UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Commission File Number 0-17594
USA BIOMASS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0329559
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7314 Scout Avenue, Bell Gardens, California 90201; telephone number
562.928.9900 (Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Thomas E. Stepp, Jr.
Stepp & Beauchamp LLP
1301 Dove Street, Suite 460
Newport Beach, California 92660
Tel. 949.660.9700 Facsimile 949.660.9010
(Name, Address and Telephone Number of Agent for Service)
Approx. date of proposed sale to the public: From time to time after this
Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _______
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================
Title of each class Amount Proposed maximum Proposed maximum
of securities to be offering price aggregate Amount of
to be registered registered per share offering price registration fee
================================================================================================================
<S> <C> <C> <C> <C>
Common Stock, $.002 par value 77,420(1) $3.35(2) $259,357.00 $68.47
================================================================================================================
Common Stock, $.002 par value 3,023,530(3) $2.62(4) $7,921,648.60 $2,091.31
================================================================================================================
Total registration fee $2,159.78
</TABLE>
(1) Represents shares of our common stock we anticipate paying out as dividends
on our Series C 6% Convertible Preferred Stock.
(2) Calculated pursuant to Rule 457(c) of Regulation C using the average of the
bid and ask prices per share of the Registrant's common stock, as reported on
the Nasdaq SmallCap Market for May 4, 2000.
(3) Represents the number of shares of our common stock that we are obligated to
register pursuant to a Registration Rights Agreement.
(4) Represents the conversion price of our Series C 6% Convertible Preferred
Stock into our common stock, calculated pursuant to the pricing provisions
specified in the Certificate of Designations of the Series C 6% Convertible
Preferred Stock.
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PART I - INFORMATION REQUIRED IN PROSPECTUS
ITEM 3. Summary Information and Risk Factors.
Background of the Company. We were incorporated in Delaware on March 10, 1988.
For most of our history we engaged primarily in agribusiness and real estate
development with three core operating divisions: (i) growing, processing and
marketing fresh table grapes in southern California's Coachella Valley (near
Palm Springs), (ii) processing clean green waste as part of a State of
California recycling mandate, and (iii) developing real estate principally
related to a 1,350 acre residential subdivision and golf course located
southeast of San Antonio, Texas. We also hold a 50% ownership interest in a
6,000 acre irrigated potato and grain farm located in the Columbia River Basin
of Eastern Oregon, which includes certain Columbia River water rights. Although
we were one of the largest producers and shippers of "early market" table grapes
that are harvested from early May through June and typically command premium
prices, increased competition from Mexico, which has a microclimate similar to
the Coachella Valley, has created uncertainty in the early table grape market.
Following our acquisition of TransPacific Environmental, Inc. ("TPE") in
November 1997, our focus shifted from agribusiness and land planning to biomass.
Subsequently, in June 1998, we broadened our new focus to include solid waste
transportation and developed a strategic alliance with Waste Management of
California, Inc. ("Waste Management"). In light of our new business plan, and
related biomass and solid waste transportation opportunities, we determined that
our shift in focus from agribusiness, land planning and land development to
solid waste transportation and biomass should be complete and permanent.
Consequently, on December 23, 1998, we adopted a formal plan to discontinue our
agri-business and real estate operations and to sell the related assets in order
to focus on our biomass and waste transportation operations. We are currently
negotiating to sell our 50% interest in the potato and grain farm to our joint
venture partner, who operates that property under a lease that would have
terminated December 31, 1999, but which has been extended for an additional
year.
While we have not totally disposed of these operations at present, we have taken
significant action to dispose of those operations. As a result, our financial
statements reflect the net assets and operating results of our agribusiness and
real estate segments as discontinued operations. Implementation of our new
business plan is in process and has had a material impact on the presentation of
our financial statements. The operations, cash flows and net assets of these
operations for all periods presented have been classified as discontinued
operations, and the assets of these operations were reduced to the lower of cost
or net realizable value. Our agribusiness and land planning and land development
operations have been accounted for as discontinued operations and the results
thereof have been excluded from continuing operations in our consolidated
financial statements.
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Summary of the Offering
Securities Offered............. We are registering 3,100,950 shares of our
common stock. 3,023,530 of these shares
represent the number of shares of our
common stock equal to twice the sum of the
number of shares of our common stock that
we will issue upon conversion of all of the
shares of Series C 6% Convertible Preferred
Stock which are currently issued and
outstanding plus the maximum number of
shares issuable upon exercise of certain
warrants held by Siete Investors LLC, a
Delaware limited liability company. The
other 77,420 shares of our common stock are
being registered in anticipation of paying
dividends which accrue on our Series C 6%
Convertible Preferred Stock. We have the
right to pay those dividends which accrue
on our Series C 6% Preferred Stock in cash
or in shares of our common stock.
Dividends...................... Our common stock is junior to our Series
A, B and C Preferred Stock in regard to
dividend preferences. We have not paid any
cash dividends on our common stock during
the last fiscal year and we are in arrears
on payments of accrued dividends on our
Series A 9% Convertible Preferred Stock.
Payment of dividends is at the sole
discretion of our Board of Directors and
it is unlikely that holders of our common
stock will receive dividends during the
next fiscal year.
Liquidation Preference......... Our preferred stock has liquidation
preferences over our common stock, which
means that, if the Company is liquidated,
common shareholders will probably receive
less of the liquidation proceeds than
preferred shareholders, and may not receive
any of the liquidation proceeds.
Voting Rights.................. Each holder of shares of our common stock
is entitled to one vote for each share on
all matters regarding which our
shareholders are entitled to vote. Each
holder of shares of Series C 6% Convertible
Preferred Stock is entitled to the number
of votes equal to the number of whole
shares of common stock into which the
shares of that Series C 6% Convertible
Preferred Stock held by such holder are
convertible immediately after the close of
business on the
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record date fixed for a shareholders'
meeting on all matters regarding which our
shareholders are entitled to vote.
Ownership Limit................ None.
RISK FACTORS
A PURCHASE OF OUR COMMON STOCK INVOLVES RISKS. YOU SHOULD CONSIDER THESE RISKS
BEFORE MAKING A DECISION TO PURCHASE OUR COMMON STOCK. PROSPECTIVE PURCHASERS OF
OUR COMMON STOCK MUST BE PREPARED FOR THE POSSIBLE LOSS OF THEIR ENTIRE
INVESTMENTS. THE ORDER IN WHICH THE FOLLOWING RISK FACTORS ARE PRESENTED IS
ARBITRARY, AND YOU SHOULD NOT CONCLUDE, BECAUSE OF THE ORDER OF PRESENTATION,
THAT ONE RISK FACTOR IS MORE SIGNIFICANT THAN ANOTHER RISK FACTOR.
We Are Operating at a Loss and Have Accumulated a Deficit. Because we are
discontinuing certain operations, our agribusiness and land planning and land
development operations have been accounted for as discontinued operations. The
financial results of those operations for the year ended December 31, 1999, the
four month period ended December 31, 1998, and the year ended August 31, 1998
have been excluded from continuing operations. The effect is to classify most of
our revenues for the year ended August 31, 1998, as discontinued operations, as
most of our fiscal 1998 and prior revenues were derived from these discontinued
activities. For the year ended December 31, 1999, we incurred an after-tax loss
of $9,186,746 from all operations as compared to an after-tax loss of $2,033,064
for the four month period ended December 31, 1998 and an after-tax loss of
$15,786,00 for the year ended August 31, 1998. As of December 31, 1999, we had
an accumulated deficit of $24,781,849. Although we expect to generate working
capital from our continuing biomass and transportation operations and
divestiture of our remaining agricultural investment, we have shifted our focus
to biomass activities with which we have relatively little experience, and there
can be no assurance that we will have profitable operations in the future.
We Use Debt Financing. Our organizational documents do not contain any
limitation on the amount or percentage of indebtedness, funded or otherwise, we
might incur. Accordingly, we, and our affiliates, could become more highly
leveraged, resulting in an increase in debt service that could adversely affect
our ability to pay dividends to our stockholders and result in an increased risk
of default on our obligations. We are also subject to other risks normally
associated with debt financing. We have used indebtedness and leveraging to
finance development and acquisition, and, therefore, most of our equipment is
lease financed. If we are unable to make lease payments on time, or if certain
other events of default occur, this equipment could be repossessed or otherwise
transferred to the lessor with a consequent loss of income and asset value.
We Need Substantial Additional Capital. Our future capital requirements will
depend upon many factors, including our ability to obtain new biomass and
transportation contracts and customers and to execute our new business plan.
Capital will be necessary to fund the periodic cash requirements
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of the discontinued operations during the execution of our new business plan and
to fund our transportation and biomass activities. There can be no assurance
that sufficient financing will be available, on a timely basis, if at all, or on
acceptable terms. If adequate funds are not available, implementation of our new
business plan and our business strategy could be impeded and we may be required
to delay, scale back or eliminate our efforts to expand our biomass and
transportation activities. Accordingly, our business, financial condition and
results of operations could be materially and adversely affected. If additional
funds are raised by issuing equity or convertible debt securities, options or
warrants, dilution to the existing stockholders of the Company may result.
We Are in a Competitive Market Which is Affected by the Seasons. Our quarterly
results have varied significantly in the past and will likely continue to do so
in the future due to a variety of factors, many of which are beyond our control,
including: the timing and nature of revenues from transportation and biomass
contracts that are recognized during any particular quarter, which fluctuate
during the seasons; the impact of potential increased competition with respect
to our biomass activities by municipalities that maintain their own waste
collection and landfill operations and have significant financial advantages
over us due to, among other things, the availability of tax revenues and
tax-exempt financing; the implementation and enforcement of and compliance with
legislation such as AB 939; the price and availability of fuel and other
resources needed for our solid waste transportation and biomass activities; the
financial health of our customers; the overall state of the solid waste
transportation and biomass industries; and economic conditions generally. The
shift in our focus away from our historical business and toward new activities
with which we have little experience, our ability to obtain new biomass and
transportation contracts, and the volume of the stream of biomass available to
us for transport or recycling under existing contracts are difficult to
forecast. Such fluctuations may also contribute to volatility in the market
price for our securities.
We Derive a Significant Portion of Our Revenues From a Limited Number of
Customers. The foundation of our continuing solid waste transportation
activities is an exclusive transport contract with Waste Management, which
accounted for approximately 77% of our revenues from continuing operations in
fiscal 1999. With the acquisition of American Waste Transport in March 2000,
this customer concentration is expected to fall to less than 60%, and decline
further during the year as additional new accounts are obtained. Although we
intend to bid on future solid waste transportation contracts for Waste
Management and other waste companies as they become available and to use our
strategic alliance with Waste Management to capitalize on existing and emerging
markets in the growing green waste recycling industry, there can be no assurance
that we will be successful in obtaining additional transportation and biomass
contracts. Further, we anticipate that our contract with Waste Management will
continue to account for the majority of our transportation revenues for the
foreseeable future. The loss of this contract or the failure of Waste Management
to continue to provide a reliable stream of biomass for transport would likely
have a material adverse effect on our business, operating results and financial
condition.
We Are Changing Our Workforce. We have elected to embark on a major departure
from our historic business into the biomass and solid waste transportation
businesses in which we have little experience. Our future success depends to a
large extent upon the continued service of certain key
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managerial employees and our ability to restructure our existing work force and
attract and retain highly qualified personnel in connection with this shift in
our activities. We recently terminated our agribusiness employees and hired four
individuals with extensive management and operational experience in the biomass
and solid waste transportation industries. We will continue to restructure our
workforce by hiring and integrating new employees experienced in solid waste
transportation and biomass activities. We may not be able to attract, assimilate
or retain such personnel.
Our Industry is Heavily Regulated. The collection and disposal of solid wastes
are subject to federal, state and local laws and regulations which regulate
health, safety, the environment, zoning and land-use. Any violation of these
laws and regulations could have a material adverse effect on the Company's
business, financial condition and results of operations. Operating permits are
generally required for recycling facilities and certain collection vehicles, and
these permits are subject to revocation, modification, and renewal. Federal,
state and local regulations vary, but generally govern all types of waste
disposal activities and the location and use of facilities and also impose
restrictions to prohibit or minimize soil, air and water pollution. In addition,
governmental authorities have the power to enforce compliance with these
regulations and to obtain injunctions or impose fines in the case of violations,
including criminal penalties. These regulations are administered by the United
States Environmental Protection Agency ("EPA") and various other federal, state
and local environmental and health and safety agencies and authorities,
including the Occupational Safety and Health Administration of the United States
Department of Labor. If environmental laws become more stringent, the Company's
environmental capital expenditures and costs for environmental compliance may
increase in the future. In addition, due to the possibility of unanticipated
factual or regulatory development, the amounts and timing of future
environmental expenditures could vary substantially from those currently
anticipated.
Subtitle D of the Resource Conservation and Recovery Act of 1976, as amended,
establishes a framework for regulating the storage, collection and disposal of
non-hazardous solid wastes. In the past, the Subtitle D framework has left the
regulation of non-hazardous waste storage, collection and disposal largely to
the states. However, in October 1991, the EPA promulgated a final rule which
imposes minimum federal comprehensive solid waste management criteria and
guidelines for disposal facilities and operations, including location
restrictions, facility design and operating criteria, closure and post-closure
requirements, financial assurance standards, groundwater monitoring requirements
and corrective action standards, many of which have not commonly been in effect
or enforced in connection with solid waste landfills. States are required to
revise their landfill regulations to meet these requirements. Because some parts
of the new regulations will be phased in over time, the full effect of these
regulations may not be known for several years. However, other than for
groundwater monitoring and financial assurance requirements, all provisions of
the final rule became effective in October 1993. There can be no assurance that
the EPA will not promulgate additional regulations in connection with the
collection of non-hazardous solid waste.
We May Face Liability for Disposal of Hazardous Substances. The Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended
("Superfund" or "CERCLA"), has been interpreted by some courts to impose strict,
joint and several liability on
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current and former owners or operators of facilities at which there has been a
release or a threatened release of a "hazardous substance" and on persons who
generate, transport or arrange for the disposal of such substances at the
facility. Thousands of substances are defined as "hazardous" under CERCLA and
their presence, even in minute amounts, can result in substantial liability. The
statute provides for the remediation of contaminated facilities and imposes the
costs therefor on the responsible parties. The costs of conducting such a
cleanup and the damages can be very significant and, given the limitations in
insurance coverage for these risks, could have a material adverse impact on the
Company and its financial condition.
We Do Not Have Environmental Liability Insurance. While the Company may able to
obtain comprehensive pollution insurance at reasonable costs, it may carry only
such coverage, if any, as is required by regulatory permits. In addition, the
extent of insurance coverage under certain forms of policies has been the
subject in recent years of litigation in which insurance companies have, in some
cases, successfully taken the position that certain risks are not covered by
such policies. If, in the absence of such insurance, the Company were to incur
liability for environmental damages of sufficient magnitude, it could have a
material adverse effect on the Company and its financial condition.
Some of Our Officers and Directors Have Conflicts of Interest. Several of our
directors are independently employed and those persons, by engaging in other
business activities, have conflicts of interest in allocating their time and
resources. Two of our officers and directors, Fred Behrens and Robert Wright,
have ownership interests in some of our affiliates, which has resulted in both
existing and potential conflicts of interest. Our business dealings with some of
our affiliates are not the result of arm's-length negotiations. For a more
detailed account of those existing and potential conflicts of interest, see the
information contained under the heading "Certain Relationships and Related
Transactions" in this Prospectus.
Voting Rights Upon Default Regarding Payment of Dividends. We are in arrears on
paying quarterly dividends on our Series A 9% Convertible Preferred Stock. The
total amount of dividend arrearages on the Series A 9% Preferred Stock as of
April 30, 2000 was $553,959. All of our Series B Preferred Stock has been
converted into 591,621 shares of our $.002 par value common stock. Dividends
accrued on that Series B Preferred Stock prior to conversion in the amount of
$538,459.00 which was paid through the issuance of 53,846 Series B Preferred
Stock to those holders of Series B Preferred Stock. The holders of our Series A
9% Convertible Preferred Stock have the right, voting as a class, to elect two
(2) members of our Board of Directors on that date which is two (2) years after
the date on which we have defaulted in the payment of dividends on the Series A
9% Convertible Preferred Stock, if such default occurs. Poor operating results
may leave us without the resources to make the dividend payments for the Series
A Preferred Stock, resulting in a change in the composition of the Board of
Directors and, therefore, a potential significant change in our management.
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ITEM 4. USE OF PROCEEDS.
We will not receive any of the proceeds from the sale of the shares of our
common stock offered by the Selling Stockholder, Siete Investors LLC, a Delaware
limited liability company.
ITEM 5. DETERMINATION OF OFFERING PRICE
The Company's common stock has traded in the over-the-counter market since1989
and is currently trading on The Nasdaq SmallCap Market. We have calculated the
registration fees for the common stock which we anticipate using to pay
dividends on the Series C 6% Convertible Preferred Stock pursuant to Rule 457(c)
of Regulation C using the average of the bid and ask prices per share of our
common stock, as reported on the Nasdaq SmallCap Market for May 4, 2000.
The conversion price of our Series C 6% Convertible Preferred Stock was set by
our Board of Directors and is specified at Section G of the Certificate of
Designations of Series C 6% Convertible Preferred Stock filed with the Delaware
Secretary of State on April 13, 2000. Each share of the Series C 6% Convertible
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time and from time to time, into such number of fully paid and nonassessable
shares of our common stock as is determined by dividing $1,000.00, plus the
amount of any accrued and unpaid dividends which we elect to pay in common
stock, by the conversion price in effect at the time of conversion. The
conversion price is defined as the lower of $4.65 or 85% of the average of the
three lowest closing bid prices of the shares of common stock for the 15 trading
days immediately preceding the conversion date. The average of the three lowest
closing bid prices for our common stock for the last 15 trading days is $2.50,
85% of which equals $2.125.
ITEM 6. DILUTION
At December 31, 1999, there were 9,485,606 outstanding shares of our only class
of $.002 par value common stock. We have authorized three classes of preferred
stock. Our $.01 par value Series A 9% Convertible Preferred Stock has $7,422,000
in aggregate liquidation preference. There are 812,500 shares of the Series A 9%
Convertible Preferred Stock authorized, and 742,200 shares issued and
outstanding. Although there are 750,000 shares of Series B 6% Convertible
Preferred Stock authorized, as of December 31, 1999, all of the Series B
Preferred Shares issued and outstanding had been converted into shares of our
$.002 par value common stock. We anticipate that all of the 3,000 authorized,
issued and outstanding shares of our $.001 par value Series C 6% Convertible
Preferred Stock will be converted into our common stock as soon as this
registration statement becomes effective.
We are registering 3,100,950 shares of our common stock. 3,023,530 of these
shares represent the number of shares of our common stock equal to twice the sum
of the number of shares of our common stock that we will issue upon conversion
of all of the shares of Series C 6% Convertible Preferred Stock which are
currently issued and outstanding plus the maximum number of shares
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issuable upon exercise of certain warrants held by Siete Investors LLC, a
Delaware limited liability company. Those warrants allow for the purchase, by
Siete Investors LLC, of up to 100,000 shares of our common stock at any time up
to the expiration date, March 13, 2005. The other 77,420 shares of our common
stock are being registered in anticipation of paying dividends which accrue on
our Series C 6% Convertible Preferred Stock. We have the right to pay those
dividends which accrue on our Series C 6% Preferred Stock in cash or in shares
of our common stock.
The following table sets forth the difference between the average offering price
of the shares of our common stock being registered by this registration
statement, the net tangible book value per share, and the net tangible book
value per share after giving effect to the offering by the Company, assuming
that all of the shares registered by the Company are distributed. Net tangible
book value per share represents the amount of total tangible assets less total
liabilities divided by the number of shares outstanding as of December 31, 1999.
Net tangible book value at 12/31/99 $(0.014) per share
Net tangible book value after giving
effect to distribution of 3,023,530 shares
at $2.125 per share and 77,420 shares
at $3.35 per share $0.69 per share
Per Share Dilution to New Investor
(conversion shares only) $1.44 per share
Percent Dilution to New Investor
(conversion shares only) 67.5%
ITEM 7. SELLING SECURITY HOLDER
Siete Investors LLC, a Delaware limited liability company, is the only
shareholder of our Series C 6% Convertible Preferred Stock, and holds 3,000
shares of that preferred stock. Upon conversion of those shares of preferred
stock into common stock, Siete Investors LLC may offer all or some portion of
those shares of our common stock for sale from time to time. The shares of our
common stock which may be offered for sale by Siete Investors LLC constitute all
of the shares of common stock known to the Company to be beneficially owned by
Siete Investors LLC. Siete Investors LLC is not an affiliate of the Company and
none of its officers or directors are also officers or directors of the Company.
On or about March 14, 2000, pursuant to the agreement by which Siete Investors
LLC acquired its shares of Series C 6% Convertible Preferred Stock, we agreed to
prepare and file a registration statement for the resale of the shares of common
stock into which the Series C 6% Convertible Preferred Stock shall be converted,
and for an additional 100,000 shares of our common stock which may be acquired
by Siete Investors LLC pursuant to certain warrants which it holds. We also
agreed to pay all expenses, other than underwriting discounts and commissions
and other fees and expenses of investment bankers and other than brokerage
commissions, in connection with the registration and
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sale of the shares of common stock which may be offered for sale by Siete
Investors LLC pursuant to the conversion of the Series C 6% Convertible
Preferred stock or the warrants.
ITEM 8. PLAN OF DISTRIBUTION
Siete Investors LLC, the Selling Stockholder, may, from time to time, sell all
or a portion of its common stock in the over-the-counter market, or on any other
national securities exchange on which our common stock is or becomes listed or
traded, in negotiated transactions or otherwise, at prices then prevailing or
related to the then current market price or at negotiated prices. The shares
will not be sold in an underwritten public offering. Siete Investors LLC's
common stock may be sold directly or through brokers or dealers. The methods by
which the common stock may be sold include (a) a block trade (which may involve
crosses) in which the broker or dealer will attempt to sell the common stock as
agent but may buy and resell a portion of the block as principal to facilitate
the transaction; (b) purchases by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this Prospectus; (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
and (d) privately negotiated transactions. Brokers and dealers engaged by the
Selling Stockholder may arrange for other brokers or dealers to participate.
Brokers or dealers may receive commissions or discounts from the Selling
Stockholder (or, if any such broker-dealer acts as agent for the purchaser of
such shares, from such purchaser) in amounts to be negotiated. Broker-dealers
may agree with the Selling Stockholder to sell a specified number of shares at a
stipulated price per share, and, to the extent such broker-dealer is unable to
do so acting as agent for the Selling Stockholder, to purchase as principal any
unsold shares at the price required to fulfill the broker-dealer commitment to
the Selling Stockholder. Broker-dealers who acquire shares as principal may
thereafter resell the shares from time to time in transactions (which may
involve crosses and block transactions and sales to and through other
broker-dealers, including transactions of the nature described above) in the
over-the-counter market or otherwise at prices and on terms then prevailing at
the time of sale, at prices then related to the then-current market price or in
negotiated transactions and, in connection with such resales, may pay to or
receive commissions from the purchasers.
In connection with the distribution of the common stock, the Selling Stockholder
may enter into hedging transactions with broker-dealers. In connection with such
transactions, broker-dealers may engage in short sales of our common stock. The
Selling Stockholder may also sell its common stock and redeliver its common
stock to close out its short positions. The Selling Stockholder may also enter
into option or other transactions with broker-dealers which require the delivery
to the broker-dealer of its common stock. The Selling Stockholder may also lend
or pledge its common stock to a broker-dealer and the broker-dealer may sell its
common stock so lent or, upon a default, the broker-dealer may sell the pledged
shares. In addition to the foregoing, the Selling Stockholder may enter into,
from time to time, other types of hedging transactions.
The Selling Stockholder and any broker-dealers participating in the
distributions of our common stock may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act of 1933, and any profit on the
sale of our common stock by the Selling Stockholder, and any
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commissions or discounts given to any such broker-dealer, may be deemed to be
underwriting commissions or discounts pursuant to the Securities Act of 1933.
Our common stock may also be sold pursuant to Rule 144 promulgated pursuant to
the Securities Act of 1933 beginning one year after the shares of our common
stock were issued, provided such date is at least 90 days after the date of this
Prospectus.
We have filed the Registration Statement, of which this Prospectus forms a part,
for the sale of the Selling Stockholder's shares of our common stock. We can
give no assurance that the Selling Stockholder will sell any or all of its
shares of our common stock.
Pursuant to the Securities Exchange Act of 1934, any person engaged in a
distribution of the common stock offered by this Prospectus may not
simultaneously engage in market making activities for our common stock during
the applicable "cooling off" periods prior to the commencement of such
distribution. In addition, the Selling Stockholder will be subject to applicable
provisions of the Securities Exchange Act of 1934 and the rules and regulations
thereunder.
We will pay all of the expenses incident to the registration of the Selling
Stockholder's common stock, other than commissions, discounts and fees of
underwriters, dealers or agents.
We have advised the Selling Stockholder that, during such time as it may be
engaged in a distribution of any of the shares or our common stock we are
registering by this Registration Statement, it is required to comply with
Regulation M promulgated under the Securities Exchange Act of 1934. In general,
Regulation M precludes any Selling Stockholder, any affiliated purchasers and
any broker-dealer or other person who participates in such distribution from
bidding for or purchasing, or attempting to induce any person to bid for or
purchase, any security which is the subject of the distribution until the entire
distribution is complete. Regulation M defines a "distribution" as an offering
of securities that is distinguished from ordinary trading activities by the
magnitude of the offering and the presence of special selling efforts and
selling methods. Regulation M also defines a "distribution participant" as an
underwriter, prospective underwriter, broker, dealer, or other person who has
agreed to participate or who is participating in a distribution.
Regulation M prohibits any bids or purchases made in order to stabilize the
price of a security in connection with the distribution of that security, except
as specifically permitted by Rule 104 of Regulation M. These stabilizing
transactions may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. We have advised the Selling
Stockholder that stabilizing transactions permitted by Regulation M allow bids
to purchase our common stock so long as the stabilizing bids do not exceed a
specified maximum, and that Regulation M specifically prohibits stabilizing that
is the result of fraudulent, manipulative, or deceptive practices. The Selling
Stockholders and distribution participants will be required to consult with
their own legal counsel to ensure compliance with Regulation M.
11
<PAGE>
ITEM 9. LEGAL PROCEEDINGS.
In December 1997, a judgment was entered against the Company and two of its
officers, who are also shareholders. The judgment required, among other things,
that the Company re-issue 144,000 shares of its common stock to the Plaintiffs'
estate. We have filed an appeal of this judgment.
On April 5, 2000, a bank filed a lawsuit against the Company related to a
deficiency pertaining to real property the bank foreclosed on in Texas. We
intend to vigorously defend against this lawsuit and believe that we have
recorded our liability arising from this lawsuit on our financial statements. We
do not expect that this matter will have a material adverse effect on our
financial condition or results of operations.
We are not involved in any other pending legal proceedings other than legal
proceedings occurring in the ordinary course of business. Such other legal
proceedings in the aggregate are believed by management to be immaterial.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Fred H. Behrens 58 Chairman of the Board, Chief Executive
Officer and Director
Robert A. Wright 63 Director
Eugene W. Tidgewell 50 Chief Financial Officer, Treasurer, Vice
President and Director
Michael J. Silva 37 Chief Development Officer and Director
Hilly G. Jones 50 Secretary
Marlene Tapie 44 Director
H. Glen Leason 75 Director
</TABLE>
FRED H. BEHRENS has served as the Chairman, Chief Executive Officer, and a
director of the Company since 1988 and previously served as Treasurer and Chief
Financial Officer of the Company from 1990 to January 1998. Mr. Behrens also
served as the Chairman and director of Sun Goddess Farms, Inc., a wholly owned
subsidiary of the Company. Mr. Behrens has been
12
<PAGE>
actively involved with the Company and its affiliates since August 1979. From
1966 to 1971, Mr. Behrens was on the audit staff of Arthur Andersen & Company;
between 1971 and 1973, he was a principal in a real estate development company;
and from 1973 to August 1979, he was employed as a Vice President of an
agricultural management company. Mr. Behrens holds a Bachelor of Science degree
from the University of Minnesota School of Business Administration. Mr. Behrens
is a general partner of Rancho California Partners II, a California limited
partnership (the "Partnership"), which filed a voluntary Chapter 11
Reorganization Petition under the federal Bankruptcy Act to resolve certain
issues with the Riverside County Tax Assessor's Office on or about March 20,
1996. The decision to file for reorganization was made to protect certain real
property owned by the Partnership from foreclosure while the property was being
reappraised. The issues raised in the Petition have been favorably resolved and
the Partnership has dismissed the Petition.
ROBERT A. WRIGHT has served as the President, Chief Operating Officer, and a
director of the Company since 1988. Mr. Wright also serves as the President and
director of Sun Goddess Farms, Inc., a wholly owned subsidiary of the Company.
In April 2000, Mr. Wright agreed to vacate the office of President to assist
with the management and liquidation of certain discontinued operations. He
remains a director of the Company. During the past 25 years Mr. Wright has been,
and continues to be, a principal in and the President of a farm equipment
manufacturing company located in central Illinois. Mr. Wright also served as
general partner or co-general partner for several agricultural real estate
partnerships, which were not organized by the Company or its affiliates. Mr.
Wright holds a Bachelor of Science degree in Business (Management and Finance)
from the University of Colorado. Mr. Wright is a general partner of the
Partnership, which filed a voluntary Chapter 11 Reorganization Petition under
the federal Bankruptcy Act to resolve certain issues with the Riverside County
Tax Assessor's Office on or about March 20, 1996. The decision to file for
reorganization was made to protect certain real property owned by the
Partnership from foreclosure while the property was being reappraised. The
issues raised in the Petition have been favorably resolved and the Partnership
has dismissed the Petition.
EUGENE W. TIDGEWELL has served as the Chief Financial Officer and Treasurer and
as a Vice President of the Company since January 1998 and has served as a
Director of the Company since February 1999. Mr. Tidgewell was an audit manager
at Kelly & Company, the Company's independent auditors, from 1989 to 1998. Mr.
Tidgewell holds a Bachelor of Science Degree in Business Administration
Accounting) from the University of Notre Dame and is a Certified Public
Accountant in the State of California.
MICHAEL J. SILVA has served as Chief Development Officer since January 2000 and
a Director since February 2000. Mr. Silva is an engineering graduate from the
University of the Pacific and has MS in civil engineering from Stanford
University. Since graduation, he has been exclusively employed in the waste
service industry, serving as Division President/Chief Operating Officer for CR&R
from 1986 to 1997. From 1997 to 1999 he served as Chief Executive Officer of
Athens Services. Both companies are ranked in the top 10 nationally.
13
<PAGE>
MARLENE A. TAPIE has served as a director of the Company since 1988. Between
1979 and 1994, she served in various capacities including Vice President,
Executive Secretary to the Chairman and Office Administrator. From 1992 through
1995, Ms. Tapie owned and operated a clothing company, Marlene & Company. In
October 1994 she and her husband, Alan Tapie, a PGA golf professional, purchased
a controlling interest in Buena Park Golf Center, a golf course and driving
range located in Buena Park, California. She currently manages her husband, who
is a touring professional in the European PGA Senior Tour.
H. GLEN LEASON has served as a director of the Company since February 1999. From
1984 to the present, Mr. Leason has served as a Senior Vice President with
Torrey Pines Securities. Prior to that, Mr. Leason served in the United States
Navy Submarine Service From 1943 to 1946. He was a securities broker with Leason
& Company in Chicago, Illinois from 1946 through 1960, eventually becoming Vice
President for its initial public offering department in Newport Beach,
California, was a Vice President in the initial public offering department at
R.J. Henderson & Co., in Newport Beach, California from 1960 to 1966, was an
Emerging Growth Stock Vice President with Jefferies & Co. in Newport Beach,
California from 1966 until Jefferies & Co., was purchased in 1969, and rejoined
Leason & Company as President until 1973. From 1973 to 1984, Mr. Leason worked
with Wedbush Securities and then with McDonald, Krieger & Bowyer in Beverly
Hills, California. Mr. Leason completed various courses at Northwestern
University and Loyola Marymount University, is a registered representative with
the NASD and holds a principal's license.
HILLY G. JONES has served as Corporate Secretary since January 2000 and has been
the Company's Office Administrator since May 1999. She has been employed part
time by the Company in various administrative capacities since 1989, except for
the period from June 1995 to December 1998, when she left the Company to own and
operate a small business. Prior to 1989, she was employed in various
administrative capacities in the securities, environmental, and other
industries.
All directors hold office until the next annual stockholders' meeting or until
their respective successors are elected or until their earlier death,
resignation or removal. Officers are appointed by, and serve at the discretion
of, the Board of Directors.
Compliance with Beneficial Ownership Reporting Rules. Section 16(a) of the
Securities Exchange Act of 1934, as amended, requires our executive officers and
directors and persons who beneficially own more than 10% of a registered class
of our common stock to file initial reports of ownership and reports of changes
in ownership with the Securities and Exchange Commission. Such reporting persons
are required to furnish us with copies of all such reports that they file.
Based solely upon our review of copies of such reports furnished to the Company
during the year ended December 31, 1999 and thereafter, or any written
representations received by the Company from reporting persons that no other
reports were required, we believe that, during the last fiscal
14
<PAGE>
year, all section 16(a) filing requirements applicable to the Company's
reporting persons were complied with.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of March 1, 2000, certain information with
respect to (i) each director of the Company, (ii) the named executives and (iii)
all directors and executive officers of the Company as a group. Other than as
described below, no other person is known to the Company to be the beneficial
owner of more than 5% of our common stock.
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP PERCENT OF
OF BENEFICIAL OWNER OF COMMON STOCK(1) COMMON STOCK
- ------------------- ------------------ ------------
Fred H. Behrens(2) 1,003,153 9.98%
7314 Scout Avenue
Bell Gardens, CA 90201
Robert A. Wright(3) 815,018 8.11%
86025 Avenue 52
Coachella, CA 92236
H. Glen Leason(4) 16,370 *
77-955 Calle Arroba
La Quinta, CA 92253
Eugene W. Tidgewell (5) 39,500 *
7314 Scout Avenue
Bell Gardens, CA 90201
Marlene Tapie (6) 89,167 *
76 Los Cabos
Dana Point, CA 92629
All Directors and Executives
Officers as a group (5 persons)(7) 1,963,208 19.54%
- ----------
* Represents less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws
15
<PAGE>
where applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them. Shares of common stock subject to options
currently exercisable, or exercisable within 60 days after March 1, 2000
are deemed to be outstanding in calculating the percentage ownership of a
person or group but are not deemed to be outstanding as to any other person
or group.
(2) Includes 782,498 shares of common stock held by Behrens Partners, Ltd., a
family limited partnership controlled by Mr. Behrens. Also includes 207,355
shares held in escrow on behalf of Mr. Behrens and 13,300 shares held in an
IRA account.
(3) Includes (i) 237,093 shares of common stock held by Wright Family Partners,
Ltd., a family limited partnership controlled by Mr. Wright, (ii) 447,533
shares of common stock held in escrow on behalf of Mr.Wright and
(iii)130,392 shares held in an IRA account.
(4) Includes 16,200 shares of common stock underlying 9,000 shares of Series A
9% Convertible Preferred Stock that are convertible and 170 shares of
common stock held in an IRA account.
(5) Represent 39,500 shares of common stock underlying options.
(6) Includes 31,250 shares of common stock underlying options.
(7) Includes 476,633 shares of common stock underlying options and 33,120
shares of common stock underlying 18,400 shares of Series A 9% Convertible
Preferred Stock that are convertible.
ITEM 12. DESCRIPTION OF SECURITIES.
The Company is authorized to issue 25,000,000 shares of common stock, $.002 par
value, each share of common stock having equal rights and preferences, including
voting privileges. There were 9,485,606 shares of common stock outstanding at
December 31, 1999.
The shares of our common stock constitute equity interests in the Company
entitling each shareholder to a pro rata share of cash distributions made to
common stock shareholders, including dividend payments. However, we have two
series of preferred stock outstanding which accrue dividends and have
liquidation preferences superior to our common stock, and we have been in
arrears in paying those dividends. We also had significant losses in our last
fiscal year. Therefore, it is unlikely that we will pay dividends on our common
stock in the next year. We currently intend to retain our future earnings, if
any, for use in our business. Any dividends declared in the future will be at
the discretion of our Board of Directors and subject to any restrictions that
may be imposed by our lenders.
16
<PAGE>
The holders of our common stock are entitled to one vote for each share of
record and the holders of our Series C 6% Convertible Preferred Stock are
entitled to the number of votes equal to the number of whole shares of common
stock into which the shares of that Series C 6% Convertible Preferred Stock held
by such holder are convertible immediately after the close of business on the
record date fixed for a shareholders' meeting for each share of record on all
matters to be voted on by shareholders. There is no cumulative voting with
respect to the election of directors of the Company or any other matter, with
the result that the holders of more than 50% of the shares voted for the
election of those directors can elect all of the Directors. In the event of
liquidation, dissolution or winding up of the Company, the holders of common
stock are entitled to share ratably in all assets remaining available for
distribution to them after payment of our liabilities and after provision has
been made for each class of stock, having preference in relation to our common
stock. Holders of our common stock have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to our
common stock. All of the outstanding shares of our common stock are duly
authorized, validly issued, fully paid and non-assessable.
ITEM 13. INTEREST OF NAMED EXPERTS AND COUNSEL.
No "expert", as that term is defined pursuant to Regulation Section 228.509(a)
of Regulation S-B, or our "counsel", as that term is defined pursuant to
Regulation Section 228.509(b) of Regulation S-B, was hired on a contingent
basis, or will receive a direct or indirect interest in the Company, or was a
promoter, underwriter, voting trustee, director, officer, or employee of the
Company, at any time prior to the filing of this Registration Statement.
ITEM 14. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
VIOLATIONS.
IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, INDEMNIFICATION FOR
LIABILITIES ARISING PURSUANT TO THE SECURITIES ACT OF 1933 IS CONTRARY TO PUBLIC
POLICY AND, THEREFORE, UNENFORCEABLE.
ITEM 15. ORGANIZATION WITHIN LAST FIVE YEARS.
Not applicable.
ITEM 16. DESCRIPTION OF BUSINESS.
Description of Business - Historical Summary. We were originally incorporated
under the name AMCOR Capital Corporation in Delaware on March 10, 1988. Our
operations at December 31, 1999 included: (i) "clean green"waste processing and
recycling ("biomass") and (ii) contract waste transport services. During 1997,
the Company's focus shifted from agribusiness and land planning and development
to the emerging biomass industry. In June, 1998, we broadened our focus to
include solid waste transportation and developed a strategic alliance with Waste
Management, Inc., formerly USA Waste Services. In light of opportunities in the
biomass industry and in the
17
<PAGE>
solid waste transportation industry, we changed our name to USA Biomass
Corporation on August 31, 1998 and adopted a new business plan, which we call
our Plan of Discontinued Operations. We decided to discontinue our agribusiness
and land planning and land development activities and, instead, focus on solid
waste transportation and biomass activities. In addition, on January 12, 1999,
since we are no longer an agricultural enterprise, we changed our fiscal year to
end December 31.
All business activity, cash flows and net assets of these operations for the
year ended August 31, 1998, the four month period ended December 31, 1998, and
the year ended December 31, 1999 have been classified as discontinued
operations, and the assets of these operations have been reduced to the lower of
cost or net realizable value.
Solid Waste Transportation. We entered into two transportation service contracts
with Waste Management in June 1998. Under the contracts, we have the exclusive
right to provide transportation services from two of Waste Management's Los
Angeles-area transfer stations to certain landfills. We began providing
transportation services in October 1998. The contracts have initial terms of
five years, with two automatic five-year extensions unless either party gives
180 days' prior written notice of its desire to terminate the contracts at the
end of the then current term. We entered into a third contract with Waste
Management in December 1999, with terms similar to the other two contracts.
Biomass and Recycling. "Clean green" waste is organic material in the form of
plants, leaves, clippings, cuttings, trimmings of grass, weeds, shrubbery,
bushes, trees, garden wastes and wood products from both commercial and
residential sources, including sawdust, tree trunks, scrap lumber and untreated
wooden pallets. The material received as clean green waste cannot contain more
than 0.5% non-organic matter by total weight.
Our clean green waste operations have been and most likely will continue to be
influenced significantly by the implementation of the California Integrated
Waste Management Act of 1989 (Assembly Bill 939 ("AB 939"). The provisions of AB
939 mandate, among other things, the diversion of recyclable materials from
over-crowded landfills. A key element of AB 939 relates to green waste that
could be processed and incorporated back into the soil or recycled in other
ways. AB 939 currently mandates that California's municipalities must have a
plan in place to divert 50% of all waste from landfills by the end of the year
2000.
We are engaged in private green waste recycling and we hold leasehold interests
in a transfer station facility located in Santa Fe Springs, California and a
3-acre site in Fontana, California that is fully permitted for green waste
processing. We receive green waste at our transfer stations from various
sources, including Waste Management. We process and market the green waste to
various users, thereby assisting Waste Management and others in fulfilling their
recycling obligations under AB 939.
In November 1998, we started hauling green waste for the County of Los Angeles
Sanitation District in connection with the diversion of processed material from
the Puente Hills landfill. The
18
<PAGE>
initial contract is for a term of three years plus an option for three
additional years and specifies that we will divert the first 100 tons per day
(500 tons per week) of excess ground or processed green waste from the landfill.
Pursuant to this contract, we have been informally presented with the
opportunity to divert more than the minimum of 100 tons per day, which
opportunity we intend to pursue as sufficient outlet markets are identified.
We also receive and process green waste from numerous Southern California
municipalities and commercial parties. We are party to an operating agreement
with Apollo Wood Recovery, Inc., to process wood for boiler fuel and fiberboard
at our site in Fontana, California. We are exploring the acquisition of a
company engaged in the composting of organic fertilizer.
In March 2000, we acquired American Waste Transport, ("AWT"), a private San
Diego County- based waste transport and green waste recycling firm. AWT has
operations that mirror the Company's operations in Los Angeles and Orange
counties, with some overlap. AWT's revenues for the year ended December 31,
1999, approximate $14 million.
In April 2000, we signed a letter of intent to acquire Brea Green Recycling,
Inc., which is located in Orange County, California. We are presently conducting
due diligence and there can be no assurance that this acquisition will be
consummated. Brea Green Recycling, Inc. is located near the entrance to the Brea
landfill in north Orange County and recycles approximately 60,000 tons of green
waste (including wood waste) annually, much of which is devoted to the
landfill's alternate daily cover environmental program, in which we also
participate. We believe the close proximity to the landfill has certain
logistical advantages for our operations because it could significantly reduce
our green waste transport costs.
Presently, there appears to be an abundant supply of green waste available due
primarily to the large volume produced in Southern California and the
implementation of AB 939. We believe there is a good economic incentive to take
all of the green waste that is offered, particularly as landfill "tipping fees"
ranging from $16 to over $27 per ton tend to establish the market. The challenge
is to identify and secure end-markets for the incoming green waste, which
historically have included fertilizer production facilities, boiler fuel (for
electricity generation) and fiberboard production facilities.
We own 710-acres of undeveloped land located in the Coachella Valley, which we
plan to use as a land-application/biomass depository for our continuing green
waste operations.
Discontinued Operations - Agribusiness. Historically, we engaged primarily in
agribusiness, principally growing, processing and marketing fresh table grapes
in Southern California's Coachella Valley. We also received management and/or
development fees and income from packing and cold storage services that we
provided for some of our affiliated partnerships and third parties. We leased an
80,000-square foot packing and cold storage plant, which we previously used as
our headquarters in the Coachella Valley.
19
<PAGE>
Although we were one of the largest producers and shippers of "early market"
table grapes that are harvested from early May through June and typically
command premium prices, increased competition from Mexico, which has a
microclimate similar to the Coachella Valley, had created supply/price
uncertainty in the early table grape market. Consequently, our new business plan
provided for the complete divestiture of the Company's agribusiness operations,
which was completed by December 31, 1999 except for our investment in an Oregon
farmland joint venture.
Our investment in the Columbia River Basin of eastern Oregon includes a 50%
ownership interest in a joint venture that owns a 6,000-acre irrigated potato
and grain farming operation, together with certain Columbia River water rights.
We are currently negotiating to sell our 50% interest in the potato and grain
farm to our joint venture partner, who operates that property under a lease that
would have terminated December 31, 1999, but which has been extended for an
additional five years.
Discontinued Operations - Land Planning and Development. The Company
traditionally was engaged primarily in agribusiness, with additional revenues
derived from partnership management, including real estate development
partnerships. Some of these partnerships owned land that was once used for
farming and ultimately became suitable for development. Other partnerships were
formed solely to acquire, plan and develop land.
During fiscal 1996, we began a major subdivision and golf course project located
southeast of San Antonio, Texas. Under contract with a partnership which we
managed, we completed development of a golf course at the project. On behalf of
that partnership, we developed and managed the 1,300- lot subdivision and golf
course. In February 2000, the golf course was sold through foreclosure, and we
have been sued for a possible deficiency judgment.
Due to disappointing sales activity, our new business plan contemplated the sale
of the entire project in a "bulk sale" transaction and, in that regard, in early
1999 we wrote down the cost of the project to estimated net realizable value
plus any costs incurred to carry the project through liquidation. This resulted
in a charge of $5,306,244 to our financial statements for the year ended August
31, 1998, to reflect this write-down. In March 1999, we entered into an
agreement to sell the project for $11.5 million. However, the buyer did not
close the transaction. In the fourth quarter of 1999, we transferred our
interest in the project, including related liabilities, to AMCOR Financial
Corporation ("AFC"),a then wholly owned subsidiary of the Company.
In January 2000, we distributed to our common and Series A 9% Convertible
Preferred shareholders, all of our shares in AFC. We currently have disputes
with AFC regarding the nature and amount of assets and liabilities transferred
to AFC. Further, all of the regulatory requirements related to the distribution
of the AFC shares to our shareholders may not have been satisfied.
During the four months ended December 31, 1998, the year ended December 31,
1999, and the first quarter of 2000, we disposed of certain assets of the
discontinued operations at amounts less than initially anticipated. Further, the
current appraised value of certain of the remaining assets has declined from the
values used in estimating the disposal loss at August 31, 1998.
20
<PAGE>
In 1999, we managed approximately 15 limited partnerships, down from over 120 in
1991. One partnership owns two Southern California parcels; two other
partnerships jointly own a 173-acre property located outside Houston. These
partnerships are in the process of terminating.
Competition. The foundation of our continuing solid waste transportation
activities is exclusive transport contracts with Waste Management, the largest
waste hauler in the country. The contracts include two transfer stations. The
first is located in Carson, California, with a permitted capacity of over 5,000
tons per day, and is reported to be one of the largest in the country. The other
transfer station is in South Gate, California. In December 1999 an additional
contract was negotiated for the transport of biomass from Waste Management's
Sunset Environmental transfer station in Orange County. Due to the exclusive
nature of these contracts and the five-year term and two five-year options to
extend, the Company does not expect to be confronted with any significant
competition for these three transfer stations for as long as 15 years, provided
that we satisfactorily discharge our contractual responsibilities. We intend to
bid on future solid waste transportation contracts for Waste Management and
other waste companies as they become available, which could provide the Company
with significant growth opportunities in the future.
In the large Southern California market, there are three principal providers of
contract waste transport services -- STS Transportation, American Waste
Transport, and us. In March 2000, we acquired American Waste Transport ("AWT"),
which had annual revenues of $14 million. AWT has major contracts with Waste
Management, Republic Services and Allied Waste, as well as extensive green waste
operations. Combined, the two companies have a contractual backlog exceeding
$350 million. Revenues for 2000 are expected to be $25 million, and will provide
us with a significant share of this market.
Our clean green waste operations provide alternatives to landfill disposal and
are part of the non- hazardous waste recycling industry. We believe that
successful entry into the green waste industry, on a volume basis, requires that
we identify and contract with multiple end-users for the recycled product. The
industry is dominated by several large national waste management companies and
numerous regional and local companies, all of which contribute to the
significant, somewhat fragmented, competition that characterizes the industry,
many having much greater financial and operational resources, and more
established market positions, than the Company. We believe that our recent
strategic alliance with Waste Management, and our expanded market share gained
with the AWT acquisition, will help insulate us from external competition and
provide a reliable supply of biomass to support our green waste operations.
There has been an increasing trend at the state and local levels to mandate
solid waste reduction at the source and to prohibit the disposal of certain
types of wastes at landfills, as evidenced by legislation such as AB 939. We
believe that as this trend continues, we will encounter additional competition
from new and existing waste industry participants. In addition, we may compete
with municipalities that maintain their own waste collection and landfill
operations and that have significant financial advantages over the Company due
to, among other things, the availability of tax revenues and tax-exempt
financing.
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<PAGE>
Business Strategy. We continue to manage and expand our solid waste
transportation and biomass businesses. Our present business strategy includes
expansion of our contractual relationships with Waste Management and other waste
haulers, and growth of our green waste processing and recycling business as
additional markets are generated, both internally and through acquisitions.
Employees. As of December 31, 1999, the Company, together with its subsidiaries,
had 108 full- time employees, including10 in administration and 98 in biomass
operations. None of our employees are represented by a labor union and we have
not experienced any work stoppages. However, we are presently in negotiations
with a local of the Teamsters Union pursuant to an election to organize held in
April 1999. AWT is signatory to a collective bargaining agreement with the
Teamsters covering its truck driving employees. We acquired AWT in March 2000
and are obligated by the terms and conditions of that agreement. We believe that
in spite of the historically low unemployment rate in Southern California, there
is an adequate supply of the type of labor needed to staff our expanding solid
waste transportation and biomass operations.
ITEM 17. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THIS PROSPECTUS SPECIFIES FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THESE
FORWARD-LOOKING STATEMENTS.
"Forward looking statements" can be identified by the use of forward-looking
terminology such as "believes", "could", "possibly", "probably", "anticipates",
"estimates", "projects", "expects", "may", "will", or "should". Such statements
are subject to certain risks, uncertainties and assumptions. No assurances can
be given that the future results anticipated by the forward looking statements
will be achieved. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this Prospectus.
In 1997, we entered the biomass business, and in 1998 entered into a strategic
alliance with Waste Management resulting in a long-term contractual relationship
for the transport of solid waste. Prior to 1999, as described above, we were
engaged in agribusiness and real estate and land planning and development. In
December 1998, our Board of Directors approved a new business plan authorizing
the liquidation of all agribusiness and real estate operations. Implementation
of that business plan, particularly for years 1998 and 1999, has had a material
impact on the presentation of our financial statements.
Fiscal Year Change. Prior to the year-ended December 31, 1999, our financial
statements were prepared on the basis of an August 31 fiscal year. In January
1998, we elected to convert to a December 31 calendar year for reporting
purposes and filed a 10-QSB "Transition Report" for the four months ended
December 31, 1998. Accordingly, the amounts reflected in our current
Consolidated Statements of Operations are for the years ended December 31, 1999
and August 31, 1998 and for the four months ended December 31, 1998. Therefore,
for purposes of
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<PAGE>
comparing the respective 12-month periods for December 31, 1998 and 1999, the
1998 numbers have been presented on a pro-forma basis. As our biomass operations
were relatively insignificant prior to December 31, 1998, the following
pro-forma analysis, in the opinion of management, presents a realistic
comparison of the two twelve month periods.
Pro Forma Statement of Operations
For the Year Ended December 31, 1998
Amounts in Thousands
-----------------------------
Add Less For Year Ended December 31
Year Ended 4 Mos.End 4 Mos.End --------------------------
08/31/98 12/31/98 12/31/97 1998 1999
Audited (Unaudited)(Unaudited) (ProForma) Audited
------- ------- ------- --------- -------
Revenues $ 2,005 $ 2,025 $ 406 $ 3,624 $ 7,645
Cost of Revenues 2,665 1,694 634 3,725 6,705
------- ------- ------- ------- -------
Gross Profit (Loss) (660) 331 (228) (101) 940
------- ------- ------- ------- -------
Gen'l & Admin. Exp. 3,228 1,153 678 3,703 1,490
Loss from Asset
Impairment 1,971 -- -- 1,971 141
Loss on Sale of
Assets 366 4 -- 370 215
Interest Exp.
(Income), net 662 390 86 966 825
------- ------- ------- ------- -------
Loss, Continuing
Operations before
income taxes (6,887) (1,216) (992) (7,111) (1,731)
(Provision for)
benefit from
income taxes 1,048 (3) -- 1,045 (3)
------- ------- ------- ------- -------
Loss, Continuing
Operations $(5,839) $(1,219) $(992) $(6,066) $(1,735)
======= ======= ======= ======= =======
Continuing Operations. In October 1998, we officially commenced waste transport
services for Waste Management. Pro forma revenues for 1998, which included green
waste recycling and tree maintenance revenues for the entire year, were $3.6
million. Revenues for 1999, which included just one calendar quarter of tree
maintenance revenues as this business was sold in March, 1999, were $7.6
million--up 112%, but still below the Company's estimated $10 million break-even
level. We did have a positive 1999 gross margin of 12.3%, although a loss in the
amount of $1,735,000 was incurred (compared to a loss of $7,111,000 the prior
year) due primarily to a $637,000 loss from TransPacific Environmental's tree
maintenance operations (which were sold in the first quarter), and carry-over
administrative and interest costs (aggregating $2,319,000), partially to support
of the phase-out of discontinued operations. In addition, continuing operations
incurred significant start-up costs to develop the infrastructure for a fast
growth biomass business. This included a substantial investment in plant,
personnel and equipment to support the future anticipated revenue stream.
23
<PAGE>
With additional contracts in place, we anticipate year 2000 revenues to increase
substantially. This will be augmented by the March 2000, acquisition of San
Diego County-based American Waste Transport, with annual revenues approximating
$14 million. This acquisition, which also has contract waste transport services,
as well as extensive green waste recycling operations, should result in combined
revenues of $25 million for 2000. Management believes that a minimum 12% gross
margin level can be maintained, which would generate adequate proceeds to carry
administrative and interest costs. The present contractual backlog, which
includes contracts/renewals with terms in excess of 10 years, exceeds $350
million.
Results of Continuing Operations
Revenues. Our revenues from continuing operations for 1999 include both biomass
recycling and waste transport revenues whereas revenues for 1998 reflect mostly
biomass recycling activities, as the initial waste transport contract did not
commence until October 1998. We generated revenues of $7,645,000 for 1999
compared to $3,624,000 for 1998, an increase of $4,021,000 or 111%. The increase
is principally due to a full year of waste transport revenues in 1999, which
totaled $5,561,000, compared to only three months in 1998, which totaled
$894,000. Other revenues for 1999 totaled $2,084,000 of which $363,000 pertained
to municipal tree maintenance operations, which were sold during the first
quarter of 1999.
Cost of Revenues. Our costs of revenues for 1999 were $6,705,000 compared to
$3,725,000 for 1998, an increase of $2,980,000 or 80%. The increase is
principally related to the 111% increase in revenues in 1999. This is partially
offset by a 1998 cost of $797,000 related to green waste soil enhancement
activities that were terminated that year and by operating costs associated with
a full year's tree maintenance operations in 1998. Overall, this resulted in a
gross profit from operations in 1999 of $940,000, for an operating margin of
12.3%. This compares to an operating loss of $101,000 for the prior year. The
improved margin is the result of significantly higher waste transport volume,
reduced losses from tree maintenance operations (which were sold in early 1999)
and the elimination of soil enhancement activities.
Our gross margin on waste transport activities was $853,000 (15.4% of waste
transport revenues) in 1999, and $236,000 (14% of gross greenwaste revenues,
exclusive of municipal tree trimming activities) in 1999. Tree trimming
contracts resulted in a negative gross margin of $146,000 (40% of tree trimming
revenue) in 1999.
General and Administrative Expenses. General and administrative expenses were
$1,490,000 for 1999 compared to $3,706,000 for the prior year, a decrease of
$2,210,000 or 60%. The significant decrease is primarily due to the expected
cost and related overhead reduction pertaining to the phasing out of our
discontinued agricultural and real estate operations. In addition, the prior
year included $672,000 of administrative costs related to TPE, which was sold
early in 1999, $360,000 of corporate restructuring consulting fees, and $188,000
related to the cost associated with options granted to members of our Board of
Directors.
24
<PAGE>
Interest Expense Net of Interest Income. For 1999, interest expense, net of
interest income, was $825,000, compared to $966,000 for 1998, a decrease of
$143,000 or 15%, due largely to the pay down of debt from asset sales.
Loss from Asset Impairment. In 1998, we incurred a $1,971,000 loss from asset
impairment related to a green waste contract that did not materialize and soil
enhancement operations that were suspended. Such losses for 1999 were only
$141,000 as the substantial portion of the loss was incurred the prior year.
Gain or Loss on Sale of Assets. For 1999, we realized a net loss of $215,000 on
the sale of assets compared to a net loss of $370,000 in 1998. The higher prior
year's loss related primarily to the liquidation of assets, related to our
initial green waste pilot program.
Loss from Continuing Operations. For 1999, we incurred a net loss of $1,735,000
from continuing operations compared to a loss of $7,111,000 for the prior year.
The material disparity between the two years is principally that 1998 was a
start-up year for biomass operations and included a full year loss from tree
maintenance activities, which were disposed of in early 1999. Concerning the
1999 loss, $637,000 was attributable to TPE's tree maintenance operations, which
were sold early in 1999. Additional administrative costs were incurred in
relocating our headquarters. Interest costs will also decrease as we have
reduced our debt by 42%. As volume increases for 2000 and future years, based on
our expanding contractual backlog, we are expecting to operate profitably.
Results of Discontinued Operations. The new business plan adopted by the Board
of Directors specified a one-year time frame for management to dispose of all
non-biomass operations, which were reclassified for financial statement
purposes, as discontinued operations. As of December 31,1999, over $12 million
of assets were sold, with a $2.5 million agricultural property scheduled for
sale by mid-year 2000. Any remaining assets not sold by December 31, 1999
(principally a San Antonio subdivision that was under contract to sell in 1999
for $11.5 million, but the sale aborted) were revalued and written down to fair
market value, resulting in an additional 1999 loss from discontinued operations.
These assets (and related liabilities) were then transferred to AMCOR Financial
Corporation (previously identified by the initials "AFC") a then wholly-owned
subsidiary. AFC has separate management from the Company, and we have no
management or control over AFC. In January 2000, the Company distributed to its
common and preferred shareholders all of its AFC common shares. We have disputes
with AFC regarding the nature and amount of assets and liabilities transferred
to AFC. Further, all of the regulatory requirements related to the distribution
of the AFC shares to the Company's shareholders may not have been satisfied.
For years 1998 and 1999, implementation of our new business plan has had a
material impact on the presentation of our financial statements. This is because
operations, cash flows and net assets of these operations for both years have
been classified as discontinued operations and the assets for these operations
were reduced to the lower of cost or net realizable value, resulting in
significant charges to earnings. Accordingly, our agribusiness and real estate
operations have been accounted
25
<PAGE>
for as discontinued operations and the results thereof have been excluded from
continuing operations in our consolidated financial statements. For fiscal 1998,
which had limited biomass start-up revenues, this resulted in a loss of
$15,786,000 of which $9,947,000 pertained to discontinued operations,
principally due to the write-down of real estate and related assets. For 1999,
which was the first full year of biomass operations, the net loss was $9,186,746
of which $7,452,029 pertained to discontinued operations, principally related
the write-down of the San Antonio project.
Liquidity and Capital Resources. Our overall financial condition as of December
31, 1999, as compared to the prior year has not changed significantly,
principally due to our inability to liquidate all of our discontinued
operations. However, some assets were sold, which served to reduce total debt
from $19.7 million at December 31, 1998 to $11.4 million at the end of 1999.
This $8.3 million debt reduction (42%) is expected to yield significant annual
interest savings for the year 2000 and beyond. In addition, 1999 revenues from
expanding biomass operations increased 111% over the prior year but, at $7.6
million, are below the projected $10 million threshold required to break even.
Although we reported a loss of $1,735,000 for the year from continuing
operations, due largely to the development of the new biomass business, we had a
gross operating margin of 12.3%, which included losses from TPE, which diluted
the target 15% margin from biomass operations. Revenue growth for the year 2000
was significantly enhanced in March, when we completed the acquisition of
American Waste Transport which, when consolidated with the Company, should
generate $25 million of revenues for 2000--an increase of 227% over 1999, and
with a gross margin expected to exceed 12%, should generate adequate funds for
operations. Moreover, we now have a contractual backlog in place of more than
$350 million with terms generally exceeding 10 years or longer, ensuring
consistent revenue for future periods. Also, in March 2000, we successfully
completed a $3 million private placement of 6% convertible preferred stock. This
capital will be largely used for acquisitions and for capital equipment needs to
service our expanding contractual base.
The Company's current ratio was .66 at December 31, 1999 compared to 1.11 the
prior year, primarily due to the write off of assets of discontinued operations,
which were classified as current, pending their anticipated disposition. This
ratio significantly improved in the first quarter 2000 as a result of the
private placement of preferred stock, which provided $3 million of working
capital. Moreover, liquidity is expected to continue to improve during 2000 as a
result of (i) the intense management of cash flow; (ii) the Company has adequate
lines of credit in place and has plans to moderately expand both senior and
subordinated debt to fund working capital related to our large contract backlog;
(iii) during 2000, we expect to liquidate our $2.5 million agricultural property
investment, (iv) we have tax-loss carry-forwards exceeding $22 million which can
be applied to shelter future earnings thereby enhancing cash flow, and (v) we
intend to, where appropriate, make acquisitions using our common stock for the
generation of earnings and cash flow. It is for the foregoing reasons that we
believe that our liquidity needs for the year 2000 will be sufficiently
satisfied. Moreover, with our discontinued operations now partially liquidated,
we are strategically positioned to profitably capitalize on the numerous
opportunities now available in the biomass industry.
26
<PAGE>
ITEM 18. DESCRIPTION OF PROPERTY
On December 31, 1998, we acquired a 4-acre industrial parcel located in Bell
Gardens, California, which includes a 40,000 square-foot equipment maintenance
facility and a separate 2,400 square- foot office building used as the base for
our transportation operations. During 1999, we officially relocated our
headquarters to the Bell Gardens facility, located at 7314 Scout Avenue, Bell
Gardens, CA 90201.
Our biomass operations are based in two locations, the first being a 1.75-acre
site in Santa Fe Springs, California, which we lease for $54,000 annually. This
site also serves as a green waste transfer station pursuant to a Conditional Use
Permit from the City of Santa Fe Springs. The second location is a fully
permitted green waste transfer and processing facility on a 3-acre site in
Fontana, California, which we lease for $42,000 annually.
ITEM 19. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Between 1981 and 1986, the Company, in its capacity as general partner and/or
placement agent, raised approximately $200 million in private placement
syndications. This syndication activity resulted in the formation of
approximately 137 limited partnerships, which acquired real estate for
agribusiness or development and resale purposes. Partnership liquidation have
reduced this total to 14 limited partnerships as of December 31, 1999. It is
planned that all partnerships will file final tax returns during the next 12
months and virtually all on-going business activities have ceased.
On November 30, 1995, the Company acquired a 50% interest in PS III Farms, LLC,
which leases 6,490 acres to one of the limited liability company members, which
is not affiliated with the Company. The lease expired September 30, 1999 and has
been renewed for an additional five years pending negotiations to sell the
Company's 50% interest to its partner during 2000. The primary crop grown on the
farm is potatoes.
The Company holds a 99% ownership interest in Las Palomas Country Club Estates
LLC, a California limited liability company, which previously acted as the
development entity for the golf course owned by an affiliated partnership, all
operations have been transferred to AFC in December 1999.
Fred H. Behrens, Chairman, Chief Executive Officer, director, and principal
shareholder of the Company holds a 1% ownership interest in Las Palomas Country
Club Estates LLC. The Company also holds a 99% ownership interest in AMCOR
Builders LLC, which previously managed the construction operations of the
Company in Texas prior to being transferred to AFC. Robert A. Wright, former
President who remains a director and principal shareholder of the Company holds
a 1% ownership interest in AMCOR Builders LLC. The Company holds a 99% ownership
interest in AMCOR Biomass Farms LLC. Enterprise packing Company ("EPC") owns 442
limited partnership interests issued by Lake Valley. Mr. Behrens and Mr. Wright
are the only general partners of Lake Valley and EPC. There are 2,600 limited
partnership interests of Lake
27
<PAGE>
Valley presently issued and outstanding. Therefore, by attribution of their
ownership interests in EPC, Messrs. Behrens and Wright jointly own 17% of the
issued and outstanding limited partnership interests of Lake Valley.
In December 1997, Messrs. Behrens and Wright agreed, at the lenders' request, to
personally guarantee $4,250,000 of debt financing obtained by the Company from
GMAC Credit Corporation and TexStar Bank in connection with the Las Palomas golf
course and subdivision project. In consideration for the guarantee, the Company
agreed to pay to Messrs. Behrens and Wright a loan guarantee fee in the
aggregate amount of $212,500. Messrs. Behrens and Wright assigned to the Company
their rights to this guarantee fee on or about August 31, 1998.
In January, 1998, the Company issued 14,927 shares of its common stock for
cancellation of debt in the amount of $70,899, of which 10,989 shares of common
stock were issued to affiliates for the cancellation of debt in the amount of
$55,082.
On December 20, 1999, the Company agreed to reduce the conversion price of its
Series B Convertible Preferred Stock to $6.67 per share from $10 per share (on
December 20, 1999, the market price for the Company's common stock were $4.188).
At that time, all of the Series B Convertible Preferred Stock that was issued to
three affiliated limited partnerships was converted into 591,621 shares of the
Company's common stock.
ITEM 20. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Our Common Stock and Related Stockholders Matters. Our common stock
has traded in the over-the-counter market since1989 and is currently trading on
The Nasdaq SmallCap Market. Set forth below are the high and low bid prices of
the Common Stock during each quarter of fiscal1998 and 1999, as reported by a
member firm of the National Association of Securities Dealers, Inc. that effects
transactions in Nasdaq SmallCap Market stocks and acts as one of the market
makers for our common stock. The quotations listed below reflect inter-dealer
prices, without retail mark-up, mark-down or commissions, and may not represent
actual transactions.
Stock Prices
----------------------
High Low
------ -----
FISCAL 1998
First Quarter $5.375 $4.1875
Second Quarter 5.313 4.125
Third Quarter 5.187 4.125
Fourth Quarter 4.938 2.378
28
<PAGE>
FISCAL 1999
First Quarter $2.875 $1.438
Second Quarter 2.375 1.375
Third Quarter 2.00 1.189
Fourth Quarter 4.50 1.125
- -------------------------------------------------------------------------------
At March 31, 2000, there were approximately 3,280 stockholders of record of the
Company's common stock. The Company has paid no dividends on its common stock
and does not expect to pay dividends in the foreseeable future.
On November 25, 1997, the Company completed the acquisition of the stock of TPE,
which was acquired for a total cost of $1,607,049, consisting of $350,000 in
cash, allocable acquisition costs of $61,207, and 406,109 shares of the
Company's common stock with a value of $1,195,842.
In January 1998, the Company issued an aggregate of 31,250 shares of common
stock in exchange for $62,500 upon the exercise of options issued under the
Company's 1994 Non-Qualified Stock Option Plan.
In January 1998, the Company issued 14,927 shares of common stock in exchange
for cancellation of debt in the amount of $70,899.
In January 1999, the Company issued an aggregate of 22,151 shares of common
stock to two non- affiliated holders of 12% notes in lieu of an interest payment
of $55,377.
In November 1999, the Company issued 149,407 shares of common stock in exchange
for the cancellation of a $410,869, 8% note payable to a former employee.
In November 1999, the Company issued 290,799 shares of common stock in exchange
for the cancellation of 12% notes aggregating $954,816 to various private
parties.
In November 1999, the Company issued 89,170 shares of common stock in exchange
for the cancellation of two 5% notes aggregating $267,461 to two private
parties.
In November 1999, the Company issued 422,883 shares of common stock pursuant to
Options outstanding to two officers in exchange for the offset of $676,613 of
notes owed to the Officers by the Company.
In December 1999, the Company issued 12,000 shares of common stock to a creditor
in exchange for the cancellation of $41,297 owed by the Company.
In December 1999, the Company issued 100,000 shares pursuant to Options held by
an employee in the amount of $200,000.
29
<PAGE>
In December 1999, the Company issued 50,000 shares of common stock pursuant to
Options held by a former employee in consideration for $65,000, in the form of a
note receivable.
In December 1999, the Company issued 12,500 shares of common stock to two
consultants pursuant to Options for a total consideration of $37,500 in the form
of a note receivable.
The issuances of the Company's common stock in the above referenced transactions
were effected in reliance upon the exemption from registration under Section
4(2) of the Securities Act of 1933, as amended (the "Securities Act"), as
transactions not involving public offering. Exemption from the registration
provisions of the Securities Act is claimed on the basis that such transactions
did not involve any public offering and the purchasers were sophisticated with
access to the kind of information registration would provide.
Submission of Matters to a Vote of Security Holders. No matters were submitted
to a vote of security holders during the last quarter of the fiscal year ended
December 31, 1999.
ITEM 21. EXECUTIVE COMPENSATION
There is shown below information concerning the annual and long-term
compensation for services in all capacities to the Company of the Company's
Chief Executive Officer and the only other executive officer of the Company
whose aggregate cash compensation exceeded $100,000 (collectively, the "Named
Executives") during the fiscal years ended August 31, 1997 and 1998 and December
31, 1999.
SUMMARY COMPENSATION TABLE
Annual Compensation
--------------------------------------
Other Annual
Name and Salary Compensation
Principal Position Year ($) ($)
------------------------- ----- ------- ------------
Fred H. Behrens 1999 136,200 15,650
Chairman and Chief 1998 152,000 15,864
Executive Officer 1997 120,000 5,724
Robert A. Wright 1999 109,375 15,180
President(1) 1998 133,081 15,080
1997 120,000 11,519
Eugene W. Tidgewell 1999 112,000 --
Vice President and 1998 102,666 --
Chief Financial Officer
30
<PAGE>
(1) In April 2000, Mr. Wright agreed to vacate the office of as President, to
assume responsibility for the management and liquidation of assets included in
discontinued operations. He will remain as a Company director.
Stock Option Grants in 1999. The following table sets forth information
concerning individual grants of stock options made pursuant to the Company's
1997 Stock Option Plan during 1999 to each of the named executives. The Company
has never granted any stock appreciation rights.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
-------------------------------------
Number of Percent of
Securities Total
Underlying Options Exercise
Options Granted to or Base
Granted Employees in Price Expiration
Name (#) Fiscal Year ($/Sh) Date
---- ------ ----- ----- --------
Eugene W. Tidgewell 19,500 66.43% $1.50 10/15/10
------ ----- ----- --------
Option Exercises and Value for 1999. During fiscal 1999, Fred H. Behrens
acquired 246,955 shares of common stock with a realized value upon exercise of
$343,514 and Robert A. Wright acquired 175,928 shares of common stock with a
realized value upon exercise of $244,715. In accordance with the Securities and
Exchange Commission guidelines, values are calculated by subtracting the
exercised price from the fair market value of the underlying common stock. Fair
market value is deemed to be closing price on the date the options were executed
for the Company's common reported for Nasdaq SmallCap transactions on December
31, 1999.
Directors' Compensation. The Company's directors do not receive cash
compensation for attending Board of Director meetings. In 1998, each director
received options to purchase up to 15,000 shares of the Company's common stock
at $3.00 per share, the then closing price of the Company's common stock.
ITEM 22. FINANCIAL STATEMENTS.
USA Biomass Corporation
Consolidated Financial Statements
As of December 31, 1999 and 1998 and for the
Year Ended December 31, 1999, the Four Month Period Ended
December 31, 1998 and
The Year Ended August 31, 1998
<PAGE>
USA Biomass Corporation
Index to the Consolidated Financial Statements
As of December 31, 1999 and 1998 and for the
Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
Independent Auditors' Report ............................................... 1
Consolidated Financial Statements for USA Biomass Corporation:
Consolidated Balance Sheets as of December 31, 1999 and 1998 .......... 2
Consolidated Statements of Operations for the Year Ended
December 31, 1999, the Four Month Period Ended December
31, 1998 and the Year Ended August 31, 1998 ........................ 5
Consolidated Statements of Shareholders' Equity for the Year
Ended December 31, 1999, the Four Month Period Ended
December 31, 1998 and the Year Ended August 31, 1998 ............... 6
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1999, the Four Month Period Ended December 31,
1998 and the Year Ended August 31, 1998 ............................ 8
Notes to the Consolidated Financial Statements ............................. 13
<PAGE>
Report of Independent Auditors
To the Board of Directors and Shareholders of
USA Biomass Corporation
We have audited the accompanying consolidated balance sheets of USA Biomass
Corporation and its subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year ended December 31, 1999, the four month period ended December
31, 1998, and the year ended August 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
Management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of USA
Biomass Corporation and its subsidiaries as of December 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for the year
ended December 31, 1999, the four month period ended December 31, 1998, and the
year ended August 31, 1998, in conformity with generally accepted accounting
principles.
Kelly & Company
Newport Beach, California
April 12, 2000
<PAGE>
USA Biomass Corporation
Consolidated Balance Sheets
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and equivalents $ 540,651 $ 767,293
Cash held in escrow 617,176 --
Cash held in trust 203,891 --
Accounts receivable, net of allowance for doubtful accounts of
$90,580 and $54,985 as of December 31, 1999 and December 31, 1998,
respectively 862,619 526,170
Receivable from affiliates 25,869 --
Income taxes receivable -- 292,639
Other current assets 129,589 423,295
Net current assets of discontinued operations 1,248,670 8,337,976
----------- -----------
Total current assets 3,628,465 10,347,373
Property and equipment, net of accumulated depreciation 7,584,040 9,104,446
Note receivable, noncurrent -- 6,462,347
Other assets 31,963 127,645
Intangible assets, net of accumulated amortization 391,667 441,666
----------- -----------
Total assets $11,636,135 $26,483,477
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
USA Biomass Corporation
Consolidated Balance Sheets
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,747,537 $ 1,944,450
Payroll and payroll taxes payable 632,013 890,698
Accrued remediation costs 180,808 507,000
Lines of credit 640,000 874,610
Payable to affiliates -- 520,618
Notes payable:
Affiliates 190,714 2,268,053
Other 727,717 979,954
Capitalized lease obligations 809,690 681,922
Income taxes payable 347,942 334,832
Accrued interest 194,620 284,272
----------- -----------
Total current liabilities 5,471,041 9,286,409
Notes payable, net of current portion:
Affiliates 1,020,967 597,420
Other 2,333,288 6,261,799
Capitalized lease obligations, net of current portion 2,551,898 3,515,768
----------- -----------
Total liabilities 11,377,194 19,661,396
=========== ===========
</TABLE>
Commitments and contingencies
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
USA Biomass Corporation
Consolidated Balance Sheets
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY, CONTINUED
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Shareholders' equity:
Preferred Stock (2,000,000 shares authorized):
Series A, 9% Convertible Preferred Stock, $0.01 par value;
cumulative nonvoting; $7,422,000 and $7,475,000 aggregate
liquidation preference at December 31, 1999 and 1998,
respectively; 812,500 shares authorized, 742,200 and 747,500
shares issued and outstanding at December 31, 1999 and 1998,
respectively $ 7,422 $ 7,475
Series B, 6% Convertible Preferred Stock, $0.01 par value;
cumulative nonvoting; 750,000 shares authorized, 394,414 shares
issued and outstanding at December 31, 1998 -- 3,944
Common stock, $0.002 par value; 25,000,000 shares authorized, 9,509,856
and 7,761,385 shares issued, 9,485,606 and 7,737,135 shares
outstanding at December 31, 1999 and 1998, respectively 19,018 15,522
Additional paid-in capital 25,235,189 21,970,123
Accumulated deficit (24,781,849) (15,056,644)
Notes receivable on common stock (102,500) --
Treasury stock, at cost (24,250 common shares at
December 31, 1999 and 1998) (118,339) (118,339)
------------ ------------
Total shareholders' equity 258,941 6,822,081
------------ ------------
Total liabilities and shareholders' equity $ 11,636,135 $ 26,483,477
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
USA Biomass Corporation
Consolidated Statements of Operations
For the Year Ended December 31, 1999, the Four Month Period Ended
December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Four Month
For the Year Ended Period Ended For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Revenues $ 7,644,907 $ 2,024,830 $ 2,005,611
Cost of revenues 6,704,505 1,694,250 2,665,206
------------ ------------ ------------
Gross margin 940,402 330,580 (659,595)
General and administrative expenses 1,490,421 1,152,697 3,228,682
Loss from asset impairment 141,050 -- 1,971,123
Loss on sale of assets 215,258 3,768 365,990
------------ ------------ ------------
Operating loss from continuing operations 906,327 825,885 6,225,390
Interest expense, net 825,190 389,429 661,889
------------ ------------ ------------
Loss from continuing operations before income taxes 1,731,517 1,215,314 6,887,279
Provision for (benefit from) income taxes 3,200 3,200 (1,048,475)
------------ ------------ ------------
Loss from continuing operations 1,734,717 1,218,514 5,838,804
------------ ------------ ------------
Discontinued operations (Note 4):
Estimated loss from disposal of discontinued operations 5,346,328 814,550 2,878,813
Loss from discontinued operations (Note 12) 2,105,701 -- 7,068,069
------------ ------------ ------------
Total 7,452,029 814,550 9,946,882
------------ ------------ ------------
Net loss $ 9,186,746 $ 2,033,064 $ 15,785,686
============ ============ ============
Loss from continuing operations per common share,
basic and diluted $ 0.41 $ 0.20 $ 0.88
============ ============ ============
Net loss per common share, basic and diluted $ 1.35 $ 0.31 $ 2.19
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
USA Biomass Corporation
Consolidated Statements of Shareholders' Equity
For the Year Ended December 31, 1999, the Four Month
Period Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common
Series A Series B Shares Series A
Preferred Preferred Common Held in Preferred
Shares Shares Shares Treasury Stock
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, August 31, 1997 -- 404,414 7,172,974 -- --
Issuance of Series A 9% Convertible Preferred
stock 747,500 -- -- -- $ 7,475
Shares issued upon exercise of options -- -- 31,250 -- --
Shares issued in payment of debt -- -- 14,927 -- --
Shares issued for the acquisition of TransPacific
Environmental, Inc. -- -- 406,109 -- --
Shares issued in settlement of litigation -- -- 144,000 -- --
Stock options granted to
nonemployees for consulting and other services -- -- -- -- --
Treasury shares acquired -- -- -- (24,250) --
Shares reacquired and retired -- -- (7,875) -- --
Series A Preferred stock dividends -- -- -- -- --
Net loss -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance, August 31, 1998 747,500 404,414 7,761,385 (24,250) $ 7,475
========== ========== ========== ========== ==========
<CAPTION>
Common Retained
Series B Stock Additional Earnings
Preferred Common Held in Paid-in (Accumulated
Stock Stock Treasury Capital Deficit)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, August 31, 1997 $ 4,044 $ 14,345 -- $ 14,242,065 $ 3,259,382
Issuance of Series A 9% Convertible Preferred
stock -- -- -- 6,161,869 --
Shares issued upon exercise of options -- 63 -- 62,437 --
Shares issued in payment of debt -- 30 -- 70,869 --
Shares issued for the acquisition of TransPacific
Environmental, Inc. -- 812 -- 1,195,030 --
Shares issued in settlement of litigation -- 288 -- 83,093 --
Stock options granted to
nonemployees for consulting and other services -- -- -- 187,500 --
Treasury shares acquired -- -- $ (118,339) -- --
Shares reacquired and retired -- (16) -- (32,840) --
Series A Preferred stock dividends -- -- -- -- (497,276)
Net loss -- -- -- -- (15,785,686)
------------ ------------ ------------ ------------ ------------
Balance, August 31, 1998 $ 4,044 $ 15,522 $ (118,339) $ 21,970,023 $(13,023,580)
============ ============ ============ ============ ============
<CAPTION>
Notes
Receivable on
Common
Stock Total
------------- ------------
<S> <C> <C>
Balance, August 31, 1997 -- $ 17,519,836
Issuance of Series A 9% Convertible Preferred
stock -- 6,169,344
Shares issued upon exercise of options -- 62,500
Shares issued in payment of debt -- 70,899
Shares issued for the acquisition of TransPacific
Environmental, Inc. -- 1,195,842
Shares issued in settlement of litigation -- 83,381
Stock options granted to
nonemployees for consulting and other services -- 187,500
Treasury shares acquired -- (118,339)
Shares reacquired and retired -- (32,856)
Series A Preferred stock dividends -- (497,276)
Net loss -- (15,785,686)
-- ------------
Balance, August 31, 1998 -- $ 8,855,145
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
USA Biomass Corporation
Consolidated Statements of Shareholders' Equity
For the Year Ended December 31, 1999, the Four Month
Period Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common
Series A Series B Shares Series A
Preferred Preferred Common Held in Preferred
Shares Shares Shares Treasury Stock
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, August 31, 1998 747,500 404,414 7,761,385 (24,250) $ 7,475
Share cancellation -- (10,000) -- -- --
Net loss -- -- -- -- --
--------- --------- --------- --------- ---------
Balance, December 31, 1998 747,500 394,414 7,761,385 (24,250) 7,475
Common stock issued in settlement of debt -- -- 563,527 -- --
Series B Convertible Preferred shares issued
for cumulative dividends in arrears -- 53,846 -- -- --
Conversion of Series B Convertible Preferred
Stock to common stock -- (448,260) 591,621 -- --
Common stock issued on exercise of stock options -- -- 585,383 -- --
Conversion of Series A Convertible Preferred
stock to common stock (5,300) -- 7,940 -- (53)
Common stock options issued for services -- -- -- -- --
Notes receivable arising from exercise of
stock options -- -- -- -- --
Net loss -- -- -- -- --
--------- --------- --------- --------- ---------
Balance, December 31, 1999 742,200 -- 9,509,856 (24,250) $ 7,422
========= ========= ========= ========= =========
<CAPTION>
Common Retained
Series B Stock Additional Earnings
Preferred Common Held in Paid-in (Accumulated
Stock Stock Treasury Capital Deficit)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, August 31, 1998 $ 4,044 $ 15,522 $ (118,339) $ 21,970,023 $(13,023,580)
Share cancellation (100) -- -- 100 --
Net loss -- -- -- -- (2,033,064)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 3,944 15,522 (118,339) 21,970,123 (15,056,644)
Common stock issued in settlement of debt -- 1,127 -- 1,728,693 --
Series B Convertible Preferred shares issued
for cumulative dividends in arrears 538 -- -- 537,921 (538,459)
Conversion of Series B Convertible Preferred
stock to common stock (4,482) 1,183 -- 3,299 --
Common stock issued on exercise of stock options -- 1,170 -- 977,941 --
Conversion of Series A Convertible Preferred
shares to common shares -- 16 -- 37 --
Stock options issued for services -- -- -- 17,175 --
Notes receivable arising from exercise of
stock options -- -- -- -- --
Net loss -- -- -- -- (9,186,746)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 -- $ 19,018 $ (118,339) $ 25,235,189 $(24,781,849)
============ ============ ============ ============ ============
<CAPTION>
Notes
Receivable on
Common
Stock Total
------------- -----------
<S> <C> <C>
Balance, August 31, 1998 $ -- $ 8,855,145
Share cancellation -- --
Net loss -- (2,033,064)
----------- -----------
Balance, December 31, 1998 -- 6,822,081
Common stock issued in settlement of debt -- 1,729,820
Series B Convertible Preferred stock issued
for cumulative dividends in arrears -- --
Conversion of Series B Convertible Preferred
stock to common stock -- --
Common stock issued on exercise of stock options -- 979,111
Conversion of Series A Convertible Preferred
stock to common stock -- --
Common stock options issued for services -- 17,175
Notes receivable arising from exercise of
stock options (102,500) (102,500)
Net loss -- (9,186,746)
----------- -----------
Balance, December 31, 1999 $ (102,500) $ 258,941
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
USA Biomass Corporation
Consolidated Statements of Cash Flows
For the Year Ended December 31, 1999, the Four Month
Period Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Four Month
For the Year Ended Period Ended For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (9,186,746) $ (2,033,064) $(15,785,686)
Deduct loss from discontinued
operations 7,452,029 814,550 9,946,882
------------ ------------ ------------
Net loss from continuing operations (1,734,717) (1,218,514) (5,838,804)
Adjustments to reconcile net loss to net
cash
used in operating
activities:
Depreciation 958,929 268,658 316,229
Amortization 49,999 16,666 41,668
Provision for uncollectible accounts 50,580 14,985 --
Loss on impairment of assets 141,050 -- 1,971,123
Loss on sale of assets, net 187,258 -- 365,990
Provision for settlement expense -- -- 112,129
Stock options granted to nonemployees
for consulting and other services -- -- 187,500
Stock Compensation 17,175 -- --
Issuance of common stock for accrued interest expense 55,376 -- --
Reduction of accrued remediation costs (254,496) -- --
Decrease (increase) in assets, net of effect of
acquisition of TransPacific Environmental, Inc.:
Cash held in escrow (617,176) -- --
Cash held in trust (203,891) -- --
Accounts receivable (387,029) (205,621) (97,855)
Income taxes recoverable 292,639 -- (292,639)
Other current assets 293,706 57,625 710,093
Due from related parties -- -- 239,887
Other assets 95,682 (97,464) 2,782
Increase (decrease) in liabilities, net of effect of
acquisition of TransPacific Environmental, Inc.:
Accounts payable (144,759) 678,193 106,421
Payroll and payroll taxes payable (258,685) (174,307) 87,557
Accrued remediation costs (71,696) -- (507,000)
Income taxes payable 13,110 331,632 (1,033,200)
Accrued interest payable 243,921 143,526 (181,583)
Deferred taxes -- -- (55,894)
Payable to affiliates (412,694) 105,518 --
------------ ------------ ------------
Net cash used in operating activities of
continuing operations (1,685,718) (79,103) (3,865,596)
Net cash used in operating activities of
discontinued operations (640,801) (1,193,334) (6,105,493)
------------ ------------ ------------
Cash used in operating activities $ (2,326,519) $ (1,272,437) $ (9,971,089)
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE>
USA Biomass Corporation
Consolidated Statements of Cash Flows
For the Year Ended December 31, 1999, the Four Month
Period Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Four Month
For the Year Ended Period Ended For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash flows provided by (used in) investing activities:
Purchases of property and equipment $ (123,008) $ (512,285) $ (142,777)
Proceeds from the sale of a note receivable 2,462,347 -- --
Proceeds from sales of property and equipment 132,084 -- 101,393
Acquisition of TransPacific Environmental, Inc., net of
cash acquired -- -- (398,154)
----------- ----------- -----------
Net cash provided by (used in)investing activities of
continuing operations 2,471,423 (512,285) (439,538)
Net cash provided by investing activities
of discontinued operations 963,676 -- 4,199,029
----------- ----------- -----------
Cash provided by (used in) investing activities 3,435,099 (512,285) 3,759,491
----------- ----------- -----------
Cash flows provided by (used in) financing activities:
Proceeds from lines of credit 15,000 625,000 249,610
Proceeds from notes and loans -- 1,464,289 2,229,065
Repayment of notes and loans (574,280) (387,349) (3,098,801)
Repayment of capital lease obligations (589,444) (63,511) (442,340)
Proceeds from exercise of options 200,000 -- --
Repayment of notes and loans - affiliates (52,900) 85,815 --
Dividends paid on Series A Preferred stock -- -- (497,276)
Acquisition of treasury shares -- -- (118,339)
Net proceeds from issuance of Series A
Preferred stock -- -- 6,169,344
Purchase and retirement of common stock -- -- (32,856)
Exercise of stock options -- -- 62,500
----------- ----------- -----------
Net cash provided by (used in) financing activities of
continuing operations (1,001,624) 1,724,244 4,520,907
Net cash provided by (used in) financing activities of
discontinued operations (333,598) -- 2,338,596
----------- ----------- -----------
Cash provided by (used in) financing activities (1,335,222) 1,724,244 6,859,503
----------- ----------- -----------
Net increase (decrease) in cash (226,642) (60,478) 647,905
Cash and equivalents at beginning of period 767,293 827,771 179,866
----------- ----------- -----------
Cash and equivalents at end of period $ 540,651 $ 767,293 $ 827,771
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE>
USA Biomass Corporation
Consolidated Statements of Cash Flows
For the Year Ended December 31, 1999, the Four Month
Period Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
For the Four Month
For the Year Ended Period Ended For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------ ------------------- ------------------
<S> <C> <C> <C>
Cash paid during the period for:
Interest:
Continuing operations $1,196,703 $ 189,382 $ 838,066
Discontinued operations 582,927 383,999 521,191
---------- ---------- ----------
$1,779,630 $ 573,381 $1,359,257
========== ========== ==========
Income taxes -- -- $ 332,589
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Supplemental Schedule of
Non-Cash Investing and Financing Activities of Continuing Operations
<S> <C> <C> <C>
Satisfaction of debt through issuance of stock:
Liabilities satisfied $ 1,674,442 -- $ 70,899
Common stock issued $(1,674,442) -- (70,899)
Dividends on Preferred Stock:
Additional paid in capital $ 538,459 -- --
Reduction in retained earnings $ (538,459) -- --
Exercise of stock options:
Reduction of liabilities 676,613 -- --
Common shares issued (676,613) -- --
Retirement of line of credit:
Line of credit satisfied 249,610 -- --
Increase in loans payable (249,610) -- --
Conversion of preferred stock to common stock:
Preferred shares converted 4,535 -- --
Common shares issued (4,535) -- --
Issuance of note receivable on common stock:
Receivable on common stock 102,500 -- --
Common shares issued (102,500) -- --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE>
USA Biomass Corporation
Consolidated Statements of Cash Flows
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
Supplemental Schedule of
Non-Cash Investing and Financing Activities of Continuing Operations, Continued
<TABLE>
<CAPTION>
For the Four Month
For the Year Ended Period Ended For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Assets disposed of in non-cash transaction:
Assets disposed $ (725,784) -- --
Liabilities satisfied 725,784 -- --
Assets acquired (disposed of) in non-cash transactions:
Assets acquired (853,691) $ 5,141,152 $ 1,141,225
Receivables from related parties 65,744 -- 815,184
Capital lease obligations incurred 787,947 (2,969,244) (727,610)
Liabilities incurred -- (2,171,908) (413,615)
Liability to officer incurred -- -- (815,184)
Settlement liability and affiliates receivable:
Liability to estate of former officer -- -- $ (283,388)
Receivable from affiliates -- -- 283,388
Purchase of all the capital stock of TransPacific Environmental, Inc.:
Fair value of assets acquired -- -- $ 2,260,933
Less:
Cash paid -- -- (411,207)
Common stock issued -- -- (1,195,842)
Liabilities assumed -- -- $ (653,884)
Included in the net liabilities assumed were the following operating
assets and liabilities:
Cash -- -- $ 13,053
Accounts receivable -- -- 116,235
Other current assets -- -- 48,531
Other assets -- -- 2,230
Accounts payable -- -- (679,283)
Notes payable -- -- (154,650)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-11
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
1. Description of the Company's Business
The operations of USA Biomass Corporation (the "Company"), a Delaware
corporation, consist of clean green waste processing ("biomass"), and waste
transportation, which commenced in October 1998. These activities take
place exclusively in Southern California. In January 1999, the Company
changed its year end to December 31.
During the year ended August 31, 1998, the Company commenced its biomass
operations, and in December 1998, the Company's Board of Directors adopted
a plan to discontinue its agribusiness and real estate activities (Note 4).
After a one year period, the Company has completed a majority of the steps
necessary to transition from its historical activities to its current
segments. Although this has resulted in the recognition of significant
losses in the periods, the Company believes that the combination of its
long term waste transportation contracts, its growing biomass operations,
and the preferred stock offering and acquisition of American Waste
Transport in the first quarter of 2000 will enable it to successfully
compete in its current lines of business.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of USA Biomass
Corporation and its subsidiaries. USA Waste Transport, USA
Biomass-Greenwaste, Inc., TransPacific Environmental Inc., and AMCOR
Biomass Farms, LLC (99% owned), are the Company's continuing operating
subsidiaries. Sun Goddess Farms, Inc., AMCOR Properties, Inc., Las Palomas
Country Club Estates, LLC (99% owned) and AMCOR Builders, LLC (99% owned)
are discontinued operations. All significant intercompany transactions have
been eliminated.
Assets of discontinued operations are recorded at their estimated net
realizable value (Note 4).
Revenue Recognition
Revenues are recognized on the accrual method at the time the related
services are performed.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Equivalents
Cash and equivalents include short-term, highly liquid instruments with
original maturities of three months or less.
Accounts Receivable
The Company grants credit to customers substantially all of whom are in the
waste industry. The Company performs credit evaluations of its customers
and, generally, requires no collateral. The Company's ability to generate
revenues and collect amounts due from customers is affected by economic
fluctuations in the waste industry.
F-12
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, Continued
Accounts Receivable, Continued
The Company uses the allowance method to account for uncollectible accounts
receivable. The Company's estimate is based on historical collection
experience and a review of the current status of trade accounts receivable.
It is reasonably possible that the Company's estimate of the allowance for
doubtful accounts will change.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the expected useful lives noted below.
Estimated Useful
Life
----------------
Vehicles and equipment 3-10 years
Office furniture and equipment 3-10 years
Buildings 30 years
Leasehold improvements are amortized over the shorter of the life of the
assets or the life of the related lease.
Intangible Assets
Intangible assets include licenses, lease agreements and customer lists.
Intangible assets are amortized using the straight-line method over a
period of 10 years. Regularly, the Company assesses the intangible assets
for impairment based on recoverability of the balances from expected future
operating cash flows on an undiscounted basis (Note 8).
Long Lived Assets
Long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The estimated undiscounted cash
flows associated with the assets are compared to the carrying amounts to
determine if a writedown to fair value is required.
As a result of the Company's review and assessment, and based upon the best
information available in the circumstances, including independent
appraisals, at December 31, 1999 and August 31, 1998 the Company determined
that the carrying amounts of certain assets exceeded the fair value of such
assets (Note 7).
F-13
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, Continued
Stock Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation ("SFAS 123"), established accounting and
disclosure requirements using a fair-value-based method of accounting for
stock-based employee and nonemployee compensation plans.
The Company continues to account for stock-based employee compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees as permitted by
SFAS 123. Compensation cost for stock options, if any, is measured as the
excess of the quoted market price of the Company's stock at the date of
grant over the amount an employee must pay to acquire the stock.
Compensation cost is recorded over the requisite vesting periods based on
the market value on the date of grant.
New Accounting Pronouncement
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, which establishes accounting and reporting standards for
derivative instruments. This Statement requires that an entity recognize
all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. In June
1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities-Deferral of the Effective Date of FASB Statement No.
133, which postponed the adoption date of SFAS 133. As such, the Company is
not required to adopt the new Statement until the year 2001. The Company is
currently evaluating the effect that implementation of the new standard
will have on its results of operations and financial position.
3. Cash Held in Escrow and in Trust
At December 31, 1999, the Company had funds held in an escrow account
resulting from the sale of farmland from its discontinued agribusiness
operations. The funds were held in escrow pending the Company's ability to
secure a certain loan release. In February 2000, the loan release was
obtained and the cash was released from the escrow account.
At December 31, 1999, the Company had cash held in trust with an attorney
to be used in the resolution of certain liabilities.
F-14
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
4. Discontinued Operations
On December 22, 1998 , the Company adopted a plan to dispose of its
agribusiness and real estate operations. In October 1999, the Company
transferred substantially all of its remaining real estate assets and
related liabilities to AMCOR Financial Corp. ("AFC"), a then wholly owned
subsidiary. In January 2000, the Company distributed to its common and
preferred shareholders all of its AFC common shares. The Company has
disputes with AFC regarding the nature and amount of assets and liabilities
transferred to AFC. Further, all the regulatory requirements related to the
distribution of the AFC shares to the Company's shareholders may not have
been satisfied. As a result, the Company continues to record its investment
related to these real estate assets as net assets of discontinued
operations in the consolidated balance sheets.
At August 31, 1998 estimated losses of approximately $1,543,000 anticipated
on sales of discontinued operations and estimated operating losses of
approximately $1,336,000 for the period from August 31, 1998 through the
estimated dates of disposition of discontinued operations, currently
expected to be December 31, 2000, were included in the estimated loss on
disposal of discontinued operations. Additional losses on the dispositions
of discontinued operations of $5,346,328 and $814,550 were recorded in the
year ended December 31, 1999 and the four months ended December 31, 1998
due to asset sales at less than expected amounts and diminished appraised
values resulting from slower than expected sales.
Selected information for the discontinued agribusiness and real estate
operations is presented below.
For the Year Ended December 31, 1999
---------------------------------------------------
Agribusiness Real Estate Total
--------------- --------------- ---------------
Revenues $ 221,793 $ 869,000 $ 1,090,793
=============== =============== ===============
Operating income (loss) $ 489,763 $ 1,615,938 $ 2,105,701
=============== =============== ===============
Loss on disposal $ 158,636 $ 5,187,692 $ 5,346,328
=============== =============== ===============
F-15
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
4. Discontinued Operations, Continued
For the Four Month Period Ended December 31, 1998
-------------------------------------------------
Agribusiness Real Estate Total
------------ ------------ ------------
Revenues -- -- --
============ ============ ============
Operating income (loss) -- -- --
============ ============ ============
Loss on disposal -- $ 814,550 $ 814,550
============ ============ ============
For the Year Ended August 31, 1998
------------------------------------------------
Agribusiness Real Estate Total
------------ ------------ ------------
Revenues $ 6,057,166 $ 12,304,686 $ 18,361,852
============ ============ ============
Operating loss $ (1,989,554) $ (1,554,930) $ (2,878,882)
============ ============ ============
Loss on disposal $ (1,323,883) $ (1,554,930) $ (2,878,813)
============ ============ ============
At December 31, 1999, the remaining assets of the discontinued operations
are the Company's receivable from a partnership that owned a golf course
sold in foreclosure in February 2000, certain housing development land in
Texas, and a 50% interest in PS III Farms, LLC, which owns 6,490 acres that
it leases to a limited liability company owned by the other 50% venture
partner. The lease has a remaining term of nine months and has been
extended for an additional five years. The primary crop grown on the Oregon
farm is potatoes. The real estate assets have been pledged as collateral on
notes payable on which the Company is primarily liable totaling $4,887,402
at December 31, 1999, which is included in the net assets of discontinued
operations. Of this amount, $3,048,070 was collateralized by a golf course
upon which the lender foreclosed in February 2000. The lender notified the
Company that a deficiency of $1,600,000 exists after the foreclosure and in
April 2000 filed a related lawsuit.
5. Amounts Due to/Due from Affiliates
Amounts due to/due from affiliates relate to the activities of a
partnership, Enterprise Packing Company ("EPC"), the partners of which are
two officers who are also shareholders and directors of the Company. The
amount due from the partnership represents the net of advances to and other
transactions with the partnership and bears interest at 8% per annum.
Offset of Guarantee Fees
The partners of EPC have from time to time provided their personal
guarantees to lenders who required the guarantees as necessary conditions
to lending the Company various amounts, which aggregate approximately
$11,750,000. During the year ended August 31, 1998, as partial satisfaction
of amounts that EPC owes the Company, the partners of EPC assigned and
offset their rights to receive loan guarantee fees totaling $548,500, which
is included in discontinued operations.
F-16
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
5. Amounts Due to/Due from Affiliates , Continued
Assignment of Priority Receivable
During the year ended August 31, 1998, EPC assigned its right to its
priority receivable from a partnership to the Company in the amount of
$428,841 as partial satisfaction of its amount owed to the Company. This
receivable is included in discontinued operations.
Exercise of Options
During the year ended December 31, 1999, the Company made advances to EPC
of approximately $100,000, and the two officers exercised options to
purchase 422,883 shares of the Company's common stock. The exercise price
of the purchased shares was paid through the cancellation of $676,613 of
amounts due the officers by the Company.
6. Note Receivable
The note receivable at December 31, 1998 resulted from sale of a portion of
the assets of the Company's discontinued operations. In August 1999, the
Company sold this note. The terms of this sale provide for the Company to
receive up to an additional $500,000 if the note is paid by August 2000.
This amount decreases monthly until July 2002. If the note is paid after
July 2002, the Company will not realize any additional amounts. Any
additional amounts received will be recorded as income when received.
7. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Vehicles and equipment $ 6,548,131 $ 7,139,065
Office furniture and equipment 32,971 21,859
Leasehold improvements 13,686 68,244
Buildings 433,043 654,288
Land 1,804,082 1,814,082
----------- -----------
8,831,913 9,697,538
Less: accumulated amortization and depreciation (1,247,873) (593,092)
----------- -----------
Total property and equipment, net $ 7,584,040 $ 9,104,446
=========== ===========
</TABLE>
F-17
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
7. Property and Equipment, Continued
The following is an analysis of property held under capital leases
(included in the preceding summaries) with related accumulated
depreciation, depreciation expense, and the total depreciation expense of
continuing operations:
December 31,
-----------------------------
1999 1998
----------- -----------
Vehicles and equipment $ 3,096,035 $ 3,142,256
Accumulated depreciation (518,685) (133,836)
----------- -----------
Total $ 2,577,350 $ 3,008,420
=========== ===========
For the Four Month
For the Year Ended Period Ended For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------ ------------------ ------------------
Capitalized lease
depreciation
expense $436,913 $ 78,240 $119,934
======== ======== ========
Total property,
equipment and
capital lease
depreciation
expense $958,929 $268,658 $319,229
======== ======== ========
During the year ended December 31, 1999, the Company sold biomass equipment
with a net book amount of $1,055,126 and recognized a loss of $215,258 on
the sale of these assets.
Asset Impairment
During the year ended December 31, 1999, the four month period ended
December 31, 1998 and the year ended August 31, 1998, certain assets
(tangible and intangible) of the Company were reviewed for impairment as
circumstances and situations changed such that there were indications that
their carrying amounts were not recoverable.
Tangible Assets
In 1999, there were certain pieces of equipment previously utilized by the
Company that were determined to no longer be necessary, or the Company
significantly changed the manner and extent to which they were used in its
biomass operations. When the Company determined that the assets would no
longer be utilized, it decided to hold these assets for disposition and
ceased recording depreciation expense. In this connection, the Company
obtained an appraisal of the fair value less estimated costs of disposal of
the equipment and, accordingly, recognized an impairment loss.
F-18
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
7. Property and Equipment, Continued
Intangible Assets
Subsequent to the acquisition of TransPacific Environmental, Inc. during
the year ended August 31, 1998, the Company concluded, based upon its
review of values assigned to the acquisition's intangible assets, and in
particular the amount assigned to a pending City of Los Angeles curb-side
green waste contract that facts and circumstances did not support the
initial value ascribed to the contract, and accordingly, the Company
recognized an impairment loss.
<TABLE>
<CAPTION>
For the Four Month
For the Year Ended Period Ended For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Impairment loss
recognized on
greenwaste equipment $ 141,050 -- $ 634,563
Impairment loss
recognized on
the intangible
assets TPE
greenwaste contract -- -- 1,336,560
---------- -- ----------
Total $ 141,050 -- $1,971,123
========== ========== ==========
</TABLE>
8. Intangible Assets
Intangible assets associated with the Company are all involved with the
green waste segment of the business. The intangible assets are noted below:
December 31,
-----------------------
1999 1998
--------- ---------
Recycling license $ 250,000 $ 250,000
Customer lists 50,000 50,000
Facilities lease 200,000 200,000
--------- ---------
500,000 500,000
Less: accumulated amortization (108,333) (58,334)
--------- ---------
Intangible assets, net of amortization $ 391,667 $ 441,666
========= =========
Amortization expense for the year ended December 31, 1999, the four month
period ended December 31, 1998, and the year ended August 31, 1998 was
$49,999, $16,666, and $41,668, respectively.
F-19
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
9. Lines of Credit
Lines of credit consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
---------- -----------
<S> <C> <C>
Borrowing under a $650,000 line of credit with a bank, interest at prime
plus 1.50%. The weighted average interest rates on borrowings outstanding
were 9.49% and 9.85% for the years ended December 31, 1999 and 1998,
respectively, collateralized by all assets of the Company, and due June 30,
2000 $ 640,000 $ 625,000
Borrowing under a $250,000 line of credit with a bank, interest at prime
plus 2%. The weighted average interest rate on borrowings outstanding was
10.35% for the four month period ended December 31, 1998, paid in full
during 1999 -- 249,610
---------- -----------
Total 640,000 874,610
Less: current portion (640,000) (874,610)
---------- -----------
Total noncurrent -- --
========== ===========
10. Notes Payable
Notes payable consist of the following:
Notes Payable to Affiliates:
Uncollateralized
Notes payable, with effective interest rates ranging from 6% to 12% per
annum. Notes with aggregate principal amounts of $175,000 are payable to
individuals who are investors in limited partnerships managed by the
Company and are in default and classified as current. A note of $210,815 is
due to the spouse of a director, a major shareholder, and is due January 2,
2001. Notes of $15,713 and $810,152 are payable to affiliated partnerships
managed by the Company. $1,211,681 $ 2,495,284
Note payable to an employee, with interest at 8% per annum,
converted into common stock in November 1999. -- 370,189
---------- -----------
Total due to affiliates 1,211,681 2,865,473
Less: current portion (190,714) (2,268,053)
---------- -----------
Total noncurrent due to affiliates $1,020,967 $ 597,420
========== ===========
</TABLE>
F-20
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
10. Notes Payable, Continued
Notes Payable to Third Parties:
Uncollateralized
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Note payable, with interest at 8% per annum with monthly payments of
$11,182, paid in 1999 -- $ 46,011
----------- -----------
Total due to third parties - uncollateralized -- 46,011
----------- -----------
Collateralized
Notes payable to individuals, paid in April 2000 $ 31,723 296,164
Notes payable, collateralized by a vehicle, with interest at 9.50% per
annum. The note is due in February 2004, with monthly payments of $714 29,396 --
Note payable, collateralized by a note receivable, with interest at 12.25%.
This note was paid in September 1999 -- 4,000,000
Note payable, collateralized by Company's Bell Gardens facility, with
interest at Wall Street Journal Prime plus 1% per annum, (8.5% at December
31,1999). The note is due in December 2003, with monthly principal payments
of $8,098 780,372 800,000
Notes payable, collateralized by equipment with interest ranging from 8% to
18.7% per annum. Maturity dates range from December 1999 to June 2004 2,219,514 2,099,578
----------- -----------
Total due to third parties - collateralized 3,061,005 7,195,742
----------- -----------
Total due to third parties 3,061,005 7,241,753
Less: current portion (727,717) (979,954)
----------- -----------
Total noncurrent due to third parties $ 2,333,288 $ 6,261,799
=========== ===========
</TABLE>
F-21
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
10. Notes Payable, Continued
Maturities of notes payable for the years ending December 31:
2000 $ 918,431
2001 1,597,388
2002 682,609
2003 349,915
2004 and thereafter 724,343
11. Obligations Under Capital Leases
The Company leases vehicles and equipment under long-term noncancellable
capital leases. Obligations under capital leases consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Capital leases with effective interest rates of 9.5% and 9.75% per annum,
with aggregate monthly principal and interest payments of $3,545 through
December 1998 -- $ 7,924
Capital lease with an effective interest rate of
8.5% per annum, with monthly principal and
interest payments of $1,525 through September 2002 $ 36,737 49,960
Capital leases with interest ranging from 9.1% to 12.62% per annum, with
monthly principal and interest payments ranging from $924 to $5,564, which
aggregate $21,515. Maturity dates range from
August 2000 to June 2001 302,021 518,464
Capital leases with an effective interest rate of 8.75% per annum, with
monthly principal and interest payments ranging from $4,125 to $15,044,
which aggregate $54,779. Maturity dates range from
October to December 2003 2,636,259 2,998,728
Capital leases with interest ranging from 7.60% to 8.50% per annum, with
monthly principal and interest payments ranging from $394 to $488, which
aggregate $1,329. Maturity dates range from
September to November 2004 64,638 --
</TABLE>
F-22
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
11. Obligations Under Capital Leases, Continued
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Capital leases with interest ranging from 7.8% to 17% per annum, with
monthly principal and interest payments ranging from $1,040 to $6,691,
which aggregate $16,426. Maturity dates range from
February 2001 to March 2003 $ 321,933 $ 622,614
----------- -----------
Total obligations under capital leases $ 3,361,588 $ 4,197,690
=========== ===========
Future minimum lease payments under capital leases at December 31, 1999 are
as follows:
2000 $ 1,063,752
2001 992,565
2002 683,799
2003 1,256,787
2004 14,920
-----------
Total minimum lease payments 4,011,823
Less: amount representing interest at the incremental borrowing
rate (650,235)
-----------
Present value of minimum lease payments 3,361,588
Less: current maturities (809,690)
-----------
Obligations under capital leases, long-term $ 2,551,898
===========
</TABLE>
F-23
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
12. Income Taxes
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
For the Four Month
For the Year Ended Period Ended For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal -- -- $ (995,904)
State $ 3,200 $ 3,200 3,323
----------- ----------- -----------
3,200 3,200 (992,581)
----------- ----------- -----------
Deferred tax expense (benefit):
Federal -- -- (240,381)
State -- -- 184,487
----------- ----------- -----------
-- -- (55,894)
----------- ----------- -----------
Total provision (benefit) $ 3,200 $ 3,200 $(1,048,475)
=========== =========== ===========
Provision (benefit) allocated to:
Discontinued operations -- -- --
Loss on disposal of discontinued
operations -- -- --
Continuing operations $ 3,200 $ 3,200 $(1,048,475)
----------- ----------- -----------
Total provision (benefit) $ 3,200 $ 3,200 $(1,048,475)
=========== =========== ===========
</TABLE>
The deferred tax benefit for federal income tax purposes is primarily due
to the utilization of the net operating loss to offset prior years' income
taxes and the expected future tax liability. The deferred tax expense for
state income tax purposes is primarily due to the establishment of a
valuation allowance in fiscal year 1998 for the state deferred tax asset
recognized in fiscal year 1997.
The income tax benefit for the year ended August 31, 1998 is allocated to
loss from continuing operations as the tax benefit arising from the loss
from continuing operations is the same as the benefit arising from the
aggregate of all losses from operations. Consequently, no incremental tax
benefit remains for allocation to the loss from discontinued operations or
loss on disposal of discontinued operations.
F-24
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
12. Income Taxes, Continued
Significant components of the Company's deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred income tax assets:
Depreciation $ 42,427 --
Net operating loss carryforward 8,767,232 $ 2,822,273
Nondeductible writedowns related to discontinued
operations 282,954 3,331,355
State tax credit carryforward -- 250,462
Other 7,086 7,086
----------- -----------
Total deferred income tax assets 9,099,699 6,411,176
Valuation allowance (8,689,700) (5,722,651)
----------- -----------
Net deferred income tax asset $ 409,999 $ 688,525
=========== ===========
Deferred income tax liability:
Depreciation -- $ 350,917
Partnership loss $ 409,999 337,608
----------- -----------
Total deferred income tax liability 409,999 688,525
----------- -----------
Net deferred income tax liability -- --
=========== ===========
</TABLE>
The Company, based upon its recent history of losses and management's
assessment of when operations are anticipated to generate taxable income,
has concluded that it is more likely than not that none of the net deferred
income tax assets will be realized through future taxable earnings and has
established a valuation allowance for them.
The valuation allowances increased $2,967,049, $507,281, and $5,215,370
during the year ended December 31, 1999, the four months ended December 31,
1998, and the year ended August 31, 1998, respectively.
F-25
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
12. Income Taxes, Continued
Reconciliation of the effective tax rate to the U.S. federal statutory
income tax rate is as follows:
<TABLE>
<CAPTION>
For the Four Month
For the Year Ended Period Ended For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
U.S. federal statutory income tax rate (34.0)% (34.0)% (34.0)%
State tax provision 0.1 0.1 0.7
Nondeductible writedowns related to
discontinued operations -- -- 2.7
Nondeductible penalties -- 5.6 --
Other 0.3 0.5 1.0
Change in valuation allowance 33.7 28.0 23.4
------ ------ ------
Effective income tax rate 0.1% 0.2% (6.2)%
====== ====== ======
</TABLE>
The Company had a California Enterprise Zone tax credit carryforward of
$250,462. The Company generated the tax credits through its farming
operations located in the Coachella Enterprise Zone. The tax credits can
only be utilized by generating income in the Enterprise Zone. In the
current year, the Company has discontinued all of its operations in the
Coachella Enterprise Zone; therefore, the deferred tax asset related to the
state tax credit carryforwards has been written off.
The Company has federal and state net operating loss carryforwards of
$22,483,572 and $12,701,550, respectively. The federal and state net
operating loss carryforwards will begin to expire in 2018 and 2003,
respectively.
13. Commitments
The Company leases certain of its biomass facilities and equipment under
noncancellable operating leases. Future minimum lease payments under
noncancellable operating leases at December 31, 1999 are as follows:
Continuing Operations
2000 $109,392
2001 38,628
--------
Total future minimum lease payments $148,020
========
Rent expense from operating leases related to continuing operations was
$150,936 for the year ended December 31, 1999, $74,792 for the four month
period ended December 31, 1998, and $240,728 for the year ended August 31,
1998.
F-26
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
13. Commitments, Continued
Discontinued Operations
The costs associated with early termination of operating leases in the real
estate operations have been included in loss on disposal of discontinued
operations. Contractually required payments relating to these operating
leases are as follows:
2000 $119,616
2001 12,512
2002 9,026
2003 9,026
2004 3,008
--------
Total future minimum lease payments $153,188
========
Rent expense from operating leases related to discontinued operations was
$201,726 for the year ended December 31, 1999, $75,737 for the four month
period ended December 31, 1998, and $308,907 for the year ended August 31,
1998.
14. Contingencies
Concentrations
Cash Balances
The Company maintains cash balances in bank accounts which exceeded
federally insured limits by $983,031 and $661,838 at December 31, 1999 and
1998, respectively; however, the Company has not experienced any losses in
such accounts.
Customers
During the year ended December 31, 1999 and the four months ended December
31, 1998, a single customer accounted for 97% and 99%, respectively, of
revenue for the transportation subsidiary and 77% and 48%, respectively of
total revenue. This revenue is realized under contracts that have initial
terms of 5 years with renewal options up to 10 years. There were no
transportation revenues during the year ended August 31, 1998. This
customer accounted for 59% and 47% of the total accounts receivable
balances at December 31, 1999 and 1998, respectively. No other customers
had accounts receivable balances that exceeded 10%.
F-27
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
14. Contingencies, Continued
Concentrations, Continued
Fuel
During the year ended December 31, 1999 and the four months ended December
31, 1998, the Company purchased 97% and 94% respectively of its fuel from
one entity. In all of its transportation contracts, the Company has terms
that provide for direct increases or decreases in the hauling rate based
upon extraordinary increases or decreases in their cost of fuel.
Certain Significant Estimates
Write-down of Equipment
At August 31, 1998 and December 31, 1999, the Company recognized impairment
write-downs of certain specialized equipment previously utilized in its
biomass operations. In determining the amount of each impairment, the
Company obtained valuations from an independent equipment appraiser. The
valuations contemplate the orderly sale of this equipment in, and the
existence of, a market for used specialty equipment. Given the unique
economic and operational nature of the equipment and the limited market, it
is reasonably possible that the Company's estimate of the amount to be
realized from the disposition of the equipment to recover its carrying
amount will change in the near term. The carrying value of this equipment
was $158,850 at December 31, 1999.
Discontinued Operations
Discontinued operations include management's best estimates of amounts it
expects to realize on the disposition of its real estate operations. These
operations include significant estimates of amounts expected to be realized
related to completed houses and residential lots held for sale, and
receivables due from affiliated real estate limited partnerships. These
estimates are based on several factors including values of recent sales of
similar properties, and valuations by independent appraisers of real
estate. These valuations contemplate sale in an orderly liquidation and
assume the existence of a market for all the assets of the discontinued
operations, all or any of which may or may not materialize. Consequently,
the amounts the Company will ultimately realize could differ materially in
the near term from the amounts assumed in arriving at the loss on disposal
of the discontinued operations.
15. Stock Based Compensation Plans
Under terms of the Company's stock option plans, directors, officers,
employees, and certain vendors may be granted options to purchase shares of
the Company's common stock at no less than 100% of the market price of the
shares on the date the option is granted. Options generally vest over four
years and have a maximum term of ten years. At December 31, 1999 and 1998,
606,850 and 982,883 shares, respectively, were reserved for future issuance
under the plans.
F-28
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
15. Stock Based Compensation Plans, Continued
A summary of the activity relating to the Company's stock option plans as
of December 31, 1999, December 31, 1998 and August 31, 1998, and changes
during the periods then ended is presented below:
<TABLE>
<CAPTION>
For the Four Month
For the Year Ended Period Ended For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 982,883 $2.43 1,012,883 $2.45 656,633 $1.65
Exercised (585,383) 1.62 -- -- (31,250) 2.00
Granted 364,350 1.18 -- -- 555,000 3.97
Cancelled/repriced -- -- (30,000) 2.81 (150,000) 4.60
Forfeited (155,000) 1.26 -- -- (17,500) 3.14
-------- --------- ----------
Outstanding at end of year 606,850 2.24 982,883 2.43 1,012,883 2.43
======== ========= ==========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Weighted Average
Outstanding at Remaining Contractual Exercisable at
Exercise Prices December 31, 1999 Life (in Years) December 31, 1999
--------------- ----------------- --------------------- -----------------
<S> <C> <C> <C>
$1.30 - $1.60 98,100 5 88,250
2.00 286,250 5 258,439
3.00 212,500 8 43,750
4.00 10,000 7 5,000
----------------- -----------------
$1.30 to 4.00 606,850 395,439
================= =================
</TABLE>
SFAS No. 123 requires the use of option valuation models to provide
supplemental information regarding options granted after 1994. Pro forma
information regarding net income and earnings per share shown below was
determined as if the Company had accounted for its employee stock options
under the fair value method of that statement.
The fair value of each option granted was estimated at the date of grant
using the Black-Scholes option pricing model (the "BSOPM") with the
following weighted average assumptions used for grants in the years ended
December 31, 1999 and August 31, 1998, respectively: dividend yield of 0%
for both years; expected volatility of 0.96 and 1.17, respectively;
risk-free interest rate of 5.57% and 4.90%, respectively; and expected
contractual life of 10 years for both years. The weighted average fair
value of options granted during the years ended December 31, 1999 and
August 31, 1998 was $1.96 and $3.07, respectively. There were no grants
during the four month period ended December 31, 1998.
F-29
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
15. Stock Based Compensation Plans, Continued
The BSOPM was developed for use in estimating the fair value of traded
options. The Company's employee stock options have characteristics
significantly different from those of traded options such as vesting
restrictions and extremely limited transferability. In addition, the
assumptions used in option valuation models are highly subjective,
particularly the expected stock price volatility of the underlying stock.
Because changes in these subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The pro forma
effect on net loss for the periods presented is not representative of the
pro forma effect on net loss in future years because it does not take into
consideration pro forma compensation expense related to grants made prior
to 1994. The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
For the Four Month
For the Year Ended Period Ended For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------- -------------------- ------------------
<S> <C> <C> <C>
Net loss, as reported $9,186,746 $2,033,064 $15,785,686
Net loss, pro forma $9,565,709 $2,069,014 $16,803,346
Basic and diluted loss per share, as reported $ 1.35 $ 0.31 $ 2.19
Basic and diluted loss per share, pro forma $ 1.40 $ 0.31 $ 2.21
</TABLE>
Common stock warrants issued in the periods presented to non-employees for
services rendered primarily under consulting agreements are accounted for
based on the fair value of the consideration received or the fair value of
the equity instrument issued, whichever is more reliably measurable.
F-30
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
15. Stock Based Compensation Plans, Continued
A summary of the activity relating to warrants as of December 31, 1999 and
1998, and changes during the year ended December 31, 1999, the four month
period ended December 31, 1998 and the year ended August 31, 1998 is
presented below:
<TABLE>
<CAPTION>
For the Four Month
For the Year Ended Period Ended For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------- ---------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Warrants Price Warrants Price Warrants Price
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 479,500 $3.29 479,500 $3.29 362,500 $1.66
Granted -- -- -- -- 117,000 1.63
Expired (340,000) 2.00 -- -- -- --
-------- -------- -------
Outstanding at end of period 139,500 6.43 479,500 3.29 479,500 3.29
======= ======== ========
</TABLE>
The range of exercise prices of warrants outstanding at December 31, 1999
was $4.50 to $6.67. The weighted average fair value of warrants granted
during the year ended August 31, 1998 was $3.25.
The following table summarizes information about warrants outstanding at
December 31, 1999:
Estimated
<TABLE>
<CAPTION>
Volatility Dividend Risk-Free Lives
Factor Yield Interest Rates (In Years)
-------------- -------- -------------- ----------
<S> <C> <C> <C> <C>
1998 warrant grants 1.032 0% 5.20% 4
1997 warrant grants 1.080 to 1.184 0% 5.34% 2
</TABLE>
16. Disclosures about Fair Values of Financial Instruments
The estimated fair value amounts of all financial instruments on the
Company's December 31, 1999 and 1998 balance sheets have been determined by
using available market information and appropriate valuation methodologies.
Fair value is described as the amount at which the instrument could be
exchanged in a current transaction between informed willing parties, other
than in a forced liquidation. However, considerable judgment is necessarily
required in interpreting market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts. The Company does not have any off balance sheet financial
instruments.
F-31
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
16. Disclosures about Fair Values of Financial Instruments, Continued
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial statements:
Cash and equivalents, accounts receivable, cash held in escrow and in
trust, other current assets, accounts payable, current portion of
notes payable, and certain other current liability amounts are
reported in the balance sheet at approximate fair value due to the
short term maturities of these instruments.
The fair value of noncurrent notes payable is estimated by determining
the net present value of future payments. The carrying amount on the
balance sheet approximates the fair value as the interest rates
approximate current market rates with the exception of one noncurrent
note with a carrying amount of $810,153 and a fair value of $686,354.
17. Loss per Common Share
Basic and diluted loss per common share have been computed by dividing the
loss available to common stockholders by the weighted-average number of
common shares for the period. Loss available to common stockholders is the
loss after adding to the loss any preferred stock dividend requirements.
The additional common shares that would be issuable for options and
warrants outstanding are ignored, as to include them in the calculation of
diluted loss per share would be antidilutive.
The computations of basic and diluted loss per common share are as follows:
<TABLE>
<CAPTION>
For the Four Month
For the Year Ended Period Ended For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Loss from continuing operations $1,734,717 $1,218,514 $5,838,804
Add: dividends on preferred
shares-declared -- -- 497,276
Add: dividends on preferred shares
- paid upon conversion 216,928 -- --
Add: dividends on preferred shares
- cumulative, not declared 671,850 297,133 362,059
Add: excess fair market value given
in preferred stock conversion to
common stock 609,284 -- --
---------- ---------- ----------
Loss to common shareholders 3,232,779 1,515,647 6,698,139
</TABLE>
F-32
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
17. Loss per Common Share, Continued
<TABLE>
<CAPTION>
For the Four Month
For the Year Ended Period Ended For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Loss from discontinued operations,
including loss on disposal $ 7,452,029 $ 814,550 $ 9,946,882
-------------- -------------- --------------
Net loss available to common shareholders
$ 10,684,808 $ 2,330,197 $ 16,645,021
============== ============== ==============
Weighted average shares - basic and
diluted 7,896,229 7,737,135 7,595,556
============== ============== ==============
Loss per Common Share - Basic and Diluted
Loss per share from continuing operations $ 0.41 $ 0.20 $ 0.88
Loss per share from discontinued
operations, including loss on disposal 0.94 0.11 1.31
-------------- -------------- --------------
Net loss per share available to common
shareholders $ 1.35 $ 0.31 $ 2.19
============== ============== ==============
</TABLE>
The effect of the potentially dilutive securities listed below were not
included in the computation of diluted earnings per share because to do so
would have been antidilutive for the periods presented.
<TABLE>
<CAPTION>
For the Four Month
For the Year Ended Period Ended For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Shares of common stock issuable under:
Employee stock options 386,850 982,883 449,084
Warrants 379,500 479,500 182,227
Series A Convertible Preferred Stock 1,335,960 1,345,500 1,345,500
Series B Convertible Preferred Stock -- 591,621 404,414
</TABLE>
Warrants to purchase an additional 12,500 and 10,000 shares of common stock
with exercise prices of $4.50 and $6.00 per share, respectively, were
outstanding during the periods presented and were not included in the
computation of diluted earnings per share because their exercise prices
were greater than the average market prices of the common shares for each
of the periods presented.
F-33
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
18. Stock Transactions
Series A Convertible Preferred Stock and Related Transactions
During the first quarter of the year ended August 31, 1998, the Company
sold 747,500 shares of its Series A 9% Convertible Preferred stock ("Series
A Preferred stock") at $10 per share. In connection with the offering, the
Company granted the underwriters warrants to purchase 65,000 shares of
Series A Preferred stock at $12 per share, which were exercisable in
September 1998 and expire four years thereafter.
The Series A Preferred stock is convertible into the Company's common stock
at the option of the holder at any time at a price equal to 125% of the
common stock closing price on September 24, 1997 of $4.4375 per share,
which represents approximately 1.8 shares of common stock for each share of
Series A Preferred stock upon conversion. The Company may convert the
Series A Preferred stock to common stock at such time as the common stock
has traded for 20 consecutive days at 150% of the closing stock price on
September 24, 1997. In the event the number of shares of the Company's
common stock is increased or decreased as a result of a stock split, stock
dividend, reverse stock split, or otherwise, the number of shares of common
stock into which each share of Series A Preferred stock may be converted
shall concurrently be proportionately increased or decreased. Further,
after five years, the Company may redeem the Series A Preferred stock at
$10.00 per share. Upon notice by the Company to redeem, the holders of
Series A Preferred stock will have 30 days to elect to convert their Series
A shares to common stock at 125% of its closing price on September 24,
1997.
The Series A Preferred stock provides for a 9% annual dividend of $.90 per
share payable quarterly. Dividends accumulate whether or not declared and
must be paid prior to any dividend distribution to the holders of Series B
Preferred stock or common stock. In any liquidation or dissolution of the
Company, the holders of Series A Preferred stock will be entitled to a
liquidation preference of $10 per share plus all related accumulated,
accrued, and unpaid dividends. Further, if the Company does not pay
dividends on the Series A Preferred stock for eight cumulative quarters,
the holders of Series A Preferred stock have the right to elect the
majority of the Company's Board of Directors. As of December 31, 1999, the
Company had not declared dividends for six consecutive quarters. In March
2000, the Company declared and paid dividends for three quarters, totaling
$416,340 and the cumulative dividends not declared at April 10, 2000 was
$553,959 ($.90 per share). No dividend in April 2000 was declared.
Series B Convertible Preferred Stock and Related Transactions
In December 1999, the Company exchanged 591,621 shares of its common stock
for Series B Preferred stock in the ratio of one and one-half shares of
common stock for each share of Series B Preferred stock. Upon conversion,
the cumulative dividends in arrears of $538,459 were paid by the issuance
of 53,846 additional shares of Series B Preferred stock. The terms of the
Series B Preferred stock provided for conversion of each share of Series B
Preferred stock into one share of common stock. The value of the enhanced
conversion has been used to reduce earnings available to common
shareholders in determining earnings per share.
F-34
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
18. Stock Transactions, Continued
Shares Issued Under Stock Option Plans
During the years ended December 31, 1999 and August 31, 1998, stock options
were exercised resulting in the purchase of 585,383 common shares for
$979,111 and 31,250 common shares for $62,500, respectively.
Common Stock Issued in Exchange for Debt
During the year ended August 31, 1998, the Company issued 14,927 shares of
common stock at market value in payment of debt of $70,899.
Shares Issued for the Acquisition of TransPacific Environmental, Inc.
During the year ended August 31, 1998, the Company issued 406,109 shares of
common stock for the acquisition of TransPacific Environmental, Inc.
Shares Issued in Connection with Legal Settlement
In the year ended August 31, 1998, the Company issued 144,000 shares of
common stock in connection with a judgment rendered by a court in
litigation brought by an individual and the estate of a former officer and
shareholder. As a result of the judgment, the issuance of these shares is
recorded as settlement expense.
Treasury Stock Repurchase Program
The Company's Board of Directors on November 10, 1997 authorized management
to purchase up to $1,000,000 worth of its common stock over a 12 month
period. As of December 31, 1999 and 1998, the Company had repurchased at
market value 24,250 shares for $118,339.
Common Shares Reserved for Future Issuance
At December 31, 1999, the Company has reserved common shares for future
issuance as follows:
Stock option plans 606,850
Warrants 139,500
Convertible preferred stock 1,335,960
---------
2,082,310
=========
F-35
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
19. Business Segments
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
stockholders. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance.
Each of these operating segments is considered a reportable segment, and
the accounting policies of the operating segments are the same as those
described in Note 2. The Company evaluates the performance of its segments
and allocates resources to them based on revenue and EBITDA. The Company
defines EBITDA as earnings before interest, income taxes, depreciation and
amortization, and other nonoperating income and expense.
Certain financial information is presented below:
<TABLE>
<CAPTION>
Green Waste Waste
Recycling Transport Other Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1999:
Revenue $ 2,084,098 $ 5,560,809 -- $ 7,644,907
EBITDA (375,503) 953,598 $ (714,338) (136,243)
Assets 1,916,002 5,444,436 4,275,697 11,636,135
Depreciation and amortization 371,934 604,417 32,577 1,008,928
Interest, net 226,146 464,693 134,351 825,190
Four months ended December 31, 1998:
Revenue $ 1,122,595 $ 902,235 $ -- $ 2,024,830
EBITDA (356,634) 164,115 (349,021) (541,540)
Assets 3,430,480 5,382,814 17,670,183 26,483,477
Depreciation and amortization 171,732 97,173 16,419 285,324
Interest, net 146,688 84,645 158,096 389,429
Year ended August 31, 1998:
Revenue $ 2,005,611 -- $ -- $ 2,005,611
EBITDA (3,898,672) -- (1,934,396) (5,833,068)
Assets 3,258,418 -- 18,212,661 21,471,079
Depreciation and amortization 249,631 -- 108,266 357,897
Interest, net 198,864 -- 463,025 661,889
</TABLE>
F-36
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
20. Subsequent Events
Acquisition of American Waste Transport
In March 2000, the Company acquired substantially all of the outstanding
shares of American Waste Transport ("AWT") for cash in the amount of
$750,000 and up to one million shares of the Company's common stock,
subject to resolution of certain contingencies. This business combination
will be accounted for using the purchase method.
The following unaudited pro forma consolidated results of operations are
presented as if the acquisition of AWT had taken place at January 1, 1999.
Year Ended
December 31, 1999
-----------------
Revenue 22,588,000
------------
Net loss from continuing operations 1,570,024
------------
Net loss 9,022,053
------------
Net loss per share, basic and diluted $ (1.16)
------------
Sale of Series C Convertible Preferred Stock
In March 2000, the Company issued 3,000 shares of its Series C Convertible
Preferred stock at $1,000 per share. In conjunction with the offering, the
Company issued warrants to purchase 100,000 shares of the Company's common
stock at $4.65 per share. The warrants may be exercised at any time until
they expire on March 31, 2005.
The Series C Convertible Preferred shares may be converted at any time at
$4.65 per share and provide for a 6% annual dividend rate. In addition, the
Company is precluded from payment of dividends on or purchase of its common
stock.
A portion of the proceeds of this offering was used for the AWT acquisition
described above and for the payment of dividends on the Series A
Convertible Preferred stock . The remaining proceeds of this offering will
be used for working capital.
F-37
<PAGE>
21. Unaudited Quarterly Financial Data
The following is a reconciliation of 1999 interim results of operations
which were impacted by the effect of year-end adjustments:
<TABLE>
<CAPTION>
Quarter
Ended
Quarter Ended Quarter Ended Quarter Ended December 31,
March 31, 1999 June 30, 1999 September 30, 1999 1999
--------------------------- --------------------------- --------------------------- -----------
As reported As reported As reported
in Form 10QSB As adjusted in Form 10QSB As adjusted in Form 10QSB As adjusted Actual
------------- ----------- ------------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 2,067,000 $ 2,067,000 $ 1,837,000 $ 1,837,000 $ 1,965,000 $ 1,965,000 $ 1,776,000
=========== =========== =========== =========== =========== =========== ===========
Costs and expenses (1) 2,487,000 2,840,000 1,998,000 1,976,000 1,747,000 2,264,000 2,300,000
=========== =========== =========== =========== =========== =========== ===========
Net income (loss)(2) $ (420,000) $ (773,000) $ (161,000) $ (139,000) $ 20,000 $ (497,000) $(7,778,000)
=========== =========== =========== =========== =========== =========== ===========
Net loss per common
share, basic and
diluted $ (0.08) $ (0.13) $ (0.05) $ (0.05) $ (0.03) $ (0.09) $ (1.08)
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
(1) Costs and expenses increased primarily due to adjustments relating to
depreciation, liability insurance, medical insurance, impairment losses, bad
debt expenses and losses on sale of assets.
(2) The reason for the significant loss of $7,778,000 in the fourth quarter,
when compared to prior quarters, is due to the recording of loss from
discontinued operations of approximately $7.4 million.
ITEM 23. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
F-38
31
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Limitation on Liability of Officers and Directors of the Company. Section 145 of
the Delaware General Corporation Law specifies that the Certificate of
Incorporation of a Delaware corporation may include a provision eliminating or
limiting the personal liability of a director or officer to that corporation or
its stockholders for damages for breach of fiduciary duty as a director or
officer, but such a provision must not eliminate or limit the liability of a
director or officer for (a) acts or omissions which involve intentional
misconduct, fraud, or a knowing violation of law; or (b) unlawful distributions
to stockholders. Our Certificate of Incorporation includes a provision
eliminating or limiting the personal liability of our officers and directors to
the Company and our shareholders for damages for breach of fiduciary duty as a
director or officer. Moreover, Sections 6.1 through 6.6 of our By-laws provide
certain indemnity to a controlling person, director or officer which affects
such a person's liability while acting in a corporate capacity. Accordingly, our
officers and directors may have no liability to our shareholders for any
mistakes or errors of judgment or for any act or omission, unless such act or
omission involves intentional misconduct, fraud, or a knowing violation of law
or results in unlawful distributions to our shareholders.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
We will pay all expenses in connection with the registration and sale of the
shares of our common stock specified in this Prospectus, except any selling
commissions or discounts allocable to sales of that common stock, fees and
disbursements of counsel and other representatives of the Selling Stockholders,
and any stock transfer taxes payable by reason of any such sale. The estimated
expenses of issuance and distribution are set forth below.
Registration Fees Approximately $2,159.78
Transfer Agent Fees Approximately $500.00
Costs of Printing and Engraving Approximately $300.00
Legal Fees Approximately $15,000.00
Accounting Fees Approximately $10,000.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In December 1998, we issued an aggregate of 11,507 shares of common stock to two
non-affiliated holders of 12% notes in lieu of an interest payout of $55,376.71.
These shares were issued in reliance upon the exemption from registration under
Section 4(2) of the Securities Act of 1933 as transactions not involving a
public offering. Exemption from the registration provisions of the Securities
Act of 1933 is claimed on the basis that such transactions did not involve any
public offering and the purchasers were sophisticated with access to the kind of
information registration would provide.
32
<PAGE>
ITEM 27. EXHIBITS.
(a) Exhibits.
1 Not applicable
2 Plan of Discontinued Operations (1)
3.1 Certificate of Incorporation of the Company filed with the
Secretary of State of Delaware on March 10, 1988 (2)
3.2 Certificate of Amendment of Certificate of Incorporation of
the Company filed with the Secretary of State of Delaware on
December 21, 1988 (2)
3.3 Certificate of Amendment of Certificate of Incorporation of
the Company filed with the Secretary of State of Delaware on
March 21, 1989 (2)
3.4 Certificate of Designations, Preferences and Relative Rights,
Qualifications and Restrictions of the Series A 9% Convertible
Preferred Stock of the Company filed with the Secretary of
State of Delaware on May 13, 1994 (3)
3.5 Certificate of Amendment of Certificate of Incorporation of
the Company filed with the Secretary of State of Delaware on
February 24, 1997 (4)
3.7 Bylaws of the Company, as amended (4)
4.1 Certificate of Designations, Preferences and Relative Rights,
Qualifications and Restrictions of the Series C 6% Convertible
Preferred Stock of the Company filed with the Secretary of
State of Delaware on April 13, 2000
4.2 Trust Indenture between the Company and First City Bank of
Dallas (2)
5 Opinion re: legality
10.1 Stock Option Agreement dated July 2, 1990 between the Company
and Fred H. Behrens (6)
10.2 Stock Option Agreement dated July 2, 1990 between the Company
and Robert A. Wright (6)
10.3 Stock Option Agreement dated July 2, 1990 between the Company
and Marlene A. Tapie (6)
33
<PAGE>
10.4 Stock Acquisition Agreement dated as of November 25, 1997 by
and among Gus Franklin and Susan K. Franklin, the Company and
TPE (1)
10.5 Agreement Regarding Transportation Services dated as of June
8, 1998 by and between USA Waste of California, Inc., the
Company and AMCOR Biomass, Inc. (1)
10.6 Commercial Lease dated effective as of November 1, 1998 by and
between Desert Mist Cooling and the Company (1)
10.7 Securities Purchase Agreement dated March 14, 2000 by and
between Siete Investors LLC, a Delaware limited liability
company, and the Company, including Registration Rights
Agreement as exhibit thereto
10.8 Agreement and Plan of Merger dated March 1, 2000 by and
between Fred Alexander, Linda Alexander, AWT Acquisition
Corp., AGI Acquisition Corp., American Waste Transport, Inc.
and American Green Waste, Inc.
11. Statement re: Computation of Per Share Earnings (Loss)(5)
21 Subsidiaries of the Company (7)
23.1 Consent of Independent Auditors
23.2 Consent of Counsel (8)
27 Financial Data Schedule(9)
99.1 Form 8-K, for event dated January 12, 1999, incorporated
herein by this reference as filed with the Commission on
January 27, 1999, reporting on Item 8, Change in Fiscal Year,
in connection with the Company's Board of Directors' decision
to change the Company's fiscal year from August 31 to December
31, commencing with the calendar year/fiscal year ended
December 31, 1998.
99.2 Form 8-K, for event dated March 1, 2000, incorporated herein
by this reference as filed with the Commission on March 15,
2000, reporting on Item 2, Acquisition of Assets, in
connection with the acquisition of 100% of the common stock of
American Waste Transport, Inc. from Fred and Linda Alexander,
non-affiliates of the Company.
99.3 Form 8-K, for event dated April 8, 2000, incorporated herein
by this reference as filed with the Commission on April 17,
2000, reporting on Item 5, Other Events, in
34
<PAGE>
connection with the grant of a leave of absence to Robert A.
Wright from the service of the Company as president of the
Company.
99.4 Form 8-K, for event dated April 19, 2000, incorporated herein
by this reference as filed with the Commission on April 20,
2000, reporting on Item 5, Other Events, in connection with
the filing of a pro forma balance sheet at February 29, 2000,
to exhibit the Company's compliance with the NASDAQ net
tangible equity requirement for continued listing on the Small
Cap Quotation Service.
- ----------
(1) Filed as an exhibit to the Company's Form 10-KSB for the fiscal year ended
August 31, 1998 and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
November 30, 1988 and incorporated herein by reference.
(3) Filed as Exhibit 4.2 to the Company's Form 10-QSB for the quarterly period
ended May 31, 1994, and incorporated herein by reference.
(4) Amended Bylaws filed as an exhibit to the Company's Form 10-KSB for the
fiscal year ended August 31, 1997 as filed with the Commission on December
5, 1997 and incorporated herein by reference. Additional amendment to
Bylaws filed as an exhibit to the Company's Form 10-QSB for the quarterly
period ended February 28, 1998 as filed with the Commission on April 15,
1998 and incorporated herein by reference.
(5) Included in Financial Statements
(6) Filed as an exhibit to the Company's Form 10-K for the fiscal years ended
November 30, 1992, 1991, and 1990 as filed with the Commission on March 15,
1991 and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Form 10-KSB for the fiscal year ended
August 31, 1997 as filed with the Commission on December 5, 1997 and
incorporated herein by reference.
(8) Included in Exhibit 5.
(9) Filed as an exhibit to the Company's Form 10-KSB filed with the Commission
on April 14, 2000, and incorporated herein by reference.
ITEM 28. UNDERTAKINGS
A. Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
35
<PAGE>
B. We hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the 1933
Act;
(ii) To specify in the prospectus any facts or events arising after
the effective date of the Registration Statement (or most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) (Section 230.424(b) of Regulation S-B) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement; and
(iii) To include any additional or changed material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the 1933 Act,
each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
SIGNATURES
In accordance with the requirements of the 1933 Act, as amended, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorize this Registration Statement on
Form SB-2 to be signed on its behalf by the undersigned, in the City of Newport
Beach, California, on May __, 2000.
USABiomass, Inc.,
a Delaware corporation
By:
-------------------------
Fred Behrens
Its: Chief Executive Officer
36
<PAGE>
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
By: /s/
----------------------------
Its: Chief Financial Officer
Date: May ___, 2000
By:
----------------------------
Its: Secretary
Date: May ____, 2000
By:/s/ By: /s/
----------------------------- --------------------
Its: Director Its: Director
Date: May ____, 2000 Date: May ___, 2000
By: /s/ By: /s/
----------------------------- --------------------
Its: Director Its: Director
Date: May ____, 2000 Date: May ___, 2000
37
Exhibit 5
Opinion of Counsel and Consent of Counsel
Board of Directors
USA Biomass Corporation
Re: Registration Statement on Form SB-2
Gentlemen: As counsel to USA Biomass Corporation, a Delaware corporation (the
"Company"), we have participated in the preparation of the Company's
Registration Statement on Form SB-2 filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended, relating to the
registration of 722,581 shares of the Company's $.002 par value Common Stock
(the "Shares"). As counsel to the Company, we have examined such corporate
records, certificates and other documents of the Company, and made inquiries of
such officers of the Company, as we have deemed necessary or appropriate for
purposes of this opinion. Based upon such examinations, we are of the opinion
that the Shares, when issued in the manner set forth in the Registration
Statement, will be duly authorized, validly issued, fully paid and
non-assessable shares of the Common Stock of the Company. We hereby consent to
the inclusion of this opinion as an exhibit to the Registration Statement on
Form SB-2 filed by the Company and the reference to our firm contained therein
under "Legal Matters."
Sincerely,
/s/ Stepp & Beauchamp LLP
- -------------------------
38
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of March 14, 2000 (this
"Agreement"), is entered into by and between USA Biomass Corporation, a Delaware
corporation (the "Company"), and Siete Investors LLC, a Delaware limited
liability company.
W I T N E S S E T H:
WHEREAS, the Company and the Purchaser are executing and delivering this
Agreement in reliance upon the exemptions from registration provided by
Regulation D ("Regulation D") promulgated by the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"), and/or Section 4(2) of the Securities Act; and
WHEREAS, the Purchaser wishes to purchase, and the Company wishes to issue
and sell, upon the terms and conditions of this Agreement for an aggregate
purchase price of three million dollars ($3,000,000), (i) three thousand (3,000)
shares (the "Shares") of the Company's 6% Convertible Series C Preferred Stock,
stated value one thousand dollars ($1,000) per share, par value $.001 per share
(the "Preferred Stock") which shall be governed by the Certificate of
Designations attached hereto as Exhibit A (the "Certificate of Designations")
and (ii) warrants ("Stock Purchase Warrants") to purchase one hundred thousand
(100,000) shares (the "Warrants") of the Company's common stock, par value $.001
per share (the "Common Stock"); and
WHEREAS, the Series A Preferred Stock shall be convertible into shares of
the Company's Common Stock on the terms set forth in the Certificate of
Designations, and the Stock Purchase Warrants (which shall be in substantially
the form attached as Exhibit B) may be exercised for the purchase of Common
Stock, on the terms set forth therein; and
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE
Purchase of Shares and Warrants. Purchaser hereby agrees to purchase from
the Company, and the Company hereby agrees to issue and sell to the Purchaser,
the Shares and the Warrants for an aggregate purchase price of three million
dollars ($3,000,000) which shall be payable on the Closing Date (as defined
herein) in immediately available funds.
Closings. The Shares and the Warrants to be purchased by Purchaser
hereunder, in definitive form, and in such denominations as Purchaser or its
representative, if any, may request upon at least twenty-four hours' prior
notice to the Company, shall be delivered by or on behalf of the Company for the
account of Purchaser, against payment by the Purchaser of the aggregate purchase
price of three million dollars ($3,000,000) therefor by wire transfer to an
account of the Company, all at the offices of Cohen Tauber Spievack & Wagner
LLP, 1350 Avenue of the Americas, 26th Floor, New York, New York 10019, by 5:00
PM, New York time
<PAGE>
on the date hereof, or at such other time and date as Purchaser or their
representative, if any, and the Company may agree upon in writing, such date
being referred to herein as the "Closing Date."
2. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER; ACCESS TO INFORMATION;
INDEPENDENT INVESTIGATION
The Purchaser represents and warrants to, and covenants and agrees with,
the Company as follows:
a. The Purchaser is (i) experienced in making investments of the kind
described in this Agreement and the related documents, (ii) able, by reason of
the business and financial experience of its management, to protect its own
interests in connection with the transactions described in this Agreement and
the related documents, and (iii) able to afford the entire loss of its
investment in the Shares and the Warrants.
b. All subsequent offers and sales of the Shares and the Warrants and the
Common Stock issuable upon conversion or exercise of, or in lieu of dividend
payments on, the Shares and the Warrants shall be made pursuant to an effective
registration statement under the Securities Act or pursuant to an applicable
exemption from such registration.
c. The Purchaser understands that the Shares and the Warrants are being
offered and sold to it in reliance upon exemptions from the registration
requirements of the United States federal securities laws, and that the Company
is relying upon the truth and accuracy of the Purchaser's representations and
warranties, and the Purchaser's compliance with its agreements, each as set
forth herein, in order to determine the availability of such exemptions and the
eligibility of the Purchaser to acquire the Shares and the Warrants.
d. The Purchaser: (A) has been provided with sufficient information with
respect to the business of the Company and such documents relating to the
Company as the Purchaser has requested and Purchaser has carefully reviewed the
same including, without limitation, the Company's Form 10-KSB for the fiscal
year ended December 31, 1998, filed with the Securities and Exchange Commission
(the "Commission") and Form 10-QSB for the period ending September 30, 1999,
filed with the Commission, (B) has been provided with such additional
information with respect to the Company and its business and financial condition
as the Purchaser, or the Purchaser's agent or attorney, has requested, and (C)
has had access to management of the Company and the opportunity to discuss the
information provided by management of the Company and any questions that the
Purchaser had with respect thereto have been answered to the full satisfaction
of the Purchaser.
e. The Purchaser has the requisite corporate power and authority to enter
into this Agreement and the registration rights agreement, dated as of the date
hereof, between the Company and the Purchaser (the "Registration Rights
Agreement").
f. This Agreement and the Registration Rights Agreement and the
transactions contemplated hereby and thereby, have been duly and validly
authorized by the Purchaser; and such agreements, when executed and delivered by
each of the Purchaser and the Company will each be a valid and binding agreement
of the Purchaser, enforceable in accordance with their
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respective terms, except to the extent that enforcement of each such agreement
may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or other similar laws now or hereafter in effect relating to
creditors' rights generally and to general principles of equity.
3. REPRESENTATIONS OF THE COMPANY
The Company represents and warrants to the Purchaser that:
a. Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Each of
the Company's subsidiaries, if any, is a corporation duly organized, validly
existing and in good standing under the laws of its respective jurisdiction.
Each of the Company and its subsidiaries, if any, is duly qualified as a foreign
corporation in all jurisdictions in which the failure to so qualify would have a
material adverse effect on the Company and its subsidiaries taken as a whole.
Schedule 3(a) lists all subsidiaries of the Company and, except as noted
therein, all of the outstanding capital stock of all such subsidiaries is owned
of record and beneficially by the Company.
b. Capitalization. On the date hereof, the authorized capital of the
Company consists of 25 million shares of Common Stock, par value $.001 per
share, of 9,726,000 shares are issued and outstanding; and 2,000,000 shares of
Preferred Stock, par value $.001 per share, of which 747,500 have been
designated as series A preferred stock, all of which are issued and outstanding
are issued and outstanding, 591,000 have been designated as series B preferred
stock, all of which have been converted into shares of Common Stock and may not
be reissued by the Company, and 3,000 have been designated as series C preferred
stock, none of which are issued and outstanding. Schedule 3(b) sets forth all of
the options, warrants and convertible securities of the Company, and any other
rights to acquire securities of the Company (collectively, the "Derivative
Securities") which are outstanding on the date hereof, including in each case
(i) the name and class of such Derivative Securities, (ii) the issue date of
such Derivative Securities, (iii) the number of shares of Common Stock of the
Company into which such Derivative Securities are convertible as of the date
hereof, (iv) the conversion or exercise price or prices of such Derivative
Securities as of the date hereof, (v) the expiration date of any conversion or
exercise rights held by the owners of such Derivative Securities and (vi) any
registration rights associated with such Derivative Securities or outstanding
Common Stock.
c. Concerning the Common Stock and the Warrants. The Shares, the Warrants
and Common Stock issuable upon conversion of, or in lieu of dividend payments
on, the Shares, and upon exercise of the Warrants when issued, shall be duly and
validly issued, fully paid and non-assessable, will not be subject to preemptive
rights and will not subject the holder thereof to personal liability by reason
of being such a holder. There are currently no preemptive rights of any
stockholder of the Company, as such, to acquire the Shares, the Warrants or the
Common Stock issuable to the Purchaser pursuant to the terms of the Shares and
the Warrants.
d. Reporting Company Status. The Common Stock is registered under Section
12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Except as provided in Schedule 3(d), the Company has duly and timely filed all
materials and documents required to be filed within the last twelve (12) months
pursuant to all reporting obligations under either
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Section 13(a) or 15(d) of the Exchange Act. The Common Stock is listed and
traded on the Nasdaq SmallCap Market, and the Company is not aware of any
pending or contemplated action or proceeding of any kind to suspend the trading
of the Common Stock.
e. Authorized Shares. The Company has available a sufficient number of
authorized and unissued shares of Common Stock as may be necessary to effect
conversion of the Shares and the exercise of the Warrants. The Company
understands and acknowledges the potentially dilutive effect to the Common Stock
of the issuance of shares of Common Stock upon the conversion of the Shares and
the exercise of the Warrants. The Company further acknowledges that its
obligation to issue shares of Common Stock upon conversion of the Shares and
upon exercise of the Warrants is absolute and unconditional regardless of the
dilutive effect that such issuance may have on the ownership interests of other
stockholders of the Company and notwithstanding the commencement of any case
under 11 U.S.C. ss. 101 et seq. (the "Bankruptcy Code").
f. Legality. The Company has the requisite corporate power and authority to
enter into this Agreement and the Registration Rights Agreement, and to issue
and deliver the Shares, the Warrants and the Common Stock issuable upon
conversion of, or in lieu of dividend payments on, the Shares and the exercise
of the Warrants.
g. Transaction Agreements. This Agreement, the Registration Rights
Agreement, the Certificate of Designations and the Stock Purchase Warrants
(collectively, the "Primary Documents"), and the transactions contemplated
hereby and thereby, have been duly and validly authorized by the Company; this
Agreement has been duly executed and delivered by the Company and this Agreement
is, and the other Primary Documents, when executed and delivered by the Company,
will each be, a valid and binding agreement of the Company, enforceable in
accordance with their respective terms, except to the extent that enforcement of
each of the Primary Documents may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other similar laws now or
hereafter in effect relating to creditors' rights generally and to general
principles of equity.
h. Non-contravention. The execution and delivery of this Agreement and each
of the other Primary Documents, and the consummation by the Company of the
transactions contemplated by this Agreement and each of the other Primary
Documents, does not and will not conflict with or result in a breach by the
Company of any of the terms or provisions of, or constitute a default under, the
Articles of Incorporation or By-laws of the Company, or any material indenture,
mortgage, deed of trust or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which they or any of their properties
or assets are bound, or any existing applicable law, rule, or regulation or any
applicable decree, judgment or order of any court or United States or foreign
federal or state regulatory body, administrative agency, or any other
governmental body having jurisdiction over the Company, its subsidiaries, or any
of their properties or assets, other than those which have been waived or
satisfied on or prior to the Closing Date. Neither the filing of the
registration statement required to be filed by the Company pursuant to the
Registration Rights Agreement nor the offering or sale of the Shares or the
Warrants as contemplated by this Agreement, and the shares of Common Stock into
which such securities may be converted or exercised, as applicable, gives rise
to any rights,
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other than those which have been waived or satisfied on or prior to the Closing
Date, for or relating to the registration of any shares of the Common Stock.
i. Approvals. No authorization, approval or consent of any court,
governmental body, regulatory agency, self-regulatory organization, stock
exchange or market or the stockholders of the Company is required to be obtained
by the Company for the entry into or the performance of this Agreement and the
other Primary Documents.
j. SEC Filings. None of the reports or documents filed by the Company with
the Commission (the "SEC Documents") contained, at the time they were filed, any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein, or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading.
k. Stabilization. Neither the Company, nor any of its affiliates, has taken
or may take, directly or indirectly, any action designed to cause or result in,
or which has constituted or which might reasonably be expected to constitute,
the stabilization or manipulation of the price of the shares of Common Stock.
l. Absence of Certain Changes. Except as disclosed in the Company's SEC
Documents or set forth on Schedule 3(l) hereto, since October 31, 1999, there
has been no material adverse change nor any material adverse development in the
business, properties, operations, financial condition, prospects, outstanding
securities or results of operations of the Company.
m. Full Disclosure. There is no fact known to the Company (other than
general economic conditions known to the public generally) that has not been
disclosed in writing to the Purchaser (i) that could reasonably be expected to
have a material adverse effect upon the condition (financial or otherwise) or
the earnings, business affairs, properties or assets of the Company or (ii) that
could reasonably be expected to materially and adversely affect the ability of
the Company to perform the obligations set forth in the Primary Documents. The
representations and warranties of the Company set forth in this Agreement (and
the schedules thereto) do not contain any untrue statement of a material fact or
omit any material fact necessary to make the statements contained herein, in
light of the circumstances under which they were made, not misleading.
n. Title to Properties; Liens and Encumbrances. The Company has good and
marketable title to all of its material properties and assets, both real and
personal, and has good title to all its leasehold interests, in each case
subject only to mortgages, pledges, liens, security interests, conditional sale
agreements, encumbrances or charges created in the ordinary course of business.
o. Patents and Other Proprietary Rights. The Company has sufficient title
and ownership of all patents, trademarks, service marks, trade names,
copyrights, trade secrets, information, proprietary rights and processes
necessary for the conduct of its business as now conducted and as proposed to be
conducted, and such business does not and would not conflict with or constitute
an infringement on the rights of others.
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p. Permits. The Company has all franchises, permits, licenses and any
similar authority necessary for the conduct of its business as now conducted,
the lack of which would materially and adversely affect the business or
financial condition of the Company. The Company is not in default in any respect
under any of such franchises, permits, licenses or similar authority.
q. Absence of Litigation. Except as disclosed in the Company's SEC
Documents, there is no action, suit, proceeding, inquiry or investigation before
or by any court, public board or body pending or, to the knowledge of the
Company or any of its subsidiaries, threatened against or affecting the Company
or any of its subsidiaries, in which an unfavorable decision, ruling or finding
would have a material adverse effect on the properties, business, condition
(financial or other) or results of operations of the Company and its
subsidiaries, taken as a whole, or the transactions contemplated by the Primary
Documents, or which would adversely affect the validity or enforceability of, or
the authority or ability of the Company to perform its obligations under, the
Primary Documents.
r. No Default. Except as set forth on Schedule 3(r) hereto, none of the
Company or any of its subsidiaries is in default in the performance or
observance of any obligation, covenant or condition contained in any indenture,
mortgage, deed of trust or other instrument or agreement to which it is a party
or by which it or its property may be bound.
s. Transactions with Affiliates. Except as disclosed in the Company's
public filings with the Commission or set forth on Schedule 3(s) hereto, there
are no agreements, understandings or proposed transactions between the Company
and any of its officers, directors or affiliates that, had they existed on
October 31, 1999, would have been required to be disclosed in the Company's 1999
Annual Report to stockholders.
t. Employment Matters. The Company is in compliance in all respects with
all presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for which the
Company would have any liability that is intended to be qualified under Section
401(a) of the Code is so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which would cause the loss of
such qualification.
u. Insurance. The Company maintains property and casualty, general
liability, personal injury and other similar types of insurance with financially
sound and reputable insurers that is adequate, consistent with industry
standards and the Company's historical claims experience. The Company has not
received notice from, and has no knowledge of any threat by, any insurer (that
has issued any insurance policy to the Company) that such insurer intends to
deny coverage under or cancel, discontinue or not renew any insurance policy
covering the Company or any of its Subsidiaries presently in force.
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v. Taxes. All applicable tax returns required to be filed by the Company
and each of its subsidiaries have been prepared and filed in compliance with all
applicable laws, or if not yet filed have been granted extensions of the filing
dates which extensions have not expired, and all taxes, assessments, fees and
other governmental charges upon the Company, its subsidiaries, or upon any of
their respective properties, income or franchises, shown in such returns and on
assessments received by the Company or its subsidiaries to be due and payable
have been paid, or adequate reserves therefor have been set up if any of such
taxes are being contested in good faith; or if any of such tax returns have not
been filed or if any such taxes have not been paid or so reserved for, the
failure to so file or to pay would not in the aggregate have a material adverse
effect on the business or financial condition of the Company and its
subsidiaries, taken as a whole.
w. Foreign Corrupt Practices Act. Neither the Company nor any of its
directors, officers or other employees has (i) used any Company funds for any
unlawful contribution, endorsement, gift, entertainment or other unlawful
expense relating to any political activity; (ii) made any direct or indirect
unlawful payment of Company funds to any foreign or domestic government official
or employee; (iii) violated or is in violation of any provision of the Foreign
Corrupt Practices Act of 1977, as amended; or (iv) made any bribe, rebate,
payoff, influence payment, kickback or other similar payment to any person.
x. Internal Controls. The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
y. Investment Company Act. The Company is not conducting, and will not
conduct, its business in a manner which would cause it to become, an "investment
company," as defined in Section 3(a) of the Investment Company Act of 1940, as
amended.
z. Agent Fees. Except for Institutional; Finance Group, whose fees and
expenses shall be paid by the Company, the Company has not incurred any
liability for any finder's or brokerage fees or agent's commissions in
connection with the offer and sale of the transactions contemplated by this
Agreement.
aa. Private Offering. Subject to the accuracy of the Purchaser's
representations and warranties set forth in Section 2 hereof, (i) the offer,
sale and issuance of the Shares and the Warrants, (ii) the issuance of Common
Stock in lieu of dividend payments on the Shares, and (iii) the conversion
and/or exercise of such securities into shares of Common Stock, each as
contemplated by the Primary Documents are exempt from the registration
requirements of the Securities Act. The Company agrees that neither the Company
nor anyone acting on its behalf will offer any of the Preferred Stock, the Stock
Purchase Warrants or any similar securities for issuance or sale, or solicit any
offer to acquire any of the same from anyone so as to render the issuance and
sale of such securities subject to the registration requirements of the
Securities Act.
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The Company has not offered or sold the Preferred Stock or the Stock Purchase
Warrants by any form of general solicitation or general advertising, as such
terms are used in Rule 502(c) under the Securities Act.
bb. Year 2000 Processing. The computer systems used by the Company and its
subsidiaries (the "Systems"), both hardware and software, are in good working
order. As of the date of this Agreement, the Company has experienced no
disruptions in its business or operations as a result of the inability of its
information systems to process date and time data from, into and beyond the year
2000.
cc. Environmental Matters. Except as set forth on Schedule 3(cc) hereto:
(i) Neither the Company and its subsidiaries, nor any predecessor in interest
nor, to the Company's knowledge, after due inquiry, any other person has ever
caused or permitted any Hazardous Material (as defined below) to be released,
treated or disposed of on, at, under or within any real property owned, leased
or operated by the Company and its subsidiaries or any predecessor in interest,
and no such real property has ever been used (either by the Company and its
subsidiaries, any predecessor in interest or, to the Company's knowledge, after
due inquiry, by any other person) as a treatment, storage or disposal site for
any Hazardous Material; and (ii) The Company has no liabilities with respect to
Hazardous Materials, and to the knowledge of the Company, after due inquiry, no
facts or circumstances exist which could give rise to liabilities with respect
to Hazardous Materials, which could have any reasonable likelihood of having a
material adverse effect on the Company. For purposes of this Agreement
"Hazardous Materials" shall mean (a) any pollutants or contaminants, (b) any
asbestos or insulation or other material composed of or containing asbestos and
(c) any petroleum product and any hazardous, toxic or dangerous waste, substance
or material defined as such in, or for purposes of, the Comprehensive
Environmental Response, Compensation and Liability Act, any so-called
"Superfund" or "Superlien" law, or (d) any other applicable federal, state,
local or other statute, law, ordinance, code, rule, regulation, order or decree
concerning the protection of human health or the environment or otherwise
regulating, relating to, or imposing liability or standards of conduct
concerning, any hazardous, toxic or dangerous waste, substance or material, as
now or at any time hereafter in effect.
dd. Intellectual Property. Except as set forth in the SEC Documents, to the
best of the Company's knowledge, each of the Company and its subsidiaries owns
or possesses adequate rights to use all material patents, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names and
copyrights which are described in the SEC Documents; except as set forth in the
SEC Documents, the Company has not received any notice of, and has no knowledge
of, any infringement of or conflict with asserted rights of the Company by
others with respect to any patent, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or finding,
would have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business of the Company and its subsidiaries, taken as a
whole, as presently conducted; and, except as set forth in the SEC Documents,
the Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with the asserted rights of others with respect to
any patent, patent rights, inventions, trade secrets, know-how, trademarks,
service marks, trade names and copyrights which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, would have a
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material adverse effect on the condition (financial or otherwise), earnings,
operations, or business of the Company and its subsidiaries, taken as a whole,
as presently conducted.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS
a. Transfer Restrictions. The Purchaser acknowledges that, except as
provided in the Registration Rights Agreement, (1) neither the Shares, the
Warrants nor the Common Stock issuable upon conversion of, or in lieu of
dividend payments on, the Shares or upon exercise of the Warrants, have been, or
are being, registered under the Securities Act, and such securities may not be
transferred unless (A) subsequently registered thereunder or (B) they are
transferred pursuant to an exemption from such registration; and (2) any sale of
the Shares, the Warrants or the Common Stock issuable upon conversion or
exchange thereof (collectively, the "Securities") made in reliance upon Rule 144
under the Securities Act may be made only in accordance with the terms of said
Rule. The provisions of Section 4(a) and 4(b) hereof, together with the rights
of the Purchaser under this Agreement and the other Primary Documents, shall be
binding upon any subsequent transferee of the Preferred Stock and the Stock
Purchase Warrants.
b. Restrictive Legend. The Purchaser acknowledges and agrees that, until
such time as the Securities shall have been registered under the Securities Act
or the Purchaser demonstrates to the reasonable satisfaction of the Company and
its counsel that such registration shall no longer be required, such Securities
may be subject to a stop-transfer order placed against the transfer of such
Securities, and such Securities shall bear a restrictive legend in substantially
the following form:
THESE SECURITIES (INCLUDING ANY UNDERLYING SECURITIES) HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF
COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION SHALL NO LONGER BE REQUIRED.
c. Filings. The Company undertakes and agrees that it will make all
required filings in connection with the sale of the Securities to the Purchaser
as required by United States laws and regulations, or by any domestic securities
exchange or trading market, and if applicable, the filing of a notice on Form D
(at such time and in such manner as required by the Rules and Regulations of the
Commission), and to provide copies thereof to the Purchaser promptly after such
filing or filings.
d. NASDAQ Listing. The Company undertakes and agrees that it will promptly
file an additional application with the NASDAQ to list all of the shares of
Common Stock issuable upon conversion of, or in lieu of dividend payments on,
the Shares and upon exercise of the Warrants on the NASDAQ SmallCap Market. The
Company further agrees and covenants that it will use
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its best efforts to maintain its eligibility for trading on the NASDAQ SmallCap
Market and, if such trading of its Common Stock is suspended or terminated, will
use its best efforts to requalify its Common Stock or otherwise cause such
trading to resume. The Company shall promptly provide to the Purchaser copies of
any notices it receives from Nasdaq regarding the continued eligibility of the
Common Stock for listing on such automated quotation system. The Company shall
pay all fees and expenses in connection with satisfying its obligations under
this Section 4(d).
e. Reporting Status. So long as the Purchaser beneficially owns any of the
Securities or any shares of Common Stock issuable upon conversion thereof
(collectively with the Securities, the "Collective Securities"), the Company
shall timely file all reports required to be filed with the Commission pursuant
to Section 13 or 15(d) of the Exchange Act and shall not terminate its status as
an issuer required to file reports under the Exchange Act even if the Exchange
Act or the rules and regulations thereunder would permit such termination.
f. State Securities Filings. The Company shall from time to time promptly
take such action as the Purchaser or any of its representatives, if applicable,
may reasonably request to qualify the Collective Securities for offering and
sale under the securities laws (other than United States federal securities
laws) of the jurisdictions in the United States as shall be so identified to the
Company, and to comply with such laws so as to permit the continuance of sales
therein, provided that in connection therewith, the Company shall not be
required to qualify as a foreign corporation or to file a general consent to the
service of process in any jurisdiction.
g. Use of Proceeds. The Company will use the net proceeds from the issuance
of the Collective Securities for acquisitions, payment of accrued and unpaid
dividends relating to the Company's Series A Preferred Stock, reduction of up to
$100,000 in outstanding indebtedness and working capital purposes.
h. Reservation of Common Stock. The Company will at all times have
authorized and reserved for the purpose of issuance a sufficient number of
shares of Common Stock to provide for the conversion of the Shares and the
exercise of the Warrants. The Company will use its best efforts at all times to
maintain a number of shares of Common Stock so reserved for issuance that is no
less than the sum of (i) one and one half (1.5) times the maximum number of
shares of Common Stock that could be issuable upon the conversion of the Shares
and (ii) the number of shares of Common Stock issuable upon exercise in full of
the Warrants.
i. Sales of Additional Shares. The Company shall not, directly or
indirectly, without the prior written consent of the Purchaser, offer, sell,
offer to sell, contract to sell or otherwise dispose of any shares of its
capital stock or any security or other instrument convertible into or
exchangeable for shares of Common Stock, in each case for a period of
two-hundred and seventy (270) days after the Closing Date (the "Lock-Up Period")
(i) at a price per share of Common Stock of less than four and 65/100 dollars
($4.65) or (ii) which contain provisions for re-pricing or (iii) are convertible
into Common Stock at a price which adjusts based upon changes in market price,
except that notwithstanding the foregoing the Company may issue shares of Common
Stock (a) for the aggregate consideration of at least ten million dollars in
connection with a bona fide, firm commitment, underwritten public offering under
the Securities Act. (ii) in connection with a bona fide transaction involving
the acquisition of another business entity or
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segment of any such entity by the Company by merger, asset, purchase, stock
purchase or otherwise; and (iii) may issue common Stock in connection with a
stock split, stock dividend or similar recapitalization of the Company which
affects all holders of the Company's Common Stock on an equivalent basis, in
each case, without the prior written consent of the Purchaser. In addition, the
Company agrees that it will not cause any shares of its capital stock that were
issued in connection with any financing, acquisition or other transaction that
occurred prior to the date of this Agreement to be covered by a registration
statement to be filed or declared effective by the Commission until the date
that the registration statement filed by the Company pursuant to its obligations
under the Registration Rights Agreement has been effective under the Securities
Act for a period of at least one-hundred and eighty (180) days.
j. Right of First Refusal. Subject to Section 4(i), if during the eighteen
(18) month period following the Lock-Up Period the Company shall desire to sell,
offer to sell, contract to sell or otherwise dispose of any securities or any
security or other instrument convertible into or exchangeable for shares of
Common Stock (collectively, the "Offered Securities") to a prospective investor
(the "Prospective Investor"), the Company shall notify (the "Offer Notice") the
Purchaser in accordance with Section 10 hereof of the terms (the "Third Party
Terms") on which the Company proposes to sell, contract to sell or otherwise
dispose of the Offered Securities to the Prospective Investor. If, within the
five (5) day period following the Purchaser's receipt of the Offer Notice, the
Purchaser delivers a written notice (the "Acceptance Notice") to the Company
stating its desire to purchase all or any portion of the Offered Securities on
the Third Party Terms, the Company shall be required to sell the Offered
Securities (or any portion thereof so desired by the Purchaser) to the Purchaser
at the price and on the terms set forth in the Offer Notice and the Company
shall not be permitted to sell such Offered Securities to the Prospective
Investor. If the Purchaser does not deliver an Acceptance Notice to the Company
in such five (5) day period, then for a period of sixty (60) days following the
date of the Offer Notice the Company may sell the Offered Securities to the
Prospective Investor on the terms set forth in the Offer Notice.
k. Additional Registration Statements. At any time during the period
beginning on the date hereof and ending on the first date that follows a period
of one hundred eighty (180) consecutive days following the effectiveness of the
Registration Statement (as defined in the Registration Rights Agreement) during
which there has been no Blackout Event (as defined in the Registration Rights
Agreement) relating to such Registration Statement, the Company agrees that it
will neither file nor cause any registration statement to be declared effective
by the Commission other than (i) any Registration Statement relating to the
Securities or (ii) any Registration Statement relating to a proposed bona fide,
firm commitment underwritten public offering under the Securities Act of an
aggregate initial public offering price of at least ten million dollars or (iii)
the filing of a Form S-8 for the Common Stock currently included in the
Company's existing employee stock option plan, as reflected in the Form S-8 most
recently filed by the Company with the Commission.
l. Stockholder Approval. If required in accordance with Nasdaq Rule 4310 or
4460, the Company agrees to use its best efforts (including obtaining any vote
of its stockholders required by applicable law or Nasdaq rules) to authorize and
approve the issuance of the Common Stock issuable upon conversion of the Shares
and upon exercise of the Warrants, to the extent that such conversion or
issuance results in the issuance of 20% or more of the Company's
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<PAGE>
outstanding Common Stock, except that the conversion of the Shares and the
exercise of the Warrants will not equal 20% or more of the Company's common
stock as of the Closing Date; provided, however, that the failure to obtain any
such stockholder approval shall not limit any of Purchaser's rights hereunder or
pursuant to any Primary Document.
m. Ownership. At no time shall the Purchaser (including its officers,
directors and affiliates) maintain in the aggregate beneficial ownership (as
defined for purposes of Section 16 of the Securities Exchange Act of 1934, as
amended) of shares of Common Stock in excess of 9.99% of the Company's
outstanding Common Stock unless the Purchaser gives the Company at least
sixty-one (61) days notice that it intends to increase its ownership percentage.
n. Return of Certificates on Conversion and Stock Purchase Warrants on
Exercise. (i) Upon any conversion by Purchaser of less than all of the Shares of
Preferred Stock pursuant to the terms of the Certificate of Designations, the
Company shall issue and deliver to Purchaser within three (3) days of the Series
A Preferred Stock Conversion Date (as defined in the Certificate of
Designations), a new certificate or certificates for, as applicable, the total
number of shares of Preferred Stock, in each case, which Purchaser has not yet
elected to convert (with the number of and denomination of such new
certificate(s) designated by Purchaser).
(ii) Upon any partial exercise by Purchaser of Stock Purchase
Warrants, the Company shall issue and deliver to Purchaser within three (3)
days of the date on which such Stock Purchase Warrants are exercised, a new
Stock Purchase Warrant or Stock Purchase Warrants representing the number
of adjusted Shares covered thereby, in accordance with the terms thereof.
o. Replacement Certificates and Stock Purchase Warrants. (i) The
certificate(s) representing the shares of Preferred Stock, held by Purchaser
shall be exchangeable, at the option of Purchaser, at any time and from time to
time at the office of Company, for certificates with different denominations
representing, as applicable, an equal aggregate number of shares of Preferred
Stock, as requested by Purchaser upon surrendering the same. No service charge
will be made for such registration or transfer or exchange.
(ii) The Stock Purchase Warrants will be exchangeable, at the option
of Purchaser, at any time and from time to time at the office of the
Company, for other Stock Purchase Warrants of different denominations
entitling the holder thereof to purchase in the aggregate the same number
of shares of Common Stock as are purchasable under such Stock Purchase
Warrants. No service charge will be made for such transfer or exchange.
p. Dividends or Distributions; Purchases of Equity Securities. So long as
any portion of the Shares or the Warrants remain outstanding, the Company agrees
that it shall not (a) declare or pay any dividends or make any distributions to
any holder or holders of Common Stock, or (b) purchase or otherwise acquire for
value, directly or indirectly, any shares of Common Stock or equity security of
the Company.
q. Bankruptcy Waiver. In the event the Company becomes a debtor under the
Bankruptcy Code, the Company hereby waives to the fullest extent permitted any
rights to relief it may have under 11 U.S.C.ss. 362 in respect of the conversion
of the Shares and the exercise of the Warrants. At the direction of Purchaser,
the Company agrees, without cost or expense to the
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<PAGE>
Purchaser, to take or consent to any and all action necessary to effectuate
relief under 11 U.S.C.ss. 362.
5. TRANSFER AGENT INSTRUCTIONS
a. The Company warrants that no instruction, other than the instructions
referred to in this Section 5 and stop transfer instructions to give effect to
Sections 4(a) and 4(b) hereof prior to the registration and sale under the
Securities Act of the Common Stock issuable upon conversion of the Shares or the
shares of Common Stock issuable upon exercise of the Warrants, will be given by
the Company to the transfer agent and that the shares of Common Stock issuable
upon conversion of, or in lieu of dividend payments on, the Shares or upon
exercise of the Warrants, shall otherwise be freely transferable on the books
and records of the Company as and to the extent provided in this Agreement, the
Registration Rights Agreement and applicable law. Nothing in this Section shall
affect in any way the Purchaser's obligations and agreement to comply with all
applicable securities laws upon resale of the Collective Securities. If the
Purchaser provides the Company with an opinion of counsel that registration of a
resale by the Purchaser of any of the Collective Securities in accordance with
clause (1)(B) of Section 4(a) of this Agreement is not required under the
Securities Act, the Company shall permit the transfer of the Collective
Securities and, in the case of the Common Stock, promptly instruct the Company's
transfer agent to issue one or more certificates for Common Stock without legend
in such names and in such denominations as specified by the Purchaser.
b. Purchaser shall exercise its right to convert the Shares or to exercise
the Warrants by faxing an executed and completed Notice of Conversion or Form of
Election to Purchase, as applicable, to the Company, and delivering within three
(3) business days thereafter, the original Notice of Conversion (and the related
certificates representing the shares of Preferred Stock, as applicable) or Form
of Election to Purchase (and the related original Stock Purchase Warrants) to
the Company by hand delivery or by express courier, duly endorsed. Each date on
which a Notice of Conversion or Form of Election to Purchase is faxed in
accordance with the provisions hereof shall be deemed a "Conversion Date." The
Company will transmit the certificates representing the Common Stock issuable
upon conversion of any shares of Preferred Stock or upon exercise of any Stock
Purchase Warrants (together with the shares of Preferred Stock not so converted
or the Stock Purchase Warrants not so exercised) to the Purchaser via express
courier as soon as practicable, but in all events no later than three (3)
business days after the Conversion Date relating to shares of Preferred Stock or
Stock Purchase Warrants (each such delivery date, together with the Dividend
Delivery Date referred to in paragraph c below, is referred to herein as a
"Delivery Date"). For purposes of this Agreement, any conversion of the Shares
or the exercise of the Warrants shall be deemed to have been made immediately
prior to the close of business on the Conversion Date.
c. The Company will transmit the certificates representing the Common Stock
issuable in lieu of dividends payable on any shares of Preferred Stock to the
Purchaser via express courier as soon as practicable, but in all events no later
than three (3) business days after the dividend payment date applicable to which
such Common Stock is delivered (the "Dividend Delivery Date").
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<PAGE>
d. In lieu of delivering physical certificates representing the Common
Stock issuable upon the conversion of, or in lieu of dividends on, the Shares or
upon the exercise of the Warrants, provided the Company's transfer agent is
participating in the Depositary Trust Company ("DTC") Fast Automated Securities
Transfer program, on the written request of the Purchaser, who shall have
previously instructed the Purchaser's prime broker to confirm such request to
the Company's transfer agent, the Company shall cause its transfer agent to
electronically transmit such Common Stock to the Purchaser by crediting the
account of the Purchaser's prime broker with DTC through its Deposit Withdrawal
Agent Commission ("DWAC") system no later than the applicable Delivery Date.
e. The Company understands that a delay in the issuance of Common Stock
beyond the applicable Delivery Date could result in an economic loss to the
Purchaser. As compensation to the Purchaser for such loss, the Company agrees to
pay to the Purchaser for late issuance of Common Stock upon conversion of, or in
lieu of dividend payments on, the Shares or upon exercise of the Warrants, the
sum of five thousand dollars ($5,000) per day for each (i) one hundred thousand
dollars ($100,000) of aggregate Stated Value (as defined in the Certificate of
Designations) amount of Shares that are being converted, or (ii) twenty-five
thousand (25,000) shares of Common Stock purchased upon the exercise of
Warrants. The Company shall pay any payments that are payable to the Purchaser
pursuant to this Section 5 in immediately available funds upon demand. Nothing
herein shall limit the Purchaser's right to pursue actual damages for the
Company's failure to so issue and deliver Common Stock to the Purchaser.
Furthermore, in addition to any other remedies which may be available to the
Purchaser, in the event that the Company fails for any reason to effect delivery
of such Common Stock within five (5) business days after the relevant Delivery
Date, the Purchaser will be entitled to revoke the relevant Notice of Conversion
or Form of Election to Purchase by delivering a notice to such effect to the
Company, whereupon the Company and the Purchaser shall each be restored to their
respective positions immediately prior to delivery of such Notice of Conversion
or Form of Election to Purchase. For purposes of this Section 5, "business day"
shall mean any day in which the financial markets of New York are officially
open for the conduct of business therein.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO ISSUE THE SHARES AND THE WARRANTS
The Purchaser understands that the Company's obligation to issue the Shares
and the Warrants on the Closing Date to the Purchaser pursuant to this Agreement
is conditioned upon:
a. The accuracy on the Closing Date of the representations and warranties
of the Purchaser contained in this Agreement as if made on the Closing Date and
the performance by the Purchaser on or before the Closing Date of all covenants
and agreements of the Purchaser required to be performed on or before the
Closing Date.
b. The absence or inapplicability of any and all laws, rules or regulations
prohibiting or restricting the transactions contemplated hereby, or requiring
any consent or approval which shall not have been obtained.
14
<PAGE>
7. CONDITIONS TO THE PURCHASER'S OBLIGATION TO PURCHASE THE SHARES AND THE
WARRANTS
The Company understands that the Purchaser's obligation to purchase the
Shares and the Warrants on the Closing Date is conditioned upon:
a. The Certificate of Designations shall have been filed with the Secretary
of State of the State of Delaware and a copy thereof certified by such Secretary
of State shall have been delivered to the Purchaser.
b. The accuracy on the Closing Date of the representations and warranties
of the Company contained in this Agreement as if made on the Closing Date, and
the performance by the Company on or before the Closing Date of all covenants
and agreements of the Company required to be performed on or before the Closing
Date.
c. On the Closing Date, the Purchaser shall have received an opinion of
counsel for the Company, dated the Closing Date, in substantially the form as
attached in Exhibit D.
d. The Company shall have executed and delivered to the Purchaser (i) a
signed counterpart to the Registration Rights Agreement in substantially the
form as attached in Exhibit C, (ii) the Shares and (iii) the Warrants.
e. On the Closing Date, the Purchaser shall have received a certificate
executed by the President or the Chairman of the Company and by the Chief
Financial Officer of the Company, stating that all of the representations and
warranties of the Company set forth in this Agreement are accurate as of the
Closing Date and that the Company has performed all of its covenants and
agreements required to be performed under this Agreement on or before the
Closing Date.
f. On the Closing Date, the Purchaser shall have received from the Company
such other certificates and documents as it or its representatives, if
applicable, shall reasonably request, and all proceedings taken by the Company
in connection with the Primary Documents contemplated by this Agreement and the
other Primary Documents and all documents and papers relating to such Primary
Documents shall be satisfactory to the Purchaser.
g. On or prior to the Closing Date, there shall not have occurred any of
the following: (i) a suspension or material limitation in the trading of
securities generally on the New York Stock Exchange, NASDAQ or the NASDAQ
Bulletin Board; (ii) a general moratorium on commercial banking activities in
New York declared by the applicable banking authorities; (iii) the outbreak or
escalation of hostilities involving the United States, or the declaration by the
United States of a national emergency or war; or (iv) a change in international,
political, financial or economic conditions, if the effect of any such event, in
the judgment of the Purchaser, makes it impracticable or inadvisable to proceed
with the purchase of the Securities on the terms and in the manner contemplated
in this Agreement and in the other Primary Documents.
h. The Company shall have delivered to the Purchaser reimbursement of the
Purchaser's out-of-pocket costs and expenses incurred in connection with the
transactions contemplated by
15
<PAGE>
this Agreement (including fees and disbursements of the Purchaser's legal
counsel) in accordance with Section 8 hereof.
8. EXPENSES
The Company covenants and agrees with the Purchaser that the Company will
pay or cause to be paid the following: (a) the fees, disbursements and expenses
of the Purchaser and Purchaser's counsel in connection with the issuance of the
Collective Securities payable on the Closing Date up to twenty-five thousand
dollars ($25,000), (b) all expenses in connection with registration or
qualification of the Collective Securities for offering and sale under state
securities laws as provided in Section 4(f) hereof, and (c) all other costs and
expenses incident to the performance of its obligations hereunder which are not
otherwise specifically provided for in this Section 8, including the fees and
disbursements of the Company's counsel, accountants and other professional
advisors, if any. If the Company fails to satisfy its obligations or to satisfy
any condition set forth in this Agreement, as a result of which the Collective
Securities are not delivered to the Purchaser on the terms and conditions set
forth herein, the Company shall reimburse the Purchaser for any out-of-pocket
expenses reasonably incurred in making preparations for the purchase, sale and
delivery of the Collective Securities not so delivered.
9. GOVERNING LAW; MISCELLANEOUS
This Agreement shall be governed by and interpreted in accordance with the
laws of the State of New York, without regard to principles of conflict of laws.
Each of the parties consents to the jurisdiction of the federal courts whose
districts encompass any part of the City of New York or the state courts of the
State of New York sitting in the City of New York in connection with any dispute
arising under this Agreement or any of the transactions contemplated hereby, and
hereby waives, to the maximum extent permitted by law, any objection, including
any objections based on forum non conveniens, to the bringing of any such
proceeding in such jurisdictions. This Agreement may be signed in one or more
counterparts, each of which shall be deemed an original. The headings of this
Agreement are for convenience of reference only and shall not form part of, or
affect the interpretation of this Agreement. This Agreement and each of the
Primary Documents have been entered into freely by each of the parties,
following consultation with their respective counsel, and shall be interpreted
fairly in accordance with its respective terms, without any construction in
favor of or against either party. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or unenforceability of this
Agreement in any other jurisdiction. This Agreement shall inure to the benefit
of, and be binding upon the successors and assigns of each of the parties
hereto, including any transferees of the Shares and the Warrants. This Agreement
may be amended only by an instrument in writing signed by the party to be
charged with enforcement. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
10. NOTICES
Any notice required or permitted hereunder shall be given in writing
(unless otherwise specified herein) and shall be effective upon personal
delivery, via facsimile (upon receipt of confirmation of error-free transmission
and mailing a copy of such confirmation,
16
<PAGE>
postage prepaid by certified mail, return receipt requested) or two business
days following deposit of such notice with an internationally recognized courier
service, with postage prepaid and addressed to each of the other parties
thereunto entitled at the following addresses, or at such other addresses as a
party may designate by five days advance written notice to each of the other
parties hereto.
Company: USA Biomass Corporation
7314 Scout Avenue
Bell Gardens, California 90201
Attention: Mr. Fred Behrens
Phone: (562) 928-9900
Fax: (562) 928-9932
with a copy to:
Stepp & Beauchamp LLP
1301 Dove Street, Suite 480
Newport Beach, California 92660-2422
Attention: Thomas E. Stetpp, Jr., Esq.
Phone: (949) 660-9700
Fax: (949) 660-9010
Purchaser: Siete Investors LLC
c\o WEC Asset Management LLC
110 Colabough Pond Road
Croton-on-the-Hudson, New York 10520
Attention: Ethan E. Benovitz
Phone: (914) 271-2211
Fax: (914) 271-0889
with a copy to:
Cohen Tauber Spievack & Wagner LLP
1350 Avenue of the Americas
26th Floor
New York, New York 10019
Attention: Laurence S. Tauber
Phone: (212) 519-5195
Fax: (212) 262-1766
11. SURVIVAL
The agreements, covenants representations and warranties of the Company and
the Purchaser shall survive the execution and delivery of this Agreement and the
delivery of the Securities hereunder.
17
<PAGE>
12. INDEMNIFICATION
Each of the Company and the Purchaser (the "Indemnifying Party") agrees to
indemnify the other party and each officer, director, employee, agent, partner,
stockholder, member and affiliate of such other party (collectively, the
"Indemnified Parties") for, and hold each Indemnified Party harmless from and
against: (i) any and all damages, losses, claims and other liabilities of any
and every kind, including, without limitation, judgments and costs of
settlement, and (ii) any and all reasonable out-of-pocket costs and expenses of
any and every kind, including, without limitation, reasonable fees and
disbursements of counsel for such Indemnified Parties (all of which expenses
periodically shall be reimbursed as incurred), in each case, arising out of or
suffered or incurred in connection with any of the following: (a) any
misrepresentation or any breach of any warranty made by the Indemnifying Party
herein or in any of the other Primary Documents, (b) any breach or
non-fulfillment of any covenant or agreement made by the Indemnifying Party
herein or in any of the other Primary Documents and (c) any claim relating to or
arising out of a violation of applicable federal or state securities laws by the
Indemnifying Party in connection with the sale or issuance of the Shares or
Warrants by the Indemnifying Party to the Indemnified Party (collectively, the
"Indemnified Liabilities"). To the extent that the foregoing undertaking by the
Indemnifying Party may be unenforceable for any reason, the Indemnifying Party
shall make the maximum contribution to the payment and satisfaction of each of
the Indemnified Liabilities which is permissible under applicable law.
[REMAINDER OF PAGE INTENTIONALLY BLANK, SIGNATURE PAGE FOLLOWS]
18
<PAGE>
IN WITNESS WHEREOF, this Securities Purchase Agreement has been duly
executed by each of the undersigned.
USA BIOMASS CORPORATION
By:
----------------------------------
Name:
Title:
SIETE INVESTORS LLC
By: WEC Asset Management LLC, Manager
By:
----------------------------------
Name: Ethan E. Benovitz
Title: Managing Director
<PAGE>
EXHIBIT INDEX
EXHIBIT A FORM OF CERTIFICATE OF DESIGNATIONS
EXHIBIT B FORM OF STOCK PURCHASE WARRANT
EXHIBIT C FORM OF REGISTRATION RIGHTS AGREEMENT
OPINION OF COUNSEL
EXHIBIT D
SCHEDULE INDEX
SCHEDULE 3(a) LIST OF SUBSIDIARIES
SCHEDULE 3(b) CAPITALIZATION, DERIVATIVE SECURITIES AND
REGISTRATION RIGHTS
SCHEDULE 3(d) REPORTING COMPANY STATUS EXCEPTIONS
SCHEDULE 3(l) CERTAIN CHANGES
SCHEDULE 3(r) DEFAULTS
SCHEDULE 3(s) TRANSACTIONS WITH AFFILIATES
SCHEDULE 3(cc) ENVIRONMENTAL MATTERS
<PAGE>
SCHEDULE 3(a)
LIST OF SUBSIDIARIES
Continuing Operations
USA Waste Transport, Inc., USA Biomass-Greenwaste, Inc., TransPacific
Environmental, Inc., AMCOR Biomass Farms, LLC
Discontinued Operations
Sun Goddess Farms, Inc., AMCOR Properties, Inc., Las Palomas Country Club
Estates, LLC, AMCOR Builders, LLC.
<PAGE>
SCHEDULE 3(b)
CAPITALIZATION, DERIVATIVE SECURITIES AND REGISTRATION RIGHTS
<TABLE>
<CAPTION>
Number of Shares Conversion
Issue upon exercise of or exercise Expiration Registration
Name Date Conversion Price Date Rights
- ---- ---- ---------- ----- ---- ------
<S> <C> <C> <C> <C> <C>
Stock Option
Plans various 2,403,867 Market value 5 years from Form S-8
at date of date of grant
Series A Sept. 97 1,346,847 $5.55 None Yes
Preferred
Stock
Warrants various 142,500 $2.00 to February Yes
$4.50 2001
Common Stock 100,000 Yes(1)
</TABLE>
- --------
(1) The acquisition of American Waste Transport will result in the issuance of
up to 1,000,000 shares, of which 100,000 have registration rights.
<PAGE>
SCHEDULE 3(d)
REPORTING COMPANY STATUS
The Company has timely filed all materials and documents pursuant to its
obligations under either Section 13(a) or 5(d) of the Exchange Act, except for
its 1998 10-KSB which was not timely filed due to extensive financial statement
revisions as a result of the Company's Plan of Discontinued Operations approved
by its Board oF Directors in late 1998. It expects to make all filings on a
timely basis in the future.
<PAGE>
SCHEDULE 3(l)
CERTAIN CHANGES
1. Material changes since September 30, 1999 include the following:
A. Conversion of $4,044,140 Series B preferred stock to 591,621 common
shares in fourth quarter.
B. Conversion of 1,770,071 of short-term notes for 574,709 common shares
at 11/30/99.
C. During the fourth quarter, the spin-off of most discontinued
operations to AMCOR Financial Corporation. Excluded from the spin-off
was the Company's $2.5 million Oregon Farming Joint Venture which is
presently being appraised pursuant to a planned sale by 6/30/00.
D. The exercise, during the fourth quarter, 1999 and first quarter, 2000
of stock options at prices from $1.60 to $3.00 per share, totaling
approximately 881,133 shares for about $1,608,333.
E. The acquisition of American Waste Transport as of 3/1/00 for $750,000
cash and 1 million shares of Company Common Stock, all but 100,000
shares restricted.
<PAGE>
SCHEDULE 3(r)
DEFAULTS
1. Subsequent to October 31, 1999 the Company spun off substantially all of
its real estate operations. As part of this transaction, AMCOR Financial
Corporation (AFC) agreed to service debt for which the Company is primarily
liable and is collateralized by property included in the spin-off. In early
2000, AFC allowed the golf course, which was part of the spin-off assets,
to be foreclosed upon by the Lender. AFC is in discussions with the lender
to recollateralize any deficiency on the $3 million note with other
property included in the spin-off. The Company believes that the property
held by AFC has sufficient value to collateralize this deficiency along
with all other liabilities assumed by AFC. The Company does not expect to
realize any loss related to this obligations.
2. As discussed, the Company has not declared dividends on its Series A
Preferred stock and is currently six quarters in arrears. It intends to use
approximately $500,000 of the proceeds from this offering to pay dividends
on these shares. The current voluntary conversion rate of the Series A is
$5.55 per share (1.8 common shares for one $10 preferred) and the Company
can force conversion at $6.67 per share. During the year, should the Series
A trade at or above that level for a sustained period of time, the Company
may elect to force conversion of the preferred to common.
<PAGE>
SCHEDULE 3(s)
TRANSACTIONS WITH AFFILIATES
At 12/31/99 a partnership controlled by two principals of the Company was
indebted to the Company for approximately $1.5 million. In turn, the Company
owed the two individuals approximately $1,125,000. The two amounts were applied
to offset each other, with the difference (approximately $375,000 owed to the
Company) paid by the individuals through common stock (87,000 shares at $4.313)
transferred to the Company.
<PAGE>
SCHEDULE 3(cc)
ENVIRONMENTAL MATTERS
The Company's history is in agriculture, and as a result, it has regularly used
chemical fertilizers and petroleum products. Other than its 6,000-acre Oregon
property, it has sold all of its agricultural land, the sales being subject to
extensive environmental review. To date, no problems have been incurred. One
600-acre property, on which the company conducted a green waste processing pilot
program, has been sold. As a condition of the sale, the Company agreed to clean
up and remediate certain residual green waste processing material, confined to
approximately 25-acres. The Company is in the process of this clean up now. The
clean up consists strictly of removing residual debris. Chemical tests reveal no
toxic or hazardous contamination. The buyer of the property has agreed to pay
$50,000 of clean up. an additional $100,000 is in escrow for this purpose. The
Company believes that the entire remediation can be done for approximately
$150,000, which has been reserved on its financial statements.
In addition to processing green waste, the Company is a major contract hauler
for Waste Management for non-hazardous municipal solid waste. Waste Management
is responsible for any claims and liability resulting from contamination. To
date there have been none.
<PAGE>
EXHIBIT A
CERTIFICATE OF DESIGNATIONS OF
SERIES C 6% CONVERTIBLE PREFERRED STOCK OF
USA BIOMASS CORPORATION
Pursuant to Section ____________ of the General
Corporation Law of the State of Delaware
The undersigned, Fred H. Behrens and Hilly G. Jones, hereby certify that:
I. They are the duly elected and acting Chairman and Secretary,
respectively, of USA Biomass Corporation, a Delaware corporation (the
"Corporation").
II. The Certificate of Incorporation of the Corporation authorizes three
thousand (3,000) shares of preferred stock, $0.001 par value per share.
III. The following is a true and correct copy of resolutions duly adopted
by the Board of Directors of the Corporation (the "Board of Directors") on March
14, 2000 pursuant to the Articles of Incorporation of the Corporation and in
accordance with the provisions of the General Corporation Law of the State of
Delaware.
RESOLUTIONS
WHEREAS, the Board of Directors is authorized to provide for the issuance
of the shares of preferred stock, and by filing a certificate pursuant to the
applicable law of the State of Delaware to establish and issue preferred stock
with such voting powers, full or limited, or no voting powers, and such
designations, preferences and relative, participating, optional or other special
rights, and with such qualifications, limitations or restrictions thereon as the
Board of Directors may determine.
WHEREAS, the Board of Directors desires, pursuant to its authority as
aforesaid, to designate a new series of preferred stock, set the number of
shares constituting such series and fix the rights, preferences, privileges and
restrictions of such series.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
designates a new series of preferred stock and the number of shares constituting
such series and fixes the rights, preferences, privileges and restrictions
relating to such series as follows:
A. Designation, Amount and Par Value. The series of preferred stock shall
be designated as the Series C 6% Convertible Preferred Stock (the "Series C
Preferred Stock"), and the number of shares so designated shall be three
thousand (3,000) (which shall not be subject to increase or decrease). Each
share of Series C Preferred Stock shall have a par value of $0.001 per share and
a stated value (the "Stated Value") of the Liquidation Preference (as
hereinafter defined in Section C(1)).
<PAGE>
B. Dividends.
(1) Holders of the Series C Preferred Stock shall be entitled to receive,
out of funds legally available therefor, dividends at a rate equal to 6% (the
"Dividend Rate") of the Liquidation Preference per share per annum (subject to
appropriate adjustments in the event of any stock dividend, stock split,
combination or other similar recapitalization affecting such shares), and no
more, payable in accordance with the provisions of this Certificate of
Designations.
(2) At the election of the Corporation, each dividend on Series C Preferred
Stock shall be paid either in shares of Common Stock of the Corporation, $0.001
par value per share ("Common Stock") or in cash on the Delivery Date (as defined
in Subsection G(2)(a) of this Certificate of Designations) with respect to any
shares of Series C Preferred Stock which are the subject of a Notice of
Conversion (as defined in Subsection G(2) of this Certificate of Designations).
Dividends paid in shares of Common Stock shall be paid (based on an assumed
value of $1,000 per share) in full shares only, with a cash payment equal to the
value of any fractional shares. Each dividend paid in cash shall be mailed to
the holders of record of the Series C Preferred Stock as their names and
addresses appear on the share register of the Corporation or at the office of
the transfer agent on the corresponding dividend payment date. Holders of Series
C Preferred Stock will receive written notification from the Corporation or the
transfer agent if a dividend is paid in kind, which notification will specify
the number of shares of Common Stock paid as a dividend and the recipient's
aggregate holdings of Common Stock as of that dividend payment date and after
giving effect to the dividend. All holders of shares of Common Stock issued as
dividends shall be entitled to all of the rights and benefits relating to shares
of Common Stock as set forth in the Corporation's Articles of Incorporation, as
amended, and By-laws.
(3) Holders of the Series C Preferred Stock shall be entitled to payment of
any dividends in preference and priority to any payment of any cash dividend on
Common Stock or any other class or series of capital stock of the Corporation,
other than holders of shares of the issued and outstanding Series A Preferred
Stock of the Company, as of the date hereof, who shall be entitled to receive
such dividends on a pari passu basis with the holders of the Series C Preferred
Stock. Dividends on the Series C Preferred Stock shall accrue with respect to
each share of the Series C Preferred Stock from the date on which such share is
issued and outstanding and thereafter shall be deemed to accrue from day to day
whether or not earned or declared and whether or not there exists profits,
surplus or other funds legally available for the payment of dividends, and shall
be cumulative so that if such dividends on the Series C Preferred Stock shall
not have been paid, or declared and set apart for payment, the deficiency shall
be fully paid or declared and set apart for payment before any dividend shall be
paid or declared or set apart for any Common Stock or other class or series of
capital stock ranking junior to the Series C Preferred Stock (such stock being
collectively referred to herein as the "Junior Stock") and before any purchase
or acquisition of any Junior Stock is made by the Corporation. At the earlier
of: (1) the redemption or conversion of the Series C Preferred Stock or (2) the
liquidation of the Corporation, any accrued but undeclared dividends shall be
paid to the holders of record of outstanding shares of the Series C Preferred
Stock in accordance with the provisions of this Certificate of Designations. No
accumulation of dividends on the Series C Preferred Stock shall bear interest.
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C. Liquidation, Dissolution or Winding Up. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
holders of shares of the Series C Preferred Stock then outstanding shall be
entitled to be paid out of the assets of the Corporation available for
distribution to its stockholders, before any payment shall be made to the
holders of Junior Stock by reason of their ownership thereof, an amount equal to
one thousand dollars ($1,000) per share of Series C Preferred Stock (the
"Liquidation Preference") plus any accrued but unpaid dividends (whether or not
declared). If upon any such liquidation, dissolution or winding up of the
Corporation the remaining assets of the Corporation available for distribution
to its stockholders shall be insufficient to pay the holders of shares of the
Series C Preferred Stock the full amount to which they shall be entitled, the
holders of shares of the Series C Preferred Stock shall share ratably in any
distribution of the remaining assets and funds of the Corporation in proportion
to the respective amounts which would otherwise be payable in respect of the
shares held by them upon such distribution if all amounts payable on or with
respect to such shares were paid in full.
D. Voting.
(1) Each holder of outstanding shares of Series C Preferred Stock shall be
entitled, at each meeting of stockholders of the Corporation (and with respect
to written consents of stockholders in lieu of meetings) with respect to any and
all matters presented to the stockholders of the Corporation for their action or
consideration, to the number of votes equal to the number of whole shares of
Common Stock into which the shares of Series C Preferred Stock held by such
holder are convertible (as adjusted from time to time pursuant to Subsection I
hereof) immediately after the close of business on the record date fixed for
such meeting or the effective date of such written consent. Except as provided
by law, and by the provisions of Section K below, holders of Series C Preferred
Stock shall vote together with the holders Common Stock as a single class.
(2) The holders of the Series C Preferred Stock shall not be entitled to
any rights of cumulative voting with respect to their shares.
E. Other Securities. Subject to any limitations contained in this
Certificate of Designations, the Corporation's Articles of Incorporation and/or
the Primary Documents (as defined in the Securities Purchase Agreement, dated as
of March 14, 2000, hereinafter the "Securities Purchase Agreement"), the Board
of Directors of the Corporation reserves the right to establish additional
classes and/or series of capital stock of the Corporation and to designate the
preferences, limitations and relative rights of any such classes and/or series;
provided, however, that no such class and/or series may have preferences,
limitations and relative rights which are superior to or senior to the
preferences, limitations and relative rights granted to the holders of the
Series C Preferred Stock.
F. Capital Reorganization. If the Corporation shall at any time hereafter
subdivide or combine its outstanding shares of Common Stock, declare a dividend
payable in Common Stock, or in case of any capital reorganization or
reclassification of the shares of Common Stock of the Corporation, the number of
shares of the Series C Preferred Stock and the Stated Value of the Series C
Preferred Stock shall be adjusted appropriately to allow the holders of the
Series C Preferred Stock, as nearly as reasonably possible, to maintain (i) the
aggregate
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Stated Value of the Series C Preferred Stock and (ii) their pro rata interest in
the Corporation and in the Common Stock upon conversion of the Series C
Preferred Stock, that each holder had prior to any such subdivision,
combination, stock dividend, reorganization or reclassification.
G. Conversion.
(1) The holders of the Series C Preferred Stock shall have conversion
rights as follows (the "Series C Preferred Stock Conversion Rights"):
(a) Each share of Series C Preferred Stock shall be convertible, at
the option of the holder thereof, at any time and from time to time, into
such number of fully paid and nonassessable shares of Common Stock as is
determined by dividing $1,000, plus the amount of any accrued and unpaid
dividends the Corporation elects to pay in Common Stock, by the Conversion
Price (as defined below) in effect at the time of conversion. The
Conversion Price at which shares of Common Stock shall be deliverable upon
conversion of Series C Preferred Stock without the payment of additional
consideration by the holder thereof (the "Conversion Price") shall be the
lower of (i) four and 65/100 dollars ($4.65) or (ii) 85% of the average of
the three lowest Closing Bid Prices of the shares of Common Stock for the
fifteen (15) trading days immediately preceding the Series C Preferred
Stock Conversion Date (as hereinafter defined). For purposes of these
Articles of Amendment, the term "Closing Bid Price" means, for any security
as of any date, the closing bid price on the principal securities exchange
or trading market where the Common Stock is listed or traded as reported by
Bloomberg, L.P. ("Bloomberg") or, if applicable, the closing bid price of
the Common Stock in the over-the-counter market on the electronic bulletin
board for such security as reported by Bloomberg, or, if no closing bid
price is reported for the Common Stock by Bloomberg, then 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 of the Common Stock can not be calculated on such date on any of the
foregoing bases, the Closing Bid Price of the Common Stock on such date
shall be the fair market value as determined by the holders of a majority
of the outstanding shares of Series C Preferred Stock being converted for
which the calculation of the Closing Bid Price is required in order to
determine the Conversion Price of such shares. "Trading day" shall mean any
day on which the Corporation's Common Stock is traded for any period on the
principal securities exchange or other securities market on which the
Common Stock is then being traded. If, during any period following March
14, 2000 (the "Original Issue Date"), as a result of the occurrence of any
of the events set forth in Section 3(f) or 3(g) of the Registration Rights
Agreement, dated as of March 14, 2000, by and between the Corporation and
the Purchaser set forth therein (the "Registration Rights Agreement"), the
Purchasers set forth therein are not able to sell shares of Common Stock
issuable upon conversion of, or in lieu of dividends on, shares of Series C
Preferred Stock pursuant to a registration statement filed pursuant to such
agreement, the holders of shares of Series C Preferred Stock shall have the
right, for any purpose during such period and thereafter, to designate as
the Conversion Price any Conversion Price that would have been applicable
during such period had such Series C Preferred Stock shareholder delivered
a Notice of Conversion with respect to any such Series C Preferred Stock.
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(b) At any time that the number of shares of Common Stock issued (A)
upon conversion of the Series C Preferred Stock and (B) in lieu of dividend
payments on the Series C Preferred Stock, shall equal 20% or more of the
Corporation's outstanding Common Stock (a "Common Stock Redemption Event"),
the Corporation shall (x) redeem, at a price per share equal to (A) the
quotient of (i) the Liquidation Preference per share of Series C Preferred
Stock plus all accrued but unpaid dividends on such shares of Series C
Preferred Stock and (ii) the Conversion Price as if the Series C Preferred
Stock had been converted on the Series C Preferred Stock Redemption Date
multiplied by (B) the average Closing Bid Price of shares of Common Stock
for the five (5) trading days immediately preceding the Series C Preferred
Stock Redemption Date, all of the outstanding Series C Preferred Stock or
(y) call a special meeting of its stockholders for the purpose of approving
the transactions contemplated by the Securities Purchase Agreement,
including the issuance of the Series C Preferred Stock on the terms set
forth therein, together with any other approvals that shall be required so
as to cause the transactions contemplated by the Securities Purchase
Agreement to remain in compliance with the Rules and Regulations of The
Nasdaq Stock Market (including Rules 4300 and 4310 of Nasdaq's
Non-Qualitative Designation Criteria in connection with conversions of
Series C Preferred Stock; such approvals are referred to herein as the
"Required Approvals"). The Corporation shall determine within five (5)
business days following the receipt of a Notice of Conversion which of such
actions it shall take, and shall promptly furnish notice to each of the
holders of Series C Preferred Stock as to such determination, including, if
applicable, a notice of redemption. In no event shall the Corporation issue
shares of Common Stock upon conversion of, or in lieu of dividend payments
on, the Series C Preferred Stock, after the occurrence of a Common Stock
Redemption Event until the Required Approvals, if any, are obtained.
(c) If the Corporation elects to call a special meeting of its
stockholders pursuant to Subsection G(1)(b) of this Certificate of
Designations to obtain the Required Approvals, the Corporation shall use
its best efforts to obtain such Required Approvals within thirty (30) days
of the Closing Date (as defined in the Securities Purchase Agreement) (such
thirty (30) day period is referred to herein as an "Approval Period"). If
the Corporation does not obtain the Required Approvals within the Approval
Period and the Corporation receives a Notice of Conversion after the
termination of the Approval Period, the Corporation must redeem, in
accordance with this Subsection G of this Certificate of Designations, any
shares of Series C Preferred Stock outstanding after the Corporation has
issued in excess of 1,944,227 shares of Common Stock in connection with
conversions of the Series C Preferred Stock.
(d) If the Corporation elects, pursuant to this Subsection G, to
redeem the Series C Preferred Stock on the occurrence of a Common Stock
Redemption Event, it shall redeem such Series C Preferred Stock at the
price determined in accordance with Subsection G(1)(b) of this Certificate
of Designations. If the Corporation shall have elected, pursuant to this
Subsection G(1), to obtain the Required Approvals but shall not have done
so by the later of the occurrence of the Common Stock Redemption Event or
the expiration of the Approval Period, it shall furnish a redemption notice
to the Purchaser within three (3) business days after the expiration of the
Approval Period.
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(2) The Series C Preferred Stock Conversion Rights shall be exercised as
follows:
(e) The Corporation will permit each holder of Series C Preferred
Stock to exercise its right to convert the Series C Preferred Stock by
faxing an executed and completed notice of conversion (the "Notice of
Conversion") to the Corporation, and delivering within three (3) business
days thereafter, the original Notice of Conversion (and the certificates
representing the related shares of Series C Preferred Stock) to the
Corporation by hand delivery or by express courier, duly endorsed. Each
date on which a Notice of Conversion is faxed in accordance with the
provisions hereof shall be deemed a "Series C Preferred Stock Conversion
Date." The Corporation will transmit the certificates representing the
Common Stock issuable upon conversion of the Series C Preferred Stock
(together with certificates representing the related shares of Series C
Preferred Stock not so converted and, if applicable, a check representing
any fraction of a share not converted) to such holder via express courier
as soon as practicable, but in all events no later than (the "Delivery
Date") three (3) business days after the Series C Preferred Stock
Conversion Date. For purposes of this Certificate of Designations, such
conversion of the Series C Preferred Stock shall be deemed to have been
made immediately prior to the close of business on the Series C Preferred
Stock Conversion Date.
(f) In lieu of delivering physical certificates representing the
Common Stock issuable upon the conversion of the Series C Preferred Stock,
provided that the Corporation's transfer agent is participating in the
Depository Trust Corporation ("DTC") Fast Automated Securities Transfer
program, on the written request of a holder of Series C Preferred Stock who
shall have previously instructed such holder's prime broker to confirm such
request to the Corporation's transfer agent, the Corporation shall use its
best efforts to cause its transfer agent to electronically transmit such
Common Stock to such holder by crediting the account of the holder's prime
broker with DTC through its Deposit Withdrawal Agent Commission system no
later than the applicable Delivery Date.
(g) The Corporation will at all times have authorized and reserved for
the purpose of issuance a sufficient number of shares of Common Stock to
provide for the conversion of the Series C Preferred Stock. The Corporation
will use its best efforts at all times to maintain a number of shares of
Common Stock so reserved for issuance that is no less than the sum of (i)
one and one-half (1.5) times the number that would then actually be
issuable upon the conversion of three thousand (3,000) shares of Series C
Preferred Stock and (ii) the exercise of the Warrants (as defined in the
Securities Purchase Agreement). Before taking any action which would cause
an adjustment reducing the Conversion Price below the established par value
of the shares of Common Stock issuable upon conversion of the Series C
Preferred Stock, the Corporation shall take any corporate action which may,
in the opinion of its counsel or in the opinion of counsel to holders of
the Series C Preferred Stock, be necessary in order that the Corporation
may validly and legally issue fully paid and nonassessable shares of Common
Stock at such adjusted Conversion Price.
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(3) In the event of a liquidation of the Corporation, the Series C
Preferred Stock Conversion Rights shall terminate at the close of business on
the first full day preceding the date fixed for the payment of any amounts
distributable on liquidation to the holders of the Series C Preferred Stock.
(4) If the conversion is in connection with an underwritten offer of
securities registered pursuant to the Securities Act of 1933, as amended, the
conversion may, at the option of any holder tendering Series C Preferred Stock
for conversion, be conditioned upon the closing with the underwriter of the sale
of securities pursuant to such offering, in which event the person(s) entitled
to receive the Common Stock issuable upon such conversion of the Series C
Preferred Stock shall not be deemed to have converted such Series C Preferred
Stock until immediately prior to the closing of the sale of securities.
(5) At no time shall any holder of the Series C Preferred Stock convert
such amount of Series C Preferred Stock as shall result in such Purchaser's
ownership, after such conversion, exceeding 9.99% of the Corporation's
outstanding Common Stock.
(6) No fractional shares of Common Stock shall be issued upon conversion of
the Preferred Stock. In lieu of fractional shares, the Corporation shall pay
cash equal to such fraction multiplied by the then effective and applicable
Conversion Price.
(7) The Corporation will not, by amendment of its Articles of Incorporation
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed under this Certificate of Designations by the Corporation, but will
at all times in good faith assist in the carrying out of all the provisions of
this Certificate of Designations and in the taking of all such action as may be
necessary or appropriate in order to protect the Series C Preferred Stock
Conversion Rights of the holders of the Series C Preferred Stock against
impairment.
(8) In the event (a) that the Corporation declares a dividend (or any other
distribution) on its Common Stock payable in Common Stock or other securities of
the Corporation, (b) that the Corporation subdivides or combines its outstanding
shares of Common Stock, (c) of any reclassification of the Common Stock of the
Corporation (other than a subdivision or combination of its outstanding shares
of Common Stock or a stock dividend or stock distribution thereon), (d) of any
consolidation or merger of the Corporation into or with another corporation, (e)
of the sale of all or substantially all of the assets of the Corporation, or (f)
of the involuntary or voluntary dissolution, liquidation or winding up of the
Corporation, then the Corporation shall cause to be filed at its principal
office or at the office of the transfer agent of the Series C Preferred Stock,
and shall cause to be mailed to each holder of the Series C Preferred Stock at
their last address as shown on the records of the Corporation or such transfer
agent, at least ten (10) days prior to the record date specified in (i) below or
twenty (20) days before the date specified in (ii) below, a notice stating
(i) the record date of such dividend, distribution, subdivision or
combination, or, if a record is not to be taken, the date as of which the
holders of
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Common Stock of record to be entitled to such dividend, distribution,
subdivision or combination are to be determined, or
(ii) the date on which such reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their shares of Common Stock
for securities or other property deliverable upon such reclassification,
consolidation, merger, sale, dissolution or winding up.
H. Sinking Fund. There shall be no sinking fund for the payment of
dividends, or liquidation preferences on the Series C Preferred Stock or the
redemption of any shares thereof.
I. Redemption Events. In case one or more of the following events, each a
redemption event, shall have occurred:
(a) failure to deliver the shares of Common Stock required to be
delivered upon conversion of the shares of Series C Preferred Stock in the
manner and at the time required by Section 5 of the Securities Purchase
Agreement; or
(c) failure of the Corporation to have authorized the number of shares
of Common Stock issuable upon conversion of the shares of Series C
Preferred Stock or exercise of the Stock Purchase Warrants (as defined in
the Securities Purchase Agreement); or
(d) failure on the part of the Corporation to duly observe or perform
any of the provisions of this Certificate of Designations or any of its
other covenants or agreements contained in the Securities Purchase
Agreement, or to cure any material breach in a material representation or
covenant contained in the Securities Purchase Agreement or the Registration
Rights Agreement for a period of ten (10) days after the date on which
written notice of such failure or breach requiring the same to be remedied
has been given by a registered holder of shares of Series C Preferred Stock
to the Corporation;
then, and in each and every such case, so long as such redemption
event has not been remedied, the holders of not less than fifty-one percent
(51%) of the shares of Series C Preferred Stock then outstanding, by notice
in writing to the Corporation (the date of such notice the "Redemption
Notice Date"), may demand that the Corporation redeem, and the Corporation
shall redeem, each share of Series C Preferred Stock then outstanding at a
price per share equal to one hundred twenty-five percent (125%) of the sum
of (x) the Stated Value and (y) the aggregate accrued and unpaid dividends
on such Redemption Notice Date
For purposes of this Section I "Material Subsidiary" means any subsidiary
with respect to which the Corporation has directly or indirectly invested,
loaned, advanced or guaranteed the obligations of, an aggregate amount exceeding
fifteen percent (15%) of the Corporation's gross assets, or the Corporation's
proportionate share of the assets or net income
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of which (based on the subsidiary's most recent financial statements) exceed
fifteen percent (15%) of the Corporation's gross assets or net income,
respectively, or the gross revenues of which exceed fifteen percent (15%) of the
gross revenues of the Corporation based upon the most recent financial
statements of such subsidiary and the Corporation.
J. Amendment. This Certificate of Designations constitutes an agreement
between the Corporation and the holders of the Series C Preferred Stock. The
Corporation shall not amend this Certificate of Designations or alter or repeal
the preferences, rights, powers or other terms of the Series C Preferred Stock
so as to affect adversely the Series C Preferred Stock, without the written
consent or affirmative vote of the holders of at least sixty-six and two-thirds
percent (66-2/3%) of the then outstanding shares of Series C Preferred Stock,
given in writing or
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by vote at a meeting, consenting or voting (as the case may be) separately as a
class.
IN WITNESS WHEREOF, USA Biomass Corporation has caused its corporate seal
to be hereunto affixed and this certificate to be signed by _____________, its
Chairman, and attested by ____________, its Secretary, this 14th day of March,
2000.
USA BIOMASS CORPORATION
By:
------------------------------
Name:
Title: Chairman
Attest:
By:
-----------------------------
Name:
Title: Secretary
EXHIBIT B
THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY
STATE, AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND
REGULATIONS THEREUNDER OR ANY STATE SECURITIES LAWS OR THE PROVISIONS OF THIS
WARRANT.
No. of Shares of Common Stock: _____________
WARRANT
To Purchase Common Stock of
USA BIOMASS CORPORATION
THIS IS TO CERTIFY THAT Siete Investors LLC, a Delaware limited liability
company, or its registered assigns, is entitled, at any time from the Warrant
Issuance Date (as hereinafter defined) to the Expiration Date (as hereinafter
defined), to purchase from USA BIOMASS CORPORATION, a Delaware corporation (the
"Company"), one hundred thousand (100,000 shares of Common Stock (as hereinafter
defined and subject to adjustment as provided herein), in whole or in part,
including fractional parts, at a purchase price per share equal to four and
65/100 ($4.65) (subject to any adjustments made to such amount pursuant to
Section 4 hereto) on the terms and conditions and pursuant to the provisions
hereinafter set forth.
1. DEFINITIONS
As used in this Warrant, the following terms have the respective meanings
set forth below:
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"Additional Shares of Common Stock" shall mean all shares of Common Stock
issued by the Company after the Closing Date, other than Warrant Stock.
"Book Value" shall mean, in respect of any share of Common Stock on any
date herein specified, the consolidated book value of the Company as of the last
day of any month immediately preceding such date, divided by the number of Fully
Diluted Outstanding shares of Common Stock as determined in accordance with GAAP
(assuming the payment of the exercise prices for such shares) by a firm of
independent certified public accountants of recognized national standing
selected by the Company and reasonably acceptable to the Holder.
"Business Day" shall mean any day that is not a Saturday or Sunday or a day
on which banks are required or permitted to be closed in the State of New York.
"Closing Date" shall have the meaning set forth in the Securities Purchase
Agreement.
"Commission" shall mean the Securities and Exchange Commission or any other
federal agency then administering the Securities Act and other federal
securities laws.
"Common Stock" shall mean (except where the context otherwise indicates)
the Common Stock, par value $.001 per share, of the Company as constituted on
the Closing Date, and any capital stock into which such Common Stock may
thereafter be changed, and shall also include (i) capital stock of the Company
of any other class (regardless of how denominated) issued to the holders of
shares of Common Stock upon any reclassification thereof which is also not
preferred as to dividends or assets over any other class of stock of the Company
and which is not subject to redemption and (ii) shares of common stock of any
successor or acquiring corporation received by or distributed to the holders of
Common Stock of the Company in the circumstances contemplated by Section 4.4.
"Convertible Securities" shall mean evidences of indebtedness, shares of
stock or other securities which are convertible into or exchangeable, with or
without payment of additional consideration in cash or property, for shares of
Common Stock, either immediately or upon the occurrence of a specified date or a
specified event.
"Current Warrant Price" shall mean four and 65/100 dollars ($4.65) subject
to any adjustments to such amount made in accordance with Section 4 hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
or any successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect from time to time.
"Exercise Period" shall mean the period during which this Warrant is
exercisable pursuant to Section 2.1.
"Expiration Date" shall mean March 13, 2005.
"Fully Diluted Outstanding" shall mean, when used with reference to Common
Stock, at any date as of which the number of shares thereof is to be determined,
all shares of
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Common Stock Outstanding at such date and all shares of Common Stock issuable in
respect of this Warrant, outstanding on such date, and other options or warrants
to purchase, or securities convertible into, including without limitation the
shares of Common Stock outstanding on such date which would be deemed
outstanding in accordance with GAAP for purposes of determining book value or
net income per share.
"GAAP" shall mean generally accepted accounting principles in the United
States of America as from time to time in effect.
"Holder" shall mean the Person in whose name the Warrant or Warrant Stock
set forth herein is registered on the books of the Company maintained for such
purpose.
"Market Price" per Common Share means the average of the closing bid prices
of the Common Shares as reported on the National Association of Securities
Dealers Automated Quotation System for the National Market, ("NASDAQ") or, if
such security is not listed or admitted to trading on the NASDAQ, on the
principal national security exchange or quotation system on which such security
is quoted or listed or admitted to trading, or, if not quoted or listed or
admitted to trading on any national securities exchange or quotation system, the
closing bid price of such security on the over-the-counter market on the day in
question as reported by the National Association of Security Dealers, Inc., or a
similar generally accepted reporting service, as the case may be, for the five
(5) trading days immediately preceding the date of determination.
"Other Property" shall have the meaning set forth in Section 4.5.
"Outstanding" shall mean, when used with reference to Common Stock, at any
date as of which the number of shares thereof is to be determined, all issued
shares of Common Stock, except shares then owned or held by or for the account
of the Company or any subsidiary thereof, and shall include all shares issuable
in respect of outstanding scrip or any certificates representing fractional
interests in shares of Common Stock.
"Person" shall mean any individual, sole proprietorship, partnership, joint
venture, trust, incorporated organization, association, corporation,
institution, public benefit corporation, entity or government (whether federal,
state, county, city, municipal or otherwise, including, without limitation, any
instrumentality, division, agency, body or department thereof).
"Registration Rights Agreement" shall mean the Registration Rights
Agreement dated a date even herewith by and between the Company and Siete
Investors LLC, as it may be amended from time to time.
"Restricted Common Stock" shall mean shares of Common Stock which are, or
which upon their issuance on the exercise of this Warrant would be, evidenced by
a certificate bearing the restrictive legend set forth in Section 9.1(a).
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
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"Securities Purchase Agreement" shall mean the Securities Purchase
Agreement dated as of a date even herewith by and between the Company and Siete
Investors LLC, as it may be amended from time to time.
"Transfer" shall mean any disposition of any Warrant or Warrant Stock or of
any interest in either thereof, which would constitute a sale thereof within the
meaning of the Securities Act.
"Transfer Notice" shall have the meaning set forth in Section 9.2.
"Warrant Issuance Date" shall mean any date on which Warrants are issued
pursuant to the Securities Purchase Agreement.
"Warrants" shall mean this Warrant and all warrants issued upon transfer,
division or combination of, or in substitution for, any thereof. All Warrants
shall at all times be identical as to terms and conditions and date, except as
to the number of shares of Common Stock for which they may be exercised.
"Warrant Price" shall mean an amount equal to (i) the number of shares of
Common Stock being purchased upon exercise of this Warrant pursuant to Section
2.1, multiplied by (ii) the Current Warrant Price as of the date of such
exercise.
"Warrant Stock" shall mean the shares of Common Stock purchased by the
holders of the Warrants upon the exercise thereof.
2. EXERCISE OF WARRANT
2.1. Manner of Exercise. From and after the Warrant Issuance Date and until
5:00 P.M., New York City time, on the Expiration Date, Holder may exercise this
Warrant, on any Business Day, for all or any part of the number of shares of
Common Stock purchasable hereunder.
In order to exercise this Warrant, in whole or in part, Holder shall
deliver to the Company at the office or agency designated by the Company
pursuant to Section 12, (i) a written notice of Holder's election to exercise
this Warrant, which notice shall specify the number of shares of Common Stock to
be purchased, (ii) payment by cash, check or bank draft payable to the Company
of the Warrant Price in cash or by wire transfer or cashier's check drawn on a
United States bank or by the Holder's surrender of Warrant Stock (or the right
to receive such number of shares) having an aggregate Market Price equal to the
Warrant Price for all shares then being purchased and (iii) this Warrant. Such
notice shall be substantially in the form of the subscription form appearing at
the end of this Warrant as Exhibit A, duly executed by Holder or its agent or
attorney. Upon receipt of the items referred to in clauses (i), (ii) and (iii)
above, the Company shall, as promptly as practicable, and in any event within
five (5) Business Days thereafter, execute or cause to be executed and deliver
or cause to be delivered to Holder a certificate or certificates representing
the aggregate number of full shares of Common Stock issuable upon such exercise,
together with cash in lieu of any fraction of a share, as hereinafter provided.
The stock certificate or certificates so delivered shall be, to the extent
possible, in such denomination or denominations as Holder shall request in the
notice and shall be registered in
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the name of Holder or, subject to Section 9, such other name as shall be
designated in the notice. This Warrant shall be deemed to have been exercised
and such certificate or certificates shall be deemed to have been issued, and
Holder or any other Person so designated to be named therein shall be deemed to
have become a holder of record of such shares for all purposes, as of the date
the Warrant has been exercised by payment to the Company of the Warrant Price.
If this Warrant shall have been exercised in part, the Company shall, at the
time of delivery of the certificate or certificates representing Warrant Stock,
deliver to Holder a new Warrant evidencing the rights of Holder to purchase the
unpurchased shares of Common Stock called for by this Warrant, which new Warrant
shall in all other respects be identical with this Warrant.
The Holder shall be entitled to exercise the Warrant notwithstanding the
commencement of any case under 11 U.S.C. ss. 101 et seq. (the "Bankruptcy
Code"). In the event the Company is a debtor under the Bankruptcy Code, the
Company hereby waives to the fullest extent permitted any rights to relief it
may have under 11 U.S.C. ss. 362 in respect of the Holder's exercise right. The
Company hereby waives to the fullest extent permitted any rights to relief it
may have under 11 U.S.C. ss. 362 in respect of the exercise of the Warrant. The
Company agrees, without cost or expense to the Holder, to take or consent to any
and all action necessary to effectuate relief under 11 U.S.C. ss. 362.
2.2. Payment of Taxes and Charges. All shares of Common Stock issuable upon
the exercise of this Warrant pursuant to the terms hereof shall be validly
issued, fully paid and nonassessable, and without any preemptive rights. The
Company shall pay all expenses in connection with, and all taxes and other
governmental charges that may be imposed with respect to, the issue or delivery
thereof.
2.3. Fractional Shares. The Company shall not be required to issue a
fractional share of Common Stock upon exercise of any Warrant. As to any
fraction of a share which Holder would otherwise be entitled to purchase upon
such exercise, the Company shall pay a cash adjustment in respect of such final
fraction in an amount equal to the same fraction of the Market Price per share
of Common Stock on the relevant exercise date.
2.4. Continued Validity. A holder of shares of Common Stock issued upon the
exercise of this Warrant, in whole or in part (other than a holder who acquires
such shares after the same have been publicly sold pursuant to a Registration
Statement under the Securities Act or sold pursuant to Rule 144 thereunder),
shall continue to be entitled with respect to such shares to all rights to which
it would have been entitled as Holder under Sections 9, 10 and 14 of this
Warrant. The Company will, at the time of exercise of this Warrant, in whole or
in part, upon the request of Holder, acknowledge in writing, in form reasonably
satisfactory to Holder, its continuing obligation to afford Holder all such
rights; provided, however, that if Holder shall fail to make any such request,
such failure shall not affect the continuing obligation of the Company to afford
to Holder all such rights.
2.5. Right to Convert Warrant. The Holder shall have the right to convert,
in whole or in part, this Warrant (the "Conversion Right") at any time prior to
the expiration of the Exercise Period, into shares of Common Stock in accordance
with this Section 2.5. Upon exercise of the Conversion Right, the Company shall
deliver to the Holder (without payment by the Holder of the Warrant Price) that
number of shares of Common Stock equal to the quotient
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obtained by dividing (x) the value of the portion of this Warrant being
converted at the time the Conversion Right is exercised (determined by
subtracting the Warrant Price for the portion of this Warrant being converted
(in effect immediately prior to the exercise of the Conversion Right) from the
amount obtained by multiplying the number of shares of Common Stock issuable
upon the whole or partial exercise of this Warrant, as the case may be, by the
Market Price immediately prior to the exercise of the Conversion Right) by (y)
the Market Price of one share of Common Stock immediately prior to the exercise
of the Conversion Right.
The Conversion Right may be exercised by the Holder, at any time or from
time to time, prior to its expiration, on any business day by delivering a
written notice (the "Conversion Notice") to the Company at the offices of the
Company, exercising the Conversion Right and specifying (i) the total number of
shares of Common Stock the Holder will purchase pursuant to the conversion and
(ii) a place and date not less than two (2) nor more than twenty (20) Business
Days from the date of the Subscription Notice for the closing of such purchase.
At any closing under this Section 2.5, (i) the Holder will surrender this
Warrant and (ii) the Company will deliver to the Holder a certificate or
certificates for the number of shares of Common Stock issuable upon such
conversion. If this Warrant shall have been converted only in part, the Company
shall, at the time of delivery of said stock certificate or certificates,
deliver to the Holder a new Warrant evidencing the rights of the Holder to
purchase the remaining shares of Common Stock called for by this Warrant, which
new Warrant shall in all other respects be identical to this Warrant, or, at the
request of the Holder, appropriate notation may be made on this Warrant and the
same returned to the Holder. The Company shall pay all expenses, taxes and other
charges payable in connection with the preparation, issue and delivery of such
stock certificates and new Warrants, except that, in case such stock
certificates and/or new Warrants shall be registered in a name or names other
than the name of the Holder, funds sufficient to pay all stock transfer taxes
that are payable upon the issuance of such stock certificates or new Warrants
shall be paid by the Holder at the time of delivering the notice of exercise
mentioned above.
3. TRANSFER, DIVISION AND COMBINATION
3.1. Transfer. Subject to compliance with Sections 9, transfer of this
Warrant and all rights hereunder, in whole or in part, shall be registered on
the books of the Company to be maintained for such purpose, upon surrender of
this Warrant at the principal office of the Company referred to in Section 2.1
or the office or agency designated by the Company pursuant to Section 12,
together with a written assignment of this Warrant substantially in the form of
Exhibit B hereto duly executed by Holder or its agent or attorney. Upon such
surrender, the Company shall, subject to Section 9, execute and deliver a new
Warrant or Warrants in the name of the assignee or assignees and in the
denomination specified in such instrument of assignment, and shall issue to the
assignor a new Warrant evidencing the portion of this Warrant not so assigned,
and this Warrant shall promptly be cancelled. A Warrant, if properly assigned in
compliance with Section 9, may be exercised by a new Holder for the purchase of
shares of Common Stock without having a new Warrant issued.
3.2. Division and Combination. Subject to Section 9, this Warrant may be
divided or combined with other Warrants upon presentation hereof at the
aforesaid office or
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agency of the Company, together with a written notice specifying the names and
denominations in which new Warrants are to be issued, signed by Holder or its
agent or attorney. Subject to compliance with Section 3.1 and with Section 9, as
to any transfer which may be involved in such division or combination, the
Company shall execute and deliver a new Warrant or Warrants in exchange for the
Warrant or Warrants to be divided or combined in accordance with such notice.
3.3. Expenses. The Company shall prepare, issue and deliver at its own
expense the new Warrant or Warrants under this Section 3.
3.4. Maintenance of Books. The Company agrees to maintain, at its aforesaid
office or agency, books for the registration and the registration of transfer of
the Warrants.
4. ADJUSTMENTS
The number of shares of Common Stock for which this Warrant is exercisable,
or the price at which such shares may be purchased upon exercise of this
Warrant, shall be subject to adjustment from time to time as set forth in this
Section 4. The Company shall give Holder notice of any event described below
which requires an adjustment pursuant to this Section 4 at the time of such
event.
4.1. Stock Dividends, Subdivisions and Combinations. If at any time the
Company shall:
(a) take a record of the holders of its Common Stock for the purpose of
entitling them to receive a dividend payable in, or other distribution of,
Additional Shares of Common Stock,
(b) subdivide its outstanding shares of Common Stock into a larger number
of shares of Common Stock, or
(c) combine its outstanding shares of Common Stock into a smaller number of
shares of Common Stock,
then (i) the number of shares of Common Stock for which this Warrant is
exercisable immediately after the occurrence of any such event shall be adjusted
to equal the number of shares of Common Stock which a record holder of the same
number of shares of Common Stock for which this Warrant is exercisable
immediately prior to the occurrence of such event would own or be entitled to
receive after the happening of such event, and (ii) the Current Warrant Price
shall be adjusted to equal (A) the Current Warrant Price multiplied by the
number of shares of Common Stock for which this Warrant is exercisable
immediately prior to the adjustment divided by (B) the number of shares for
which this Warrant is exercisable immediately after such adjustment.
4.2. Certain Other Distributions.
In case the Company shall issue any Common Stock or any rights, options or
warrants to all holders of record of its Common Stock entitling all holders to
subscribe for or
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purchase shares of Common Stock at a price per share less than the Market Price
per share of the Common Stock on the date fixed for such issue, the Current
Warrant Price in effect immediately prior to the close of business on the date
fixed for such determination shall be reduced to the amount determined by
multiplying such Current Warrant Price by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding immediately prior to
the close of business on the date fixed for such determination plus the number
of shares of Common Stock which the aggregate of the offering price of the total
number of shares of Common Stock so offered for subscription or purchase would
purchase at such Market Price and the denominator of which shall be the number
of shares of Common Stock outstanding immediately prior to the close of business
on the date fixed for such determination plus the number of shares of Common
Stock so offered for subscription or purchase, such reduced amount to become
effective immediately after the close of business on the date fixed for such
determination. For the purposes of this clause (b), (i) the number of shares of
Common Stock at any time outstanding shall not include shares held in the
treasury of the Company and (ii) in the case of any rights, options or warrants
which expire by their terms not more than 60 days after the date of issue, sale,
grant or assumption thereof, no adjustment of the Current Warrant Price shall be
made until the expiration or exercise of all rights, options or warrants,
whereupon such adjustment shall be made in the manner provided in this clause
(b), but only with respect to the shares of Common Stock actually issued
pursuant thereto. Such adjustment shall be made successively whenever any event
specified above shall occur. In the event that any or all rights, options or
warrants covered by this clause (b) are not so issued or expire or terminate
before being exercised, the Current Warrant Price then in effect shall be
appropriately readjusted.
4.3. Common Share Distribution.
(a) If, other than in an Exempt Distribution, the Company shall issue or
otherwise sell any shares of its Common Stock (any such issuance or sale other
than an Exempt Distribution, including any event described in paragraphs (b) and
(c) of this Section 4.3, hereafter being called a "Common Share Distribution"),
the Current Warrant Price shall be reduced to the price (calculated to the
nearest cent) determined by multiplying the Current Warrant Price in effect
immediately prior to such Common Share Distribution by a fraction, the numerator
of which shall be the sum of (A) the number of shares of Common Stock
outstanding immediately prior to such Common Share Distribution multiplied by
the Market Price per share on the date of such Common Share Distribution plus
(B) the consideration received by the Company upon such Common Share
Distribution, and the denominator of which shall be the product of (1) the total
number of shares of Common Stock outstanding immediately after such Common Share
Distribution, multiplied by (2) the Market Price per share on the date of such
Common Share Distribution.
No adjustment of the Current Warrant Price shall be made in an amount less
than 1% of such Current Warrant Price, but any such lesser adjustment shall be
carried forward and shall be made at the time of, and together with, the next
subsequent adjustment which together with any adjustments so carried forward
shall aggregate an amount equal to or greater than 1% of such Current Warrant
Price.
If any Common Share Distribution shall require an adjustment to the Current
Warrant Price pursuant to the foregoing provisions of this Section 4.3, then
effective at the time
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such adjustment is made, the number of shares of Common Stock subject to
purchase upon exercise of this Warrant shall be increased to a number determined
by multiplying the number of shares of Common Stock subject to purchase
immediately before such Common Share Distribution by a fraction, the numerator
of which shall be the number of shares outstanding immediately after giving
effect to such Common Share Distribution and the denominator shall be the sum of
the number of shares outstanding immediately before giving effect to such Common
Share Distribution plus the number of shares of Common Stock which the aggregate
consideration received by the Company with respect to such Common Share
Distribution would purchase at the Market Price on the date of such Common Share
Distribution (before giving effect to such Common Share Distribution). The
provisions of this Section 4.3 shall not operate to increase the Current Warrant
Price or reduce the number of shares of Common Stock subject to purchase upon
exercise of this Warrant.
(b) If, other than in an Exempt Distribution, the Company shall issue,
sell, distribute or otherwise grant in any manner (whether directly or by
assumption in a merger or otherwise) any rights to subscribe for or to purchase,
or any warrants or options for the purchase of, Common Stock or any stock or
securities convertible into or exchangeable for Common Stock (such rights,
warrants or options being herein called "Options" and such convertible or
exchangeable stock or securities being herein called "Convertible Securities"),
whether or not such Options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the price per share for
which shares of Common Stock are issuable upon exercise of such Options or upon
conversion or exchange of such Convertible Securities (determined by dividing
(i) the aggregate amount, if any, received or receivable by the Company as
consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Company upon the exercise of
all such Options, plus, in the case of Options to acquire Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
payable upon the issue or sale of such Convertible Securities and upon the
conversion or exchange thereof, by (ii) the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon the conversion
or exchange of all such Convertible Securities issuable upon the exercise of
such Options) shall be less than the Market Price per share on the date of
granting such Options (before giving effect to such grant), then, for purposes
of paragraph (a) above, the total maximum number of shares of Common Stock
issuable upon the exercise of such Options or upon conversion or exchange of all
such Convertible Securities issuable upon the exercise of such Options shall be
deemed to have been issued as of the date of granting of such Options and
thereafter shall be deemed to be outstanding and the Company shall be deemed to
have received as consideration such price per share, determined as provided
above, therefor, provided, however upon the expiration or termination of
Convertible Securities or Options, if any thereof shall not have been converted,
exchanged or exercised, the number of shares of Common Stock deemed to be issued
and outstanding pursuant to this subsection (b) shall be reduced by such number
of shares as to which Convertible Securities or Options shall have expired or
terminated unexercised, and such shares shall no longer be deemed to be issued
and outstanding, and the Current Warrant Price then in effect shall be
readjusted and thereafter be the price which it would have been had adjustment
been made on the basis of the issuance only of shares actually issued pursuant
to such Convertible Securities or Options. Except as otherwise provided in
paragraph (c) below, no additional adjustment of the Current Warrant Price shall
be made upon the actual exercise of such Options or upon conversion or exchange
of such Convertible Securities.
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(c) If the purchase price provided for in any Option referred to in
paragraph (b) above, the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in paragraph
(b) above, or the rate at which any Convertible Securities referred to in
paragraph (b) above are convertible into or exchangeable for Common Stock shall
change at any time (other than under or by reason of provisions designed to
protect against dilution upon an event which results in a related adjustment
pursuant to this Section 4), the Current Warrant Price then in effect shall
forthwith be readjusted (effective only with respect to any exercise of this
Warrant after such readjustment) to the Current Warrant Price which would then
be in effect had the adjustment made upon the issue, sale, distribution or grant
of such Options or Convertible Securities been made based upon such changed
purchase price, additional consideration or conversion rate, as the case may be;
provided, however, that such readjustment shall give effect to such change only
with respect to such Options and Convertible Securities as then remain
outstanding.
(d) If any shares of Common Stock, Options or Convertible Securities shall
be issued, sold or distributed for cash, the consideration received therefor
shall be deemed to be the amount received by the Company therefor, after
deduction therefrom of any expenses incurred and any underwriting commission or
concessions paid or allowed by the Company in connection therewith. If any
shares of Common Stock, Options or Convertible Securities shall be issued, sold
or distributed for a consideration other than cash, the amount of the
consideration other than cash received by the Company shall be deemed to be the
fair market value of such consideration, after deduction of any expenses
incurred and any underwriting commissions or concessions paid or allowed by the
Company in connection therewith. If any shares of Common Stock, Options or
Convertible Securities shall be issued in connection with any merger in which
the Company is the surviving corporation, the amount of consideration therefor
shall be deemed to be the fair market value of such portion of the assets and
business of the nonsurviving corporation as shall be attributable to such shares
of Common Stock, Option or Convertible Securities, as the case may be. If any
Options shall be issued in connection with the issue and sale of other
securities of the Company, together comprising one integral transaction in which
no specific consideration is allocated to such Options by the parties thereto,
such Options shall be deemed to have been issued for an amount of consideration
equal to the fair market value thereof.
(e) For the purposes of this Section 4, "Exempt Distribution" shall means
an issuance or other sale by the Company of any shares of its Common Stock:
(i) (a) to the Company's officers or directors or (b) to the Company's
officers, directors or employees pursuant to employee stock option, benefit
or incentive plans established for their benefit, whether in existence on
the date hereof or approved by the Board of Directors of the Company after
the date hereof, provided that the number of shares of Common Stock issued
from and after March 14, 2000 pursuant to all issuances and sales pursuant
to this subparagraph (i) does not exceed, in the aggregate, ten percent
(10%) of the Fully Diluted Outstanding of the Company March 14, 2000;
(ii) at a price per share of more than the greater of (a) the Current
Warrant Price or (b) eighty five percent (85%) of the Market Price;
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(iii) upon the conversion or exercise of any options, warrants or
other convertible securities of the Company outstanding on March 14, 2000
and disclosed on the disclosure schedules to the Securities Purchase
Agreement;
4.4. Other Provisions Applicable to Adjustments under this Section. The
following provisions shall be applicable to the making of adjustments of the
number of shares of Common Stock for which this Warrant is exercisable and the
Current Warrant Price provided for in this Section 4:
(a) When Adjustments to Be Made. The adjustments required by this Section 4
shall be made whenever and as often as any specified event requiring an
adjustment shall occur. For the purpose of any adjustment, any specified event
shall be deemed to have occurred at the close of business on the date of its
occurrence.
(b) Fractional Interests. In computing adjustments under this Section 4,
fractional interests in Common Stock shall be taken into account to the nearest
1/10th of a share.
(c) When Adjustment Not Required. If the Company shall take a record of the
holders of its Common Stock for the purpose of entitling them to receive a
dividend or distribution or subscription or purchase rights and shall,
thereafter and before the distribution to stockholders thereof, legally abandon
its plan to pay or deliver such dividend, distribution, subscription or purchase
rights, then thereafter no adjustment shall be required by reason of the taking
of such record and any such adjustment previously made in respect thereof shall
be rescinded and annulled.
(d) Challenge to Good Faith Determination. Whenever the Board of Directors
of the Company shall be required to make a determination in good faith of the
fair value of any item under this Section 4, such determination may be
challenged in good faith by the Holder, and any dispute shall be resolved by an
investment banking firm of recognized national standing selected by the Holder
and reasonably acceptable to the Company.
(e) Proceeding Prior to Any Action Requiring Adjustment. As a condition
precedent to the taking of any action which would require an adjustment pursuant
to this Section 4, the Company shall take any action which may be necessary,
including obtaining regulatory approvals or exemptions, in order that the
Company may thereafter validly and legally issue as fully paid and nonassessable
all shares of Common Stock which the Holder is entitled to receive upon exercise
hereof.
4.5. Reorganization, Reclassification, Merger, Consolidation or Disposition
of Assets. In case the Company shall reorganize its capital, reclassify its
capital stock, consolidate or merge with or into another corporation (where the
Company is not the surviving corporation or where there is a change in or
distribution with respect to the Common Stock of the Company), or sell, transfer
or otherwise dispose of all or substantially all its property, assets or
business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever
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(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation ("Other
Property"), are to be received by or distributed to the holders of Common Stock
of the Company, then Holder shall have the right thereafter to receive, upon
exercise of the Warrant, the number of shares of common stock of the successor
or acquiring corporation or of the Company, if it is the surviving corporation,
and Other Property receivable upon or as a result of such reorganization,
reclassification, merger, consolidation or disposition of assets by a holder of
the number of shares of Common Stock for which this Warrant is exercisable
immediately prior to such event. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate, subject to the Holder's consent, in order to provide for
adjustments of shares of Common Stock for which this Warrant is exercisable
which shall be as nearly equivalent as practicable to the adjustments provided
for in this Section 4. For purposes of this Section 4.5, "common stock of the
successor or acquiring corporation" shall include stock of such corporation of
any class which is not preferred as to dividends or assets over any other class
of stock of such corporation and which is not subject to redemption and shall
also include any evidences of indebtedness, shares of stock or other securities
which are convertible into or exchangeable for any such stock, either
immediately or upon the arrival of a specified date or the happening of a
specified event and any warrants or other rights to subscribe for or purchase
any such stock. The foregoing provisions of this Section 4.4 shall similarly
apply to successive reorganizations, reclassifications, mergers, consolidations
or disposition of assets.
4.6. Other Action Affecting Common Stock. In case at any time or from time
to time the Company shall take any action in respect of its Common Stock, other
than any action taken in the ordinary course of the Company's business or any
action described in this Section 4, which would have a material adverse effect
upon the rights of the Holder, the number of shares of Common Stock and/or the
purchase price thereof shall be adjusted in such manner as may be equitable in
the circumstances, as determined in good faith by an investment bank selected by
Holder.
4.6. Certain Limitations. Notwithstanding anything herein to the contrary,
the Company agrees not to enter into any transaction which, by reason of any
adjustment hereunder, would cause the Current Warrant Price to be less than the
par value per share of Common Stock.
4.7. No Voting Rights. This Warrant shall not entitle its Holder to any
voting rights or other rights as a shareholder of the Company.
5. NOTICES TO HOLDER
5.1. Notice of Adjustments. Whenever the number of shares of Common Stock
for which this Warrant is exercisable, or whenever the price at which a share of
such Common Stock may be purchased upon exercise of the Warrants, shall be
adjusted pursuant to Section 4, the Company shall forthwith prepare a
certificate to be executed by an executive officer of the Company setting forth,
in reasonable detail, the event requiring the adjustment and the method by which
such adjustment was calculated, specifying the number of shares of
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Common Stock for which this Warrant is exercisable and (if such adjustment was
made pursuant to Section 4.4 or 4.5) describing the number and kind of any other
shares of stock or Other Property for which this Warrant is exercisable, and any
change in the purchase price or prices thereof, after giving effect to such
adjustment or change. The Company shall promptly cause a signed copy of such
certificate to be delivered to the Holder in accordance with Section 14.2. The
Company shall keep at its office or agency designated pursuant to Section 12
copies of all such certificates and cause the same to be available for
inspection at said office during normal business hours by the Holder, its
representatives, or any prospective purchaser of a Warrant designated by the
Holder.
5.2. Notice of Corporate Action. If at any time
(a) the Company shall take a record of the holders of its Common Stock for
the purpose of entitling them to receive a dividend or other distribution
(whether in cash, , or any right to subscribe for or purchase any evidences of
its indebtedness, any shares of stock of any class or any other securities or
property of any nature whatsoever, or to receive any warrants or other rights
(including, without limitation, rights to subscribe for or purchase any
evidences of its indebtedness, any shares of its stock or any other securities
or property of any nature whatsoever), or
(b) there shall be any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
consolidation or merger of the Company with, or any sale, transfer or other
disposition of all or substantially all the property, assets or business of the
Company to, another corporation, or
(c) there shall be a voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder (i) at
least thirty (30) Business Days' prior written notice of the date on which a
record date shall be selected for such dividend, distribution or right or for
determining rights to vote in respect of any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up, and (ii) in the case of any such
reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, dissolution, liquidation or winding up, at least thirty (30)
Business Days' prior written notice of the date when the same shall take place.
Such notice in accordance with the foregoing clause also shall specify (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, the date on which the holders of Common Stock shall be
entitled to any such dividend, distribution or right, and the amount and
character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up. Each such written notice shall be sufficiently given if addressed to Holder
at the last address of Holder appearing on the books of the Company and
delivered in accordance with Section 14.2.
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A reclassification of the 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) into shares
of Common Stock and shares of any other class of stock shall be deemed a
distribution by the Company to the holders of its Common Stock of such shares of
such other class of stock within the meaning of this Section and, if the
outstanding shares of Common Stock shall be changed into a larger or smaller
number of shares of Common Stock as a part of such reclassification, such change
shall be deemed a subdivision or combination, as the case may be, of the
outstanding shares of Common Stock within the meaning of Section 4.1.
6. NO IMPAIRMENT
The Company shall not by any action, including, without limitation,
amending its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such actions as may be necessary or appropriate to protect the rights of Holder
against impairment. Without limiting the generality of the foregoing, the
Company will (a) not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of this Warrant, and (c) use its best efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under this Warrant.
Upon the request of Holder, the Company will at any time during the period
this Warrant is outstanding acknowledge in writing, in form reasonably
satisfactory to Holder, the continuing validity of this Warrant and the
obligations of the Company hereunder.
7. RESERVATION AND AUTHORIZATION OF COMMON STOCK
From and after the Closing Date, the Company shall at all times reserve and
keep available for issue upon the exercise of Warrants such number of its
authorized but unissued shares of Common Stock as will be sufficient to permit
the exercise in full of all outstanding Warrants. All shares of Common Stock
which shall be so issuable, when issued upon exercise of any Warrant and payment
therefor in accordance with the terms of such Warrant, shall be duly and validly
issued and fully paid and nonassessable, and not subject to preemptive rights.
Before taking any action which would cause an adjustment reducing the
Current Warrant Price below the then par value, if any, of the shares of Common
Stock issuable upon exercise of the Warrants, the Company shall take any
corporate action which may be necessary in order that the Company may validly
and legally issue fully paid and non-assessable shares of such Common Stock at
such adjusted Current Warrant Price.
Before taking any action which would result in an adjustment in the number
of shares of Common Stock for which this Warrant is exercisable or in the
Current Warrant Price,
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the Company shall obtain all such authorizations or exemptions thereof, or
consents thereto, as may be necessary from any public regulatory body or bodies
having jurisdiction thereof.
8. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS
In the case of all dividends or other distributions by the Company to the
holders of its Common Stock with respect to which any provision of Section 4
refers to the taking of a record of such holders, the Company will in each such
case take such a record as of the close of business on a Business Day. The
Company will not at any time close its stock transfer books or Warrant transfer
books so as to result in preventing or delaying the exercise or transfer of any
Warrant.
9. RESTRICTIONS ON TRANSFERABILITY
The Warrants and the Warrant Stock shall not be transferred, hypothecated
or assigned before satisfaction of the conditions specified in this Section 9,
which conditions are intended to ensure compliance with the provisions of the
Securities Act with respect to the Transfer of any Warrant or any Warrant Stock.
Holder, by acceptance of this Warrant, agrees to be bound by the provisions of
this Section 9.
9.1. Restrictive Legend. The Holder by accepting this Warrant and any
Warrant Stock agrees that this Warrant and the Warrant Stock issuable upon
exercise hereof may not be assigned or otherwise transferred unless and until
(i) the Company has received an opinion of counsel for the Holder that such
securities may be sold pursuant to an exemption from registration under the
Securities Act or (ii) a registration statement relating to such securities has
been filed by the Company and declared effective by the Commission.
(a) Each certificate for Warrant Stock issuable hereunder shall bear a
legend substantially worded as follows unless such securities have been sold
pursuant to an effective registration statement under the Securities Act:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the "Act") or any
state securities laws. The securities may not be offered for sale, sold,
assigned, offered, transferred or otherwise distributed for value except
(i) pursuant to an effective registration statement under the Act or any
state securities laws or (ii) pursuant to an exemption from registration or
prospectus delivery requirements under the Act or any state securities laws
in respect of which the Company has received an opinion of counsel
satisfactory to the Company to such effect. Copies of the agreement
covering both the purchase of the securities and restricting their transfer
may be obtained at no cost by written request made by the holder of record
of this certificate to the Secretary of the Company at the principal
executive offices of the Company."
(b) Except as otherwise provided in this Section 9, the Warrant shall be
stamped or otherwise imprinted with a legend in substantially the following
form:
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"This Warrant and the securities represented hereby have not been
registered under the Securities Act of 1933, as amended, or any state
securities laws and may not be transferred in violation of such Act, the
rules and regulations thereunder or any state securities laws or the
provisions of this Warrant."
9.2. Notice of Proposed Transfers. Prior to any Transfer or attempted
Transfer of any Warrants or any shares of Restricted Common Stock, the Holder
shall give five (5) days' prior written notice (a "Transfer Notice") to the
Company of Holder's intention to effect such Transfer, describing the manner and
circumstances of the proposed Transfer, and obtain from counsel to Holder an
opinion that the proposed Transfer of such Warrants or such Restricted Common
Stock may be effected without registration under the Securities Act or state
securities laws. After the Company's receipt of the Transfer Notice and opinion,
such Holder shall thereupon be entitled to Transfer such Warrants or such
Restricted Common Stock, in accordance with the terms of the Transfer Notice.
Each certificate, if any, evidencing such shares of Restricted Common Stock
issued upon such Transfer and the Warrant issued upon such Transfer shall bear
the restrictive legends set forth in Section 9.1, unless in the opinion of such
counsel such legend is not required in order to ensure compliance with the
Securities Act.
9.3. Required Registration. Pursuant to the terms and conditions set forth
in the Registration Rights Agreement, the Company shall prepare and file with
the Commission not later than the thirtieth (30th) day after the Closing Date, a
Registration Statement relating to the offer and sale of the Common Stock
issuable upon exercise of the Warrants and shall use its best efforts to cause
the Commission to declare such Registration Statement effective in accordance
with the terms set forth in Section 2(a) of the Registration Rights Agreement.
9.4. Termination of Restrictions. Notwithstanding the foregoing provisions
of Section 9, the restrictions imposed by this Section upon the transferability
of the Warrants, the Warrant Stock and the Restricted Common Stock (or Common
Stock issuable upon the exercise of the Warrants) and the legend requirements of
Section 9.1 shall terminate as to any particular Warrant or share of Warrant
Stock or Restricted Common Stock (or Common Stock issuable upon the exercise of
the Warrants) (i) when and so long as such security shall have been effectively
registered under the Securities Act and applicable state securities laws and
disposed of pursuant thereto or (ii) when the Company shall have received an
opinion of counsel that such shares may be transferred without registration
thereof under the Securities Act and applicable state securities laws. Whenever
the restrictions imposed by Section 9 shall terminate as to this Warrant, as
hereinabove provided, the Holder hereof shall be entitled to receive from the
Company upon written request of the Holder, at the expense of the Company, a new
Warrant bearing the following legend in place of the restrictive legend set
forth hereon:
"THE RESTRICTIONS ON TRANSFERABILITY OF THE WITHIN WARRANT CONTAINED
IN SECTION 9 HEREOF TERMINATED ON ________, 20__, AND ARE OF NO FURTHER
FORCE AND EFFECT."
All Warrants issued upon registration of transfer, division or combination of,
or in substitution for, any Warrant or Warrants entitled to bear such legend
shall have a similar legend endorsed
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thereon. Whenever the restrictions imposed by this Section shall terminate as to
any share of Restricted Common Stock, as hereinabove provided, the holder
thereof shall be entitled to receive from the Company, at the Company's expense,
a new certificate representing such Common Stock not bearing the restrictive
legends set forth in Section 9.1.
9.5. Listing on Securities Exchange. If the Company shall list any shares
of Common Stock on any securities exchange, it will, at its expense, list
thereon, maintain and, when necessary, increase such listing of, all shares of
Common Stock issued or, to the extent permissible under the applicable
securities exchange rules, issuable upon the exercise of this Warrant so long as
any shares of Common Stock shall be so listed during the Exercise Period.
10. SUPPLYING INFORMATION
The Company shall cooperate with Holder in supplying such information as
may be reasonably necessary for Holder to complete and file any information
reporting forms presently or hereafter required by the Commission as a condition
to the availability of an exemption from the Securities Act for the sale of any
Warrant or Restricted Common Stock.
11. LOSS OR MUTILATION
Upon receipt by the Company from Holder of evidence reasonably satisfactory
to it of the ownership of and the loss, theft, destruction or mutilation of this
Warrant and indemnity reasonably satisfactory to it (it being understood that
the written agreement of the Holder shall be sufficient indemnity), and in case
of mutilation upon surrender and cancellation hereof, the Company will execute
and deliver in lieu hereof a new Warrant of like tenor to Holder; provided, in
the case of mutilation, no indemnity shall be required if this Warrant in
identifiable form is surrendered to the Company for cancellation.
12. OFFICE OF THE COMPANY
As long as any of the Warrants remain outstanding, the Company shall
maintain an office or agency (which may be the principal executive offices of
the Company) where the Warrants may be presented for exercise, registration of
transfer, division or combination as provided in this Warrant, such office to be
initially located at 7314 Scout Avenue, Bell Gardens, California 90201 fax:
(562) 928-9933, provided, however, that the Company shall provide prior written
notice to Holder of a change in address no less than thirty (30) days prior to
such change.
13. LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative action by Holder to
purchase shares of Common Stock, and no enumeration herein of the rights or
privileges of Holder hereof, shall give rise to any liability of Holder for the
purchase price of any Common Stock or as a stockholder of the Company, whether
such liability is asserted by the Company or by creditors of the Company.
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14. MISCELLANEOUS
14.1. Nonwaiver and Expenses. No course of dealing or any delay or failure
to exercise any right hereunder on the part of Holder shall operate as a waiver
of such right or otherwise prejudice Holder's rights, powers or remedies,
notwithstanding all rights hereunder terminate on the Expiration Date. If the
Company fails to make, when due, any payments provided for hereunder, or fails
to comply with any other provision of this Warrant, the Company shall pay to
Holder such amounts as shall be sufficient to cover any direct and indirect
losses, damages, costs and expenses including, but not limited to, reasonable
attorneys' fees, including those of appellate proceedings, incurred by Holder in
collecting any amounts due pursuant hereto or in otherwise enforcing any of its
rights, powers or remedies hereunder.
14.2. Notice Generally. Except as may be otherwise provided herein, any
notice or other communication or delivery required or permitted hereunder shall
be in writing and shall be delivered personally or sent by certified mail,
postage prepaid, or by a nationally recognized overnight courier service, and
shall be deemed given when so delivered personally or by overnight courier
service, or, if mailed, three (3) days after the date of deposit in the United
States mails, as follows:
(a) if to the Company, to:
USA Biosmass Corporation
7314 Scout Avenue
Bell Gardens, California 90201
Attention: Mr. Fred Behrens
Phone: (562) 928-9900
Fax: (562) 928-9932
with a copy to: Stepp & Beauchamp LLP
1301 Dove Street, Suite 480
Newport Beach, California 92660-2422
Attention: Thomas E. Stetpp, Jr., Esq.
Phone: (949) 660-9700
Fax: (949) 660-9010
(b) if to the Purchaser to: Siete Investors LLC
c\o WEC Asset Management LLC
110 Colabough Pond Road
Croton-on-the-Hudson, New York 10520
Attention: Ethan E. Benovitz
Phone: (914) 271-2211
Fax: (914) 271-0889
with a copy to: Cohen Tauber Spievack & Wagner LLP
1350 Avenue of the Americas, 26th Floor
New York, New York 10019
Attention: Laurence S. Tauber
Phone: (212) 519-5195
Fax: (212) 262-1766
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The Company or the Holder may change the foregoing address by notice given
pursuant to this Section 14.2.
14.3. Indemnification. The Company agrees to indemnify and hold harmless
Holder from and against any liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses
and disbursements of any kind which may be imposed upon, incurred by or asserted
against Holder in any manner relating to or arising out of any failure by the
Company to perform or observe in any respect any of its covenants, agreements,
undertakings or obligations set forth in this Warrant.
14.4. Remedies. Holder in addition to being entitled to exercise all rights
granted by law, including recovery of damages, will be entitled to specific
performance of its rights under this Warrant. The Company agrees that monetary
damages would not be adequate compensation for any loss incurred by reason of a
breach by it of the provisions of this Warrant and hereby agrees to waive the
defense in any action for specific performance that a remedy at law would be
adequate.
14.5. Successors and Assigns. Subject to the provisions of Sections 3.1 and
9, this Warrant and the rights evidenced hereby shall inure to the benefit of
and be binding upon the successors of the Company and the successors and assigns
of Holder. The provisions of this Warrant are intended to be for the benefit of
all Holders from time to time of this Warrant and, with respect to Section 9
hereof, holders of Warrant Stock, and shall be enforceable by any such Holder or
holder of Warrant Stock.
14.6. Amendment. This Warrant and all other Warrants may be modified or
amended or the provisions hereof waived only with the prior written consent of
the Company and the Holder.
14.7. Severability. Wherever possible, each provision of this Warrant shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Warrant shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Warrant.
14.8. Headings. The headings used in this Warrant are for the convenience
of reference only and shall not, for any purpose, be deemed a part of this
Warrant.
14.9. Governing Law. This Warrant shall be governed by the laws of the
State of New York, without regard to the provisions thereof relating to conflict
of laws. The Company consents to the jurisdiction of the federal courts whose
districts encompass any part of the City of New York or the state courts of the
State of New York sitting in the City of New York in connection with any dispute
arising under this Warrant or any of the transactions contemplated hereby, and
hereby waives, to the maximum extent permitted by law, any objection, including
any objections based on forum non conveniens, to the bringing of any such
proceeding in such jurisdictions.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
and its corporate seal to be impressed hereon and attested by its Secretary or
an Assistant Secretary.
Dated: March 14, 2000
USA BIOMASS CORPORATION
By:
----------------------------
Name:
Title: Chairman
Attest:
By:
------------------------
Name:
Title:
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EXHIBIT A
SUBSCRIPTION FORM
[To be executed only upon exercise of Warrant]
The undersigned registered owner of this Warrant irrevocably exercises this
Warrant for the purchase of ______ Shares of Common Stock of USA Biomass
Corporation, and herewith makes payment therefor in cash or by check or bank
draft made payable to the Company, all at the price and on the terms and
conditions specified in this Warrant and requests that certificates for the
shares of Common Stock hereby purchased (and any securities or other property
issuable upon such exercise) be issued in the name of and delivered to
_____________ whose address is _________________ and, if such shares of Common
Stock shall not include all of the shares of Common Stock issuable as provided
in this Warrant, that a new Warrant of like tenor and date for the balance of
the shares of Common Stock issuable hereunder be delivered to the undersigned.
-------------------------------
(Name of Registered Owner)
-------------------------------
(Signature of Registered Owner)
-------------------------------
(Street Address)
-------------------------------
(City) (State) Zip Code)
NOTICE: The signature on this subscription must correspond with the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
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EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby
sells, assigns and transfers unto the Assignee named below all of the rights of
the undersigned under this Warrant, with respect to the number of shares of
Common Stock set forth below:
Name and Address of Assignee No. of Shares of
---------------------------- ----------------
Common Stock
and does hereby irrevocably constitute and appoint _______ ________________
attorney-in-fact to register such transfer on the books of USA Biomass
Corporation maintained for the purpose, with full power of substitution in the
premises.
Dated:__________________ Print Name:___________________
Signature:_____________________
Witness:______________________
NOTICE: The signature on this assignment must correspond with the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
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EXHIBIT C
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of March 14, 2000 (this
"Agreement"), is made by and between USA Biomass Corporation, a Delaware
corporation (the "Company") and Siete Investors LLC, a Delaware limited
liability company (the "Purchaser").
W I T N E S S E T H:
WHEREAS, pursuant to a Securities Purchase Agreement, dated as of the date
hereof among the Purchaser and the Company (the "Securities Purchase
Agreement"), the Company has agreed to issue and sell to the Purchaser, (i)
three thousand (3,000) shares of the Company's 6% Convertible Series C Preferred
Stock, stated value $1,000 per share (the "Preferred Stock") and (ii) warrants
(the "Warrants") to purchase one hundred thousand (100,000) shares of the common
stock par value $.001 per share of the Company (the "Common Stock");
WHEREAS, pursuant to the terms of the Preferred Stock and the Warrants, (i)
upon the conversion of the Preferred Stock, (ii) in lieu of dividend payments on
the Preferred Stock and (iii) upon exercise of the Warrants, the Company will
issue to the Purchaser shares of Common Stock (such shares are referred to
herein as the "Shares"); and
WHEREAS, to induce the Purchaser to execute and deliver the Securities
Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended (the "Securities Act"), and
applicable state securities laws.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Purchaser
hereby agree as follows:
1. Definitions.
(a) As used in this Agreement, the following terms shall have the following
meanings:
(i) "Effectiveness Deadline" shall have the meaning set forth in
section 2(a)(i) hereof.
(ii) "Filing Deadline" shall have the meaning set forth in Section
2(a)(i) hereof.
(iii) "Purchase Price" means the aggregate purchase price paid by the
Purchaser for the Preferred Stock and the Warrants.
(iv) "Register," "Registered," and "Registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415
under the Securities Act or any successor rule providing for offering
securities on a continuous basis ("Rule 415"), and the declaration or
ordering of
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effectiveness of such Registration Statement by the United States
Securities and Exchange Commission (the "Commission").
(v) "Registrable Securities" means the Shares.
(vi) "Registration Statement" means a registration statement or
registration statements of the Company filed under the Securities Act
covering Registrable Securities relating to the Shares.
Capitalized terms used herein and not otherwise defined herein shall have
the meanings set-forth in the Securities Purchase Agreement.
2. Registration.
(a) Mandatory Registrations.
(i) Registration Statement. The Company shall prepare, and, as soon as
practicable but in no event later than thirty (30) days after the Closing
Date (as defined in the Securities Purchase Agreement) (the "Filing
Deadline"), file with the Commission a Registration Statement or
Registration Statements (as necessary) on Form S-3, covering the resale of
all of the Registrable Securities. In the event that Form S-3 is
unavailable for such a registration, the Company shall use Form S-1 or such
other form as is available for such a registration. Any Registration
Statement prepared pursuant hereto shall register for resale at least that
number of shares of Common Stock equal to the product of (x) two and, (y)
the sum of (i) the maximum number of Shares that are issuable upon
conversion of the Preferred Stock on the date of filing, and (ii) the
maximum number of Shares issuable upon exercise of the Warrants, in each
case, without regard to any limitation on any holder's ability to convert
any of the Warrants or the Preferred Stock and without regard to whether
any or all of such Preferred Stock or Warrants have been issued to
Purchaser (on the date calculated, the "Minimum Conversion Amount"). Such
Registration Statement shall state that, in accordance with Rule 416 under
the Securities Act, it also covers such indeterminate number of additional
Shares as may become issuable upon conversion of such Preferred Stock or
exercise of such Warrants (i) resulting from any adjustment in the
applicable Conversion Price of such Preferred Stock or the Exercise Price
of such Warrants or (ii) to prevent dilution resulting from stock splits or
stock dividends. If at any time the Minimum Conversion Amount exceeds the
total number of Shares so registered, the Company shall, within five (5)
business days after receipt of a written notice from the Purchaser, either
(i) amend the Registration Statement or Registration Statements filed by
the Company pursuant to the preceding sentence, if such Registration
Statement has not been declared effective by the Commission at that time,
to register all of the Shares into which the Preferred Stock and the
Warrants may be converted or exercised, as applicable, or (ii) if such
Registration Statement has been declared effective by the Commission at
that time, file with the Commission an additional Registration Statement on
Form S-3, or such other appropriate form, to register the number of shares
of Common Stock into which the Preferred Stock and Warrants may be
converted or exercised, as applicable, that exceed the number of Shares
already registered. The Company shall use its best efforts to have the
Registration Statement declared effective within the earliest to occur of
(i) ninety (90) days following the Closing Date (ii) if the Commission
elects not to conduct a review of the Registration Statement, the date
which is three (3) business days after the date upon which either the
Company or its counsel is so notified, whether orally or in writing; or
(iii) if the Registration Statement is reviewed by the Commission, the date
which is three (3) business days after the date upon which the Company or
its counsel is notified by the
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Commission, whether orally or in writing, that the Commission has no
further comments with respect to the Registration Statement or that the
Registration Statement may be declared effective. The earliest of such
dates is referred to herein as the "Required Effective Date."
Notwithstanding the use of the terms "Required Filing Date" and "Required
Effective Date" herein, the Company shall at all times use its best efforts
to file each required Registration Statement or amendment to a Registration
Statement as soon as possible after the Closing Date or after the date the
Company becomes obligated to file such Registration Statement or amendment,
as the case may be, and to cause each such Registration Statement or
amendment to become effective as soon as possible thereafter. No securities
of the Company other than the Registrable Securities shall be included in
any such Registration Statement.
(ii) The Company shall keep each Registration Statement effective
pursuant to Rule 415 at all times until such date as is the earlier of (i)
the date on which all of the Registrable Securities have been sold, (ii)
the date on which the Registrable Securities (in the opinion of counsel to
the Purchaser) may be immediately sold without restriction (including
without limitation as to volume by each holder thereof) without
registration under the Securities Act and (iii) the date which is twenty
four (24) months following the date on which the Registration Statement was
declared effective (the "Registration Period").
(b) Payments by the Company.
(i) (A) If the Registration Statement covering the Registrable
Securities is not filed in proper form with the Commission on or prior to
the Filing Deadline, (B) if the Registration Statement covering the
Registrable Securities is not effective on or prior to the Effectiveness
Deadline, (C) if the number of Shares listed for trading on the NASDAQ
National Market, as applicable, or reserved by the Company for issuance
shall be insufficient, for any period of five (5) consecutive days at any
time after the Effectiveness Deadline, for issuance upon the conversion of
the Shares and the exercise of the Warrants, or (D) upon the occurrence of
a Blackout Event (as described in Section 3(f) or Section 3(g) below), for
any period of five (5) consecutive days at any time after the Effectiveness
Deadline (each of the events described in clauses (A) through (D) of this
paragraph are referred to herein as a "Registration Default"), the Company
will make payments to the Purchaser in such amounts and at such times as
shall be determined pursuant to this Section 2(b).
(ii) The amount (the "Periodic Amount") to be paid by the Company to
the Purchaser as of each thirty (30) day period during which a Registration
Default shall be in effect (each such period, a "Default Period") shall be
equal to (x) with respect to any Registration Default described in Section
2(b)(i) clause (A) or (B), one percent (1%) of the Purchase Price paid by
the Purchaser for the first thirty (30) day period and two percent (2%) of
such amount for each thirty (30) day period thereafter and (y) with respect
to any Registration Default described in Section 2(b)(i) clause (C) or (D),
one percent (1%) of the Purchase Price paid by the Purchaser of any
securities affected by such event as described in Section 2(b)(i) clause
(C) or (D) for the first thirty (30) day period and two percent (2%) of
such amount for each thirty (30) day period thereafter; provided that, with
respect to any Default Period during which the relevant Registration
Defaults shall have been cured, the Periodic Amount shall be pro rated for
the number of days during such period during which the Registration
Defaults were pending; and provided, however, that the payment of such
Periodic Amounts shall not relieve the Company from its continuing
obligations to register the Shares pursuant to Section 2(a).
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<PAGE>
(iii) Each Periodic Amount shall be payable by the Company in cash or
other immediately available funds to the Purchaser monthly, without demand
therefor by the Purchaser.
(iv) The parties acknowledge that the damages which may be incurred by
the Purchaser if the Registration Statement is not filed by the Filing
Deadline, if the Registration Statement has not been declared effective by
the Effectiveness Deadline, or if the provisions of Section 3(e) or 3(f)
become applicable, may be difficult to ascertain. The parties agree that
the Periodic Amount represents a reasonable estimate on the part of the
parties, as of the date of this Agreement, of the amount of such damages.
(c) Piggyback Registration. (i) If at any time or from time to time, the
Company shall determine to register any of its securities, for its own account
or the account of any of its shareholders, other than a Registration relating
solely to employee share option plans or pursuant to an acquisition transaction
on Form S-4, the Company will:
(A) provide to the Purchaser written notice thereof as soon as
practicable prior to filing the Registration Statement; and
(B) include in such Registration Statement and in any underwriting
involved therein, all of the Registrable Securities specified in a written
request by the Purchaser made within fifteen (15) days after receipt of
such written notice from the Company.
(ii) If the Registration is for a registered public offering involving
an underwriting, the Company shall so advise the Purchaser as a part of the
written notice given pursuant to this Section. In such event, the rights of
the Purchaser hereunder shall include participation in such underwriting
and the inclusion of the Registrable Securities in the underwriting to the
extent provided herein. To the extent that the Purchaser proposes to
distribute its securities through such underwriting, the Purchaser shall
(together with the Company and any other security holders of the Company
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by the Company. Notwithstanding
any other provision of this Section, if the managing underwriter of such
underwriting determines that marketing factors require a limitation of the
number of shares to be offered in connection with such underwriting, the
managing underwriter may limit the number of Registrable Securities to be
included in the Registration and underwriting (provided, however, (a) the
Registrable Securities shall not be excluded from such underwritten
offering prior to any securities held by officers and directors of the
Company or their affiliates, (b) the Registrable Securities shall be
entitled to at least the same priority in an underwritten offering as any
of the Company's existing security holders, and (c) the Company shall not
enter into any agreement that would provide any security holder with
priority in connection with an underwritten offering greater than the
priority granted to the Purchaser hereunder). The Company shall so advise
any of its other security holders who are distributing their securities
through such underwriting pursuant to their respective piggyback
registration rights, and the number of shares of Registrable Securities and
other securities that may be included in the registration and underwriting
shall be allocated among the Purchaser and all other security holders of
the Company in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities held by the Purchaser and such other
security holders at the time of the filing of the registration statement.
If the Purchaser disapproves of the terms of any such underwriting, it may
elect to withdraw therefrom by written
4
<PAGE>
notice to the Company. Any Registrable Securities so excluded or withdrawn
from such underwriting shall be withdrawn from such Registration.
(d) Eligibility for Form S-1. The Company represents and warrants that it
meets all of the requirements for the use of Form S-1 for the Registration, of
the sale by the Purchaser of the Registrable Securities and any transferee who
purchases the Registrable Securities, and the Company shall file all reports
required to be filed by the Company with the Commission in a timely manner, and
shall take such other actions as may be necessary to maintain such eligibility
for the use of Form S-1.
(e) Priority in filing. From the date hereof until one hundred eighty (180)
days following the effective date of the Registration Statement pursuant to
Section 2(a) of this Agreement, provided, however, that such one hundred eighty
day period shall be extended by the number of days after the effective date of
such Registration Statement when the Purchaser is not permitted to utilize the
prospectus or otherwise to resell Registrable Securities, the Company shall not
permit the registration of any of its securities under the Securities Act to be
filed or to become effective, other than those covered by this Agreement,
without the prior written approval of the Purchaser.
3. Obligations of the Company. In connection with the registration of the
Registrable Securities, the Company shall do each of the following:
(a) Prepare and file with the Commission the Registration Statements
required by Section 2 of this Agreement and such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectuses used in connection with the Registration Statement, each in such
form as to which the Purchaser and its counsel shall not have objected, as may
be necessary to keep the Registration effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the Securities Act with respect to the disposition of all of the
Registrable Securities and all of the Warrants of the Company covered by the
Registration Statement until such time as all of such Registrable Securities and
all of such Warrants have been disposed of in accordance with the intended
methods of disposition by the seller or sellers thereof as set forth in the
Registration Statement;
(b) Furnish to the Purchaser, if the Registrable Securities of the
Purchaser are included in the Registration Statement, and its legal counsel
identified to the Company, promptly after the same is prepared and publicly
distributed, filed with the Commission, or received by the Company, a copy of
the Registration Statement, each preliminary prospectus, each final prospectus,
and all amendments and supplements thereto and such other documents, as the
Purchaser may reasonably request in order to facilitate the disposition of its
Registrable Securities and Warrants;
(c) Furnish to the Purchaser and its counsel copies of any correspondence
between the Company and the Commission with respect to any registration
statement or amendment or supplement thereto filed pursuant to this Agreement;
(d) Use all best efforts to (i) register and qualify the Registrable
Securities covered by the Registration Statement under such other securities or
blue sky laws of such jurisdictions as the Purchaser may reasonably request,
(ii) prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements to such registrations
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<PAGE>
and qualifications as may be necessary to maintain the effectiveness thereof at
all times during the Registration Period, (iii) take such other actions as may
be necessary to maintain such registrations and qualifications in effect at all
times during the Registration Period and (iv) take all other actions necessary
or advisable to qualify the Registrable Securities for sale in such
jurisdictions, provided that in connection therewith, the Company shall not be
required to qualify as a foreign corporation or to file a general consent to the
service of process in any jurisdiction;
(e) List such securities on the Nasdaq National Market and all the other
national securities exchanges on which any securities of the Company are then
listed, and file any filings required by the Nasdaq National Market and/or such
other exchanges.
(f) As promptly as practicable after becoming aware of such event, notify
each Purchaser of the occurrence of any event of which the Company has
knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading, and to use its best efforts to promptly prepare a
supplement or amendment to the Registration Statement or other appropriate
filing with the Commission to correct such untrue statement of omission, and to
deliver a number of copies of such supplement or amendment to the Purchaser as
the Purchaser may reasonably request;
(g) As promptly as practicable after becoming aware of such event, notify
the Purchaser who holds Warrants or Registrable Securities being sold (or, in
the event of an underwritten offering, the underwriters) of the issuance by the
Commission or any stop order or other suspension of the effectiveness of the
Registration Statement at the earliest possible time, and to use its best
efforts to promptly obtain the withdrawal of such stop order or other suspension
of effectiveness;
(h) As promptly as practicable after becoming aware of such event, notify
the Purchaser who holds Registrable Securities being sold (or, in the event of
an underwritten offering, the managing underwriters) of the issuance by the
Commission or any stop order or other suspension of the effectiveness of the
Registration Statement at the earliest possible time, and to use its best
efforts to promptly obtain the withdrawal of such stop order or other suspension
of effectiveness (the occurrence of any of the events described in paragraphs
(f) and (g) of this Section 3 is referred to herein as a "Blackout Event");
(i) During the period commencing upon (i) the Purchaser's receipt of a
notification pursuant to Section 3(f) above, or (ii) the entry of a stop order
or other suspension of effectiveness of the Registration Statement described in
Section 3(g) above, and ending at such time as (y) the Company shall have
completed the applicable filings (and if applicable, such filings shall have
been declared effective) and shall have delivered to the Purchaser the documents
required pursuant to Section 3(f) above, or (z), such stop order or other
suspension of the effectiveness of the Registration Statement shall have been
removed, the Company shall be liable to remit the payments required to be paid
pursuant to Section 2(b) above;
(j) If the offering is underwritten, at the request of a Purchaser, to
furnish on the date that Registrable Securities are delivered to the
underwriters for sale pursuant to such registration: (i) an opinion dated such
date of counsel representing the Company for the purposes of such registration,
addressed to the underwriters and to any Purchaser selling Registrable
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<PAGE>
Securities in connection with such underwriting, stating that such registration
statement has become effective under the Securities Act and that (A) to the best
knowledge of such counsel, no stop order suspending the effectiveness thereof
has been issued and no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act and (B) the registration
statement, the related prospectus and each amendment or supplement thereof
comply as to form in all material respects with the requirements of the
Securities Act (except that such counsel need not express any opinion as to
financial statements or other financial data contained therein) and (ii) a
letter dated such date from the Company's independent public accountants
addressed to the underwriters and to the Purchaser, stating that they are
independent public accountants within the meaning of the Securities Act and
that, in the opinion of such accountants, the financial statements of the
Company included in the registration statement or the prospectus, or any
amendment or supplement thereof, comply as to form in all material respects with
the applicable accounting requirements of the Securities Act, and such letter
shall additionally cover such other financial matters (including information as
to the period ending no more than five (5) business days prior to the date of
such letter) with respect to such registration as such underwriters may
reasonably request; and
(k) Cooperate with the Purchaser to facilitate the timely preparation and
delivery of certificates for the Registrable Securities to be offered pursuant
to the Registration Statement and to enable such certificates for the
Registrable Securities to be in such denominations or amounts, as the case may
be, as the Purchaser may reasonably request, and registered in such names as the
Purchaser may request; and, within three (3) business days after a Registration
Statement which includes Registrable Securities is ordered effective by the
Commission, the Company shall deliver, and shall cause legal counsel selected by
the Company to deliver, to the transfer agent for the Registrable Securities
(with copies to the Purchaser) an appropriate instruction and opinion of such
counsel.
4. Obligations of the Purchaser. In connection with the registration of the
Registrable Securities, the Purchaser shall have the following obligations:
(a) Take all other reasonable actions necessary to expedite and facilitate
the disposition by the Purchaser of the Registrable Securities pursuant to the
Registration Statement.
(b) Furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of and
the Registrable Securities held by it, as shall be reasonably required to effect
the registration of such Registrable Securities, and the Purchaser shall execute
such documents in connection with such registration as the Company may
reasonably request. At least five (5) days prior to the first anticipated filing
date of the Registration Statement, the Company shall notify the Purchaser of
the information the Company included in the Registration Statement.
(c) The Purchaser, by its acceptance of the Registrable Securities, agrees
to cooperate with the Company as reasonably requested by the Company in
connection with the preparation and filing of any Registration Statement
hereunder.
(d) The Purchaser agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in Section 3(f) or 3(g)
above, it will immediately discontinue disposition of its Registrable Securities
pursuant to the Registration Statement covering such Registrable Securities
until such copies of the supplemented or amended prospectus contemplated by
Section 3(f) or 3(g) shall be furnished to the Purchaser.
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<PAGE>
5. Expenses of Registration. All expenses, other than underwriting
discounts and commissions and other fees and expenses of investment bankers and
other than brokerage commissions, incurred in connection with registrations,
filings or qualifications pursuant to Section 3, but including, without
limitation, all registration, listing, and qualification fees, printing and
accounting fees, and the fees and disbursements of counsel for the Company, and
the fees of one counsel to the Purchaser with respect to each Registration
Statement filed pursuant hereto, shall be borne by the Company.
6. Indemnification. In the event any Registrable Securities are included in
a Registration Statement under this Agreement:
(a) The Company will indemnify and hold harmless the Purchaser, each of its
officers, directors, shareholders and members, and each person, if any, who
controls the Purchaser within the meaning of the Securities Act or the Exchange
Act (each, an "Indemnified Person"), against any losses, claims, damages,
liabilities or expenses (joint or several) incurred (collectively, "Claims") to
which any of them may become subject under the Securities Act, the Exchange Act
or otherwise, insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon: (i)
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or any post-effective amendment thereof or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances in which they were made, not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus if used prior to the effective date of such Registration
Statement, or contained in the final prospectus (as amended or supplemented, if
the Company files any amendment thereof or supplement thereto with the
Commission) or the omission to state therein any material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state or
foreign securities law or any rule or regulation under the Securities Act, the
Exchange Act or any state or foreign securities law (the matters in foregoing
clauses (i) through (iii) being, collectively, "Violations"). The Company shall,
subject to the provisions of Section 6(b) below, reimburse the Purchaser,
promptly as such expenses are incurred and are due and payable, for any legal
and other costs, expenses and disbursements in giving testimony or furnishing
documents in response to a subpoena or otherwise, including without limitation,
the costs, expenses and disbursements, as and when incurred, of investigating,
preparing or defending any such action, suit, proceeding or investigation
(whether or not in connection with litigation in which the Purchaser is a
party), incurred by it in connection with the investigation or defense of any
such Claim. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(a) shall not (i) apply to
any Claim arising out of or based upon a modification which occurs in reliance
upon and in conformity with information furnished in writing to the Company by
or on behalf of any Indemnified Person expressly for use in connection with the
preparation of the Registration Statement or any such amendment thereof or
supplement thereto; (ii) with respect to any preliminary prospectus, inure to
the benefit of any such person from whom the person asserting any such Claim
purchased the Registrable Securities that are the subject thereof (or to the
benefit of any person controlling such person) if the untrue statement or
omission of material fact contained in the preliminary prospectus was corrected
in the final prospectus, as then amended or supplemented, if such final
prospectus was timely made available by the Company pursuant to Section 3(b)
hereof; (iii) be available to the extent that such Claim is based upon a failure
of the Purchaser to deliver or to
8
<PAGE>
cause to be delivered the prospectus made available by the Company, if such
prospectus was timely made available by the Company pursuant to Section 3(b)
hereof; or (iv) apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of the Company, which
consent shall not be unreasonably withheld. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of the
Indemnified Person and shall survive the transfer of the Registrable Securities
by the Purchaser pursuant to Section 9. The Purchaser will indemnify the Company
and its officers and directors against any Claims arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company, by or on behalf of the Purchaser, expressly
for use in connection with the preparation of the Registration Statement,
subject to such limitations and conditions as are applicable to the
Indemnification provided by the Company in this Section 6.
(b) Promptly after receipt by an Indemnified Person under this Section 6 of
notice of the commencement of any action (including any governmental action),
such Indemnified Person shall, if a Claim in respect thereof is to be made
against any indemnifying party under this Section 6, deliver to the indemnifying
party a written notice of the commencement thereof, and the indemnifying party
shall have the right to participate in, and to the extent that the indemnifying
party so desires, jointly with any other indemnifying party similarly notified,
to assume control of the defense thereof with counsel mutually satisfactory to
the indemnifying party and the Indemnified Person, provided, however, that an
Indemnified Person shall have the right to retain its own counsel with the
reasonable fees and expenses to be paid by the indemnifying party, if, in the
reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person and the indemnifying
party would be inappropriate due to actual or potential differing interests
between such Indemnified Person and any other party represented by such counsel
in such proceeding. In such event, the Company shall pay for only one separate
legal counsel for the Purchaser, and such legal counsel shall be selected by the
Purchaser. The failure to deliver written notice to an indemnifying party within
a reasonable time after the commencement of any such action shall not relieve
such indemnifying party of any liability to the Indemnified Person under this
Section 6, except to the extent that the indemnifying party is materially
prejudiced in its ability to such action. The indemnification required by this
Section 6 shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as such expense, loss, damage or
liability is incurred and is due and payable.
(c) No indemnifying party, in the defense of any such claim or litigation,
shall, except with the consent of each Indemnified Party, consent to entry of
any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Person of an unconditional and irrevocable release from all
liability in respect of such claim or litigation.
(d) Notwithstanding the foregoing, to the extent that any provisions
relating to indemnification or contribution contained in the underwriting
agreements entered into among the Company, the underwriters and the Purchaser in
connection with the underwritten public offering are in conflict with the
foregoing provisions, the provisions in such underwriting agreements shall be
controlling as to the Registrable Securities included in the public offering;
provided, however, that if, as a result of this Section 6(d), the Purchaser, its
officers, directors, shareholders, members or any person controlling the
Purchaser is or are held liable with respect to any Claim for which they would
be entitled to indemnification hereunder but for this Section
9
<PAGE>
6(d) in an amount which exceeds the aggregate proceeds received by the Purchaser
from the sale of Registrable Securities included in a registration pursuant to
such underwriting agreement (the "Excess Liability"), the Company shall
reimburse the Purchaser for such Excess Liability.
7. Contribution. To the extent any indemnification by an indemnifying party
is prohibited or limited under applicable law, the indemnifying party agrees to
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage, liability or expense in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the one
hand and the Indemnified Person on the other hand in connection with the
statements or omissions which resulted in such Claim, as well as any other
relevant equitable considerations. The relative fault of the indemnifying party
and the Indemnified Person shall be determined by reference to, among other
things, whether the untrue statement of a material fact or the omission to state
a material fact on which such Claim is based relates to information supplied by
the indemnifying party or by the Indemnified Person, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. Notwithstanding the forgoing, (a) no contribution
shall be made under circumstances where the payor would not have been liable for
indemnification under the fault standards set forth in Section 6, (b) no seller
of Registrable Securities guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any seller of Registrable Securities who was not guilty of
such fraudulent misrepresentation and (c) contribution by any seller of
Registrable Securities shall be limited in amount to the net proceeds received
by such seller from the sale of such Registrable Securities. The Company and the
Purchaser agree that it would not be just and equitable if contribution pursuant
to this Section 7 were determined by pro-rata allocation (even if the Purchaser
and any other party were treated as one entity for such purpose) or by any other
method of allocation that does not take account of the equitable considerations
referred to in this Section.
8. Reports Under Exchange Act.
With a view to making available to the Purchaser the benefits of Rule 144
promulgated under the Securities Act or any other similar rule or regulation of
the Commission that may at any time permit the Purchaser to sell securities of
the Company to the public without registration ("Rule 144"), the Company agrees
to:
(i) make and keep public information available, as those terms are
understood and defined in Rule 144;
(ii) file with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange
Act; and
(iii) furnish to the Purchaser so long as the Purchaser owns
Registrable Securities, promptly upon request, (i) a written statement by
the Company that it has complied with the reporting requirements of the
Securities Act and the Exchange Act, (ii) a copy of the most recent annual
or periodic report of the Company and such other reports and documents so
filed by the Company and (iii) such other information as may be reasonably
requested to permit the Purchaser to sell such securities pursuant to Rule
144 without registration.
9. Assignment of the Registration Rights. The rights to have the Company
register Registrable Securities pursuant to this Agreement shall be
automatically assigned by Purchaser to any transferee of all or any portion of
the Shares, Warrants or the underlying
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Common Stock held by Purchaser if: (a) Purchaser agrees in writing with the
transferee or assignee to assign such rights, and a copy of such agreement is
furnished to the Company within a reasonable time after such assignment; (b) the
Company is, within a reasonable time after such transfer or assignment,
furnished with written notice of (i) the name and address of such transferee or
assignee and (ii) the Securities with respect to which such registration rights
are being transferred or assigned; (c) at or before the time the Company
receives the written notice contemplated by clause (b) of this sentence, the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein; and (d) the transfer of the relevant Securities
complies with the restrictions set forth in Section 4 of the Securities Purchase
Agreement.
10. Amendment of Registration Rights. Any provision of this Agreement may
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Purchaser. Any amendment or waiver
effected in accordance with this Section 10 shall be binding upon Purchaser and
the Company.
11. Miscellaneous.
(a) A person or entity is deemed to be a holder of Warrants or Registrable
Securities whenever such person or entity owns of record such Warrants or
Registrable Securities. If the Company receives conflicting instructions,
notices or elections from two or more persons or entities with respect to the
same Warrants or Registrable Securities, the Company shall act upon the basis of
the instructions, notice or election received from the registered owner of such
Warrants or Registrable Securities.
(b) Any notice required or permitted hereunder shall be given in writing
(unless otherwise specified herein) and shall be effective upon personal
delivery, via facsimile (upon receipt of confirmation of error-free transmission
and mailing a copy of such confirmation postage prepaid by certified mail,
return receipt requested) or two business days following deposit of such notice
with an internationally recognized courier service, with postage prepaid and
addressed to each of the other parties thereunto entitled at the following
addresses, or at such other addresses as a party may designate by ten (10) days
advance written notice to each of the other parties hereto.
COMPANY: USA Biomass Corporation
7314 Scout Avenue
Bell Gardens, California 90201
Attention: Mr. Fred Behrens
Phone: (562) 928-9900
Fax: (562) 928-9932
11
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With a copy to:
Stepp & Beauchamp LLP
1301 Dove Street, Suite 480
Newport Beach, California 92660-2422
Attention: Thomas E. Stetpp, Jr., Esq.
Phone: (949) 660-9700
Fax: (949) 660-9010
PURCHASER:
Siete Investors LLC
110 Colabough Pond Road
Croton-on-the-Hudson, New York 10520
Attention: Mr. Ethan E. Benovitz
Phone: (914) 271-2211
Fax: (914) 271-0889
With a copy to:
Cohen Tauber Spievack & Wagner LLP
1350 Avenue of the Americas
26th Floor
New York, New York 10019
Attention: Laurence S. Tauber
Phone: (212) 519-5195
Fax: (212) 262-1766
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(d) This Agreement shall be governed by and interpreted in accordance with
the laws of the State of New York, except for provisions with respect to
internal corporate matters of the Company which shall be governed by the
corporate laws of the State of Virginia. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based on forum non conveniens, to the bringing of any such
proceeding in such jurisdictions. This Agreement may be signed in one or more
counterparts, each of which shall be deemed an original. The headings of this
Agreement are for convenience of reference and shall not form part of, or affect
the interpretation of, this Agreement. If any provision of this Agreement shall
be invalid or unenforceable in any jurisdiction, such validity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction. Subject to the provisions of Section 10 hereof, this
Agreement may be amended only by an instrument in writing signed by the party to
be charged with enforcement. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
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<PAGE>
(e) This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. This Agreement supersedes all
prior agreements and understandings among the parties hereto with respect to the
subject matter hereof.
(f) Subject to the requirements of Section 9 hereof, this Agreement shall
inure for the benefit of and be binding upon the successors and assigns of each
of the parties hereto.
(g) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(h) The Company acknowledges that any failure by the Company to perform its
obligations under Section 2(a), or any delay in such performance could result in
direct damages to the Purchaser, and the Company agrees that, in addition to any
other liability the Company may have by reason of any such failure or delay, the
Company shall be liable for all direct damages caused by any such failure or
delay. Nothing herein shall limit the Purchaser's right to pursue any claim
seeking such direct damages.
[REMAINDER OF PAGE INTENTIONALLY BLANK, SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, this Agreement has been duly executed by the
undersigned.
"COMPANY"
USA BIOMASS CORPORATION
By:
---------------------------------
Name:
Title:
"PURCHASER"
SIETE INVESTORS LLC
By: WEC ASSET MANAGEMENT LLC, Manager
By:
---------------------------------
Name: Ethan E. Benovitz
Title: Managing Director
14
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EXHIBIT D
[FORM OF OPINION OF COUNSEL]
March 14, 2000
Siete Investors LLC
c\o WEC Asset Management LLC
110 Colabough Pond Road
Croton-on-the-Hudson, New York 10520
Attention: Ethan E. Benovitz
Re: USA Biomass Corporation
-----------------------
Dear Sirs:
This opinion is delivered to you pursuant to a Securities Purchase
Agreement (the "Purchase Agreement") dated as of March 14, 2000, between Siete
Investors LLC, Delaware limited liability company (the "Purchaser") and USA
Biomass Corporation, a Delaware corporation (the "Company"), in connection with
the sale by the Company and purchase by the Purchaser of the Company's Shares
and Warrants (as such terms are defined in the Purchase Agreement). All
capitalized terms not otherwise defined herein shall have the meanings given
them in the Purchase Agreement.
I have examined and am familiar with the Certificate of Incorporation and
By-laws of the Company any and all amendments thereto. I have also examined and
am familiar with the Primary Agreements and any and all other instruments
executed and delivered by or on behalf of the Company in connection with the
Purchase Agreement and the transactions contemplated thereunder. In addition to
the foregoing, I have examined such minutes and other corporate proceedings of
the Company and such matters of law, documents and certificates of public
officials as I have deemed necessary in rendering my opinion. In all such
examinations, I have assumed the genuineness of all the signatures on original
documents and the conformity to original and certified documents of all copies
submitted to us as conformed or photostatic copies.
Based upon the foregoing, I am of the opinion that:
1. The Company and each of its subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to own its
properties and to carry on its business as now being conducted and is duly
qualified and in good standing as a foreign corporation in, and is authorized to
do business under the laws of, each jurisdiction where the character of the
properties owned or leased by it or the transaction of its business makes such
qualification or authorization necessary and in which the failure to so qualify
would have a material adverse effect on the Company and its subsidiaries taken
as a whole.
<PAGE>
[________] Investors LLC
March __, 2000
Page 2
2. The authorized and issued and outstanding capital stock of the Company
are as stated in Section 3(b) of the Purchase Agreement. All shares of the
outstanding capital stock of the Company have been validly issued and are fully
paid and non-assessable. To my knowledge, Schedule 3 (b) of the Purchase
Agreement accurately sets forth the information to be provided therein pursuant
to Section 3 (b) of the Purchase Agreement.
3. The issuance by the Company of the Shares and Warrants (collectively,
the "Initial Securities"), and the shares of Common Stock issuable upon
conversion of, or in lieu of dividend payments on, the Shares and Additional
Shares and exercise of the Warrants (collectively, the "Shares") have been duly
authorized and the Initial Securities have been validly issued and the
consideration to be paid therefor under the Purchase Agreement has been fully
paid. The Common Stock issuable upon conversion of, or in lieu of dividend
payments on, the Preferred Stock, and upon exercise of the Warrants, when issued
in accordance with the Primary Documents, shall be duly and validly issued,
fully paid and non-assessable, and will not subject the holder thereof to
personal liability by reason of being such a holder. There are no preemptive
rights of any stockholder of the Company to acquire any of the Initial
Securities or the Shares (collectively, the "Collective Securities").
4. The Common Stock is registered under Section 12 of the Securities
Exchange Act of 1934, as amended. The Company has duly and timely filed all
materials and documents required to be filed pursuant to all reporting
obligations under either Section 13(a) or 15(d) of the Exchange Act, if any,
through the date hereof (prior to the offer and sale of the Securities). The
Common Stock is listed and traded on the Nasdaq National Market, and to my
knowledge there is no pending or contemplated action or proceeding of any kind
to suspend the trading of the Common Stock.
5. The Company has the requisite corporate power and authority to enter
into the Purchase Agreement and to issue and deliver the Collective Securities.
6. The Primary Documents and the transactions contemplated thereby, have
been duly and validly authorized by the Company and are legal, valid and binding
agreements of the Company, enforceable in accordance with their respective
terms, except to the extent that enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
other similar laws now or hereafter in effect relating to creditors' rights
generally and to general principles of equity.
7. The execution and delivery of the Primary Documents and the consummation
by the Company of the other transactions contemplated thereby, does not and will
not conflict with or result in a breach by the Company of any of the terms or
provisions of, or constitute a default under, the Certificate of Incorporation
or By-laws of the Company, or, to my knowledge, (i) any material indenture,
mortgage, deed of trust or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which they or any of their properties
or assets are bound, or (ii) any existing applicable law, rule, or regulation or
any applicable decree, judgment or order of any court or United States Federal
or state regulatory body, administrative agency, or any other governmental body
having jurisdiction over the Company, its subsidiaries, or any of their
properties or assets. Except as set forth on
<PAGE>
[________] Investors LLC
March __, 2000
Page 3
Schedule 3(h) to the Purchase Agreement, neither the filing of the registration
statement required to be filed by the Company pursuant to the Registration
Rights Agreement nor the offering or sale of the Collective Securities gives
rise to any rights for or relating to the registration of any shares of the
Common Stock.
8. No authorization, approval or consent of any court, governmental body,
regulatory agency, self-regulatory organization, stock exchange or market or the
stockholders of the Company is required to be obtained by the Company for the
entry into or the performance of the Primary Documents by the Company.
9. To my knowledge, there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board or body pending or threatened
against or affecting the Company or any of its subsidiaries, in which an
unfavorable decision, ruling or finding would have a material adverse effect on
the properties, business, condition (financial or other) or results of
operations of the Company and its subsidiaries, taken as a whole, or the
transactions contemplated by the Primary Documents, or which would adversely
affect the validity or enforceability of, or the authority or ability of the
Company to perform its obligations under, the Primary Documents.
10. To my knowledge, neither the Company nor any of its subsidiaries is in
default in the performance or observance of any obligation, covenant or
condition contained in any material indenture, mortgage, deed of trust or other
instrument or agreement to which it is a party or by which it or its property
may be bound.
11. Subject to the accuracy of the Purchaser's representations and
warranties set forth in Section 2 of the Purchase Agreement, the offer, sale and
issuance of the Securities and the other securities as contemplated by the
Purchase Agreement are exempt from the registration requirements of the
Securities Act.
This opinion is rendered only with regard to the matters set out in the
numbered paragraphs above. No other opinions are intended nor should they be
inferred.
The opinions expressed herein are given to you solely for your use in
connection with the transaction contemplated by the Purchase Agreement and may
not be relied upon by, or delivered to, any other person or entity or for any
other purpose without my prior written consent.
Sincerely,
23.1 CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Registration Statement on Form SB-2 [file
no. 0-17594] of our report dated April 12, 2000, on our audits of the financial
statements of USA Biomass Corporation, a Delaware corporation.
Dated: May 5, 2000
By: /s/
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For: Kelly & Company
Newport Beach, California
