UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 29, 1996.
[_] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE EXCHANGE ACT FOR
THE TRANSITION PERIOD FROM ______________ TO ________________.
Commission file number 0-17483
EUROAMERICAN GROUP INC.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3477824
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Broad Street, Suite 516
New York, New York 10004
(Address of principal executive offices)
(212) 269-6686
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
The number of shares outstanding of the Issuer's Common Stock, par
value $.001 per share, as of April 1, 1996, was 16,060,000.
<PAGE>
EUROAMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
February 29, 1996
(Unaudited)
CURRENT ASSETS:
Cash $ 83,578
Accounts receivable, net of allowance 137,514
Inventory 246,646
Foreign taxes receivable 48,615
Prepaid expenses and other 31,559
--------
TOTAL CURRENT ASSETS 547,912
PROPERTY AND EQUIPMENT, less
accumulated depreciation 103,237
SOFTWARE DEVELOPMENT COSTS, less
accumulated amortization 110,771
DEPOSITS AND OTHER ASSETS 27,174
--------
TOTAL ASSETS $ 789,094
========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 974,607
Customer deposits and unearned revenue 147,334
Other 67,331
--------
TOTAL CURRENT LIABILITIES 1,189,272
--------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock ($.001 par value;
2,000,000 shares authorized):
Series A Preferred Stock (245,000
shares issued and outstanding)
(liquidation preference $490,000) 245
Common stock ($.001 par value; 35,000,000
shares authorized; 16,060,000 shares
issued and outstanding) 16,060
Additional paid-in capital 4,511,405
Accumulated deficit (4,803,563)
Cumulative translation adjustment (124,325)
--------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (400,178)
--------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 789,094
========
See Selected Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
EUROAMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
For The Nine Months For The Three Months
Ended February 29(28), Ended February 29 (28),
1996 1995 1996 1995
<S> <C> <C> <C> <C>
NET REVENUES $1,374,890 $1,969,284 $ 411,373 $ 407,354
OPERATING COSTS AND EXPENSES:
Direct costs relating to revenues 1,133,505 1,599,976 389,236 353,433
Selling, general and administrative 915,412 1,130,813 340,015 346,921
Research and development 185,401 158,619 52,965 66,938
--------- --------- --------- ---------
TOTAL OPERATING COSTS AND EXPENSES 2,234,318 2,889,408 782,216 767,292
--------- --------- --------- ---------
INTEREST INCOME - 2,798 - 2,395
OTHER INCOME - 165,855 - 165,855
--------- --------- --------- ---------
(LOSS) BEFORE INCOME TAXES (859,428) (751,471) (370,843) (191,688)
RECOVERY OF INCOME TAXES - 60,000 - 27,000
--------- --------- --------- ---------
(LOSS) FROM CONTINUING OPERATIONS (859,428) (691,471) (370,843) (164,688)
--------- --------- --------- ---------
DISCONTINUED OPERATIONS:
Income from discontinued operations
(Net of taxes of $0, $60,000, $0,
and $27,000) - 88,803 - 41,590
--------- -------- --------- ---------
NET (LOSS) $ (859,428) $ (602,668) $ (370,843) $ (123,098)
========= ======== ========= =========
EARNINGS (LOSS) PER SHARE:
Continuing operations $ (.05) $ (.06) $ (.02) $ (.01)
Discontinued - .01 - -
---------- --------- -------- --------
$ (.05) $ (.05) $ (.02) $ (.01)
========== ========= ======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING 16,060,000 11,960,000 16,060,000 11,960,000
========== ========== ========== ==========
</TABLE>
See Selected Notes to Consolidated Financial Statements
<PAGE>
EUROAMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
February 29,(28)
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(859,428) $(602,668)
Adjustments to reconcile net (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 157,517 109,221
Changes in operating assets and liabilities:
(Increase) decrease in:
Inventory 37,003 13,647
Accounts receivable (41,856) 63,661
Foreign taxes receivable 46,738 11,524
Prepaid and other (19,647) 11,557
Increase (decrease) in:
Accounts payable and accrued expenses (223,047) 482,409
Other liabilities 7,985 (123,700)
--------- --------
TOTAL ADJUSTMENTS (35,306) 568,319
--------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (894,734) (34,349)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred
stock 489,981 -
Collection of stock subscription
receivable 250,000 70,000
Payments under capitalized leases - (6,443)
-------- -------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 739,981 63,557
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (17,581) (144,465)
Payments to stockholder - (17,322)
-------- --------
NET CASH (USED IN) INVESTING
ACTIVITIES (17,581) (161,787)
-------- --------
EFFECT OF FOREIGN EXCHANGE RATES
ON CASH 735 17,611
-------- --------
NET (DECREASE) IN CASH AND CASH
EQUIVALENTS (171,600) (114,968)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 255,178 296,384
-------- --------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 83,578 $ 181,416
======== ========
See Selected Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
EUROAMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED FEBRUARY 29, 1996
(UNAUDITED)
<CAPTION>
Preferred Stock Common Stock Additional Cumulative
paid-in Accumulated Translation
$.001 par value $.001 par value Capital Deficit Adjustment Total
Number Amount Number Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
June 1, 1995 - $ - 16,010,000 $16,010 $4,011,719 $(3,944,135) $(137,570) $ (53,976)
Net loss - - - - - (859,428) - (859,428)
Foreign
currency
translation
adjustment - - - - - - 13,245 13,245
Issuance of
common stock
in satisfaction
of liabilities - - 50,000 50 9,950 - - 10,000
Issuance of
preferred stock 245,000 245 - - 489,736 - - 489,981
------ ----- --------- ------ -------- --------- -------- --------
Balance,
February 29, 1996 245,000 $245 16,060,000 $16,060 $4,511,405 $(4,803,563) $(124,325) $(400,178)
======= ===== ========== ====== ========= ========== ======== ========
</TABLE>
See Selected Notes to Consolidated Financial Statements
<PAGE>
EUROAMERICAN GROUP, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of February 29, 1996 and the
related consolidated statements of operations, cash flows and changes
in stockholders' equity for the nine months ended February 29, 1996
and 1995 have been prepared by the Company, without audit. In the
opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at November 30, 1995
and for all periods presented have been made. The results of
operations for the period ended February 29, 1996 are not necessarily
indicative of the operating results for the full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with general accepted
accounting principals have been condensed or omitted. It is
suggested that these condensed consolidated financial statements be
read in conjunction with the financial statements and notes included
in the Company's May 31, 1995 filing on Form 10-KSB.
NOTE 2 - INVENTORIES
Inventory, consisting of electronic components, is stated at the
lower of cost (FIFO) or market.
NOTE 3 - RECLASSIFICATIONS
Certain classifications have been made to the prior period financial
statements to conform with the current period presentation.
NOTE 4 - DISCONTINUED OPERATIONS
At a Board of Directors meeting held in March 1995, the Board
approved the sale of certain assets of the Company's brokerage
business (the "Discontinued Business") to Mr. Hubert Scharnowski, the
Company's former Chairman and Chief Executive Officer and who at the
time was a current member of the Company's Board of Directors, for
700,000 shares of the Company's common stock owned by Mr. Scharnowski
and certain releases from employment and other consulting agreements
with Mr. Scharnowski.
The assets sold consisted of fixed assets with nominal carrying value
and the brokerage customer list which value was not reflected on the
Company's books and records. The Company recognized a gain of
approximately $73,000 net of related costs and income taxes in fiscal
1995. Operating results for the Discontinued Business for the
periods presented are shown separately in the accompanying statements
of operations.
Nine Months Ended Three Months Ended
February 29(28), February 29,(28),
1996 1995 1996 1995
$ - $430,832 $ - $176,200
======== ======== ======== ========
The above amounts are not included in net revenues in the
accompanying statements of operations.
NOTE 5 - CONSULTING AGREEMENT
As of August 1995, the Company entered into a consulting agreement
with Mr. George Tsirivakos (an Officer and Director of the Company)
and his affiliate Tsirivakos Software for the period August 1, 1995
to July 31, 2000 at a monthly rate of 6000 Marks (approximately
$4,100 using exchange rates in effect at February 29, 1996). On each
June 30 on which this contract is in effect and not terminated
(beginning June 30, 1996), EAG shall award Mr. Tsirivakos a number
of shares of common stock equal to the quotient of dividing $15,000
by the average of the closing bid and asked prices of the common
stock as reported by the principal market in which the Company's
common stock trades for the thirty (30) days prior to the June 30 in
question, but in no event less then $.20 per share.
Furthermore, the Company granted Mr. Tsirivakos an option to purchase
an aggregate of 500,000 shares of common stock, exercisable in whole
or in part after the dates set forth below:
Number of
Shares First Date Exercisable Price
100,000 June 30, 1996 U.S. $.20
100,000 June 30, 1997 U.S. $.30
100,000 June 30, 1998 U.S. $.40
100,000 June 30, 1999 U.S. $.50
100,000 June 30, 2000 U.S. $.60
Also in August 1995, the Company entered into an employment agreement
with Mr. Tsirivakos for an indefinite period at an annual
compensation of 108,000 Marks (approximately $74,000 using exchange
rates in effect at February 29, 1996).
NOTE 6 - GOING CONCERN
As reflected in the consolidated financial statements, the Company
has suffered recurring losses and has a working capital deficiency.
The Company's continued existence is dependent upon its ability to
achieve and maintain profitable operations and positive cash flow.
The Company's liquidity and capital resources to date have been
provided from proceeds from sales of equity, trade credit and, to a
limited extent, operating activities. The Company raised
approximately $490,000 through the sale of its preferred stock in
fiscal 1996. Additionally, in April 1996 the Company completed a
private placement of its common stock receiving net proceeds of
approximately $950,000.
NOTE 7 - STOCKHOLDERS' EQUITY
(A) Common Stock
In fiscal 1995, the Company issued 50,000 shares of common stock to a
consultant in satisfaction of $10,000 in liabilities owed to the
consultant.
In April 1996, the Company completed a private placement of its
common stock receiving net proceeds of approximately $950,000.
(B) Preferred Stock
The Board of Directors is authorized to issue, by resolution and
without any action by stockholders, up to 2,000,000 shares of
Preferred Stock and may establish the designations, dividend rights,
dividend rate, conversion rights, voting rights, terms of redemption,
liquidation preference, sinking fund terms and all other preferences
and rights of any series of Preferred Stock, including rights that
could adversely affect the voting power of the holders of Shares. In
November, 1995 the Board of Directors has designated 325,000 shares
of Preferred Stock as Series A Preferred Stock, with the rights and
preferences described below.
The Series A Preferred Stock is not entitled to vote and is not
entitled to any dividends. On November 30, 1997 (the "First
Redemption Date"), the Company shall be entitled to, and on November
30, 1998 (the "Final Redemption Date"), the Company shall, redeem all
but not less than all of the Series A Preferred Stock. The Company
may, at its election, redeem Series A Preferred Stock in cash or in
common shares, except that the Company may not redeem the Series A
Preferred Stock in common shares on the First Redemption Date unless
the Net Income Test (defined below) is met. If redemption is made in
cash, the redemption price is $2.00 per share plus $.32 per share if
redeemed on the First Redemption Date, and $.48 per share if redeemed
on the Final Redemption Date. If redemption is made in Shares, (i)
if the Net Income Test is met, the number of Shares issued for each
share of Series A Preferred Stock shall be equal to the quotient of
dividing $2.00 by 90% of the Average Price (defined below), and (ii)
if the Net Income Test is not met, the number of common shares is
equal to the Conversion Rate (defined below). "Net Income Test"
means that the Company's consolidated net income, determined in
accordance with generally accepted accounting principles, for the
last fiscal year ending prior to the date of the redemption, is at
least $750,000. "Average Price" means the average of the reported
closing high bid and low asked prices per common share for the 30
trading days ending 15 days prior to the Company's Notice of
Redemption in the principal market in which the Shares are then
traded.
The Series A Preferred Stock is convertible into common shares at the
option of the holder on November 30, 1996, November 30, 1997 and
November 30, 1998 at the following rates (the "Conversion Rate"): 8
common shares of Series A Preferred Stock, if converted on November
30, 1996; 7 common shares if converted on November 30, 1997; and 6
common shares if converted on November 30, 1998.
The Series A Preferred Stock has a security interest in all assets of
the Company (other than the stock of the Company's subsidiaries) to
secure the Company's obligation to pay the redemption price in cash.
On liquidation, the Series A Preferred Stock is entitled, prior to
any distribution on common shares, to receive an amount equal to the
amount that would be paid on a redemption of the Series A Preferred
Stock for cash.
In November 1995 and January 1996, the Company issued 245,000 shares
of Series A Preferred Stock and received net proceeds of $489,981.
NOTE 8 - OTHER INCOME
Commencing in the third quarter of fiscal 1995, the Company entered
into a series of settlements with creditors and outstanding
litigation. These settlements resulted in the recognition of income
of $165,855 in the third quarter of 1995. As part of the
settlements, the Company settled a litigation with a vendor in the
amount of $107,000 by a mutual release by both parties and no amounts
were required to be paid or received by the Company.
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Nine months ended February 29, 1996 compared to
the nine months ended February 28, 1995
For the nine months ended February 29, 1996 the Company reported a loss
from continuing operations of $859,428 as compared with a loss of $691,471
for the comparable period of fiscal 1995.
The Company's overall revenues decreased from $1,969,284 for the nine
months ended February 28, 1995 to $1,374,890 for the comparable period in
fiscal 1996, a decrease of $594,394 or 30%. The decrease in revenues in
the nine months ended February 29, 1996 as compared with fiscal 1995 was
principally due to a one-time large sale of hardware in fiscal 1995 to a
single customer which did not recur in fiscal 1996. As a result, hardware
sales decreased by $375,674 or 74% in fiscal 1996 as compared with fiscal
1995. License fees from the Satquote system decreased by approximately
$214,800 or 15% in fiscal 1996.
Overall expenses decreased from $2,889,408 for the nine months ended
February 28, 1995 to $2,234,318 for the comparable period in fiscal 1996,
a decrease of $655,090 or 23%. Direct expenses relating to revenues
decreased by $466,471 or 29%. This decrease is primarily related to a
decrease in cost of sales attributable to the sale of hardware in the
first nine months of fiscal 1995 which did not recur in 1996. Selling,
general and administrative expenses decreased by $215,401 or 19% in the
first nine months of fiscal 1996 as compared with fiscal 1995. The
decrease is primarily due to cost reductions enacted in the last quarter
of fiscal 1995.
In the first nine months of fiscal 1996, the Company incurred $185,401 of
research and development costs as compared with approximately $158,619 in
the comparable period of fiscal 1995, a $26,782 increase or 17%. The
increase is primarily related to the shift from capitalization of software
development costs to research and development in 1996.
Financial Condition and Liquidity
As a result of the Company's continued losses, deficiency in working
capital, and relatively high level of payables, its independent public
accountants have included an explanatory paragraph in their May 31, 1995
audit report regarding the Company's ability to continue as a going
concern.
Historically, the Company's liquidity and capital resources have been
provided from proceeds from sales of equity, trade credit and, to a
limited extent, operating activities. The Company does not have any lines
of credit, long-term debt, or other credit facilities other than day-to-
day credit extended by its suppliers.
The Company's continued existence is dependent upon its ability to achieve
and maintain profitable operations and positive cash flow. The Company
raised approximately $490,000 through the sale of its preferred stock in
fiscal 1996. Additionally, in April 1996 the Company completed a private
placement of its common stock receiving net proceeds of approximately
$950,000.
PART II - OTHER INFORMATION
Item 2. Changes in Securities
(a) Not applicable.
(b) The Series A Preferred Stock is entitled to a preference over
the Common Stock on liquidation of $2.00 per share of Series A
Preferred Stock plus the amount in excess of $2.00 per share
that would be due to the Series A Preferred Stock if it were
then being redeemed for cash. On November 30, 1997, such excess
amount is $.32 per share and on November 30, 1998, such excess
amount is $.48 per share.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3 Certificate of Incorporation, as amended.
27 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter
for which this report is filed.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EUROAMERICAN GROUP, INC.
Date: April 19, 1996 By: /s/Alexis Charamis
Alexis Charamis, Chairman of
the Board and Chief Executive Officer
and Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
3 Certificate of Incorporation, as amended
27 Financial Data Schedule
Exhibit 3
CERTIFICATE OF INCORPORATION, AS AMENDED
EUROAMERICAN GROUP INC.
FIRST: The name of the Corporation is EuroAmerican Group Inc.
SECOND: Its registered office is to be located at 306 South
State Street, in the City of Dover, in the County of Kent, in the State of
Delaware. The name of its registered agent at that address is the United
States Corporation Corporation.
THIRD: The purpose of the Corporation is to engage in any
lawful act or activity for which corporations may be organized under the
General Corporation Law of Delaware.
FOURTH:
(a) The Corporation is authorized to issue two
classes of shares to be designated, respectively, "Preferred Stock" and
"Common Stock". The total number of shares the Corporation is authorized
to issue is thirty-seven million (37,000,000) consisting on two million
(2,000,000) shares of Preferred Stock and thirty-five million (35,000,000)
shares of Common Stock. The Preferred Stock and the Common Stock shall
each have a par value of $0.001 per share, and the aggregate par value of
all shares of Preferred Stock shall be $2,000.00 and all shares of Common
Stock shall be $35,000.00.
(b) The shares of Preferred Stock may be issued from
time to time in one or more series. The Board of Directors is authorized,
subject to limitations prescribed by law and the provisions of this
Article FOURTH to provide for the issuance of the shares of Preferred
Stock in one or more series, by filing a certificate pursuant to the
applicable law of the State of Delaware, to establish from time to time
the number of shares to be included in each such series, and to fix the
designated powers, preference and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof.
The authority of the Board of Directors with respect
to each series shall include, but not be limited to, determination of the
following:
(a) The number of shares constituting that series and
the distinctive designation of that series;
(b) The dividend rate on shares of that series,
whether dividends shall be cumulative, and, if so, from which date or
dates, and the relative rights or priority, if any, of payment of
dividends on shares of that series;
(c) Whether that series shall have voting rights, in
addition to the voting rights provided by law; and, if so, the terms of
such voting rights;
(d) Whether that series shall have conversion
privileges, and, if so, the terms and conditions of such conversion,
including provision for adjustment of the conversion rate in such events
as the Board of Directors shall determine;
(e) Whether or not the shares of that series shall be
redeemable, and, if so, the terms and conditions of such redemption,
including the date or dates upon or after which they shall be redeemable,
and the amount per share payable in case of redemption, which amount may
vary under different conditions and at different redemption dates;
(f) Whether that series shall have a sinking fund for
the redemption or purchase of shares of that series, and, if so, the terms
and amount of such sinking fund;
(g) The rights of the shares of that series in the
event of voluntary or involuntary liquidation, dissolution or winding up
of the Corporation, and the relative rights of priority, if any, of
payment on shares of that series; and
(h) Any other relative or participating rights,
preferences and limitations of that series.
RESOLVED, that pursuant to the authority expressly granted to
and vested in the Board by provisions of the Certificate of Incorporation
of the Company and the General Corporation Law of the State of Delaware,
the issuance of a series of Preferred Stock, which shall consist of
325,000 shares of the 2,000,000 shares of Preferred Stock which the
Company now has authority to issue, be, and the same hereby is,
authorized, and the Board hereby fixes the powers, designations,
preferences and relative, participating, optional or other special rights,
and the qualifications, limitations or restrictions thereof, of the shares
of such series authorized by this resolution as follows:
1. Designation and Rank. The designation of such series of
Preferred Stock authorized by this resolution shall be Series A Non-Voting
Convertible Senior Preferred Stock (the "Series A Preferred Stock"). The
maximum number of shares of Series A Preferred Stock shall be 325,000.
Shares of the Series A Preferred Stock shall have a liquidation preference
of $2.00 per share. The Series A Preferred Stock shall rank prior to the
Company's Common Stock as to rights upon liquidation, dissolution or
winding up.
2. No Dividends. Except in the case of dividends which are
liquidating distributions (any such dividend to be governed by the
provisions of Section 3 hereof), no dividends shall be paid on the Series
A Preferred Stock.
3. Liquidation. In the event of any voluntary or involuntary
dissolution, liquidation or winding up of the Company (a "Liquidation"),
before any distribution of assets shall be made to the holders of any
Common Stock or to any other capital stock of the Company which by its
terms ranks junior to the Series A Preferred Stock as to amounts
distributable on Liquidation of the Company, the holder of each share of
Series A Preferred Stock then outstanding shall be entitled to be paid out
of the assets of the Company available for distribution to its
stockholders, an amount equal to $2.00 per share plus the amount, if any,
per share in excess of $2.00 that would be due to the Series A Preferred
Stock if the Series A Preferred Stock were being redeemed for cash on the
date fixed for the distribution of assets of the Company to the holders of
Series A Preferred Stock.
The voluntary sale, conveyance, lease, exchange or transfer of
all or substantially all the property or assets of the Company, or the
merger or consolidation of the Company into or with any other corporation
or the merger of any other corporation into the Company in which merger or
consolidation the stockholders of the Company receive distributions in
cash or securities of another corporation as a result of such merger or
consolidation (in any case other than a merger solely for the purpose of
changing the Company's domicile) shall not be deemed to be a Liquidation
of the Company for the purposes of this Section 3.
The holder of any shares of Series A Preferred Stock shall not
be entitled to receive any payment owed for such shares under this Section
3 until such holder shall cause to be delivered to the Company (i) the
certificate(s) representing such shares of Series A Preferred Stock and
(ii) transfer instrument(s) satisfactory to the Company and sufficient to
transfer such shares of Series A Preferred Stock to the Company free of
any adverse interest. No interest shall accrue on any payment upon
Liquidation after the due date thereof.
After payment of the full amount of the liquidating distribution
to which they are entitled, the holders of shares of the Series A
Preferred Stock will not be entitled to any further participation in any
distribution of assets by the Company.
4. Conversion. The holders of the Series A Preferred Stock
shall have conversion rights as follows:
(a) Right to Convert. Each share of Series A Preferred
Stock shall be convertible, at the option of the holder thereof, on each
anniversary of the Original Issue Date (as hereinafter defined), by giving
a Conversion Notice (as hereinafter defined) at least five days before
such anniversary (but no Conversion Notice shall be effective if a
Redemption Notice (as defined in Section 5(b) hereof is given no later
than 10 days prior to the anniversary next following the Redemption
Notice), at the office of the Company or any transfer agent for such
stock, into such number of fully paid and nonassessable shares of Common
Stock as is determined in accordance with the table below (such number of
shares of Common Stock are herein referred to as the "Conversion Rate").
Original Issue Date means the date on which shares of Series A Preferred
Stock were originally issued.
Anniversary of No. Shares of
Original Issue Date Common Stock
First 8
Second 7
Third 6
(b) Mechanics of Conversion. Before any holder of Series A
Preferred Stock shall be entitled to convert the same into shares of
Common Stock, he shall surrender the certificate or certificates thereof,
duly endorsed, at the principal office of the Company (which shall be
deemed to be the office set forth on the cover page of the Company's last
periodic report filed with the Securities and Exchange Commission at 30
days prior to the Conversion Notice) or of any transfer agent for such
stock, and shall give written notice to the Company at such office that he
elects to convert the same and shall state therein the name or names in
which he wishes the certificate or certificates for shares of Common Stock
to be issued (a "Conversion Notice"). The Company shall, as soon as
practicable thereafter, issue and deliver at such office to such holder of
Series A Preferred Stock, a certificate or certificates for the number of
shares of Common Stock to which he shall be entitled as aforesaid. Such
conversion shall be deemed to have been made on the anniversary next
following the Conversion Notice. The person or persons entitled to
receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date.
(c) Adjustments for Combinations or Subdivisions of Common
Stock. In the event the Company at any time or from time to time after
the Original Issue Date shall declare or pay any dividend on the Common
Stock payable in Common Stock or in any right to acquire Common Stock, or
shall effect a subdivision of the outstanding shares of Common Stock into
a greater number of shares of Common Stock (by stock split,
reclassification or otherwise), or in the event the outstanding shares of
Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, then the
Conversion Rate of the Series A Preferred Stock in effect immediately
prior to such event shall, concurrently with the effectiveness of such
event, be proportionately decreased or increased, as appropriate.
(d) Other Distributions. In the event the Company shall
at any time or from time to time make or issue, or fix a record date for
the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in securities of the Company or any
of its subsidiaries, then in each such event provision shall be made so
that the holders of Series A Preferred Stock shall receive, upon the
conversion thereof, the securities of the Company which they would have
received had their stock been converted into Common Stock on the date of
such event.
(e) Certificates as to Adjustments. Upon the occurrence
of each adjustment or readjustment of the number of shares of Common Stock
issuable upon conversion of a share of Series A Preferred Stock pursuant
to this Section 4, the Company at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare
and furnish to each holder of Series A Preferred Stock a certificate
setting forth such adjustment or readjustment and showing in detail the
facts upon which such adjustment or readjustment is based.
(f) Reservation of Stock Issuable Upon Conversion. The
Company shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of the Series A Preferred Stock,
such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of the
Series A Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the
conversion of all then outstanding shares of the Series A Preferred Stock,
the Company will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such
purpose, including, without limitation, engaging in best efforts to obtain
the requisite stockholder approval of any necessary amendment to the
Certificate of Incorporation.
(g) Fractional Shares. No fractional share shall be
issued upon the conversion of any share or shares of Series A Preferred
Stock. All shares of Common Stock (including fractions thereof) issuable
upon conversion of more than one share of Series A Preferred Stock by a
holder thereof shall be aggregated for purposes of determining whether the
conversion would result in the issuance of any fractional share. If,
after the aforementioned aggregation, the conversion would result in the
issuance of a fraction of a share of Common Stock, the Company shall round
such fractional share up to the next whole share of Common Stock.
(h) Notices. Any notice required by the provisions of
this Section 4 to be given to the holders of shares of Series A Preferred
Stock shall be deemed given if deposited in the United States mail,
postage prepaid, and addressed to each holder of record at its address
appearing on the books of the Company.
(i) Adjustments. In case of any reorganization or any
reclassification of the capital stock of the Company or any consolidation
or merger of the Company with or into any other corporation or
corporations or a sale of all or substantially all of the assets of the
Company, each share of Series A Preferred Stock shall thereafter be
convertible into the number of shares of stock or other securities or
property (including cash) to which a holder of the number of shares of
Common Stock deliverable upon conversion of such share of Series A
Preferred Stock would have been entitled upon the record date of (or date
of, if no record date is fixed) such reorganization or reclassification,
and, in any case, appropriate adjustment (as determined by the Board of
Directors) shall be made in the application of the provisions herein set
forth with respect to the rights and interests thereafter of the holders
of such Series A Preferred Stock, to the end that the provisions set forth
herein shall thereafter be applicable, as nearly as equivalent as is
practicable, in relation to any shares of stock or the securities or
property (including cash) thereafter deliverable upon the conversion of
the shares of such Series A Preferred Stock.
5. Redemption.
(a) On the second anniversary of the Original Issue Date,
the Company shall be entitled to, and on the third anniversary of the
Original Issue Date, the Company shall, redeem from each holder of Series
A Preferred Stock (out of funds legally available therefor if the
Redemption Price (as hereinafter defined) is payable in cash), all, but
not less than all, of the outstanding shares of Series A Preferred Stock
held by each holder of Series A Preferred Stock. On the relevant date on
which the Series A Preferred Stock is to be redeemed (the "Redemption
Date"), the redemption shall be made at the election of the Company (i) by
payment in cash of a sum equal to $2.00 per share of Series A Preferred
Stock plus, if the Redemption Price is being paid in cash, an amount equal
to $.32 per share of Series A Preferred Stock, if the Redemption Date is
the second anniversary of the Original Issue Date, and $.48 per share if
the Redemption Date is the third anniversary of the Original Issue Date,
or (ii) by issuance of a number of shares of Common Stock equal to the
Redemption Shares (as hereinafter defined) (such amount of cash or number
of shares of Common Stock is herein referred to as the "Redemption
Price"), provided, however, if the Redemption Date is prior to the third
anniversary of the Original Issue Date, the Redemption Price may be paid
in Redemption Shares only if the Net Income Test (as hereinafter defined)
is met.
Redemption Shares means (i) if the Net Income Test is met,
the number of shares of Common Stock issued on redemption for each share
of Series A Preferred Stock shall be equal to the quotient of dividing
$2.00 by 90% of the Average Price (as hereinafter defined), and (ii) if
the Net Income Test is not met, the Conversion Rate. Net Income Test
means that the Company's consolidated net income, determined in accordance
with generally accepted accounting principles, for the last fiscal year
ending prior to the Redemption Date, is at least $750,000. Any report by
an independent public accountant on the Company's financial statements for
such year which contains an opinion on such financial statements to the
effect that they are presented in accordance with generally accepted
accounting principles without exception and which contains no limitation
as to the scope of the audit shall be deemed conclusive evidence of the
Company's net income for such year. Average Price means the average of the
reported closing high bid and low asked prices per share of Common Stock
for the 30 trading days ending 15 days prior to the Redemption Notice in
the principal maket in which the Common Stock is then traded.
(b) At least 10 days prior to the Redemption Date, written
notice (the "Redemption Notice") shall be mailed, first class postage
prepaid, by the Company to each holder of record (at the close of business
on the business day next preceding the day on which the Redemption Notice
is given) of the Series A Preferred Stock, at the address last shown on
the records of the Company for such holder, notifying such holder of the
redemption which is to be effected, specifying the Redemption Date, the
Redemption Price, whether the Redemption Price is to be paid in cash or in
Common Stock and if in Common Stock, the Redemption Shares, the place at
which payment may be obtained and calling upon each such holder to
surrender to the Company, in the manner and at the place designated, its
certificate or certificates representing all of its shares. Except as
provided in Section 5(c), on or after the Redemption Date, each holder of
Series A Preferred Stock shall surrender to the Company the certificate or
certificates representing the shares of Series A Preferred Stock owned by
it in the manner and at the place designated in the Redemption Notice, and
thereupon the Redemption Price of such shares shall be payable to the
order of the person whose name appears on such certificate or certificates
as the owner thereof and each surrendered certificate shall be canceled.
(c) From and after the Redemption Date, unless there shall
have been a default in payment of the Redemption Price, all rights of the
holders of shares of Series A Preferred Stock (except the right to receive
the Redemption Price without interest upon surrender of their certificate
or certificates) shall cease with respect to such shares, and such shares
shall not thereafter be transferred on the books of the Company or be
deemed to be outstanding for any purpose whatsoever. In the event the
Company elects to pay the Redemption Price in cash and defaults in such
payment, the holders of the Series A Preferred Stock shall have such
rights as are afforded to them by law and under any agreement with the
Company providing security for such payment.
6. Voting Rights. Except as otherwise required by law, the
Series A Preferred Stock shall have no voting rights.
FIFTH: The number of directors of the Corporation that shall
constitute the entire Board of Directors shall be not less than three and
not more than five directors, with the exact number specified in the
Bylaws of the Corporation from time to time.
SIXTH: None of the following actions may be taken, nor
commitments therefor made on behalf of the Corporation, by the President
or any other officer, agent or representative of the Corporation without
the prior approval of a majority of the members of the Board of Directors:
(a) The acquisition or disposition of any item or
related items of real property or personal property for a consideration in
excess of $25,000;
(b) The lease of any personal property or real
property, if (i) the present value (computed on the basis of a 10%
discount rate) of the total lease payments due under such lease, without
regard to the exercise of any options to extend or renew, exceeds $75,000
or (ii) the fair market value of the property leased exceeds $75,000 or
(iii) the term of such lease exceeds 12 months;
(c) The expenditure by the Corporation in excess of
$25,000 in any single transaction or series of related transactions;
(d) The establishment of a new line of credit or
extension of any existing line of credit; any guarantee of indebtedness by
the Corporation, other than pursuant to endorsement of checks or drafts
received in the ordinary course of business; and any incurring or
assumption of indebtedness by the Corporation in excess of $25,000 in any
single instance other than pursuant to lines of credit approved in
accordance with this section;
(e) The granting of any indemnity or performance
guarantee by the Corporation to any person where the potential liability
of the Corporation exceeds $25,000;
(f) The establishment and approval of any periodic
budget for the Corporation;
(g) Any decision relating to which products or
services the Corporation shall sell, market, distribute, lease, license or
otherwise deal in, including any decision not to sell, market, distribute,
lease, license or otherwise deal in any of the Corporation's current
products, services or improvements thereto; any decisions regarding the
general pricing policy for products or services of the Corporation; or any
material change in the scope or nature of the business of the Corporation;
(h) Any decision regarding the conduct of litigation,
whether as plaintiff or defendant, where the aggregate amount in
controversy exceeds $10,000;
(i) Any entry into any commitment or agreement for
employment or termination of employment by the Corporation of any person
for any executive position or any other agreement or commitment for the
services of any person, including consulting contracts, providing for an
annual compensation in excess of $40,000, in each case regardless of
whether the agreement or commitment is oral or in writing, for a term or
at will, express or implied;
(j) The issuance of any capital stock, securities
convertible into capital stock or any other securities of the Corporation
or subscriptions, options, warrants or other rights of the issuance or
purchase of any capital stock or other securities to any officer of the
Corporation or employee having duties and responsibilities similar to
those of an office or to any shareholder of the Corporation;
(k) The granting of any distributorships with respect
to products or services of the Corporation;
(l) The alteration or change in any of the rights,
preferences or privileges of any class or series of the capital stock;
(m) Any increase in the authorized number of shares
of any class or series of capital stock;
(n) The creation of any new class or series of shares
of capital stock or securities convertible into shares of capital stock;
(o) Any amendment to the Certificate of Incorporation
or By-laws of the Corporation;
(p) Any merger into or consolidation with any other
corporation, partnership or other entity;
(q) The sale or transfer by the Corporation of any
shares of capital stock of the Corporation, whether a new issue or out of
treasury shares, or the issuance of any other securities, whether equity
or debt, or any warrant, option or other right exercisable for any
securities of the Corporation, including, without limitation, the issuance
of any Preferred Stock or other securities in response to an unsolicited
offer for the Corporation or the issuance of securities under the
Corporation's 1988 Stock Incentive Plan or other employee benefit plans;
(r) The purchase or other acquisition, redemption or
retirement of any capital stock or other securities of the Corporation or
any agreement or commitment to do any of the foregoing, including the
redemption or calling of any Stock or Warrants owned by CAL.
(s) Any liquidation, dissolution, reorganization,
recapitalization or other alteration of the Corporation's legal status or
the commencement of any proceedings therefor;
(t) The declaration or payment of any dividends or
the making of any other distributions, in cash, property or stock, with
respect to the capital stock of the Corporation;
(u) Any decision relating to the insolvency,
bankruptcy or similar financial distress of the Corporation;
(v) The appointment of any corporate officer of the
Corporation; or
(w) Entering into any new arrangement, or
modification of any existing arrangement, relating to the terms of service
and duties of any stockholder with the Corporation.
SEVENTH: The By-Laws of the Corporation may be made, altered,
amended, changed, added or repealed by the Board of Directors without the
assent or vote of the stockholders. Elections of directors need not be by
ballot unless the By-Laws so provide.
EIGHTH: The Corporation shall, to the fullest extent permitted
by Section 145 of the General Corporation Law of the State of Delaware, as
the same may be amended and supplemented, indemnify any and all persons
whom it shall have power to indemnify under said section from and against
any and all of the expenses, liabilities, or other matters referred to, in
or covered by said section, and the indemnification provided for herein
shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any By-Law, agreement, vote of
stockholders, or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to
be a director, officer, employee, or agent and shall inure to the benefit
of the heirs, executors, and administrators of such a person. Without
limiting the generality of the foregoing, the Corporation shall have the
express authority to enter into such agreements as the Board of Directors
deems appropriate for the indemnification of present or future directors
and officers of the Corporation in connection with their service to or
status with, the Corporation or any other corporation, entity or
enterprise with whom such person is serving at the express written request
of the Corporation.
NINTH: A director of this Corporation shall not be liable to
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except to the extent such exemption from
liability or limitation thereof is not permitted under the Delaware
General Corporation Law as the same exists or may hereafter be amended.
In particular, and without limiting the generality of the foregoing, the
personal liability of the directors of the Corporation is hereby
eliminated to the fullest extent permitted by Paragraph (7) of Subsection
(b) of Section 102 of the General Corporation Law of the State of
Delaware, as the same may be amended or supplemented. Any repeal or
modification of the foregoing paragraph by the stockholders of the
Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification.
TENTH: The Corporation reserves the right to amend, alter,
change or repeal any provision contained in this certificate in the manner
now or hereafter prescribed by law, and all rights and powers conferred
herein on stockholders, directors and officers are subject to this
reserved power.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 83,578
<SECURITIES> 0
<RECEIVABLES> 174,411
<ALLOWANCES> 36,897
<INVENTORY> 246,646
<CURRENT-ASSETS> 547,912
<PP&E> 612,616
<DEPRECIATION> 509,379
<TOTAL-ASSETS> 789,094
<CURRENT-LIABILITIES> 1,189,272
<BONDS> 0
0
245
<COMMON> 16,060
<OTHER-SE> (416,483)
<TOTAL-LIABILITY-AND-EQUITY> 1,189,272
<SALES> 135,083
<TOTAL-REVENUES> 1,374,890
<CGS> 85,110
<TOTAL-COSTS> 1,133,505
<OTHER-EXPENSES> 1,100,813
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (859,428)
<INCOME-TAX> 0
<INCOME-CONTINUING> (859,428)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (859,428)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> 0
</TABLE>
