paragraph (C) shall become
effective immediately after the record date in the case of a
dividend and shall become effective immediately after the
effective date in the case of a subdivision, combination,
reclassification, exchange or substitution.
31
<PAGE>
(ii) In case of any consolidation or merger to which the
Corporation is a party, other than a merger or consolidation
in which the Corporation is the surviving or continuing
corporation and which does not result in any reclassification
of, or change (other than a change in par value or from par
value to no par value or from no par value to par value, or as
a result of subdivision or combination) in, outstanding Common
Shares, then the Corporation, or such successor corporation,
as the case may be, shall make appropriate provision so that
the holder of each Series D Preferred Share then outstanding
shall have the right to convert such share into the kind and
amount of shares or other securities and property receivable
upon such consolidation or merger by a holder of the number of
Common Shares into which such Series D Preferred Shares might
have been converted immediately prior to such consolidation or
merger.
(D) Fractional Shares. No fractional Common Shares shall be
issued upon conversion of Series D Preferred Shares. In lieu
of any fractional shares to which the holder would otherwise
be entitled, the Corporation shall pay, in cash, an amount
equal to the product of (i) such fraction of a share times
(ii) the market price (as hereinabove defined) of one Common
Share on the Effective Conversion Date.
(E) Reservation of Shares Issuable Upon Conversion. The
Corporation shall at all times use its best efforts to reserve
and keep available out of its authorized but unissued Common
Shares, solely for the purpose of effecting the conversion of
the Series D Preferred Shares, such number of its Common
Shares as shall from time to time be sufficient to effect the
conversion of all outstanding Series D Preferred Shares, and
if at any time the number of authorized but unissued Common
Shares shall not be sufficient to effect the conversion of all
then outstanding Series D Preferred Shares, the Corporation
will, as its sole obligation, subject to the requirements of
applicable state law, take such corporate action as may, in
the opinion of its counsel, be necessary to increase its
authorized but unissued Common Shares to such number of shares
as shall be sufficient
32
<PAGE>
for such purposes; provided, however that nothing contained
herein shall preclude the Corporation from satisfying its
obligations in respect of the conversion of the Series D
Preferred Shares by delivery of purchased Common Shares which
are held in the treasury of the Corporation.
(F) Lost, Stolen or Destroyed Certificates. In the event that
the holder shall notify the Corporation that the
certificate(s) representing Series D Preferred Shares have
been lost, stolen or destroyed and either (i) provide a
letter, in form satisfactory to the Corporation, to the effect
that he will indemnify the Corporation from any loss incurred
by it in connection therewith, and/or (ii) provide an
indemnity bond in such amount as is reasonably required by the
Corporation, the Corporation having the option of electing
either (i) or (ii) or both, the Corporation may, in its sole
discretion, accept such letter and/or indemnity bond in lieu
of the surrender of the certificate(s) as required by
subsections (iv) and (v) hereof.
(G) Statutory Restrictions. The foregoing provisions for
conversion of the Series D Preferred Shares shall be subject
to all applicable statutory limitations and restrictions.
(vi) Liquidation Preference. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Corporation, the holders of Series D Preferred Shares will be
entitled to receive, prior and in preference to any
distribution of the assets or surplus funds of the Corporation
to the holders of any Common Shares by reason of the ownership
thereof, and on a pari passu basis with the holders of the
Series A, Series B and Series C Preferred Shares, if any, an
amount equal to (i) the fixed sum of two dollars fifty cents
($2.50) per share and no more and (ii) all accrued and unpaid
dividends due with respect to the Series D Preferred Shares
(the "Preferential Amount"). If, upon the occurrence of such
an event, the assets and funds thus distributed among the
holders of Series D Preferred Shares shall be insufficient to
permit the payment to such holders of the
33
<PAGE>
full Preferential Amount, then, the entire assets and funds of
the Corporation legally available for distribution to the
holders of the Series D Preferred Shares shall be distributed
ratably among such holders in accordance with the respective
amounts which would be payable on such shares if all amounts
payable thereon were paid in full. After the payment or
setting apart of the full Preferential Amounts required to be
paid to the holders of Series A, Series B, Series C and Series
D Preferred Shares, the holders of Common Shares or any other
stock of the Corporation ranking in liquidation junior to the
Series A, Series B, Series C and Series D Preferred Shares
shall be entitled to receive ratably all remaining assets or
surplus funds of the Corporation. Neither the merger or
consolidation of the Corporation, nor the sale, lease or
conveyance of all or part of its assets, shall be deemed to be
a liquidation, dissolution or winding up of the affairs of the
Corporation, either voluntarily or involuntarily, within the
meaning of this section.
(vii) Sinking Fund. The Series D Preferred Shares shall not be
entitled to the benefit of any sinking fund to be applied to
their purchase or redemption.
(g) Series E Preferred Shares. A series of Preferred Shares is
hereby created, to be limited in amount to 1,085,000 of the 5,000,000 authorized
Preferred Shares. The designation, relative rights, powers, preferences,
qualifications and limitations are as follows:
(i) Designation of Series. The designation of the series of
Preferred Shares created hereby shall be Series E Preferred
Shares (hereinafter the "Series E Preferred Shares").
(ii) Dividends.
34
<PAGE>
(A) The holders of Series E Preferred Shares, in preference to
the holders of Common Shares and on a pari passu basis with
the holders of Series A Preferred Shares, Series B Preferred
Shares, Series C Preferred Shares and Series D Preferred
Shares, if any, shall be entitled to receive, when and as
declared by the Board of Directors, dividends at the rate of
twenty-two and one-half cents ($.225) per share per annum, and
no more. Subject to the requirements of applicable law,
dividends on the Series E Preferred Shares shall be payable
annually, when and as declared by the Board of Directors,
commencing in 1996. Such dividends on the Series E Preferred
Shares shall be cumulative so that if all or any part of such
dividends shall not have been paid or distributed in any year,
or declared and set apart, the amount of the deficiency
(without interest) shall be paid or distributed, or declared
and set apart, before any dividend or other distribution shall
be paid upon, or declared and set apart for, Common Shares.
Declared but unpaid dividends shall not bear interest.
(B) Except as hereinafter provided and subject to the
requirements of applicable law, including, without limitation,
the obtaining of any necessary approvals or consents from the
holders of the Common Shares and/or Series A Preferred Shares
and/or Series B Preferred Shares and/or Series C Preferred
Shares and/or Series D Preferred Shares of the Corporation,
any dividend declared on the Series E Preferred Shares shall
be paid in cash or, at the option of the Corporation, in
Common Shares of the Corporation, the number of which shall be
equal to the amount of the dividend divided by the Conversion
Price (as hereinafter defined) then in effect.
(iii) Voting Rights. The holders of the Series E Preferred Shares
shall be entitled to vote on all matters at all meetings of
the shareholders of the Corporation, and shall be entitled to
such number of votes for each Series E Preferred Share
entitled to vote at such meetings as is set forth below,
voting together with the holders of Common Shares, and other
Preferred Shares who are entitled to vote, if any such shares
are then outstanding, and not as a separate class, except as
35
<PAGE>
required by law. The number of votes to which the holders of
the Series E Preferred Shares shall be entitled to vote for
each Series E Preferred Share shall equal the number of Common
Shares of the Corporation into which such Series E Preferred
Share is convertible.
(iv) Redemption. The Series E Preferred Shares shall not be
subject to mandatory redemption by either the Corporation
or the holders thereof.
(v) Conversion.
(A) Conversion Right and Price. Each Series E Preferred Share
shall be convertible, at the option of the holder thereof, at
the office of the Corporation, into such number of Common
Shares of the Corporation as is determined by dividing two
dollars eighty-one and one-quarter cents ($2.8125) by the
Conversion Price (as hereinafter defined). For purposes
hereof, the term "Conversion Price" shall mean two dollars
eighty-one and one-quarter cents ($2.8125), subject to
adjustment as hereinafter set forth.
(B) Procedure. Before any holder of Series E Preferred Shares
shall be entitled to receive Common Shares upon conversion,
the holder shall (i)(a) surrender the certificate(s) therefor,
duly endorsed, at the office of the Corporation and (ii) shall
give written notice to the Corporation at such office that the
holder elects to convert the same into Common Shares and shall
further state therein the number of Series E Preferred Shares
being converted. Subject to the provisions hereof, effective
thirty (30) days following the later of the receipt by the
Corporation of the certificate(s) pursuant to and in
accordance with (i) above and the written notice pursuant to
and in accordance with (ii) above, or such shorter period of
time as the Board of Directors shall determine with respect to
any particular conversion (such thirtieth (30th) day or end of
shorter period of time being hereinafter referred to as the
"Effective Conversion Date"), the holder shall thereupon be
deemed to be the holder of record of the Common Shares
issuable upon conversion, notwithstanding that the stock
transfer
36
<PAGE>
books of the Corporation shall then be closed or that the
certificate(s) representing such Common Shares shall not then
be actually delivered to the holder. Subject to the provisions
hereof, immediately following the Effective Conversion Date,
the Corporation shall cause its transfer agent to issue and
deliver to such holder of Series E Preferred Shares a
certificate(s) for the number of Common Shares to which the
holder shall be entitled.
(C) Adjustment of Conversion Price.
(i) In the event that the Corporation shall (a) pay any
dividend on its Common Shares payable in Common Shares; (b)
effect a subdivision of its outstanding shares into a greater
number of Common Shares (by reclassification, stock split or
otherwise than by payment of a dividend in Common Shares); (c)
effect a combination or consolidation of its outstanding
Common Shares into a lesser number of Common Shares (by
reclassification, reverse split or otherwise); (d) issue by
reclassification, exchange or substitution of its Common
Shares any shares of capital stock of the Corporation or
effect any other transaction having similar effect, the
Conversion Price in effect immediately prior to such action
shall be adjusted so that upon the exercise of the conversion
right hereof at any time after the occurrence of any event
described above, the holder shall be entitled to receive the
Common Shares to which such holder would have been finally
entitled, after giving effect to the occurrence of such event,
as if such holder had converted the Series E Preferred Shares
immediately prior to the occurrence of such event. An
adjustment made pursuant to this paragraph (C) shall become
effective immediately after the record date in the case of a
dividend and shall become effective immediately after the
effective date in the case of a subdivision, combination,
reclassification, exchange or substitution.
(ii) In case of any consolidation or merger to which the
Corporation is a party, other than a merger or consolidation
in which the Corporation is the surviving or continuing
corporation and which does not result in any reclassification
of, or change (other than a change
37
<PAGE>
in par value or from par value to no par value or from no par
value to par value, or as a result of subdivision or
combination) in, outstanding Common Shares, then the
Corporation, or such successor corporation, as the case may
be, shall make appropriate provision so that the holder of
each Series E Preferred Share then outstanding shall have the
right to convert such share into the kind and amount of shares
or other securities and property receivable upon such
consolidation or merger by a holder of the number of Common
Shares into which such Series E Preferred Shares might have
been converted immediately prior to such consolidation or
merger.
(iii) In the event, as of June 30, 1996, the Common Shares are
listed on an Exchange or traded in the OTC Market and the June
1996 Common Share Price (as hereinafter defined) does not
equal or exceed the Conversion Price then in effect, the
Conversion Price shall thereupon, effective June 30, 1996, be
reduced to equal the June 1996 Common Share Price. As used
herein, (a) the term "June 1996 Common Share Price" shall mean
the average of the "market prices" of the Common Shares of the
Corporation during the last five (5) trading days immediately
preceding June 30, 1996 and (b) the term "market price" shall
mean the closing bid price or, if not available, the highest
bid price of the Common Shares as quoted on an Exchange or in
the OTC Market, as reported by NASDAQ or, if not available, by
NQBI.
(D) Fractional Shares. No fractional Common Shares shall be
issued upon conversion of Series E Preferred Shares. In lieu
of any fractional shares to which the holder would otherwise
be entitled, the Corporation shall pay, in cash, an amount
equal to the product of (i) such fraction of a share times
(ii) the market price (as hereinabove defined) of one Common
Share on the Effective Conversion Date.
(E) Reservation of Shares Issuable Upon Conversion. The
Corporation shall at all times use its best efforts to reserve
and keep available out of its authorized but unissued Common
Shares, solely for the purpose of effecting the conversion of
the Series E Preferred
38
<PAGE>
Shares, such number of its Common Shares as shall from time to
time be sufficient to effect the conversion of all outstanding
Series E Preferred Shares, and if at any time the number of
authorized but unissued Common Shares shall not be sufficient
to effect the conversion of all then outstanding Series E
Preferred Shares, the Corporation will, as its sole
obligation, subject to the requirements of applicable state
law, take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued
Common Shares to such number of shares as shall be sufficient
for such purposes; provided, however that nothing contained
herein shall preclude the Corporation from satisfying its
obligations in respect of the conversion of the Series E
Preferred Shares by delivery of purchased Common Shares which
are held in the treasury of the Corporation.
(F) Lost, Stolen or Destroyed Certificates. In the event that
the holder shall notify the Corporation that the
certificate(s) representing Series E Preferred Shares have
been lost, stolen or destroyed and either (i) provide a
letter, in form satisfactory to the Corporation, to the effect
that he will indemnify the Corporation from any loss incurred
by it in connection therewith, and/or (ii) provide an
indemnity bond in such amount as is reasonably required by the
Corporation, the Corporation having the option of electing
either (i) or (ii) or both, the Corporation may, in its sole
discretion, accept such letter and/or indemnity bond in lieu
of the surrender of the certificate(s) as required by the
subsection (v).
(G) Statutory Restrictions. The foregoing provisions for
conversion of the Series E Preferred Shares shall be subject
to all applicable statutory limitations and restrictions.
(vi) Liquidation Preference. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Corporation, the holders of Series E Preferred Shares
will be entitled to receive, prior and in preference to
any distribution of the assets or surplus funds of the
39
<PAGE>
Corporation to the holders of any Common Shares by reason of
the ownership thereof, and on a pari passu basis with the
holders of the Series A, Series B, Series C and Series D
Preferred Shares, if any, an amount equal to (i) the fixed sum
of two dollars eighty-one and one-quarter cents ($2.8125) per
share and no more and (ii) all accrued and unpaid dividends
due with respect to the Series E Preferred Shares (the
"Preferential Amount"). If, upon the occurrence of such an
event, the assets and funds thus distributed among the holders
of Series E Preferred Shares shall be insufficient to permit
the payment to such holders of the full Preferential Amount,
then, the entire assets and funds of the Corporation legally
available for distribution to the holders of the Series E
Preferred Shares shall be distributed ratably among such
holders in accordance with the respective amounts which would
be payable on such shares if all amounts payable thereon were
paid in full. After the payment or setting apart of the full
Preferential Amounts required to be paid to the holders of
Series A, Series B, Series C, Series D and Series E Preferred
Shares, the holders of Common Shares or any other stock of the
Corporation ranking in liquidation junior to the Series A,
Series B, Series C, Series D and Series E Preferred Shares
shall be entitled to receive ratably all remaining assets or
surplus funds of the Corporation. Neither the merger or
consolidation of the Corporation, nor the sale, lease or
conveyance of all or part of its assets, shall be deemed to be
a liquidation, dissolution or winding up of the affairs of the
Corporation, either voluntarily or involuntarily, within the
meaning of this section.
(vii) Sinking Fund. The Series E Preferred Shares shall not be
entitled to the benefit of any sinking fund to be applied to
their purchase or redemption.
(h) Series F Preferred Shares. A series of Preferred Shares is
hereby created, to be limited in amount to 415,250 of the 5,000,000 authorized
Preferred Shares. The designation, relative rights, powers, preferences,
qualifications and limitations are as follows:
40
<PAGE>
(i) Designation of Series. The designation of the series of
Preferred Shares created hereby shall be Series F Preferred
Shares (hereinafter the "Series F Preferred Shares").
(ii) Dividends.
The holders of Series F Preferred Shares, on a pari passu
basis with the holders of the Corporation's Common Shares
(based upon the number of Common Shares into which the Series
F Preferred Shares are convertible), shall be entitled to
receive such dividends as may be declared by the Board of
Directors. Declared but unpaid dividends shall not bear
interest.
The rights of the holders of the Series F Preferred Shares
shall be junior and subordinate to the rights of the holders
of the Series A, Series B, Series C, Series D and Series E
Preferred Shares of the Corporation to receive dividends, as
well as to the right of any other series of Preferred Shares
of the Corporation hereafter created which shall have any
preferential right to receive dividends before the holders of
the Common Shares.
(iii) Voting Rights. The holders of the Series F Preferred Shares
shall be entitled to vote on all matters at all meetings of
the shareholders of the Corporation, and shall be entitled to
such number of votes for each Series F Preferred Share
entitled to vote at such meetings as is set forth below,
voting together with the holders of Common Shares, and other
Preferred Shares who are entitled to vote, if any such shares
are then outstanding, and not as a separate class, except as
required by law. The number of votes to which the holders of
the Series F Preferred Shares shall be entitled to vote for
each Series F Preferred Share shall equal the number of Common
Shares of the Corporation into which such Series F Preferred
Share is convertible.
41
<PAGE>
(iv) Redemption. The Corporation may elect, at its option, at any
time and from time to time, by notice given as provided below,
to redeem all or any part of the outstanding Series F
Preferred Shares, from any or all holders thereof, at a
redemption price of five dollars ($5.00) per share (the
"Redemption Price").
If the Corporation elects to redeem all or any part of the
outstanding Series F Preferred Shares, notice of such
redemption (the "Redemption Notice") shall be given by mailing
the same to every holder of record of any shares then to be
redeemed, not less than thirty (30) prior to the date fixed as
the date for the redemption thereof (the "Redemption Date"),
at the respective addresses of such holders as the same shall
appear on the stock transfer books of the Corporation. The
Redemption Notice shall state that the shares specified in
such notice will be redeemed by the Corporation at the
Redemption Price on the Redemption Date, upon the surrender
for cancellation, at the place designated in such notice, of
the certificate(s) representing the shares so to be redeemed,
properly endorsed for transfer, or accompanied by a proper
instrument of assignment and transfer, and bearing all
necessary transfer tax stamps thereto affixed and canceled.
Following receipt of the Redemption Notice and at any time
before the Redemption Date, each holder of shares called for
redemption may elect to convert all or any part of such shares
into Common Shares of the Corporation pursuant to and in
accordance with (v) below. On and after the Redemption Date,
each holder of shares called for redemption who has not
converted such shares shall be entitled to receive therefor,
in cash, the Redemption Price upon presentation and surrender
at the place designated in such notice of the certificate(s)
for shares held by such holder and called for redemption,
properly endorsed for transfer or accompanied by proper
instruments of assignment or transfer, and bearing all
necessary transfer tax stamps thereto affixed and
42
<PAGE>
canceled. If the Corporation shall give notice of redemption
as aforesaid, all shares called for redemption and not
converted shall be deemed to have been redeemed on the
Redemption Date, whether or not the certificates for said
shares shall be surrendered for redemption and cancellation,
and said shares so called for redemption shall from and after
said date cease to represent any interest whatever in the
Corporation or its property, and the holders thereof shall
have no rights other than the right to receive the Redemption
Price, without interest thereon.
(v) Conversion.
(A) Conversion Right and Price. Each Series F Preferred Share
shall be convertible, at the option of the holder thereof, at
the office of the Corporation, into such number of Common
Shares of the Corporation as is determined by dividing five
dollars ($5.00) by the Conversion Price (as hereinafter
defined). For purposes hereof, the term "Conversion Price"
shall mean five dollars ($5.00), subject to adjustment as
hereinafter set forth.
(B) Procedure. Before any holder of Series F Preferred Shares
shall be entitled to receive Common Shares upon conversion,
the holder shall (i)(a) surrender the certificate(s) therefor,
duly endorsed, at the office of the Corporation and (ii) shall
give written notice to the Corporation at such office that the
holder elects to convert the same into Common Shares and shall
further state therein the number of Series F Preferred Shares
being converted. Subject to the provisions hereof, effective
thirty (30) days following the later of the receipt by the
Corporation of the certificate(s) pursuant to and in
accordance with (i) above and the written notice pursuant to
and in accordance with (ii) above, or such shorter period of
time as the Board of Directors shall determine with respect to
any particular conversion (such thirtieth (30th) day or end of
shorter period of time being hereinafter referred to as the
"Effective
43
<PAGE>
Conversion Date"), the holder shall thereupon be deemed to be
the holder of record of the Common Shares issuable upon
conversion, notwithstanding that the stock transfer books of
the Corporation shall then be closed or that the
certificate(s) representing such Common Shares shall not then
be actually delivered to the holder. Subject to the provisions
hereof, immediately following the Effective Conversion Date,
the Corporation shall cause its transfer agent to issue and
deliver to such holder of Series F Preferred Shares a
certificate(s) for the number of Common Shares to which the
holder shall be entitled.
(C) Adjustment of Conversion Price.
(i) In the event that the Corporation shall (a) pay any
dividend on its Common Shares payable in Common Shares; (b)
effect a subdivision of its outstanding shares into a greater
number of Common Shares (by reclassification, stock split or
otherwise than by payment of a dividend in Common Shares); (c)
effect a combination or consolidation of its outstanding
Common Shares into a lesser number of Common Shares (by
reclassification, reverse split or otherwise); (d) issue by
reclassification, exchange or substitution of its Common
Shares any shares of capital stock of the Corporation or
effect any other transaction having similar effect, the
Conversion Price in effect immediately prior to such action
shall be adjusted so that upon the exercise of the conversion
right hereof at any time after the occurrence of any event
described above, the holder shall be entitled to receive the
Common Shares to which such holder would have been finally
entitled, after giving effect to the occurrence of such event,
as if such holder had converted the Series F Preferred Shares
immediately prior to the occurrence of such event. An
adjustment made pursuant to this paragraph (C) shall become
effective immediately after the record date in the case of a
dividend and shall become effective immediately after the
effective date in the case of a subdivision, combination,
reclassification, exchange or substitution.
44
<PAGE>
(ii) In case of any consolidation or merger to which the
Corporation is a party, other than a merger or consolidation
in which the Corporation is the surviving or continuing
corporation and which does not result in any reclassification
of, or change (other than a change in par value or from par
value to no par value or from no par value to par value, or as
a result of subdivision or combination) in, outstanding Common
Shares, then the Corporation, or such successor corporation,
as the case may be, shall make appropriate provision so that
the holder of each Series F Preferred Share then outstanding
shall have the right to convert such share into the kind and
amount of shares or other securities and property receivable
upon such consolidation or merger by a holder of the number of
Common Shares into which such Series F Preferred Shares might
have been converted immediately prior to such consolidation or
merger.
(iii) In the event, as of October 10, 1997, the Common Shares
are listed on a national securities exchange (an "Exchange")
or traded in the over-the-counter market (the "OTC Market")
and the October 1997 Common Share Price (as hereinafter
defined) does not equal or exceed the Conversion Price then in
effect, the Conversion Price shall thereupon, effective
October 10, 1997, be reduced to equal the October 1997 Common
Share Price. As used herein, (a) the term "October 1997 Common
Share Price" shall mean the average of the "market prices" of
the Common Shares of the Corporation during the trading days
from October 1, 1997 through October 10, 1997 and (b) the term
"market price" shall mean the closing price or, if not
available, the average of the closing bid and asked prices or,
if not available, the average of the highest bid and lowest
asked prices of the Common Shares as quoted on an Exchange or
in the OTC Market, as reported by NASDAQ or, if not available,
by the National Quotation Bureau, Incorporated; provided,
however, that, in no event shall the Conversion Price be
reduced to less than three dollars fifty cents ($3.50) per
share (subject to adjustment pursuant to the provisions of
subparagraphs (i) and (ii) of this paragraph (C)) pursuant to
the
45
<PAGE>
provisions of this subparagraph (iii). Any adjustment pursuant
to the provisions of this subparagraph (iii) shall apply only
to such Series F Preferred Shares which are outstanding as of
the effective date of the adjustment and shall not apply
retroactively with respect to any Series F Preferred Shares
theretofore converted.
(D) Fractional Shares. No fractional Common Shares shall be
issued upon conversion of Series F Preferred Shares. In lieu
of any fractional shares to which the holder would otherwise
be entitled, the Corporation shall pay, in cash, an amount
equal to the product of (i) such fraction of a share times
(ii) the market price (as hereinabove defined) of one Common
Share on the Effective Conversion Date.
(E) Reservation of Shares Issuable Upon Conversion. The
Corporation shall at all times use its best efforts to reserve
and keep available out of its authorized but unissued Common
Shares, solely for the purpose of effecting the conversion of
the Series F Preferred Shares, such number of its Common
Shares as shall from time to time be sufficient to effect the
conversion of all outstanding Series F Preferred Shares, and
if at any time the number of authorized but unissued Common
Shares shall not be sufficient to effect the conversion of all
then outstanding Series F Preferred Shares, the Corporation
will, as its sole obligation, subject to the requirements of
applicable state law, take such corporate action as may, in
the opinion of its counsel, be necessary to increase its
authorized but unissued Common Shares to such number of shares
as shall be sufficient for such purposes; provided, however
that nothing contained herein shall preclude the Corporation
from satisfying its obligations in respect of the conversion
of the Series F Preferred Shares by delivery of purchased
Common Shares which are held in the treasury of the
Corporation.
(F) Lost, Stolen or Destroyed Certificates. In the
event that the holder shall notify the Corporation that
46
<PAGE>
the certificate(s) representing Series F Preferred Shares have
been lost, stolen or destroyed and either (i) provide a
letter, in form satisfactory to the Corporation, to the effect
that he will indemnify the Corporation from any loss incurred
by it in connection therewith, and/or (ii) provide an
indemnity bond in such amount as is reasonably required by the
Corporation, the Corporation having the option of electing
either (i) or (ii) or both, the Corporation may, in its sole
discretion, accept such letter and/or indemnity bond in lieu
of the surrender of the certificate(s) as required by this
subsection (v).
(G) Statutory Restrictions. The foregoing provisions for
conversion of the Series F Preferred Shares shall be subject
to all applicable statutory limitations and restrictions.
(vi) Liquidation Preference. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Corporation, the holders of Series F Preferred Shares will be
entitled to receive, prior and in preference to any
distribution of the assets or surplus funds of the Corporation
to the holders of any Common Shares by reason of the ownership
thereof, and on a pari passu basis with
the holders of the Series A, Series B, Series C, Series D and
Series E Preferred Shares, if any, an amount equal to the
fixed sum of five dollars ($5.00) per share and no more (the
"Preferential Amount"). If, upon the occurrence of such an
event, the assets and funds thus distributed among the holders
of Series F Preferred Shares shall be insufficient to permit
the payment to such holders of the full Preferential Amount,
then, the entire assets and funds of the Corporation legally
available for distribution to the holders of the Series F
Preferred Shares shall be distributed ratably among such
holders in accordance with the respective amounts which would
be payable on such shares if all amounts payable thereon were
paid in full. After the payment or setting apart of the full
Preferential Amounts required to be paid to the holders of
Series A, Series B, Series
47
<PAGE>
C, Series D, Series E and Series F Preferred Shares, the
holders of Common Shares or any other stock of the Corporation
ranking in liquidation junior to the Series A, Series B,
Series C, Series D, Series E and Series F Preferred Shares
shall be entitled to receive ratably all remaining assets or
surplus funds of the Corporation. Neither the merger or
consolidation of the Corporation, nor the sale, lease or
conveyance of all or part of its assets, shall be deemed to be
a liquidation, dissolution or winding up of the affairs of the
Corporation, either voluntarily or involuntarily, within the
meaning of this section.
(vii) Sinking Fund. The Series F Preferred Shares shall not be
entitled to the benefit of any sinking fund to be applied to
their purchase or redemption.
(i) Series G Preferred Shares. A series of Preferred Stock is
hereby created, to be limited in amount to 145,000 of the 5,000,000 authorized
shares of Preferred Stock. The designation, relative rights, powers,
preferences, qualifications and limitations are as follows:
Section 1. Designation, Amount and Par Value. The
---------------------------------
series of Preferred Stock shall be designated as the Series G Convertible
Preferred Stock (the "Series G Preferred Stock"), and the number of shares so
designated shall be 145,000, of which 20,000 is reserved for issuance solely for
payment of stock dividends, if any, hereunder. The par value of each share of
Preferred Stock shall be $.001. Each share of Preferred Stock shall have a
stated value of $20 per share (the "Stated Value"). The Series G Preferred Stock
shall rank, with respect to dividends and distributions upon a Liquidation (as
hereinafter defined) or otherwise, pari passu with each other series of
preferred stock of the Company outstanding as of the Original Issue Date,
including without limitation the Company's Series B Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred
48
<PAGE>
Stock, and shall rank pari passu with respect to dividends and distributions
upon a Liquidation or otherwise with each other series of preferred stock of the
Company hereafter created unless the terms of such other series of preferred
stock expressly states that such series ranks junior to the Series G Preferred
Stock. All such other series of preferred stock ranking pari passu with the
Series G Preferred Stock is referred to as the "Other Preferred Stock."
Section 2. Dividends.
----------------------
(a) Holders of Series G Preferred Stock shall be entitled to
receive, when and as declared by the Board of Directors out of funds legally
available therefor, and the Company shall pay, cumulative dividends at the rate
per share (as a percentage of the Stated Value per share) equal to 5% per annum,
payable, in cash or (at the Company's option) shares of Common Stock or
additional Series G Preferred Stock, which the Company shall immediately convert
into shares of Common Stock at the Conversion Ratio (as hereinafter defined), in
arrears on the Conversion Date (as hereinafter defined) without interest.
Dividends on the Series G Preferred Stock shall accrue daily commencing the
Original Issue Date (as defined in Section 7) and shall be deemed to accrue on
such date whether or not earned or declared and whether or not there are
profits, surplus or other funds of the Company legally available for the payment
of dividends. The party that holds the Series G Preferred Stock on an applicable
record date for any dividend payment will be entitled to receive such dividend
payment and any other accrued and unpaid dividends which accrued prior to such
dividend payment date, without regard to any sale or disposition of such Series
G Preferred Stock subsequent to the applicable record date but prior to the
applicable dividend payment date. Except as otherwise provided herein, if at any
time the Company pays less than the total amount of dividends then accrued to
the Series G Preferred Stock, such payment shall be distributed ratably among
the holders of such series based upon the number of shares held by each holder.
(b) So long as any Series G Preferred Stock shall remain
outstanding, neither the Company nor any subsidiary thereof shall redeem,
purchase or otherwise acquire directly or indirectly any Junior Securities (as
defined in Section 7), nor shall the Company
49
<PAGE>
directly or indirectly pay or declare any dividend or make any distribution
(other than a dividend or distribution described in Section 5) upon, nor shall
any distribution be made in respect of, any Junior Securities, nor shall any
monies be set aside for or applied to the purchase or redemption (through a
sinking fund or otherwise) of any Junior Securities unless all dividends on the
Series G Preferred Stock for all past dividend periods shall have been paid.
Section 3. Voting Rights. The holders of Series G Preferred
---------------------------
Stock shall be entitled vote on all matters for which holders of the Company's
Common Stock are entitled to vote, and shall vote together with such Common
Stock as a single class. Each share of Series G Preferred Stock shall be
entitled to the number of votes on such matters as equals the number of shares
of Common Stock issuable upon conversion of such share of Series G Preferred
Stock had such share been converted on the Original Issue Date in accordance
with the terms hereof. So long as any shares of Series G Preferred Stock are
outstanding, the Company shall not, without the affirmative vote of the holders
of a majority of the shares of the Series G Preferred Stock then outstanding,
(i) alter or change adversely the powers, preferences or rights given to the
Series G Preferred Stock (except that the foregoing shall not be construed to
limit the ability of the Company, without the vote of such holders, to grant
such voting rights or, subject to the other provisions set forth herein,
conversion rights, as it may determine with regard to shares of its capital
stock now or hereafter authorized) or (ii) authorize or create any class of
stock ranking as to dividends or distribution of assets upon a Liquidation (as
defined below) senior to, or prior to the Series G Preferred Stock.
Section 4. Liquidation. Upon any liquidation, dissolution or
-----------------------
winding-up of the Company, whether voluntary or involuntary (a "Liquidation"),
the holders of shares of Series G Preferred Stock shall be entitled to receive
out of the assets of the Company, whether such assets are capital or surplus,
for each share of Series G Preferred Stock an amount equal to the Stated Value,
plus an amount equal to accrued but unpaid dividends per share, whether declared
or not, but without interest, before any distribution or payment shall be made
to the holders of any Junior Securities, and if the assets of the Company shall
be insufficient to pay in full such amounts, then the entire assets to be
50
<PAGE>
distributed shall be distributed among the holders of Series G Preferred Stock
ratably in accordance with the respective amounts that would be payable on such
shares if all amounts payable thereon were paid in full. A sale, conveyance or
disposition of all or substantially all of the assets of the Company or the
effectuation by the Company of a transaction or series of related transactions
in which more than 50% of the voting power of the Company is disposed of shall
be deemed a Liquidation; provided that, a consolidation or merger of the Company
with or into any other company or companies shall not be treated as a
Liquidation, but instead shall be subject to the provisions of Section 5. The
Company shall mail written notice of any such liquidation, not less than 45 days
prior to the payment date stated therein, to each record holder of Series G
Preferred Stock.
Section 5. Conversion.
-----------------------
(a) Each share of Preferred Stock shall be convertible into
shares of Common Stock at the Conversion Ratio at the option of the holder in
whole or in part at any time after the expiration of the earlier to occur of (i)
90 days after the Original Issue Date and (ii) the date that the Securities and
Exchange Commission (the "Commission") declares effective under the Securities
Act of 1933, as amended (the "Securities Act"), the registration statement (the
"Registration Statement") contemplated by the Registration Rights Agreement (the
"Registration Rights Agreement"), by and between the Company and the original
holder of Series G Preferred Stock relating to the Series G Preferred Stock and
the shares of Common Stock into which the Series G Preferred Stock is
convertible in accordance with the terms hereof. Any conversion under this
Section 5(a) shall be of a minimum amount of at least 1,000 shares of Series G
Preferred Stock. The holder shall effect conversions by surrendering the
certificate or certificates representing the shares of Series G Preferred Stock
to be converted to the Company, together with the form of conversion notice
attached hereto as Exhibit A (the "Holder Conversion Notice") in the manner set
forth in Section 5(j). Each Holder Conversion Notice shall specify the number of
shares of Series G Preferred Stock to be converted and the date on which such
conversion is to be effected, which date may not be prior to the date the holder
delivers such Notice by facsimile (the "Holder Conversion Date"). Subject to
Section 5(c) and, as to the original holder (or its sole designee), subject to
51
<PAGE>
Section 3.11 of the Purchase Agreement (as defined in Section 7), each Holder
Conversion Notice, once given, shall be irrevocable. If the holder is converting
less than all shares of Series G Preferred Stock represented by the certificate
or certificates tendered by the holder with the Holder Conversion Notice, the
Company shall promptly deliver to the holder a certificate for such number of
shares as have not been converted.
(b) Provided that 10 Trading Days shall have elapsed from the
date the Commission declared the Registration Statement effective under the
Securities Act, each share of the Series G Preferred Stock shall be convertible
into shares of Common Stock at the Conversion Ratio at the option of the Company
in whole or in part at any time on or after the expiration of one year after the
Original Issue Date; provided, however, that the Company is not permitted to
deliver a Company Conversion Notice (as defined below) within 10 days of issuing
any press release or other public statement relating to such conversion. The
Company shall effect such conversion by delivering to the holders of such shares
of Series G Preferred Stock to be converted a written notice in the form
attached hereto as Exhibit B (the "Company Conversion Notice"), which Company
Conversion Notice, once given, shall be irrevocable. Each Company Conversion
Notice shall specify the number of shares of Preferred Stock to be converted and
the date on which such conversion is to be effected, which date will be at least
one Trading Day after the date the Company delivers such Notice by facsimile to
the holder (the "Company Conversion Date"). The Company shall give such Company
Conversion Notice in accordance with Section 5(j) below at least one Trading Day
before the Company Conversion Date. Any such conversion shall be effected on a
pro rata basis among the holders of Series G Preferred Stock. Upon the
conversion of shares of Series G Preferred Stock pursuant to a Company
Conversion Notice, the holders of the Series G Preferred Stock shall surrender
the certificates representing such shares at the office of the Company or of any
transfer agent for the Series G Preferred Stock or Common Stock. If the Company
is converting less than all shares of the Series G Preferred Stock, the Company
shall, upon conversion of such shares subject to such Company Conversion Notice
and receipt of the certificate or certificates representing such shares of
Series G Preferred Stock deliver to the holder or holders a certificate for such
number of shares of Series G Preferred Stock as have not been converted. Each of
a Holder
52
<PAGE>
Conversion Notice and a Company Conversion Notice is sometimes referred to
herein as a "Conversion Notice," and each of a "Holder Conversion Date" and a
"Company Conversion Date" is sometimes referred to herein as a "Conversion
Date."
(c) (i) If on any Conversion Date for any shares of Series G
Preferred Stock applicable to any conversion under Section 5(a) or 5(b), the
average Per Share Market Value of the Common Stock for the five (5) Trading Days
immediately preceding the Conversion Date exceeds 150% of the Initial Conversion
Price (as hereinafter defined), the number of shares issuable upon conversion of
such shares of Series G Preferred Stock shall be reduced by a number of shares
equal to 50% of (A) the amount by which such Per Share Market Value exceeds 150%
of the Initial Conversion Price, divided by (B) such average Per Share Market
Value, times (C) the number of shares which would otherwise be issuable upon
such conversion, but for the reduction provided for in this Section 5(c)(i).
(ii) Not later than three Trading Days after the
Conversion Date, the Company will deliver to the holder (i) a certificate or
certificates which shall be free of restrictive legends and trading restrictions
(other than those then required by law and as set forth in the Purchase
Agreement), representing the number of shares of Common Stock being acquired
upon the conversion of shares of Series G Preferred Stock and (ii) one or more
certificates representing the number of shares of Series G Preferred Stock not
converted; provided, however that the Company shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon conversion of
any shares of Series G Preferred Stock until certificates evidencing such shares
of Series G Preferred Stock are either delivered for conversion to the Company
or any transfer agent for the Series G Preferred Stock or Common Stock, or the
holder notifies the Company that such certificates have been lost, stolen or
destroyed and provides a bond (or other adequate security reasonably acceptable
to the Company) satisfactory to the Company to indemnify the Company from any
loss incurred by it in connection therewith. The Company shall, upon request of
the holder, use its best efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section 5(c) electronically
through the Depository Trust Corporation or another established clearing
corporation performing similar functions. In the case of a
53
<PAGE>
conversion pursuant to a Holder Conversion Notice, if such certificate or
certificates are not delivered by the date required under this Section 5(c), the
holder shall be entitled by written notice to the Company at any time on or
before such holder's receipt of such certificate or certificates thereafter, to
rescind such conversion, in which event the Company shall immediately return the
certificates representing the shares of Preferred Stock tendered for conversion.
(d) (i) The conversion price for each share of Series G
Preferred Stock (the "Conversion Price") in effect on any Conversion Date shall
be the lesser of (a) the average Per Share Market Value for the five (5) Trading
Days immediately preceding the Original Issuance Date (the "Initial Conversion
Price") and (b) 80% of the average Per Share Market Value for the five (5)
Trading Days immediately preceding the Conversion Date; provided, however, that
the percentage set forth in clause (b) above is subject to reduction in
accordance with the Registration Rights Agreement.
(ii) If the Company, at any time while any shares
of Series G Preferred Stock are outstanding, (a) shall pay a stock dividend or
otherwise make a distribution or distributions on shares of its Junior
Securities payable in shares of its capital stock (whether payable in shares of
its Common Stock or of capital stock of any class), (b) subdivide outstanding
shares of Common Stock into a larger number of shares, (c) combine outstanding
shares of Common Stock into a smaller number of shares, or (d) issue by
reclassification of shares of Common Stock any shares of capital stock of the
Company, the Initial Conversion Price designated in Section 5(d)(i)(a) shall be
multiplied by a fraction of which the numerator shall be the number of shares of
Common Stock outstanding before such event and of which the denominator shall be
the number of shares of Common Stock outstanding after such event. Any
adjustment made pursuant to this Section 5(d)(ii) shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
reclassification.
(iii) If the Company, at any time while any shares
of Series G Preferred Stock are outstanding, shall issue rights or
54
<PAGE>
warrants to all holders of Common Stock (and not to the holders of the Series G
Preferred Stock) entitling them to subscribe for or purchase shares of Common
Stock at a price per share less than the Per Share Market Value of Common Stock
at the record date mentioned below, the Initial Conversion Price designated in
Section 5(d)(i)(a) shall be multiplied by a fraction, of which the denominator
shall be the number of shares of Common Stock (excluding treasury shares, if
any) outstanding on the date of issuance of such rights or warrants plus the
number of additional shares of Common Stock offered for subscription or
purchase, and of which the numerator shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding on the date of issuance of
such rights or warrants plus the number of shares which the aggregate offering
price of the total number of shares so offered would purchase at such Per Share
Market Value. Such adjustment shall be made whenever such rights or warrants are
issued, and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants.
However, upon the expiration of any right or warrant to purchase Common Stock
the issuance of which resulted in an adjustment in the Initial Conversion Price
designated in Section 5(d)(i)(a) pursuant to this Section 5(d)(iii), if any such
right or warrant shall expire and shall not have been exercised, the Initial
Conversion Price designated in Section 5(d)(i)(a) shall immediately upon such
expiration be recomputed and effective immediately upon such expiration be
increased to the price which it would have been (but reflecting any other
adjustments in the Conversion Price made pursuant to the provisions of this
Section 5 after the issuance of such rights or warrants) had the adjustment of
the Conversion Price made upon the issuance of such rights or warrants been made
on the basis of offering for subscription or purchase only that number of shares
of Common Stock actually purchased upon the exercise of such rights or warrants
actually exercised.
(iv) If the Company, at any time while shares of
Series G Preferred Stock are outstanding, shall distribute to all holders of
Common Stock (and not to holders of Series G Preferred Stock) evidences of its
indebtedness or assets or rights or warrants to subscribe for or purchase any
security (excluding those referred to in Section 5(d)(iii) above) then in each
such case the Initial Conversion Price at which each share of Series G Preferred
Stock shall thereafter be convertible shall be determined by
55
<PAGE>
multiplying the Initial Conversion Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Per Share
Market Value of Common Stock determined as of the record date mentioned above,
and of which the numerator shall be such Per Share Market Value of the Common
Stock on such record date less the then fair market value at such record date of
the portion of such assets or evidence of indebtedness so distributed applicable
to one outstanding share of Common Stock as determined by the Board of Directors
in good faith; provided, however that in the event of a distribution exceeding
ten percent (10%) of the net assets of the Company, such fair market value shall
be determined by a nationally recognized or major regional investment banking
firm or firm of independent certified public accountants of recognized standing
(which may be the firm that regularly examines the financial statements of the
Company) (an "Appraiser") selected in good faith by the holders of a majority in
interest of the shares of Series G Preferred Stock; and provided, further that
the Company, after receipt of the determination by such Appraiser shall have the
right to select an additional Appraiser, in which case the fair market value
shall be equal to the average of the determinations by each such Appraiser. In
either case the adjustments shall be described in a statement provided to all
holders of Preferred Stock of the portion of assets or evidences of indebtedness
so distributed or such subscription rights applicable to one share of Common
Stock. Such adjustment shall be made whenever any such distribution is made and
shall become effective immediately after the record date mentioned above.
(v) All calculations under this Section 5 shall be
made to the nearest cent or the nearest 1/100th of a share, as the
case may be.
(vi) Whenever the Initial Conversion Price is
adjusted pursuant to Section 5(d)(ii),(iii), (iv) or (v), the Company shall
promptly mail to each holder of Series G Preferred Stock, a notice setting forth
the Initial Conversion Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment.
(vii) In case of any reclassification of the
Common Stock, any consolidation or merger of the Company with or
56
<PAGE>
into another person, the sale or transfer of all or substantially all of the
assets of the Company or any compulsory share exchange pursuant to which the
Common Stock is converted into other securities, cash or property, the holders
of the Series G Preferred Stock then outstanding shall have the right thereafter
to convert such shares only into the shares of stock and other securities and
property receivable upon or deemed to be held by holders of Common Stock
following such reclassification, consolidation, merger, sale, transfer or share
exchange, and the holders of the Series G Preferred Stock shall be entitled upon
such event to receive such amount of securities or property as the shares of the
Common Stock of the Company into which such shares of Series G Preferred Stock
could have been converted immediately prior to such reclassification,
consolidation, merger, sale, transfer or share exchange would have been
entitled. The terms of any such consolidation, merger, sale, transfer or share
exchange shall include such terms so as to continue to give to the holder of
Series G Preferred Stock the right to receive the securities or property set
forth in this Section 5(d)(vii) upon any conversion following such
consolidation, merger, sale, transfer or share exchange. This provision shall
similarly apply to successive reclassifications, consolidations, mergers, sales,
transfers or share exchanges.
(viii) If:
(a) the Company shall declare a dividend
(or any other distribution) on its
Common Stock; or
(b) the Company shall declare a special
nonrecurring cash dividend on or a
redemption of its Common Stock; or
(c) the Company shall authorize the
granting to all holders of the
Common Stock rights or warrants to
subscribe for or purchase any shares
of capital stock of any class or of
any rights; or
(d) the approval of any stockholders of
the Company shall be required in
connection with any reclassification
of the Common Stock of the Company
57
<PAGE>
(other than a subdivision or combination
of the outstanding shares of Common
Stock), any consolidation or merger to
which the Company is a party, any sale or
transfer of all or substantially all of
the assets of the Company, or any
compulsory share exchange whereby the
Common Stock is converted into other
securities, cash or property; or
(e) the Company shall authorize the
voluntary or involuntary
dissolution, liquidation or winding-
up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Series G Preferred Stock, and shall cause to be
mailed to the holders of Preferred Stock at their last addresses as they shall
appear upon the stock books of the Company, at least 20 calendar days prior to
the applicable record or effective date hereinafter specified, a notice stating
(x) the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined, or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, share exchange, dissolution, liquidation or winding-up
is expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding-up; provided, however, that the failure to
mail such notice or any defect therein or in the mailing thereof shall not
affect the validity of the corporate action required to be specified in such
notice.
(ix) In any case in which this Section shall require
that an adjustment be made effective as of the record date for a
specified event, the Company may elect to defer until occurrence of
58
<PAGE>
such event (A) issuing to the holder, if Series G Preferred Stock is to be
converted after such record date, the Underlying Shares and other capital stock
of the Company, if any, issuable upon such conversion over and above the
Underlying Shares and other capital stock of the Company, if any, issuable upon
such conversion thereof on the basis of the Conversion Price prior to adjustment
and (B) paying to the holder any amount in cash in lieu of a fractional share
pursuant to the terms hereof, provided, however, that the Company shall deliver
to the holder a due bill or other appropriate instrument evidencing the holder's
right to receive such additional Underlying Shares, other capital stock and/or
cash upon the occurrence of the event requiring such adjustment.
(e) If at any time conditions shall arise by reason of action
taken by the Company which in the opinion of the Board of Directors are not
adequately covered by the other provisions hereof and which might materially and
adversely affect the rights of the holders of Series G Preferred Stock
(different than or distinguished from the effect generally on rights of holders
of any class of the Company's capital stock) or if at any time any such
conditions are expected to arise by reason of any action contemplated by the
Company, the Company shall mail a written notice briefly describing the action
contemplated and the material adverse effects of such action on the rights of
the holders of Series G Preferred Stock at least 20 calendar days prior to the
effective date of such action, and an Appraiser selected by the holders of
majority in interest of the Series G Preferred Stock shall give its opinion as
to the adjustment, if any (not inconsistent with the standards established in
this Section 5), of the Conversion Price (including, if necessary, any
adjustment as to the securities into which shares of Series G Preferred Stock
may thereafter be convertible) and any distribution which is or would be
required to preserve without diluting the rights of the holders of shares of
Series G Preferred Stock; provided, however, that the Company, after receipt of
the determination by such Appraiser, shall have the right to select an
additional Appraiser, in which case the adjustment shall be equal to the average
of the adjustments recommended by each such Appraiser. The Board of Directors
shall make the adjustment recommended forthwith upon the receipt of such opinion
or opinions or the taking of any such action contemplated, as the case may be;
provided, however, that no such adjustment of the Conversion Price shall be made
which in the
59
<PAGE>
opinion of the Appraiser(s) giving the aforesaid opinion or opinions would
result in an increase of the Conversion Price to more than the Conversion Price
then in effect.
(f) The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued Common Stock solely for
the purpose of issuance upon conversion of Series G Preferred Stock as herein
provided, free from preemptive rights or any other actual contingent purchase
rights of persons other than the holders of Series G Preferred Stock, such
number of shares of Common Stock as shall be issuable (taking into account the
adjustments and restrictions of Section 5(b) and Section 5(d) hereof) upon the
conversion of all outstanding shares of Series G Preferred Stock, and in no
circumstances shall such reserved and available shares of Common Stock be less
than twice the number of shares of Common Stock which would be issuable upon
conversion of the Series G Preferred Stock were such conversion effected on the
Original Issue Date. The Company covenants that all shares of Common Stock that
shall be so issuable shall, upon issue, be duly and validly authorized, issued
and fully paid and nonassessable.
(g) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of Common
Stock, but may if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the Per Share Market Value at such time. If
the Company elects not, or is unable, to make such a cash payment, the holder of
a share of Series G Preferred Stock shall be entitled to receive, in lieu of the
final fraction of a share, one whole share of Common Stock.
(h) The issuance of certificates for shares of Common Stock on
conversion of Series G Preferred Stock shall be made without charge to the
holders thereof for any documentary stamp or similar taxes that may be payable
in respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect of
any transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the holder of such shares of Preferred
Stock so converted and the Company shall not be required to issue or deliver
such certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
60
<PAGE>
(i) Shares of Series G Preferred Stock converted into Common
Stock or redeemed pursuant to the terms hereof shall be canceled and shall have
the status of authorized but unissued shares of preferred stock.
(j) Each Holder Conversion Notice shall be given by facsimile
and by mail, postage prepaid, addressed to the attention of the Chief Financial
Officer of the Company at the facsimile telephone number and address of the
principal place of business of the Company. Each Company Conversion Notice shall
be given by facsimile and by mail, postage prepaid, addressed to each holder of
Series G Preferred Stock at the facsimile telephone number and address of such
holder appearing on the books of the Company or provided to the Company by such
holder for the purpose of such Company Conversion Notice, or if no such
facsimile telephone number or address appears or is so provided, at the
principal place of business of the holder. Any such notice shall be deemed given
and effective upon the earliest to occur of (i)(a) if such Conversion Notice is
delivered via facsimile at the facsimile telephone number specified in this
Section 5(j) prior to 6:00 p.m. (Eastern Standard Time) on any date, such date
(or, in the case of a Company Conversion Notice, the next Trading Day) or such
later date as is specified in the Conversion Notice, and (b) if such Conversion
Notice is delivered via facsimile at the facsimile telephone number specified in
this Section 5(j) after 6:00 p.m. (Eastern Standard Time) on any date, the next
date (or, in the case of a Company Conversion Notice, the next Trading Day after
such next day) or such later date as is specified in the Conversion Notice, (ii)
five days after deposit in the United States mails or (iii) upon actual receipt
by the party to whom such notice is required to be given.
Section 6. Company Redemption Option.
--------------------------------------
The Company may, at its option, redeem any outstanding and
unconverted Series G Preferred Stock on the third anniversary of the Original
Issue Date (the "Optional Redemption Date"), provided that the Company notifies
the holders thereof no later than the third business day prior to the Optional
Redemption Date of its intention to do so.
61
<PAGE>
If the Company elects to redeem such outstanding and
unconverted shares of Series G Preferred Stock, the redemption price per share
(the "Optional Redemption Price") shall equal the Conversion Price on the
Optional Redemption Date and shall be paid by the Company to the holders of such
unconverted Series G Preferred Stock on the Optional Redemption Date. If any
portion of the Optional Redemption Price shall not be paid by the Company within
7 calendar days after the Optional Redemption Date, such Optional Redemption
Price shall be increased by an amount accruing from the 7th day to the 21st day
after the Optional Redemption Date at the rate of 5% per annum, from the 22nd
day to the 60th day at 8% per annum and from the 61st day until paid at the rate
of 12% per annum. However, if any portion of the Optional Redemption Price
remains unpaid more than 7 calendar days after the Optional Redemption Date,
then the holder may elect, by written notice to the Company given within 45 days
after the Optional Redemption Date, to either (i) demand conversion in
accordance with the formula and the time frame therefor set forth in Section 5
for a conversion at the option of the holder hereof of all Series G Preferred
Shares for which the Optional Redemption Price, plus interest, has not been paid
in full (the "Unpaid Optional Redemption Shares"), in which event the Per Share
Market Price for such shares shall be the lower of the Per Share Market Price
calculated on the Optional Redemption Date and the Per Share Market Price as of
the holder's written demand for conversion, or (ii) demand that the Company
withdraw its election to force such redemption. If the holder elects option (i)
above, the Company shall within three business days of its receipt of such
election deliver to the holder the shares of Common Stock issuable upon
conversion of the Unpaid Shares subject to such holder conversion demand and
otherwise perform its obligations hereunder with respect thereto; or, if the
Holder elects option (ii) above, the Company shall promptly, and in any event
not later than three business days from receipt of holder's notice of such
election, return to the holder all of the Unpaid Optional Redemption Shares.
Section 7. Definitions. For the purposes hereof, the
-----------------------
following terms shall have the following meanings:
"Common Stock" means shares now or hereafter authorized
of the class of Common Stock, par value $.001, of the Company and
62
<PAGE>
stock of any other class into which such shares may hereafter have been
reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, of which
the numerator is Stated Value plus accrued but unpaid dividends (which shall not
include dividends paid upon conversion) and of which the denominator is the
Conversion Price at such time.
"Junior Securities" means the Common Stock and all other
equity securities of the Company, except the Other Preferred Stock.
"Original Issue Date" shall mean the date of the first
issuance of any shares of the Series G Preferred Stock regardless of the number
of transfers of any particular shares of Series G Preferred Stock and regardless
of the number of certificates which may be issued to evidence such Series G
Preferred Stock.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on The NASDAQ
SmallCap Market or other market or stock exchange on which the Common Stock has
been listed or if there is no such price on such date, then the closing bid
price on such market or exchange on the date nearest preceding such date, or (b)
if the Common Stock is not listed on The NASDAQ SmallCap Market or any market or
stock exchange, the closing bid for a share of Common Stock in the
over-the-counter market, as reported by the NASDAQ Stock Market at the close of
business on such date, or (c) if the Common Stock is not quoted on the NASDAQ
Stock Market, the closing bid price for a share of Common Stock in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or similar organization or agency succeeding to its functions of
reporting prices), of (d) if the Common Stock is no longer reported by the
National Quotation Bureau Incorporated (or similar organization or agency
succeeding to its functions of reporting prices), then the average of the "Pink
Sheet" quotes for the relevant conversion period as determined by the holder, or
(e) if the Common Stock is no longer publicly traded the fair market value of a
share of Common Stock as determined by an Appraiser (as defined in Section
5(d)(iv) above) selected in good faith by the holders of a majority in interest
of the shares of the Series G Preferred Stock; provided, however, that the
Company, after receipt of the determination by such Appraiser, shall have the
right to select an additional Appraiser, in which
63
<PAGE>
case, the fair market value shall be equal to the average of the determinations
by each such Appraiser.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Purchase Agreement" means the Convertible Preferred
Stock Purchase Agreement between the Company and the original
holder of the Series G Preferred Stock.
"Trading Day" means (a) a day on which the Common Stock is
traded on The NASDAQ SmallCap Market or principal stock exchange on which the
Common Stock has been listed, or (b) if the Common Stock is not listed on The
NASDAQ SmallCap Market or any stock exchange, a day on which the Common Stock is
traded in the over-the-counter market, as reported by the NASDAQ Stock Market,
or (c) if the Common Stock is not quoted on the NASDAQ Stock Market, a day on
which the Common Stock is quoted in the over-the-counter market as reported by
the National Quotation Bureau Incorporated (or any similar organization or
agency succeeding its functions of reporting prices).
64
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registered Holder
in order to Convert shares of Series G Preferred Stock)
The undersigned hereby elects to convert the number of shares of Series G
Convertible Preferred Stock indicated below, into shares of Common Stock, par
value U.S.$.001 per share (the "Common Stock"), of AMNEX, Inc. (the "Company")
according to the conditions hereof, as of the date written below. If shares are
to be issued in the name of a person other than undersigned, the undersigned
will pay all transfer taxes payable with respect thereto and is delivering
herewith such certificates and opinions as reasonably requested by the Company
in accordance therewith. No fee will be charged to the Holder for any
conversion, except for such transfer taxes, if any.
Conversion calculations: ___________________________________________________
Date to Effect Conversion
---------------------------------------------------
Number of shares of Series G Preferred
Stock to be Converted
---------------------------------------------------
Applicable Conversion Price
---------------------------------------------------
Signature
---------------------------------------------------
Name:
---------------------------------------------------
Address:
The Company undertakes to promptly upon its receipt of this conversion
notice (and, in any case prior to the time it effects the conversion requested
hereby), notify the converting holder by facsimile of the number of shares of
Common Stock outstanding on such date and the number of shares of Common Stock
which would be issuable to the holder if the conversion requested in this
65
<PAGE>
conversion notice were effected in full, whereupon, the holder may, within one
day of the notice from the Company, revoke the conversion requested hereby to
the extent that it determines that such conversion would result in it owning in
excess of 4.9% of the outstanding shares of Common Stock on such date, and the
Company shall issue to the holder one or more certificates representing shares
of Series G Preferred Stock which have not been converted as a result of this
provision. If the holder waives the applicability of this limitation by notice
to the Company delivered upon its receipt of the Company's notice regarding the
number of outstanding shares of Common Stock or if the Purchaser fails to
respond to the Company's notice within one day thereafter, the Company shall
effect in full the conversion requested in this notice.
66
<PAGE>
EXHIBIT B
AMNEX, INC.
NOTICE OF CONVERSION AT
THE ELECTION OF THE COMPANY
The undersigned in the name and on behalf of AMNEX, Inc. (the "Company") hereby
notifies the addressee hereof that the Company hereby elects to exercise its
right to convert [ ] shares of its Series G Convertible Preferred Stock held by
the Holder into shares of Common Stock, par value U.S.$.001 per share (the
"Common Stock") of the Company according to the terms hereof, as of the date
written below. No fee will be charged to the Holder for any conversion
hereunder, except for such transfer taxes, if any which may be incurred by the
Company if shares are to be issued in the name of a person other than the person
to whom this notice is addressed.
Conversion calculations: ___________________________________________________
Date to Effect Conversion
---------------------------------------------------
Number of Shares of Preferred Stock
to be Converted
---------------------------------------------------
Applicable Conversion Price
---------------------------------------------------
Number of Shares of Common Stock
Outstanding as at the Close of Trading on
the Conversion Date
AMNEX, INC.
By:________________________________________________
Title:__________________________________________
67
<PAGE>
(j) Series L Preferred Shares. A series of Preferred Shares is hereby
created, to be limited in amount to 200,000 of the 5,000,000 authorized
Preferred Shares. The designation, relative rights, powers, preferences,
qualifications and limitations are as follows:
(i) Designation of Series. The designation of the series of
Preferred Shares created hereby shall be Series L Preferred
Shares (hereinafter the "Series L Preferred Shares").
(ii) Dividends. The holders of Series L Preferred Shares, on a pari
passu basis with the holders of the Corporation's Common
Shares (based upon the number of Common Shares into which the
Series L Preferred Shares are convertible), Series F Preferred
Shares and any other series of Preferred Shares of the
Corporation hereafter created which shall have a pari passu
right with the holders of the Common Shares to receive
dividends, shall be entitled to receive such dividends as may
be declared by the Board of Directors. Declared but unpaid
dividends shall not bear interest.
The rights of the holders of the Series L Preferred Shares
shall be junior and subordinate to the rights of the holders
of the Series A, Series B, Series C, Series D, Series E and
Series G Preferred Shares of the Corporation to receive
dividends, as well as to the right of any other series of
Preferred Shares of the Corporation hereafter created which
shall have any preferential right to receive dividends before
the holders of the Common Shares.
(iii) Voting Rights. The holders of the Series L Preferred Shares
shall be entitled to vote on all matters at all meetings of
the shareholders of the Corporation, and shall be entitled to
such number of votes for each Series L Preferred Share
entitled to vote at such meetings as is set forth below,
voting together with the holders of Common Shares, and other
Preferred Shares who are entitled to vote, if any such shares
are then outstanding, and not as a separate class, except as
required by law. The number of votes to which the holders of
the Series L Preferred Shares shall be entitled to vote for
each Series L Preferred Share shall equal the number of Common
Shares of the Corporation into which such Series L Preferred
Share would convert upon the occurrence of the Mandatory
Conversion Event(as hereinafter defined).
(iv) Redemption. The Series L Preferred Shares shall not be
subject to mandatory redemption by either the Corporation
or the holders thereof.
(v) Conversion.
(A) Mandatory Conversion Event and Price. Immediately upon the
filing with the Secretary of State of New York of the
Certificate of Amendment (as hereinafter defined) (the
"Mandatory Conversion Event"), each Series L Preferred Share
shall convert into fifteen (15) Common Shares of the
Corporation (the "Conversion Ratio"), subject to adjustment as
hereinafter set forth.
(B) Procedure. Before any holder of Series L Preferred Shares
shall be entitled to receive Common Shares upon conversion,
the holder shall surrender the certificate(s) therefor, duly
endorsed, at the principal offices of the Corporation. Subject
to the provisions hereof, effective upon the occurrence of the
Mandatory Conversion Event (the "Effective Conversion Date"),
the holder shall thereupon be deemed to be the holder of
record of the Common Shares issuable upon conversion,
notwithstanding that the stock transfer books of the
Corporation shall then be closed or that the certificate(s)
representing such Common Shares shall not then be actually
delivered to the holder. Subject to the provisions hereof,
promptly following the Effective Conversion Date, the
Corporation shall cause its transfer agent to issue and
deliver to such holder of Series L Preferred Shares a
certificate for the number of Common Shares to which the
holder shall be entitled.
68
<PAGE>
(C) Adjustment of Conversion Ratio.
(i) In the event that the Corporation shall (a) pay any
dividend on its Common Shares payable in Common Shares; (b)
effect a subdivision of its outstanding shares into a greater
number of Common Shares (by reclassification, stock split or
otherwise than by payment of a dividend in Common Shares); (c)
effect a combination or consolidation of its outstanding
Common Shares into a lesser number of Common Shares (by
reclassification, reverse split or otherwise); (d) issue by
reclassification, exchange or substitution of its Common
Shares any shares of capital stock of the Corporation or
effect any other transaction having similar effect, the
Conversion Ratio in effect immediately prior to such action
shall be adjusted so that, in the event of the occurrence of
the Mandatory Conversion Event at any time after the
occurrence of any event described above, the holder shall be
entitled to receive the Common Shares to which such holder
would have been finally entitled, after giving effect to the
occurrence of such event, as if such holder had converted the
Series L Preferred Shares immediately prior to the occurrence
of such event. An adjustment made pursuant to this paragraph
(C) shall become effective immediately after the record date
in the case of a dividend and shall become effective
immediately after the effective date in the case of a
subdivision, combination, reclassification, exchange or
substitution.
(ii) In case of any consolidation or merger to which the
Corporation is a party, other than a merger or consolidation
in which the Corporation is the surviving or continuing
corporation and which does not result in any reclassification
of, or change (other than a change in par value or from par
value to no par value or from no par value to par value, or as
a result of subdivision or combination) in, outstanding Common
Shares, then the Corporation, or such successor corporation,
as the case may be, shall make appropriate provisions so that
the holder of each Series L Preferred Share then outstanding
69
<PAGE>
shall have the right to convert such share into the kind and
amount of shares or other securities and property receivable
upon such consolidation or merger by a holder of the number of
Common Shares into which such Series L Preferred Shares might
have been converted immediately prior to such consolidation or
merger.
(D) Fractional Shares. No fractional Common Shares shall be
issued upon conversion of Series L Preferred Shares. In lieu
of any fractional shares to which the holder would otherwise
be entitled, the Corporation shall pay, in cash, an amount
equal to the product of (i) such fraction of a share times
(ii) the market price of one Common Share on the Effective
Conversion Date.
(E) Reservation of Shares Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out
of its authorized but unissued Common Shares, solely for the
purpose of effecting the conversion of the Series L Preferred
Shares, such number of its Common Shares as shall from time to
time be sufficient to effect the conversion of all outstanding
Series L Preferred Shares; provided, however, that nothing
contained herein shall preclude the Corporation from
satisfying its obligations in respect of the conversion of the
Series L Preferred Shares by delivery of Common Shares which
are held in the treasury of the Corporation. Notwithstanding
the foregoing, the Corporation shall not be obligated to
reserve and keep available out its authorized but unissued
Common Shares, or issue, any Common Shares to the holders of
the Series L Preferred Shares unless and until it shall have
filed with the Secretary of State of New York a Certificate of
Amendment of its Certificate of Incorporation as a result of
which there will be a sufficient number of authorized Common
Shares of the Corporation available for issuance upon the
conversion of the Series L Preferred Shares and the exercise
of any and all outstanding purchase, exchange or conversion
rights for the acquisition of Common Shares of the Corporation
(the "Certificate of Amendment").
70
<PAGE>
(F) Lost, Stolen or Destroyed Certificates. In the event that
the holder shall notify the Corporation that the
certificate(s) representing Series L Preferred Shares have
been lost, stolen or destroyed and either (i) provide a
letter, in form satisfactory to the Corporation, to the effect
that he will indemnify the Corporation from any loss incurred
by it in connection therewith, and/or (ii) provide an
indemnity bond in such amount as is reasonably required by the
Corporation, the Corporation having the option of electing
either (i) or (ii) or both, the Corporation may, in its sole
discretion, accept such letter and/or indemnity bond in lieu
of the surrender of the certificate(s) as required by this
subsection (v).
(G) Statutory Restrictions. The foregoing provisions for
conversion of the Series L Preferred Shares shall be subject
to all applicable statutory limitations and restrictions.
(vi) Liquidation Preference. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Corporation, the holders of Series L Preferred Shares
will be entitled to receive, prior and in preference to
any distribution of the assets or surplus funds of the
Corporation to the holders of any Common Shares by reason
of the ownership thereof, and on a pari passu basis with
the holders of the Series A, Series B, Series C, Series
D, Series E, Series F, and Series G Preferred Shares and
any Series H, Series I, Series J, and/or Series K
Preferred Shares hereafter authorized, an amount equal to
the fixed sum of forty-five dollars and forty-five cents
($45.45) per share and no more (the "Preferential
Amount"). If, upon the occurrence of such an event, the
assets and funds thus distributed among the holders of
Series L Preferred Shares shall be insufficient to permit
the payment to such holders of the full Preferential
Amount, then, the entire assets and funds of the
Corporation legally available for distribution to the
holders of the Series L Preferred Shares shall be
distributed ratably among such holders in accordance with
the respective amounts which would be payable on such
shares if all amounts payable thereon were paid in full.
71
<PAGE>
After the payment or setting apart of the full Preferential
Amounts required to be paid to the holders of Series A, Series
B, Series C, Series D, Series E, Series F, Series G and Series
L Preferred Shares and any Series H, Series I, Series J and/or
Series K Preferred Shares hereafter authorized, the holders of
Common Shares or any other stock of the Corporation ranking in
liquidation junior to the Series A, Series B, Series C, Series
D, Series E, Series F, Series G and Series L Preferred Shares
and any Series H, Series I, Series J and/or Series K Preferred
Shares hereafter authorized, shall be entitled to receive
ratably all remaining assets or surplus funds of the
Corporation. Neither the merger or consolidation of the
Corporation, nor the sale, lease or conveyance of all or part
of its assets, shall be deemed to be a liquidation,
dissolution or winding up of the affairs of the Corporation,
either voluntarily or involuntarily, within the meaning of
this section.
(vii) Sinking Fund. The Series L Preferred Shares shall not be
entitled to the benefit of any sinking fund to be applied to
their purchase or redemption."
(5) No holder of any shares of the Corporation shall, because of his
ownership of shares of the Corporation, have a pre-emptive or other right to
purchase, subscribe for, or take any part of any shares of the Corporation, or
any part of any notes, debentures, bonds, or other securities convertible into
or providing for options or warrants to purchase shares of the Corporation which
are issued, offered, or sold by the Corporation after its incorporation, whether
the shares, notes, debentures, bonds, or other securities be authorized by this
certificate of incorporation or by an amended certificate duly filed and in
effect at the time of the issuance, offer, or sale of such shares, notes,
debentures, bonds, or other securities. Any part of the shares authorized by
this Certificate of Incorporation, or by an amended certificate duly filed, and
any part of any notes, debentures, bonds, or other securities convertible into
or providing for options or warrants to purchase shares of the Corporation may
at any time be issued, offered for sale, and sold or disposed of by the
Corporation, pursuant to a resolution of its Board of Directors and to such
persons and upon such terms and conditions as the Board of Directors may, in its
sole discretion, deem proper and advisable, without first offering to existing
shareholders any part of such shares, notes, debentures, bonds, or other
securities.
72
<PAGE>
(6) The Secretary of State is designated as the agent of the
Corporation upon whom process against the Corporation may be served, and the
address to which the Secretary of State shall mail a copy of any process against
the Corporation served upon him is 101 Park Avenue, New York, New York 10178,
Attention: Vice President - General Counsel.
(7) A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for damages for any breach of duty in his
capacity as a director, unless a judgment or other final adjudication adverse to
him establishes that (i) his acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law or (ii) he personally
gained in fact a financial or other advantage to which he was not legally
entitled or (iii) his acts violated Section 719 of the Business Corporation Law.
Neither the amendment nor repeal of this Article 7, nor the adoption of any
provision of the Certificate of Incorporation inconsistent with this Article 7,
shall eliminate or reduce the effect of this Article 7 in respect of any matter
occurring, or any cause of action, suit or claim that but for this Article 7
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
73
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> dec-31-1997
<PERIOD-START> jan-01-1997
<PERIOD-END> mar-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,863
<SECURITIES> 0
<RECEIVABLES> 26,071
<ALLOWANCES> 2,568
<INVENTORY> 828
<CURRENT-ASSETS> 29,980
<PP&E> 38,867
<DEPRECIATION> 13,652
<TOTAL-ASSETS> 101,505
<CURRENT-LIABILITIES> 39,868
<BONDS> 33,073
0
12,959
<COMMON> 60,132
<OTHER-SE> (34,171)
<TOTAL-LIABILITY-AND-EQUITY> 101,505
<SALES> 0
<TOTAL-REVENUES> 31,326
<CGS> 0
<TOTAL-COSTS> 25,789
<OTHER-EXPENSES> 5,967
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 835
<INCOME-PRETAX> (1,265)
<INCOME-TAX> 50
<INCOME-CONTINUING> (1,310)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,310)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
