<PAGE> 1
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
METRETEK TECHNOLOGIES, INC.
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(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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METRETEK TECHNOLOGIES, INC.
1675 BROADWAY
SUITE 2150
DENVER, COLORADO 80202
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY 3, 2000
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To the Stockholders of Metretek Technologies, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"Special Meeting") of Metretek Technologies, Inc. (the "Company") will be held
at the Brown Palace Hotel, 321 17th Street, Denver, Colorado, on Thursday,
February 3, 2000 at 2:00 p.m., local time, for the following purposes:
1. To approve and ratify:
o the issuance and sale in a private placement of (i) up to
1,400,000 shares of the Company's Common Stock, par value
$.01 per share ("Common Stock"), (ii) up to 7,000 shares of
the Company's Series B Preferred Stock, par value $.01 per
share (the "Series B Preferred Stock"), and (iii) warrants
("Warrants") to purchase up to 700,000 shares of the
Company's Common Stock;
o the issuance of shares of Common Stock upon conversion of the
Series B Preferred Stock, in accordance with the terms of the
Series B Preferred Stock; and
o the issuance of shares of Common Stock upon exercise of the
Warrants, in accordance with the terms of the Warrants.
2. To approve an amendment to Article Fourth of the Company's Restated
Certificate of Incorporation, as amended, to:
o increase the authorized number of shares of the Company's
Preferred Stock, par value $.01 per share, by 1,000,000
shares to an aggregate of 3,500,000 shares;
o eliminate the currently authorized Series A Preferred Stock;
o amend the terms of the Series B Preferred Stock to provide
the holders of Series B Preferred Stock with majority Board
representation upon the occurrence of a redemption default;
and
o eliminate references to prior reverse stock splits.
3. To approve an amendment to the Company's 1998 Stock Incentive Plan
to:
o increase the number of shares of Common Stock authorized for
issuance thereunder by 500,000 shares to an aggregate of
750,000 shares; and
o increase the limit on the maximum number of shares with
respect to which awards may be granted during any calendar
year to any individual participant from 25,000 shares to
100,000 shares.
4. To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. Only stockholders of record as of the close
of business on December 28, 1999 are entitled to notice of and to vote at the
Special Meeting and at any adjournments or postponements thereof.
By Order of the Board of Directors,
Gary J. Zuiderveen
Secretary
Denver, Colorado
January 5, 2000
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YOUR VOTE IS IMPORTANT
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN PERSON.
HOWEVER, WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE REQUESTED TO SIGN AND DATE
THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED, SELF-ADDRESSED
STAMPED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF
YOU ATTEND THE SPECIAL MEETING AND SO DESIRE, YOU MAY REVOKE YOUR PROXY AND VOTE
YOUR SHARES IN PERSON.
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METRETEK TECHNOLOGIES, INC.
1675 BROADWAY
SUITE 2150
DENVER, COLORADO 80202
---------------------------------------------
PROXY STATEMENT
FOR THE
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY 8, 2000
---------------------------------------------
INFORMATION CONCERNING PROXY SOLICITATION AND VOTING RIGHTS
PROXY SOLICITATION
This Proxy Statement is furnished to the holders of Common Stock, par
value $.01 per share (the "Common Stock"), and to the holders of Series B
Preferred Stock, par value $.01 per share ("Series B Preferred Stock"), of
Metretek Technologies, Inc., a Delaware corporation (the "Company"), in
connection with the solicitation of proxies by the Board of Directors of the
Company for use at the Special Meeting of Stockholders of the Company to be held
at the Brown Palace Hotel, 321 17th Street, Denver, Colorado, on Thursday,
February 3, 2000, at 2:00 p.m., local time, and at any adjournments or
postponements thereof (the "Special Meeting"), for the purposes set forth in the
accompanying Notice of Special Meeting of Stockholders.
This Proxy Statement, together with the Notice of Special Meeting of
Stockholders and the accompanying proxy card, is being first mailed to
stockholders on or about January 5, 2000.
The solicitation of proxies will initially be made by mail and may
thereafter be made in person or by mail, telephone, telecopy, telegram,
facsimile or other means of communication by the directors, officers and regular
employees of the Company for no additional or special compensation. In addition,
brokerage houses, banks, nominees, trustees, custodians and other fiduciaries
will be requested by the Company to forward proxy solicitation materials for
shares of Common Stock held of record by them to the beneficial owners of such
shares, and such fiduciaries will, upon request, be reimbursed by the Company
for their reasonable out-of-pocket expenses incurred in connection therewith. In
addition, the Company has engaged Georgeson Shareholders Communications, Inc., a
professional soliciting organization, to assist the Company in the solicitation
of proxies for an estimated fee of $7,500, plus reimbursement for certain
out-of-pocket expenses. The cost of the solicitation of proxies for use at the
Special Meeting will be borne by the Company.
VOTING RIGHTS AND PROCEDURES
Only stockholders of record as of the close of business on December 28,
1999 (the "Record Date") are entitled to notice of and to vote at the Special
Meeting. As of the close of business on the Record Date, 3,784,045 shares of
Common Stock and 1,450 shares of Series B Preferred Stock were issued and
outstanding. Each share of Common Stock outstanding on the Record Date entitles
the holder thereof to one vote on each matter to be voted upon at the Special
Meeting, except as provided herein. Holders of shares of Series B Preferred
Stock are not entitled to vote at the Special Meeting, except as provided
herein. The presence, in person or by proxy, at the Special Meeting of the
holders of a majority of the shares of Common Stock outstanding as of the Record
Date is necessary to constitute a quorum for the transaction of business at the
Special Meeting.
The affirmative vote of the holders of a majority of the shares of Common
Stock present, in person or by proxy, and entitled to vote at the Special
Meeting, exclusive of the shares issued to the DDJ Investors (as defined below)
in the Private Placement (as defined below), is required to approve and ratify
the following (the "Private Placement Proposal"):
o the issuance and sale in a private placement of (i) up to
1,400,000 shares of the Company's Common Stock, (ii) up to
7,000 shares of the Company's Series B Preferred Stock, and
(iii) warrants ("Warrants") to purchase up to 700,000 shares
of the Company's Common Stock;
o the issuance of shares of Common Stock upon conversion of the
Series B Preferred Stock, in accordance with the terms of the
Series B Preferred Stock; and
<PAGE> 4
o the issuance of shares of Common Stock upon exercise of the
Warrants, in accordance with the terms of the Warrants.
The affirmative vote of (i) the holders of a majority of the shares of
Common Stock outstanding and entitled to vote at the Special Meeting and (ii) of
the holders of a majority of the outstanding shares of Series B Preferred Stock,
voting as a separate class, is required to approve an amendment (the "Preferred
Stock Proposal") to Article Fourth of the Company's Restated Certificate of
Incorporation, as amended (the "Restated Certificate"), to:
o increase the authorized number of shares of the Company's Preferred
Stock, par value $.01 per share, by 1,000,000 shares to an aggregate
of 3,500,000 shares;
o eliminate the currently authorized Series A Preferred Stock;
o amend the terms of the Series B Preferred Stock to provide the
holders of Series B Preferred Stock with majority Board
representation upon the occurrence of a redemption default; and
o eliminate references to prior reverse stock splits.
The affirmative vote of the holders of a majority of the shares of Common
Stock present, in person or by proxy, and entitled to vote at the Special
Meeting is required to approve an amendment (the "Stock Plan Proposal") to the
Company's 1998 Stock Incentive Plan (the "1998 Stock Plan") to:
o increase the number of shares of Common Stock authorized for
issuance thereunder by 500,000 shares to an aggregate of 750,000
shares; and
o increase the limit on the maximum number of shares with respect to
which awards may be granted during any calendar year to any
individual participant from 25,000 shares to 100,000 shares.
Abstentions and "broker non-votes" (shares held of record by brokers or
nominees which are not voted on a particular matter because the broker or
nominee has not received voting instructions from the beneficial owner of such
shares and does not have discretionary voting power with respect to that matter)
will be treated as present for purposes of determining the presence of a quorum
for the transaction of business at the Special Meeting. Abstentions on a matter
will be treated as present on such matter and, accordingly, will have the same
effect as votes against the Private Placement Proposal, the Preferred Stock
Proposal and the Stock Plan Proposal. Broker non-votes on a matter will not be
treated as present on such matter and, accordingly, (i) will have no effect on
the outcome of the Private Placement Proposal or the Stock Plan Proposal, and
(ii) will have the same effect as votes against the Preferred Stock Proposal.
If a proxy card is properly signed and returned to the Company at or prior
to the Special Meeting, unless subsequently properly revoked, the shares
represented by that proxy card will be voted at the Special Meeting in
accordance with the instructions specified thereon. If a proxy card is properly
signed and returned to the Company at or prior to the Special Meeting without
voting instructions, it will be voted "FOR" the Private Placement Proposal,
"FOR" the Preferred Stock Proposal and "FOR" the Stock Plan Proposal. If any
other matters are properly presented at the Special Meeting or any adjournments
or postponements thereof, the persons appointed as proxies in the proxy card
will have the discretionary authority to vote or act thereon in accordance with
their best judgment.
Any stockholder may revoke a proxy at any time before it is exercised,
either by delivering to the Secretary of the Company a written notice of
revocation or a properly signed proxy bearing a later date, or by attending the
Special Meeting and voting in person. Attendance at the Special Meeting will not
in and of itself constitute the revocation of a proxy.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of December 28, 1999 (except as
otherwise noted in the footnotes) by (i) each person known by the Company to be
the beneficial owner of more than 5% of the outstanding shares of Common Stock,
(ii) each director of the Company, (iii) each "Named Executive Officer" (as
defined in "Executive Compensation" below), and (iv) all directors and executive
officers of the Company, as a group:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED (1)
-----------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OF CLASS (2)
- ------------------------ ------ --------------------
<S> <C> <C>
American Meter Software Corporation (3)............... 730,216 17.9
105 Erskine Lane
Scott Depot, West Virginia 25560
Kenneth B. Funsten (4)................................ 417,212 10.8
121 Outrigger Mall
Marina del Ray, California 90292
DDJ Capital Management, LLC (5)....................... 290,000 7.7
141 Linden Street, Suite 4
Wellesley, Massachusetts 02482
Famco Value Income Partners, L.P.(6).................. 244,450 6.4
121 Outrigger Mall
Marina del Ray, California 90292
W. Phillip Marcum (7)................................. 240,603 6.1
Albert F. Thomasson (8)............................... 136,336 3.6
A. Bradley Gabbard (9)................................ 71,603 1.9
Robert Lloyd (10)..................................... 61,915 1.6
Ronald W. McKee (11).................................. 42,358 1.1
Anthony D. Pell (12).................................. 37,762 1.0
Basil M. Briggs (13).................................. 23,633 0.6
Harry I. Skilton (14)................................. 16,290 0.4
All directors and executive officers
as a group (8 persons)(15)....................... 630,500 15.2
</TABLE>
- ----------
(1) For purposes of this table, the Number and Percent of Class of Shares
Beneficially Owned are determined in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and such information is not necessarily indicative of beneficial
ownership for any other purpose. Under Rule 13d-3, beneficial ownership
includes any shares as to which the person has sole or shared voting
power or investment power and any shares subject to options, warrants
or other rights to acquire shares held by that person that are
currently exercisable or exercisable within 60 days of December 28,
1999. In addition, such shares are deemed to be outstanding in
calculating the Percent of Class of such person, but are not deemed to
be outstanding as to any other person. Unless otherwise indicated in
the footnotes, each beneficial owner has sole voting and investment
power (or shares such powers with his spouse) with respect to the
shares shown as beneficially owned, subject to community property laws
where applicable.
(2) The Percent of Class is based upon 3,784,045 shares of Common Stock
outstanding as of December 28, 1999.
(3) Information based upon Schedule 13D filed by American Meter Software
Corporation under its former name, Eagle Research Corporation
("American Meter Software") with the Securities and Exchange Commission
("SEC") on April 2, 1998. American Meter Software is a wholly-owned
subsidiary of American Meter Company
3
<PAGE> 6
("American Meter"), and both corporations are ultimately controlled by
Ruhrgas AG, a German corporation. Includes up to 180,766 shares that
may be acquired by American Meter Software upon the conversion of a
convertible, subordinated note, subject to certain conditions, and up
to 109,890 shares that may be acquired by American Meter Software upon
the exercise of currently exercisable warrants.
(4) Information based upon Amendment No. 4 to Schedule 13D filed by Kenneth
B. Funsten and by FamCo Value Income Partners, L.P. with the SEC on
September 24 , 1999, and Form 4 filed by Mr. Funsten with the SEC on
October 25, 1999. According to the information contained therein,
includes (a) 23,825 shares that may be acquired upon the exercise of
currently exercisable warrants owned by Mr. Funsten; (b) 186,400
shares, and 58,050 shares that may be acquired upon the exercise of
currently exercisable warrants, owned by FamCo Value Income Partners,
L.P. ("FamCo VIP"); and (c) 36,250 shares, and 9,062 shares that may be
acquired upon the exercise of currently exercisable warrants, owned by
FamCo Offshore, Ltd. ("Famco Offshore"). Funsten Asset Management
Company and Mr. Funsten, who is the president and portfolio manager of
Funsten Asset Management Company, are the general partners of FamCo VIP
and FamCo Offshore. Mr. Funsten holds sole voting and investment power
over the securities owned by Famco VIP and Famco Offshore. In this
table, the shares beneficially owned by Mr. Funsten include the shares
owned by FamCo VIP (see note (6) below). Does not include 4,100 shares
owned by an employee of Funsten Asset Management Company which cannot
be sold or further added to without permission by Mr. Funsten by virtue
of restrictions that are placed on securities transactions by employees
of Funsten Asset Management Company, because Mr. Funsten has no
investment or voting authority over the shares of such employee and Mr.
Funsten expressly disclaims beneficial ownership of such shares.
(5) Information based upon Schedule 13D filed by DDJ Capital Management,
LLC with the SEC on December 21, 1999. DDJ Capital Management is the
investment advisor to the DDJ Investors, which are funds and an
institutional separate account that beneficially own 290,000 shares in
the aggregate. Does not include 244,379 shares of Common Stock that may
be acquired by the DDJ Investors upon the conversion of 1,450 shares of
Series B Preferred Stock (based upon the Initial Conversion Rate (as
defined below)) which become convertible into shares of Common Stock
after June 9, 2000, or 145,000 shares of Common Stock that may be
acquired by the DDJ Investors upon the exercise of Warrants that become
exercisable after March 9, 2000.
(6) Information based upon Amendment No. 4 to Schedule 13D filed by Famco
VIP with the SEC on September 24, 1999. According to the information
contained therein, includes 58,050 shares that may be acquired by Famco
VIP upon the exercise of currently exercisable warrants. Kenneth B.
Funsten and Funsten Asset Management Company are the general partners
of Famco VIP. In this table, the shares owned by Famco VIP are also
included in the shares beneficially owned by Mr. Funsten (see note (4)
above). Does not include 4,100 shares owned by an employee of Funsten
Asset Management Company which cannot be sold or further added to
without permission by Mr. Funsten by virtue of restrictions that are
placed on securities transactions by employees of Funsten Asset
Management Company, because Famco VIP has no investment or voting
authority over the shares of such employee and Famco VIP expressly
disclaims beneficial ownership of such shares.
(7) Includes 7,750 shares owned by Mr. Marcum's wife. Also includes 22,120
shares that may be acquired by Mr. Marcum or his wife upon the exercise
of currently exercisable warrants. Also includes 120,000 shares that
may be acquired by Mr. Marcum upon the exercise of currently
exercisable stock options.
(8) Includes 2,338 shares held of record by Mr. Thomasson's wife and 32,858
shares held in family trusts. Also includes 23,165 shares that may be
acquired by Mr. Thomasson upon the exercise of currently exercisable
stock options and 33,199 shares that may be acquired by Mr. Thomasson
or his wife or their family trusts upon the exercise of currently
exercisable warrants.
(9) Includes 1,750 shares owned by Mr. Gabbard's minor children. Also
includes 4,587 shares that may be acquired by Mr. Gabbard or his minor
children upon the exercise of currently exercisable warrants. Also
includes 48,667 shares that may be acquired by Mr. Gabbard upon the
exercise of currently exercisable stock options.
(10) Includes 18,165 shares that may be acquired by Mr. Lloyd upon the
exercise of currently exercisable stock options and 5,000 shares that
may be acquired by Mr. Lloyd upon the exercise of currently exercisable
warrants.
(11) Includes 29,167 shares that may be acquired by Mr. McKee upon the
exercise of currently exercisable stock options and 2,638 shares that
may be acquired by Mr. McKee upon the exercise of currently exercisable
warrants.
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<PAGE> 7
(12) Includes 2,600 shares held by Mr. Pell's wife. Also includes 17,500
shares that may be acquired by Mr. Pell upon the exercise of currently
exercisable stock options and 4,052 shares that may be acquired by Mr.
Pell or his wife upon the exercise of currently exercisable warrants.
(13) Includes 8,826 shares owned by Mr. Briggs' wife. Also includes 14,714
shares that may be acquired by Mr. Briggs' wife upon the exercise of
currently exercisable stock options and 93 shares that may be acquired
by Mr. Briggs' wife upon the exercise of currently exercisable
warrants.
(14) Includes 13,165 shares that may be acquired by Mr. Skilton upon the
exercise of currently exercisable stock options and 625 shares that may
be acquired by Mr. Skilton upon the exercise of currently exercisable
warrants. Although Mr. Skilton is the President, Chief Executive
Officer and a director of American Meter and the Vice President and a
director of American Meter Software, no shares owned of record by
American Meter Software have been attributed to Mr. Skilton's
beneficial ownership.
(15) See notes (7) through (14).
5
<PAGE> 8
PROPOSAL 1
APPROVAL AND RATIFICATION OF THE PRIVATE PLACEMENT PROPOSAL
The Company is seeking stockholder approval and ratification, for the
purpose of certain rules of the Nasdaq Stock Market, Inc. ("Nasdaq") that are
applicable in connection therewith, of the Company's issuance of the following
securities:
o the issuance and sale in a private placement of (i) up to
1,400,000 shares of the Company's Common Stock, (ii) up to
7,000 shares of the Company's Series B Preferred Stock, and
(iii) Warrants to purchase up to 700,000 shares of the
Company's Common Stock;
o the issuance of shares of Common Stock upon conversion of the
Series B Preferred Stock, in accordance with the terms of the
Series B Preferred Stock; and
o the issuance of shares of Common Stock upon exercise of the
Warrants.
The following summary of the provisions of the Securities Purchase
Agreement, dated as of December 9, 1999, as amended (the "Securities Purchase
Agreement"), by and among the Company and certain investors advised by DDJ
Capital Management, LLC (the "DDJ Investors"), the Certificate of Designation
relating to the Series B Preferred Stock (the "Certificate of Designation"), the
Registration Rights Agreement, dated as of December 9, 1999 (the "Registration
Rights Agreement"), by and among the Company and the DDJ Investors, and the
Warrants is qualified in its entirety by reference to, and should be read in
conjunction with, such documents, which are incorporated herein by reference.
The terms of the Series B Preferred Stock, which are set forth in the
Certificate of Designation for the Series B Preferred Stock, are included in the
Proposed Amendment to Article Fourth of the Company's Restated Certificate,
which is attached hereto as Appendix A, except that paragraphs 2(b) and 2(c) of
Section A of Article Fourth, as set forth in Appendix A, are subject to
stockholder approval of the Preferred Stock Proposal. See "Terms of the Series B
Preferred Stock - Special Class Voting Rights - Board Representation" below. The
Securities Purchase Agreement, the Certificate of Designation, the Registration
Rights Agreement and the form of the Warrants have been included as exhibits to
the Company's Current Report on Form 8-K filed with the SEC on December 22,
1999. A copy of such documents can be obtained by contacting the Company at
Metretek Technologies, Inc., 1675 Broadway, Suite 2150, Denver, Colorado 80202,
telephone: (303) 592-5555, Attention: Corporate Secretary.
THE PRIVATE PLACEMENT
GENERAL DESCRIPTION. On December 9, 1999, the Company entered into the
Securities Purchase Agreement and related agreements with the DDJ Investors,
pursuant to which the DDJ Investors agreed to purchase in a private placement,
subject to certain conditions described below, 3,000 units ("Units"), at a price
of $2,000 per Unit, for an aggregate purchase price of $6,000,000 in cash. Each
Unit consists of 200 shares of Common Stock, one share of Series B Preferred
Stock, and Warrants to purchase 100 shares of Common Stock. The Securities
Purchase Agreement provides for the issuance of the Units to DDJ in two closings
("Closings"). On December 9, 1999, the Company issued and sold to the DDJ
Investors 1,450 Units for an aggregate purchase price of $2,900,000 (the "First
Closing"). At the "Second Closing", the Company will issue and sell to the DDJ
Investors 1,550 additional Units for an aggregate purchase price of $3,100,000
in cash, subject to reduction as set forth below. The Second Closing will occur
promptly after the date the stockholders approve this Private Placement
Proposal, if certain other conditions described herein are met.
Among other things, the Second Closing is conditioned upon additional
institutional investors or other "accredited investors" (as such term is defined
in Regulation D promulgated under the Securities Act of 1933, as amended (the
"Securities Act")) ("Additional Investors") purchasing no less than 3,000
additional Units and no more than 4,000 additional Units, at a price dependent
upon market conditions. The DDJ Investors and the Additional Investors are
collectively referred to in this Proxy Statement as the "Purchasers." The
Additional Investors will enter into the Securities Purchase Agreement and the
Registration Rights Agreement, will receive Warrants and will purchase Units at
the Second Closing. If the economic terms of the sale of Units to the Additional
Investors are more favorable than the economic terms of the sale of the Units to
the DDJ Investors, such as a lower per Unit purchase price, then the DDJ
Investors will be entitled to receive the same economic benefit with respect to
all of the 3,000 Units they have agreed to purchase, whether through refund,
redemption, exchange or otherwise, such as by a reduction in the purchase price
of the Units to be purchased by the DDJ Investors in the Second Closing.
6
<PAGE> 9
The offer, sale and issuance of the Units to the DDJ Investors and to the
Additional Investors is referred to in this Proxy Statement as the "Private
Placement". As discussed below, the primary purpose of the Private Placement is
to raise capital to enable the Company to develop its Internet business, repay
certain outstanding indebtedness, and otherwise fund general working capital
requirements, as more fully described below. Consummation of the Second Closing
is conditioned upon, among other things, the approval of this Private Placement
Proposal by the stockholders of the Company.
TRANSFER RESTRICTIONS. The issuance of the shares of Common Stock, the
shares of Series B Preferred Stock and the Warrants in the Private Placement,
including the issuance of shares of Common Stock upon conversion of the Series B
Preferred Stock and upon exercise of the Warrants, has not been registered under
the Securities Act or any state securities laws. Such securities may not be
offered, sold or otherwise transferred by the holders thereof unless such offer,
sale or transfer is registered under the Securities Act and applicable state
securities laws, or made pursuant to valid exemption from such registration
requirements. All securities issued in the Private Placement bear or will bear a
legend to that that effect.
REGISTRATION RIGHTS. Concurrently with and pursuant to the Securities
Purchase Agreement, the Company entered into the Registration Rights Agreement
with the DDJ Investors. The Additional Investors will also become parties to the
Registration Rights Agreement. Pursuant to the terms of the Registration Rights
Agreement, the Company is required to file, on or before February 7, 2000, a
Form S-3 "shelf" registration statement (the "Shelf Registration Statement")
with the SEC covering the resale of (i) the shares of Series B Preferred Stock
issued in the Private Placement, and (ii) the shares of Common Stock issued in
the Private Placement, including the shares of Common Stock issuable upon
conversion of the Series B Preferred Stock and upon exercise of the Warrants
included in the Units (collectively, the "Registrable Securities"). If the Shelf
Registration Statement (i) is not filed with the SEC on or prior to February 7,
2000, (ii) does not become effective on or prior to May 9, 2000, or (iii) is
filed and declared effective but its effectiveness is suspended for any reason
(without being succeeded immediately by a replacement shelf registration
statement filed and declared effective) for a period of time which shall exceed
30 days in the aggregate, then the Company will be required to pay liquidated
damages to each holder of Registrable Securities. The amount of liquidated
damages payable during any period in which a registration default shall have
occurred and be continuing is that amount which is equal to $1.00 per 1,000
shares of Registrable Securities per week and shall increase by an amount equal
to $0.10 per 1,000 shares of Registrable Securities at the end of each
subsequent two week period up to a maximum of $3.20. In addition, pursuant to
the Registration Rights Agreement, the holders of Registrable Securities have
certain "piggyback" registration rights in connection with registration
statements filed by the Company, on its own behalf or on behalf of any of its
stockholders, with respect to the Registrable Securities. The Company will pay
all expenses, other than underwriting and brokerage discounts and commissions
and other selling expenses, of all such registrations.
BOARD REPRESENTATION. Pursuant to the terms of the Securities Purchase
Agreement and the Series B Preferred Stock, the holders of a majority of the
outstanding shares of Series B Preferred Stock, voting together as a separate
class, are entitled to elect one member of the Company's Board of Directors, so
long as an aggregate of at least 2,000 shares of Series B Preferred Stock remain
outstanding. In addition, the proposed amendment to the terms of the Series B
Preferred Stock, as set forth in the Preferred Stock Proposal, provides that, in
the event the Company fails to redeem the Series B Preferred Stock in accordance
with its terms, the holders of the Series B Preferred Stock will have the right
to elect a majority of the Company's Board of Directors until such time as all
shares of Series B Preferred Stock have been redeemed by the Company.
CONDITIONS TO SECOND CLOSING. The Second Closing of the sale of Units in
the Private Placement is subject to certain conditions. The conditions to the
obligation of the DDJ Investors to purchase Units at the Second Closing include
the following:
o the Company shall have sold no less than 3,000 Units and no
more than 4,000 Units to the Additional Investors;
o market conditions, at the time of the Second Closing, shall
not be such that, in the reasonable judgment of the Purchasers
in the Second Closing, the purchase and sale of the Units at
the Second Closing on the terms set forth in the Securities
Purchase Agreement do not reflect appropriate market terms;
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o the stockholders of the Company shall have duly adopted the
Private Placement Proposal in accordance with Nasdaq
requirements;
o the stockholders of the Company shall have duly adopted the
Preferred Stock Proposal;
o the representations and warranties of the Company contained in
the Securities Purchase Agreement shall continue to be true
and correct at the time of the Second Closing;
o the Company shall have complied with all agreements and
covenants contained in the Securities Purchase Agreement
required to be performed by it prior to or at the Second
Closing; and
o the Company shall have obtained all requisite consents and
approvals.
The conditions to the obligation of the Company to issue and sell Units at
the Second Closing include the following:
o the stockholders of the Company shall have duly adopted this
Private Placement Proposal in accordance with Nasdaq
requirements; and
o the Company shall have received a fairness opinion from
Hanifen, Imhoff Inc. ("Hanifen"), which states that the
Private Placement is fair, from a financial point of view, to
the Company.
INDEMNIFICATION. The Company has agreed to indemnify and hold harmless
each Purchaser and its respective affiliates, and their employees, officers,
partners, members, directors and agents, from and against any and all losses,
claims, damages, liabilities, costs and expenses in connection with or arising
out of any breach by the Company of any of its representations, warranties or
covenants in the Securities Purchase Agreement or in the related agreements or
any third party proceeding in connection therewith.
EXPENSES. The Company has agreed to pay all reasonable, documented,
out-of-pocket fees and expenses actually incurred by the Purchasers in
connection with the Private Placement.
MANAGEMENT RIGHTS. By separate letter agreement, the Company has granted
to the DDJ Investors the right to receive information and to submit proposals to
and to consult with management regarding the Company's operations and financial
condition.
TERMS OF THE SERIES B PREFERRED STOCK
The holders of the Series B Preferred Stock are entitled to significant
rights, preferences and privileges as a result of their investment in the
Company. These rights, preferences and privileges are summarized below. The
terms of the Series B Preferred Stock, which are set forth in the Certificate of
Designation establishing the terms of the Series B Preferred Stock, which was
filed with the Secretary of State of the State of Delaware on December 9, 1999,
are included in the Proposed Amendment to Article Fourth of the Restated
Certificate, which is attached to this Proxy Statement as Appendix A. The
following summary of certain key terms of the Series B Preferred Stock is not
complete and is qualified in its entirety by, and should be read in conjunction
with, Appendix A.
AMOUNT. The Company has authorized a total of 1,000,000 shares of Series B
Preferred Stock, of which up to 7,000 shares will be issued in the Private
Placement.
DIVIDENDS. The holders of shares of Series B Preferred Stock are entitled,
in preference to the holders of any other class of capital stock of the Company,
to receive cumulative cash dividends on a quarterly basis, at the rate per annum
of 8%, when, as and if declared by the Company. The dividends on the Series B
Preferred Stock are cumulative and so long as at least 1,000 shares of Series B
Preferred Stock are outstanding and such dividends have not been paid in full,
no dividends shall be paid or declared on, and the Company cannot purchase,
redeem or acquire, any shares of Common Stock or any other class of capital
stock of the Company ranking junior to or on parity with the Series B Preferred
Stock. In addition, in the event that the Company declares or pays any cash or
Common Stock dividends on the Common Stock, the Company must also declare and
pay to the holders of the Series B Preferred Stock the same dividends
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or distributions based upon the number of shares of Common Stock into which the
shares of Series B Preferred Stock are then convertible.
LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding-up of the Company, the holders of Series B Preferred
Stock will be entitled to receive, out of the assets of the Company available
for distribution to stockholders, before any payment or distribution will be
paid on any Common Stock or any other class of stock ranking on liquidation
junior to the Series B Preferred Stock, an amount in cash equal to $1,000 per
share of Series B Preferred Stock held by such holder, plus accrued but unpaid
dividends, if any (the "Liquidation Preference"). In the event the assets of the
Company available for distribution to the holders of Series B Preferred Stock
are insufficient to permit payment in full of the Liquidation Preference, then
all such assets will be distributed ratably among the holders of the Preferred
Stock. If the holders of Series B Preferred Stock would have received more than
the Liquidation Preference if they had converted their Series B Preferred Stock
into Common Stock immediately prior to the liquidation event, then they shall
receive such greater amount.
REDEMPTION. On December 9, 2004, the Company is required to redeem all
outstanding shares of Series B Preferred Stock at a redemption price equal to
the Liquidation Preference.
In addition, the holders of Series B Preferred Stock may, by majority
vote, elect either to participate in, or to have their shares of Series B
Preferred Stock redeemed upon the occurrence of, any of the following
"extraordinary transactions":
o certain mergers or consolidations of the Company;
o the sale or transfer of all or substantially all of the
properties and assets of the Company;
o any purchase by any person or group of capital stock of the
Company causing such person or group to own a majority of the
voting power of the Company; or
o the redemption or repurchase of a majority of the voting power
of the capital stock of the Company.
The Company has agreed to provide an adequate remedy to the DDJ Investors
in the event it fails to redeem all of the Series B Preferred Stock pursuant to
the terms thereof. The amendment to the terms of the Series B Preferred Stock
relating to Board representation of the holders of Series B Preferred Stock, as
described below under "Special Class Voting Rights -- Board Representation" and
as described in the Preferred Stock Proposal, will be the remedy, if the
Preferred Stock Proposal is adopted by the stockholders at the Special Meeting.
If the Preferred Stock Proposal is not adopted, then the DDJ Investors will not
be obligated to purchase Units at the Second Closing and will be entitled to
contractual remedies, including, without limitation, the payment of interest at
an increasing rate on the liquidation amount of the Series B Preferred Stock
that the Company fails to redeem.
Furthermore, in the event that, at any time commencing on December 9,
2000, the market price of the Common Stock equals or exceeds 200% of the
Conversion Price (as defined below) then in effect for 20 out of a period of 30
consecutive trading days, then the Company shall have the right to redeem the
Series B Preferred Stock at a purchase price equal to the Liquidation
Preference.
CONVERSION RIGHTS. After June 9, 2000, each share of Series B Preferred
Stock will be convertible, at the option of the holder thereof, into the number
of shares of Common Stock equal to the Liquidation Preference divided by the
"Conversion Price" per share then in effect. The initial "Conversion Price" is
$5.9334 (the "Initial Conversion Price"), which equals approximately 168 shares
of Common Stock per share of Series B Preferred Stock, based upon a Liquidation
Preference of $1,000 per share of Series B Preferred Stock. On December 9, 2000,
the Conversion Price will be reset to the lower of (i) the Initial Conversion
Price, (ii) the Conversion Price then in effect, if it has been adjusted
pursuant to the anti-dilution provisions of the Series B Preferred Stock as
discussed below, or (iii) 110% of the sum of (a) the average closing bid price
of the Common Stock for the 30 trading days immediately preceding such date,
plus (b) the fair market value of any securities, cash or assets (other than
dividends paid exclusively in cash or Common Stock) distributed to the holders
of Series B Preferred Stock, but the Conversion Price will not, in any event, be
reduced by more than 50% of the Conversion Price then in effect. Therefore, if
the Series B Preferred Stock is not converted into Common Stock prior to
December 9, 2000, the Series B Preferred Stock may become convertible into
Common Stock at a rate which is below the prevailing market price of the Common
Stock on such date. If the Conversion Price is so adjusted, then the holders of
Series B Preferred Stock will not, for a period of 90 days after the adjustment,
sell, pledge or transfer any capital stock of the
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Company, or, for a period of 30 days after the adjustment, purchase (although
they can convert their Series B Preferred Stock or exercise their Warrants) any
shares of Common Stock to cover any "short" position.
The Conversion Price, and the number of shares of Common Stock of the
Company (or the number and kind of other securities or rights) into which each
share of Series B Preferred Stock is convertible, are also subject to adjustment
pursuant to the anti-dilution provisions of the Series B Preferred Stock as set
forth in the Certificate of Designation. These anti-dilution provisions include
the following:
o If the number of shares of Common Stock outstanding is
increased by a stock dividend or other distribution payable in
shares of Common Stock, or by a subdivision or split-up of the
outstanding shares of Common Stock into a greater number of
shares of Common Stock, then the Conversion Price will be
proportionally decreased so that the number of shares of
Common Stock issuable upon conversion of the Series B
Preferred Stock shall be increased in proportion to the
increase of outstanding shares of Common Stock.
o If the number of shares of Common Stock outstanding is
decreased by a combination or reverse split of the outstanding
shares of Common Stock, then the Conversion Price will be
proportionately increased so that the number of shares of
Common Stock issuable upon conversion of the Series B
Preferred Stock shall be decreased in proportion to such
decrease in outstanding shares of Common Stock.
o If the Company issues any Common Stock at a price, or any
options, rights, warrants or other securities convertible into
or exchangeable for shares of Common Stock (other than certain
shares and options to officers, directors or employees under
the Company's employee plans, certain shares issuable upon the
exercise of outstanding warrants or other rights, or
securities issuable upon conversion of the Series B Preferred
Stock or upon exercise of the Warrants) at a purchase price,
conversion price or exercise price (as applicable) per share
less than the greater of the market price of the Common Stock
or the Conversion Price in effect immediately prior to such
issuance, then the Conversion Price will be reduced pursuant
to a "weighted price anti-dilution" formula, thereby entitling
the holders of the Series B Preferred Stock to receive
additional shares of Common Stock upon conversion.
o If the Company distributes to all holders of shares of Common
Stock evidences of its indebtedness, shares of any class or
series of capital stock, other securities, cash or assets
(excluding cash dividends or distributions of shares of its
Common Stock), then, if they so elect by majority vote, the
holders of outstanding shares of Series B Preferred Stock
shall be entitled to, either (i) receive such distribution
upon conversion, be entitled to covert each share of Series B
Preferred Stock into the consideration or if the holder has
converted its holdings of Series B Preferred Stock into Common
Stock as of the payment date, or (ii) have the Conversion
Price of the Series B Preferred Stock proportionately reduced.
GENERAL VOTING RIGHTS. The holders of the Series B Preferred Stock are not
entitled to vote on matters presented to the holders of Common Stock generally,
except as expressly provided by law or in the Certificate of Designation.
SPECIAL CLASS VOTING RIGHTS - BOARD REPRESENTATION. The holders of the
Series B Preferred Stock, voting together as a separate class, have the right to
elect one member of the Company's Board of Directors, so long as at least 2,000
shares of Series B Preferred Stock remain outstanding. All other directors will
be elected by the holders of Common Stock and of any other class of capital
stock of the Company that has the right to vote in the election of directors.
The Company is recommending that its stockholders approve an amendment to
the terms of the Series B Preferred Stock providing that, in the event the
Company fails for any reason to redeem the Series B Preferred Stock in full in
accordance with its terms, then the size of the Board of Directors will be
increased to allow the holders of the Series B Preferred Stock to elect a
sufficient number of additional directors to constitute a majority of the Board
of Directors, to serve until the Company pays in full the redemption price for
the shares of Series B Preferred Stock to be redeemed. Thereafter, the size of
the Board of Directors will be reduced to its size in effect prior to the
redemption default. The Company is including such provision in the Preferred
Stock Proposal, which provision is set forth in paragraphs 2(b) and 2(c) of
Section A included in the Proposed Amendment to Article Fourth of the Restated
Certificate, which is attached to this Proxy Statement as Appendix A.
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SPECIAL CLASS VOTING RIGHTS -- RIGHT TO VETO CERTAIN TRANSACTIONS. So long
as at least 1,000 shares of Series B Preferred Stock remain outstanding, the
Company may not, without the consent of the holders of at least a majority of
the shares of Series B Preferred Stock then outstanding, voting as a single
class, take any of the following actions:
o enter into any merger, consolidation, recapitalization,
reorganizational or like transaction involving the Company or
any of its subsidiaries;
o liquidate or dissolve the Company or any of its subsidiaries;
o sell or transfer all or substantially all of the assets or
properties of the Company; dispose of assets in one or more
transactions for consideration in excess of $1,000,000 without
the approval of the Board of Directors of the Company; or
o incur indebtedness for money borrowed, except for borrowings
under the Company's primary credit agreement of up to
$3,000,000.
In addition, so long as any shares of Series B Preferred Stock remain
outstanding, the Company may not, without the consent of the holders of at least
a majority of the shares then outstanding, voting as a single class, take any of
the following actions:
o issue any equity securities, or securities exchangeable or
convertible into equity securities or measured by the
Company's earnings or profit, other than Series C Preferred
Stock or securities of the Company or its Internet
subsidiaries that rank junior to the Series B Preferred Stock
as to liquidation, dividend and redemption rights;
o redeem, repurchase or otherwise acquire for value any equity
security of the Company (other than the Series B Preferred
Stock in accordance with its terms); or
o amend the Certificate of Incorporation, By-Laws or other
charter documents of the Company or any of its subsidiaries.
WARRANTS
Each Warrant included in the Units being sold in the Private Placement
entitles the holder thereof to purchase one share of Common Stock at the then
current "Exercise Price". The Warrants are initially exercisable at an exercise
price per share equal to $6.7425 (the "Initial Exercise Price"). The Initial
Exercise Price will be reset on December 9, 2000 to the lower of (i) the Initial
Exercise Price, (ii) the Exercise Price then in effect, if it has been adjusted
pursuant to the anti-dilution provisions of the Warrants, or (iii) 125% of the
average closing bid price of the Common Stock for the 30 trading days
immediately preceding such date. The Exercise Price is subject to further
adjustment pursuant to certain anti-dilution provisions, which are substantially
the same as the anti-dilution provisions of the Series B Preferred Stock
described in "Terms of the Series B Preferred Stock - Conversion Rights" above.
The Warrants are immediately detachable from the Units, can be exercised at any
time after March 9, 2000, and expire December 9, 2004. In lieu of paying the
Exercise Price in cash, holders of Warrants may exercise such Warrants by
delivering to the Company shares of Common Stock of the Company with a fair
market value equal to the Exercise Price. Alternatively, holders of Warrants may
make a "cashless" exercise of the Warrants and recover, upon exercise and
without making any payments (of cash, Common Stock or any other asset), a "net"
number of shares of Common Stock determined by a formula based on the amount the
trading price of the Common Stock exceeds the Exercise Price then in effect.
PRIVATE PLACEMENT AGENT
The Company has engaged First Albany Corporation to serve as its exclusive
placement agent in connection with the Private Placement. The Company will pay
to First Albany Corporation a fee equal to two percent (2%) of the gross
proceeds received by the Company in the Private Placement, plus customary fees
and expenses.
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USE OF PROCEEDS
The aggregate gross proceeds from the Private Placement, if 6,000 Units
(the minimum required for the Second Closing) are sold at a purchase price of
$2,000 per Unit and if the other conditions to the Second Closing are met, will
be $12,000,000, including the gross proceeds at $2,900,000 received by the
Company at the First Closing. Because the actual amount of the gross proceeds
will depend upon (i) the consummation of the Second Closing, (ii) the number of
Units (between 3,000 and 4,000 Units) sold to the Additional Investors, and
(iii) the price of the Units sold to the Additional Investors (which will depend
on market conditions and, if less than $2,000 per Unit, will also reduce the
Company's proceeds from the First Closing), the Company cannot provide any
assurance of the actual amount of gross proceeds from the Private Placement.
The gross proceeds from the First Closing will be used primarily to
finance, in part, the development of the Company's Internet business. Any
additional proceeds received by the Company in the Second Closing will be used
by the Company for development of its Internet business, repayment of certain
indebtedness, payment of its expenses associated with the Private Placement, and
for general corporate and working capital purposes.
REASONS FOR THE PRIVATE PLACEMENT
The Company is selling the Units in the Private Placement primarily to
raise funds it needs to satisfy short-term capital requirements to finance the
development of its Internet business. The Company expects that the initial
development of its eBusiness, which will allow the Company to define and develop
its eBusiness market, products and services and to launch a fully functional
website to conduct its eBusiness, will cost approximately $5,000,000, consisting
of consulting fees and technology costs.
The Company will also use a portion of the proceeds of the Private
Placement to fund certain long-term capital requirements. These long-term
capital requirements include the potential repayment of a convertible promissory
note issued to American Meter Company in connection with the acquisition of a
business acquired from American Meter Company (an expected $600,000 principal
balance due May 2002), and the repayment of outstanding indebtedness
(approximately $2,100,000 as of November 30, 1999) under its credit facility
with its principal lender which expires May 2001. In addition, the Company will
utilize the proceeds of the Private Placement to finance its working capital
needs and the expansion of its business operations, including potentially
providing the funds to finance an acquisition opportunity, if one were to arise.
The Company has no present agreement or arrangement for any such acquisition
opportunities.
The Company has recently focused a major part of its business strategy
upon the development of an Internet-based business, also referred to as its
eBusiness. The Company is currently developing and operating its eBusiness
through two wholly-owned subsidiaries, Metretek Internet Services, Inc.
("Metretek Internet") and TotalPlan, Inc. ("TotalPlan"). In furtherance of this
business strategy, the Company has entered into a strategic relationship with
Scient Corporation ("Scient"), a leading eBusiness consultant and advisor, to
assist the Company in designing, developing and creating its eBusiness. The goal
of the eBusiness is to enable the Company to take its measurement information
products, services and data management technologies to a broader market of end
users of natural gas and electricity by creating a comprehensive market place on
the Internet for energy consumers and suppliers to take advantage of deregulated
energy markets. The Company's initial focus, which is the principal reason for
the Private Placement, is to develop and launch an Internet-based transactional
website.
The Company estimates that this initial development phase of its eBusiness
will require estimated expenditures of approximately $5,000,000, consisting of
consulting fees and expenses payable to Scient and costs of acquiring the
requisite technology, including hardware and software, as well as research and
development costs. The Company expects that after this initial development stage
is completed and its website is launched, the further development and growth of
its eBusiness, including staffing, organizational and start-up expenses,
marketing costs and additional capital expenditures, will require significant
additional funds. In order to so develop and expand its eBusiness, the Company
will need to raise the significant additional funds beyond the proceeds of the
Private Placement, from the proceeds of public or private equity financing, debt
financing or from other sources. Any such capital raising will be subject to the
consent of the Company's lender on its credit facility, if its credit facility
is then in effect. In addition, any such capital raising will be subject to any
required consents from the holders of Series B Preferred Stock, as described
above. There can be no assurance that such additional funds will be available to
the Company in the future or that, if available, such funds can be obtained on
terms favorable to the Company, and on terms acceptable to the Company's lender,
if its consent is required, and on terms acceptable to the holders of the Series
B Preferred Stock, if their consent is required. The inability of the Company to
raise
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sufficient additional funds, beyond the proceeds of the Private Placement, to
meet the capital requirements of its eBusiness could have a material adverse
effect on its business, financial condition and results of operations.
Also in furtherance of its eBusiness strategy, the Company has entered
into a Consulting and Joint Venture Agreement with Mercator Energy Incorporated
("Mercator"). Mercator is a Denver-based natural gas services and brokerage
company that acts as broker-agent for both producers and users. Pursuant to the
Mercator Consulting Agreement, Mercator is providing consulting services to
TotalPlan, allowing the Company to obtain, utilize and incorporate into its
eBusiness Mercator's expertise in the area of energy procurement, which is a key
element in the Company's eBusiness strategy. The term of the Mercator Consulting
Agreement ends March 2000, but is renewable by mutual consent for six additional
months. In consideration for entering into the Mercator Consulting Agreement,
Mercator receives consulting fees of $7,500 per month and received an option to
purchase up to 25% of the capital stock of TotalPlan for a purchase price equal
to 25% of TotalPlan's cumulative net loss (adjusted by adding back depreciation
and amortization, and exclusive of expenditures on the Scient project).
Mercator's stock option is exercisable only during the term of the Mercator
Consulting Agreement.
REASON FOR STOCKHOLDER APPROVAL
The Common Stock is listed on the Nasdaq National Market. Nasdaq Rule
4460(i)(1)(D) ("Nasdaq 20% Rule") requires stockholder approval prior to the
issuance of securities under certain circumstances, including in connection with
a transaction (other than a public offering) involving the sale or issuance by
the Company of Common Stock, or securities convertible into or exercisable for
Common Stock, equal to 20% or more of the Common Stock or 20% or more of the
voting power outstanding before such issuance at a price less than the greater
of the book or market value of the Common Stock. Additionally, Nasdaq Rule
4460(i)(1)(B) (the "Nasdaq Control Rule") requires stockholder approval of the
issuance of securities by the Company that would result in a "change of control"
of the Company. There is no concrete test to determine the amount of securities
that the Company may issue to investors without triggering the Nasdaq Control
Rule. Depending on the facts and circumstances, the issuance by the Company of a
small amount of securities may result in a change of control of the Company
where an investor already owns a sizable portion of the Company's outstanding
securities. The Company is seeking stockholder approval and ratification of the
issuance of the Units in the Private Placement, consisting of the issuance of
shares of Common Stock, shares of Series B Preferred Stock and Warrants, and of
the issuance of shares of Common Stock upon conversion of the Series B Preferred
Stock and upon exercise of the Warrants, in order to ensure compliance with the
Nasdaq 20% Rule and the Nasdaq Control Rule (collectively, the "Nasdaq Rules").
Stockholder approval of the Private Placement is not otherwise required as a
matter of Delaware law or other applicable laws or rules or by the Company's
Restated Certificate or By-Laws.
As a result of the issuance of the Common Stock included in the Units
issued to the DDJ Investors in the First Closing, the DDJ Investors, in the
aggregate, own 290,000 shares of Common Stock, and have the right to acquire an
additional 389,379 shares of Common Stock upon the conversion of the Preferred
Stock (based upon the Initial Conversion Price) and upon the exercise of the
Warrants. The terms of the Securities Purchase Agreement prohibit the Company
from issuing to the DDJ Investors 696,809 or more shares of Common Stock
(including the 290,000 shares of Common Stock issued at the First Closing plus
all other shares of Common Stock issuable upon conversion of the Series B
Preferred Stock and exercise of the Warrants issued at the First Closing), which
constitutes 20% of the number of shares of Common Stock outstanding on the date
preceding the First Closing, without stockholder approval of this Private
Placement Proposal. In addition, the Second Closing is conditioned, among other
things, upon stockholder approval of this Private Placement Proposal. If
stockholder approval is obtained, the Company will be able to issue and sell up
to an additional 5,550 Units, including 1,110,000 shares of Common Stock
included in such Units, and will be permitted to issue all shares of Common
Stock issuable upon conversion of the Series B Preferred Stock and upon exercise
of the Warrants included in the Units.
The book value of the Common Stock was $4.66 per share on September 30,
1999. The market value of the Common Stock on the date of the First Closing was
$5.56, based upon the last sale price of the Common Stock as reported on the
Nasdaq National Market on such date. Although the shares of Series B Preferred
Stock have an Initial Conversion Price of $5.9334 per share, and the Warrants
have an Initial Exercise Price of $6.7425 per share, each of which is in excess
of the book value and the market value of the Common Stock on the date of the
First Closing, such prices are subject to downward adjustment for two reasons:
(i) the reset provision in the Conversion Price of the Series B Preferred Stock
(up to a maximum reduction of 50% of the Conversion Price then in effect), and
in the Exercise Price of the Warrants (without limitation on reduction) based
upon the market price of the Common Stock for the 30 trading days preceding the
first anniversary of the First Closing, and (ii) certain "price weighted"
anti-dilution provisions of the Series B Preferred Stock and the Warrants, which
may reduce the Conversion Price of the Series B Preferred Stock and the Exercise
Price of the Warrants, based on a formula, if the Company issues additional
shares of Common Stock at a price (or issues securities
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convertible into or exercisable for shares of Common Stock at a conversion or
exercise price) below the greater of the Conversion Price of the Series B
Preferred Stock and the Exercise Price of the Warrants or the market price of
the Common Stock.
If stockholder approval of this Private Placement is not obtained, then
the shares of Common Stock, shares of Series B Preferred Stock and Warrants
which were issued to the DDJ Investors in the First Closing will remain
outstanding, but the Second Closing will not occur and the Company will not be
able to sell any additional Units in the Private Placement, and the Company will
not be permitted to issue more than 406,809 shares of Common Stock upon the
conversion of the Series B Preferred Stock or the exercise of the Warrants,
collectively, issued at the First Closing to the DDJ Investors, irrespective of
the Conversion Price or Exercise Price, respectively, from time to time in
effect. In addition, if the Conversion Price of the Series B Preferred Stock is
materially reduced due either to the reset provisions or the anti-dilution
provisions, then the Company will not be able to issue all the shares of Common
Stock issuable upon such conversion or exercise without violating the Nasdaq
Rules, and the Company could be subject to delisting from Nasdaq if such excess
shares of Common Stock are issued by the Company. In the Securities Purchase
Agreement, the Company has agreed to repurchase any Series B Preferred Stock or
Warrants at a price based upon the liquidation value of the Series B Preferred
stock and the market value of the underlying Common Stock to the extent the
conversion or exercise thereof would violate the Nasdaq Rules.
OPINION OF FINANCIAL ADVISOR
On December 22, 1999, Hanifen, Imhoff Inc. delivered its written opinion,
dated December 22, 1999, to the Board of Directors to the effect that, as of
such date, based upon and subject to the assumptions made, matters considered
and limits on review set forth in Hanifen's opinion, the consideration to be
received by the Company from the investment contemplated by the Securities
Purchase Agreement, dated as of December 9, 1999, is fair to the Company from a
financial point of view.
THE FULL TEXT OF THE OPINION OF HANIFEN, DATED DECEMBER 22, 1999, IS
ATTACHED AS APPENDIX B TO THIS PROXY STATEMENT AND SETS FORTH THE ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN. STOCKHOLDERS ARE
URGED TO READ THE OPINION OF HANIFEN IN ITS ENTIRETY. Hanifen's opinion is
directed only to the fairness, from a financial point of view, of the
consideration to be received by the Company from the investment contemplated by
the Securities Purchase Agreement, pursuant to which, among other things, the
DDJ Investors and the Additional Investors will purchase, in a First and Second
Closing, for cash, a minimum of 6,000 Units and a maximum of 7,000 Units, each
Unit consisting of 200 shares of Common Stock, one share of Series B Preferred
Stock, liquidation value $1,000 per share, and Warrants to purchase 100 shares
of Common Stock, at a purchase price of $2,000 per Unit (the "Securities
Issuance"). The price of the Units to be sold at the Second Closing of the
Securities Issuance is subject to market conditions, and any investment at a
price other than $2,000 per Unit is subject to separate analysis, judgement and
opinion by Hanifen as to the fairness, from a financial point of view, to the
Company of the consideration to be received by the Company. Except as set forth
below and in the full text of Hanifen's opinion, no limitations were imposed by
the Board of Directors upon Hanifen with respect to the investigations made or
procedures followed by it in rendering its opinion. In rendering its opinion,
Hanifen did not opine as to any other transactions or contractual arrangements
to be entered into or payments to be made by or to the Company or any other
person concurrently with the Securities Issuance. In addition, Hanifen was not
requested to opine as to, and its opinion did not address, the underlying
business decision of the Board of Directors to proceed with or to effect the
Securities Issuance.
THE SUMMARY OF THE OPINION OF HANIFEN SET FORTH IN THIS PROXY STATEMENT
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION SET
FORTH AS APPENDIX B TO THIS PROXY STATEMENT AND INCORPORATED HEREIN BY
REFERENCE. HANIFEN'S OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
STOCKHOLDER OF THE COMPANY AS TO HOW SUCH STOCKHOLDER SHOULD VOTE ON THE
PROPOSALS AT THE SPECIAL MEETING.
In arriving at its opinion, Hanifen, among other things:
o reviewed the Securities Purchase Agreement, the Certificate of
Designation relating to the Series B Preferred Stock, the Registration
Rights Agreement and the form of the Warrant;
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<PAGE> 17
o reviewed the Company's Annual Reports to Stockholders for the fiscal
years ended December 31, 1996 through 1998, its Annual Reports on Form
10-KSB for the fiscal years ended December 31, 1996 through 1998, and
its Quarterly Reports on Form 10-QSB for the periods ended March 31,
June 30, and September 30, 1999;
o reviewed certain operating and financial information, including budgets
and current estimates for Fiscal 1999 through 2004 provided to Hanifen
by the Company's senior management, relating to the Company's
businesses and prospects;
o met with or had telephone conversations with certain members of the
Company's senior management to discuss the Company's businesses and
operations, historical financial performance, estimated financial
performance for Fiscal 1999 through 2004, current financial condition
and liquidity, expected capital requirements and future prospects;
o reviewed the historical prices, trading activity and valuation
parameters of the shares of Common Stock;
o reviewed publicly available financial data, stock market performance
data and valuation parameters of certain companies which Hanifen deemed
reasonably comparable to the Company;
o reviewed the terms of selected precedent merger and acquisition
transactions, to the extent publicly available, involving companies
which Hanifen deemed reasonably comparable to the Company;
o reviewed the terms of selected precedent investment transactions, to
the extent publicly available, which Hanifen deemed generally
comparable to the Securities Issuance;
o reviewed a draft of this Proxy Statement in substantially the form in
which it is being distributed to stockholders; and
o conducted such other studies, analyses, inquiries and investigations as
Hanifen deemed appropriate.
In connection with the foregoing, Hanifen relied upon and assumed the
accuracy and completeness of the financial and other information provided to it
by the Company and representations of the Company's senior management related
thereto. With respect to the Company's budgets and current estimates for Fiscal
1999 through 2004 referred to in the previous paragraph, Hanifen assumed that
they had been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the senior management of the Company as to
the expected performance of the Company for Fiscal 1999 through 2004. Hanifen
did not assume any responsibility for the information or current estimates
provided to it and relied upon the assurances of the senior management of the
Company that it was unaware of any facts that would make the information
provided to Hanifen incomplete or misleading. In arriving at its opinion,
Hanifen did not perform or obtain any independent appraisal of the assets of the
Company. Hanifen's opinion was necessarily based on economic, market and other
conditions, and the information made available to it, as of the date thereof.
In rendering its opinion, Hanifen considered, among other things:
o the reaction of the stock market to the announcement of the
relationships among the Company, Scient and Mercator (the "eBusiness
Announcements") which had been publicly disclosed on September 13,
1999;
o the Company's recent financial performance, current financial condition
and (based on recent trends as well as the discussions with senior
management described above) future prospects;
o the fact that no other potential investors had made a formal investment
proposal to the Company since the eBusiness Announcements;
o the Company's prospects for raising debt or equity in the public and
private capital markets;
o the various terms and conditions of the Securities Issuance; and
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<PAGE> 18
o the fact that the Second Closing of the Securities Issuance is subject
to market conditions, and any investment at a price other than $2,000
per Unit is subject to separate analysis and judgement as to fairness,
from a financial point of view, to the Company by Hanifen.
The following is a summary of the principal financial and valuation
analyses performed by Hanifen to arrive at its opinion. Based on these financial
and valuation analyses and the other factors discussed herein, Hanifen
determined that, as of the date of its opinion, the consideration to be received
by the Company pursuant to the Securities Issuance is fair, from a financial
point of view, to the Company.
FINANCIAL AND OPERATING PERFORMANCE OF THE COMPANY. As part of its overall
analysis, Hanifen examined the historical financial and operating performance of
the Company for its last three full fiscal years and for the twelve-month period
ended September 30, 1999 ("LTM"), and the estimated financial and operating
performance of the Company for Fiscal 1999 through 2004, furnished by senior
management and described above. This analysis considered the Company's reported
revenues, gross profit, earnings before interest and income taxes ("EBIT"),
earnings before interest, taxes, depreciation and amortization ("EBITDA") and
net income.
Hanifen noted that on an LTM basis, EBIT and net income were both negative
and EBITDA was significantly below historical and projected levels. Hanifen also
noted that because of the operating results for the Company on an LTM basis, it
was not meaningful to conduct any valuation analysis based on (i) total
enterprise value to EBIT, (ii) total enterprise value to EBITDA and (iii)
price/earnings multiples.
STOCK MARKET TRADING ACTIVITY. As part of its review and analysis, Hanifen
examined the historical trading performance of the Common Stock in light of the
recent financial and operating trends of the Company. In particular, Hanifen
reviewed the closing prices of the Common Stock surrounding the date of the
eBusiness Announcements. From July 26, 1999 through September 3, 1999, the
closing bid price of the Common Stock ranged from $2.63 to $3.81, with an
average closing price of $3.21 (the "Unaffected Market Price"). Hanifen noted
that the price of the Common Stock had risen significantly during the week
leading up to the eBusiness Announcements, closing at $7.00 on September 14,
1999, the day after the eBusiness Announcements, and at $5.25 on December 10,
1999 (the "Affected Market Price"). Based on a review of selected publicly
traded companies, precedent merger and acquisition transactions and discounted
cash flow analysis, Hanifen estimated the price at which the Common Stock might
trade (i) in light of the financial and operating performance of the Company and
(ii) absent the prospect of any extraordinary events such as the eBusiness
Announcements or extraordinary transaction such as the Securities Issuance (the
"Hypothetical Intrinsic Value"); as described more fully herein, Hanifen
estimated the Hypothetical Intrinsic Value utilizing, for Hanifen's analytical
purposes, $3.00 to $3.50 per Common Share.
DISCOUNTED CASH FLOW ANALYSIS. A discounted cash flow analysis provides
insight into the intrinsic value of a business based on the projected earnings
and capital requirements and the net present value of the subsequent cash flows
anticipated to be generated by the assets of the business. Hanifen performed a
discounted cash flow analysis for Fiscal 1999 through 2004 for the Company to
estimate the present value of the stand-alone, unlevered free cash flows of the
Company, not including the eBusiness opportunity, based upon the financial
projections presented to Hanifen by the Company's senior management. For
purposes of this analysis, unlevered free cash flows were defined as after-tax
operating earnings, plus depreciation and amortization, less projected capital
expenditures and investment in working capital. To derive a terminal value,
Hanifen applied a range of EBITDA multiples of 5.0x to 7.0x, representing the
mid-range of LTM EBITDA multiples for the Comparable Companies (as described
below), to the projected EBITDA of the Company in Fiscal 2004. The unlevered
free cash flows and terminal values were then discounted to the present using a
range of discount rates of 14.0% to 18.0%, representing an estimated range of
the weighted average cost of capital of the Company. From the derived present
value of the unlevered free cash flows, Hanifen then subtracted the value of the
Company's net debt (defined as estimated total debt less cash at September 30,
1999) and added the present value of the Company's net operating loss tax
carryforward to obtain the implied equity value. Hanifen estimated the
Hypothetical Intrinsic Value utilizing the values derived from the discounted
cash flow analysis, which resulted in an implied equity value range of
approximately $2.30 to $3.30 per share.
Inherent in any discounted cash flow valuation is the use of a number of
assumptions and judgments, including the accuracy of projections, and the
subjective determination of an appropriate terminal value and discount rate to
apply to the projected cash flows of the entity under examination. Variations in
any of these assumptions or judgments could significantly alter the results of a
discounted cash flow analysis.
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<PAGE> 19
ANALYSIS OF SELECTED PUBLICLY TRADED COMPANIES. Hanifen compared certain
operating and financial information of the Company to certain publicly available
operating, financial, trading and valuation information of seven publicly traded
companies which, in Hanifen's judgment, were reasonably comparable to the
Company. These companies included Badger Meter, Inc.; CellNet Data Systems,
Inc.; Engineering Measurements, Inc.; Intelligent Controls, Inc.; Itron, Inc.;
Mesa Laboratories, Inc.; and ONIX Systems, Inc. (collectively, the "Comparable
Companies"). Hanifen's analysis of the Comparable Companies included reviewing
their enterprise values as a multiple of revenues, EBITDA and EBIT and their
stock prices as a multiple of earnings per share; in addition, Hanifen analyzed
various financial and operating performance measures of the Comparable Companies
including revenue growth, EBITDA growth, EBITDA margins, EBIT growth, EBIT
margins, net income margins, earning per share growth and total debt as a
percentage of total capitalization. In reviewing the valuation parameters of the
Company, Hanifen noted that the Company could only be analyzed based on a
multiple of revenues as a result of its recent financial performance. Hanifen's
analysis of the Comparable Companies indicated that the range of enterprise
value to revenues multiples was 0.6x to 2.6x with an arithmetic mean (excluding
the high and low values) of 1.1x. Hanifen estimated the Hypothetical Intrinsic
Value of the Company's Common Stock based on a range of enterprise value to
revenue multiples of 1.0x to 1.2x. Hanifen noted that enterprise value to
revenue multiple valuations are generally not regarded as a highly reliable
method of valuation.
ANALYSIS OF SELECTED PRECEDENT MERGER AND ACQUISITION TRANSACTIONS.
Hanifen reviewed and analyzed the publicly available financial terms of 15
selected recent merger and acquisition transactions involving companies which,
in Hanifen's judgment, were reasonably comparable to the Company for purposes of
this analysis. The 15 transactions were:
o the acquisition of Aseco Corporation by Micro Component Technology,
Inc.;
o the acquisition of CR Technology, Inc. by Photon Dynamics, Inc.;
o the acquisition of DSP Technology, Inc. by MTS Systems Corporation;
o the acquisition of Haskel International, Inc. by Tinicum Capital
Partners, L.P.;
o the acquisition of Aydin Corporation by L-3 Communications Corporation;
o the acquisition of Liberty Technologies, Inc. by Crane Co.;
o the acquisition of Kavouras, Inc. by Data Transmission Network
Corporation;
o the acquisition of Unit Instruments, Inc. by United States Filter
Corporation;
o the acquisition of Data Measurement Corporation by Thermo Electron
Corporation.;
o the acquisition of Granville-Phillips Company by Helix Technology
Corporation;
o the acquisition of mPm SpA by Woodhead Industries, Inc.;
o the acquisition of Industrial Data Systems by Roper Industries, Inc.;
o the acquisition of Tinsley Laboratories, Inc. by Silicon Valley Group,
Inc.;
o the acquisition of Tower Electronics, Inc. by Advanced Energy
Industries, Inc.; and
o the acquisition of Teletrac, Inc. by Axsys Technologies, Inc.
(collectively, the "Precedent M&A Transactions").
Hanifen reviewed the prices paid in the Precedent M&A Transactions and
analyzed various operating and financial information and imputed valuation
multiples and ratios. Hanifen noted that none of the Precedent M&A Transactions
were identical to the Securities Issuance and that, accordingly, any analysis of
the Precedent M&A Transactions necessarily involved complex considerations and
judgments concerning differences in financial and operating characteristics and
other factors that would necessarily affect the value of the Company versus the
acquisition values of the companies to which the Company was being compared. In
addition, Hanifen noted that the Precedent M&A Transactions
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<PAGE> 20
could generally be analyzed based on various valuation parameters such as
enterprise value as a multiple of revenues, EBIT and EBITDA whereas the Company
could only be analyzed based on a multiple of revenues as a result of its recent
financial performance. Hanifen's analysis of the Precedent M&A Transactions
indicated that the range of enterprise value to revenue multiples was 0.7x to
2.3x with an arithmetic mean (excluding the high and low values) of 1.1x.
Hanifen estimated the Hypothetical Intrinsic Value of the Company's Common Stock
based on a range of enterprise value to revenue multiples of 1.0x to 1.2x.
Hanifen noted that enterprise value to revenue multiple valuations are generally
not regarded as a highly reliable method of valuation.
PRECEDENT INVESTMENT TRANSACTIONS. Hanifen summarized and analyzed ten
transactions in which private equity investors had purchased minority equity
stakes directly from publicly traded corporations. These transactions were:
o the investment by SOFTBANK Venture Capital, Pequot Capital Management,
Inc. and Van Wagoner Capital Management, Inc. in MessageMedia, Inc.;
o the investment by Van Wagoner Capital Management, Inc. and Nevis
Capital Management, Inc. in OnHealth Network Company, Inc.;
o the investment by Tail Wind Fund, Ltd. in FaxSav, Inc.;
o the investment by Dawson-Samberg Capital Management and Sierra Ventures
in Vertel Corporation;
o the investment by CMG Information Services, Inc. in Open Market, Inc.;
o the investment in Interactive Objects, Inc.;
o the investment in Navidec, Inc.
o the investment in e-Net, Inc.;
o the investment by Rho Management Partners and Hudson Trust in Diacrin,
Inc.; and
o the investment by Orbimed Advisors LLC, among others, in Aquila
Biopharmaceuticals, Inc. (collectively, the "Precedent Investment
Transactions").
Hanifen noted that none of the Precedent Investment Transactions were
identical to the Securities Issuance and that, accordingly, any analysis of the
Precedent Investment Transactions necessarily involved complex considerations
and judgments concerning differences in transaction structures, financial and
operating characteristics of the issuing corporation and other factors that
would necessarily affect the terms of the Securities Issuance versus the terms
of the Precedent Investment Transactions. Notwithstanding the numerous and
significant differences between the Securities Issuance and the Precedent
Investment Transactions, this analysis provided a useful benchmark as to certain
aspects of such investment transactions.
THE SERIES B PREFERRED STOCK. As part of its overall analysis, Hanifen
evaluated the terms of the Series B Preferred Stock, including the $1,000
liquidation preference, the 8% annual dividend and the implied conversion
premiums associated with the Company's Common Stock price based on the
Hypothetical Intrinsic Value, the Unaffected Market Price and the Affected
Market Price. In its review of the Series B Preferred Stock's annual dividend
yield, Hanifen considered the financial condition of the Company and Hanifen's
historical experience involving private equity investments and trading levels of
public and private high-yield securities. In its review of the Series B
Preferred Stock's implied conversion premiums, Hanifen noted that, based upon
the (i) $5.93 conversion price and (ii) the Affected Market Price of the Common
Stock of $5.25 per share on December 10, 1999, the resulting 13.0% implied
conversion premium appeared consistent with Hanifen's knowledge of market rates.
In addition, based on a range of market prices of the Common Stock, Hanifen
noted that the following range of implied conversion premiums of the Series B
Preferred Stock would result: (i) at a Hypothetical Intrinsic Value of $3.25 per
share, the implied conversion premium would be 82.5%; and (ii) at the Unaffected
Market Price of $3.21 per share, the implied conversion premium would be 84.7%.
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<PAGE> 21
THE WARRANTS. Hanifen also analyzed the terms of the Warrants as part of
its overall analysis. In its valuation of the Warrants, Hanifen undertook
various considerations, including use of Black-Scholes modeling, to develop a
valuation range for the Common Stock Purchase Warrants utilizing the strike
price of $6.74 in relation to the Hypothetical Intrinsic Value, the Unaffected
Market Price and the Affected Market Price. At an assumed volatility level of
50% and based on each of the underlying Common Stock prices outlined above,
Hanifen developed a valuation range for the Warrants of approximately $1.00 to
$2.50 per warrant.
VALUATION OF THE UNITS. Hanifen estimated the value of the Units to be
issued pursuant to the Securities Issuance based on three alternative scenarios
assuming underlying per share prices for the Common Stock of $3.25, $3.21 and
$5.25 (the Hypothetical Intrinsic Value, the Unaffected Market Price and the
Affected Market Price, respectively). At an assumed underlying price for the
Common Stock of $3.25, Hanifen determined that the value of the units was
approximately $1,750 per Unit. At an assumed underlying price for the Common
Stock of $3.21, Hanifen determined that the value of the units was approximately
$1,750 per Unit. At an assumed underlying price for the Common Stock of $5.25,
Hanifen determined that the value of the units was approximately $2,300 per
Unit.
Based on the foregoing analyses and factors Hanifen arrived at its
opinion. However, the summary set forth above does not purport to be a complete
description of the analysis performed and factors considered by Hanifen in
arriving at its opinion, although it does reflect all material factors
considered and analyses performed by Hanifen. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. Selecting portions of the analyses or of the
summary set forth above, without considering the analysis as a whole, could
create an incomplete view of the processes underlying Hanifen's opinion. In
arriving at its opinion, Hanifen considered the results of all such reviews,
calculations and analyses. The analyses were prepared solely for purposes of
providing its opinion as to the fairness of the consideration to be received by
the Company pursuant to the Securities Issuance, from a financial point of view,
to the Company and do not purport to be appraisals or necessarily reflect the
prices at which securities might actually be sold to other parties. Analyses
based upon future prospects are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. As described above, Hanifen's opinion and presentation to the
Board of Directors was one of many factors taken into consideration by the Board
of Directors in making its determination to approve the Securities Issuance and
recommend the Proposals to the stockholders of the Company.
The Company retained Hanifen in connection with the Securities Issuance
based upon Hanifen's qualifications, expertise and reputation, including the
fact that Hanifen, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. In the ordinary course of its business, Hanifen may actively
trade securities of the Company for its own account and for the accounts of its
customers and, accordingly, may, at any time, hold a long or short position in
such securities.
Pursuant to the terms of an engagement letter, dated November 16, 1999,
the Company has agreed to pay Hanifen a total fee of $150,000, of which $25,000
was paid upon execution of the engagement letter, an additional $50,000 became
payable upon distribution of this Proxy Statement with the Hanifen opinion
included, and $75,000 will become payable at the Second Closing. In addition,
the Company has agreed to indemnify Hanifen against certain liabilities,
including liabilities under federal securities laws, in connection with such
engagement.
DILUTIVE IMPACT OF THE PRIVATE PLACEMENT ON OUR EXISTING STOCKHOLDERS
The holders of the Series B Preferred Stock will have certain rights which
are senior to those of the holders of the Common Stock. Consummation of the
Private Placement will also result in a significant increase in the number of
shares of Common Stock outstanding, which will be increased even further if the
Series B Preferred Stock is converted into shares of Common Stock and the
Warrants are exercised for Common Stock. As of December 28, 1999, 3,784,045
shares of Common Stock were outstanding, including 290,000 shares of Common
Stock issued to the DDJ Investors in the First Closing. Upon completion of the
Private Placement, (i) if 6,000 Units are sold, 4,694,045 shares of Common Stock
would be outstanding, and 1,611,224 shares of Common Stock would be issuable
upon conversion of the Series B Preferred Stock (based upon the Initial
Conversion Price) and upon exercise of the Warrants, collectively; and (ii) if
7,000 Units are sold, 4,894,045 shares of Common Stock would be outstanding, and
1,879,762 shares of Common Stock would be issuable upon conversion of the Series
B Preferred Stock (based upon the Initial Conversion Price) and upon exercise of
the Warrants, collectively. A decrease in the trading price of the Common Stock
in the 30 trading day period preceding December 9, 2000, or certain events
triggering the anti-dilution provisions of the Series B Preferred Stock and the
Warrants reducing the Conversion Price and Exercise Price thereof, respectively,
will cause an increase in the number of shares of Common Stock
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<PAGE> 22
issuable upon conversion of the Series B Preferred Stock and a decrease in the
Conversion Price of the Series B Preferred Stock and in the Exercise Price of
the Warrants.
Pursuant to the Registration Rights Agreement, the Company is required to
register under the Securities Act the resale of all shares of Common Stock,
whether issued as part of the Units or issuable upon conversion of the Series B
Preferred Stock or exercise of the Warrants, and all shares of Series B
Preferred Stock. Consequently, such shares will be freely transferable without
restriction under the Securities Act, although the holders thereof may be
subject to short-swing profits and other restrictions under the Exchange Act.
Such free transferability could materially and adversely affect the market price
of the Common Stock.
Stockholders should consider the following factors in determining whether
to vote for the Private Placement Proposal:
o The issuance of the Common Stock, the Series B Preferred Stock
and the Warrants, the ability of the holders of Series B
Preferred Stock to convert their shares into Common Stock and
of the holders of the Warrants to purchase Common Stock, and
the Conversion Price and Exercise Price reset provisions of
the Series B Preferred Stock and the Warrants, respectively,
may impact the trading patterns and adversely affect the
market price of the Common Stock.
o The holders of Series B Preferred Stock will have a prior
claim against the Company's assets senior to the holders of
Common Stock in the event of the Company's liquidation or
bankruptcy.
o The holders of Series B Preferred Stock will be entitled to
receive certain preferred dividends (8% annually) out of funds
legally available therefor. The payment of these preferred
dividends will take priority over the payment of dividends, if
any, on the Company's Common Stock, which may also limit the
amount of working capital which would otherwise be available.
o Current stockholders are subject to the risk of substantial
dilution to their interests which may result from the issuance
of additional shares of Common Stock, whether as a part of the
Units or upon conversion of the Series B Preferred Stock or
exercise of the Warrants. As a result of the additional
issuance of Common Stock, the current stockholders will own a
smaller percentage of the outstanding Common Stock of the
Company.
o The holders of the Series B Preferred Stock will be entitled
to elect one director, voting as a separate class. The holders
of Series B Preferred Stock and will also have other
substantial rights and preferences described in this Proxy
Statement, including the right to elect a majority of the
Board of Directors upon a redemption default, if the Preferred
Stock Proposal is approved, and the right to veto certain
corporate transactions, even those that are authorized by the
Board of Directors or approved by the holders of Common Stock.
These rights may give the holders of the Series B Preferred
Stock the ability to influence the Company's management and
may prevent transactions that holders of Common Stock deem
beneficial.
LISTING AND REGISTRATION OF SECURITIES BEING ISSUED
Neither the Series B Preferred Stock nor the Warrants issued in the
Private Placement will be listed on the Nasdaq Stock Market, any national
securities exchange or any other stock market, stock exchange or stock trading
system. The Company has agreed to apply for the listing on the Nasdaq National
Market of the shares of Common Stock issued as part of the Units, as well as the
shares of Common Stock issuable upon conversion of the Series B Preferred Stock
or upon exercise of the Warrants.
The Company's issuance of the Units in the First Closing has not been, and
the Company's issuance of Units in the Second Closing will not be, registered
under the Securities Act or any state securities laws. However, the Common Stock
and the Series B Preferred Stock issued as part of the Units, and the Common
Stock issuable upon conversion of the Series B Preferred Stock or upon exercise
of the Warrants, will be registered for public resale by the holders thereof
pursuant to a Form S-3 "shelf" registration statement to be filed by the Company
with the SEC in accordance with the registration rights of the Purchasers. See
"Registration Rights Agreement" above.
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BOARD APPROVAL
The Board of Directors of the Company has unanimously authorized and
approved the Private Placement, including the Securities Purchase Agreement and
related agreements, and the other matters set forth in this Private Placement
Proposal, concluding that they are in the best interests of the Company and its
stockholders. The Board of Directors specifically conditioned its approval of
the Second Closing upon receipt of the Fairness Opinion. At such time, the Board
of Directors also called the Special Meeting and recommended that stockholders
vote for the approval of this Proposal.
The Board of Directors has determined that the Private Placement is the
most expedient method by which the Company can raise capital for the purposes
described in "Reasons for the Private Placement" above, as compared to other
sources of debt and equity financing. The Private Placement provides the Company
with the opportunity to secure additional financing without the delay and
expense of the registration process required in a public offering. After
extensive negotiations, the Company concluded it was necessary to offer
investors the protection of the rights, preferences and privileges of the Series
B Preferred Stock and the Warrants in order to secure their commitments. The
Board of Directors' decision to approve the Private Placement was based upon
weighing the benefits of the Private Placement against the risk that alternative
financing and strategic alternatives may not be available. Before authorizing to
the Private Placement, the Company pursued other alternatives which, in the
judgment of the Board of Directors, were not as attractive or even likely to be
consummated within an acceptable time frame.
The Board of Directors of the Company believes that the consummation of
the Private Placement is in the best interests of the Company and its
stockholders. In reaching its conclusions and recommendations with respect to
the Private Placement, the Board of Directors considered a number of factors,
including the factors set forth below:
o The expectation that the proceeds to be received in the
Private Placement could finance the development the Company's
Internet business, which the Company considers to be in the
best interests of the Company and its stockholders.
o The Board of Director's view that the Company's short-term
working capital needs require significant infusion of cash and
the Private Placement represents the most efficient and
expeditious means of satisfying such needs, given the limited
capital-raising alternatives currently available to the
Company.
o The presentation and opinion of Hanifen, an investment banking
firm retained by the Board of Directors to act as its
financial advisor in connection with the Private Placement as
to the fairness, from a financial point of view, of the
consideration to be received by the Company in the Private
Placement.
o If the consideration in the Second Closing changes due to
market conditions, the Second Closing will be subject to a
separate opinion of Hanifen as to the fairness, from a
financial point of view, of such different consideration to be
received in the Second Closing.
o The business experience, resources and contacts of the Company
and its officers and directors.
o The Second Closing of the Private Placement and the sale of
Units to Additional Investors requires the approval of the
stockholders of the Company.
POTENTIAL ANTI-TAKEOVER EFFECTS OF THE SERIES B PREFERRED STOCK
The Private Placement could have certain effects which could adversely
affect the ability of a potential acquirer to purchase the Common Stock of the
Company at a premium, even if it is in the best interests of the Company's
stockholders so to do. First, the holders of the Series B Preferred Stock have
the power, voting separately as a class, to veto certain transactions and
corporate action. Second, the rights and privileges associated with the Series B
Preferred Stock may discourage other potential acquirers from seeking to acquire
the Company, even if such acquisition would be beneficial to the stockholders of
the Company.
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<PAGE> 24
AMENDMENT TO STOCKHOLDER RIGHTS AGREEMENT
The Board of Directors also approved an amendment to the Company's Rights
Agreement at the same time that it approved the Private Placement. The amendment
to the Rights Agreement prevents the Private Placement, including the
Purchasers' acquisition of the Common Stock, Series B Preferred Stock and the
Warrants included in the Units, and Purchasers' acquisition of Common Stock upon
conversion of the Series B Preferred Stock or upon exercise of the Warrants,
from triggering the protections contained in the Rights Agreement.
EFFECT OF THE FAILURE TO APPROVAL THIS PROPOSAL
Failure to obtain stockholder approval of this Private Placement Proposal
(i) will limit the number of shares of Common Stock that the Company can issue
upon the exercise of the Series B Preferred Stock and upon conversion of the
Warrants issued in the First Closing to the DDJ Investors due to the Nasdaq
Rules, and may obligate the Company to repurchase certain shares of Series B
Preferred Stock and Warrants to comply with the Nasdaq Rules, (ii) will prevent
the Company from issuing any additional Units in the Second Closing, either to
the DDJ Investors or to any Additional Investors, and thus will prevent the
Company from raising any additional capital, and (iii) will limit the Company's
ability to finance its continuing operations and the development of its Internet
business.
VOTE REQUIRED
The approval and ratification of the Private Placement Proposal requires
the affirmative vote of the holders of a majority of the shares of Common Stock
present, in person or by proxy, and entitled to vote at the Special Meeting,
excluding the shares of Common Stock acquired by the DDJ Investors in the First
Closing.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
THE APPROVAL AND RATIFICATION OF THE PRIVATE PLACEMENT PROPOSAL. PROXY CARDS
SIGNED AND TIMELY RETURNED TO THE COMPANY WILL BE SO VOTED, UNLESS CONTRARY
INSTRUCTIONS ARE SPECIFIED THEREIN.
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PROPOSAL 2
APPROVAL OF AMENDMENT TO THE RESTATED CERTIFICATE
RELATING TO PREFERRED STOCK
The Company's Restated Certificate, as currently in effect, provides that
the Company is authorized to issue two classes of stock: 25,000,000 shares of
Common Stock, par value $.01 per share, and 2,500,000 shares of Preferred Stock,
par value $.01 per share. The Board of Directors of the Company has unanimously
adopted an amendment (the "Proposed Certificate Amendment") to Article Fourth of
the Restated Certificate, subject to stockholder approval, to:
o increase the authorized number of shares of Preferred Stock to
3,500,000 shares,
o eliminate the currently authorized Series A Preferred Stock,
o amend the terms of the Series B Preferred Stock to provide the
holders of Series B Preferred Stock with majority Board
representation upon the occurrence of a redemption default;
and
o eliminate references to prior reverse stock splits.
The Proposed Certificate Amendment does not change the authorized number
of shares of the Company's Common Stock. The Board of Directors unanimously
recommends that the stockholders of the Company approve the Proposed Certificate
Amendment. The text of the Proposed Certificate Amendment is attached to this
Proxy Statement as Exhibit A and incorporated herein by this reference.
THE COMPANY'S CURRENT PREFERRED STOCK
As of December 28, 1999, the Company's 2,500,000 authorized shares of
Preferred Stock was divided into the following three series: 1,000,000 shares of
Series A Preferred Stock, none of which were issued and outstanding; 1,000,000
shares of newly created Series B Preferred Stock, of which 1,450 shares were
issued and outstanding; and 500,000 shares of the Company's Series C Preferred
Stock, none of which were issued and outstanding. All previously issued and
outstanding shares of Series A Preferred Stock, the terms of which were fixed in
connection with a previous transaction and would be unlikely to facilitate any
future transactions, have been converted into Common Stock pursuant to their
terms. The Series B Preferred Stock is being issued in connection with the
Private Placement, as described above. The Series C Preferred Stock is reserved
for issuance in connection with the Company's stockholder rights plan in
accordance with the Company's Rights Agreement, dated as of December 2, 1991, as
amended, which, as a result of the 1-for-4 reverse split of the Company's Common
Stock effected on July 8, 1998, provides for the distribution of one right to
purchase four one-hundredths of a share of Series C Preferred Stock at an
exercise price of $25.00 per one one-hundredth of a share to the holder of each
share of Common Stock. No shares of Preferred Stock are currently available for
issuance by the Board of Directors in any other series or containing any other
terms.
THE PROPOSED CERTIFICATE AMENDMENT
Under the Proposed Certificate Amendment, the Company's Preferred Stock
would consist of 3,500,000 shares, of which 1,000,000 shares would continue to
be designated as Series B Preferred Stock, without change to its existing terms
and rights, 500,000 shares would continue to be designated as Series C Preferred
Stock, without change to its existing terms and rights, and the remaining
2,000,000 shares would be undesignated Preferred Stock. The Proposed Certificate
Amendment, by eliminating the currently authorized 1,000,000 shares of Series A
Preferred Stock and by increasing the authorized number of shares of Preferred
Stock by 1,000,000 shares, would give the Board of Directors of the Company the
authority to issue up to 2,000,000 shares of Preferred Stock in one or more
series containing such designations, powers, preferences, rights, restrictions,
qualifications and other terms and conditions, as the Board of Directors may
from time to time determine. In addition, the Board of Directors could issue any
such series of Preferred Stock without requiring future stockholder approval of
such issuances, except as may be required by (i) applicable law, (ii) Nasdaq or
other applicable stock exchange requirements, or (iii) the terms of any series
of outstanding shares of Preferred Stock. Each series of Preferred Stock could,
as determined by the Board of Directors at the time of issuance, rank, with
respect to dividends and liquidation rights, senior to the Common Stock, and
could contain rights to veto transactions approved by the holders of Common
Stock. However, so long as any shares of Series B Preferred Stock remain
outstanding, the Company cannot issue any shares of a series of Preferred Stock
that ranks senior to or on parity with the Series B Preferred Stock as to
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liquidation, dividend or redemption rights without approval of the holders of a
majority of the then outstanding shares of Series B Preferred Stock.
The Company is recommending that its stockholders approve an amendment to
the terms of the Series B Preferred Stock providing that, in the event the
Company fails for any reason to redeem in full the Series B Preferred Stock in
accordance with its terms, then the size of the Board of Directors will be
increased sufficiently to allow the holders of the Series B Preferred Stock to
elect additional directors, constituting a majority of the Board of Directors,
to serve until the Company pays in full the redemption price for the shares of
Series B Preferred Stock to be redeemed. Thereafter, the size of the Board of
Directors will be decreased to its size in effect prior to the redemption
default. The Company is including this provision, which is set forth in
paragraphs 2(b) and 2(c) of Section A of Article Fourth included in the Proposed
Amendment to Article Fourth of the Restated Certificate attached to this Proxy
Statement as Appendix A, in the Preferred Stock Proposal. If this Preferred
Stock Proposal is not adopted, then the DDJ Investors will not be obligated to
purchase Units at the Second Closing and will be entitled to contractual
remedies, including the payment of interest at an increasing rate on the
liquidation amount of Series B Preferred Stock that the Company fails to redeem.
The Proposed Certificate Amendment would also eliminate references to two
prior reverse splits of the Company's Common Stock. In 1991, prior to and in
order to facilitate the Company's initial public offering, and in 1998, in order
to maintain its Nasdaq National Market listing, the Company, with stockholder
approval, effected reverse splits of its Common Stock. These reverse splits were
effected by amendments to Article Fourth of the Restated Certificate. For the
sake of simplification, the Proposed Certificate Amendment would consolidate
Article Fourth, as amended, by eliminating all language referring to past
reverse splits. The elimination of this language would not have any effect on
these prior reverse splits.
REASONS FOR THE PROPOSED CERTIFICATE AMENDMENT
The principal purpose of the Proposed Certificate Amendment is to provide
the Company with shares of Preferred Stock to be available for issuance in
future transactions in the event the Board of Directors determines any such
issuance is necessary or advisable for any proper corporate purposes. Such
purposes may include, without limitation, issuances in public or private sales
for cash as a means of raising additional capital for use in the Company's
business and operations, issuances as all or part of the consideration to be
paid by the Company in order to acquire other entities, businesses, assets or
technology, or issuances in connection with the establishment of a strategic
relationship with a strategic partner. The Board of Directors anticipates
authorizing the issuance of additional shares of Preferred Stock from time to
time upon terms the Board of Directors deems to be in the best interests of the
Company and its stockholders. Other than in connection with the Private
Placement and the Company's Rights Agreement, the Board of Directors has no
present agreement or arrangement to issue any shares of Preferred Stock.
POTENTIAL EFFECT OF PROPOSED CERTIFICATE AMENDMENT ON HOLDERS OF COMMON STOCK
The holders of Common Stock do not have any preemptive or similar rights
to purchase any shares of Preferred Stock. Although the increase in the
authorized number of shares of Preferred Stock will not, in and of itself, have
any immediate effect on the rights of the holders of shares of Common Stock, the
issuance of shares in one or more series of Preferred Stock could, depending on
the nature of the rights and preferences granted to a newly issued series of
Preferred Stock, affect the holders of shares of Common Stock in a number of
respects, including the following:
o By diluting the voting power of the holders of Common Stock, to the
extent that a new series of Preferred Stock has voting rights;
o By reducing the amount otherwise available for payment of dividends on
Common Stock, to the extent dividends are payable on shares of a new
series of Preferred Stock;
o By restricting the payment of dividends on Common Stock, to the extent
of any dividend restrictions set forth in the terms of a new series of
Preferred Stock;
o By diluting the market price of the Common Stock, to the extent that a
new series of Preferred Stock provides for the conversion of such
Preferred Stock into Common Stock at prices that could be (either
initially or subject to anti-dilution or other adjustment provisions)
below the fair market value of the Common Stock;
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o By reducing the amount otherwise available for payment upon liquidation
of the Company to holders of Common Stock, to the extent of any
liquidation preference on a new series of Preferred Stock; and
o By diluting the earnings per share and book value per share of
outstanding shares of Common Stock and Preferred Stock.
In addition, although the Proposed Certificate Amendment is not motivated
by takeover concerns and is not considered or intended by the Board of Directors
to be an anti-takeover measure, the availability of additional authorized shares
of Preferred Stock could enable the Board of Directors to make more difficult,
discourage or prevent an attempt by a person, group or entity to obtain control
of the Company by a merger, tender offer, proxy contest or other means. For
example, the Board of Directors could issue shares of Preferred Stock
defensively into friendly hands or upon friendly terms in response to a takeover
attempt. Such issuances could deter the types of transactions which may be
proposed or could discourage or limit the participation of Common Stock in
certain types of transactions that might be proposed (such as a tender offer),
whether or not such transactions were favored by the majority of the
stockholders, and could enhance the ability of officers and directors to retain
their positions. The Company has previously adopted certain other measures that
may have the effect of discouraging or delaying unsolicited takeover attempts
and making removal of incumbent management more difficult, including the
Company's Rights Agreement, a classified Board of Directors, an advance notice
By-Law and certain severance arrangements in executive employment agreements.
However, the Board of Directors is not aware of any present attempt to take over
control of the Company, and the Board of Directors has no present intention to
use the Preferred Stock in order to impede a takeover attempt, other than the
Series C Preferred Stock.
In addition, under the Proposed Certificate Amendment, if the Company
fails, for any reason, to redeem in full the outstanding shares of Series B
Preferred Stock when it is so required, then the holders of the Series B
Preferred Stock will have the right to elect a majority of the Board of
Directors, and thus will be in control of the Board of Directors, until such
time as the Company makes payment in full of the redemption price. Accordingly,
for such period of time as the required redemption price on the Series B
Preferred Stock is not paid in full, the directors of the Company elected by the
holders of Common Stock would not be in control of the Board of Directors.
In any event, so long as any shares of Series B Preferred Stock remain
outstanding, the Company cannot issue any shares of Preferred Stock of any
series which has liquidation, dividend or redemption rights senior to or on
parity with those of the Series B Preferred Stock, without the consent of the
holders of a majority of the then outstanding shares of Series B Preferred
Stock.
IMPLEMENTING THE PROPOSED CERTIFICATE AMENDMENT
If approved by the stockholders at the Special Meeting, the Proposed
Certificate Amendment will become effective upon the filing of a Certificate of
Amendment to the Restated Certificate with the Secretary of State of the State
of Delaware. Although the Board of Directors intends to file a Certificate of
Amendment as soon as practicable following the date of the Special Meeting, if,
in the judgment of the Board of Directors, any circumstances exist which would
make consummation of the Proposed Certificate Amendment inadvisable, then, in
accordance with Delaware law and notwithstanding approval of the Proposed
Certificate Amendment by the stockholders, the Board of Directors may abandon
the Proposed Certificate Amendment, either before or after approval and
authorization thereof by the stockholders, at any time prior to the
effectiveness of the filing of the Certificate of Amendment.
NO APPRAISAL RIGHTS
Under Delaware law, stockholders are not entitled to appraisal rights with
respect to the Proposed Certificate Amendment.
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VOTE REQUIRED
The approval of the proposed amendment to Article Fourth of the Restated
Certificate requires the affirmative vote of the holders of (i) a majority of
the shares of Common Stock outstanding and entitled to vote at the Special
Meeting, and (ii) a majority of the shares of Series B Preferred Stock
outstanding and entitled to vote at the Special Meeting, voting separately as a
class.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
THE ADOPTION AND APPROVAL OF THE PROPOSED AMENDMENT TO ARTICLE FOURTH OF THE
COMPANY'S RESTATED CERTIFICATE RELATING TO PREFERRED STOCK. PROXY CARDS SIGNED
AND TIMELY RETURNED TO THE COMPANY WILL BE SO VOTED, UNLESS CONTRARY
INSTRUCTIONS ARE SPECIFIED THEREON.
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PROPOSAL 3
APPROVAL OF AMENDMENT TO THE 1998 STOCK INCENTIVE PLAN
The Company's 1998 Stock Incentive Plan (the "1998 Stock Plan") was
adopted by the Board of Directors of the Company in March 1998 and approved by
the stockholders of the Company in June 1998. The 1998 Stock Plan replaced the
Company's 1991 Stock Option Plan and Directors' Stock Option Plan. The 1998
Stock Plan authorizes the Board of Directors to grant non-qualified stock
options ("NQSOs"), incentive stock options ("ISO"s), stock appreciation rights
("SAR"s), restricted stock, performance awards, and other stock-based awards to
officers, directors, employees, consultants and advisors of the Company and its
subsidiaries. The purpose of the 1998 Stock Plan is to promote the success of
the Company by enabling it to attract, retain, reward, and motivate officers,
directors, employees, advisors and consultants of the Company and its
subsidiaries by providing them with an equity interest in the Company in order
to align their interest with those of the Company's stockholders and to provide
such persons with incentives to pursue the long-term growth, profitability, and
financial success of the Company and its subsidiaries and increase stockholder
value. The 1998 Stock Plan is a critical part of the Company's overall
compensation program.
A total of 250,000 shares of Common Stock are presently reserved for
issuance under the 1998 Stock Plan, of which as of December 28, 1999, only
45,090 shares were available for issuance in future awards. On December 2, 1999,
the Board of Directors unanimously approved an amendment to the 1998 Stock Plan,
subject to stockholder approval, to (i) increase the number of shares reserved
for issuance thereunder by 500,000 shares to a total of 750,000 shares, and (ii)
increase the limit on the number of shares of Common Stock with respect to which
awards may be granted during any calendar year to any individual participant
from 25,000 shares to 100,000 shares.
At the Special Meeting, the stockholders are being requested to approve
the proposed amendment to the 1998 Stock Plan, to increase the shares reserved
for issuance thereunder and to increase the limit on awards that may be granted
to an individual participant in one calendar year. The purpose of the proposed
amendment is to ensure that a sufficient number shares of the Company's Common
Stock are available under the plan for awards to attract, retain, reward and
motivate officers, directors, employees, advisors and consultants as set forth
above, and to ensure that the Company can issue the proper award to individual
participants.
As of December 28, 1999, an aggregate of 193,959 shares were subject to
outstanding awards under the 1998 Stock Plan to 39 employees and directors. To
date, all awards under the 1998 Stock Plan have been stock options. In addition,
as of December 28, 1999, an aggregate of 269,867 shares were subject to
outstanding options granted under the Company's 1991 Stock Option Plan and
92,500 shares were subject to outstanding options granted under the Company's
Directors' Stock Option Plan. On December 28, 1999, the last reported sales
price of the Common Stock as reported on the Nasdaq National Market was $5.06
per share.
SUMMARY OF THE 1998 STOCK PLAN
The major provisions of the 1998 Stock Plan are summarized below. The
following summary does not purport to be complete and is qualified in its
entirety by reference to the 1998 Stock Plan. A copy of the 1998 Stock Plan will
be furnished upon oral or written request of stockholders of the Company
directed to the Corporate Secretary, Metretek Technologies, Inc., 1675 Broadway,
Suite 2150, Denver, Colorado 80202, telephone: (303) 592-5555.
GENERAL. The 1998 Stock Plan provides for the grant of incentive stock
options, non-qualified stock options, restricted stock, performance awards and
other stock-based awards to officers, directors, employees, consultants and
advisors of the Company and its subsidiaries. A maximum of 250,000 shares of
Common Stock are currently issuable under the 1998 Stock Plan, which would be
increased by the proposed amendment to 750,000 shares. The 1998 Stock Plan
limits the number of shares of Common Stock with respect to which awards may be
granted during any calendar year to any individual participant to 25,000 shares
of Common Stock, which would be increased by the proposed amendment to 100,000
shares. The shares of Common Stock issuable under the 1998 Stock Plan may be
authorized or unissued shares or treasury shares, including shares repurchased
by the Company for purposes of the 1998 Stock Plan. If any shares subject to any
award are forfeited or payment is made in the form of cash, cash equivalents or
property other than shares, or an award otherwise terminates without payment
being made to the participant in the form of shares, the shares subject to such
awards will again be available under the 1998 Stock Plan.
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ADMINISTRATION. The 1998 Stock Plan is administered by the Board of
Directors of the Company. The Board of Directors has the right to delegate the
administration of the 1998 Stock Plan to a committee comprised of two or more
directors who are not officers or employees of the Company or any its
subsidiaries, and who meet certain other requirements under applicable federal
securities law and federal tax law provisions. The members of the Board of
Directors, or of any committee appointed by the Board of Directors, are eligible
for awards under the 1998 Stock Plan. The Board of Directors is authorized to
designate participants, determine the type and number of awards to be granted,
set the terms, conditions and provisions of awards, cancel or suspend awards,
prescribe forms of award agreements, interpret the 1998 Stock Plan, establish,
amend and rescind rules and regulations related to the 1998 Stock Plan, and make
all other determinations which may be necessary or advisable to the
administration of the 1998 Stock Plan.
ELIGIBILITY. Officers, directors, employees, consultants and advisers of
the Company and its existing or future subsidiaries who, in the determination of
the Board of Directors, are responsible for or contribute to the management,
growth, profitability and successful performance of the Company and its
subsidiaries are eligible to receive awards under the 1998 Stock Plan. All of
the approximately 260 employees of the Company and its subsidiaries, all eight
directors of the Company, and all advisors and consultants of the Company are
eligible to receive awards under the 1998 Stock Plan.
STOCK OPTIONS. Under the 1998 Stock Plan, the Board of Directors is
authorized to grant incentive stock options and non-qualified stock options. The
exercise price of stock options is determined by the Board of Directors but may
not be less than the fair market value of the Common Stock on the date of grant
(or 110% of the fair market value in the case of an ISO granted to an employee
beneficially owning more than 10% of the outstanding Common Stock). The Board of
Directors may grant NQSOs to any eligible participant, but may grant ISOs only
to employees. Stock options become exercisable at such time or times in whole or
in part as determined by the Board of Directors, except that ISOs may not be
exercised after the expiration of 10 years after the date of grant (5 years
after grant in the case of ISO, granted to an employee beneficially owning more
than 10% of the outstanding Common Stock). Options may be exercised by payment
of the exercise price in cash, shares of Common Stock, exchange of outstanding
awards or other property, or in any combination thereof having a fair market
value equal to the exercise price, as the Board of Directors determines.
The 1998 Stock Plan provides for a formula grant of NQSO, to directors who
are not employees of the Company or any of its subsidiaries ("Non-Employee
Directors"). Under the 1998 Stock Plan, each person who is first elected or
appointed to serve as a Non-Employee Director automatically receives an option
to purchase 5,000 shares of Common Stock. On the date of the annual meeting of
stockholders each year, each Non-Employee Director (other than a person who
became a Non-Employee Director within the previous six months) automatically
receives an option to purchase 2,500 shares of Common Stock. All such options
granted to Non-Employee Directors under the formula provisions of the 1998 Stock
Plan vest immediately upon grant, have an exercise price equal to the fair
market value of the Common Stock on the date of grant, and expire 10 years after
the date of grant. Under the 1998 Stock Plan, additional (non-formula) options
may be granted to the Non-Employee Directors in the discretion of the Board of
Directors. In addition, under the 1998 Stock Plan, Non-Employee Directors have
the right to elect annually in advance to receive options in lieu of cash fees
for attending meetings of the Board of Directors.
STOCK APPRECIATION RIGHTS. The Board of Directors is authorized to grant
SARs either alone or in tandem with underlying stock options. SARs entitle the
participant upon exercise to receive cash or shares of Common Stock (as
determined by the Board Directors) equal in value to the excess of the fair
market value of the shares of Common Stock covered by the SAR on the date of
exercise over the grant price of the SAR. The grant price for SARs is fixed by
the Board of Directors but will not be less than the fair market value of the
Common Stock on the date of grant. SARs are exercisable at such time or times in
whole or in part as determined by the Board of Directors, except that they may
not be exercised after the expiration of 10 years from the date of grant.
RESTRICTED STOCK. The 1998 Stock Plan also authorizes the award of
restricted stock. An award of restricted stock is an award of shares of Common
Stock that is subject to such restrictions as the Board of Directors determines.
The restricted stock vests and may be disposed of by the participant only after
such restrictions lapse in whole or in installments as the Board of Directors
determines. Restricted stock awards may be subject to forfeiture if, for
example, the participant's employment terminates before the award vests. A
participant receiving restricted stock has all the rights of a stockholder of
the Company, including the right to vote the shares and the right to receive any
dividends, unless the Board of Directors otherwise determines. The Board of
Directors, in its sole discretion, may waive or accelerate the lapsing of
restrictions in whole or in part.
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DEFERRED STOCK. The 1998 Stock Plan also authorizes the Board of Directors
to make deferred stock awards, generally consisting of a right to receive shares
of Common Stock at the end of specified deferral periods. Awards of deferred
stock are subject to such limitations as the Board of Directors may impose,
which limitations may lapse at the end of the deferral period in installments or
otherwise. Deferred stock awards carry no voting or dividend rights or other
rights associated with stock ownership. Upon termination of employment during
the restriction or deferral period, restricted stock or deferred stock will be
forfeited subject to such exceptions, if any, as are authorized by the Board of
Directors.
BONUS SHARES AND AWARDS IN LIEU OF OBLIGATIONS. The Board of Directors is
authorized under the 1998 Stock Plan to grant shares of Common Stock to eligible
persons as a bonus or in lieu of obligations (such as salary requirements) to
pay cash or deliver other property, subject to such terms as determined by the
Board of Directors.
PERFORMANCE AWARDS. Under the 1998 Stock Plan, the Board of Directors may
make a performance award, which is an award of a number of units that represents
the right to receive a specified number of shares of Common Stock or cash, or
both, upon satisfaction of certain specified performance criteria, subject to
such terms and conditions as the Board of Directors determines. Performance
awards will be earned to the extent such performance goals established by the
Board of Directors are achieved over a period of time specified by the Board of
Directors. The performance objectives may vary from participant to participant,
group to group and period to period. The performance objectives for awards
intended to constitute "qualified performance-based compensation" (see
discussion below under the heading "Certain Federal Income Tax Consequences")
will be based upon one or more of the following: earnings per share; revenues;
cash flow; return on investment; return on net assets, assets, capital or
equities; economic value added; operating margins; net income; pre-tax earnings;
pre-tax earnings before interest, depreciation and amortization; pre-tax
operating earnings after interest expense and before extraordinary or special
items; operating earnings; total stockholder returns; price of the shares (and
changes thereof); and any of the above goals as compared to the performance of a
published or special index deemed applicable by the Board of Directors
including, but not limited to, the Standard & Poor's 500 Stock Index or a group
of comparable companies. The Board of Directors has the discretion to determine
the value of each performance award, to adjust the performance goal as it deems
equitable to reflect events affecting the Company or changes in law or
accounting principles or other factors, and to determine the extent to which
performance awards that are earned may be paid in the form of cash, deferred
cash, shares of Common Stock or other awards or property, or combination
thereof, as determined by the Board of Directors.
DIVIDEND EQUIVALENTS. The Board of Directors is authorized to grant
dividend equivalents conferring on a participant the right to receive, quarterly
or on a deferred basis, interest or dividends, or interest or dividend
equivalents. Dividend equivalents may be paid directly to a participant or may
be reinvested under the 1998 Stock Plan.
OTHER STOCK-BASED AWARDS. In order to enable the Company to respond to
material developments in the area of taxes and other legislation and regulations
and interpretations thereof, and to trends in executive compensation practices,
the 1998 Stock Plan authorizes the Board of Directors to grant awards that are
denominated or payable in, valued in whole or in part by reference to, or
otherwise based on or related to securities of the Company. The Board of
Directors shall determine the terms and conditions of such awards, including the
consideration paid for awards as purchase rights, which consideration generally
may not be less than the fair market value of the Common Stock on the date that
the purchase right is granted. These awards may include, without limitation,
performance shares and restricted stock units that entitle the participant to
receive, upon satisfaction of performance goals or other conditions, a specified
number of shares of Common Stock or the cash equivalent thereof.
TRANSFERABILITY OF OPTIONS. Under the 1998 Stock Plan, awards are
generally not assignable or transferable by a participant, except by will or the
laws of descent and distribution or pursuant to a qualified domestic relations
order, except to the Company under the terms of the 1998 Stock Plan, and except
that, upon approval by the Board of Directors, NQSOs and SARs may be transferred
by participants to immediate family members, to trusts for the benefit of
immediate family members and to partnerships or similar entities in which such
participant and his or her immediate family members are the sole parties or
members.
ACCELERATION OF AWARDS UPON CHANGE IN CONTROL. The 1998 Stock Plan
provides that in the event of a "change in control" of the Company (as defined
in the 1998 Stock Plan), all outstanding awards under the 1998 Stock Plan,
regardless of any limitations or restrictions, will immediately vest and become
fully exercisable, and all restrictions applicable to outstanding restricted
stock, performance awards and other stock-based awards will lapse, unless
otherwise provided by the Board of Directors at the time of grant of the award
or unless waived or deferred by the participants. In the event of a change in
control of the Company, with certain exceptions, participants may elect to
surrender any outstanding
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award and receive in satisfaction thereof a cash, stock or other payment equal
to the value of their outstanding awards based on the "change in control price"
(as defined in the 1998 Stock Plan), which is generally the highest price paid
or offered for the Common Stock during the preceding 60-day period, of the
shares of Common Stock subject to the award or of the fair market value of any
property other than shares of the Company relating to such award, except that
with respect to an ISO or an SAR granted in tandem with an ISO, the cash payment
will be based on the fair market value of the shares subject to the ISO or SAR
on the date on which the change in control occurred.
AMENDMENT AND TERMINATION OF THE 1998 STOCK PLAN. The Board of Directors
has the right to amend, alter, suspend, discontinue or terminate the 1998 Stock
Plan at any time without the consent of the stockholders or participants, except
that (i) stockholder approval of such action will be required if such approval
is required by any federal or state law or regulation or stock exchange or
Nasdaq rule, regulation or policy, or if the Board of Directors in its
discretion determines that obtaining such stockholder approval is advisable, and
(ii) subject to the terms of the 1998 Stock Plan, no amendment or termination of
the 1998 Stock Plan may materially and adversely affect the rights of a
participant under any award granted under the 1998 Stock Plan without the
consent of the affected participant. The proposed amendment to the 1998 Stock
Plan is being submitted to stockholders at the Special Meeting pursuant to
Nasdaq rules. Unless earlier terminated by the Board of Directors, no award may
be granted under the 1998 Stock Plan after June 12, 2008, ten years after the
date of the Annual Meeting.
ACCOUNTING CONSEQUENCES
Depending on the type and terms of the award, the grant of an award under
the 1998 Stock Plan to a participant may constitute an expense to the Company
for accounting and financial reporting purposes, and any such expense would
reduce the Company's income (or increase the Company's loss) for the relevant
accounting period by a like amount. The accounting consequences of grants,
exercises and disposition will in some, but not all, cases be the same as the
tax consequences to the Company described below under "Certain Federal Income
Tax Consequences."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain federal income tax consequences of
certain kinds of awards that may be granted under the 1998 Stock Plan. This
summary is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), the applicable treasury regulations promulgated thereunder, judicial
authority and administrative ruling and practice, all as in effect on the date
hereof. Legislative, judicial or administrative rules and interpretations are
subject to change, potentially on a retroactive basis, at any time, and
therefore could alter or modify the statements and conclusions set forth below.
This summary does not purport to be complete and does not address all aspects of
federal income taxation that may be relevant to a particular participant in
light of such participant's personal investment circumstances or participants
subject to special treatment under the federal income tax laws. The summary also
does not address the effects of foreign, state or local tax consequences. The
1998 Stock Plan is not a tax-qualified deferred compensation plan under Section
401(a) of the Code, and is not subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended. Participants of grants of
awards under the 1998 Stock Plan should consult with their personal tax advisors
with respect to such grants and transactions in awards and shares acquired
pursuant to the 1998 Stock Plan.
NQSOs. A participant will not recognize any taxable income, and the
Company is not entitled to a tax deduction, upon the grant of a NQSO. In
general, upon the exercise of a NQSO, a participant will recognize ordinary
income in an amount equal to the difference between the option exercise price
and the fair market value of the Common Stock on the date of exercise, and the
Company will be entitled to a tax deduction in the same amount in the year the
participant exercises the NQSO. Upon subsequent disposition of shares of Common
Stock acquired upon the exercise of a NQSO, a participant will have a capital
gain or loss equal to the difference between the amount realized on the
disposition and the participant's tax basis in the shares, which is generally
the amount paid for the shares plus the amount treated as ordinary income at the
time the NQSO was exercised. Such capital gain or loss will be long-term if the
participant's holding period is longer than one year, and short-term otherwise.
The participant's taxable disposition of the shares of Common Stock acquired
upon the exercise of a NQSO will not result in any additional tax consequences
to the Company.
ISOs. A participant will generally not recognize any taxable income upon
the grant or exercise of an ISO so long as he or she has been an employee of the
Company or any of its subsidiaries from the date the ISO was granted until three
months before the date of exercise (one year if the employee is disabled), but
the amount by which the fair market value of the Common Stock on the date of
exercise exceeds the option exercise price is a required adjustment for purposes
of the alternative minimum tax applicable to the participant. If the participant
holds the shares of Common Stock received
30
<PAGE> 33
upon the exercise of the ISO for at least one year after the date of exercise
and two years after the date of grant of the ISO (the "holding period"), then
any difference between the amount realized upon the disposition of the shares
and the exercise price will be treated as long-term capital gain or loss to the
participant. The Company will not be entitled to any tax deduction with respect
to the grant or exercise of an ISO (except as discussed below) if the
participant satisfies the holding period requirements.
If a participant exercises an ISO but does not satisfy the holding period
requirements set forth above, the participant generally will recognize ordinary
income in the year of disposition of the shares of Common Stock acquired upon
the exercise of an ISO equal to the excess, if any, of the fair market value of
the Common Stock on the date of exercise over the option exercise price, and any
excess of the amount realized on such disposition over the fair market value of
the Common Stock on the date of exercise will be taxed as long-term or
short-term capital gain, as applicable. If the participant disposes of the
shares of Common Stock prior to the satisfaction of the holding period
requirements but for proceeds in an amount less than the fair market value of
the Common Stock on the date of exercise, the participant will recognize
ordinary income equal only on the difference between the amount realized on the
disposition of the shares and the option exercise price. In either event, the
Company will be entitled to a tax deduction in an amount equal to the amount
constituting ordinary income to the participant.
If a participant exercises an ISO by tendering shares of Common Stock
(other than the shares acquired upon the exercise of an ISO and not held for the
requisite holding period set forth above) in payment of all or part of the
option exercise price, the participant will not be required to recognize any
taxable income from the exchange and option exercise, and the participant's tax
basis and holding period (for capital gain purposes) for the tendered shares of
Common Stock will be treated as a substituted basis for the shares received upon
the exercise of the ISO. If the participant uses shares received pursuant to the
exercise of an ISO as to which the participant had not satisfied the applicable
holding period requirements, the exchange will be treated as a taxable
disqualifying disposition of the exchanged shares, with the result of the excess
of the fair market value of the shares tendered over the participant's basis in
such shares would be taxable.
SARs. The grant of a SAR will create no federal income tax consequences
for the participant or the Company. When a participant exercises a SAR, any cash
received and the fair market value of the Common Stock on the date of exercise
will constitute ordinary income to the participant, and the Company will be
entitled to a tax deduction in the same amount in the year of exercise.
RESTRICTED STOCK. The federal income tax consequences of restricted stock
awards depend upon the restrictions imposed on the stock. In the absence of a
Section 83(b) election by a participant, the grant of restricted stock will not
recognize any result in taxable income to the participant or entitle the Company
to a tax deduction in the year of grant if the restricted stock received is
subject to a substantial risk of forfeiture and is either non-transferable or
after transfer remains subject to such substantial risk of forfeiture. In such
case, a participant must recognize ordinary income equal to the fair market
value of the restricted stock received as of the first date the restricted stock
becomes either transferable or not subject to a substantial risk of forfeiture,
whichever occurs earlier. However, a participant may, in his or her discretion,
make a Section 83(b) election to recognize as ordinary income the value of the
restricted stock as of the date of receipt rather than upon lapse of
restrictions on transferability or the substantial risk of forfeiture. The
Company generally will be entitled to a tax deduction in the amount of the fair
market value of the restricted stock transferred to the participant in the year
the participant recognizes ordinary income. Prior to the lapse of restrictions,
dividends paid on restricted stock will be taxable to the participant as
ordinary income in the year such restricted stock is received free of
restrictions, and the Company will be entitled to a tax deduction in the same
amount.
PERFORMANCE AWARDS. A participant who receives a performance award of
shares of Common Stock will generally recognize ordinary income in the year the
award is received equal to the fair market value of the Common Stock on the date
of award. The Company will be entitled to a tax deduction equal to the amount of
ordinary income recognized by the participant in the year such income is
recognized.
OTHER STOCK-BASED AWARDS. A participant will recognize ordinary income
equal to the amount of any cash payments or the fair market value of any Common
Stock or other property a participant receives in connection with other
stock-based awards (less any amounts paid by the participant) in the year the
stock based award is received or made available to the participant without
substantial restrictions or risk of forfeiture in a manner consistent with the
treatment of restricted stock. The Company generally will be entitled to a tax
deduction in the same amount and at the same time the participant recognizes
such ordinary income.
31
<PAGE> 34
SECTION 162(m). Section 162(m) of the Code generally limits the deductible
amount of annual compensation paid (including, unless an exception applies,
compensation otherwise deductible in connection with awards granted under the
1998 Stock Plan) by a public company to a "covered participant" (the chief
executive officer and four other most highly compensated executive officers of
the Company) to no more than $1,000,000. This limit, however, does not apply to
qualified "performance-based compensation." The Company generally structures
stock options and other awards granted under the 1998 Stock Plan that might be
affected by Section 162(m) of the Code to comply with the performance-based
compensation exemption to the deductibility limit.
SPECIAL RULES. Special rules will apply to a participant who is subject to
Section 16 of the Exchange Act.
NEW PLAN BENEFITS
The grant of awards under the 1998 Stock Plan to eligible directors,
officers, employees, consultants and advisors, including the only executive
officers of the Company whose total compensation and bonus in 1998 was at least
$100,000 (the "Named Executive Officers"), is subject to the discretion of the
Board of Directors, other than the annual formula stock option grants to
Non-Employee Directors. As of the date of this Proxy Statement, no determination
has been made as to which or how many of the persons eligible to receive awards
under the 1998 Stock Plan will receive future awards under the 1998 Stock Plan,
other than formula stock option grants to Non-Employee Directors. Accordingly,
the benefits or awards that will be received by or allocated to persons under
the 1998 Plan in the future are not presently determinable.
The following table sets forth, as of November 30, 1999, the aggregate
number of shares of the Company's Common Stock subject to outstanding awards
granted under the 1998 Stock Plan, to (i) each Named Executive Officer; (ii) all
current executive officers as a group; (iii) all employees, including all
current officers who are not executive officers, as a group; and (iv) all
directors who are not executive officers, as a group. In addition to the grant
of stock options set forth below, it is likely that substantial additional
grants of awards will be made to such persons and others during the life of the
1998 Stock Plan, although the present amount of terms of such future grants are
not determinable, other than the formula grant of stock options to Non-Employee
Directors. To date, all of the awards granted under the 1998 Stock Plan have
been stock options. The term of all stock options outstanding under the 1998
Stock Plan is 10 years from date of grant.
<TABLE>
1998 STOCK INCENTIVE PLAN
-------------------------
<CAPTION>
NUMBER OF SHARES
NAME (OR GROUP) AND POSITION SUBJECT TO OPTIONS GRANTED
- ---------------------------- --------------------------
<S> <C>
W. Phillip Marcum ................................................ 0
Chairman of the Board, President and Chief
Executive Officer
A. Bradley Gabbard ............................................... 12,500
Executive Vice President and Chief Financial
Officer
Ronald W. McKee .................................................. 25,000
President, Metretek, Incorporated
All current executive officers as a group (3 persons) ............ 37,500
All employees, including all current officers
who are not executive officers, as a group (32 persons) ...... 122,250
All current directors who are not executive
officers as a group (5 persons) .............................. 34,209
</TABLE>
VOTE REQUIRED
The approval of the amendment to the 1998 Stock Plan requires the
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock present, in person or by proxy, and entitled to vote at the Special
Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
THE ADOPTION AND APPROVAL OF THE PROPOSED AMENDMENT TO THE 1998 STOCK PLAN.
PROXY CARDS SIGNED AND TIMELY RETURNED TO THE COMPANY WILL BE SO VOTED, UNLESS
CONTRARY INSTRUCTIONS ARE SPECIFIED THEREON.
32
<PAGE> 35
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth certain information concerning the total
compensation that the Company paid or accrued for services rendered to the
Company in all capacities during the last three fiscal years by its Chief
Executive Officer and its two other executive officers (the "Named Executive
Officers") whose total salary and bonus exceeded $100,000 in the fiscal year
ended December 31, 1998 ("fiscal 1998"):
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
------
ANNUAL COMPENSATION(1) SECURITIES
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)(2) COMPENSATION($)(3)
- --------------------------- ---- --------- -------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
W. Phillip Marcum............. 1998 $200,000 $ 0 120,000 (4) $ 6,436
President and Chief 1997 175,250 31,395 50,000 6,127
Executive Officer 1996 162,000 21,900 76,200 (5) 12,678
A. Bradley Gabbard............ 1998 145,000 0 44,500 (4) 6,249
Executive Vice 1997 127,292 24,225 25,000 5,877
President and Chief 1996 121,000 13,200 23,250 (5) 8,821
Financial Officer
Ronald W. McKee (6)........... 1998 130,000 0 25,000 (4) 4,102
President of Metretek 1997 100,000 19,380 12,250 3,829
</TABLE>
- ----------
(1) Excludes perquisites and other personal benefits, if any, which were
less than the lesser of $50,000 or 10% of the total annual salary and
bonus reported for each Named Executive Officer.
(2) The number of securities underlying options has been adjusted to
reflect the one-to-four reverse split of the Common Stock effected on
July 6, 1998.
(3) Includes amounts paid or accrued by the Company on behalf of the Named
Executive Officers in 1998 for (i) matching contributions under the
Company's 401(k) plan of $5,000 for Mr. Marcum, $5,000 for Mr. Gabbard,
and $3,360 for Mr. McKee; (ii) premiums for group term life insurance
of $972 for Mr. Marcum, $785 for Mr. Gabbard, and $422 for Mr. McKee;
and (iii) premiums for long-term disability insurance of $464 for Mr.
Marcum, $464 for Mr. Gabbard, and $320 for Mr. McKee.
(4) Includes options originally granted prior to 1998 (120,000 to Mr.
Marcum, 44,500 to Mr. Gabbard and 12,500 to Mr. McKee) that were
cancelled and regranted pursuant to a stock option repricing in 1998.
(5) Includes options originally granted prior to 1996 (70,000 to Mr. Marcum
and 19,500 to Mr. Gabbard) that were cancelled and regranted pursuant
to a stock option repricing in 1996.
(6) Mr. McKee became an executive officer of the Company in 1997.
33
<PAGE> 36
EMPLOYMENT AGREEMENTS, CHANGE IN CONTROL ARRANGEMENTS AND OTHER COMPENSATION
ARRANGEMENTS
The Company has entered into employment agreements with W. Phillip Marcum,
the President, Chief Executive Officer and Chairman of the Board of the Company,
and A. Bradley Gabbard, the Executive Vice President and Chief Financial Officer
of the Company. These employment agreements were amended on December 3, 1998 to
provide for an extension of the employment term until December 3, 2001 for Mr.
Marcum and until June 3, 2000 for Mr. Gabbard, with automatic additional
one-year renewal periods when the term expires, unless either party gives six
months prior written notice of termination. The base salaries under these
employment agreements, which are subject to annual upward adjustments at the
discretion of the Board of Directors, are currently set at $210,000 for Mr.
Marcum and $152,250 for Mr. Gabbard. In addition to the base annual
compensation, the employment agreements provide, among other things, for
standard benefits commensurate with the management levels involved. The
employment agreements also provide for the Company to establish an incentive
compensation fund, to be administered by the Compensation Committee of the Board
of Directors, to provide for incentive compensation to be paid to each officer
or employee (including Messrs. Marcum and Gabbard) deemed by the Compensation
Committee to have made a substantial contribution to the Company in the event of
a change of control of the Company or of the sale of substantially all of the
assets of the Company or similar transactions. The total amount of incentive
compensation from the fund available for distribution will be determined by a
formula based on the amount by which the fair market value per share of the
Common Stock exceeds $10.08, multiplied by a factor ranging from 10-20%
depending upon the ratio of the fair market value to $10.08. In the case of the
sale of a significant subsidiary of the Company or substantially all of the
assets of a significant subsidiary, a similar pro rata distribution is required.
As amended, the employment agreements with Messrs. Marcum and Gabbard provide
that if the employment period expires without being renewed, then the executive
is entitled to receive a lump-sum severance payment equal to 12 months, for Mr.
Marcum, and six months, for Mr. Gabbard, of his then base salary, and continued
participation in all insurance plans of the Company for such additional period.
The employment agreements also contain certain restrictions on each executive's
ability to compete, use of confidential information and use of inventions and
other intellectual property.
As amended, the employment agreements with Messrs. Marcum and Gabbard also
include "change in control" provisions designed to provide for continuity of
management in the event of a change in control of the Company. The agreements
provide that if within three years after a change in control of the Company, the
executive is terminated by the Company for any reason other than for "cause", or
if the executive terminates his employment for "good reason" (as such terms are
defined in the employment agreements), then the executive is entitled to receive
a lump-sum severance payment equal to two times, for Mr. Marcum, and one times,
for Mr. Gabbard, the amount of his then base salary, together with certain other
payments and benefits, including continued participation in all insurance plans
of the Company for a period of two years for Mr. Marcum and one year for Mr.
Gabbard. Under these employment agreements, a "change in control" will be deemed
to have occurred only if: (i) any person or group becomes the beneficial owner
of 50% or more of the Company's Common Stock; (ii) a majority of the Company's
present directors are replaced, unless the election of any new director is
approved by a two-thirds vote of the current (or properly approved successor)
directors; (iii) the Company approves a merger, consolidation, reorganization or
combination, other than one in which the voting securities of the Company
outstanding immediately prior thereto continue to represent more than 50% of the
total voting power of the Company or of the surviving corporation following such
a transaction and the directors of the Company continue to represent a majority
of the directors of the Company or of the surviving corporation following such
transaction; or (iv) the Company approves a sale of all or substantially all of
its assets.
During 1998, under the Company's 1998 Employee Stock Purchase Plan, all
full-time employees of the Company, including Messrs. Marcum, Gabbard and McKee,
were entitled to purchase shares of the Company's Common Stock at fifty percent
(50%) of the market value of the Common Stock, based upon the closing sale price
of the Common Stock as reported on the Nasdaq National Market on the purchase
dates. A total of 47,244 shares of Common Stock were purchased by 48 employees,
including 10,966 shares purchased by Mr. Marcum, 5,918 shares purchased by Mr.
Gabbard, and 5,687 shares purchased by Mr. McKee. The 1998 Employee Purchase
Plan was discontinued in July 1998.
STOCK OPTION GRANTS
On October 6, 1998, the Company repriced all stock options held by its
officers, employees and directors. The exercise price of all such options was
reduced to $2.00, the last sale price of the Common Stock as reported on the
Nasdaq National Market on the date of repricing. The remaining terms of the
options reissued to effect the repricing were generally identical to the terms
of the options cancelled, except that (i) a one year exercise blackout period
was imposed with respect to options held by officers and
34
<PAGE> 37
employees, as a result of which repriced options held by officers and employees
will not be exercisable prior to October 6, 1999, whether or not the cancelled
options were previously vested and exercisable, and thereafter the options will
be subject to the original vesting conditions, and (ii) all repriced options
held by Mr. Marcum and Mr. Gabbard will be deemed vested as of October 6, 1999,
irrespective of prior vesting conditions. Options held by the Board of Directors
of the Company and the Named Executive Officers were included in the repricing.
The following table sets forth certain information with respect to stock
options granted during fiscal 1998 to the Named Executive Officers. The Company
did not grant any stock appreciation rights, alone or in tandem with stock
options, in fiscal 1998.
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
INDIVIDUAL GRANTS(1)
----------------------------------------------------------------------------
% OF TOTAL
OPTIONS
NUMBER OF SECURITIES GRANTED TO
UNDERLYING EMPLOYEES IN EXERCISE EXPIRATION
NAME OPTIONS GRANTED (#)(2) FISCAL YEAR (3) PRICE ($)(4) DATE (5)
- ---- ---------------------- --------------- ------------ --------
<S> <C> <C> <C> <C>
W. Phillip Marcum............... 40,000 (6) 12.3% $2.00 August 6, 2002
15,000 (6) 4.6% 2.00 March 5, 2003
15,000 (6) 4.6% 2.00 May 19, 2003
50,000 (6) 15.4% 2.00 July 14, 2007
A. Bradley Gabbard............. 7,500 (6) 2.3% 2.00 August 6, 2002
6,000 (6) 1.8% 2.00 March 5, 2003
6,000 (6) 1.8% 2.00 May 19, 2003
25,000 (6) 7.7% 2.00 July 14, 2007
Ronald W. McKee................ 12,500 (6) 3.8% 2.00 March 20, 2007
12,500 3.8% 2.44 December 4, 2008
</TABLE>
- ----------
(1) All information in this table has been adjusted to reflect the
one-for-four reverse split of the Common Stock effected on July 6,
1998.
(2) The options in this table are incentive stock options or nonqualified
stock options granted under the Company's 1991 Stock Option Plan and
the Company's 1998 Stock Incentive Plan. All options have ten year
terms from the date of initial grant and vest and become fully
exercisable on October 6, 1999, one year after the date of repricing,
except that the options granted to Mr. McKee after the repricing were
fully vested and exercisable upon grant.
(3) Based upon 325,058 options granted by the Company during 1998 to
employees, including 277,558 options that were cancelled and regranted
in connection with a repricing by the Company during 1998.
(4) The exercise price of the option is the fair market value of the Common
Stock on the date of grant or the date of repricing, as appropriate,
based upon the last sale price of the Common Stock on such date as
reported on the Nasdaq National Market.
(5) These options may terminate before their terms expire due to the
termination of the optionee's employment or the optionee's disability
or death.
(6) These options were originally granted prior to 1998, at an exercise
price equal to the fair market value of the Common Stock on the date of
grant, and were cancelled and reissued in 1998, in connection with a
stock option repricing, at the fair market value of the Common Stock on
October 6, 1998, the date of the repricing.
35
<PAGE> 38
STOCK OPTION EXERCISES AND VALUES
The following table sets forth information with respect to stock options
held by the Named Executive Officers on December 31, 1998. The Named Executive
Officers did not exercise any stock options during 1998.
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)(1)
------------------------------ --------------------------
NAME EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE
- ---- ---------------------------- ----------- -------------
<S> <C> <C> <C> <C>
W. Phillip Marcum ......... 0 120,000 $0 $15,000
A. Bradley Marcum ......... 0 44,500 0 5,563
Ronald W. McKee ........... 12,500 12,500 0(3) 1,563
</TABLE>
- ----------
(1) For purposes of this table, the value of unexercised in-the-money
options is calculated based upon the difference between $2.125, the
closing sale price of the Common Stock on such date as reported on the
Nasdaq National Market, and the option exercise price.
(2) The unexercisable options included in this table are options that were
granted prior to 1998 and then cancelled and regranted in the 1998
stock option repricing. Pursuant to a one year exercise blackout period
imposed under the terms of that repricing, the unexercisable options do
not become exercisable until October 6, 1999, on which date they become
fully vested.
(3) The exercise price of these options exceeded $2.125, the closing sale
price of the Common Stock on December 31, 1998 as reported on the
Nasdaq National Market.
COMPENSATION COMMITTEE REPORT ON STOCK OPTION REPRICING
During September and October 1998, members of the Compensation Committee,
along with A. Bradley Gabbard, the Company's Chief Financial Officer, held
discussions with respect to the option exercise prices for the stock options
granted by the Company, including options granted under the Company's 1991 Stock
Option Plan, the Company's Directors' Stock Option Plan and the Company's 1998
Stock Incentive Plan. As a result of those discussions, the Committee
recommended that the Company reprice all outstanding stock options to the
current market price of the Company's Common Stock. The stock option repricing
was authorized and approved by the Board of Directors on October 6, 1998. The
exercise price on all outstanding stock options was reduced to $2.00 per share,
the closing sale price of the Common Stock as reported on the Nasdaq National
Market on such date.
In making its recommendation, the Committee considered the Company's
compensation policy and stock option programs. The Committee believed that as a
result of the decline in the Company's stock price, outstanding options with
high exercise prices in excess of the current stock price were not providing
meaningful compensation or incentives for the Company's officers, employees and
directors. The Committee also believed that the future growth and success of the
Company was dependent upon its ability to successfully attract, retain and
motivate its officers, employees and directors, which serves the best interests
of the Company and its stockholders. The Committee noted the importance of the
Company's stock option programs in accomplishing these goals, especially for
small and technology-based companies like the Company which utilize stock
options as a significant portion of their compensation and incentives. The
Committee believes that the use of stock options also aligns the interests of
the optionees with the interests of the stockholders, which is in the best
interests of the stockholders.
The Committee noted that in 1994, all outstanding options (other than
those issued pursuant to the Directors' Stock Option Plan) exercisable at a
price in excess of $16.52 per share were repriced to $16.52 per share. The
Committee
36
<PAGE> 39
also noted that in 1996 all existing stock options held by directors, officers,
employees and consultants were repriced to $6.36 per share, and such repricing
was ratified by the stockholders of the Company. The Committee noted that since
those repricings, the Company's stock price had continued to substantially
decline. The Committee noted that the decline of the price of the Company's
Common Stock over the past few years has caused virtually all of the Company's
outstanding options granted to its officers, employee and directors to be
"underwater," with exercise prices substantially higher than the Company's
recent stock price. It was noted that most options were exercisable at prices
two to four times as high as the recent trading price of the Common Stock.
Accordingly, it was the opinion of the Committee that existing stock options
were not providing meaningful, if any, incentives to the holders of the options,
that the purposes of the Company's stock option program were not being achieved,
that the current stock options were not providing appropriate compensation, and
that reducing the exercise price of the stock options to the current market
price of the Common Stock was essential to further the purposes of the stock
option program and was in the best interests of the Company and its
stockholders.
It was noted that the receipt of options under the Company's stock option
plans is the primary means (other than $1,000 per meeting and expense
reimbursements) by which non-employee directors are compensated for their
services as members of the Board of Directors. The Committee also noted that
repricing stock options provided an additional or alternative method of
supplementing the compensation of, and attracting, retaining and motivating, the
Company's employees, compared to more substantial increases in their cash
compensation, which would reduce the Company's limited capital resources, and
the issuance of new options, which would dilute existing equity. The Committee
also took note of the fact that many public companies had recently repriced
outstanding options for similar reasons.
The Committee also considered the legal and accounting issues and
considerations relating to the repricing of stock options. The Committee
consulted with counsel and analyzed the requirements for disclosure of the
repricing of stock options in the Company's filings with the Securities and
Exchange Commission and the Board's fiduciary duties. The Committee received the
advice of the Company's independent auditors on the accounting and tax issues
attendant to a repricing. The Committee also consulted informally with its
financial advisors and, based on such consultation and advice, concluded that
the repricing of stock options would not have a long-term detrimental effect on
the market for the Common Stock.
Based on the foregoing, the Committee concluded that a reduction in the
exercise price of outstanding options held by officers, employees and directors
was appropriate to provide meaningful incentives to option holders to operate
the Company with the goal of maximizing stockholder value and would provide
appropriate compensation for services. Accordingly, the Committee unanimously
concluded that all outstanding stock options held by the officers, employees and
directors of the Company should be repriced, with the option exercise price
being $2.00, the last sale price of the Company's Common Stock as reported on
the Nasdaq National Market on October 6, 1998, the date the Board of Directors
adopted and approved the repricing. All other terms of the options, including
vesting and termination, remain unchanged, except (i) all repriced options held
by W. Phillip Marcum and A. Bradley Gabbard will be deemed vested as of October
6, 1999, irrespective of vesting conditions of the prior options, and (ii) no
repriced employee options will be exercisable prior to October 6, 1999, one year
after the date of repricing, even if the prior options vested before such date.
COMPENSATION COMMITTEE OF
THE BOARD OF DIRECTORS
W. Phillip Marcum
Basil M. Briggs
Harry I. Skilton
DIRECTOR COMPENSATION
Directors who are officers or employees of the Company or any of its
subsidiaries do not receive any additional compensation for serving on the Board
of Directors. All directors are reimbursed for out-of-pocket costs of attending
meetings of the Board of Directors and its committees. Non-Employee Directors
currently receive a fee of $1,000 for attendance at each meeting of the Board of
Directors. Non-Employee Directors also receive stock options granted by the
Company. Until June 1998, such options were granted under the Company's
Directors' Stock Option Plan (the "Directors' Plan"). Since June 1998, all such
options have been granted under the 1998 Stock Plan. Under the formula for these
stock option grants, which is the same in both the Directors' Plan and the 1998
Stock Plan, each person who is first elected or appointed to serve as a
Non-Employee Director is automatically granted an option to purchase 5,000
shares of Common
37
<PAGE> 40
Stock. On the date of the Annual Meeting of Stockholders each year, each
Non-Employee Director (who has been such for at least six months) is
automatically granted an option to purchase 2,500 shares of Common Stock. All
options vest and become exercisable immediately upon grant. Additional
non-formula options can be granted to Non-Employee Directors under the 1998
Stock Plan in the discretion of the Board of Directors.
Each Non-Employee Director has the right to irrevocably elect on an annual
basis in advance to receive additional stock options under the 1998 Stock Plan
("Meeting Options") in lieu of cash fees for attending meetings of the Board of
Directors. The Meeting Options are granted on the date of each Annual Meeting of
Stockholders and vest in 25% increments on the date of each of the subsequent
four regular quarterly meetings of the Board of Directors attended by such
Non-Employee Director. The number of shares of Common Stock exercisable upon the
exercise of Meeting Options are such that the value of the stock options granted
is equal to the amount of fees waived.
All options granted to Non-Employee Directors are nonqualified stock
options exercisable at a price equal to the fair market value of the Common
Stock on the date of grant and have ten year terms, subject to earlier
termination in the event of the termination of the optionee's status as a
director or the optionee's death. Options typically remain exercisable for one
year after a Non-Employee Director dies and for that number of years after a
Non-Employee Director leaves the Board of Directors (for any reason other than
death or removal for cause) equal to the number of full or partial years that
the Non-Employee Director served as a director, but not beyond the ten year term
of the option. On October 6, 1998, the exercise price of all options then
outstanding to Non-Employee Directors under the Directors' Plan and under the
1998 Plan were reduced to $2.00 per share, the closing sale price of the Common
Stock as reported on the Nasdaq National Market on such date.
STOCKHOLDER PROPOSALS
Stockholders of the Company may submit proper proposals for consideration
at the Company's Annual Meetings of Stockholders by submitting their proposals
in writing to the Company in a timely manner and otherwise in compliance with
federal and state laws and regulations and the Company's By-Laws. In order to
have been considered for inclusion in the Company's proxy materials for the 2000
Annual Meeting of Stockholders, stockholder proposals must have been received by
the Secretary of the Company on or before January 2, 2000, and must have
otherwise complied with the requirements of Rule 14a-8 of the Exchange Act
("Rule 14a-8"). The timely submission of a stockholder proposal does not
guarantee that it will be included in the Company's proxy materials for the 2000
Annual Meeting.
In addition, the Company's By-Laws establish an advanced notice procedure
that stockholders must follow in order to nominate directors or to bring other
business before an Annual Meeting of stockholders without complying with Rule
14a-8. These advance notice procedures require that, among other things, notice
of a director nomination or other business must be submitted in writing to the
Secretary of the Company not less than 45 days nor more than 120 days prior to
the anniversary of the date on which the Company first mailed its proxy
materials for the prior Annual Meeting, unless the date of the Annual Meeting is
changed by more than 30 days from the anniversary of the date of the prior
Annual Meeting. For director nominations or other business to be properly
brought before the 2000 Annual Meeting, a stockholder must deliver written
notice to the Secretary of the Company no later than March 16, 2000; provided,
however, that if the date of the 2000 Annual Meeting is changed by more than 30
days from the date of the 1999 Special Meeting, notice must be received not
later than the later of 75 days before the date of the 2000 Annual Meeting or 10
days following the date on which public announcement of the date of the 2000
Annual Meeting is first made.
The notice must contain the information specified in the By-Laws
concerning the matters to be brought before such meeting and concerning the
stockholder proposing such matters, including the name, address, number of
shares beneficially owned and any material interest of the stockholder making
the proposal. Notice of a director nomination must include information on
various matters regarding the nominee, including the nominee's name, age,
business and residence address, principal occupation and security holdings and
any arrangements between the stockholder and the nominee. Notice of other
business must include a description of the proposed business, the reasons
therefor and other specified matters. A copy of the relevant provisions of the
Company's By-Laws may be obtained by a stockholder without charge upon written
request to the Secretary of the Company. All notices of proposals by
stockholders, whether or not to be included in the Company's proxy materials,
must be sent to Metretek Technologies, Inc., 1675 Broadway, Suite 2150, Denver,
Colorado 80202, attention: Secretary.
Any stockholder proposal must also comply with all other applicable
provisions of the Company's Restated Certificate and By-Laws, the Exchange Act,
including the rules and regulations thereunder, and Delaware law. No
38
<PAGE> 41
stockholder proposal will be considered unless it is in compliance with the
foregoing requirements. If a stockholder does not comply with the requirements
of Rule 14a-4 of the Exchange Act, then the persons appointed as proxies in the
proxy card solicited by the Board of Directors of the Company for the 2000
Annual Meeting may exercise discretionary voting authority to vote in accordance
with their best judgment on any proposal submitted by such stockholder outside
of Rule 14a-8.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors knows of no
other matters to be presented at the Special Meeting. However, if any other
matters are properly presented at the Special Meeting, the persons appointed as
proxies in the accompanying proxy card will have the discretionary authority to
vote the shares represented by the proxy card in accordance with their best
judgment.
By Order of the Board of Directors
Gary J. Zuiderveen
Secretary
January 5, 2000
Denver, Colorado
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<PAGE> 42
APPENDIX A
----------
PROPOSED AMENDMENT TO ARTICLE FOURTH
OF THE
RESTATED CERTIFICATE OF INCORPORATION, AS AMENDED,
OF
METRETEK TECHNOLOGIES, INC.
Article FOURTH of the Restated Certificate of Incorporation, as amended,
of Metretek Technologies, Inc. shall be amended to read in its entirety as
follows:
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is Twenty-Eight Million Five Hundred
Thousand (28,500,000) shares, consisting of two classes: Twenty-Five Million
(25,000,000) shares of Common Stock, par value $.01 per share, and Three Million
Five Hundred Thousand (3,500,000) shares of Preferred Stock, par value $.01 per
share.
Subject to the provisions of applicable law, this Article FOURTH, and the
rights, if any, of the holders of the Preferred Stock, or any series thereof,
from time to time outstanding, the holders of the outstanding shares of Common
Stock shall have and possess exclusive voting power and right for the election
of directors and for all other purposes, with each holder of record of shares of
Common Stock being entitled to one vote for each share of Common Stock standing
in such holder's name on the books of the Corporation in the election of
directors and on all other matters presented to the stockholders. Holders of
Common Stock shall not have cumulative voting rights in the election of
directors. Subject to the preferential dividend rights, if any, of the holders
of Preferred Stock, or any series thereof, from time to time outstanding, the
holders of Common Stock shall be entitled to receive such dividends as may be
declared by the Board of Directors of the Corporation from time to time. Subject
to the preferential liquidation rights, if any, of the holders of Preferred
Stock, or any series thereof, from time to time outstanding, in the event of any
voluntary or involuntary liquidation, dissolution or winding up of, or any
distribution of the assets of, the Corporation, the holders of shares of Common
Stock shall be entitled to receive all of the assets of the Corporation
available for distribution to its stockholders ratably in proportion to the
number of shares of Common Stock held by them.
The shares of Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is hereby vested with authority, within the
limitations and restrictions set forth in this Article FOURTH, to determine or
alter by resolution or resolutions the powers, preferences, and relative,
participating, optional or other special rights, and any qualifications,
limitations or restrictions thereof, including, without limitation, the voting
rights, dividend rate, conversion or exchange rights, redemption rights and
price (including sinking fund provisions) and liquidation preference, of any
wholly issued series of shares of Preferred Stock, and to fix the number of
shares constituting any such series and the designation thereof, and to increase
or decrease the number of shares of any such series subsequent to the issuance
of shares of that series (but not below the number of shares of such series then
outstanding). In case the number of shares of any such series shall be so
decreased, the shares constituting such decrease shall resume the status which
they had prior to the adoption of the resolution or resolutions originally
fixing the number of shares of such series.
The respective designations, powers, preferences, rights, qualifications,
limitations and restrictions granted to and imposed on the two currently
authorized series of Preferred Stock, the Series B Preferred Stock and the
Series C Preferred Stock, are as follows:
A. SERIES B PREFERRED STOCK
1. Designation. A total of 1,000,000 shares of the Corporation's Preferred
Stock shall be designated as a class known as Series B Preferred Stock, par
value $0.01 per share (the "Convertible Preferred Stock"). All of the
preferential amounts to be paid to the holders of the Convertible Preferred
Stock as provided in this Section A shall be paid or set apart for payment
before the payment or setting apart for payment of any amount for, or the
distribution of any property of the Corporation to, the holders of any other
equity securities of the Corporation, whether now or hereafter authorized.
A-1
<PAGE> 43
2. Election of Directors.
(a) So long as an aggregate of at least 2,000 shares of Convertible
Preferred Stock remain outstanding, the holders of outstanding shares of
Convertible Preferred Stock shall, voting together as a separate class, be
entitled to elect one (1) Director. Such Director shall be the individual
receiving the greatest number of affirmative votes of the outstanding shares of
Convertible Preferred Stock (the "Convertible Preferred Stock Director
Designee"), with each share of Convertible Preferred Stock entitled to one (1)
vote, and with votes cast against such person and votes withheld having no legal
effect. Each Director so elected shall hold office until a new Convertible
Preferred Stock Director Designee is elected Director as provided below,
provided that such Director shall in any event cease to hold office at such time
as the holders of Convertible Preferred Stock are no longer entitled to elect a
Director in accordance with this Section A.2. The election of the Convertible
Preferred Stock Director Designee by the holders of the Convertible Preferred
Stock shall occur (i) at the annual meeting of holders of Common Stock, (ii) if
there is then no Convertible Preferred Stock Director Designee serving as a
Director, at any special meeting of holders of capital stock, (iii) if there is
no Convertible Preferred Stock Director Designee serving as a Director, at any
special meeting of holders of Convertible Preferred Stock called by holders of a
majority of the outstanding shares of Convertible Preferred Stock (a "Majority
Interest") or (iv) in lieu of an election at a meeting, by the written consent
of holders of not less than sixty-six and two-thirds percent (66 2/3%) of the
outstanding shares of Convertible Preferred Stock (a "Two Thirds Interest"). If
at any time when any share of Convertible Preferred Stock is outstanding the
Convertible Preferred Stock Director Designee should cease to be a Director for
any reason, the vacancy shall only be filled by the vote or written consent of
holders of the outstanding shares of Convertible Preferred Stock, voting
together as a separate class, in the manner and on the basis specified above.
The holders of a majority of the outstanding shares of Convertible Preferred
Stock, may, in their sole discretion, determine to elect fewer than one (1)
Convertible Preferred Stock Director Designee from time to time, and during any
such period the Board of Directors nonetheless shall be deemed duly constituted.
The holders of Common Stock and the holders of any other class or series of
capital stock of the Company with the right to vote in the election of
directors, shall be entitled to elect the remaining members of the Board of
Directors.
(b) Notwithstanding the provisions of paragraph 2(a) above, in the
event that the Corporation fails for any reason to redeem the Convertible
Preferred Stock in full in accordance with the terms of Section A.5(a) hereof,
then the number of Directors on the Corporation's Board of Directors shall
immediately and without any action taken by the Corporation or any of its
stockholders, be increased by the minimum such minimum number as is necessary to
ensure that the directors elected under this paragraph 2(b) (the "Default
Preferred Directors") will constitute a majority of the Corporation's Board of
Directors, and the holders of the Convertible Preferred Stock shall be entitled
to elect the Default Preferred Directors, with each share of Convertible
Preferred Stock entitled to one (1) vote. Each Default Preferred Director so
elected shall hold office in accordance with the terms for directors elected at
such meeting as provided by law, the Certificate of Incorporation, as amended,
or the by-laws of the Corporation in effect at the time, provided that such
Director shall in any event cease to hold office at such time as the holders of
Convertible Preferred Stock are no longer entitled to elect Default Preferred
Directors in accordance with this Section A.2(b). The election of the Default
Preferred Directors by the holders of the Convertible Preferred Stock shall
occur (i) at the annual meeting of holders of capital stock, (ii) at any special
meeting of holders of Common Stock, (ii) if there is then no Convertible
Preferred Stock Director Designee serving as a Director, at any special meeting
of holders of capital stock, (iii) if there is then no Convertible Preferred
Stock Director Designee serving as a Director, at any special meeting of holders
of Convertible Preferred Stock called by a Majority Interest, or (iv) in lieu of
an election at a meeting, by the written consent of holders of a Two Thirds
Interest. If at any time when any share of Convertible Preferred Stock is
outstanding any Default Preferred Director should cease to be a director for any
reason, the vacancy shall only be filled by the vote or written consent of
holders of the outstanding shares of Convertible Preferred Stock, voting
together as a separate class, in the manner and on the basis specified above.
The holders of a majority of the outstanding shares of Convertible Preferred
Stock may, in their sole discretion, determine to elect fewer than all of the
Default Preferred Directors from time to time, and during any such period the
Board of Directors nonetheless shall be deemed duly constituted. Upon full
payment by the Corporation of all amounts payable to the holders of the
Convertible Preferred Stock pursuant to Section A.5(a) hereof, including any
interest thereon, which the Board of Directors shall cause to be made by the
Corporation as soon as is lawful and practical to be made, the right of the
holders of Convertible Preferred Stock to elect Default Preferred Directors
under this paragraph (2) shall terminate, the terms of all such Default
Preferred Directors shall forthwith cease, and the number of Directors shall
forthwith be reduced by an amount equal to the number of Default Preferred
Directors which the holders of Convertible Preferred Stock were previously
entitled to elect hereunder.
A-2
<PAGE> 44
(c) Whenever the holders of Convertible Preferred Stock are entitled
to take any action under either paragraph (a) or (b) of this Section A.2(b), a
Majority Interest shall have the right to fix any record date and the date,
timeand location, to the extent applicable, of any meeting or written consent
referred to therein and to send any required notices. If a Majority Interest
requests that the Corporation take any of such actions, it will do so
immediately. The Corporation will not take any action, including amending its
Certificate of Incorporation or bylaws, which is inconsistent with the intent or
purposes of Section A.2.
3. Dividends. The holders of shares of Convertible Preferred Stock shall be
entitled, in preference to the holders of any and all other classes of capital
stock of the Corporation, to receive, when, as and if declared by the Board of
Directors, out of funds legally available therefor, cumulative dividends on the
Convertible Preferred Stock in cash at the rate per annum of eight percent (8%)
(the "Dividend Rate") of the Initial Liquidation Preference or $80.00 per share
of Convertible Preferred Stock (adjusted appropriately for stock splits, stock
dividends, recapitalizations and the like with respect to the Convertible
Preferred Stock, and subject to adjustment pursuant to Section A.5(e) hereof) as
of the original issuance date of the Convertible Preferred Stock (for any such
issuance, the "Convertible Preferred Original Issuance Date"), subject to
proration for partial years on the basis of a 365-day year, compounded quarterly
on March 31, June 30, September 30 and December 31 of each year (the
"Convertible Cumulative Dividend"). Such dividends will accumulate commencing as
of the Convertible Preferred Original Issuance Date and shall be cumulative, to
the extent unpaid, whether or not they have been declared and whether or not the
Corporation may legally pay the dividends. Such dividends shall become due and
payable with respect to any shares of Convertible Preferred Stock as provided in
Sections A.4, A.5 and A.6. Dividends paid in an amount less than the total
amount of such dividends at the time accumulated and payable on all outstanding
shares of Convertible Preferred Stock shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. So long as
at least 1,000 shares of Convertible Preferred Stock are outstanding and the
Convertible Cumulative Dividends have not been paid in full: (a) no dividend
whatsoever (other than dividends paid in stock) shall be paid or declared, and
no distribution shall be made, on any Common Stock or other capital stock of the
Corporation ranking with regard to dividend rights, rights upon a Liquidation
Event (as defined in Section A.4 below) or an Extraordinary Transaction (as
defined in Section A.5(a)(ii) below) or redemption rights junior to or on a
parity with the Convertible Preferred Stock; and (b) except as provided in
Section A.8(c), no shares of Common Stock or other capital stock of the
Corporation ranking with regard to dividend rights, rights upon a Liquidation
Event or an Extraordinary Transaction or redemption rights junior to or on a
parity with the Convertible Preferred Stock shall be purchased, redeemed or
acquired by the Corporation and no monies shall be paid into or set aside or
made available for a sinking fund for the purchase, redemption or acquisition
thereof.
In addition to Convertible Cumulative Dividends, the holders of
Convertible Preferred Stock shall be entitled to receive dividends out of funds
legally available therefor at such times and in such amounts as the Board of
Directors may determine in its sole discretion; provided, however, that no cash
or Common Stock dividend may be declared or paid on any shares of Common Stock
unless at the same time a dividend is declared or paid on all outstanding shares
of Convertible Preferred Stock, with holders of Convertible Preferred Stock and
Common Stock sharing in any such dividends as if they constituted a single class
of stock and with each holder of shares of Convertible Preferred Stock entitled
to receive such dividends based on the number of shares of Common Stock into
which such shares of Convertible Preferred Stock are then convertible in
accordance with Section A.6 hereof.
4 . Liquidation.
(a) Liquidation Preference. Upon any liquidation, dissolution or
winding up of the Corporation and its subsidiaries, whether voluntary or
involuntary (a "Liquidation Event"), each holder of outstanding shares of
Convertible Preferred Stock shall be entitled to be paid out of the assets of
the Corporation available for distribution to stockholders, whether such assets
are capital, surplus or earnings, and before any amount shall be paid or
distributed to the holders of Common Stock or of any other stock ranking on
liquidation junior to the Convertible Preferred Stock, an amount in cash, equal
to (i) $1,000 per share of Convertible Preferred Stock held by such holder
(adjusted appropriately for stock splits, stock dividends, recapitalizations and
the like with respect to the Convertible Preferred Stock) (the "Initial
Liquidation Preference"), plus (ii) any accumulated but unpaid dividends to
which such holder of outstanding shares of Convertible Preferred Stock is then
entitled, if any, pursuant to Sections A.3, A.5(e) and A.5(f) hereof (the sum of
clauses (i) and (ii) being referred to herein as the "Convertible Liquidation
Preference Amount"); provided, however, that if upon any Liquidation Event, the
amounts payable with respect to the Convertible Liquidation Preference Amount
are not paid in full,
A-3
<PAGE> 45
the holders of the Convertible Preferred Stock shall share ratably in any
distribution of assets in proportion to the full respective preferential amounts
to which they are entitled; and provided further, however, that if upon any
Liquidation Event the holders of the outstanding shares of Convertible Preferred
Stock would have received more than the Convertible Liquidation Preference
Amount in the event their shares were converted into Common Stock immediately
prior to such Liquidation Event and such shares of Common Stock pursuant to
Section A.6(a) received a liquidating distribution or distributions from the
Corporation, then each holder of Convertible Preferred Stock shall receive as a
distribution from the Corporation in connection with such Liquidation Event an
amount equal to the amount that would be paid if such holder's shares of
Convertible Preferred Stock were converted into Common Stock immediately prior
to such Liquidation Event pursuant to A.6(a). The provisions of this Section A.4
shall not in any way limit the right of the holders of Convertible Preferred
Stock to elect to convert their shares of Convertible Preferred Stock into
Common Stock pursuant to Section A.6 prior to or in connection with any
Liquidation Event. Upon any Liquidation Event, holders of fractional shares of
Convertible Preferred Stock shall receive proportionate payments in respect
thereof.
(b) Notice. Prior to the occurrence of any Liquidation Event, the
Corporation will furnish each holder of Convertible Preferred Stock notice in
accordance with Section A.9 hereof, together with a certificate prepared by the
chief financial officer of the Corporation describing in detail the facts of
such Liquidation Event, stating in detail the amount(s) per share of Convertible
Preferred Stock each holder of Convertible Preferred Stock would receive
pursuant to the provisions of Section A.4(a) hereof pursuant to clauses (i),
(ii) and (iii) or the proviso of Section A.4(a) and stating in detail the facts
upon which such amounts were determined.
5. Redemption; Preferential Payment in Extraordinary Transactions.
(a) Redemption.
(i) Time Based Redemption. On December 9, 2004, the
Corporation shall redeem all of the outstanding shares of Convertible Preferred
Stock held by each holder of Convertible Preferred Stock. The redemption price
for each share of Convertible Preferred Stock redeemed pursuant to this Section
A.5(a)(i) shall be the per share Convertible Liquidation Preference Amount (as
defined in Section A.4(a) above) (the "Convertible Redemption Price").
(ii) Redemption upon Extraordinary Transactions. Upon the
occurrence of an "Extraordinary Transaction," the holders of not less than a
Majority Interest may elect (i) to have the Convertible Preferred Stock redeemed
in connection with the Extraordinary Transaction or (ii) otherwise to
participate in the Extraordinary Transaction.
"Extraordinary Transaction" means any of the following: (A) a merger or
consolidation of the Corporation with or into another corporation (with respect
to which less than a majority of the outstanding voting power of the surviving
or consolidated corporation is held by stockholders of the Corporation
immediately prior to such event), (B) the sale or transfer of all or
substantially all of the properties and assets of the Corporation and its
subsidiaries, (C) any purchase by any party (or group of affiliated parties) of
shares of capital stock of the Corporation (either through a negotiated stock
purchase or a tender for such shares), the effect of which is that such party
(or group of affiliated parties) that did not beneficially own a majority of the
voting power of the outstanding shares of capital stock of the Corporation
immediately prior to such purchase beneficially owns at least a majority of such
voting power immediately after such purchase, or (D) the redemption or
repurchase of shares representing a majority of the voting power of the
outstanding shares of capital stock of the Corporation immediately prior to such
redemption.
As a condition to the effectiveness of any Extraordinary Transaction,
unless the holders of Convertible Preferred Stock shall have elected to convert
their shares of Convertible Preferred Stock into Common Stock in accordance with
the provisions of Section A.6 prior to the effective date of such Extraordinary
Transaction, the Corporation shall either (1) if redemption is elected, on the
effective date of such Extraordinary Transaction, redeem all (but not less than
all) of the outstanding shares of Convertible Preferred Stock held by each
holder of Convertible Preferred Stock for an amount equal to the Convertible
Redemption Price, such amount to be payable in cash or, at the election of such
holder or holders, in the same form of consideration as is paid to the holders
of Common Stock in such Extraordinary Transaction, or (2) if the holders elect
to participate in the relevant transaction (such as a merger) on terms
acceptable to them, take such actions as shall be sufficient to facilitate such
participation (including executing a merger agreement including an exchange
ratio reflecting the provisions hereof) (on terms giving such holders the right
to the Convertible Redemption Price as a preferential amount, in which event
such amount shall be paid in cash or, at the election of such holders, in the
same form
A-4
<PAGE> 46
of consideration as is paid to the holders of Common Stock in such Extraordinary
Transaction, but in preference to and before any amount is paid or otherwise
distributed to the holders of the Common Stock or any other stock ranking with
regard to dividend rights, rights upon a Liquidation Event or an Extraordinary
Transaction, or redemption rights junior to the Convertible Preferred Stock, in
which event such preferential amount shall be deemed to have been distributed to
the holders of the Convertible Preferred Stock as if in a Liquidation Event).
For purposes of this Section A.5(a)(ii), a sale of substantially all of the
assets of the Corporation and its subsidiaries shall mean the sale or other
disposition other than in the ordinary course of business of more than 75% of
such assets, by reference to the book value or the fair market value of such
assets, determined on a consolidated basis under generally accepted accounting
principles.
Notwithstanding the foregoing, if upon any Extraordinary Transaction the
holders of the outstanding shares of Convertible Preferred Stock would receive
more than the Convertible Redemption Price in the event their shares were
converted into Common Stock immediately prior to such Extraordinary Transaction
and such shares of Common Stock were purchased or otherwise participated in such
Extraordinary Transaction, then each holder of Convertible Preferred Stock shall
receive from the Corporation or the relevant purchaser, as applicable, upon the
election by a Majority Interest to redeem or otherwise participate in such
Extraordinary Transaction, an amount equal to the amount per share that would be
paid if the shares of Common Stock receivable upon conversion of the Convertible
Preferred Stock were being acquired in the Extraordinary Transaction at the same
price per share as is paid for other shares of Common Stock, which amount shall
be paid in the same form of consideration as is paid to holders of Common Stock,
as if each share of Convertible Preferred Stock had been converted into the
number of shares of Common Stock issuable upon the conversion of such share of
Convertible Preferred Stock immediately prior to such Extraordinary Transaction.
Also, notwithstanding the foregoing, in connection with the acquisition of the
Convertible Preferred Stock in an Extraordinary Transaction which is to be
accounted for by the acquiring entity as a pooling of interests, the holders of
shares of Convertible Preferred Stock shall receive upon such election to redeem
or otherwise participate, if so required for the application of such accounting
treatment, and in lieu of cash, the number of shares of common stock of such
entity having a value equal to the amount otherwise payable to the holders of
Convertible Preferred Stock in such Extraordinary Transaction pursuant to this
Section A.5(a)(ii) and having the same registered status or registration rights
as any other shares in such transaction. The Corporation shall not participate
in any Extraordinary Transaction or make or agree to have made any payments to
the holders of shares of Common Stock or any other stock ranking junior to the
Convertible Preferred Stock unless the holders of the Convertible Preferred
Stock shall have received the full preferential amount to which they are
entitled hereunder in an Extraordinary Transaction.
The foregoing election shall be made by such holders giving the
Corporation and each other holder of Convertible Preferred Stock not less than
five (5) business days prior written notice, which notice shall set forth the
date for such redemption or participation in an Extraordinary Transaction, as
applicable. The provisions of this Section A.5 shall not in any way limit the
right of the holders of Convertible Preferred Stock to elect to convert their
shares into shares of Common Stock pursuant to Section A.6 prior to or in
connection with any Extraordinary Transaction.
(iii) Redemption at the Option of the Company. In the event
that, at any time commencing on the Anniversary Date (as defined in Section
A.7(a)), the market price of the Common Stock equals or exceeds 200% of the
Conversion Price then in effect for 20 out of a period of 30 consecutive trading
days (any period of 30 days where this condition has been met being referred to
herein as a "Redemption Period"), then the Company shall have the right, in its
discretion during any Redemption Period or within the 30 days immediately
following the Redemption Period, to send 30 days' prior written notice to each
holder of Convertible Preferred Stock and after such 30-day period, to redeem
all outstanding shares of Convertible Preferred Stock at a redemption price
equal to the Convertible Redemption Price; provided, that no such redemption may
be effected if at any time between the giving of the notice of redemption and
the date on which redemption is to occur there is not in effect a registration
statement covering the sale by the holders thereof of all shares of Common Stock
issuable upon conversion of the Convertible Preferred Stock.
(b) Valuation of Distribution Securities. Any securities or other
consideration to be delivered to the holders of the Convertible Preferred Stock,
if so elected in connection with a redemption or upon any Extraordinary
Transaction in accordance with the terms hereof, shall be valued as follows:
(i) If traded on a nationally recognized securities exchange
or inter-dealer quotation system, the value shall be deemed to be the average of
the closing prices of the securities on such exchange or system over the 30-day
period ending three (3) business days prior to the closing of such Extraordinary
Transaction;
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(ii) If traded over-the-counter, the value shall be deemed to
be the average of the closing bid prices over the 30-day period ending three (3)
business days prior to the closing of such Extraordinary Transaction; and
(iii) If there is no active public market, the value shall be
the fair market value thereof, as mutually determined by the Corporation and the
holders of not less than a Two Thirds Interest, provided that if the Corporation
and the holders of not less than a Two Thirds Interest are unable to reach
agreement, then by independent appraisal by a mutually agreed to investment
banker, the fees of which shall be paid by the Corporation.
(c) Notice by Corporation. Prior to the occurrence of any
Extraordinary Transaction, the Corporation will furnish each holder of
Convertible Preferred Stock notice in accordance with Section A.9 hereof,
together with a certificate prepared by the chief financial officer of the
Corporation describing in detail all material terms of such Extraordinary
Transaction, including without limitation the consideration to be delivered in
connection with such Extraordinary Transaction, the valuation of the Corporation
at the time of such Extraordinary Transaction and the identities of the parties
to the Extraordinary Transaction.
(d) Purchase Date and Price. Upon the election of the holders of not
less than a Majority Interest to cause the Corporation to redeem Convertible
Preferred Stock or otherwise to participate in an Extraordinary Transaction
pursuant to Section A.5(a)(ii), each holder of Convertible Preferred Stock shall
be deemed to have elected to cause the shares held by such holder to be so
redeemed or to so participate. Any date upon which a redemption or other
acquisition is to occur in accordance with Section A.5(a) shall be referred to
as a "Redemption Date." If at a Redemption Date shares of Convertible Preferred
Stock are unable to be redeemed (as contemplated by Section A.5(e) below), then
holders of Convertible Preferred Stock shall also be entitled to interest and
dividends pursuant to Sections A.5(e) and (f) below. The aggregate applicable
redemption price elected to be payable in cash pursuant to Section A.5(a) shall
be payable in cash in immediately available funds to the respective holders on
the Redemption Date (subject to Section A.5(e)), except as otherwise
contemplated by Section A.5(a)(ii). Upon any redemption as provided herein,
holders of fractional shares shall receive proportionate amounts in respect
thereof. Until the aggregate applicable redemption price has been paid for all
shares of Convertible Preferred Stock being redeemed or acquired: (A) no
dividend whatsoever shall be paid or declared, and no distribution shall be
made, on any capital stock of the Corporation; and (B) except as permitted by
Section A.8(c), no shares of capital stock of the Corporation (other than in
accordance with this Section A.5) shall be purchased, redeemed or acquired by
the Corporation and no monies shall be paid into or set aside or made available
for a sinking fund for the purchase, redemption or acquisition thereof.
(e) Redemption Prohibited. If, at a Redemption Date, the Corporation
is prohibited under Section 160 of the General Corporation Law of the State of
Delaware from redeeming all shares of Convertible Preferred Stock for which
redemption is required hereunder, then it shall redeem such shares on a pro-rata
basis among the holders of Convertible Preferred Stock in proportion to the full
respective redemption amounts to which they are entitled hereunder to the extent
possible and shall redeem the remaining shares to be redeemed as soon as the
Corporation is not prohibited from redeeming some or all of such shares under
Section 160 of the General Corporation Law of the State of Delaware, subject to
the last paragraph of Section A.8. Any shares of Convertible Preferred Stock not
redeemed shall remain outstanding and entitled to all of the rights and
preferences provided in this Section A. The Corporation shall take such action
as shall be necessary or appropriate to review and promptly remove any
impediment to its ability to redeem Convertible Preferred Stock under the
circumstances contemplated by this Section A.5(e). In the event that the
Corporation fails for any reason to redeem shares for which redemption is
required pursuant to this Section A.5, including without limitation due to a
prohibition of such redemption under the General Corporation Law of the State of
Delaware, then during the period from the applicable Redemption Date through the
date on which such shares are redeemed, the applicable Dividend Rate shall
increase by 2% per annum and shall increase by an additional .5% at the end of
each six (6) month period thereafter until the Redemption Price (as so
increased) is paid in full, subject to a maximum rate of 15% per annum.
(f) Dividend After Redemption Date. From and after a Redemption
Date, no shares of Convertible Preferred Stock subject to redemption shall be
entitled to dividends, if any, as contemplated by Section A.3; provided,
however, that in the event that shares of Convertible Preferred Stock are unable
to be redeemed and continue to be outstanding in accordance with Section A.5(e),
such shares shall continue to be entitled to dividends and interest thereon as
provided in Sections A.3 and A.5(e) until the date on which such shares are
actually redeemed by the Corporation.
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(g) Surrender of Certificates. Upon receipt of the applicable
Convertible Redemption Price by certified check or wire transfer (in the event
such price is to be paid in cash), each holder of shares of Convertible
Preferred Stock to be redeemed shall surrender the certificate or certificates
representing such shares to the Corporation, duly assigned or endorsed for
transfer (or accompanied by duly executed stock powers relating thereto), or, in
the event the certificate or certificates are lost, stolen or missing, shall
deliver an affidavit or agreement satisfactory to the Corporation to indemnify
the Corporation from any loss incurred by it in connection therewith (an
"Affidavit of Loss") with respect to such certificates at the principal
executive office of the Corporation or the office of the transfer agent for the
Convertible Preferred Stock or such office or offices in the continental United
States of an agent for redemption as may from time to time be designated by
notice to the holders of Convertible Preferred Stock, and each surrendered
certificate shall be canceled and retired; provided, however, that if the
Corporation is prohibited from redeeming all shares of Convertible Preferred
Stock as provided in Section A.5(e) or such redemption is a partial redemption
of the shares of Convertible Preferred Stock held by a holder, the holder shall
not be required to surrender said certificate(s) to the Corporation until said
holder has received a new stock certificate for those shares of Convertible
Preferred Stock not so redeemed.
(h) Further Restrictions on Redemption. Notwithstanding anything
herein to the contrary, the Convertible Preferred Stock shall not be redeemed
hereunder unless (i) all obligations of the Corporation under the Loan and
Security Agreement dated April 14, 1998 among the Corporation, certain of its
subsidiaries, and National Bank of Canada, as agent and as a lender, and the
other lenders from time to time party thereto (collectively, the "Lender") shall
have been or is concurrently paid in full, or (ii) the Lenders shall have
consented to such redemption. If the Corporation is prohibited from redeeming
the Convertible Preferred Stock hereunder, the holders of Convertible Preferred
Stock shall be entitled to the provisions of Section A.5(e) and A.5(f) hereof.
6. Conversion. The holders of the Convertible Preferred Stock shall have
the following conversion rights:
(a) Conversion Upon Election of Holder. Any holder of shares of
Convertible Preferred Stock shall be entitled at any time after June 9, 2000,
upon written election and without the payment of any additional consideration,
to cause any or all of such holder's shares of Convertible Preferred Stock to be
converted into the number of shares of Common Stock resulting from dividing the
Conversion Value (as defined in this Section A.6(a)) per share in effect for the
Convertible Preferred Stock at the time of conversion, as the numerator, by the
per share Conversion Price (as defined in this Section A.6(a)) of the
Convertible Preferred Stock, as the denominator, with fractional shares treated
proportionately. The number of shares of Common Stock into which a share of a
Convertible Preferred Stock is convertible is hereinafter referred to as the
"Conversion Rate." Upon the filing of this Certificate of Designation with the
Secretary of State of Delaware the "Conversion Price" per share of Convertible
Preferred Stock shall be $5.9334, and the per share "Conversion Value" of
Convertible Preferred Stock shall be the sum of $1,000 plus per share
accumulated but unpaid dividends on the Convertible Preferred Stock at the time
of conversion. The Conversion Price per share of Convertible Preferred Stock and
the Conversion Rate shall be subject to adjustment from time to time as provided
in Section A.7 hereof.
(b) Procedure for Conversion. Upon election to convert pursuant to
Section A.6(a), the relevant holder of Convertible Preferred Stock shall
surrender the certificate or certificates representing the Convertible Preferred
Stock being converted, duly assigned or endorsed for transfer to the Corporation
(or accompanied by duly executed stock powers relating thereto), at the
principal executive office of the Corporation or the offices of the transfer
agent for the Convertible Preferred Stock or such office or offices in the
continental United States of an agent for conversion as may from time to time be
designated by notice to the holders of the Convertible Preferred Stock by the
Corporation, or shall deliver an Affidavit of Loss with respect to such
certificates. The issuance by the Corporation of Common Stock upon a conversion
of Convertible Preferred Stock pursuant to Section A.6(a) hereof shall be
effective as of the surrender of the certificate or certificates for the
Convertible Preferred Stock to be converted, duly assigned or endorsed for
transfer to the Corporation (or accompanied by duly executed stock powers
relating thereto), or as of the delivery of an Affidavit of Loss. Upon surrender
of a certificate representing Convertible Preferred Stock for conversion, or
delivery of an Affidavit of Loss, the Corporation shall issue and send by hand
delivery, by courier or by first class mail (postage prepaid) to the holder
thereof or to such holder's designee, at the address designated by such holder,
certificates for the number of shares of Common Stock to which such holder shall
be entitled upon conversion (rounded to the nearest whole share) plus, if
applicable, a cash payment in the amount of any accumulated but unpaid dividends
and other amounts as contemplated by Section A.6(a) in respect of the shares of
Convertible Preferred Stock. The issuance of certificates for Common Stock upon
conversion of Convertible Preferred Stock will be made without charge to the
holders of such shares for any issuance
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tax in respect thereof or other costs incurred by the Corporation in connection
with such conversion and the related issuance of such stock. If a conversion of
Convertible Preferred Stock upon a Liquidation Event or an Extraordinary
Transaction occurs and the holders of the Common Stock issued on such conversion
elect to participate, the Corporation shall make appropriate provisions for the
Common Stock issued upon such conversion to be treated on the same basis as all
other Common Stock in such Liquidation Event or Extraordinary Transaction.
(c) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of Convertible 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 Convertible 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 of the then outstanding shares of Convertible
Preferred Stock, the Corporation will take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose.
(d) No Closing of Transfer Books. The Corporation shall not close
its books against the transfer of shares of Convertible Preferred Stock in any
manner which would interfere with the timely conversion of any shares of
Convertible Preferred Stock.
7. Adjustments. The Conversion Price in effect from time to time shall be
subject to adjustment from and after the Convertible Preferred Original Issuance
Date and regardless of whether any shares of Convertible Preferred Stock are
then issued and outstanding as follows:
(a) Adjustment upon Change in Market Value. If on December 9, 2000
(the "Anniversary Date") the product of (a) 1.10 multiplied by (b) the sum of
(i) the average closing bid price of the Common Stock for the 30 trading days
immediately preceding the Anniversary Date, plus (ii) on an as-converted, per
share basis, the fair market value on the Anniversary Date (as determined in
good faith by the Board of Directors and reasonably agreed to by a Two-Thirds
Interest, except that if the distribution includes any securities, the fair
market value of such securities shall be determined by reference to Section
A.5(b) hereof) of any securities, cash or assets (excluding any dividend or
distribution paid exclusively in cash or in Common Stock) which prior to the
Anniversary Date are distributed or made payable to the holders of Convertible
Preferred Stock (such product the "Reset Price"), is less than the Conversion
Price then in effect, then the Conversion Price shall be adjusted to equal the
Reset Price and shall be subject to further adjustment as provided herein;
provided, however, that in no event shall the Conversion Price be reduced by
more than 50% pursuant to this Section A.7(a). Any dispute as to fair market
value hereunder shall be resolved by independent appraisal by a mutually agreed
investment banker, the fees of which shall be paid by the Corporation.
(b) Dividends and Stock Splits. If the number of shares of Common
Stock (which term for purposes of this Section A.7 shall include all common
stock of the Corporation) outstanding at any time after the date hereof is
increased by a stock dividend or distribution payable in shares of Common Stock
or by a subdivision or split-up of shares of Common Stock, then, on the date
such payment is made or such change is effective, the Conversion Price shall be
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of any shares of Convertible Preferred Stock shall be increased in
proportion to such increase of outstanding shares of Common Stock.
(c) Reverse Stock Splits. If the number of shares of Common Stock
outstanding at any time after the date hereof is decreased by a combination or
reverse split of the outstanding shares of Common Stock, then, on the effective
date of such combination or reverse split, the Conversion Price shall be
appropriately increased so that the number of shares of Common Stock issuable on
conversion of any shares of Convertible Preferred Stock shall be decreased in
proportion to such decrease in outstanding shares of Common Stock.
(d) Sale of Common Stock. In the event the Corporation shall at any
time, or from time to time, issue, sell or exchange any shares of Common Stock
(including shares held in the Corporation's treasury but excluding (I) up to
1,211,236 shares and options issued to officers, directors or employees of the
Corporation or upon the exercise of options or other rights issued to such
officers, directors or employees pursuant to the Corporation's stock option,
stock purchase and related employee plans (II) up to 1,555,150 shares issuable
upon exercise of warrants or other rights issued by the Company prior to the
first date any shares of Convertible Preferred Stock are issued or (III) any
securities issuable upon
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conversion of the Convertible Preferred Stock or exercise of warrants issued
pursuant to the Securities Purchase Agreement dated December 9, 1999 (the
"Purchase Agreement") (the "Excluded Shares")), for a consideration per share
(the "Purchase Price") less than the greater of (a) the Market Price (as
hereinafter defined) of the Common Stock in effect immediately prior to the
issuance, sale or exchange of such shares or (b) the Conversion Price in effect
immediately prior to the issuance, sale or exchange of such shares, then, and
thereafter successively upon each such issuance, sale or exchange, the
Conversion Price in effect immediately prior to the issuance, sale or exchange
of such shares shall be reduced to an amount determined by multiplying such
Conversion Price by a fraction:
(i) the numerator of which shall be (X) the number of shares
of Common Stock of all classes outstanding immediately prior to the issuance of
such additional shares of Common Stock (excluding treasury shares but including
all shares of Common Stock issuable upon conversion or exercise of any
outstanding Convertible Preferred Stock, options, warrants, rights or
convertible securities having an exercise or conversion price less than such
Purchase Price), plus (Y) the number of shares of Common Stock which the net
aggregate consideration received by the Corporation for the total number of such
additional shares of Common Stock so issued would purchase at the Conversion
Price (prior to adjustment), and
(ii) the denominator of which shall be (X) the number of
shares of Common Stock of all classes outstanding immediately prior to the
issuance of such additional shares of Common Stock (excluding treasury shares
but including all shares of Common Stock issuable upon conversion or exercise of
any outstanding Convertible Preferred Stock, options, warrants, rights or
convertible securities having an exercise or conversion price less than such
Purchase Price), plus (Y) the number of such additional shares of Common Stock
so issued.
The "Market Price" of the Common Stock on any date shall mean the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Common Stock is not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Common Stock is listed or admitted to trading or, if the Common
Stock is not listed or admitted to trading on any national securities exchange,
the last quoted price, or if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the Nasdaq Stock
Market, Inc.'s Automated Quotation System or, if such system is no longer in
use, the principal other automated quotation system that may then be in use, or
if the Common Stock is not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in the Common Stock that is selected by the Board of Directors of the
Company, or, if there is no such professional market maker, such amount as an
independent investment banking firm selected by the Board of Directors of the
Company determines to be the value of a share of Common Stock.
(e) Sale of Options, Rights or Convertible Securities. In the event
the Corporation shall at any time or from time to time, issue options, warrants
or rights to subscribe for shares of Common Stock, or issue any securities
convertible into or exchangeable for shares of Common Stock (other than any
options or warrants for Excluded Shares), for a Purchase Price (determined by
dividing the Net Aggregate Consideration (as determined below) by the aggregate
number of shares of Common Stock that would be issued if all such options,
warrants, rights or convertible securities were exercised or converted to the
fullest extent permitted by their terms) less than the greater of (a) the Market
Price in effect immediately prior to the issuance, sale or exchange of such
shares or (b) the Conversion Price in effect immediately prior to the issuance
of such options or rights or convertible or exchangeable securities, then the
Conversion Price in effect immediately prior to the issuance of such options,
warrants or rights or securities shall be reduced to an amount determined by
multiplying such Conversion Price by a fraction:
(i) the numerator of which shall be (X) the number of shares
of Common Stock of all classes outstanding immediately prior to the issuance of
such options, rights or convertible securities (excluding treasury shares but
including all shares of Common Stock issuable upon conversion or exercise of any
outstanding Convertible Preferred Stock, options, warrants, rights or
convertible securities having an exercise or conversion price less than such
Purchase Price), plus (Y) the number of shares of Common Stock which the total
amount of consideration received by the Corporation for the issuance of such
options, warrants, rights or convertible securities plus the minimum amount set
forth in the terms of such security as payable to the Corporation upon the
exercise or conversion thereof (the "Net Aggregate Consideration") would
purchase at the Conversion Price prior to adjustment, and
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(ii) the denominator of which shall be (X) the number of
shares of Common Stock of all classes outstanding immediately prior to the
issuance of such options, warrants, rights or convertible securities (excluding
treasury shares but including all shares of Common Stock issuable upon
conversion or exercise of any outstanding Convertible Preferred Stock, options,
warrants, rights or convertible securities having an exercise or conversion
price less than such Purchase Price), plus (Y) the aggregate number of shares of
Common Stock that would be issued if all such options, warrants, rights or
convertible securities were exercised or converted.
(f) Expiration or Change in Price. If the consideration per share
provided for in any options or rights to subscribe for shares of Common Stock or
any securities exchangeable for or convertible into shares of Common Stock,
changes at any time (other than as a result of the operation of the antidilution
provision of this Section A.7 or the antidilution provisions of certain Warrants
issued by the Corporation pursuant to the Purchase Agreement), the Conversion
Price in effect at the time of such change shall be readjusted to the Conversion
Price which would have been in effect at such time had such options or
convertible securities provided for such changed consideration per share
(determined as provided in Section A.7(d) hereof), at the time initially
granted, issued or sold; provided, that such adjustment of the Conversion Price
will be made only as and to the extent that the Conversion Price effective upon
such adjustment remains less than or equal to the Conversion Price that would be
in effect if such options, rights or securities had not been issued. No
adjustment of the Conversion Price shall be made under this Section A.7 upon the
issuance of any additional shares of Common Stock which are issued pursuant to
the exercise of any warrants, options or other subscription or purchase rights
or pursuant to the exercise of any conversion or exchange rights in any
convertible securities if an adjustment shall previously have been made upon the
issuance of such warrants, options or other rights. Any adjustment of the
Conversion Price shall be disregarded if, as, and when the rights to acquire
shares of Common Stock upon exercise or conversion of the warrants, options,
rights or convertible securities which gave rise to such adjustment expire or
are canceled without having been exercised, so that the Conversion Price
effective immediately upon such cancellation or expiration shall be equal to the
Conversion Price in effect at the time of the issuance of the expired or
canceled warrants, options, rights or convertible securities, with such
additional adjustments as would have been made to that Conversion Price had the
expired or canceled warrants, options, rights or convertible securities not been
issued.
(g) Other Adjustments. In case the Company shall, by dividend,
distribution or otherwise, distribute to all holders of its Common Stock
evidences of its indebtedness, shares of any class or series of capital stock,
other securities, cash or assets (excluding (i) any options, rights or warrants
referred to in Section A.7(e), and (ii) any dividend or distribution paid
exclusively in cash or in Common Stock), then, at the election of a Majority
Interest, either (A) adequate provision shall be made so that holders of
Convertible Preferred Stock shall receive upon conversion thereof, in addition
to the number of shares of Common Stock receivable thereupon, the evidence of
indebtedness, shares of any class or series of capital stock, securities of any
issuer other than the Corporation, cash or assets which they would have received
had the Convertible Preferred Stock been converted into Common Stock as to the
date referenced for the payment of such distribution (the "Reference Date"), or
(B) the Conversion Price shall be reduced so that such price shall equal the
price determined by multiplying the Conversion Price in effect immediately prior
to the effectiveness of the Conversion Price reduction contemplated by this
Section A.7(g) by a fraction, the numerator of which shall be the Market Price
(determined as provided in Section A.7(d) per share of the Common Stock on the
Reference Date less the fair market value (as determined, subject to the last
sentence of this Section A.7(g), in good faith by the Board of Directors, whose
determination shall be conclusive and described in a resolution of the Board of
Directors), on the Reference Date, of such number or amount of the evidences of
indebtedness, shares of capital stock, securities, cash and assets that is so
distributed to a holder of one share of Common Stock, and the denominator shall
be such Market Price per share of the Common Stock, such reduction to become
effective immediately prior to the opening of business on the day following the
Reference Date. Notwithstanding any other provision of this Section A.7(g), if
any shares of capital stock distributed to a holder of Common Stock are listed
or admitted to trading on any national securities exchange or on the Nasdaq
Stock Market, or quoted on any other automated quotation system that may then be
in use, for the five consecutive trading days prior to and including the
Reference Date, or will be listed or admitted to trading or quoted thereon as of
(but not prior to) the Reference Date for the ten consecutive trading days
subsequent to and including the Reference Date, then, the Board of Directors, in
making its determination of the fair market value of such number of shares of
capital stock that are so distributed to a holder of one share of Common Stock,
shall make such determination by reference to the Market Price (as determined by
reference to Section 7(d)) of such shares of capital stock as of the Reference
Date.
(h) Reorganization, etc. If the Common Stock issuable upon the
conversion of the Convertible Preferred Stock shall be changed into the same or
different number of shares of any class or classes of stock, whether by
reclassification or otherwise (other than a subdivision or combination of shares
or stock dividend provided for above, or a
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reorganization, merger, consolidation or sale of assets provided for elsewhere
in this Section A.7), then and in each such event the holder of each share of
Convertible Preferred Stock shall have the right thereafter to convert such
share into the kind and amount of shares of stock and other securities and
property receivable upon such reorganization, reclassification or other change,
by holders of the number of shares of Common Stock into which such shares of
Convertible Preferred Stock might have been converted immediately prior to such
reorganization, reclassification or change, all subject to further adjustment as
provided herein.
(i) Mergers and Other Reorganizations. Unless such transaction is an
Extraordinary Transaction in which the holders of the Convertible Preferred
Stock elect redemption or otherwise participate (in which case Section
A.5(a)(ii) shall apply and this subsection shall not apply), if at any time or
from time to time there shall be a capital reorganization of the Common Stock
(other than a subdivision, combination, reclassification or exchange of shares
provided for elsewhere in this Section A.7) or a merger or consolidation of the
Corporation with or into another corporation or the sale of all or substantially
all of the Corporation's properties and assets to any other person, then, to the
extent permitted by law, as part of and as a condition to the effectiveness of
such reorganization, merger, consolidation or sale, lawful and adequate
provision shall be made so that the holders of the Convertible Preferred Stock
shall thereafter be entitled to receive upon conversion of the Convertible
Preferred Stock the number of shares of stock or other securities or property of
the Corporation, or of the successor corporation resulting from such merger or
consolidation or sale, to which a holder of Common Stock would have been
entitled in connection with such capital reorganization, merger, consolidation,
or sale. In any such case, appropriate provisions shall be made with respect to
the rights of the holders of the Convertible Preferred Stock after the
reorganization, merger, consolidation or sale to the end that the provisions of
this Section A.7 (including, without limitation, provisions for adjustment of
the applicable Conversion Price and the number of shares purchasable upon
conversion of the Convertible Preferred Stock) shall thereafter be applicable,
as nearly as may be, with respect to any shares of stock, securities or assets
to be deliverable thereafter upon the conversion of the Convertible Preferred
Stock.
(j) Calculations. All calculations under this Section A.7 shall be
made to the nearest cent or to the nearest one hundredth (1/100) of a share, as
the case may be.
(k) Certificate. Upon the occurrence of each adjustment or
readjustment pursuant to this Section A.7, the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to each holder of Convertible Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Corporation
shall, upon written request at any time of any holder of Convertible Preferred
Stock, furnish or cause to be furnished to such holder a like certificate
setting forth (i) such adjustments and readjustments, (ii) the Conversion Price
before and after such adjustment or readjustment, and (iii) the number of shares
of Common Stock and the amount, if any, of other property which at the time
would be received upon the conversion of such holder's shares of Convertible
Preferred Stock.
(l) Disputes. In the event of a dispute in connection with an
adjustment hereunder, the Corporation will cause independent certified public
accountants of recognized national standing (which may be the regular auditors
of the Corporation) selected by the Corporation to verify such computation
(other than any computation of the fair value of property as determined in good
faith by the Board of Directors of the Corporation) and prepare a report setting
forth such adjustment or readjustment and showing in reasonable detail the
method of calculation thereof and the facts upon which such adjustment or
re-adjustment is based. The Corporation will forthwith mail a copy of each such
report to the holders of Convertible Preferred Stock and will, upon the written
request at any time of any such holder, furnish to such holder a like report
setting forth the Conversion Price at the time in effect and showing in
reasonable detail how it was calculated. The Corporation will also keep copies
of all such reports at its principal office and will cause the same to be
available for inspection at such office during normal business hours by any
holder of Convertible Preferred Stock or any prospective purchaser of such stock
designated by the holder thereof.
(m) Multiple Adjustments. If any single transaction or event would
require adjustment of the Conversion Price pursuant to more than one of the
provisions described above, only one adjustment shall be made and such
adjustment shall be in the amount of the adjustment having the highest absolute
value to the holders of the Convertible Preferred Stock.
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(n) Minimum Adjustment. No adjustment in the Conversion Price shall
be required to be made unless and until such adjustment would require a change
of at least one percent (1%) of the Conversion Price then in effect; provided,
however, that any adjustment that would not be required to be made shall be
taken into account and in subsequent adjustment.
8. Covenants.
(a) So long as at least 1,000 shares of Convertible Preferred Stock
shall be outstanding, the Corporation shall not, without first having provided
written notice of such proposed action to each holder of outstanding shares of
Convertible Preferred Stock and having obtained the affirmative vote or written
consent of the holders of not less than a Majority Interest, voting as a single
class, with each share of Convertible Preferred Stock entitling the holder
thereof to one vote per share of Convertible Preferred Stock held by such
holder, directly or indirectly (which consent shall not be unreasonably
withheld), enter into an agreement with respect to, or effect, or permit, any:
(i) merger or consolidation of the Corporation or any of its
subsidiaries with any other person or entity, recapitalization,
reorganization or other like transaction involving the Corporation
or any of its subsidiaries, or liquidation or dissolution of the
Corporation or any of its subsidiaries;
(ii) sale or transfer of all or substantially all of the
Corporation's consolidated properties or assets;
(iii) disposition of assets in one or more transactions for
consideration in excess of $1,000,000 without the approval of the
Board of Directors of the Corporation; or
(iv) incurrence of indebtedness for money borrowed, except for
borrowings under the Corporation's primary credit agreement of up to
$3,000,000.
(b) So long as any shares of Convertible Preferred Stock shall be
outstanding, the Corporation shall not, without first having provided written
notice of such proposed action to each holder of outstanding shares of
Convertible Preferred Stock and having obtained the affirmative vote or written
consent of the holders of not less than a Majority Interest, voting as a single
class, with each share of Convertible Preferred Stock entitling the holder
thereof to one vote per share of Convertible Preferred Stock held by such
holder, directly or indirectly, enter into an agreement with respect to, or
effect, or permit, any:
(i) issuance of any equity securities (including Convertible
Preferred Stock, except as contemplated by the Purchase Agreement)
or any securities exchangeable or convertible into equity securities
or measured by earnings or profit of the Corporation or any of its
subsidiaries (other than Series C Preferred Stock); provided, that
the Corporation or any subsidiary permitted to do so under the
Purchase Agreement may issue securities that rank junior to the
Convertible Preferred Stock as to liquidation, dividend and
redemption rights;
(ii) redemption, repurchase or other acquisition for value of
any equity security of the Corporation (other than redemption of the
Convertible Preferred Stock in accordance with the terms hereof); or
(iii) amendment of the Corporation's or any of its
subsidiaries' certificate of incorporation, bylaws or other charter
documents as in effect on the date of filing of this Certificate of
Designations.
(c) The prohibition on repurchases contained in Section A.8(b)(i)
shall not apply to the repurchase by the Corporation of up to 250,000 shares of
Common Stock pursuant to the terms of restrictive agreements under which the
Corporation has the option to repurchase such shares from employees, officers,
directors, consultants, or other persons performing services for the Corporation
or any subsidiary upon the occurrence of certain events.
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Further, the Corporation shall not, by amendment of its Certificate of
Incorporation or through any Extraordinary Transaction or other reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities, agreement or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation but shall at all times in good faith assist in the
carrying out of all the provisions of this Section A and in the taking of all
such action as may be necessary or appropriate in order to protect the rights of
the holders of the Convertible Preferred Stock against impairment. Without
limitation of the foregoing, the Corporation shall take such action as shall be
necessary or appropriate, to the extent reasonably within its control, to remove
promptly any impediments to its ability to redeem Convertible Preferred Stock
under the circumstances contemplated by Section A.5(e). Any successor to the
Corporation shall agree, as a condition to such succession, to carry out and
observe the obligations of the Corporation hereunder with respect to the
Convertible Preferred Stock.
9. Notice.
(a) Liquidation Events, Extraordinary Transactions, Etc. In the
event (i) the Corporation establishes a record date to determine the holders of
any class of securities who are entitled to receive any dividend or other
distribution or who are entitled to vote at a meeting (or by written consent) in
connection with any of the transactions identified in clause (ii) hereof, or
(ii) any Liquidation Event (as defined in Section A.4) or any Extraordinary
Transaction (as defined in Section A.5), becomes reasonably likely to occur, the
Corporation shall mail or cause to be mailed by first class mail (postage
prepaid) to each holder of Convertible Preferred Stock at least twenty (20) days
prior to such record date specified therein or the expected effective date of
any such transaction, whichever is earlier, a notice specifying (A) the date of
such record date for the purpose of such dividend or distribution or meeting or
consent and a description of such dividend or distribution or the action to be
taken at such meeting or by such consent, (B) the date on which any such
Liquidation Event, Extraordinary Transaction or public offering is expected to
become effective, and (C) the date on which the books of the Corporation shall
close or a record shall be taken with respect to any such event.
(b) Waiver of Notice. The holder or holders of not less than a Two
Thirds Interest of the outstanding shares of Convertible Preferred Stock may, at
any time upon written notice to the Corporation, waive any notice provisions
specified herein for the benefit of such holders, and any such waiver shall be
binding upon all holders of such securities.
(c) General. In the event that the Corporation provides any notice,
report or statement to any holder of Common Stock, the Corporation shall at the
same time provide a copy of any such notice, report or statement to each holder
of outstanding shares of Convertible Preferred Stock.
10. No Reissuance of Convertible Preferred Stock. No share or shares of
Convertible Preferred Stock acquired by the Corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such shares shall
be canceled, retired and eliminated from the shares which the Corporation shall
be authorized to issue.
11. Contractual Rights of Holders. The various provisions set forth herein
for the benefit of the holders of the Convertible Preferred Stock shall be
deemed contract rights enforceable by them, including without limitation, one or
more actions for specific performance.
12. Notices. Any notice required by any provision of this Section A to be
given to the holders of shares of Convertible Preferred Stock shall be deemed
given three (3) business days after being deposited in the United States mail,
postage pre-paid and registered or certified, and addressed to each holder of
record at such holder's address appearing on the stock records of the
Corporation.
B. SERIES C PREFERRED STOCK
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series C Preferred Stock" and the number of shares constituting
such series shall be Five Hundred Thousand (500,000). Such number of shares may
be increased or decreased by resolution of the Board of Directors; provided,
that no decrease shall reduce the number of shares of Series C Preferred Stock
to a number less than that of the shares then outstanding.
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<PAGE> 55
Section 2. Dividends and Distributions.
A. The holders of shares of Series C Preferred Stock in preference to the
holders of Common Stock shall be entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available for the purpose,
quarterly dividends payable in cash on the first day of March, June, September
and December in each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Series C Preferred Stock, in an amount per share (rounded to the nearest cent)
equal to the greater of (i) Four Dollars ($4.00) value or (ii) subject to the
provision for adjustment hereinafter set forth, One Hundred (100) times the
aggregate per share amount of all cash dividends, and One Hundred (100) times
the aggregate per share amount (payable in kind) of all non-cash dividends or
other distributions, other than a dividend payable in shares of Common Stock or
a subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of any share or fraction of a share of
Series C Preferred Stock. In the event the Corporation shall at any time declare
or pay any dividend on Common Stock payable in shares of Common Stock, or effect
a subdivision or combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise than by payment of a dividend in
shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the amount to which holders of shares of Series C
Preferred Stock were entitled immediately prior to such event under clause (ii)
of the preceding sentence shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event, and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
B. The Corporation shall declare a dividend or distribution on the Series
C Preferred Stock as provided in paragraph (a) of this section immediately after
it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in the event no
dividend or distribution shall have been declared on the Common Stock during the
period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of Four Dollars ($4.00) per share on
the Series C Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
C. Dividends shall begin to accrue and be cumulative on outstanding shares
of Series C Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series C Preferred Stock, unless
the date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or unless the date of
issue is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series C Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series C Preferred Stock in
an amount not less than the total amount of such dividends at the time accrued
and payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series C Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than sixty (60) days prior to the
date fixed for the payment thereof.
Section 3. Voting Rights. The holders of Series C Preferred Stock shall
have the following voting rights:
A. Subject to the provision for adjustment hereinafter set forth, each
share of Series C Preferred Stock shall entitle the holder thereof to One
Hundred (100) votes on all matters submitted to a vote of the stockholders of
the Corporation. In the event the Corporation shall at any time declare or pay
any dividend on Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the number of votes per share to which holders of shares of
Series C Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event, and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
A-14
<PAGE> 56
B. Except as otherwise provided herein or by law, the holders of shares of
Series C Preferred Stock and the holders of shares of Common Stock shall vote
together as one (1) class on all matters submitted to a vote of stockholders of
the Corporation.
C. Except as set forth herein, holders of Series C Preferred Stock shall
have no special voting rights and their consent shall not be required (except to
the extent they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
Section 4. Certain Restrictions.
A. Whenever quarterly dividends or other dividends or distributions
payable on the Series C Preferred Stock as provided in section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series C Preferred Stock outstanding shall have
been paid in full, the corporation shall not:
(i) declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series C Preferred Stock;
(ii) declare or pay dividends on or make any other distributions on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series C Preferred Stock,
except dividends paid ratably on the Series C Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such shares are then
entitled.
Section 5. Reacquired Shares. Any shares of Series C Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the board of directors, subject to
the conditions and restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made (i)
to the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series C Preferred Stock unless,
prior thereto, the holders of shares of Series C Preferred Stock shall have
received the greater of (y) Sixteen Dollars ($16.00) per share, plus an
additional amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment, or (z) an
aggregate amount per share, subject to the provision for adjustment hereinafter
set forth, equal to One Hundred (100) times the aggregate amount to be
distributed per share to holders of Common Stock, or (ii) to the holders of
stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series C Preferred Stock, except
distributions made ratably on the Series C Preferred Stock and all other such
parity stock in proportion to the total amounts to which the holders of all such
shares are entitled upon such liquidation, dissolution or winding up. In the
event the Corporation shall at any time declare or pay any dividend on Common
Stock payable in shares of Common Stock, or effect a subdivision or combination
or consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
aggregate amount to which holders of shares of Series C Preferred Stock were
entitled immediately prior to such event under the proviso in clause (i) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event, and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 7. Consolidation. In case the corporation shall enter into any
consolidation, merger, combination or other transaction in which the shares of
Common Stock are exchanged for or changed into other stock or securities, cash
and/or other property, then in any such case the shares of Series C Preferred
Stock shall at the same time be similarly exchanged or changed in an amount per
share (subject to the provision for adjustment hereinafter set forth) equal to
One Hundred (100) times the aggregate amount of stock, securities, cash and/or
any other property (payable in kind), as the case may be, into which or for
which each share of Common Stock is changed or exchanged. In the event the
Corporation shall at any time declare or pay any dividend on Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation
A-15
<PAGE> 57
of the outstanding shares of Common Stock (by reclassification or otherwise)
into a greater or lesser number of shares of Common Stock, then in each such
case the amount set forth in the preceding sentence with respect to the exchange
or change of shares of Series C Preferred Stock shall be adjusted by multiplying
such amount by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event, and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
Section 8. Amendment. The Restated Certificate of Incorporation shall not
be amended in any manner which would materially alter or change the powers,
preferences or special rights of the Series C Preferred Stock, so as to affect
them adversely without the affirmative vote of the holders of at least
two-thirds (2/3) of the outstanding shares of Series C Preferred Stock, voting
together as a single series.
A-16
<PAGE> 58
APPENDIX B
----------
FAIRNESS OPINION OF HANIFEN, IMHOFF INC.
December 22, 1999
The Board of Directors
Metretek Technologies, Inc.
1675 Broadway, Suite 2150
Denver, CO 80202
To the Members of the Board of Directors:
You have requested our opinion as to the fairness, from a financial point of
view, to Metretek Technologies, Inc., a Delaware corporation ("Metretek" or the
"Company"), of the consideration to be received by Metretek pursuant to the
Securities Issuance described below. With your consent, however, we are not
opining with respect to, nor including within our understanding of the
Securities Issuance, any other transactions or contractual arrangements to be
entered into or payments to be made by or to Metretek or any other person in
connection with that purchase and sale of securities.
We understand that, pursuant to a Securities Purchase Agreement, dated December
9, 1999, (the "Securities Purchase Agreement"), the Company will sell a minimum
of 6,000 Units and a maximum of 7,000 Units, in two closings, each Unit
consisting of (i) 200 shares of Common Stock; (ii) one share of Series B
Preferred Stock, liquidation value $1,000 per share; and (iii) Warrants to
purchase 100 shares of Common Stock, at a purchase price of $2,000 per Unit. We
understand that the Series B Preferred Stock will have the terms, limitations
and relative rights and preferences set forth in the Certificate of Designation
included in the Proposed Amendment to Article Fourth of the Company's Restated
Certificate and that the Warrants will be in substantially the form of the
exhibit attached to the Company's 8-K filed with the SEC on December 22, 1999.
Hanifen, Imhoff Inc. ("Hanifen"), as part of its investment banking business, is
regularly engaged in the evaluation of capital structures, the valuation of
businesses and their securities in connection with the mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements, financial restructurings and
other financial services. In the ordinary course of our business, Hanifen may
trade the securities of the Company for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
those securities. As you are aware, Hanifen did not participate in structuring
or negotiating the terms of the Securities Issuance, and has not heretofore
provided any investment banking services to the Company or any of its
subsidiaries or affiliates.
As you are also aware, Hanifen has been engaged by the Company to provide the
opinion contained herein, and will receive a fee for providing such opinion. In
addition, we note that we have not been authorized by the Company or its Board
of Directors to solicit, nor have we solicited, offers for transaction
alternatives to the Securities Issuance, nor have we been asked to advise the
Company or its Board as to financial alternatives to the Securities Issuance.
In connection with our opinion, we have reviewed the Securities Purchase
Agreement, the Registration Rights Agreement, dated December 9, 1999, and the
Warrants, and certain financial and other information that was publicly
available or furnished to us by Metretek, including certain internal financial
analyses, budgets, forecasts, reports and other information prepared by the
Company's management. We have also reviewed the proxy statement of Metretek in
substantially the form that will be distributed to the stockholders of Metretek
in connection with the Securities Issuance. We have also discussed with
representatives of the management of Metretek the business, properties and
prospects of the Company and undertaken such other reviews, analyses and
inquiries relating to the Company as we deemed appropriate.
In our review and analysis and in rendering the opinion contained herein, we
have relied upon, and have not independently verified, the accuracy,
completeness and fair presentation of all financial and other information that
was provided to us by or on behalf of Metretek or that was publicly available,
and such opinion is conditioned upon such information (whether written or oral)
being complete, accurate and fair in all material respects. We have not made an
independent evaluation or
B-1
<PAGE> 59
appraisal or conducted a physical inspection of any of the assets of Metretek,
nor have we been furnished with any such appraisals. Our opinion is based on
economic, monetary, political, market and other conditions existing and which
can be evaluated as of the date of this opinion; however, such conditions are
subject to rapid and unpredictable change.
In conducting our analysis and arriving at the opinion expressed herein, we have
considered such financial and other factors as we have deemed appropriate under
the circumstances, including, among others: (i) the business and financial
aspects of the Securities Issuance; (ii) the historical and current markets for
Metretek Common Stock; (iii) the financial impact of the Securities Issuance
upon the Company; (iv) certain of the Company's operating and financial
information; (v) the Company's Annual Reports to Stockholders and Annual Reports
on Form 10-KSB for its last three full fiscal years and its Quarterly Reports on
Form 10-QSB filed since the date of its most recent such Form 10-KSB; (vi) the
fact that no other potential investors have made a formal investment proposal to
the Company (vii) such other information as we deemed to be appropriate. We also
conducted such other reviews, analyses and inquiries relating to the Company (in
addition to those set forth above) as we considered proper.
With your permission, in rendering such opinion we have also assumed that: (i)
the conditions to the consummation of the second closing of the Securities
Issuance set forth in the Securities Purchase Agreement will be satisfied; and
(ii) there is not now, and there will not as a result of consummation of the
transactions contemplated by the Securities Purchase Agreement be, any default,
or event of default, under any indenture, credit agreement or other material
instrument to which the Company or any of its subsidiaries or affiliates is a
party.
Finally, in rendering the opinion set forth below we note that: (i) the
consummation of the second closing of the Securities Issuance is conditioned
upon the approval of Metretek's stockholders; (ii) the price of the Units to be
sold at the Second Closing of the Securities Issuance is subject to market
conditions, and any investment at a price other than $2,000 per Unit is subject
to separate analysis and judgement as to fairness, from a financial point of
view, to the Company by Hanifen; and (iii) we are not opining as to the prices
at which any of the securities of the Company may trade upon and following the
consummation of the Securities Issuance.
Based upon and subject to the foregoing, and upon such other matters as we
consider relevant, it is our opinion as investment bankers that, as of the date
hereof, the consideration to be received by Metretek pursuant to the Securities
Issuance is fair to Metretek from a financial point of view.
It is understood and agreed that this opinion is provided for the use of the
Board of Directors of the Company as one element in such Board's consideration
of the Securities Issuance, and does not constitute a recommendation to Metretek
or its Board of Directors or to any security holders of Metretek as to how such
holders should vote with respect to the Securities Issuance. This letter is not
to be used for any other purpose, or otherwise referred to, relied upon or
circulated, without our prior written consent. This opinion may be reproduced in
full in any proxy statement mailed to holders of Metretek Common Stock in
connection with the Securities Issuance but may not otherwise be disclosed
publicly in any manner without our prior written approval.
Sincerely,
HANIFEN, IMHOFF INC.
By: William V. Dunn
Principal
B-2
<PAGE> 60
PROXY METRETEK TECHNOLOGIES, INC. PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD FEBRUARY 3, 2000
The undersigned stockholder of Metretek Technologies, Inc., a Delaware
corporation (the "Company"), hereby appoints W. Phillip Marcum and A. Bradley
Gabbard, or either of them, with full power and substitution (the "proxies"), as
proxy or proxies of the undersigned, to represent the undersigned, and to
exercise all the powers that the undersigned would have if personally present to
act and to vote all of the shares of the Company that the undersigned is
entitled to vote, at the Special Meeting of Stockholders of the Company (the
"Special Meeting") called to be held on Thursday, February 3, 2000, at 2:00 p.m.
local time, at the Brown Palace Hotel, 321 17th Street, Denver, Colorado, and at
any adjournments or postponements thereof, as follows:
1. To approve and ratify the issuance and sale in a private placement of up to
1,400,000 shares of the Company's Common Stock, up to 7,000 shares of the
Company's Series B Preferred Stock and Warrants to purchase up to 700,000
shares of the Company's Common Stock, and the issuance of shares of Common
Stock upon the conversion of such Series B Preferred Stock and upon the
exercise of such Warrants in accordance with their respective terms.
|_| FOR |_| AGAINST |_| ABSTAIN
2. To approve an amendment to Article Fourth of the Company's Restated
Certificate of Incorporation, as amended, relating to the Company's
Preferred Stock to, among other things, increase the authorized number of
shares of the Company's Preferred Stock by 1,000,000 shares to an aggregate
of 3,500,000 shares.
|_| FOR |_| AGAINST |_| ABSTAIN
3. To approve an amendment to the Company's 1998 Stock Incentive Plan to, among
other things, increase the number of shares of the Company's Common Stock
authorized for issuance thereunder by 500,000 shares to an aggregate of
750,000 shares.
|_| FOR |_| AGAINST |_| ABSTAIN
4. In their discretion, the proxies are authorized to take action and to vote
upon such other business as may properly come before the Special Meeting or
any adjournments or postponements thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2 AND 3.
The shares represented by this proxy card when properly executed will be voted
as specified. IF NO SPECIFICATION IS MADE, THE SHARES WILL BE VOTED FOR ITEMS 1,
2 AND 3 AND IN ACCORDANCE WITH THE DISCRETION OF THE PROXIES UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY ADJOURNMENTS OR
POSTPONEMENTS THEREOF. All proxies previously given are hereby revoked. Receipt
of the accompanying Proxy Statement is hereby acknowledged.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
SELF-ADDRESSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES.
Date:
--------------------------------------------
-------------------------------------------------
Signature
-------------------------------------------------
Additional Signature (if shares are held jointly)
INSTRUCTIONS: Please sign exactly as your name appears on the label above and
return this proxy card promptly in the accompanying envelope. When shares are
held by joint tenants, both should sign. When shares are held in the name of a
corporation, partnership, limited liability company or other entity, please sign
the full entity name by an authorized officer, partner, manager, member or other
authorized person. When signing as attorney, executor, administrator, trustee,
guardian or in any other representative capacity, please give your full title as
such.
