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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Three Months Ended March 31, 1999
Commission File Number: 33-9640-LA
U. S. TRUCKING, INC.
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(Exact Name of Issuer as Specified in its Charter)
COLORADO 68-0133692
- ------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
3125 Ashley Phosphate Road, Suite 128, North Charleston, S.C. 29418
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(Address of Principal Executive Offices)
(843) 767-9197
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(Registrant's Telephone Number, Including Area Code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [ X ] NO [ ]
There were 6,484,591 shares of the Registrant's common stock outstanding as of
March 31, 1999.
Item 1: FINANCIAL STATEMENTS
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U. S. TRUCKING, INC.
FORM 10-QSB
INDEX
Page Number
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets (Unaudited) -
March 31, 1999 and December 31, 1998 3
Consolidated Statement of Income (Unaudited) -
Three Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or
Plan of Operation 8
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
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U.S. TRUCKING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1999 December 31, 1998
(UNAUDITED) (UNAUDITED)
Assets
Current Assets
Cash in Bank $ 433,235 $ 22,976
Trade Accounts Receivable - net 4,613,718 3,447,570
Accounts Receivable - Other 164,430 141,673
Parts and Supply Inventory 252,698 257,030
Prepaid Expenses and Other 529,986 162,036
----------- -----------
Total Current Assets 5,994,067 4,031,285
----------- -----------
Transportation & Other Equipment - 8,417,971 9,718,805
at cost - Less accumulated
depreciation and amortization
Other Assets
Restricted Cash - Owner Operators 2,320 2,320
Restricted Cash - Letters of Credit 40,000 10,000
Restricted Cash - Captive Insurance 196,000 -
Due from Related Party 100,000 100,000
Due from Captive Insurer 389,301 355,321
Security Deposits 12,575 12,575
Intangible Assets - net of accumulated
amortization 1,995,062 2,082,055
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Total Other Assets 2,735,258 2,562,271
----------- -----------
Total Assets $17,147,296 $16,312,361
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable - Trade $ 1,378,561 $ 1,443,415
Revolving Credit Line 2,662,027 1,795,888
Accruals & Other Current Liabilities 1,154,462 669,957
Current Portion - Long Term Debt 1,998,102 2,034,756
----------- -----------
Total Current Liabilities 7,193,151 5,944,016
----------- -----------
Other Liabilities
Owner Operator Escrow 87,787 55,874
Long-Term Notes Payable - net of
current portion 4,184,365 5,224,092
----------- -----------
Total Other Liabilities 4,272,152 5,279,966
----------- -----------
Total Liabilities 11,465,304 11,223,982
----------- -----------
Stockholders' Equity
Preferred Stock (no par value -
20,000,000 shares authorized,
990,000 issued and outstanding) 762
Common Stock -(no par value -
75,000,000 shares authorized,
6,484,591 issued and outstanding
on March 31, 1999, and 16,074,591
on December 31, 1998) 2,867,238 2,796,000
Additional Paid in Capital 4,223,480 3,821,812
Accumulated Deficit (1,289,488) (1,409,433)
Subscription Receivable (120,000) (120,000)
----------- -----------
Total Stockholders' Equity 5,681,992 5,088,379
----------- -----------
Total Liabilities &
Stockholders' Equity $17,147,296 $16,312,361
=========== ===========
3
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U.S.TRUCKING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
March 31, 1999 March 31, 1998
(UNAUDITED) (UNAUDITED)
Net Revenues 7,661,372 100.0% 5,067,331 100.0%
Operating Expenses
Purchased Transportation &
Rentals 2,670,015 34.9% 1,556,955 30.7%
Salaries, Wages & Benefits 2,055,129 26.8% 1,281,918 25.3%
Fuel 715,099 9.3% 562,427 11.1%
Operating Supplies &
Maintenance 322,187 4.2% 302,350 6.0%
Insurance & Claims 223,428 2.9% 170,963 3.4%
Misc. Operating Expenses 201,787 2.6% 141,121 2.8%
Taxes & Licenses 115,493 1.5% 101,441 2.0%
Insurance Captive Expense 271,136 3.5% - 0.0%
Occupancy Costs 85,030 1.1% 69,903 1.4%
Depreciation and Amortization 550,635 7.2% 434,655 8.6%
----------- ----- ----------- -----
Total Operating Expenses 7,209,939 94.1% 4,621,732 91.2%
General Administrative Expenses 372,746 4.9% 176,546 3.5%
Operating Income 78,687 1.0% 269,053 5.3%
Interest Expense (108,796) -1.4% (141,074) -2.8%
Gain on Sale of Equipment 124,114 1.6% - 0.0%
Interest Income 42 0.0% 185 0.0%
Other Income 25,899 0.3% 9,436 0.2%
----------- ----- ----------- -----
Net Income before Taxes 119,946 1.6% 137,600 2.7%
Provision for Income Taxes 46,800 0.6% 53,700 1.1%
Tax Benefit of Net Operating
Loss Carryforward (46,800) -0.6% (53,700) -1.1%
----------- ----- ----------- -----
Net Income $ 119,946 1.6% $ 137,600 2.7%
=========== ===== =========== =====
Accumulated Deficit-beginning (1,409,434) (1,531,200)
----------- -----------
Accumulated Deficit-ending $(1,289,488) $(1,393,600)
=========== ===========
Earnings per Common Share $ 0.01 $ 0.01
Fully Diluted Earnings per Share $ 0.01 $ 0.01
Average Number of Shares
Outstanding 10,863,310 13,000,000
4
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U.S. TRUCKING, INC.
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS
Consolidated Consolidated
3/31/99 3/31/98
(Unaudited) (Unaudited)
Cash Flows From Operating Activities
Net Income 119,946 137,599
Adjustments to Reconcile Net Income
to Net Cash Used in Operating Activities
Depreciation & Amortization 550,635 428,656
Gain on Sale of Equipment (124,114) -
(Increase ) Decrease - Assets
Restricted Cash (226,000) (167,664)
Accounts Receivable (1,222,885) 238,267
Parts & Supply Inventory - (5,688)
Prepaid Expenses & Other Current Assets (363,619) (123,646)
Increase (Decrease) - Liabilities
Accounts Payable and Revolving Credit Line 801,285 (210,934)
Accrued Expenses and Other liabilities 516,419 52,746
----------- -----------
Total Adjustments (68,279) 211,737
Net Cash Provided by Operating Activities 51,667 349,336
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Cash Flows From Investing Activities
Purchase of Equipment (142,808) (16,287)
Sale of Transportation and Other Equipment 1,104,114 -
Payment for Re-financing of Acquisition Debt - (55,274)
Proceeds from Sale of Common Stock and
Additional Paid in Capital 473,668 -
----------- -----------
Net Cash Provided(Used) by Investing
Activities 1,434,974 (71,561)
Cash Flows from Financing Activities
Principal Payments on Long-Term Debt (1,076,382) (166,476)
Principal Payments on Capital Lease
Obligations - (79,274)
----------- -----------
Net Cash Used by Financing Activities (1,076,382) (245,750)
Net Increase in Cash 410,259 32,025
Cash at Beginning of Year 22,976 60,099
----------- -----------
Cash at End of Period 433,235 92,124
Supplementary Disclosure of Cash Flow
Information
Cash Paid during the period
Interest Expense 108,796 143,952
Income Taxes - -
5
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U.S. TRUCKING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
annual consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although management believes these disclosures are
adequate to make the information presented not misleading. In the opinion of
management, all adjustments necessary for fair presentation for the periods
presented has been reflected and are of a normal recurring nature. These
condensed consolidated financials statements and the notes thereto for the
three years ended December 31, 1998, 1997, and 1996, as filed with the
Securities and Exchange Commission as part of the Company's Annual Report on
Form 10-KSB. Results of operations for the interim periods are not
necessarily indicative of the results to be expected for the year.
NOTE 2 - Earnings per Share
Earnings per common share amounts are based on the weighted average number of
common shares outstanding and diluted earnings per share amounts are based on
the weighted average number of common shares outstanding plus the incremental
shares that would have been outstanding upon the assumed exercise of all
dilutive preferred shares.
NOTE 3 - Segment Information
Description of the types of services from which each reportable segment
derives its revenues. The Company has three major business segments: long-
haul trucking of refrigerated and non refrigerated products, interstate
freight brokerage and a captive insurance program for liability insurance for
the trucking industry. During the fourth quarter of 1998, the company adopted
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS 131).
The adoption of SFAS 131 requires the presentation of descriptive information
about reportable segments which is consistent with that made available to the
management of U.S. Trucking to assess performance. As a result of this
change, the company now reports information on its truck brokerage operation.
In addition, during 1998, the company added the captive liability insurance
program (business) and reports that segment's performance similarly. In
determining the net income of each segment of the company, 100% of the
interest expense is allocated to long-haul trucking and effective tax rates
are determined for each business segment.
The Company evaluates performance and allocates resources based on net profit
and loss from operations
The Company's reportable segments are business units that offer different
transportation services. The reportable segments are each managed separately
because of their distinct differences in the operations.
6
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<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED MARCH 31, 1999
Long Haul Truck Liability Intersegment Total
Trucking Brokerage Insurance
<S> <C> <C> <C> <C> <C>
Sales 7,066,758 345,119 473,861 (224,366) 7,661,372
Net Income 95,283 (19,366) 33,980 10,048 119,945
Assets 15,618,943 219,460 1,308,893 - 17,147,296
Depreciation & Amortization 550,035 600 550,635
THREE MONTH PERIOD ENDED MARCH 31, 1998
Long Haul Truck Liability Intersegment Total
Trucking Brokerage Insurance
<S> <C> <C> <C> <C> <C>
Sales 4,545,773 600,554 - (78,996) 5,067,331
Net Income 120,959 16,641 - - 137,600
Assets 9,719,940 374,486 - - 10,094,426
Depreciation & Amortization 400,820 600 - - 401,420
</TABLE>
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results of
operations for the three months ended March 31, 1999 and 1998 should be read
in conjunction with the Company's Consolidated Financial Statements and Notes
thereto contained elsewhere in this report.
GENERAL
The Company was established in January of 1997 by combining under U.S.
Trucking-Nevada the operations of Gulf Northern, a mid- to long-haul truckload
carrier, Mencor, a third party logistics (brokerage) company, selected assets
of another truckload company, and the customer base of a small specialized
truckload air freight company. The Company consolidated operations and
implemented manpower reductions and blending of all trucking operations under
Gulf Northern and all brokerage operations under Mencor.
The Company's operating results are primarily driven by the results of the
truckload business of its primary operating subsidiary, Gulf Northern
Transport, Inc. as well as the implementation of a Captive Insurance Program
for Auto-Liability for trucking. The Company reported a profit in the year
ended December 31, 1998, by significantly decreasing the operating losses in
its trucking division and by initially showing a profit in its Auto-Liability
Captive Insurance Program.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
Revenues for the three months ended March 31, 1999, increased by 51.2% to $7.7
million as compared to $5.1 million for the three months ended March 31, 1998.
The increase in revenues was primarily due to revenues generated by Mid-Cal
Express, Inc., which was acquired by U.S. Trucking on December 30, 1998.
Company driver generated revenue increased by 24% to $4.2 million for the
three months ended March 31, 1999 from $3.2 million for the same period in
1998. Independent contractor generated revenues increased by 85% to $2.4
million in 1999 from $1.3 million in 1998. Third-party brokerage decreased
58% to $345 thousand in 1999 from $600 thousand in 1998. Another factor which
caused revenue to increase was the addition during the second quarter of 1998
of a captive insurance program for auto-liability insurance provided to third
party trucking companies. Captive insurance revenues increased to $305
thousand in 1999 from zero in 1998.
Operating expenses for the three months ended March 31, 1999 were $7.2
million, or 94% of revenues, as compared to $4.6 million, or 91% of revenues,
for the same period in 1998. The increase as a percentage of revenues is
primarily costs related to the acquisition of the assets of Mid-Cal Express,
Inc. Fuel expenses increased $153 thousand to $715 thousand (17% of revenues
generated by company drivers) in 1999 from $562 thousand (18% of revenues
generated by company drivers) in 1998. Company driver payroll increased $442
thousand to $1.2 million (28.6% of revenues generated by company drivers) in
1999 from $758 thousand (24% of revenues generated by company drivers) in
1998. Repairs and maintenance costs increased $20 thousand to $322 thousand
(4.6% of revenues generated by the trucking segment) in 1999 from $302
thousand (6.8% of revenues generated by the trucking segment) in 1998. Lower
repair and maintenance costs as a percentage of revenues from the trucking
segment were due both from the replacement of older equipment in the fleet and
the product of better management in decreasing the outsourcing of major
repairs and increased dedication to preventive maintenance.
8
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Expenses related to the captive insurance program such as paid losses,
reserved losses, reinsurance and administrative fees increased to $271
thousand in 1999 from zero in 1998.
All expenses related to insurance in the truckload division increased $52
thousand to $223 thousand (2.9% of all revenues) in 1999 from $171 thousand
(3.4% of all revenues) in 1998. This represents a decrease as a percentage of
revenues and is a direct result of lower premiums paid in the internal captive
insurance program.
General and other administrative expenses for the three months ended March 31,
1999, were $372 thousand or 4.8% of revenues, compared to $176 thousand or
3.5% of revenues, for the same period in 1998. The increase was due to the
completed acquisition of the assets of Mid-Cal Express, Inc. Administrative
payroll increased $114 thousand to $341 thousand (4.5% of all revenues) in
1999 from $227 thousand (4.5% of all revenues) in 1998. This increase is
directly related to the increase in revenues.
Depreciation and amortization expenses for the three months ended March 31,
1999 were $551 thousand, or 7.2% of revenue, as compared to $435 thousand or
8.6% of revenue for the same period in 1998. This increase in the dollar
amount is primarily due to amortization of goodwill on the acquisition of Mid-
Cal Express, Inc. Normal recurring depreciation and amortization did not
significantly change.
Interest expense was $109 thousand or 1.4% of revenue for the quarter ended
March 31, 1999 as compared to $141 thousand or 2.8% of revenue, for the same
period in 1998. The decrease in interest as a percent of revenue is the
result of (1) the restructure of the original acquisition loan, (2) lower
receivable financing costs due to the transfer of the factoring relationship
to a revolving line of credit facility and (3) the restructuring of some
equipment debt to operating leases.
Freight settlements paid to outside carriers decreased $221 thousand to $308
thousand (89% of brokerage generated revenues) for the quarter ended March 31,
1999 as compared to $529 thousand or 88% of revenues for the same period in
1998. This decrease resulted from fewer loads being brokered in 1999 because
of increased competition in the industry.
Income taxes have been provided at the statutory federal and state rates,
adjusted for certain permanent differences between financial statement and
income tax reporting. The Company has net operating losses available to
offset future income for financial reporting expiring in the year 2012.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had a working capital deficit of approximately
$1,199,084 as compared to a deficit of approximately $1,912,731 at March 31,
1998. The Company's working capital deficit improved primarily as a result of
the $1,104,114 received from the sale of transportation equipment during the
three months ended March 31, 1999. Net cash provided by operating activities
was approximately $52,000 for the first three months of 1999 compared to
$349,000 for the corresponding period in 1998. The Company has historically
funded its working capital requirements through a combination of funds
provided from operations, the Company's working capital facility with GE
Capital and invested capital. In order to continue with its growth plans, the
Company intends to raise additional funds through private placements of equity
and/or debt securities.
9
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Since March 31, 1999, the Company has raised approximately $500,000 in gross
proceeds from the sale of Series B Convertible Preferred Stock and
approximately $600,000 in gross proceeds from the sale of a convertible
debenture to a foreign investor.
INFLATION
Many of the Company's operating expenses, including fuel costs and fuel taxes,
are sensitive to the effects of inflation, which could result in higher
operating costs. The effects of inflation on the Company's business during
the three months ended March 31, 1999, were negligible.
SEASONALITY
The results of operations are often impacted by seasonality in the
transportation industry. Seasonal variations may result from adverse weather
or from a customer's reduced shipments after busy holidays or as a result of
geographic location. The Company has operated in the mid-west, southeast and
eastern regions of the United States until recently adding a west coast
operation facility with the asset purchase of Mid-Cal Express, Inc. which is
predominately a fresh produce long-haul division, which by its nature is
subject to weather conditions that could expose the Company to greater
operating variances in the future.
YEAR 2000 COMPLIANCE
The Company is in the midst of implementing its plan to ensure year 2000
compliance of its computer hardware and software. The plan is centered around
the purchase of a new hardware system consisting of a Compaq proliant P2 300
300 MHz processor, 320 MB RAM, 2/9.1 GB mirror hard drive, and a Server Tower
which is installed in the Charleston, South Carolina, location. From the
system will be generated all functions of the Company's operating systems
including, but not limited to, the initiation of loads, dispatch, billing,
accounts payable and receivable, general ledger functions and preparation of
financial statements. All maintenance records for all of the trucks,
inventory records for all parts and supplies, claim records and accident
records as well as fuel and mileage for taxing bodies will be supplied.
Information from the Company's fuel provider, Comdata, will be downloaded into
the system over the Internet on a daily basis. The Company has received data
from Comdata with respect to their program for year 2000 compliance and is
satisfied that they will be in total compliance.
The new software system has been fully operational for the agent program and
brokerage business since November 1998, and the complete system is now
operating Company-wide. At present, the Company is working with its hardware
provider to have installed PC workstations for use with a Windows NT User
Network, MS Exchange 50 User Internal E-mail. Each workstation is a Compaq
Deskpro EP Pentium 333 Mhz. Protrip software from Computerized Management
Services of Sioux Falls, South Dakota, will be used. The Company is currently
also preparing and reviewing its database information on its current system
for transfer to the new system in an effort to streamline the flow of
information from one system to the other.
The Company may also be vulnerable to the failure of other companies to be
year 2000 compliant. The Company has commenced its assessment of whether
third parties with whom the Company has material relationships are year 2000
compliant. The Company is evaluating its vendors and suppliers to determine
if there would be a material effect on the Company's business if they do not
timely become year 2000 compliant. The same analysis is being made for
10
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significant customers. The Company has not yet initiated formal contingency
planning processes to mitigate the risk to the Company if any vendors or
customers are not prepared for the year 2000, but the Company intends to
complete this process by June 30, 1999.
Although the Company expects its internal systems to be year 2000 compliant,
the failure of any of its significant vendors or customers to correct a
material year 2000 problem could result in an interruption in certain normal
business activities and operations. Due to the general uncertainty inherent
in the year 2000 problem, resulting in part from the uncertainty of the year
2000 readiness of third parties which the Company relies on, the Company is
unable to determine at this time whether the consequences of year 2000
failures will have a material adverse impact on the Company's results of
operations, but the Company believes that with the implementation of its new
computer system and completion of its assessment of its vendors and customers,
the possibility of significant interruptions of normal operations should be
reduced.
11
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES. None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None
ITEM 5. OTHER INFORMATION. None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Exhibit
Number Description Location
3.5 Articles of Amendment dated April 29, Filed herewith
1999, regarding Series B Convertible electronically
Preferred Stock
10.12 10% Convertible Debenture due May 31, Filed herewith
2002 for $600,000 electronically
27 Financial Data Schedule Filed herewith
electronically
(b) REPORTS ON FORM 8-K. None.
12
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Issuer caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
U. S. TRUCKING, INC.
By:/s/ Dan L. Pixler
Dan L. Pixler, President
Dated: June 2, 1999
13
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
- ------- ----------------
3.5 Articles of Amendment dated April 29, Filed herewith
1999, regarding Series B Convertible electronically
Preferred Stock
10.12 10% Convertible Debenture due May 31, Filed herewith
2002 for $600,000 electronically
27 Financial Data Schedule Filed herewith
electronically
ARTICLES OF AMENDMENT TO
ARTICLES OF INCORPORATION
OF
U.S. TRUCKING, INC.
(SERIES B CONVERTIBLE PREFERRED STOCK)
FIRST:
That pursuant to authority expressly granted and vested in the Board of
Directors (the "Board of Directors" or the "Board") of this Corporation under
the Colorado Business Corporation Act and the provisions of the Articles of
Incorporation, the Board of Directors, on April 29, 1999, adopted the
following resolution setting forth the designations, powers, preferences and
rights of its Series B Convertible Preferred Stock (the "Statement of
Designation").
RESOLVED: That the designations, powers, preferences and rights of the Series
B Convertible Preferred Stock be, and they hereby are, as set forth below:
I. DESIGNATION AND AMOUNT
The designation of this series, which consists of 2,000 shares of Preferred
Stock, is the Series B Convertible Preferred Stock (the "Series B Preferred
Stock") and the stated value shall be One Thousand U.S. Dollars ($1,000.00)
per share (the "Stated Value").
II. NO DIVIDENDS
The Series B Preferred Stock will bear no dividends, and the holders of the
Series B Preferred Stock shall not be entitled to receive dividends on the
Series B Preferred Stock.
III. CERTAIN DEFINITIONS
For purposes of this Statement of Designation, the following terms shall have
the following meanings:
A. "Closing Bid Price" means, for any security as of any date, the
closing bid price of such security on the over-the-counter market on the
electronic bulletin board (the "Bulletin Board") or principal securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg Financial Markets or if Bloomberg Financial Markets is not then
reporting closing bid prices of such security a comparable reporting service
of national reputation selected by the Corporation and reasonably acceptable
to holders of a majority of the then outstanding shares of Series B Preferred
Stock (collectively, "Bloomberg"). If the foregoing does not apply, if no bid
price is reported for such security by Bloomberg, the average of the bid
prices of any market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price of such security on such date shall be the fair market value
as reasonably determined by an investment banking firm selected by the
Corporation and reasonably acceptable to holders of a majority of the then
outstanding shares of Series B Preferred Stock, with the costs of such
appraisal to be borne by the Corporation.
<PAGE>
B. "Conversion Date" means, for any Conversion, the date on which the
notice of conversion in the form attached hereto (the "Notice of Conversion")
is delivered by fax, as evidenced by a mechanically or electronically
generated confirmation thereof, (or delivered by other means resulting in
notice) to the Corporation before 6:00 p.m., New York City time on the
Conversion Date indicated in the Notice of Conversion. The holder shall
confirm, by overnight courier, in person (by courier or otherwise) or by
telephone (to an authorized officer of the Corporation or his or her
administrative assistant), the delivery of the Notice of Conversion to the
Corporation on the date on which the Notice of Conversion is delivered or
before 9:00 a.m., New York City time on the trading day immediately succeeding
such date; provided that an overnight courier delivery which is signed for or
refused by the Corporation prior to 12:00 noon, New York City time on a given
day shall be deemed to have been delivered before 9:00 a.m. New York City time
on such day. If the Notice of Conversion is not so faxed or otherwise
delivered or the overnight courier, in-person or telephone confirmation is not
so made or deemed to be made before such applicable times, then the Conversion
Date shall be the date as of which both such conditions are satisfied (i.e.,
the Notice of Conversion is delivered on or before 6:00 p.m. New York City
time on a given day and the overnight courier, in-person or telephone
confirmation is made or deemed to be made either on such day of delivery or
before 9:00 a.m. New York City time on the immediately succeeding trading
day).
C. "Conversion Price" means the lower of the Fixed Conversion Price and
the Variable Conversion Price, each in effect as of such date and subject to
adjustment as provided herein.
D. "First Conversion Date" means, with respect to Series B Preferred
Stock issued on any Issue Date the earliest of (i) the 181st day following the
Initial Issuance Date, (ii) the date the Corporation makes a public
announcement that it intends to merge or consolidate with any other entity
(other than a merger in which the Corporation is the surviving or continuing
entity and the voting capital stock of the Corporation immediately prior to
such merger represents at least 50% of the voting power of the capital stock
of the Corporation after the merger) or to sell or transfer all or
substantially all of the assets of the Corporation, (iii) the date any person,
group or entity (including the Corporation) publicly announces a tender offer,
exchange offer or another transaction to purchase 50% or more of the
Corporation's outstanding Common Stock or otherwise publicly announces an
intention to replace a majority of the Corporation's Board of Directors by
waging proxy battle or otherwise, or (iv) the date on which a Redemption Event
described in Article VIII.A(iv) occurs.
E. "Fixed Conversion Price" means $2.59 (the average of the Closing Bid
Prices for the Corporation's common stock, no par value per share ("Common
Stock") during the five (5) consecutive trading days ending on the day
immediately prior to the Initial Issuance Date), and shall be subject to
adjustment as provided herein.
F. "Initial Issuance Date" means the date of the First Closing under
that certain Securities Purchase Agreement dated as of April 29, 1999 by and
among the Corporation and the other signatories thereto (the "Securities
Purchase Agreement").
G. "Issuance Date" means for each share of Series B Preferred Stock, the
date on which such share is first issued by the Corporation.
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H. "Market Price," as of any date, (i) means the average of the closing
bid prices for the shares of Common Stock as reported on the Bulletin Board by
Bloomberg for the ten consecutive trading days immediately preceding such
date, or (ii) if the Bulletin Board is not the principal trading market for
the shares of Common Stock, the average of the closing bid prices as reported
by Bloomberg on the principal trading market or exchange for the Common Stock
during the same period, or, if there is no sale price for such period, the
last reported bid price as reported by Bloomberg for such period, or (iii) if
market value cannot be calculated as of such date on any of the foregoing
bases, the Market Price shall be the average fair market value as reasonably
determined by an investment banking firm selected by the Corporation and
reasonably acceptable to the holder, with the costs of the appraisal to be
borne by the Corporation. The manner of determining the Market Price of the
Common Stock set forth in the foregoing definition shall apply with respect to
any other security in respect of which a determination as to market value must
be made hereunder.
I. "N" means, with respect to each share of Series B Preferred Stock,
the number of days from, but excluding, the Issuance Date until the date
Premium is first redeemed in accordance with Article IV.D hereof on such share
and thereafter the number of days from and including the date on which Premium
was last redeemed in accordance with Article IV.D hereof until the date
Premium is next redeemed on such share..
J. "Variable Conversion Price" means, as of any date of determination,
the amount obtained by multiplying 0.90 by the average of the Closing Bid
Prices for the Common Stock for any three (3) consecutive trading days chosen
by the holder of Series B Preferred Stock during the period beginning on the
twentieth trading day prior to the Conversion Date for such Conversion and
ending on such Conversion Date (subject to equitable adjustment for any stock
splits, stock dividends, reclassifications or similar events during such
trading day period), and shall be subject to adjustment as provided herein;
provided, however, beginning on that date which is one hundred eighty days
after the Initial Issuance Date, such twenty day period shall be increased by
one additional trading day for each thirty day period thereafter.
K. "Premium" means an amount equal to (X)x(N/365) x (1,000), where "X"
means twelve hundredths (.12).
IV. CONVERSION; REDEMPTION OF PREMIUM
A. Conversion at the Option of the Holder. Subject to the limitations
on conversions contained in Paragraph C of this Article IV and to the
Corporation's right of redemption contained in Article VIII.D, each holder of
shares of Series B Preferred Stock may, at any time and from time to time on
or after the First Conversion Date, convert (a "Conversion") each of its
shares of Series B Preferred Stock into a number of fully paid and
nonassessable shares of Common Stock determined in accordance with the
following formula:
$1,000
Conversion Price
B. Mechanics of Conversion. In order to effect a Conversion, a holder
shall: (x) fax (or otherwise deliver) a copy of the fully executed Notice of
Conversion to the Corporation or the transfer agent for the Common Stock and
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(y) surrender or cause to be surrendered the original certificates
representing the Series B Preferred Stock being converted (the "Preferred
Stock Certificates"), duly endorsed, along with a copy of the Notice of
Conversion as soon as practicable thereafter to the Corporation or the
transfer agent. The holder shall confirm by overnight courier, in person (by
courier or otherwise) or by telephone (to an authorized officer of the
Corporation or his or her administrative assistant), the delivery of the
Notice of Conversion to the Corporation on the date on which the Notice of
Conversion is delivered or before 9:00 a.m. New York City time on the trading
day immediately succeeding such date; provided that an overnight courier
delivery which is signed for or refused by the Corporation prior to 12:00
noon, New York City time on a given day shall be deemed to have been delivered
before 9:00 a.m. New York City time on such day. Upon receipt by the
Corporation of the Notice of Conversion by fax from a holder, the Corporation
shall, within one business day, following the later of the Corporation's
receipt of such Notice of Conversion and the holder's overnight courier,
in-person or telephone confirmation of the delivery of such Notice of
Conversion, send, via fax, a confirmation (the "Notice of Conversion
Confirmation") to such holder stating that the Notice of Conversion has been
received, the date upon which the Corporation expects to deliver the Common
Stock issuable upon such conversion, the name and telephone number of a
contact person at the Corporation regarding the conversion. The Corporation
shall not be obligated to issue shares of Common Stock upon a conversion
unless either the Preferred Stock Certificates are delivered to the
Corporation or the transfer agent as provided above, or the holder notifies
the Corporation or the transfer agent that such certificates have been lost,
stolen or destroyed and delivers the documentation to the Corporation required
by Article XIV.B hereof.
(i) Delivery of Common Stock Upon Conversion. Upon the surrender
of Preferred Stock Certificates from a holder of Series B Preferred Stock
accompanied by a Notice of Conversion, the Corporation shall, subject to the
Corporation's redemption rights set forth in Article VIII.D, no later than the
later of (a) the third business day following the Conversion Date and (b) the
business day following the date of such surrender (or, in the case of lost,
stolen or destroyed certificates, after provision of documentation pursuant
to Article XIV.B) (the "Delivery Period"), issue and deliver to the holder or
its nominee, after registration of the resale of such shares under the
Securities Act of 1933, as amended (the "Securities Act"), or delivery of
documentation reasonably satisfactory to the Corporation that the registration
of such shares is not required, to such holder's nominee, (x) that number of
shares of Common Stock issuable upon conversion of such shares of Series B
Preferred Stock being converted and (y) a certificate representing the number
of shares of Series B Preferred Stock not being converted, if any. If the
Corporation's transfer agent is participating in the Depository Trust
Corporation ("DTC") Fast Automated Securities Transfer program, and so long as
the certificates therefor do not bear a legend and the holder thereof is not
then required to return such certificate for the placement of a legend
thereon, the Corporation may cause its transfer agent to electronically
transmit the Common Stock issuable upon conversion to the holder by crediting
the account of the holder or its nominee with DTC through its Deposit
Withdrawal Agent Commission system ("DTC Transfer"). If the aforementioned
conditions to a DTC Transfer are not satisfied or a DTC Transfer is otherwise
not effected, the Corporation shall deliver to the holder physical
certificates representing the Common Stock issuable upon conversion. Further,
a holder may instruct the Corporation to deliver to the holder physical
certificates representing the Common Stock issuable upon conversion in lieu of
delivering such shares by way of DTC Transfer.
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(ii) Taxes. The Corporation shall pay any and all taxes which may
be imposed upon the Corporation with respect to the issuance and delivery of
the shares of Common Stock upon the conversion of the Series B Preferred Stock
other than transfer taxes due upon conversion, if such holder has transferred
to another party the Series B Preferred Stock or the right to receive Common
Stock upon the holder's conversion thereof.
(iii) No Fractional Shares. If any conversion of Series B
Preferred Stock would result in the issuance of a fractional share of Common
Stock, such fractional share shall be disregarded and the number of shares of
Common Stock issuable upon conversion of the Series B Preferred Stock shall be
rounded up or down to the nearest whole share, it being understood that .5 of
one share shall be rounded up to the next highest share.
(iv) Conversion Disputes. In the case of any dispute with respect
to a conversion, the Corporation shall promptly issue such number of shares of
Common Stock as are not disputed in accordance with subparagraph (i) above.
If such dispute involves the calculation of the Conversion Price, the
Corporation shall submit the disputed calculations to the Corporation's
outside auditors reasonably acceptable to the holder of Series B Preferred
Stock being converted via facsimile at any time prior to the expiration of the
Delivery Period. The accountant, at the Corporation's expense, shall audit the
calculations and notify the Corporation and the holder of the results as soon
as practicable following the date it receives the disputed calculations. The
accountant's calculation shall be deemed conclusive, absent manifest error.
The Corporation shall then issue the appropriate number of shares of Common
Stock in accordance with subparagraph (i) above.
C. Limitations on Conversions. The conversion of shares of Series B
Preferred Stock shall be subject to the following limitations (each of which
limitations shall be applied independently):
(i) Cap Amount. If, notwithstanding the representations and
warranties of the Corporation contained in the Securities Purchase Agreement,
the Corporation is prohibited by the rules or regulations of any securities
exchange or quotation system on which the Common Stock is then listed or
traded, from listing or issuing a number of shares of Common Stock in excess
of a prescribed amount (the "Cap Amount") without the approval of the
Corporation's shareholders, then the Corporation shall not be required to list
or issue, as applicable, shares in excess of the Cap Amount unless the
Corporation has obtained the required approvals. The Cap Amount shall be
allocated pro rata to the holders of Series B Preferred Stock as provided in
Article XIV.C. In the event a holder of Series B Preferred Stock submits a
Notice of Conversion and the Corporation is prohibited from listing or issuing
shares of Common Stock to satisfy such Notice of Conversion as a result of the
operation of this subparagraph (i), such holder shall be entitled to the
rights set forth in Article VII hereof.
(ii) No Five Percent Holders. Unless a holder of shares of Series B
Preferred Stock delivers a waiver in accordance with the last sentence of this
subparagraph (ii), in no event shall a holder of shares of Series B Preferred
Stock be entitled to receive shares of Common Stock upon a conversion to the
extent that the sum of (x) the number of shares of Common Stock beneficially
owned by the holder and its affiliates (exclusive of shares issuable upon
conversion of the unconverted portion of the shares of Series B Preferred
Stock or the unexercised or unconverted portion of any other securities of the
Corporation (including, without limitation, the warrants (the "Warrants")
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issued by the Corporation pursuant to the Securities Purchase Agreements)
subject to a limitation on conversion or exercise analogous to the limitations
contained herein) and (y) the number of shares of Common Stock issuable upon
the conversion of the shares of Series B Preferred Stock with respect to which
the determination of this subparagraph is being made, would result in
beneficial ownership by the holder and its affiliates of more than 4.99% of
the outstanding shares of Common Stock. For purposes of this subparagraph,
beneficial ownership shall be determined in accordance with Section 13(d) of
the Securities Exchange Act of 1934, as amended, and Regulation 13 D-G
thereunder, except as otherwise provided in clause (x) above. Except as
provided in the immediately succeeding sentence, the restriction contained in
this subparagraph (ii) shall not be altered, amended, deleted or changed in
any manner whatsoever unless the holders of a majority of the outstanding
shares of Common Stock and each holder of outstanding shares of Series B
Preferred Stock shall approve such alteration, amendment, deletion or change.
Notwithstanding the foregoing, a holder of shares of Series B Preferred Stock
may, by providing written notice to the Corporation, adjust the restriction
set forth in this subparagraph (ii) so that the limitation on beneficial
ownership of 4.99% of the outstanding shares of Common Stock referred to above
shall be increased to 9.99%, which adjustment shall not take effect until the
61st day after the date of such notice.
(iii) Percentage Limits on Conversion. Notwithstanding anything to
the contrary contained herein, no holder of shares of Series B Preferred Stock
may, without the prior written consent of the Corporation, on any one trading
day convert into shares of Common Stock a number of shares of Series B
Preferred Stock in excess of ten percent (10%) of the aggregate number of
shares of Series B Preferred Stock purchased by such holder from the
Corporation.
D. Redemption of Premium. The Corporation shall, on the fifteenth
(15th) day of each calendar month, redeem in cash any and all accrued and
unpaid Premium as of such date. All such redemption payments hereunder shall
be paid in lawful money of the United States of America at such address for
the holder as appears on the record books of the Corporation (or at such other
address as such holder shall hereafter give to the Corporation by written
notice).
V. RESERVATION OF SHARES OF COMMON STOCK
A. Reserved Amount. On the Issuance Date of shares of Series B
Preferred Stock, the Corporation shall reserve 200% of the number of shares
which would be issuable if the outstanding shares of Series B Preferred Stock
were converted in their entirety on the such Issuance Date based on the
Conversion Price in effect on such Issuance Date of the authorized but
unissued shares of Common Stock for issuance upon conversion of the Series B
Preferred Stock and thereafter the number of authorized but unissued shares of
Common Stock so reserved (the "Reserved Amount") shall not be decreased and
shall at all times be sufficient to provide for the conversion of the Series B
Preferred Stock outstanding at the then current Conversion Price thereof. The
Reserved Amount shall be allocated to the holders of Series B Preferred Stock
as provided in Article XIV.C.
B. Increases to Reserved Amount. If the Reserved Amount for any three
consecutive trading days (the last of such three trading days being the
"Authorization Trigger Date") shall be less than 135% of the number of shares
of Common Stock issuable upon conversion of the then outstanding shares of
Series B Preferred Stock, the Corporation shall immediately notify the holders
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of Series B Preferred Stock of such occurrence and shall take immediate action
(including, if necessary, seeking shareholder approval to authorize the
issuance of additional shares of Common Stock) to increase the Reserved Amount
to 200% of the number of shares of Common Stock then issuable upon conversion
of the outstanding Series B Preferred Stock. In the event the Corporation
fails to so increase the Reserved Amount within 90 days after an Authorization
Trigger Date (such event being the "Reserved Amount Trigger Event"), each
holder of Series B Preferred Stock shall thereafter have the option,
exercisable in whole or in part at any time and from time to time by delivery
of a Redemption Notice (as defined in Article VIII.C) to the Corporation, to
require the Corporation to purchase for cash, at an amount per share equal to
the Redemption Amount (as defined in Article VIII.B), a portion of the
holder's Series B Preferred Stock such that, after giving effect to such
purchase, the holder's allocated portion of the Reserved Amount exceeds 135%
of the total number of shares of Common Stock issuable to such holder upon
conversion of its Series B Preferred Stock. If the Corporation fails to
redeem any of such shares within five (5) business days after its receipt of
such Redemption Notice, then such holder shall be entitled to the remedies
provided in Article VIII.C.
C. Adjustment to Conversion Price. If the Corporation is prohibited, at
any time, from issuing shares of Common Stock upon conversion of Series B
Preferred Stock to any holder because the Corporation does not then have
available a sufficient number of authorized and reserved shares of Common
Stock, then the Fixed Conversion Price in respect of any shares of Series B
Preferred Stock held by any holder (including shares of Series B Preferred
Stock submitted to the Corporation for conversion, but for which shares of
Common Stock have not been issued to any such holder) shall be adjusted as
provided in Article VI.A.
D. Limitations on Redemption Right. Notwithstanding the provisions of
Paragraph B of this Article V, the holders of Series B Preferred Stock shall
have no right to require the Corporation to effect a redemption of their
outstanding shares of Series B Preferred Stock as provided in Paragraph B of
this Article V so long as (i) the Corporation has not, at any time, decreased
the Reserved Amount below that number of shares of Common Stock computed as
set forth in Article V.A.; (ii) the Corporation shall have taken immediate
action following the applicable Authorization Trigger Date (including, if
necessary, seeking stockholder approval to authorize the issuance of
additional shares of Common Stock) to increase the Reserved Amount to 200% of
the number of shares of Common Stock then issuable upon conversion of the
outstanding Series B Preferred Stock; and (iii) the Corporation continues to
use all commercially reasonable good faith best efforts (including the
resolicitation of stockholder approval to authorize the issuance of additional
shares of Common Stock) to increase the Reserved Amount to 200% of the number
of shares of Common Stock then issuable upon conversion of the outstanding
Series B Preferred Stock. The Corporation will be deemed to be using "all
commercially reasonable good faith best efforts" to increase the Reserved
Amount so long as it solicits stockholder approval to authorize the issuance
of additional shares of Common Stock not less than three (3) times during each
twelve month period following the applicable Authorization Trigger Date during
which any shares of Series B Preferred Stock remain outstanding.
VI. FAILURE TO SATISFY CONVERSIONS
A. Conversion Defaults. The following shall constitute a "Conversion
Default": (i) following the submission by a holder of shares of Series B
Preferred Stock of a Notice of Conversion, the Corporation fails for any
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reason (other than because of an event described in clause (iii) below) to
deliver, on or prior to the tenth business day following the expiration of the
Delivery Period for such conversion, such number of shares of Common Stock
without a restrictive legend covered by an effective registration statement to
which such holder is entitled upon such conversion, (ii) the Corporation
provides notice to any holder of Series B Preferred Stock at any time of its
intention not to issue freely tradeable shares of Common Stock upon exercise
by any holder of its conversion rights in accordance with the terms of this
Statement of Designation (other than because of an event described in clause
(iii) below), or (iii) the Corporation is prohibited, at any time, from
listing shares of Common Stock or from issuing shares of Common Stock upon
conversion of Series B Preferred Stock to any holder because the Corporation
(A) does not at the date of such conversion have available a sufficient number
of authorized and reserved shares of Common Stock or (B) such listing or
issuance would exceed the then unissued portion of such holder's Cap Amount.
In the case of a Conversion Default described in clause (i) or (iii) above,
the Fixed Conversion Price in respect of any shares of Series B Preferred
Stock held by such holder (including shares of Series B Preferred Stock
submitted to the Corporation for conversion, but for which shares of Common
Stock have not been issued to such holder) shall thereafter be the lesser of
(x) the Fixed Conversion Price on the date of the Conversion Default and (y)
the lowest Conversion Price in effect during the period beginning on, and
including, such date through and including (A) in the case of a Conversion
Default referred to in clause (i) above, the earlier of (1) the day such
shares of Common Stock are delivered to the holder and (2) the day on which
the holder regains its rights as a holder of Series B Preferred Stock with
respect to such unconverted shares of Series B Preferred Stock pursuant to the
provisions of Article XIV.F hereof, and (B) in the case of a Conversion
Default referred to in clause (iii) above, the date on which the prohibition
on listing or issuance of Common Stock terminates. In the case of a
Conversion Default described in clause (ii) above, the Fixed Conversion Price
with respect to any conversion thereafter shall be the lowest Conversion Price
in effect at any time during the period beginning on, and including, the date
of the occurrence of such Conversion Default through and including the Default
Cure Date (as defined below). Following any adjustment to the Fixed
Conversion Price pursuant to this Article VI.A, the Fixed Conversion Price
shall thereafter be subject to further adjustment for any events described in
Article XI. Upon the occurrence of each reset of the Fixed Conversion Price
pursuant to this Paragraph A, the Corporation, at its expense, shall promptly
compute the new Fixed Conversion Price and prepare and furnish to each holder
of Series B Preferred Stock a certificate setting forth such new Fixed
Conversion Price and showing in detail each Conversion Price in effect during
such reset period.
"Default Cure Date" means (i) with respect to a Conversion Default
described in clause (i) of its definition, the date the Corporation effects
the conversion of the full number of shares of Series B Preferred Stock, (ii)
with respect to a Conversion Default described in clause (ii) of its
definition, the date the Corporation issues shares of Common Stock without a
restrictive legend covered by an effective registration statement in
satisfaction of all conversions of Series B Preferred Stock in accordance with
Article IV.A, and (iii) with respect to a Conversion Default described in
clause (i) or clause (ii) of its definition, the date on which the Corporation
redeems shares of Series B Preferred Stock held by such holder pursuant to
paragraph C of this Article VI.
B. Intentionally Omitted.
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C. Redemption Right. If the Corporation fails, and such failure
continues uncured for five (5) business days after the Corporation has been
notified thereof in writing by the holder, for any reason (other than because
such issuance would exceed such holder's allocated portion of the Reserved
Amount or Cap Amount, for which failures the holders shall have the remedies
set forth in Articles V and VII, respectively) to issue shares of Common Stock
within 10 business days after the expiration of the Delivery Period with
respect to any conversion of Series B Preferred Stock, then the holder may
elect at any time and from time to time prior to the Default Cure Date for
such Conversion Default, by delivery of a Redemption Notice to the
Corporation, to have all of such holder's shares of Series B Preferred Stock
which were submitted for conversion purchased by the Corporation for cash, at
an amount per share equal to the Redemption Amount (as defined in Article
VIII.B). If the Corporation fails to redeem any of such shares within five
business days after its receipt of such Redemption Notice, then such holder
shall be entitled to the remedies provided in Article VIII.C.
D. Void Notice of Conversion. If for any reason a holder has not
received all of the shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Delivery Period with respect to a conversion
of Series B Preferred Stock and such shares are not subject to a redemption
notice from the holder thereof, then the holder, upon written notice to the
Corporation's transfer agent, with a copy to the Corporation, may void its
Notice of Conversion with respect to, and retain or have returned, as the case
may be, any shares of Series B Preferred Stock that have not been converted
pursuant to such holder's Notice of Conversion; provided that the voiding of a
holder's Notice of Conversion shall not affect such holders rights and
remedies which have accrued prior to the date of such notice pursuant to
Article VI hereof or otherwise.
VII. INABILITY TO LIST OR CONVERT DUE TO CAP AMOUNT
A. Obligation to Cure. If at any time after April 30, 1999 the then
unissued portion of any holder's Cap Amount is less than 135% of the number of
shares of Common Stock then issuable upon conversion of such holder's shares
of Series B Preferred Stock (a "Trading Market Trigger Event"), the
Corporation shall immediately notify the holders of Series B Preferred Stock
of such occurrence and shall take immediate action (including, if necessary,
seeking the approval of its shareholders to authorize the listing or issuance
of the full number of shares of Common Stock which would be issuable upon the
conversion of the then outstanding shares of Series B Preferred Stock but for
the Cap Amount) to eliminate any prohibitions under applicable law or the
rules or regulations of any stock exchange, interdealer quotation system or
other self-regulatory organization with jurisdiction over the Corporation or
any of its securities on the Corporation's ability to list or issue shares of
Common Stock in excess of the Cap Amount ("Trading Market Prohibitions"). In
the event the Corporation fails to eliminate all such Trading Market
Prohibitions within 120 days after the Trading Market Trigger Event, then each
holder of Series B Preferred Stock shall thereafter have the option,
exercisable in whole or in part at any time and from time to time until such
date that all such Trading Market Prohibitions are eliminated, by delivery of
a Redemption Notice (as defined in Article VIII.C) to the Corporation, to
require the Corporation to purchase for cash, at an amount per share equal to
the Redemption Amount, a number of the holder's shares of Series B Preferred
Stock such that, after giving effect to such redemption, the then unissued
portion of such holder's Cap Amount exceeds 135% of the total number of shares
of Common Stock issuable upon conversion of such holder's shares of Series B
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Preferred Stock. If the Corporation fails to redeem any of such shares within
five (5) business days after its receipt of such Redemption Notice, then such
holder shall be entitled to the remedies provided in Articles VII.B and
VIII.C.
B. Remedies. If the Corporation fails to redeem any shares of Series B
Preferred Stock pursuant to Article VII.A within five business days after its
receipt of such Redemption Notice, and thereafter the Corporation is
prohibited, at any time, from listing shares of Common Stock or from issuing
shares of Common Stock upon conversion of Series B Preferred Stock to any
holder because such listing or issuance would exceed the then unissued portion
of such holder's Cap Amount because of applicable law or the rules or
regulations of any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Corporation or its
securities, any holder who is so prohibited from converting its Series B
Preferred Stock because the shares of Common Stock underlying such Series B
Preferred Stock may not be listed or issued, may elect either or both of the
following additional remedies:
(i) to require, with the consent of holders of at least fifty
percent (50%) of the outstanding shares of Series B Preferred Stock (including
any shares of Series B Preferred Stock held by the requesting holder), the
Corporation to terminate the trading of its Common Stock on the Bulletin Board
(or any other stock exchange, interdealer quotation system or trading market)
and to cause its Common Stock to be eligible for trading on the "pink sheets";
or
(ii) to require the Corporation to issue shares of Common Stock in
accordance with such holder's Notice of Conversion at a conversion price equal
to the average of the Closing Bid Prices for the Common Stock during the five
consecutive trading days ending on the trading day immediately preceding the
date of the holder's written notice to the Corporation of its election to
receive shares of Common Stock pursuant to this subparagraph (ii) (subject to
equitable adjustment for any stock splits, stock dividends, reclassifications
or similar events during such five trading day period).
C. Adjustment to Conversion Price. If the Corporation is prohibited, at
any time, from listing shares of Common Stock or from issuing shares of Common
Stock upon conversion of Series B Preferred Stock to any holder because such
listing or issuance would exceed the then unissued portion of such holder's
Cap Amount because of applicable law or the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Corporation or its securities, then the Fixed
Conversion Price in respect of any shares of Series B Preferred Stock held by
any holder (including shares of Series B Preferred Stock submitted to the
Corporation for conversion, but for which shares of Common Stock have not been
issued) shall be adjusted as provided in Article VI.A.
VIII. REDEMPTION
A. Redemption by Holder. In the event (each of the events described in
clauses (i)-(vii) below after expiration of the applicable cure period (if
any) being a "Redemption Event"):
(i) the Common Stock (including, from and after the First
Conversion Date, any of the shares of Common Stock issuable upon conversion of
the Series B Preferred Stock) is suspended from trading on any of, or is not
listed (and authorized) for trading on at least one of, the Bulletin Board,
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NASDAQ Small Cap Market, the NASDAQ National Market, the New York Stock
Exchange or the American Stock Exchange for an aggregate of 10 full trading
days in any nine month period;
(ii) the Corporation fails to remove any restrictive legend on any
certificate or any shares of Common Stock issued to the holders of Series B
Preferred Stock (a "Legend Removal Failure") upon conversion of the Series B
Preferred Stock as and when required by this Statement of Designation, the
Securities Purchase Agreement or that certain Registration Rights Agreement
(the "Registration Rights Agreement") by and among the Corporation and the
other signatories thereto entered into in connection with the Securities
Purchase Agreement and any such failure continues uncured for ten business
days after the Corporation has been notified thereof in writing by the holder;
(iii) the Corporation provides notice to any holder of Series B
Preferred Stock, including by way of public announcement, at any time, of its
intention not to issue, or otherwise refuses to issue, shares of Common Stock
to any holder of Series B Preferred Stock upon conversion in accordance with
the terms of this Statement of Designation (other than due to the
circumstances contemplated by Articles V or VII for which the holders shall
have the remedies set forth in such Articles);
(iv) the Corporation shall:
(a) sell, convey or dispose of all or substantially all of its
assets (the presentation of any such transaction for stockholder approval
being conclusive evidence that such transaction involves the sale of all or
substantially all of the assets of the Corporation); or
(b) merge, consolidate or engage in any other business
combination with any other entity (other than pursuant to a migratory merger
effected solely for the purpose of changing the jurisdiction of incorporation
of the Corporation and other than pursuant to a merger in which the
Corporation is the surviving or continuing entity and the voting capital stock
of the Corporation immediately prior to such merger represents at least 50% of
the voting power of the capital stock of the Corporation after the merger) and
its capital stock is unchanged; or
(c) have fifty percent (50%) or more of the voting power of
its capital stock owned beneficially by one person, entity or "group" (as such
term is used under Section 13(d) of the Securities Exchange Act of 1934, as
amended), other than Logistics Management LLC and its current affiliates;
(v) the Corporation otherwise shall breach any material term
hereunder or under the Securities Purchase Agreement or the Registration
Rights Agreement and such breach continues for 5 business days after the
Corporation has been notified thereof in writing by the holder; or
(vi) as of the last day of any Trading Volume Valuation Period
(defined below) and the Trading Volume Value (defined below) for such Trading
Volume Valuation Period shall not equal or exceed $150,000. The term "Trading
Volume Valuation Period" shall mean any twenty (20) consecutive trading day
period during the period beginning on the one hundred eightieth (180th) day
after the Initial Issuance Date and continuing thereafter. The term "Trading
Volume Value" shall mean, for any Trading Volume Valuation Period, the
average of the products obtained by multiplying (i) the Closing Bid Price for
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the Common Stock on a trading day by (ii) the total actual number of shares of
Common Stock purchased on the Bulletin Board or the principal exchange or
market on which the Common Stock is traded on such trading day for each
trading day in such Trading Volume Valuation Period.
then, upon the occurrence of any such Redemption Event, each holder of shares
of Series B Preferred Stock shall thereafter have the option, exercisable in
whole or in part at any time and from time to time by delivery of a Redemption
Notice (as defined in Paragraph C below) to the Corporation while such
Redemption Event continues, to require the Corporation to purchase for cash
any or all of the then outstanding shares of Series B Preferred Stock held by
such holder for an amount per share equal to the Redemption Amount (as defined
in Paragraph B below) in effect at the time of the redemption hereunder. For
the avoidance of doubt, the occurrence of any event described in clauses (i),
(iii) or (iv) above shall immediately constitute a Redemption Event and there
shall be no cure period. Upon the Corporation's receipt of any Redemption
Notice hereunder (other than during the three trading day period following the
Corporation's delivery of a Redemption Announcement (as defined below) to all
of the holders in response to the Corporation's initial receipt of a
Redemption Notice from a holder of Series B Preferred Stock), the Corporation
shall immediately (and in any event within one business day following such
receipt) deliver a written notice (a "Redemption Announcement") to all holders
of Series B Preferred Stock stating the date upon which the Corporation
received such Redemption Notice and the amount of Series B Preferred Stock
covered thereby. Subject to Article VIII.D, the Corporation shall not redeem
any shares of Series B Preferred Stock during the three trading day period
following the delivery of a required Redemption Announcement hereunder. At
any time and from time to time during such three trading day period, each
holder of Series B Preferred Stock may request (either orally or in writing)
information from the Corporation with respect to the instant redemption
(including, but not limited to, the aggregate number of shares of Series B
Preferred Stock covered by Redemption Notices received by the Corporation) and
the Corporation shall furnish (either orally or in writing) as soon as
practicable such requested information to such requesting holder.
Notwithstanding anything in this Article VIII.A to the contrary, the
holders of Series B Preferred Stock shall have no right to deliver a
Redemption Notice following the occurrence of a Redemption Event specified in
clause (i) above if the Corporation pays to each holder within five (5)
business days after the occurrence of such Redemption Event and on each three
month anniversary thereafter, as liquidated damages for the decrease in the
value of the Series B Preferred Stock (and the shares of the Corporation's
Common Stock issuable upon conversion thereof) which will result from the
occurrence of such Redemption Event, an amount (the "Damages Amount") equal to
ten percent (10%) of the aggregate Stated Value of the shares of Series B
Preferred Stock then held by each such holder. The Damages Amount shall be
payable, at the Corporation's option, in cash or shares of Common Stock (based
upon a price per share of Common Stock equal to eighty percent (80%) of the
Variable Conversion Price in effect as of the date of such Redemption Event).
Notwithstanding anything in this Article VIII.A to the contrary, if the
holders of Series B Preferred Stock deliver a Redemption Notice following the
occurrence of a Redemption Event specified in clause (vi) above, the
Corporation may at its election in lieu of paying the Redemption Amount pay to
the holders of Series B Preferred Stock the Trading Value Redemption Amount
(as defined below). The "Trading Value Redemption Amount" with respect to a
share of Series B Preferred Stock means an amount equal to the Stated Value
hereof multiplied by 1.2 plus the accrued and unpaid Premium thereon through
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the date of payment of the Trading Value Redemption Amount. Notwithstanding
anything in this Article VIII.A to the contrary, the Trading Value Redemption
Amount shall be payable, at the Corporation's option, in cash or shares of
Common Stock (based upon a price per share of Common Stock equal to eighty
percent (80%) of the Variable Conversion Price in effect as of the date of
such Redemption Event). If the Corporation elects to pay such amount in
shares of Common Stock such shares shall be issued not later than five (5)
business days after the date the Trading Value Redemption Amount becomes due
and such shares for all purposes shall constitute Registrable Securities (as
defined in the Registration Rights Agreement). If the Corporation elects to
pay such amount in cash, the Corporation shall pay such amount in twelve (12)
equal monthly installments plus interest on such amount at a per annum,
compounded rate of twelve percent (12%). Such interest will begin to accrue
and the first of such payments shall be made on the date the Trading Value
Redemption Amount becomes due. The Corporation shall have the right to prepay
any such cash amount.
B. Definition of Redemption Amount. The "Redemption Amount" with
respect to a share of Series B Preferred Stock means an amount equal to:
V x M
C P
where:
"V" means the Stated Value thereof, plus the accrued Premium thereon
through the date of payment of the Redemption Amount;
"CP" means the Conversion Price in effect on the date on which the
Corporation receives the Redemption Notice; and
"M" means the higher of (i) the highest Closing Bid Price of the
Corporation's Common Stock during the period beginning on the date on which
the Corporation receives the Redemption Notice and ending on the date
immediately preceding the date of payment of the Redemption Amount and (ii)
the fair market value, as of the date on which the Corporation receives the
Redemption Notice, of the consideration payable to the holder of a share of
Common Stock pursuant to the transaction which triggers the redemption. For
purposes of this definition, "fair market value" shall be determined by the
mutual agreement of the Corporation and holders of a majority-in-interest of
the shares of Series B Preferred Stock then outstanding, or if such agreement
cannot be reached within five business days prior to the date of redemption,
by an investment banking firm selected by the Corporation and reasonably
acceptable to holders of a majority-in-interest of the then outstanding shares
of Series B Preferred Stock, with the costs of such appraisal to be borne by
the Corporation.
C. Redemption Defaults. If the Corporation fails to pay any holder the
Redemption Amount or Trading Value Redemption Amount with respect to any share
of Series B Preferred Stock within five business days after its receipt of a
notice requiring such redemption (a "Redemption Notice"), then the holder of
Series B Preferred Stock delivering such Redemption Notice (i) shall be
entitled to interest on the Redemption Amount at a per annum rate equal to the
lower of twenty-four percent (24%) and the highest interest rate permitted by
applicable law from the date on which the Corporation receives the Redemption
Notice until the date of payment of the Redemption Amount hereunder, and (ii)
shall have the right, at any time and from time to time, to require the
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Corporation, upon written notice, to immediately convert (in accordance with
the terms of Paragraph A of Article IV) all or any portion of the Redemption
Amount, plus interest as aforesaid, into shares of Common Stock at the lowest
Conversion Price in effect during the period beginning on the date on which
the Corporation receives the Redemption Notice and ending on the Conversion
Date with respect to the conversion of such Redemption Amount. In the event
the Corporation is not able to redeem all of the shares of Series B Preferred
Stock subject to Redemption Notices delivered prior to the date upon which
such redemption is to be effected, the Corporation shall redeem shares of
Series B Preferred Stock from each holder pro rata, based on the total number
of shares of Series B Preferred Stock outstanding at the time of redemption
included by such holder in all Redemption Notices delivered prior to the date
upon which such redemption is to be effected relative to the total number of
shares of Series B Preferred Stock outstanding at the time of redemption
included in all of the Redemption Notices delivered prior to the date upon
which such redemption is to be effected.
D. Void Redemption. In the event that the Corporation does not pay the
Redemption Amount within the time period set forth in Article IV.D, Article
VIII.A or Article VIII.D, at any time thereafter and until the Corporation
pays such unpaid applicable Redemption Amount in full, a holder of Series B
Preferred Stock shall have the option (the "Void Optional Redemption Option")
to, in lieu of redemption, require the Corporation to promptly return to such
holder any or all of the shares of Series B Preferred Stock that were
submitted for redemption by such holder under this Article VIII and for which
the applicable Redemption Amount (together with any interest thereon) has not
been paid, by sending written notice thereof to the Corporation via facsimile
and confirmed by overnight courier, in person (by courier or otherwise) or by
telephone (to an authorized officer of the Corporation or his or her
administrative assistant) (the "Void Optional Redemption Notice"). Upon the
Corporation's receipt of such Void Optional Redemption Notice and overnight
courier, in-person or telephone confirmation, (i) the Notice of Redemption
shall be null and void with respect to those shares of Series B Preferred
Stock subject to the Void Optional Redemption Notice, and (ii) the Corporation
shall immediately return any shares of Series B Preferred Stock subject to the
Void Optional Redemption Notice
IX. RANK
The Series B Preferred Stock shall rank (i) prior to the Corporation's
Common Stock; (ii) prior to any class or series of capital stock of the
Corporation hereafter created that, by its terms, ranks junior to the Series B
Preferred Stock ("Junior Securities"); (iii) junior to any class or series of
capital stock of the Corporation hereafter created (with the consent of the
holders of Series B Preferred Stock, obtained in accordance with Article XIII
hereof) specifically ranking, by its terms, senior to the Series B Preferred
Stock ("Senior Securities"); and (iv) pari passu with the Series A Preferred
Stock, the Series B Preferred Stock and any other class or series of capital
stock of the Corporation hereafter created (with the consent of the holders of
the Series B Preferred Stock obtained in accordance with Article XIII hereof)
specifically ranking by its terms on parity with the Series B Preferred Stock
("Pari Passu Securities"), in each case as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary
or involuntary.
X. LIQUIDATION PREFERENCE
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A. If the Corporation shall commence a voluntary case under the U.S.
Federal bankruptcy laws or any other applicable bankruptcy, insolvency or
similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or make an assignment
for the benefit of its creditors, or admit in writing its inability to pay its
debts generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the U.S. Federal bankruptcy laws or
any other applicable bankruptcy, insolvency or similar law resulting in the
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for
a period of 60 consecutive days and, on account of any such event, the
Corporation shall liquidate, dissolve or wind up, or if the Corporation shall
otherwise liquidate, dissolve or wind up, including, but not limited to, the
sale or transfer of all or substantially all of the Corporation's assets in
one transaction or in a series of related transactions (a "Liquidation
Event"), no distribution shall be made to the holders of any shares of capital
stock of the Corporation (other than Senior Securities and Pari Passu
Securities) upon liquidation, dissolution or winding up unless prior thereto
the holders of shares of Series B Preferred Stock shall have received the
Liquidation Preference with respect to each share. If, upon the occurrence of
a Liquidation Event, the assets and funds available for distribution among the
holders of the Series B Preferred Stock and holders of Pari Passu Securities
shall be insufficient to permit the payment to such holders of the
preferential amounts payable thereon, then the entire assets and funds of the
Corporation legally available for distribution to the Series B Preferred Stock
and the Pari Passu Securities shall be distributed ratably among such shares
in proportion to the ratio that the Liquidation Preference payable on each
such share bears to the aggregate Liquidation Preference payable on all such
shares.
B. The purchase or redemption by the Corporation of stock of any class,
in any manner permitted by law, shall not, for the purposes hereof, be
regarded as a liquidation, dissolution or winding up of the Corporation.
Neither the consolidation or merger of the Corporation with or into any other
entity nor the sale or transfer by the Corporation of less than substantially
all of its assets shall, for the purposes hereof, be deemed to be a
liquidation, dissolution or winding up of the Corporation.
C. The "Liquidation Preference" with respect to a share of Series B
Preferred Stock means an amount equal to the Stated Value thereof, plus the
accrued Premium thereon through the date of final distribution. The
Liquidation Preference with respect to any Pari Passu Securities shall be as
set forth in the Statement of Designation filed in respect thereof.
XI. ADJUSTMENTS TO THE CONVERSION PRICE
The Conversion Price shall be subject to adjustment from time to time as
follows:
A. Stock Splits, Stock Dividends, Etc. If, at any time on or after the
Initial Issuance Date, the number of outstanding shares of Common Stock is
increased by a stock split, stock dividend, combination, reclassification or
other similar event, the Fixed Conversion Price shall be proportionately
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reduced, or if the number of outstanding shares of Common Stock is decreased
by a reverse stock split, combination or reclassification of shares, or other
similar event, the Fixed Conversion Price shall be proportionately increased.
In such event, the Corporation shall notify the Corporation's transfer agent
of such change on or before the effective date thereof.
B. Adjustment Due to Merger, Consolidation, Etc. If, at any time after
the Initial Issuance Date, there shall be (i) any reclassification or change
of the outstanding shares of Common Stock (other than a change in par value,
or from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination), (ii) any consolidation or merger of
the Corporation with any other entity (other than a merger in which the
Corporation is the surviving or continuing entity and its capital stock is
unchanged), (iii) any sale or transfer of all or substantially all of the
assets of the Corporation or (iv) any share exchange pursuant to which all of
the outstanding shares of Common Stock are converted into other securities or
property (each of (i) - (iv) above being a "Corporate Change"), then the
holders of Series B Preferred Stock shall thereafter have the right to receive
upon conversion, in lieu of the shares of Common Stock otherwise issuable,
such shares of stock, securities and/or other property as would have been
issued or payable in such Corporate Change with respect to or in exchange for
the number of shares of Common Stock which would have been issuable upon
conversion (without giving effect to the limitations contained in Article
IV.C) had such Corporate Change not taken place, and in any such case,
appropriate provisions (in form and substance reasonably satisfactory to the
holders of a majority of the Series B Preferred Shares then outstanding) shall
be made with respect to the rights and interests of the holders of the Series
B Preferred Stock to the end that the economic value of the shares of Series B
Preferred Stock are in no way diminished by such Corporate Change and that the
provisions hereof (including, without limitation, in the case of any such
consolidation, merger or sale in which the successor entity or purchasing
entity is not the Corporation, an immediate adjustment of the Fixed Conversion
Price so that the Fixed Conversion Price immediately after the Corporate
Change reflects the same relative value as compared to the value of the
surviving entity's common stock that existed between the Fixed Conversion
Price and the value of the Corporation's Common Stock immediately prior to
such Corporate Change and an immediate revision to the Variable Conversion
Price so that it is determined as provided in Article III.H but based on the
price of the common stock of the surviving entity and the market in which such
common stock is traded) shall thereafter be applicable, as nearly as may be
practicable in relation to any shares of stock or securities thereafter
deliverable upon the conversion thereof. The Corporation shall not effect any
Corporate Change unless (i) each holder of Series B Preferred Stock has
received written notice of such transaction along with the notice sent to the
holders of the Common Stock of the Corporation, but in no event later than 20
days prior to the record date for the determination of shareholders entitled
to vote with respect thereto, and (ii) the resulting, successor or acquiring
entity (if not the Corporation) assumes by written instrument (in form and
substance reasonably satisfactory to the holders of a majority of the Series B
Preferred Shares then outstanding) the obligations of this Statement of
Designation. The above provisions shall apply regardless of whether or not
there would have been a sufficient number of shares of Common Stock authorized
and available for issuance upon conversion of the shares of Series B Preferred
Stock outstanding as of the date of such transaction, and shall similarly
apply to successive reclassifications, consolidations, mergers, sales,
transfers or share exchanges.
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C. Adjustment Due to Major Announcement. In the event the Corporation
at any time after the Initial Issuance Date (i) makes a public announcement
that it intends to consolidate or merge with any other entity (other than a
merger in which the Corporation is the surviving or continuing entity and its
capital stock is unchanged) or to sell or transfer all or substantially all of
the assets of the Corporation or (ii) any person, group or entity (including
the Corporation) publicly announces a tender offer, exchange offer or another
transaction to purchase 50% or more of the Corporation's Common Stock or
otherwise publicly announces an intention to replace a majority of the
Corporation's Board of Directors by waging or proxy battle or otherwise (the
date of the announcement or commencement referred to in clause (i) or (ii) of
this Paragraph C is hereinafter referred to as the "Announcement Date"), then
the Conversion Price shall, effective upon the Announcement Date and
continuing through the tenth trading day following the earlier of the
consummation of the proposed transaction or tender offer, exchange offer or
another transaction or the Abandonment Date (as defined below) (the earlier of
such dates being the "Adjusted Conversion Price Termination Date"), be equal
to the lower of (x) the Conversion Price which would have been applicable for
a Conversion occurring on the Announcement Date and (y) the Conversion Price
determined in accordance with Article III.C on the Conversion Date set forth
in the Notice of Conversion for the Conversion. After the Adjusted Conversion
Price Termination Date, the Conversion Price shall be determined as set forth
in Article III.C. "Abandonment Date" means with respect to any proposed
transaction or tender offer, exchange offer or another transaction for which a
public announcement or an action contemplated by this Paragraph C has been
made or commenced, the date upon which the Corporation (in the case of clause
(i) above) or the person, group or entity (in the case of clause (ii) above)
publicly announces the termination or abandonment of the proposed transaction
or tender offer, exchange offer or another transaction which caused this
Paragraph C to become operative.
D. Adjustment Due to Distribution. If, at any time after the Initial
Issuance Date, the Corporation shall declare or make any distribution of its
assets (or rights to acquire its assets) to holders of Common Stock as a
partial liquidating dividend, by way of return of capital or otherwise
(including any dividend or distribution to the Corporation's common
shareholders in shares (or rights to acquire shares) of capital stock of a
subsidiary (i.e. a spin-off)) (a "Distribution"), then the holders of Series B
Preferred Stock shall be entitled, upon any conversion of shares of Series B
Preferred Stock after the date of record for determining shareholders entitled
to such Distribution, to receive the amount of such assets which would have
been payable to the holder with respect to the shares of Common Stock issuable
upon such conversion (without giving effect to the limitations contained in
Article IV.C) had such holder been the holder of such shares of Common Stock
on the record date for the determination of shareholders entitled to such
Distribution.
E. Issuance of Other Securities. (i) If at any time after the Initial
Issuance Date the Corporation issues or sells or in accordance with Article
XI.E(ii) is deemed to have issued and sold any shares of Common Stock for no
consideration or for a consideration per share less than the Dilutive Price
(as defined in this subparagraph) on the date of issuance (a "Dilutive
Issuance"), then effective immediately upon the Dilutive Issuance, the
Conversion Price will be adjusted in accordance with the formula below. For
purposes of this subparagraph, "Dilutive Price" means the Market Price. The
Conversion Price will be adjusted in accordance with the following formula:
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C' = C x O + P/M;
CSDO
where:
C' = the adjusted Conversion Price;
C = the then current Conversion Price;
M = the then current Market Price;
O = the number of shares of Common Stock outstanding
immediately prior to the Dilutive Issuance;
P = the aggregate consideration, calculated as set forth
herein, received by the Corporation upon such Dilutive
Issuance; and
CSDO = the total number of shares of Common Stock deemed
outstanding immediately after the Dilutive Issuance.
(ii) Effect on Conversion Price of Certain Events. For purposes of
determining the adjusted Conversion Price under Article XI.E(i) hereof, the
following will be applicable:
(a) Issuance of Rights or Options. If the Corporation in any
manner issues or grants any warrants, rights or options, whether or not
immediately exercisable, to subscribe for or to purchase Common Stock or other
securities exercisable, convertible into or exchangeable for Common Stock
("Convertible Securities") (such warrants, rights and options to purchase
Common Stock or Convertible Securities are hereinafter referred to as
"Options") and the price per share for which Common Stock is issuable upon the
exercise of such Options is less than the Dilutive Price in effect on the date
of issuance of such Options ("Below Market Options"), then the maximum total
number of shares of Common Stock issuable upon the exercise of all such Below
Market Options (assuming full exercise, conversion or exchange of Convertible
Securities, if applicable) will, as of the date of the issuance or grant of
such Below Market Options, be deemed to be outstanding and to have been issued
and sold by the Corporation for such price per share. For purposes of the
preceding sentence, the "price per share for which Common Stock is issuable
upon the exercise of such Below Market Options" is determined by dividing (i)
the total amount, if any, received or receivable by the Corporation as
consideration for the issuance or granting of all such Below Market Options,
plus the minimum aggregate amount of additional consideration, if any, payable
to the Corporation upon the exercise of all such Below Market Options, plus,
in the case of Convertible Securities issuable upon the exercise of such Below
Market Options, the minimum aggregate amount of additional consideration
payable upon the exercise, conversion or exchange thereof at the time such
Convertible Securities first become exercisable, convertible or exchangeable,
by (ii) the maximum total number of shares of Common Stock issuable upon the
exercise of all such Below Market Options (assuming full conversion of
Convertible Securities, if applicable). No further adjustment to the
Conversion Price will be made upon the actual issuance of such Common Stock
upon the exercise of such Below Market Options or upon the exercise,
conversion or exchange of Convertible Securities issuable upon exercise of
such Below Market Options.
(b) Issuance of Convertible Securities.
(A) If the Corporation in any manner issues or sells any
Convertible Securities, whether or not immediately convertible (other than
where the same are issuable upon the exercise of Options) and the price per
share for which Common Stock is issuable upon such exercise, conversion or
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exchange (as determined pursuant to Article XI.E(ii)(b)(A) if applicable) is
less than the Dilutive Price in effect on the date of issuance of such
Convertible Securities, then the maximum total number of shares of Common
Stock issuable upon the exercise, conversion or exchange of all such
Convertible Securities will, as of the date of the issuance of such
Convertible Securities, be deemed to be outstanding and to have been issued
and sold by the Corporation for such price per share. For the purposes of the
preceding sentence, the "price per share for which Common Stock is issuable
upon such exercise, conversion or exchange" is determined by dividing (i) the
total amount, if any, received or receivable by the Corporation as
consideration for the issuance or sale of all such Convertible Securities,
plus the minimum aggregate amount of additional consideration, if any, payable
to the Corporation upon the exercise, conversion or exchange thereof at the
time such Convertible Securities first become exercisable, convertible or
exchangeable, by (ii) the maximum total number of shares of Common Stock
issuable upon the exercise, conversion or exchange of all such Convertible
Securities. No further adjustment to the Conversion Price will be made upon
the actual issuance of such Common Stock upon exercise, conversion or exchange
of such Convertible Securities.
(B) If the Corporation in any manner issues or sells any
Convertible Securities with a fluctuating conversion or exercise price or
exchange ratio (a "Variable Rate Convertible Security"), then the "price per
share for which Common Stock is issuable upon such exercise, conversion or
exchange" for purposes of the calculation contemplated by Section 4(b)(ii)(A)
shall be deemed to be the lowest price per share which would be applicable
(assuming all holding period and other conditions to any discounts contained
in such Convertible Security have been satisfied) if the Dilutive Price on the
date of issuance of such Convertible Security was 75% of the Dilutive Price on
such date (the "Assumed Variable Market Price"). Further, if the Dilutive
Price at any time or times thereafter is less than or equal to the Assumed
Variable Market Price last used for making any adjustment under this Section 4
with respect to any Variable Rate Convertible Security, the Conversion Price
in effect at such time shall be readjusted to equal the Conversion Price which
would have resulted if the Assumed Variable Market Price at the time of
issuance of the Variable Rate Convertible Security had been 75% of the
Dilutive Price existing at the time of the adjustment required by this
sentence.
(c) Change in Option Price or Conversion Rate. If there is a
change at any time in (i) the amount of additional consideration payable to
the Corporation upon the exercise of any Options; (ii) the amount of
additional consideration, if any, payable to the Corporation upon the
exercise, conversion or exchange of any Convertible Securities; or (iii) the
rate at which any Convertible Securities are convertible into or exchangeable
for Common Stock (in each such case, other than under or by reason of
provisions designed to protect against dilution), the Conversion Price in
effect at the time of such change will be readjusted to the Conversion Price
which would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold.
(d) Treatment of Expired Options and Unexercised Convertible
Securities. If, in any case, the total number of shares of Common Stock
issuable upon exercise of any Option or upon exercise, conversion or exchange
of any Convertible Securities is not, in fact, issued and the rights to
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exercise such Option or to exercise, convert or exchange such Convertible
Securities shall have expired or terminated, the Conversion Price then in
effect will be readjusted to the Conversion Price which would have been in
effect at the time of such expiration or termination had such Option or
Convertible Securities, to the extent outstanding immediately prior to such
expiration or termination (other than in respect of the actual number of
shares of Common Stock issued upon exercise or conversion thereof), never been
issued.
(e) Calculation of Consideration Received. If any Common
Stock, Options or Convertible Securities are issued, granted or sold for cash,
the consideration received therefor for purposes hereof will be the amount
received by the Corporation therefor, before deduction of reasonable
commissions, underwriting discounts or allowances or other reasonable expenses
paid or incurred by the Corporation in connection with such issuance, grant or
sale. In case any Common Stock, Options or Convertible Securities are issued
or sold for a consideration part or all of which shall be other than cash, the
amount of the consideration other than cash received by the Corporation will
be the fair market value of such consideration, except where such
consideration consists of securities, in which case the amount of
consideration received by the Corporation will be the Market Price thereof as
of the date of receipt. In case any Common Stock, Options or Convertible
Securities are issued in connection with any merger or consolidation in which
the Corporation is the surviving corporation, the amount of consideration
therefor will be deemed to be the fair market value of such portion of the net
assets and business of the non-surviving corporation as is attributable to
such Common Stock, Options or Convertible Securities, as the case may be. The
fair market value of any consideration other than cash or securities will be
determined in good faith by an investment banker or other appropriate expert
of national reputation selected by the Corporation and reasonably acceptable
to the holder hereof, with the costs of such appraisal to be borne by the
Corporation. In case any Common Stock, Options or Convertible Securities are
issued in connection with the issuance of debt securities the amount of
consideration therefor shall be the cash received by the Corporation and the
value of the securities issued by the Corporation shall be the fair market
value of all securities and instruments issued in such transaction, with fair
market value being determined by agreement between the holder thereof and the
Corporation or if no such agreement is reached pursuant to the immediately
preceding sentence. For all Options and Warrants the fair market value
thereof shall be determined in accordance with the Black Scholes methodology.
(f) Exceptions to Adjustment of Conversion Price. No
adjustment to the Conversion Price will be made (i) upon the exercise of any
warrants, options or convertible securities issued and outstanding on the
Issue Date and set forth on Schedule 3(d) of the Securities Purchase Agreement
in accordance with the terms of such securities as of such date or (ii) upon
the grant or exercise of any stock or options which may hereafter be granted
or exercised under any employee benefit plan of the Corporation now existing
or to be implemented in the future, so long as the issuance of such stock or
options is approved by a majority of the non-employee members of the Board of
Directors of the Corporation, if any, or a majority of the members of a
committee of non-employee directors established for such purpose; (iii) upon
the issuance of securities pursuant to an underwriters public offering; or
(iv) upon issuance of shares in connection with the acquisition of Prostar,
Inc.
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F. Purchase Rights. If, at any time after the Initial Issuance Date,
the Corporation issues any securities which are convertible into or
exchangeable for Common Stock, or rights to purchase stock, warrants,
securities or other property (the "Purchase Rights") pro rata to the record
holders of any class of Common Stock, then the holders of Series B Preferred
Stock will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which such holder could have acquired if
such holder had held the number of shares of Common Stock acquirable upon
complete conversion of the Series B Preferred Stock (without giving effect to
the limitations contained in Article IV.C) immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase
Rights, or, if no such record is taken, the date as of which the record
holders of Common Stock are to be determined for the grant, issue or sale of
such Purchase Rights.
G. Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price pursuant to this Article XI, the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to each holder of Series B Preferred
Stock a certificate setting forth such adjustment or readjustment and showing
in detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of
Series B Preferred Stock, furnish to such holder a like certificate setting
forth (i) such adjustment or readjustment, (ii) the Conversion Price at the
time in effect and (iii) the number of shares of Common Stock and the amount,
if any, of other securities or property which at the time would be received
upon conversion of a share of Series B Preferred Stock.
XII. VOTING RIGHTS
The holders of the Series B Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Colorado Business Corporation
Act (the "Business Corporation Act") and in Article XIII below.
Notwithstanding the above, the Corporation shall provide each holder of
Series B Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders) at the same time such notice and materials are provided to the
holders of Common Stock. If the Corporation takes a record of its
shareholders for the purpose of determining shareholders entitled to (a)
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger consolidation
or recapitalization) any share of any class or any other securities or
property, or to receive any other right, or (b) to vote in connection with any
proposed sale, lease or conveyance of all or substantially all of the assets
of the Corporation, or any proposed merger, consolidation, liquidation,
dissolution or winding up of the Corporation, the Corporation shall mail a
notice to each holder, at least 20 days prior to the record date specified
therein (but in no event earlier than public announcement of such proposed
transaction), of the date on which any such record is to be taken for the
purpose of such dividend, distribution, right or other event, and a brief
statement regarding the amount and character of such dividend, distribution,
right or other event to the extent known at such time.
To the extent that under the Business Corporation Act the vote of the
holders of the Series B Preferred Stock, voting separately as a class or
series, as applicable, is required to authorize a given action of the
Corporation, the affirmative vote or consent of the holders of at least a
21
<PAGE>
majority of the then outstanding shares of the Series B Preferred Stock
represented at a duly held meeting at which a quorum is present or by written
consent of the holders of at least a majority of the then outstanding shares
of Series B Preferred Stock (except as otherwise may be required under the
Business Corporation Act) shall constitute the approval of such action by the
class. To the extent that under the Business Corporation Act holders of the
Series B Preferred Stock are entitled to vote on a matter with holders of
Common Stock, voting together as one class, each share of Series B Preferred
Stock shall be entitled to a number of votes equal to the number of shares of
Common Stock into which it is then convertible (subject to the limitations
contained in Article IV.C(ii)) using the record date for the taking of such
vote of shareholders as the date as of which the Conversion Price is
calculated.
XIII. PROTECTION PROVISIONS
So long as any shares of Series B Preferred Stock are outstanding, the
Corporation shall not without first obtaining the approval (by vote or written
consent, as provided by the Business Corporation Act) of a majority in
interest of the holders of the then outstanding shares of Series B Preferred
Stock:
(a) alter or change the rights, preferences or privileges of
the Series B Preferred Stock;
(b) alter or change the rights, preferences or privileges of
any previously issued shares of capital stock of the Corporation so as to
affect adversely the Series B Preferred Stock;
(c) create any new class or series of capital stock having a
preference over the Series B Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously
defined in Article IX hereof, "Senior Securities");
(d) create any new class or series of capital stock ranking
pari passu with the Series B Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously
defined in Article IX hereof, "Pari Passu Securities");
(e) increase the authorized number of shares of Series B
Preferred Stock;
(f) issue any shares of Senior Securities;
(g) issue any shares of Series B Preferred Stock other than
pursuant to the Securities Purchase Agreement;
(h) redeem, or declare or pay any cash dividend or
distribution on, any Junior Securities; or
(i) increase the par value of the Common Stock.
Notwithstanding the foregoing, no change pursuant to this Article XIII shall
be effective to the extent that, by its terms, it applies to less than all of
the holders of shares of Series B Preferred Stock then outstanding.
22
<PAGE>
XIV. MISCELLANEOUS
A. Cancellation of Series B Preferred Stock. If any shares of Series B
Preferred Stock are converted pursuant to Article IV, the shares so converted
shall be canceled, shall return to the status of authorized, but unissued
preferred stock of no designated series, and shall not be issuable by the
Corporation as Series B Preferred Stock.
B. Lost or Stolen Certificates. Upon receipt by the Corporation of (i)
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of
indemnity (without any bond or other security) reasonably satisfactory to the
Corporation, or (z) in the case of mutilation, upon surrender and cancellation
of the Preferred Stock Certificate(s), the Corporation shall execute and
deliver new Preferred Stock Certificate(s) of like tenor and date. However,
the Corporation shall not be obligated to reissue such lost or stolen
Preferred Stock Certificate(s) if the holder contemporaneously requests the
Corporation to convert such Series B Preferred Stock.
C. Allocation of Cap Amount and Reserved Amount. The initial Cap Amount
and Reserved Amount shall be allocated pro rata among the holders of Series B
Preferred Stock based on the number of shares of Series B Preferred Stock
issued to each holder. Each increase to the Cap Amount and the Reserved
Amount shall be allocated pro rata among the holders of Series B Preferred
Stock based on the number of shares of Series B Preferred Stock held by each
holder at the time of the increase in the Cap Amount or Reserved Amount. In
the event a holder shall sell or otherwise transfer any of such holder's
shares of Series B Preferred Stock, each transferee shall be allocated a pro
rata portion of such transferor's Cap Amount and Reserved Amount. Any portion
of the Cap Amount or Reserved Amount which remains allocated to any person or
entity which does not hold any Series B Preferred Stock shall be allocated to
the remaining holders of shares of Series B Preferred Stock, pro rata based on
the number of shares of Series B Preferred Stock then held by such holders.
D. Quarterly Statements of Available Shares. For each calendar quarter
beginning in the quarter in which the initial registration statement required
to be filed pursuant to the Registration Rights Agreement is declared
effective and thereafter so long as any shares of Series B Preferred Stock are
outstanding, the Corporation shall deliver (or cause its transfer agent to
deliver) to each holder a written report notifying the holders of any
occurrence which prohibits the Corporation from issuing Common Stock upon any
such conversion. The report shall also specify (i) the total number of shares
of Series B Preferred Stock outstanding as of the end of such quarter, (ii)
the total number of shares of Common Stock issued upon all conversions of
Series B Preferred Stock prior to the end of such quarter, (iii) the total
number of shares of Common Stock which are reserved for issuance upon
conversion of the Series B Preferred Stock as of the end of such quarter and
(iv) the total number of shares of Common Stock which may thereafter be listed
or issued by the Corporation upon conversion of the Series B Preferred Stock
before the Corporation would exceed the Cap Amount and the Reserved Amount.
The Corporation (or its transfer agent) shall deliver the report for each
quarter to each holder prior to the tenth day of the calendar month following
the quarter to which such report relates. In addition, the Corporation (or
its transfer agent) shall provide, within 15 days after delivery to the
Corporation of a written request by any holder, any of the information
enumerated in clauses (i) - (iv) of this Paragraph D as of the date of such
request.
23
<PAGE>
E. Payment of Cash; Defaults. Whenever the Corporation is required to
make any cash payment to a holder under this Statement of Designation (upon
redemption or otherwise), such cash payment shall be made to the holder within
five business days after delivery by such holder of a notice specifying that
the holder elects to receive such payment in cash and the method (e.g., by
check, wire transfer) in which such payment should be made. If such payment
is not delivered within such five business day period, such holder shall
thereafter be entitled to interest on the unpaid amount at a per annum rate
equal to the lower of twenty-four percent (24%) and the highest interest rate
permitted by applicable law until such amount is paid in full to the holder.
F. Status as Stockholder. Upon submission of a Notice of Conversion by
a holder of Series B Preferred Stock, (i) the shares covered thereby (other
than the shares, if any, which cannot be issued because their listing or
issuance would exceed such holder's allocated portion of the Reserved Amount
or Cap Amount) shall be deemed converted into shares of Common Stock and (ii)
the holder's rights as a holder of such converted shares of Series B Preferred
Stock shall cease and terminate, excepting only the right to receive
certificates for such shares of Common Stock and to any remedies provided
herein or otherwise available at law or in equity to such holder because of a
failure by the Corporation to comply with the terms of this Statement of
Designation. Notwithstanding the foregoing, if a holder has not received
certificates for all shares of Common Stock prior to the tenth business day
after the expiration of the Delivery Period with respect to a conversion of
Series B Preferred Stock for any reason, then (unless the holder otherwise
elects to retain its status as a holder of Common Stock by so notifying the
Corporation within five business days after the expiration of such 10 business
day period) the holder shall regain the rights of a holder of Series B
Preferred Stock with respect to such unconverted shares of Series B Preferred
Stock and the Corporation shall, as soon as practicable, return such
unconverted shares to the holder. In all cases, the holder shall retain all
of its rights and remedies (including, without limitation, the right to have
the Conversion Price with respect to subsequent conversions determined in
accordance with Article VI.A) for the Corporation's failure to convert Series
B Preferred Stock.
G. Remedies Cumulative. The remedies provided in this Statement of
Designation shall be cumulative and in addition to all other remedies
available under this Statement of Designation, at law or in equity (including
a decree of specific performance and/or other injunctive relief), and nothing
herein shall limit a holder's right to pursue actual damages for any failure
by the Corporation to comply with the terms of this Statement of Designation.
The Corporation acknowledges that a breach by it of its obligations hereunder
will cause irreparable harm to the holders of Series B Preferred Stock and
that the remedy at law for any such breach may be inadequate. The Corporation
therefore agrees, in the event of any such breach or threatened breach, that
the holders of Series B Preferred Stock shall be entitled, in addition to all
other available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security
being required.
24
<PAGE>
IN WITNESS WHEREOF, the undersigned Corporation has caused these Articles
of Amendment to the Articles of Incorporation to be signed by a duly
authorized officer and duly attested by another such officer, to be hereunto
affixed on this 29th day of April 1999.
U.S. TRUCKING, INC..
By: /s/ Dan Pixler
Dan Pixler, President
ATTEST:
/s/ Marion W. Huff
Marion W. Huff, Secretary
25
<PAGE>
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series B Preferred Stock)
The undersigned hereby irrevocably elects to convert ____________ shares of
Series B Preferred Stock (the "Conversion"), represented by stock certificate
Nos(s). ___________ (the "Preferred Stock Certificates"), into shares of
common stock ("Common Stock") of U.S. TRUCKING, INC. (the "Corporation")
according to the conditions of the Statement of Designation, Rights and
Preferences of the Series B Convertible Preferred Stock of U.S. Trucking, Inc.
(the "Statement of Designation"), as of the date written below. If securities
are to be issued in the name of a person other than the undersigned, the
undersigned will pay all transfer taxes payable with respect thereto. No fee
will be charged to the holder for any conversion, except for transfer taxes,
if any. A copy of each Preferred Stock Certificate is attached hereto (or
evidence of loss, theft or destruction thereof).
The undersigned requests that the Corporation electronically transmit the
Common Stock issuable pursuant to this Notice of Conversion to the account of
the undersigned or its nominee (which is _________________) with DTC through
its Deposit Withdrawal Agent Commission System ("DTC Transfer").
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of
the Series B Preferred Stock shall be made pursuant to registration of the
Common Stock under the Securities Act of 1933, as amended (the "Act"), or
pursuant to an exemption from registration under the Act.
In lieu of receiving the shares of Common Stock issuable pursuant to
this Notice of Conversion by way of DTC Transfer, the undersigned hereby
requests that the Corporation issue and deliver to the undersigned physical
certificates representing such shares of Common Stock.
Date of Conversion:
Applicable Conversion Price:
Number of Shares of Common
Stock to be Issued:
Signature:
Name:
Address:_______________________________________
_______________________________________
_______________________________________
THIS DEBENTURE, AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE CONVERSION
HEREOF, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR FILED OR REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE
COMMISSION OR WITH THE SECURITIES REGULATORY AUTHORITY OF ANY STATE, BUT ARE
BEING ISSUED PURSUANT TO CERTAIN EXEMPTIONS THEREUNDER. THIS DEBENTURE, AND
SUCH SHARES OF COMMON STOCK, HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR BY THE SECURITIES
REGULATORY AUTHORITY OF ANY STATE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. THIS DEBENTURE, AND SUCH SHARES OF COMMON STOCK, ARE SUBJECT
TO RESTRICTIONS ON TRANSFERABILITY AND RESALE, AND MAY NOT BE TRANSFERRED OR
RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION THEREUNDER OR
EXEMPTION THEREFROM
US$600,000. Debenture No. 1
U. S. TRUCKING, INC.
10% Convertible Debenture Due May 31, 2002
THIS DEBENTURE is one of a duly authorized issue of US$5,000,000 of 10%
Convertible Debentures due May 31, 2002 (the "Debentures"), of U. S.
Trucking, Inc., a corporation duly organized and existing under the laws of
the State of Colorado (the "Company") designated as its 10% Convertible
Debentures Due May 31, 2002
FOR VALUE RECEIVED, the Company promises to pay to the order of Thomson
Kernaghan & Co. Ltd., as Nominee, or other registered holder hereof
(collectively, the "Holder"), the principal sum of Six Hundred Thousand
Dollars in lawful currency of the United States of America (US $600,000) on
May 31, 2002 (the "Maturity Date"), and to pay interest on the principal sum
outstanding from time to time on the Maturity Date at the rate of Ten Percent
(10%) per year accruing from the date of initial issuance. Subject to the
provisions of paragraph 4 below, the principal of and interest on this
Debenture are payable at the option of the Holder, in shares of the Company's
Common Stock, no par value, ("Common Stock"). The Company will pay the
principal of and interest upon this Debenture on the Maturity Date to the
Holder in immediately available funds, in care of Thomson Kernaghan & Co. Ltd.
as Agent (the "Agent"), at the Agent's address, 365 Bay Street, Tenth Floor,
Toronto, Ontario M5H 2V2, Canada, or at such other address as the Agent shall
designate by written notice to the Company. The delivery of such funds to the
Agent shall constitute a payment and shall satisfy and discharge the liability
for principal and interest on this Debenture to the extent of the sum
represented by such payment.
This Debenture is subject to the following additional provisions:
1. The Debentures are issuable in denominations of One Hundred Thousand
United States Dollars (US $100,000) and integral multiples thereof. The
Debentures are exchangeable for an equal aggregate principal amount of
Debentures of different authorized denominations, as requested by the Holders
surrendering the same. No service charge will be made for such registration
or transfer or exchange.
<PAGE>
2. This Debenture may be transferred only in compliance with the
Securities Act of 1933, as amended (the "Securities Act"), and other
applicable state and foreign securities laws, pursuant to registration
thereunder or exemption therefrom. In the event of any proposed transfer of
this Debenture, the Company may require, prior to issuance of a new Debenture
in the name of such other person, that it receive reasonable transfer
documentation including opinions that the issuance of the Debenture in such
other name does not and will not cause a violation of the Securities Act or
any applicable state or foreign securities laws. Prior to due presentment for
transfer of this Debenture, the Company and any agent of the Company may treat
the person in whose name this Debenture is duly registered on the Company's
Debenture Register as the owner hereof for the purpose of receiving payment as
herein provided and for all other purposes, whether or not this Debenture be
overdue, and neither the Company nor any such agent shall be affected by
notice to the contrary.
3. Registration under the Securities Act of 1933.
(a) As soon as possible, and in any event on or before June 15, 1999,
the Company shall, at no cost or expense to the Holder, file a registration
statement (the "Registration Statement") under the Securities Act, for the
purpose of registering the issuance of 3,333,333 shares of Common Stock into
which the Debentures are convertible. The Company shall cause the Registration
Statement to be declared effective by the SEC as soon as possible, and in any
event on or before August 15, 1999. The Company shall cause the Registration
Statement to continuously remain effective, and shall cause the Common Stock
to be continuously registered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and continuously quoted on the OTC Bulletin Board
or listed on the Nasdaq Small Cap Market, until the thirtieth (30th) day after
this Debenture shall have been fully converted, or matured, or redeemed,
whichever occurs first.
(b) In connection with the filing the Registration Statement, the
Company shall: (i) notify the Holder as to the filing thereof and of all
amendments thereto filed prior to the effective date; (ii) notify the Holder,
promptly after it shall have received notice thereof, of the time when the
Registration Statement becomes effective or any supplement to any prospectus
forming a part of the Registration Statement has been filed; (iii) prepare and
file without expense to the Holder any necessary amendment or supplement to
such registration statement or prospectus as may be necessary to comply with
the Securities Act or advisable in connection with the proposed distribution
of the securities; (iv) take all reasonable steps to qualify the Warrant Stock
being registered for sale under the securities or blue sky laws in such
reasonable number of states as the Holder may designate in writing and to
register or obtain the approval of any federal or state authority that may be
required in connection with the proposed distribution, except in jurisdictions
in which the Company must either qualify to do business or file a general
consent to service of process as a condition to the qualification of such
securities; (v) notify the Holder of any stop order suspending the
effectiveness of the registration statement and use reasonable efforts to
remove such stop order; and (vi) furnish to the Holder, as soon as available,
copies of any such registration statement and each preliminary or final
prospectus and any supplement or amendment, including all exhibits thereto,
required to be prepared pursuant to this paragraph.
(c) The Company acknowledges and agrees that the Holder will be
substantially damaged if the Company does not cause the Registration Statement
to be effective by August 15, 1999, but those damages would be difficult, if
2
<PAGE>
not impossible to ascertain. Accordingly, if the Registration Statement has
not been declared effective by August 15, 1999, then, (i) for each day to and
including September 15, 1999, that the Registration Statement is not
effective, the Company shall pay the Holder, as liquidated damages and not as
a penalty, an amount per day equal to 2% per month of the principal amount of
this Debenture; and (ii) for each day after September 15, 1999, that the
Registration Statement is not effective, the Company shall pay the Holder, as
liquidated damages and not as a penalty, an amount per day equal to 3% per
month of the purchase price of this Debenture, until the Registration
Statement is effective.
4. The Holder of this Debenture is entitled, at its option, to convert
at any time and from time to time beginning on the thirtieth (30th) day after
the Initial Funding Date, all or any part of the principal amount of the
Debenture, plus accrued interest. No fraction of Shares or scrip representing
fractions of shares will be issued on conversion, but the number of shares
issuable shall be rounded to the nearest whole share. To convert this
Debenture, this Debenture must be surrendered at the principal executive
office of the Escrow Agent pursuant to an Escrow Agreement between the Company
and Thomson Kernaghan & Co. Ltd., dated May 13, 1999, accompanied by written
notice of conversion substantially in the form of Exhibit A to this Debenture,
with appropriate insertions. The date upon which the conversion shall be
effective (the "Conversion Date") shall be deemed to be the date on which the
Holder has delivered this Debenture, with the conversion notice duly executed
to Escrow Holder, or if earlier, the date set forth in such notice of
conversion if the Debenture and such conversion notice is received by the
Escrow Holder within three (3) business days therefrom. The Escrow Holder will
deliver certificates representing the Common Stock into which the Debenture is
converted within three (3) business days following receipt of the Debenture
and conversion notice. The price per share of Common Stock into which this
Debenture is convertible (the "Conversion Price") shall be the higher of (i)
US$1.50, or (ii) the lower of (x) 80% of the average closing bid price of the
Common Stock quoted on the OTC Bulletin Board for the three trading days
preceding the conversion date or (y) $2.37; i.e., in no event shall the
Conversion Price be less that US$1.50 per share of Common Stock.
5. No provision of this Debenture shall alter or impair the obligation
of the Company, which is absolute and unconditional, to pay the principal of
and interest on, this Debenture at the time, place and rate, and in the coin
or currency herein prescribed. This Debenture and all other Debentures now or
hereafter issued of similar terms are direct obligations of the Company.
6. If the Company merges or consolidates with another corporation or
sells or transfers all or substantially all of its assets to another person
and the holders of the Common Stock are entitled to receive stock, securities
or property in respect of or in exchange for Common Stock, then as a condition
of such merger, consolidation, sale or transfer, the Company and any such
successor, purchaser or transferee shall amend this Debenture to provide that
it may thereafter be converted on the terms and subject to the conditions set
forth above into the kind an amount of stock, securities or property
receivable upon such merger, consolidation, sale or transfer by a holder of
the number of shares of Common Stock into which this Debenture might have been
converted immediately before such merger, consolidation, sale or transfer,
subject to adjustments which shall be a nearly equivalent as may be
practicable. In the event of any proposed merger, consolidation or sale or
transfer of all or substantially all of the assets of the Company (a "Sale"),
the Holder hereof shall have the right to convert by delivering a Notice of
3
<PAGE>
Conversion to the Company within fifteen (15) days of receipt of notice of
such Sale from the Company. In the event the Holder hereof shall elect not to
convert, the Company may prepay all outstanding principal and accrued interest
on this Debenture, less all amounts required by law to be deducted, upon which
tender of payment following such notice, the right of conversion shall
terminate.
7. This Debenture shall be governed by and construed in accordance with
the laws of the State of Kentucky, provided however, that if any provision of
this Debenture is unenforceable under the laws of Kentucky but is enforceable
under the laws of the Province of Ontario, Canada, then that provision shall
be governed by and construed in accordance with the laws the Province of
Ontario. Any controversy or claim arising out of or relating to this
Debenture (whether in contract or tort, or both) shall be determined by
binding arbitration at Toronto, Canada, in accordance with the commercial
arbitration rules of the International Chamber of Commerce. The prevailing
party in any arbitration proceeding shall be awarded reasonable attorneys fees
and costs of the proceeding. The arbitration award shall be final, and may be
entered in any court having jurisdiction.
8. The following constitute an "Event of Default":
a. The Company shall default in the payment of principal or interest
on this Debenture; or
b. Any of the representations or warranties made by the Company
herein or in any certificate or financial or other written statements
heretofore or hereafter furnished by the Company in connection with the
execution and delivery of this Debenture shall be false or misleading in any
material respect at the time made; or
c. The Company shall fail to perform or observe, in any material
respect, any other covenant, term, provision, condition, agreement or
obligation of the Company under this Debenture and such failure shall continue
uncured for a period of thirty (30) days after written notice from the Holder
of such failure;
d. The Company shall (1) admit in writing its inability to pay its
debts generally as they mature; (2) make an assignment for the benefit of
creditors or commence proceedings for its dissolution; or (3) apply for or
consent to the appointment of a trustee, liquidator or receiver for it or a
for a substantial part of its property or business; or
e. A trustee, liquidator or receiver shall be appointed for the
Company or for a substantial part of its property or business without its
consent and shall not be discharged within sixty (60) days after such
appointment;
f. Any governmental agency or any court of competent jurisdiction at
the instance of any governmental agency shall assume custody or control of the
whole or any substantial portion of the properties or assets of the Company
and shall not be dismissed within sixty (60) days thereafter;
g. Any money judgment, writ or warrant of attachment, or similar
process in excess of One Hundred Thousand Dollars ($100,000) in the aggregate
shall be entered or filed against the Company or any of its properties or
other assets, and shall remain unpaid, unvacated, unbonded or unstayed for a
period of sixty (60) days in or in any event later than five (5) days prior to
the date of any proposed sale thereunder; or
4
<PAGE>
h. Bankruptcy, reorganization, insolvency or liquidation proceedings
or other proceedings for relief under any bankruptcy law or any law for the
relief of debtors shall be instituted by or against the Company and, if
instituted against the Company, shall not be dismissed within one hundred
twenty (120) days after such institution or the Company shall by any action or
answer approve of, consent to, or acquiesce in any such proceedings or admit
the material allegations of, or default in answering a petition filed in any
such proceeding; or
i. The Company shall fail to timely file the Registration Statement
or cause it to become and remain effective as provided in this Debenture; or
j. The Company shall fail to timely file all reports required of it
under the Exchange Act, or the Common Stock shall fail to be registered under
the Exchange Ac, or the Company, for any reason, shall not be a reporting
company under the Exchange Act; or
k. The Company shall have its Common Stock suspended or delisted from
an exchange or suspended from over-the-counter market from trading.
Then, or at any time thereafter, and in each and every case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may consider this
Debenture immediately due and payable, without presentment, demand, protest or
notice of any kind, all of which are hereby expressly waived, anything herein
or in any note or other instruments contained to the contrary notwithstanding,
and the Holder may immediately enforce any and all of the Holder's rights and
remedies provided herein or any other rights or remedies afforded by law.
11. Nothing contained in this Debenture shall be construed as conferring
upon the Holder the right to vote or to receive dividends or to consent or
receive notice as a shareholder in respect of any meeting of shareholders or
any rights whatsoever as a shareholder of the Company, unless and to the
extent converted in accordance with the terms hereof.
12. The Company may prepay this Debenture in whole or in part prior to
the Maturity Date by payment of an amount equal to the outstanding principal
amount being repaid plus all accrued interest to date of payment plus a
redemption premium of 20% of such prepaid principal amount.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated: ______________________________
U. S. Trucking, Inc.
By
Name _________________________________
Title ________________________________
ATTEST:
____________________________________
5
<PAGE>
EXHIBIT "A"
NOTICE OF CONVERSION
To be executed by the Registered Holder in order to Convert the Debenture)
TO U. S. TRUCKING, INC.
C/O THOMSON KERNAGHAN & CO. LTD
The undersigned hereby irrevocably elects to convert $________________ of
the principal amount of the above Debenture No. ______ into Shares of Common
Stock of U. S. Trucking, Inc. (the "Company") according to the conditions
hereof, as of the date written above.
Date of Conversion
Applicable Conversion Price
Signature
Name __________________________________________________________
Address:_______________________________________________________
6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of operations found on
pages 3, 4 and 5 of the Company's Form 10-Q for the year to date, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 433,235
<SECURITIES> 0
<RECEIVABLES> 4,778,148
<ALLOWANCES> 0
<INVENTORY> 252,698
<CURRENT-ASSETS> 5,994,067
<PP&E> 8,417,971
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,147,296
<CURRENT-LIABILITIES> 7,193,151
<BONDS> 0
<COMMON> 2,867,238
0
0
<OTHER-SE> 2,813,992
<TOTAL-LIABILITY-AND-EQUITY> 17,147,296
<SALES> 7,661,372
<TOTAL-REVENUES> 7,661,372
<CGS> 0
<TOTAL-COSTS> 7,209,939
<OTHER-EXPENSES> 372,746
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108,796
<INCOME-PRETAX> 119,946
<INCOME-TAX> 0
<INCOME-CONTINUING> 119,946
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 119,946
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
