UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File Number 0-22282.
USCI, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3702647
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6115-A Jimmy Carter Blvd., Norcross, Georgia 30071
(Address of principal executive offices) (Zip Code)
(770) 840-8888
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer's
classes of Common Stock, as of the latest practicable date:
As of August 12, 1998, 11,375,401 shares of $.0001 par value
Common Stock were outstanding.
In addition to historical information, this Quarterly Report contains
forward-looking statements made in good faith by the Company pursuant
to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995, including, but not limited to, those statements
regarding the Company's intention to continue to seek additional
distribution channels, the proposed expansion of the Company's
reseller operations, and the expected financial position, business and
financing plans of the Company. Although the Company believes that
the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove
to be correct. Readers are cautioned not to place undue reliance on
these forward-looking statements as they are based on the Company's
current expectations and are subject to a number of risks,
uncertainties and assumptions relating to the Company's business and
results of operations, competitive factors, shifts in market demand
and other risks and uncertainties, including, in addition to those
outlined in Exhibit 99.1 to this Quarterly Report and elsewhere in
this Quarterly Report, uncertainties with respect to changes or
developments in social, business, economic, industry, market, legal
and regulatory circumstances and conditions and actions taken or
omitted to be taken by third parties, including the Company's
customers, suppliers, competitors and stockholders and legislative,
regulatory, judicial and other governmental authorities. The Company
undertakes no obligation to revise these forward-looking statements to
reflect events or circumstances that arise after the date hereof.
<PAGE>
USCI, INC.
FORM 10-Q
INDEX
<TABLE>
<S> <C> <C>
Part I FINANCIAL INFORMATION PAGE NO.
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as
of June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of
Operations and Accumulated Deficit for
the Three month periods ended
June 30, 1998 and June 30, 1997 4
Condensed Consolidated Statements of
Operations and Accumulated Deficit for
the Six month periods ended
June 30, 1998 and June 30, 1997 5
Condensed Consolidated Statements of Cash
Flows for the Six months ended
June 30, 1998 and June 30, 1997 6
Notes to Condensed Consolidated
Financial Statements 7-8
Item 2 Management's Discussion and Analysis of 9-15
Financial Condition and Results of
Operations for the Six and Three months
ended June 30, 1998 and June 30, 1997
PART II OTHER INFORMATION
Item 1 Legal Proceedings - None
Item 2 Changes in Securities 16
Item 3 Default Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of
Security Holders - None
Item 5 Other Information 16-17
Item 6 Exhibits and Reports on Form 8-K 18-19
</TABLE>
2
<PAGE>
USCI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1998
(unaudited) December 31, 1997*
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents, including restricted
cash of $648,193 in 1998 and $731,500 in 1997 $ 810,455 $ 1,105,530
Accounts receivable--trade, net of allowances of
$3,342,000 in 1998 and $1,250,000 in 1997 14,815,387 4,895,952
Accounts receivable--other, net of allowances of
$100,000 in 1998 and $137,000 in 1997 826,391 1,102,084
Prepaid expenses and other 765,694 159,968
------------ ------------
Total current assets 17,217,927 7,263,534
------------ ------------
PROPERTY AND EQUIPMENT, net 2,593,811 3,422,476
OTHER ASSETS 1,981,577 2,908,037
------------ ------------
Total Assets $21,793,315 $13,594,047
============ =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable $ 3,266,370 $ 3,305,000
Bank Debt 3,132,919 0
Accounts payable and bank overdraft 10,135,000 3,939,212
Accrued expenses 4,586,693 4,315,161
Commissions payable 6,336,488 6,651,597
Promotional deposits 1,496,055 1,696,055
------------ ------------
Total current liabilities 28,953,525 19,907,025
------------ ------------
OTHER LIABILITIES:
Long Term Debt, less current portion 3,653,524 0
------------ ------------
Total Liabilities 32,607,049 19,907,025
------------ -------------
STOCKHOLDERS' DEFICIT:
Convertible preferred stock, $.01 par value;
5,000 shares authorized, 1,000 shares issued at
June 30, 1998 10 0
Common stock, $.0001 par value; 100,000,000 shares
authorized; 11,035,869 shares issued at June 30,
1998 and 10,267,309 shares issued at December 31,
1997 1,104 1,027
Additional paid-in capital 46,201,317 33,714,625
Warrants 7,769,000 3,122,000
Accumulated deficit (64,757,115) (43,122,580)
Treasury stock, at cost, 5,500 shares in 1998 and 1997 (28,050) (28,050)
------------ -------------
Total Stockholders' Deficit (10,813,734) (6,312,978)
------------ -------------
Total Liabilities and Stockholders' Deficit $21,793,315 $13,594,047
============ =============
</TABLE>
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements. 3
<PAGE>
USCI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT
Three Months Ended June 30,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
============ ============
<S> <C> <C>
REVENUES
Subscriber Sales $ 12,383,670 $ 488,009
Activation Commissions 2,500 1,038,191
------------ ------------
Total Revenues 12,386,170 1,526,200
------------ ------------
COST OF SALES
Cost of subscriber sales 7,225,042 209,986
Cost of activation commissions 2,000 340,305
------------ ------------
Total cost of sales 7,227,042 550,291
------------ ------------
GROSS MARGIN 5,159,128 975,909
------------ ------------
OPERATING EXPENSES
Selling, general and administrative 5,919,261 4,184,562
Subscriber acquisition and promotional costs 6,278,556 916,458
------------ ------------
Total Operating Expenses 12,197,817 5,101,020
------------ ------------
OPERATING LOSS (7,038,689) (4,125,111)
Interest expense (income), Net 2,910,490 (157,634)
------------ ------------
LOSS BEFORE INCOME TAXES (9,949,179) (3,967,477)
Income Taxes 0 0
------------ ------------
NET LOSS (9,949,179) (3,967,477)
Deficit at Beginning of Period (54,681,267) (17,452,340)
Preferred Stock Dividends (126,667) 0
------------ -------------
Deficit at End of Period $(64,757,113) $(21,419,817)
============= ============
Basic and Diluted Net Loss per Share $ (0.94) $ (0.39)
============ ============
Weighted Average Common Shares Outstanding 10,718,925 10,249,574
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
USCI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT
Six Months Ended June 30,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
============ ============
<S> <C> <C>
REVENUES
Subscriber Sales $ 21,748,367 $ 642,240
Activation Commissions 10,750 2,448,410
------------ ------------
Total Revenues 21,759,117 3,090,650
------------ ------------
COST OF SALES
Cost of subscriber sales 12,699,347 286,631
Cost of activation commissions 8,600 1,135,758
------------ ------------
Total cost of sales 12,707,947 1,422,389
------------ ------------
GROSS MARGIN 9,051,170 1,668,261
------------ ------------
OPERATING EXPENSES
Selling, general and administrative 12,164,946 8,040,312
Subscriber acquisition and promotional costs 13,055,854 1,041,458
------------ ------------
Total Operating Expenses 25,220,800 9,081,770
------------ ------------
OPERATING LOSS (16,169,630) (7,413,509)
Interest expense (income), Net 5,338,238 (329,668)
------------ ------------
LOSS BEFORE INCOME TAXES (21,507,868) (7,083,841)
Income Taxes 0 0
------------ ------------
NET LOSS (21,507,868) (7,083,841)
Deficit at Beginning of Period (43,122,578) (14,335,976)
Preferred Dividend Declared (126,667) 0
------------ -------------
Deficit at End of Period $(64,757,113) $(21,419,817)
============= ============
Basic and Diluted Net Loss per Share $ (2.05) $ (0.69)
============ ============
Weighted Average Common Shares Outstanding 10,557,309 10,237,660
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
USCI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
============= =============
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(21,507,868) $(7,083,841)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,201,061 1,114,249
Amortization of discount on notes payable 4,258,370 0
Amortization of deferred financing costs 629,600 0
Provision for losses on accounts receivable 983,721 113,452
Changes in operating assets and liabilities:
Accounts receivable - trade (10,940,156) (771,788)
Accounts receivable - other 312,693 38,467
Prepaids and other assets (15,930) 299,706
Commissions payable (315,109) 21,469
Accounts payable and accrued expenses 6,505,333 (496,860)
Promotional deposits (200,000) (282,581)
----------- -------------
Total adjustments 2,419,583 36,114
----------- ------------
Net cash used in operating activities (19,088,285) (7,047,727)
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (276,622) (1,064,281)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 2,000,000 0
Repayments of notes payable (500,000) 0
Proceeds from Term Loan 6,089,200 0
Borrowings on Revolving Line of Credit 1,500,000 0
Repayments on Revolving Line of Credit (802,757) 0
Costs associated with Term Loan & Line of Credit (388,710) 0
Issuance of common stock 2,437,500 0
Costs associated with issuance of common stock (185,970) 0
Issuance of preferred stock 10,000,000 0
Costs associated with issuance of
preferred stock (1,084,075) 0
Issuance of stock upon exercise of warrants 3,751 0
Issuance of stock upon exercise of options 893 35,975
------------ ------------
Net cash provided by financing activities 19,069,832 35,975
------------ ------------
NET INCREASE (DECREASE) IN CASH (295,075) (8,076,033)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,105,530 15,581,244
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 810,455 $ 7,505,211
============ =============
INTEREST PAID DURING THE PERIOD $ 334,675 $ 958
============ =============
NON-CASH FINANCING ACTIVITIES:
Warrants issued in connection with
debt financings $4,647,000 $ 0
=========== =============
Conversion of notes payable and accrued interest $1,188,013 $ 0
=========== =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
<PAGE>
USCI, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 1998
(Unaudited)
Note 1: BASIS OF PRESENTATION
The unaudited financial information furnished herein in the opinion of
management reflects all adjustments which are necessary to fairly state the
Company's financial position, the results of its operations and its cash
flows. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-K for
the year ended December 31, 1997. Footnote disclosure which would
substantially duplicate the disclosure contained in those documents has
been omitted. Operating results for the six month and three month periods
ended June 30, 1998 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1998.
Note 2: LOSS PER SHARE
Basic earnings per share are based on the weighted average
number of shares outstanding. Diluted earnings
per share are based on the weighted average number of shares outstanding
and the dilutive effect of outstanding stock options and warrants (using
the treasury stock method). For all periods presented, outstanding options
and warrants have been excluded from diluted weighted average shares
outstanding, as their impact was antidilutive.
Net loss for the six month period ended June 30, 1998 is adjusted by dividend
requirements of $126,667 related to the Company's Convertible Preferred
Stock.
Note 3: CONVERTIBLE PREFERRED STOCK AND BRIDGE LOAN CONVERSIONS
On March 24, 1998, the Company entered into an agreement for the private
placement of up to $15 million in Series A, B, and C Convertible Preferred
Stock (the "Convertible Preferred Stock"). The Convertible Preferred Stock
provides for dividends at a rate of 6% per annum, payable quarterly in cash
or registered common stock. All outstanding principal and accrued dividends
may be converted into the Company's common stock at the lower of 120% of the
average closing price for five days immediately preceding the conversion
notice or 85% of the average of the three lowest closing prices of the common
stock for the 25 trading days preceding the conversion notice, and
automatically converts three years from issuance. The Convertible Preferred
Stock is mandatorily redeemable by the Company upon the occurrence of certain
events. The Company has filed a registration statement which was declared
effective on June 2, 1988 covering the shares of common stock issuable upon
conversion of the Convertible Preferred Stock and exercise of certain
outstanding options and warrants.
On March 24, 1998, the initial $5 million was provided to the Company which
issued 500 shares of Series A Convertible Preferred Stock and five-year
warrants to the preferred stockholder to purchase up to 149,522 shares of
the Company's Common Stock at an exercise price of $6.89 per share. The
Company paid a finder's fee of $500,000 and issued five-year warrants to the
finder to purchase 62,500 shares of common stock at an exercise price of
$6.89 per share.
On May 7, 1998, the second tranche of $5 million was provided to the Company
which issued 500 shares of Series B Convertible Preferred Stock and five-year
warrants to purchase up to 203,749 shares of the Company's Common Stock at an
exercise price of $5.85 per share. The Company paid a finder's fee of
$500,000 and issued five-year warrants to the finder to purchase 62,500
shares of Common Stock at an exercise price of $5.85 per share.
7
<PAGE>
On July 31, 1998, the third tranche of $5 million was provided to the Company
which issued 500 shares of Series C Convertible Preferred Stock and five-year
warrants to purchase up to 332,246 shares of the Company's Common Stock at an
exercise price of $5.31 per share. The Company paid a finder's fee of
$500,000 and issued five-year warrants to the finder to purchase 62,500
shares of Common Stock at an exercise price of $5.85 per share.
On June 23, 1998, the Company issued 343,356 shares of Common Stock upon the
conversion of $1,150,000 principal amount and accrued interest on 10%
Convertible Notes issued by the Company in February 1998. On July 16, 1998,
the remaining $350,000 million principal amount and accrued interest was
converted into 119,281 shares of Common Stock of the Company for a total
converted amount of $1,500,000 principal amount plus accrued interest.
On July 29, 1998, the Company issued an aggregate of 500 shares of 6% Series
D Convertible Preferred Stock in exchange for an aggregate of $4 million 8%
unsecured Convertible Restated Notes due July 31, 1998. The Series D
Preferred Stock is entitled to a dividend of 6% per annum, payable quarterly
in arrears and is convertible, together with accrued dividends, at a
conversion price equal to 120% of the average closing bid price for five
trading days immediately preceding the closing date or 85% of the average of
the three lowest closing prices per share of Common Stock for the 25 trading
days preceding the conversion notice, with a floor of not less than $4.00 per
share and a ceiling of not more than $6.00 per share. The Series D Preferred
Stock is redeemable at the Company's option at the then applicable conversion
price. If the Company does not complete a private offering of equity and
debt securities by October 15, 1998, the shares of Series D Convertible
Preferred Stock shall be convertible into shares of Common Stock at a
conversion price equal to the lesser of $5.00 per share or 80% of the average
closing sales price of the Company's Common Stock during the last five
trading days prior to conversion. Reference is made to the Company's Current
Report on Form 8-K dated and filed on July 29, 1998 and the exhibits filed
therewith for a complete description of all terms of the Series D Convertible
Preferred Stock and the Securities Purchase Agreement pursuant to which it
was issued.
Note 4: BANK FINANCING
On June 5, 1998, the Company entered into a four-year $20 million revolving
credit and term loan facility with Foothill Capital Corp. (the "Foothill
Credit Facility"). The Foothill Credit Facility provides for term loans
which will amortize equally over a 30-month period and revolving credit
borrowings. Availability is based on a number of factors, including eligible
accounts receivables and eligible cellular subscribers. Term loan borrowings
bear interest at the bank's base rate plus 2.5% and revolving credit
borrowings bear interest at the base rate plus 1.5%. Concurrent with the
closing of the Credit Facility, the Company received proceeds of $6.1 million
under a term loan borrowing, of which $3 million was used to reduce secured
trade payables. Through June 30, 1998, the Company received approximately
$700,000 in revolving credit borrowings bringing the total outstanding under
the Foothill Credit Facility to $6.8 million.
Note 5: RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the current
year's presentation.
Note 6: COMPREHENSIVE INCOME
The Company currently has no other comprehensive income items as defined by
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income."
8
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF USCI, INC.
The following discussion should be read in conjunction with the
Financial Statements and Notes set forth elsewhere in this Report.
OVERVIEW
The Company was organized as U.S. Communications, Inc. in 1991 and
commenced operations in mid-1993 as a cellular activation processing
agent with OfficeMax, its first retail mass merchandiser channel of
distribution. Prior to that time, U.S. Communications, Inc. was
principally engaged in organizational activities, raising capital and
in the development of its activation and processing systems. On May
15, 1995, U.S. Communications, Inc. merged with Trinity Six Inc.
("Trinity"), a publicly-traded company, pursuant to which U.S.
Communications, Inc. became a wholly-owned subsidiary of Trinity,
which changed its name to USCI, Inc.
Between 1993 and 1996 the Company expanded its operations as a sales,
marketing and activation processing agent for facilities-based
cellular and paging carriers. By late 1996, the Company had entered
into agency agreements with cellular carriers which enabled the
Company to offer cellular activation service in virtually all of the
Metropolitan Statistical Areas ("MSAs") and a majority of the Rural
Service Areas ("RSAs") in the United States.
The Company, as an independent activation agent, marketed the
carriers' wireless services through a national network of mass
merchandisers and direct response marketing companies. National
distribution of cellular service was made possible through use of the
Company's proprietary software platform, which both expedites and
simplifies the complete administrative and technical functions
necessary to initiate, complete and support activations of wireless
telephones and pagers from multiple locations in the United States and
Puerto Rico.
In the fourth quarter of 1996, the Company began a planned transition
to becoming a national reseller of wireless communications services.
The transition was undertaken to enable the Company to obtain the
benefits of retaining wireless subscribers as customers, including
access to an on-going revenue stream rather than a one-time agency
commission, the creation of a national wireless platform, the creation
of uniform national rate plans, the creation of a single service
platform for retail channels of distribution, greater ability to cross
market additional telecommunications services to its subscriber base
and the ability to create a branded identity for its Ameritel wireless
services. During 1997, the Company entered into reseller agreements
with a number of facilities-based cellular and paging carriers to
replace, on a market by market basis, its carrier agency agreements.
9
<PAGE>
The Company currently offers, through its national mass merchandisers
network, its Ameritel cellular services in 372 MSAs and RSAs covering
a population of approximately 214 million people, or "POPs", and
paging services to areas containing 248 million POPs.
Historically, the Company's revenues have consisted of commissions
earned as an activation agent for cellular and paging carriers and,
since the last quarter of 1996, revenues from the resale of cellular
and paging services. For the three months ended June 30, 1998, agency
commissions were $2,500 and reseller revenues were $12.4 million.
The Company bills its resale customers for monthly access to the
underlying carrier's cellular or paging network, cellular usage based
on the number, time and duration of calls, the geographic location of
both the originating and terminating phone numbers, extra service
features, the applicable rate plan in effect and the time of the call.
The wholesale cost of subscriber service includes monthly access,
usage (home and roaming) and special features charges paid by the
Company to the cellular and paging carriers.
Subscriber acquisition and promotional costs includes commission
payments made by the Company to its channels of distribution (or to
equipment suppliers on their behalf) for each activation by their
customers of a cellular telephone, certain advertising costs incurred
by the Company or its distribution channels and reduced access and/or
free airtime for a limited period to its cellular subscribers. These
costs are recoverable from the long-term revenue stream created by the
continuation of subscribers services. The Company's ability to
capture such revenue streams may be adversely affected by early
service cancellations ("churn") and by losses caused by fraudulent use
of service by third persons which, by law, are not recoverable from
subscribers. Under existing agreements with the carriers providing
the Company with cellular service, access fraud is generally
recoverable and although not generally recoverable, subscriber fraud
is also recoverable under certain circumstances. The Company believes
that it will be able to mitigate churn through competitive pricing,
and retention programs. The Company has also taken steps to mitigate
losses due to fraud through improved controls and the hiring of
additional personnel to monitor fraud and install fraud prevention
procedures.
Selling expense includes the costs of providing sales and other
support services for customers including salaries and commissions to
salesforce personnel and the Company's independent sales
representatives. General and administrative expense include the costs
of the billing and information systems, other administrative expenses,
personnel required to support the Company's operations and growth as
well as all amortization expenses.
10
<PAGE>
The Company experienced significant growth in its resale operations in
the latter half of 1997 and the first half of 1998 and believes that
future growth will require additional funding, expansion and
enhancement of its management, personnel and information systems. To
accommodate this growth, the Company intends to continue to implement
and improve its operational, financial and management information
systems. To support its growth, the Company added various management
positions in the fourth quarter of 1997 and the first half of 1998.
The Company is also expanding its information systems to provide
improved recordkeeping for customer information and management of
uncollectible accounts and fraud control.
The Company has experienced and will continue to experience
significant operating and net losses and negative cash flow from
operations. The Company believes that it will achieve positive
operating margins only when gross margins from subscriber revenues
exceed subscriber acquisition and promotional costs and operating
expenses. The Company believes that it will achieve positive
operating margins over time by increasing the number of revenue-
generating customers and realizing reductions in wholesale cost from
carriers while maintaining (or decreasing) its lower than industry
average subscriber acquisition costs. The Company expects that
operating and net losses and negative operating cash flow will
continue to increase as the Company implements its growth strategy
See "Liquidity and Capital Resources."
RESULTS OF OPERATIONS
SIX AND THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO
SIX AND THREE MONTHS ENDED JUNE 30, 1997
Revenues
Total revenues for the six months ended June 30, 1998 ("1998 Six
Months"), consisting primarily of subscriber sales, were $21,759,117
as compared to $3,090,650 for the six months ended June 30, 1997
("1997 Six Months"). Total revenues for the three months ended June
30, 1998 ("1998 Quarter"), consisting primarily of subscriber sales,
were $12,386,170 as compared to $1,526,200 for the three months ended
June 30, 1997 ("1997 Quarter").
The increased revenues for the 1998 Six Months and 1998 Quarter are
attributable to increased sales of the Company's Ameritel brand
cellular and paging services. Cellular and paging subscriber revenues
amounted to $21,748,367 for the 1998 Six Months compared to $642,240
for the 1997 Six Months and $12,383,670 for the 1998 Quarter compared
to $488,009 for the 1997 Quarter.
Agency activation commissions, which the Company receives from other
wireless carriers for which it performs activation processing
services, decreased significantly from the 1997 Six Months to the 1998
Six Months due to the Company's transition from agent to reseller.
Agency commissions in the 1998 Six Months were $10,750 as compared to
$2,448,410 in the 1997 Six Months. Agency commissions for the 1998
Quarter were $2,500 in the 1998 Quarter as compared to $1,038,191 in
the 1997 Quarter.
11
<PAGE>
Cost of Sales
Costs of subscriber services, which consist of direct charges from
cellular and paging carriers for access, airtime and services resold
to the Company's subscribers, amounted to $12,699,347 and $7,225,042
for the 1998 Six Months and 1998 Quarter, respectively, and $286,631
and $209,986 for the 1997 Six Months and 1997 Quarter, respectively.
The gross margin for subscriber sales was $9,049,020 or 41.6% and
$355,609 or 55.4% for the 1998 Six Months and 1997 Six Months,
respectively, and $5,158,628 or 41.7% and $278,023 or 57% for the 1998
Quarter and 1997 Quarter, respectively. The decline in gross margin
dollars from the 1997 to 1998 periods is due to the substantial
increase in the number of markets in which the Company operated as a
reseller rather than as an agent.
Operating Expenses
Subscriber acquisition and promotional costs represent expenses
incurred by the Company in its efforts to acquire new subscribers for
its cellular and paging services. These costs consist primarily of
commissions paid to retailers, equipment suppliers and outside sales
representatives, below cost discounts, such as reduced monthly access
charges and/or free airtime granted to subscribers when utilizing the
Company's cellular or paging services, rebates issued to subscribers
and certain advertising costs. Subscriber acquisition and promotional
costs amounted to $13,055,854 and $1,041,458 for the 1998 Six Months
and 1997 Six Months, respectively and $6,278,556 and $916,458 for the
1998 Quarter and 1997 Quarter, respectively.
Selling, general and administrative expenses for the 1998 Six Months
aggregated $12,164,946 as compared to $8,040,312 for the 1997 Six
Months and $5,919,261 for the 1998 Quarter as compared to $4,184,562
for the 1997 Quarter, reflecting the Company's growth. Salaries and
related employee benefits increased by 31% to approximately $5,561,121
for the 1998 Six Months from $4,234,782 for the 1997 Six Months and by
37% to approximately $2,663,506 for the 1998 Quarter from $1,941,868
for the 1997 Quarter, reflecting the Company's hiring of executive,
managerial, customer service and information systems personnel to
support its growth. Telecommunications expenses increased by 34% to
$881,020 for the 1998 Six Months from $659,291 for the 1997 Six Months
and by 46% to $423,759 for the 199 Quarter from $290,634 for the 1997
Quarter. Billing and credit review services increased to $1,124,327
for the 1998 Six Months from $33,603 for the 1997 Six Months and to
$609,189 for the 1998 Quarter from $20,619 for the 1997 Quarter. The
increase in both telecommunications and billing and credit review is
due, in substantial part, to increased activity and growth of the
reseller business. As a percentage of revenues, selling, general and
administrative expenses were 48% for the 1998 Quarter compared to 113%
in the fourth quarter of 1997 and 67% in the first quarter of 1998,
reflecting the Company's emphasis on controlling overhead costs while
increasing revenues.
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Interest Expense
Interest expense (net of income) aggregated $5,338,238 and $2,910,490
in the 1998 Six Months and 1998 Quarter, respectively, and interest
income (net of expense) aggregated $329,668 and $157,634 for the 1997
Six Months and 1997 Quarter, respectively. The increase in interest
expense during 1998 is related to approximately $4.9 million for the
1998 Six Months and $2.5 million for the 1998 Quarter of non-cash
interest expense attributable to the fair value of warrants issued in
connection with three private financings and to the Company's use of
cash and cash equivalents and the effect of borrowings to fund
increased operating expenses and capital expenditures discussed above.
See "Liquidity and Capital Resources."
Net Loss
The Company incurred net losses of $21,507,868 and $7,083,841 for the
1998 Six Months and 1997 Six Months, respectively and incurred net
losses of $9,949,179 and $3,967,477 for the 1998 Quarter and 1997
Quarter, respectively.
Liquidity and Capital Resources
At June 30, 1998, the Company's working capital deficiency was
$11,735,597, cash and cash equivalents totaled $810,455 (of which
$648,193 was restricted) and there was a stockholders' deficit of
$10,813,734, compared to a working capital deficiency of $12,643,491,
cash and cash equivalents of $1,105,530 (of which $731,500 was
restricted) and a stockholders' deficit of $6,312,978 at December 31,
1997.
The Company continues to experience monthly negative cash flow from
operations due to its growing subscriber base. The Company's
significant growth in subscribers has created a working capital
deficiency due to the initial acquisition costs associated with the
high rate of subscriber growth. The Company currently requires
substantial amounts of capital to fund both current operations and to
expand its subscriber base, consisting primarily of subscriber
acquisition costs. The Company also expects to incur additional
capital expenditures for computer and telephony equipment to support
future increases in customer service and other administrative
activities. The Company has budgeted approximately $1.6 million for
such capital expenditures in 1998, of which $280,000 has been expended
at June 30, 1998. The Company expects to continue to incur
significant losses and negative operating cash flow in connection with
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the expansion of its resale operations, as revenues from the sale of
cellular telephone service are generally insufficient during the early
periods of service to recover the initial costs of acquiring
subscribers.
Due to recurring losses from operations, a net capital deficiency and
the Company's inability to date to obtain sufficient financing
commitments to support current and anticipated levels of operations,
the Company's independent public accountants' audit opinion for the
year ended December 31, 1997 stated that these matters raise
substantial doubt about the Company's ability to continue as a going
concern.
In order to fund its operations and capital requirements in the fourth
quarter of 1997 and the first half of 1998, the Company obtained
letter of credit financing in the amount of approximately $3.1 million
from an investment banking firm, short term loans totaling $6.0
million from private individuals (of which $500,000 was repaid in the
first quarter of 1998, $1.5 million plus accrued interest was
converted into a total of 462,637 shares of Common Stock and $4.0
million was exchanged for 500 shares of 6% Series D Convertible
Preferred Stock) and entered into the Credit Facility (described
below) in June 1998. In addition, the Company raised approximately
$2.4 million from the private sale of Common Stock and $15.0 million
from the private sale of Convertible Preferred Stock through July 31,
1998. The $3.1 million letter of credit financing is collateralized
by Common Stock of the Company pledged by officers, directors and a
stockholder of the Company. The Company was obligated to replace this
stock collateral with cash or cash equivalents (Treasury bills) in an
amount equal to 125% of the amount of the letters of credit, or
approximately $3,825,000, by January 30, 1998. The Company intends to
replace these letters of credit. In connection with these financings,
the Company issued warrants to purchase an aggregate of 5,462,284
shares of Common Stock as of July 31, 1998 at exercise prices ranging
from $5.00 to $7.1875 per share. Reference is made to Note 3 of the
Notes to Condensed Consolidated Financial Statements included as part
of this Quarterly Report.
In June 1998 the Company entered into an agreement providing for $20.0
million revolving credit and term loan facility with Foothill Capital
Corp. Availability under this facility is dependent upon meeting
certain formulas. Reference is made to Note 4 of the Notes to
Condensed Consolidated Financial Statements included as part of this
Quarterly Report.
During 1998, the Company has borrowed approximately $8.5 million under
the Foothill Credit Facility. Based upon its current and anticipated
level of operations, the Company believes that its cash flow from
operations, the availability of additional amounts under the Foothill
Credit Facility, together with approximately $12 million of additional
financing (including approximately $3 million in letter of credit
financing), will be adequate to meet its anticipated cash requirements
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for working capital and principal and interest payments through 1998.
In addition, the Company is presently seeking to raise funds through
simultaneous equity and debt private placements. There is no
assurance, however, and no representation is made that the Company
will be successful in raising these funds privately. If the Company
is not successful in obtaining adequate financing or is unable to
control its subscriber growth, if it experiences unanticipated costs
or pricing or other competitive pressures, if the Company is unable to
avail itself of additional amounts under the Foothill Credit Facility
or if the Company's plans or assumptions change or otherwise prove to
be inaccurate, the Company will be required to curtail its planned
expansion and/or substantially reduce its current operations, which
would materially adversely affect the Company's business, results of
operations and financial condition and its ability to compete.
Seasonality
The Company's revenue and operating results tend to fluctuate over the
course of the year, particularly in the fourth quarter of the calendar
year. This is primarily attributable to increased retail sales during
the holiday season in November and December. This seasonal pattern
may place pressure on the Company's cash and working capital
positions, which may have an adverse effect on the Company's financial
liquidity.
Inflation
To date, inflation has not had any significant impact on the Company's
business.
15
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PART II
ITEM 2 - CHANGES IN SECURITIES
Previously reported under Item 5 of the Company's Current Report
on Form 8-K dated and filed on July 29, 1998.
ITEM 5 - OTHER INFORMATION
On July 31, 1998, in a private transaction exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933, as amended, the Company issued
for investment to JNC Opportunity Fund Ltd. ("JNC"), an institutional
investor, 500 shares of Series C Convertible Preferred Stock ("Series B
Preferred Stock") representing the third and final $5 million tranche
purchased by JNC pursuant to the terms and conditions of the Convertible
Preferred Stock Purchase Agreement between the Company and JNC dated as of
March 24, 1998, under the terms of which JNC agreed to purchase for
investment up to $15 million in convertible preferred stock of the Company.
The first $5 million tranche was funded on March 24, 1998 and the second $5
million tranche was funded on May 5, 1998. Reference is made to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 and
the exhibits filed thereto for a complete description and terms of the March
24, 1998 initial $5 million financing and to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998 and the exhibits filed
thereto for a complete description of the terms of the May 5, 1998 second $5
million financing.
The Series C Preferred Stock is entitled to a dividend of 6% per annum,
payable quarterly in arrears and is convertible, together with accrued
dividends, at a conversion price equal to 120% of the average closing bid
price for 5 trading days immediately preceding the closing date or 85% of the
average of the three lowest closing prices per share of Common Stock for the
25 trading days preceding the conversion notice. The Preferred Stock is
redeemable at the option of the Company at the then applicable conversion
price. In addition, JNC received five-year warrants to purchase 332,266
shares of Common Stock at a purchase price of $5.31 per share. The Company
paid a finder's fee of 10% of the gross proceeds of the third tranche to
Wharton Capital Ltd. ("Wharton"), a New York-based financial consulting firm
and an unaffiliated individual. Wharton Capital also received five-year
warrants to purchase 62,500 shares of Common Stock at a purchase price of
$5.31 per share. The shares issuable upon conversion of the Preferred Stock
and exercise of the Warrants are subject to registration rights. Reference
is made to the Certificate of Designation and financing documents which are
filed as exhibits to this Quarterly Report for a complete description of all
terms of the third $5 million of financing.
On July 29, 1998, the Company issued an aggregate of 500 shares of 6% Series
D Convertible Preferred Stock in exchange for an aggregate of $4 million 8%
unsecured Convertible Restated Notes due July 31, 1998. The Series D
Preferred Stock is entitled to a dividend of 6% per annum, payable quarterly
in arrears and is convertible, together with accrued dividends, at a
conversion price equal to 120% of the average closing bid price for five
trading days immediately preceding the closing date or 85% of the average of
the three lowest closing prices per share of Common Stock for the 25 trading
days preceding the conversion notice, with a floor of not less than $4.00 per
share and a ceiling of not more than $6.00 per share. The Series D Preferred
Stock is redeemable at the Company's option at the then applicable conversion
16
<PAGE>
price. If the Company does not complete a private offering of equity and
debt securities by October 15, 1998, the shares of Series D Convertible
Preferred Stock shall be convertible into shares of Common Stock at a
conversion price equal to the lesser of $5.00 per share or 80% of the average
closing sales price of the Company's Common Stock during the last five
trading days prior to conversion. Reference is made to the Company's Current
Report on Form 8-K dated and filed on July 29, 1998 and the exhibits filed
therewith for a complete description of all terms of the Series D Convertible
Preferred Stock and the Securities Purchase Agreement pursuant to which it
was issued.
The Company intends to seek shareholder approval of these transactions as
required by NASD Rule 4460(i)(D)(ii). To the extent that shares of Preferred
Stock cannot be converted, the Company is obligated, in addition to other
remedies, to pay in cash to the holder of the Preferred Stock the difference
between the conversion price and the net proceeds that such holder would have
received from the sale of the shares issued by the Company pursuant to such
conversion. Reference is made to the Certificates of Designation for the 6%
Series A, Series B and Series C Convertible Preferred Stock filed as exhibits
to this Quarterly Report.
The Company has agreed to include the shares of Common Stock issuable upon
conversion of the Preferred Stock and issuable upon exercise of the warrants
in a registration statement to be filed for the purpose of permitting the
resale of such shares.
The Company intends to use the proceeds of the private placement for working
capital.
17
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
NUMBER DESCRIPTION OF EXHIBIT
3.1 Certificate of Incorporation, as amended, including
Certificates of Designation for 6% Series A, B, C and D
Convertible Preferred Stock (8)
3.2 By-Laws of Registrant (1).
10.1 Warrant issued by the Registrant to Alan R. Dresher.(2)
10.2 Promissory Note issued by the Registrant to Alan R.
Dresher. (2)
10.3 Warrant issued by the Registrant to Decameron Partners.(2)
10.4 Promissory Note issued by the Registrant to Decameron
Partners.(2)
10.5 Warrant issued by the Registrant to Alan Baron. (2)
10.6 Warrant dated February 2, 1998 issued by the Registrant to
Decameron Partners, Inc.(3)
10.7 Warrant dated February 2, 1998 issued by the Registrant to
Alan R. Dresher.(3)
10.8 Warrant dated February 2, 1998 issued by the Registrant to
Alan Baron.(3)
10.9 Private Placement Purchase Agreement dated February 24, 1998
among the Registrant, George Karfunkel, Michael Karfunkel,
Huberfeld Bodner Family Foundation, Inc., Laura Huberfeld/
Naomi Bodner Partnership and Ace Foundation, Inc.(3)
10.10 Convertible Restated Note dated February 24, 1998 issued by
the Registrant in favor of George Karfunkel.(3)
10.11 Convertible Restated Note dated February 24, 1998 issued by
the Registrant in favor of Michael Karfunkel.(3)
10.12 Convertible Restated Note dated February 24, 1998 issued by
the Registrant in favor of Laura Huberfeld/Naomi Bodner
Partnership.(3)
10.13 Convertible Restated Note dated February 24, 1998 issued by
the Registrant in favor of Huberfeld Bodner Family
Foundation, Inc.(3)
10.14 Warrant dated February 24, 1998 issued by the Registrant to
George Karfunkel.(3)
10.15 Warrant dated February 24, 1998 issued by the Registrant to
Michael Karfunkel.(3)
10.16 Warrant dated February 24, 1998 issued by the Registrant to
Laura Huberfeld/Naomi Bodner Partnership.(3)
10.17 Warrant dated February 24, 1998 issued by the Registrant to
Huberfeld Bodner Family Foundation, Inc.(3)
10.18 Convertible Note dated February 24, 1998 issued by the
Registrant in favor of George Karfunkel.(3)
10.19 Convertible Note dated February 24, 1998 issued by the
Registrant in favor of Ace Foundation.(3)
10.20 Warrant dated March 5, 1998 issued by the Registrant to Alan
R. Dresher.(3)
10.21 Warrant dated March 5, 1998 issued by the Registrant to
Bulldog Capital Management.(3)
10.22 Warrant dated March 5, 1998 issued by the Registrant to Alan
Baron. (3)
10.23 Convertible Preferred Stock Purchase Agreement between the
Registrant and JNC Opportunity Fund Ltd. dated March 24, 1998(4).
10.24 Registration Rights Agreement dated March 24, 1998 between
the Registrant and JNC Opportunity Fund, Ltd. (4)
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<PAGE>
10.25 Escrow Agreement dated March 24, 1998 among the Registrant,
JNC Opportunity Fund, Ltd. and Robinson Silverman Pearce Aronsohn &
Berman LLP (4)
10.26 Warrant dated March 24, 1998 granted by the Registrant to
JNC Opportunity Fund Ltd. (4)
10.27 Warrant dated March 24, 1998 granted by the Registrant to
Wharton Capital Partners, Ltd. (4)
10.28 Escrow Agreement dated May 7, 1998 among the Registrant,
JNC Opportunity Fund, Ltd. and Robinson Silverman Pearce Aronsohn &
Berman LLP (5)
10.29 Warrant dated May 7, 1998 granted by the Registrant to
JNC Opportunity Fund Ltd. (5)
10.30 Warrant dated May 7, 1998 granted by the Registrant to
Wharton Capital Partners, Ltd. (5)
10.29 Warrant dated July 31, 1998 granted by the Registrant to
JNC Opportunity Fund Ltd. (8)
10.30 Warrant dated July 31, 1998 granted by the Registrant to
Wharton Capital Partners, Ltd. (8)
10.31 Loan and Security Agreement by and between Ameritel Communications,
Inc. and Foothill Capital Corporation dated as of June 5, 1998 (6)
10.32 Convertible Preferred Stock Purchase Agreement dated as of
July 29, 1998 among the Registrant, George Karfunkel, Michael
Karfunkel, Laura Huberfeld/Naomi Bodner Partnership and Huberfeld
Bodner Family Foundation, Inc. (7)
11 Computation of Earnings per Share (8)
27 Financial Data Schedule (8)
99.1 Risk Factors (8)
- ----------------------------
(1) Incorporated by reference to an Exhibit filed as part of
Trinity's Registration Statement on Form S-1 (File No. 33-64489).
(2) Incorporated by reference to an Exhibit filed as part of the
Registrant's Form 8-K dated and filed on January 13, 1998.
(3) Incorporated by reference to an Exhibit filed as part of the
Registrant's Form 8-K dated and filed on March 12, 1998.
(4) Incorporated by reference to an Exhibit filed as part of the
Registrant's Form 10-K for the year ended December 31, 1997.
(5) Incorporated by reference to an Exhibit filed as part of the
Registrant's Form 10-Q for the quarter ended March 31, 1998.
(6) Incorporated by reference to an Exhibit filed as part of the
Registrant's Form 8-K dated and filed on July 7, 1998.
(7) Incorporated by reference to an Exhibit filed as part of the
Registrant's Form 8-K dated and filed on July 29, 1998.
(8) Filed herewith.
(b) REPORTS ON FORM 8-K
The Registrant did not file any Current Reports on Form 8-K during
the quarter ended June 30, 1998.
19
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FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf by the
undersigned thereunto duly authorized.
USCI, INC.
/S/ ROBERT J. KOSTRINSKY
---------------------------
Robert J. Kostrinsky,
Executive Vice President;
Chief Financial Officer
Date: August 14, 1998
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
TRINITY SIX INC.
The undersigned, being of legal age, in order to form a corporation
under and pursuant to the laws of the State of Delaware, do hereby set forth
as follows:
FIRST: The name of the corporation is
TRINITY SIX INC.
SECOND: The address of the initial registered and principal office
of this corporation in this state is c/o United Corporate Services, Inc., 15
East North Street, in the City of Dover, County of Kent, State of Delaware
19901 and the name of the registered agent at said address is United
Corporate Services, Inc.
THIRD: The purpose of the corporation is to engage in any lawful
act of activity for which corporations may be organized under the corporation
laws of the State of Delaware.
FOURTH: a) The corporation shall be authorized to issue the
following shares:
Class Number of Shares Par Value
Common 100,000,000 .0001
Preferred 5,000 . 01
b) The designations and the powers, preferences and
rights, and the qualifications or restrictions
thereof are as follows:
The Preferred shares shall be issued from time to time in one or
more series, with such distinctive serial designations as shall be
stated and expressed in the resolution or resolutions providing for the
issue of such shares from time to time adopted by the Board of
Directors; and in such resolution or resolutions providing for the
issue of shares of each particular series, the Board of Directors is
expressly authorized to fix the annual rate of rates of dividends for
the particular series; the dividend payment dates for the particular
series and the date from which dividends on all shares of such series
issued prior to the record date for the first dividend payment date
shall be cumulative; the redemption price or prices for the particular
series; the voting powers for the particular series; the rights, if
any, of holders of the shares of the particular series to convert the
same into shares of any other series or class or other securities of
the corporation, with any provisions for the subsequent adjustment of
such conversion rights; and to classify or reclassify any unissued
preferred shares by fixing or altering from time to time any of the
foregoing rights, privileges and qualifications.
All the Preferred shares of any one series shall be identical
with each other in all respects, except that shares of any one series
issued at different times may differ as to the dates from which
dividends thereon shall be cumulative; and all Preferred shares shall
be of equal rank, regardless of series, and shall be identical in all
respects except as to the particulars fixed by the Board as
hereinabove provided or as fixed herein.
FIFTH: The name and address of the incorporator are as follows:
Name Address
Ira Roxland 529 Fifth Avenue
New York, New York 10017
(1) SIXTH: The following provisions are inserted for the
management of the business and for the conduct of the affairs of the
corporation, and for further definition, limitation and regulation of the
powers of the corporation and of its directors and stockholders:
(1) The number of directors of the corporation shall be such as
from time to time shall be fixed by, or in the manner provided in the
by-laws. Election of directors need not be by ballot unless the by-
laws so provide.
(2) The Board of Directors shall have power without the assent
or vote of the stockholders:
(a) To make, alter, amend, change, add to or repeal the
by-laws of the corporation; to fix and vary the amount to be
reserved for any proper purpose; to authorize and cause to be
executed mortgages and liens upon all or any part of the property
of the corporation; to determine the use and disposition of any
surplus or net profits; and to fix the times for the declaration
and payment of dividends
(b) To determine from time to time whether, and to what
times and places and under what conditions the accounts and books
of the corporation (other than the stock ledger) or any of them,
shall be open to the inspection of the stockholders.
(3) The directors in their discretion may submit any contract
or act for approval or ratification at any annual meeting of the
stockholders or at any meeting of the stockholders called for the
purpose of considering any such act or contract, and any contract or
act that shall be approved or be ratified by the vote of the holders of
a majority of the stock of the corporation which is represented in
person or by proxy at such meeting and entitled to vote thereat
(provided that a lawful quorum of stockholders be there represented in
person or by proxy) shall be as valid and as binding upon the
corporation and upon all the stockholders as though it had been
approved or ratified by every stockholder of the corporation, whether
or not the contract or act would otherwise be open to legal attack
because of directors' interest, or for any other reason.
(4) In addition to the powers and authorities hereinbefore or
by statute expressly conferred upon them, the directors are hereby
empowered to exercise all such powers and do all such acts and things
as may be exercised or done by the corporation; subject, nevertheless,
to the provisions of the statutes of Delaware, of this certificate, and
to any by-laws from time to time made by the stockholders; provided,
however, that no by-laws so made shall invalidate any prior act of the
directors which would have been valid if such by-law had not been made.
SEVENTH: No director shall be liable to the corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
except with respect to (1) a breach of the director's duty of loyalty to the
corporation or its stockholders, (2) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3)
liability under Section 174 of the Delaware General Corporation Law or (4) a
transaction from which the director derived an improper personal benefit, it
being the intention of the foregoing provision to eliminate the liability of
the corporation's directors to the corporation or its stockholders to the
fullest extent permitted by Section 102(b)(7) of the Delaware General
Corporation Law, as amended from time to time. The corporation shall
indemnify to the fullest extent permitted by Sections 102(b)(7) and 145 of
the Delaware General Corporation Law, as amended from time to time, each
person that such Sections grant the corporation the power to indemnify.
EIGHTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware, may, on the application in a
summary way of this corporation or of any creditor or stockholder thereof or
on the application of any receiver or receivers appointed for this
corporation under the provisions of Section 291 of Title 8 of the Delaware
Code or on the application of trustees in dissolution or of any receiver or
receivers appointed for this corporation under the provisions of Section 279
of Title 8 of the Delaware Code order a meeting of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, to be summoned in such manner as the said
court directs. If a majority in number representing three-fourths (3/4) in
value of the creditors or class of creditors, and/or of the stockholders or
class of stockholders of this corporation, as the case maybe, agree to any
compromise or arrangement and to any reorganization of this corporation as a
consequence of such compromise or arrangement, the said compromise or
arrangement and the said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on all the creditors or
class of creditors, and/or on all the stockholders or class of stockholders,
of this corporation, as the case may be, and also on this corporation.
NINTH: The corporation reserves the right to amend, alter, change
or repeal any provision contained in this certificate or incorporation in the
manner now or hereafter prescribed by law, and all rights and powers
conferred herein on stockholders, directors and officers are subject to this
reserved power.
IN WITNESS WHEREOF, the undersigned hereby executes this document and
affirms that the facts set forth herein are true under the penalties of
perjury this 15th day of September, 1992.
______________________________________
Ira Roxland, Incorporator
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
TRINITY SIX INC.
TRINITY SIX INC., a corporation organized an existing under and
by virtue of the General Corporation Law of the State of Delaware DOES HEREBY
CERTIFY:
That pursuant to the unanimous written consent of the Board of Directors of
Trinity Six, Inc., (the "Corporation") taken as of August 27, 1993,
resolutions were duly adopted setting forth a proposed amendment to the
Certificate of Incorporation of said Corporation, declaring said amendment to
be advisable and directing that the stockholders of said Corporation consider
approval thereof. The resolution setting forth the proposed amendment is as
follows:
RESOLVED, that the Board of Directors does hereby declare advisable the
amendment of the Certificate of Incorporation of this corporation to
add to the Certificate of Incorporation a new Article Tenth as follows:
TENTH: The following provisions (A) through (D) shall apply
during the period commencing upon the consummation of the initial
public offering of the securities of this corporation effectuated
through Registration Statement No. 33-64489 ("IPO") and terminating
upon the consummation of any "Business Combination" and may not be
amended prior to the consummation of any Business Combination. A
"Business Combination" shall mean any merger, exchange or capital
stock, asset acquisition of other similar business combination of the
corporation with any operating business ("Acquired Business") in any
"Target Industry". "Target Industry" shall mean any of the following:
(i) The manufacture of analytical and controlling equipment, chemicals
and allied products, electronic equipment and medical instrumentation;
(ii) health services (including HMOs, laboratories and nursing homes;
(iii) environmental services and products; (iv) engineering and
construction; (v) wholesale and retail distribution (including discount
operations) of home furnishings, office supplies, computers and related
products, medical equipment and supplies, apparel and accessories,
automotive parts and supplies and food and beverage products; and (vi)
communications and entertainment.
A. Prior to the consummation of any Business Combination, the
corporation shall submit such Business Combination to its stockholders
for approval regardless of whether the Business Combination is of a
type which normally would require such stockholder approval under the
General Corporation Law. In the event that the holders of a majority
of the outstanding Common Stock vote for the approval of the Business
Combination, the corporation shall be authorized to consummate the
Business Combination. Notwithstanding the foregoing, in the event that
the holders of 20 % or more of the Common Stock (excluding, for this
purpose, those persons who were stockholders prior to the consummation
of the IPO ("Insiders") vote against the Business Combination, the
corporation shall not be authorized to consummate such Business
Combination.
B. In the event that a Business Combination is approved in
accordance with the above paragraph A and is consummated by the
corporation, the shares of Common Stock owned as of the record date for
determination of stockholders entitled to vote on the Business
Combination (the "Record Date") by any stockholder of the corporation
other that an Insider (a "Public Stockholder") who (i) delivered to the
corporation a written notice of objection to the Business Combination
prior to the stockholder vote on the Business Combination; and (ii) who
voted against the Business Combination shall be redeemed at a per share
redemption price (the "Redemption Price") equal to the quotient
determined by dividing (i) the amount of the Trust Account (as defined
below), inclusive of any interest income thereon, as of the Record
Date, by (ii) the number of shares of Common Stock held by all
stockholders of the Company (excluding, for this purpose, shares
outstanding prior to the IPO). Payment of the Redemption Price shall
be within ten business days after receipt by the corporation or its
transfer agent of the certificate or certificates evidencing the shares
of Common Stock being redeemed. "Trust Account" shall mean the trust
account established by the corporation at the consummation of its IPO
and into which certain amounts of the net proceeds of the IPO are
deposited.
C. In the event that the corporation does not consummate a
Business Combination by the later of (i) 18 months after the
consummation of the IPO or (ii) 27 months after the consummation of the
IPO in the event that a letter of intent, an agreement in principle or
a definitive agreement for a Business Combination has been signed prior
to the expiration of such 18 month period but such Business Combination
has not been consummated for any reason other than a negative vote with
respect thereto actually cast by at least 20 % in interest of the
Public Stockholders (such later date being referred to as the
"Termination Date") the officers of the corporation shall take all such
action necessary to dissolve and liquidate the corporation within sixty
days of the Termination Date. In the event that the corporation is so
dissolved and liquidated pursuant to this paragraph C, shares of Common
Stock issued prior to the IPO shall not be entitled to receive
liquidating distributions.
D. An Insider with respect to shares of Common Stock not issued
prior to the IPO and a Public Stockholder shall be entitled to receive
distributions from the Trust Account only in the event of a liquidation
of the corporation or, in the case of a Public Stockholder only, in the
event he demands redemption of his shares in accordance with paragraph
B, above. In no other circumstances shall a Public Stockholder or an
Insider have any right or interest of any kind in or to the Trust
Account.
That thereafter, pursuant to a resolution of the Board of
Directors, directing that such amendment be considered by the stockholders of
the Corporation, the stockholders of the Corporation, holding more than a
majority of the outstanding shares of Common Stock of the Corporation, in
accordance with Section 228 of the General Corporation Law of the State of
Delaware, consented in writing to and approved said amendment and delivered
such written consents to the Corporation. The Corporation thereafter provided
to the other stockholders of the Corporation the notice called for in Section
228 of the General Corporation Law.
That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, Trinity Six Inc. has caused this certificate
to be signed by its Chairman, Barry Goldin, and attested by its Assistant
Secretary, Ira Roxland this 30th day of August, 1993.
TRINITY SIX INC.
By: _________________________
Barry Goldin, Chairman
ATTEST:
By: _____________________________________
Ira Roxland, Assistant Secretary
STATE OF NEW YORK )
ss.:
COUNTY OF NEW YORK )
BE IT REMEMBERED that on this 30th day of August, 1993. personally
came before me, a Notary Public in and for the County and State aforesaid,
Barry Goldin, Chairman of Trinity Six Inc., a corporation of the State of
Delaware and he duly executed said certificate before me and acknowledged the
said certificate to be his act and deed and the act and deed of said
Corporation and the facts stated therein are true.
IN WITNESS WHEREOF, I have hereunto set my hand and seal of
office the day and year aforesaid.
_______________________________
Notary Public
CERTIFICATE OF CORRECTION
OF
CERTIFICATE OF AMENDMENT (filed 8/31/93)
OF
TRINITY SIX INC.
The undersigned corporation hereby certifies as follows:
FIRST: The name of the corporation is:
TRINITY SIX INC.
SECOND: In the Certificate of Amendment to the Certificate of
Incorporation filed in the Office of the Secretary of State of Delaware on
August 31, 1993, setting forth amendments to the Certificate of
Incorporation, the Certificate of Amendment inadvertently and incorrectly
omitted to include the text of paragraph (c) of Article FOURTH.
THIRD: The correction to the Certificate of Amendment to the
Certificate of Incorporation filed on August 31, 1993 in the Office of the
Secretary of State of Delaware to be effected hereby is as follows:
RESOLVED, that ARTICLE FOURTH of the Certificate of Incorporation of
the Corporation be amended to add the following provision to said
article:
(c) At the time and date this Certificate of Amendment to the
Certificate of Incorporation of the Corporation is filed with the
Secretary of State of the State of Delaware, all outstanding shares of
Common Stock held by each holder of record on such time and date shall
be automatically combined at the rate of .83-for-one without any
further action on the part of the holders thereof or this Corporation.
No fractional shares will be issued. All fractional shares for one-
half share or more shall be increased to the next higher whole number
of shares and all fractional shares of less than one-half share shall
be decreased to the next lower whole number of shares, respectively."
FOURTH: The correction effected herein is authorized by Section
103(f) of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this certificate
to be executed by Lawrence Burstein, its President, and attested to by Ira
Roxland, its Assistant Secretary, the 7th day of August, 1993.
TRINITY SIX INC.
By: Lawrence Burstein, President
ATTEST: By: Ira Roxland, Assistant Secretary
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
TRINITY SIX INC.
Trinity Six Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of Trinity Six Inc. adopted a resolution
proposing and declaring advisable the following amendment to the Certificate
of Incorporation of the Corporation, and declaring that such proposed
amendment to be submitted for consideration by the stockholders of the
Corporation entitled to vote in respect thereof. The resolution setting
forth the proposed amendment is as follows:
RESOLVED, that ARTICLE FIRST of the Certificate of Incorporation,
relating to the name of the Corporation is hereby amended and restated
in its entirety to read as follows:
"FIRST: The name of the corporation is USCI, Inc."
SECOND: That thereafter, pursuant to resolution of its Board of Directors,
the proposed amendment was considered at a special meeting of stockholders,
which meeting of stockholders was duly called and held, upon notice in
accordance with Section 222 of the General Corporation Law of the state of
Delaware and at such meeting the necessary number of shares as required by
statute were voted in favor of the amendment.
THIRD: The amendment effected herein were duly adopted in accordance with
the applicable provisions of Section 242 of the General Corporation Law of
the State of Delaware.
IN WITNESS WHEREOF, said TRINITY SIX INC. has caused this certificate to be
signed by Lawrence Burstein, its President, and by Ira I. Roxland, its
Assistant Secretary, this 15th day of May, 1995.
TRINITY SIX INC.
By: ____________________________
Lawrence Burstein, President
ATTEST:
_______________________________
Ira I. Roxland, Secretary
<PAGE>
CERTIFICATE OF DESIGNATION
OF
USCI, INC. (filed with the Delaware Secretary of State on 3/23/98)
The undersigned corporation hereby certifies as follows:
FIRST: The name of the corporation is USCI, Inc.
SECOND: The following resolutions establishing a new series of
Preferred Shares were adopted by the Board of Directors in accordance
with Section 151 of the General Corporation Laws of the State of
Delaware:
RESOLVED, that 500 Preferred shares, with a par value of
$.01 per share, are to be designated Series A; and be it
further
RESOLVED, that the relative rights, privileges,
preferences, restrictions and/or limitations or those
shares designated Series A are as follows:
Terms of Series A Preferred Stock
Section 1. Designation, Amount and Par Value. The series of preferred
stock shall be designated as 6% Series A Convertible Preferred Stock
(the "Preferred Stock") and the number of shares so designated shall be
500 (which shall not be subject to increase without the consent of the
holders of the Preferred Stock ("Holder"). Each share of Preferred
Stock shall have a par value of $.01 per share and a stated value of
$10,000.00 per share (the "Stated Value").
Section 2. Dividends.
(a) Holders of Preferred Stock shall be entitled to receive, when and
as declared by the Board of Directors out of funds legally available
therefor, and USCI, Inc. (the "Company") shall pay, cumulative dividends
at the rate per share (as a percentage of the Stated Value per share)
equal to 6% per annum, payable on a quarterly basis on March 31, June
30, September 30 and December 31 of each year during the term hereof
(each a "Dividend Payment Date"), commencing on March 31, 1998, in cash
or shares of Common Stock (as defined in Section 8) at (subject to the
terms and conditions set fort herein) the option of the Company. Any
dividends not paid on any Dividend Payment Date shall accrue and shall
be due and payable upon conversion of the Preferred Stock. A party that
holds shares of Preferred Stock on a Dividend Payment Date will be
entitled to receive such dividend payment and any other accrued and
unpaid dividends which accrued prior to such Dividend Payment Date,
without regard to any sale or disposition of such Preferred Stock
subsequent to the applicable record date. All overdue accrued and
unpaid dividends and other amounts due herewith shall entail a late fee
at the rate of 15% per annum (to accrue daily, from the date such
dividend is due hereunder through and including the date of payment).
Except as otherwise provided herein, if at any time the Company pays
less than the total amount of dividends then accrued on account of the
Preferred Stock, such payment shall be distributed ratably among the
holders of the Preferred Stock based upon the number of shares held by
each Holder. Payment of dividends on the Preferred Stock is further
subject to the provisions of Section 5(c)(i). The Company shall provide
the Holders notice of its intention to pay dividends in cash or shares
of Common Stock not less than 10 Trading Days prior to the Dividend
Payment Date for so long as shares of Preferred Stock are outstanding,
and in the event the Company fails to provide such notice, it shall pay
such dividends in shares of Common Stock. If dividends are paid in
shares of Common Stock, the number of shares of Common Stock payable as
such dividend to each Holder shall be equal to the cash amount of such
dividend payable to such Holder on such Dividend Payment Date divided by
the Conversion Price at such time (as defined below).
(b) Notwithstanding anything to the contrary contained herein, the
Company may not issue shares of Common Stock in payment of dividends
(and must deliver cash in respect thereof) on the Preferred Stock if:
(i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes is insufficient to pay such
dividends in shares of Common Stock;
(ii) the shares of Common Stock to be issued in respect of such
dividends are not registered for resale pursuant to an effective
registration statement that names the recipient of such dividend as a
selling stockholder thereunder and may not be sold without volume
restrictions pursuant to Rule 144 promulgated under the Securities Act
of 1933, as amended (the "Securities Act"), as determined by counsel to
the Company pursuant to a written opinion letter, addressed to the
Company's transfer agent in the form and substance acceptable to the
Holder and such transfer agent;
(iii) the shares of Common Stock to be issued in respect of such
dividends are not listed on the Nasdaq National Market System (the
"NASDAQ") and any other exchange or quotation system on which the Common
Stock is then listed for trading;
(iv) the Company has failed to timely satisfy its obligations pursuant
to any Conversion Notice (as defined in Section 5(a)(ii)); or
(v) the issuance of such shares would result in the recipient thereof
beneficially owning, as determined in accordance with Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), more than 4.999% of the then issued and outstanding
shares of Common Stock.
(c) So long as any Preferred Stock shall remain outstanding, neither
the Company nor any subsidiary thereof shall redeem, purchase or
otherwise acquire directly or indirectly any Junior Securities (as
defined in Section 8), nor shall the Company directly or indirectly pay
or declare any dividend or make any distribution (other than a dividend
or distribution described in Section 5) upon, nor shall any distribution
be made in respect of, any Junior Securities, nor shall any monies be
set aside for or applied to the purchase or redemption (through a
sinking fund or otherwise) of any Junior Securities or shares pari passu
with the Preferred Stock, except for repurchases effected by the Company
on the open market, pursuant to a direct stock purchase plan.
Section 3. Voting Rights. Except as otherwise provided herein and as
otherwise required by law, the Preferred Stock shall have no voting
rights. However, so long as any shares of Preferred Stock are
outstanding, the Company shall not and shall cause its subsidiaries not
to, without the affirmative vote of the Holders of all of the shares of
the Preferred Stock then outstanding, (a) alter or change adversely the
powers, preferences or rights given to the Preferred Stock, (b) alter or
amend this Certificate of Designation, (c) authorize or create any class
of stock ranking as to dividends or distribution of assets upon a
Liquidation (as defined in Section 4) or otherwise senior to the
Preferred Stock, except for any series of Preferred Stock issued and
sold in accordance with the Purchase Agreement, (d) amend its
Certificate of Incorporation, bylaws or other charter documents so as to
affect adversely any rights of any Holders, (e) increase the authorized
number of shares of Preferred Stock, or (f) enter into any agreement
with respect to the foregoing.
Section 4. Liquidation. Upon any liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary (a "Liquidation"), the
Holders shall be entitled to receive out of the assets of the Company,
whether such assets are capital or surplus, for each share of Preferred
Stock an amount equal to the Stated Value plus all due but unpaid
dividends per share, whether declared or not, before any distribution or
payment shall be made to the holders of any Junior Securities, and if
the assets of the Company shall be insufficient to pay in full such
amounts, then the entire assets to be distributed to the Holders of
Preferred Stock shall be distributed among the Holders of Preferred
Stock ratably in accordance with the respective amounts that would be
payable on such shares if all amounts payable thereon were paid in full.
A sale, conveyance or disposition of all or substantially all of the
assets of the Company or the effectuation by the Company of a
transaction or series of related transactions in which more than 50% of
the voting power of the Company is disposed of, or a consolidation or
merger of the Company with or into any other company or companies shall
not be treated as a Liquidation, but instead shall be subject to the
provisions of Section 5. The Company shall mail written notice of any
such Liquidation, not less than 45 days prior to the payment date stated
therein, to each record Holder of Preferred Stock.
Section 5. Conversion.
(a)(i) Each share of Preferred Stock (in minimum amounts of $50,000 or
such lesser amounts as the Company agrees or as may then be held by the
converting Holder) shall be convertible into shares of Common Stock
(subject to reduction pursuant to Section 5(a)(iii) hereof and Section
3.8 of the Purchase Agreement) at the Conversion Ratio (as defined in
Section 6) at the option of the Holder in whole or in part at any time
after the earlier of (i) the 90th day following the Original Issue Date
(as defined in Section 8) or (ii) the date the Underlying Shares
Registration Statement is declared effective by Securities and Exchange
Commission (the "Commission"). The Holders shall effect conversions by
surrendering the certificate or certificates representing the shares of
Preferred Stock to be converted to the Company, together with the form
of conversion notice attached hereto as Exhibit A (a "Conversion
Notice"). Each Conversion Notice shall specify the number of shares of
Preferred Stock to be converted and the date on which such conversion is
to be effected, which date may not be prior to the date the Holder
delivers such Conversion Notice by facsimile (the "Conversion Date").
If no Conversion Date is specified in a Conversion Notice, the
Conversion Date shall be the date that the Conversion Notice is deemed
delivered pursuant to Section 5(i). Subject to Sections 5(b) and
5(a)(iii) hereof, each Conversion Notice, once given, shall be
irrevocable. If the Holder is converting less than all shares of
Preferred Stock represented by the certificate or certificates tendered
by the Holder with the Conversion Notice, or if a conversion hereunder
cannot be effected in full for any reason, the Company shall promptly
deliver to such Holder (in the manner and within the time set forth in
Section 5(b)) a certificate for such number of shares as have not been
converted.
(ii) Any outstanding shares of Preferred Stock not theretofore converted
on the third anniversary of the Original Issue Date shall automatically
be converted into shares of Common Stock at the Conversion Price then in
effect. Notwithstanding the foregoing, no such conversion shall occur
unless (a) the Underlying Shares that would then be issuable upon such
conversion could either be resold by such Holder pursuant to Rule
144(k) promulgated under the Securities Act or there is then an
effective Underlying Shares Registration Statement naming the recipient
of such shares as a selling stockholder thereunder, (b) the Company has
a sufficient number of authorized and unreserved Common Stock to issue
upon such conversion. Further, the number of shares of Preferred Stock
that are subject to conversion pursuant to this section shall be limited
to the number of Underlying Shares which may be issued upon such
conversion at the prevailing Conversion Price in accordance with Rule
4460(i) promulgated under the Rules of the Nasdaq Stock Market. Any
shares of Preferred Stock which cannot be converted at the then
Conversion Price as a result of such Rule shall be subject to the
provisions of Section 5(a)(iii).
(iii) If on any Conversion Date (A) the Common Stock is listed for
trading on the Nasdaq National Market or the Nasdaq SmallCap Market, (B)
the Conversion Price then in effect is such that the aggregate number of
shares of Common Stock that would then be issuable upon conversion in
full of all then outstanding shares of Preferred Stock, together with
any shares of the Common Stock previously issued upon conversion of the
shares of Preferred Stock and as payment of interest thereon, would
equal or exceed 20% of the number of shares of the Common Stock
outstanding on the Original Issue Date (such number of shares as would
not equal or exceed such 20% limit, the "Issuable Maximum"), and (C) the
Company shall not have previously obtained the vote of shareholders (the
"Shareholder Approval"), if any, as may be required by the rules and
regulations of The Nasdaq Stock Market applicable to approve the
issuance of Common Stock in excess of the Issuable Maximum in a private
placement whereby shares of Common Stock are deemed to have been issued
at a price that is less than the greater of book or fair market value of
the Common Stock, then the Company shall issue to the Holder so
requesting a conversion a number of shares of Common Stock equal to the
Issuable Maximum and, with respect to the remainder of the aggregate
stated value of the shares of Preferred Stock then held by such Holder
for which a conversion in accordance with the Conversion Price would
result in an issuance of Common Stock in excess of the Issuable Maximum,
the converting Holder shall have the option to require the Company to
either (1) use its best efforts to obtain the Shareholder Approval
applicable to such issuance as soon as is possible, but in any event not
later than the 60th day after such request, or (2)(i) issue and deliver
to such Holder a number of shares of Common Stock as equals (x) the
aggregate stated value of the shares of Preferred Stock tendered for
conversion in respect of the Conversion Notice at issue but for which a
conversion in accordance with the other terms hereof would result in an
issuance of Common Stock in excess of the Issuable Maximum, divided by
(y) the Initial Conversion Price (as defined below), and (ii) cash in an
amount equal to the product of (x) the Per Share Market Value on the
Conversion Date and (y) the number of shares of Common Stock in excess
of such Holder's pro rata portion of the Issuable Maximum that would
have otherwise been issuable to the Holder in respect of such conversion
but for the provisions of this Section (such amount of cash being
hereinafter referred to as the "Discount Equivalent"), or (3) pay cash
to the converting Holder in an amount equal to the Mandatory Redemption
Amount (as defined in Section 5(b)(ii) hereunder) for the number of
Underlying Shares in or issuable upon such conversion in excess of the
Issuable Maximum. If the Company fails to pay the Discount Equivalent
or the Mandatory Redemption Amount, as the case may be, in full pursuant
to this Section within seven (7) days after the date payable, the
Company will pay interest thereon at a rate of 15% per annum to the
converting Holder, accruing daily from the Conversion Date until such
amount, plus all such interest thereon, is paid in full.
(b) (i) Not later than three (3) Trading Days after any Conversion
Date, the Company will deliver to the Holder (i) a certificate or
certificates which shall be free of restrictive legends and trading
restrictions (other than those required by Section 3.1(b) of the
Purchase Agreement) representing the number of shares of Common Stock
being acquired upon the conversion of shares of Preferred Stock (subject
to reduction pursuant to Section 5(a)(iii) and Section 3.8 of the
Purchase Agreement), (ii) one or more certificates representing the
number of shares of Preferred Stock tendered for conversion that were
not requested to be converted (or that the Company is prohibited from
converting), (iii) a bank check in the amount of accrued and unpaid
dividends (if the Company has elected to pay accrued dividends in cash),
and (iv) if the Company has elected and is permitted hereunder to pay
accrued dividends in shares of Common Stock, certificates, which shall
be free of restrictive legends and trading restrictions (other than
those required by Section 3.1 (b) of the Purchase Agreement),
representing such number of shares of Common Stock as equals such
dividend divided by the Conversion Price on the Dividend Payment Date;
provided, however, that the Company shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon
conversion of any shares of Preferred Stock until certificates
evidencing such shares of Preferred Stock are either delivered for
conversion to the Company or any transfer agent for the Preferred Stock
or Common Stock, or the Holder of such Preferred Stock notifies the
Company that such certificates have been lost, stolen or destroyed and
provides a bond (or other adequate security) reasonably satisfactory to
the Company to indemnify the Company from any loss incurred by it in
connection therewith. The Company shall, upon request of the Holder, if
available, use its best efforts to deliver any certificate or
certificates required to be delivered by the Company under this Section
electronically through the Depository Trust Corporation or another
established clearing corporation performing similar functions. If in
the case of any Conversion Notice such certificate or certificates,
including for purposes hereof, any shares of Common Stock to be issued
on the Conversion Date on account of accrued but unpaid dividends
hereunder, are not delivered to or as directed by the applicable Holder
by the third Trading Day after the Conversion Date, the Holder shall be
entitled by written notice to the Company at any time on or before its
receipt of such certificate or certificates thereafter, to rescind such
conversion, in which event the Company shall immediately return the
certificates representing the shares of Preferred Stock tendered for
conversion, (such recision shall be in addition to, and not in lieu of,
the rights set forth elsewhere herein).
(ii) If the Company fails to deliver to the Holder such certificate or
certificates pursuant to Section 5(b)(i), including for purposes hereof,
any shares of Common Stock to be issued on the Conversion Date on
account of accrued but unpaid dividends hereunder, prior to the third
Trading Day after the Conversion Date, the Company shall pay to such
Holder, in cash, as liquidated damages and not as a penalty, $5,000 for
each day after such third Trading Day until such certificates are
delivered. Nothing herein shall limit a Holder's right to pursue actual
damages for the Company's failure to deliver certificates representing
shares of Common Stock upon conversion within the period specified
herein (including, without limitation, damages relating to any purchase
of shares of Common Stock by such Holder to make delivery on a sale
effected in anticipation of receiving certificates representing shares
of Common Stock upon conversion, such damages to be in an amount equal
to (A) the aggregate amount paid by such Holder for the shares of Common
Stock so purchased minus (B) the aggregate amount of net proceeds, if
any, received by such Holder from the sale of the shares of Common Stock
issued by the Company pursuant to such conversion), and such Holder
shall have the right to pursue all remedies available to it at law or in
equity including, without limitation, a decree of specific performance
and/or injunctive relief. The exercise of any such rights shall not
prohibit the Holders from seeking to enforce damages pursuant to any
other Section hereof or under applicable law.
(iii) In addition to any other rights available to the Holder, if the
Company fails to deliver to the Holder such certificate or certificates
pursuant to Section 5(b)(i), including for purposes hereof, any shares
of Common Stock to be issued on the Conversion Date on account of
accrued but unpaid dividends hereunder, prior to the third Trading Day
after the Conversion Date, and if after such the third Trading Day the
Holder purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by such Holder of the
Underlying Shares which the Holder anticipated receiving upon such
conversion (a "Buy-In"), then the Company shall pay in cash to the
Holder (in addition to any remedies available to or elected by the
Holder) the amount by which (x) the Holder's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock
so purchased exceeds (y) the aggregate stated value of the shares of
Preferred Stock for which such conversion was not timely honored. For
example, if the Holder purchases shares of Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an attempted
conversion of $10,000 aggregate stated value of the shares of Preferred
Stock, the Company shall be required to pay the Holder $1,000. The
Holder shall provide the Company written notice indicating the amounts
payable to the Holder in respect of the Buy-In.
(c) (i) The conversion price for each share of Preferred Stock (the
"Conversion Price") in effect on any Conversion Date shall be the lesser
of (a) 120% of the average of the Per Share Market Values for the five
(5) Trading Days immediately preceding the Original Issue Date (the
"Initial Conversion Price") or (b) 85% of the average of the three (3)
lowest Per Share Market Values during the twenty five (25) Trading Days
prior to the date of the applicable Conversion Notice, which Per Share
Market Values shall be chosen by the converting Holder; provided,
however, that, (a) if the Underlying Shares Registration Statement (as
defined in the Registration Rights Agreement) is not filed on or prior
to the Filing Date (as defined in the Registration Rights Agreement), or
(b) if the Company fails to file with the Commission a request for
acceleration in accordance with Rule 12d1-2 promulgated under the
Exchange Act within five (5) days of the date that the Company is
notified (orally or in writing, whichever is earlier) by the Commission
that an Underlying Shares Registration Statement will not be "reviewed,"
or not subject to further review, or (c) if the Underlying Shares
Registration Statement is not declared effective by the Commission on or
prior to the 90th day after the Original Issue Date, or (d) if such
Underlying Shares Registration Statement is filed with and declared
effective by the Commission but thereafter ceases to be effective as to
all Registrable Securities (as such term is defined in the Registration
Rights Agreement) at any time prior to the expiration of the
"Effectiveness Period" (as such term is defined in the Registration
Rights Agreement), without being succeeded within 10 Trading Days by a
subsequent Underlying Shares Registration Statement filed with and
declared effective by the Commission, or (e) if trading in the Common
Stock shall be suspended, or if the Common Stock shall be delisted, for
more than three (3) Trading Days, or (f) if the conversion rights of the
Holders are suspended for any reason, or if a Holder is not permitted to
resell Registrable Securities under an Underlying Shares Registration
Statement, or (g) if the Company is required to convene a shareholders
meeting pursuant to Section 5(a)(iii) and fails to convene a meeting of
shareholders within the time periods specified in Section 5(a)(iii) or
does so convene a meeting of shareholders within such time period but
fails to obtain Shareholder Approval at such meeting, or (h) if an
amendment to the Underlying Securities Registration Statement is not
filed by the Company with the Commission within ten (10) days of the
Commission's notifying the Company that such amendment is required in
order for the Underlying Securities Registration Statement to be
declared effective, or (j) the Company fails to comply with requests for
conversion of any Preferred Stock into shares of Common Stock in
accordance with the terms hereof (any such failure or breach being
referred to as an "Event," and for purposes of clauses (a), (c), (f) and
(g) the date on which such Event occurs, or for purposes of clause (b)
the date on which such five (5) day period is exceeded, or for purposes
of clauses (d) and (h) the date which such 10 Trading Day-period is
exceeded, or for purposes of clause (e) the date on which such three
Trading Day period is exceeded, being referred to as "Event Date"), the
Conversion Price shall be decreased by 2.5% each month (i.e., the
Conversion Price would decrease by 2.5% as of the Event Date and an
additional 2.5% as of each monthly anniversary of the Event Date) until
the earlier to occur of the second month anniversary after the Event
Date and such time as the applicable Event is cured. Commencing the
second month anniversary after the Event Date, the Company shall pay to
each Holder 2.5% of the product of the Stated Value and the number of
shares of Preferred Stock then held by such Holder, in cash as
liquidated damages, and not as a penalty, on the first day of each
monthly anniversary of the Event Date until such time as the applicable
Event, is cured. Any decrease in the Conversion Price pursuant to this
Section shall continue notwithstanding the fact that the Event causing
such decrease has been subsequently cured.
(ii) If the Company, at any time while any shares of Preferred Stock
are outstanding, shall (a) pay a stock dividend or otherwise make a
distribution or distributions on shares of its Junior Securities or pari
passu securities (other than with respect to the Series B Preferred
Stock or Series C Stock) payable in shares of Common Stock, (b)
subdivide outstanding shares of Common Stock into a larger number of
shares, (c) combine outstanding shares of Common Stock into a smaller
number of shares, or (d) issue by reclassification of shares of Common
Stock any shares of capital stock of the Company, the Initial Conversion
Price shall be multiplied by a fraction of which the numerator shall be
the number of shares of Common Stock outstanding before such event and
of which the denominator shall be the number of shares of Common Stock
outstanding after such event. Any adjustment made pursuant to this
Section 5(c)(ii) shall become effective immediately after the record
date for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately after
the effective date in the case of a subdivision, combination or
re-classification.
(iii) If the Company, at any time while any shares of Preferred Stock
are outstanding, shall issue rights or warrants to all holders of Common
Stock entitling them to subscribe for or purchase shares of Common Stock
at a price per share less than the Per Share Market Value of the Common
Stock at the record date mentioned below, the Initial Conversion Price
shall be multiplied by a fraction, of which the denominator shall be the
number of shares of Common Stock (excluding treasury shares, if any)
outstanding on the date of issuance of such rights or warrants plus the
number of additional shares of Common Stock offered for subscription or
purchase, and of which the numerator shall be the number of shares of
Common Stock (excluding treasury shares, if any) outstanding on the date
of issuance of such rights or warrants plus the number of shares which
the aggregate offering price of the total number of shares so offered
would purchase at such Per Share Market Value. Such adjustment shall be
made whenever such rights or warrants are issued, and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such rights or warrants. However, upon
the expiration of any right or warrant to purchase Common Stock the
issuance of which resulted in an adjustment in the Initial Conversion
Price pursuant to this Section 5(c)(iii), if any such right or warrant
shall expire and shall not have been exercised, the Initial Conversion
Price shall immediately upon such expiration be recomputed and effective
immediately upon such expiration be increased to the price which it
would have been (but reflecting any other adjustments in the Initial
Conversion Price made pursuant to the provisions of this Section 5 after
the issuance of such rights or warrants) had the adjustment of the
Initial Conversion Price made upon the issuance of such rights or
warrants been made on the basis of offering for subscription or purchase
only that number of shares of Common Stock actually purchased upon the
exercise of such rights or warrants actually exercised.
(iv) If the Company, at any time while shares of Preferred Stock are
outstanding, shall distribute to all holders of Common Stock (and not to
Holders of Preferred Stock) evidences of its indebtedness or assets or
rights or warrants to subscribe for or purchase any security (excluding
those referred to in Sections 5(c)(ii) and (iii) above), then in each
such case the Conversion Price at which each share of Preferred Stock
shall thereafter be convertible shall be determined by multiplying the
Conversion Price in effect immediately prior to the record date fixed
for determination of stockholders entitled to receive such distribution
by a fraction of which the denominator shall be the Per Share Market
Value of Common Stock determined as of the record date mentioned above,
and of which the numerator shall be such Per Share Market Value of the
Common Stock on such record date less the then fair market value at such
record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as
determined by the Board of Directors in good faith; provided, however,
that in the event of a distribution exceeding ten percent (10%) of the
net assets of the Company, if the Holders of a majority in interest of
the Preferred Stock dispute such valuation, such fair market value shall
be determined by a nationally recognized or major regional investment
banking firm or firm of independent certified public accountants of
recognized standing (which may be the firm that regularly examines the
financial statements of the Company) (an "Appraiser") selected in good
faith by the Holders of a majority in interest of the shares of
Preferred Stock then outstanding; and provided, further, that the
Company, after receipt of the determination by such Appraiser shall have
the right to select an additional Appraiser, in good faith, in which
case the fair market value shall be equal to the average of the
determinations by each such Appraiser. In either case the adjustments
shall be described in a statement provided to the Holders of Preferred
Stock of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of
Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the
record date mentioned above.
(v) All calculations under this Section 5 shall be made to the nearest
cent or the nearest 1/100th of a share, as the case may be.
(vi) Whenever the Conversion Price is adjusted pursuant to Section
5(c)(i),(ii),(iii) or (iv), the Company shall promptly mail to each
Holder of Preferred Stock, a notice setting forth the Conversion Price
after such adjustment and setting forth a brief statement of the facts
requiring such adjustment.
(vii) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person
pursuant to which (i) a majority of the Company's Board of Directors
will not constitute a majority of the board of directors of the
surviving entity or (ii) less than 50% of the outstanding shares of the
capital stock of the surviving entity will be held by the same
shareholders of the Company prior to such reclassification,
consolidation or merger (a "Change of Control Transaction"), the sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is
converted into other securities, cash or property, the Holders of the
Preferred Stock then outstanding shall have the right thereafter to
convert such shares only into the shares of stock and other securities,
cash and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification, consolidation, merger,
sale, transfer or share exchange, and the Holders of the Preferred Stock
shall be entitled upon such event to receive such amount of securities,
cash or property as the shares of the Common Stock of the Company into
which such shares of Preferred Stock could have been converted
immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange would have been entitled. The terms of any
such consolidation, merger, sale, transfer or share exchange shall
include such terms so as to continue to give to the Holder of Preferred
Stock the right to receive the securities, cash or property set forth in
this Section 5(c)(vii) upon any conversion or redemption following such
consolidation, merger, sale, transfer or share exchange. This provision
shall similarly apply to successive reclassifications, consolidations,
mergers, sales, transfers or share exchanges. With respect to any such
reclassification, consolidation or merger, each Holder shall have the
option to require the Company to redeem its shares of Preferred Stock at
a price per share equal to the product of (i) the average Per Share
Market Value for the five (5) Trading Days immediately preceding (1) the
effective date, the date of the closing or the date of the announcement,
as the case may be, of the reclassification, consolidation, merger,
sale, transfer or share exchange the triggering such redemption right or
(2) the date of payment in full by the Company of the redemption price
hereunder, whichever is greater, and (ii) the Conversion Ratio
calculated on the date of the closing or the effective date, as the case
may be, of the reclassification, consolidation, merger, sale, transfer
or share exchange triggering such redemption right, as the case may be.
The entire redemption price shall be paid in cash, and if any portion of
the applicable redemption price shall not be paid by the Company within
seven (7) calendar days after the date due, late fees shall accrue
thereon at the rate of 15% per annum until the redemption price plus all
such late fees are paid in full (which amount shall be paid as
liquidated damages and not as a penalty). In addition, if any portion
of such redemption price remains unpaid for more than seven (7) calendar
days after the date due, the Holder of the Preferred Stock subject to
such redemption may elect, by written notice to the Company given within
30 days after the date due, to either (i) demand conversion in
accordance with the formula and the time frame therefor set forth in
Section 5 of all of the shares of Preferred Stock for which such
redemption price, plus accrued liquidated damages thereof, has not been
paid in full (the "Unpaid Redemption Shares"), in which event the Per
Share Market Value for such shares shall be the lower of the Per Share
Market Value calculated on the date such redemption price was originally
due and the Per Share Market Value as of the Holder's written demand for
conversion, or (ii) invalidate ab initio such redemption,
notwithstanding anything herein contained to the contrary. If the
Holder elects option (i) above, the Company shall within three (3)
Trading Days of its receipt of such election deliver to the Holder the
shares of Common Stock issuable upon conversion of the Unpaid Redemption
Shares subject to such Holder conversion demand and otherwise perform
its obligations hereunder with respect thereto; or, if the Holder elects
option (ii) above, the Company shall promptly, and in any event not
later than three (3) Trading Days from receipt of Holder's notice of
such election, return to the Holder all of the Unpaid Redemption Shares.
(viii) If:
A. the Company shall declare a dividend (or any other distribution) on
its Common Stock; or
B. the Company shall declare a special nonrecurring cash dividend on or
a redemption of its Common Stock; or
C. the Company shall authorize the granting to all holders of the Common
Stock rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights; or
D. the approval of any stockholders of the Company shall be required in
connection with any reclassification of the Common Stock of the Company,
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, of
any compulsory share of exchange whereby the Common Stock is converted
into other securities, cash or property; or
E. the Company shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of Preferred Stock, and shall
cause to be mailed to the Holders of Preferred Stock at their last
addresses as they shall appear upon the stock books of the Company, at
least 20 calendar days prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which a record
is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the
date as of which the holders of Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is expected to
become effective or close, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale,
transfer or share exchange; provided, however, that the failure to mail
such notice or any defect therein or in the mailing thereof shall not
affect the validity of the corporate action required to be specified in
such notice. Holders are entitled to convert shares of Preferred Stock
during the 20-day period commencing the date of such notice to the
effective date of the event triggering such notice.
(ix) If the Company (i) makes a public announcement that it intends to
enter into a Change of Control Transaction or (ii) any person, group or
entity (including the Company, but excluding a Holder or any affiliate
of a Holder) publicly announces a bona fide tender offer, exchange offer
or other transaction to purchase 50% or more of the Common Stock (such
announcement being referred to herein as a "Major Announcement" and the
date on which a Major Announcement is made, the "Announcement Date"),
then, in the event that a Holder seeks to convert shares of Preferred
Stock on or following the Announcement Date, the Conversion Price shall,
effective upon the Announcement Date and continuing through the earlier
to occur of the consummation of the proposed transaction or tender
offer, exchange offer or other transaction and the Abandonment Date (as
defined below), be equal to the lower of (x) the average Per Share
Market Value on the five Trading Days immediately preceding (but not
including) the Announcement Date and (y) the Conversion Price in effect
on the Conversion Date for such Preferred Stock. "Abandonment Date"
means with respect to any proposed transaction or tender offer, exchange
offer or other transaction for which a public announcement as
contemplated by this paragraph has been made, the date upon which the
Company (in the case of clause (i) above) or the person, group or entity
(in the case of clause (ii) above) publicly announces the termination or
abandonment of the proposed transaction or tender offer, exchange offer
or another transaction which caused this paragraph to become operative.
(d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the
purpose of issuance upon conversion of Preferred Stock and payment of
dividends on Preferred Stock, each as herein provided, free from
preemptive rights or any other actual contingent purchase rights of
persons other than the Holders of Preferred Stock, not less than such
number of shares of Common Stock as shall (subject to any additional
requirements of the Company as to reservation of such shares set forth
in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5(a) and Section 5(c)) upon the
conversion of all outstanding shares of Preferred Stock and payment of
dividends hereunder. The Company covenants that all shares of Common
Stock that shall be so issuable shall, upon issue, be duly and validly
authorized, issued and fully paid, nonassessable and freely tradeable,
subject to the legend requirements of Section 3.1 (b) of the Purchase
Agreement.
(e) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common
Stock, but may if otherwise permitted, make a cash payment in respect of
any final fraction of a share based on the Per Share Market Value at
such time. If the Company elects not, or is unable, to make such a cash
payment, the Holder of a share of Preferred Stock shall be entitled to
receive, in lieu of the final fraction of a share, one whole share of
Common Stock.
(f) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the
Holders thereof for any documentary stamp or similar taxes that may be
payable in respect of the issue or delivery of such certificate,
provided that the Company shall not be required to pay any tax that may
be payable in respect of any transfer involved in the issuance and
delivery of any such certificate upon conversion in a name other than
that of the Holder of such shares of Preferred Stock so converted and
the Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof
shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been
paid.
(g) Shares of Preferred Stock converted into Common Stock shall be
canceled and shall have the status of authorized but unissued shares of
undesignated stock.
(h) Any and all notices or other communications or deliveries to be
provided by the Holders of the Preferred Stock hereunder, including,
without limitation, any Conversion Notice, shall be in writing and
delivered personally, by facsimile or sent by a nationally recognized
overnight courier service, addressed to the attention of the Chief
Executive Officer of the Company at the facsimile telephone number or
address of the principal place of business of the Company as set forth
in the Purchase Agreement. Any and all notices or other communications
or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile or sent by a nationally
recognized overnight courier service, addressed to each Holder of
Preferred Stock at the facsimile telephone number or address of such
Holder appearing on the books of the Company, or if no such facsimile
telephone number or address appears, at the principal place of business
of the Holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the
date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section
prior to 8:00 p.m. (Eastern Standard Time), (ii) the date after the date
of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section
later than 8:00 p.m. (Eastern Standard Time) on any date and earlier
than 11:59 p.m. (Eastern Standard Time) on such date, (iii) upon
receipt, if sent by a nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required
to be given.
Section 6. Redemption Upon Certain Events. Upon the occurrence of a
Triggering Event (as defined below), each Holder shall (in addition to
all other rights it may have hereunder or under applicable law), have
the right, exercisable at the sole option of such Holder, to require the
Company to redeem all or a portion of the Preferred Stock then held by
such Holder for a redemption price, in cash, equal to the sum of (i) the
Mandatory Redemption Amount (as defined in Section 8) plus (ii) the
product of (A) the number of Underlying Shares issued in respect of
conversions or as payment of dividends hereunder and then held by the
Holder and (B) the Per Share Market Value on the date such redemption is
demanded or the date the redemption price hereunder is paid in full,
whichever is greater. For purposes of this Section, a share of
Preferred Stock is outstanding until such date as the Holder shall have
received Underlying Shares upon a conversion (or attempted conversion)
thereof.
A "Triggering Event" means any one or more of the following events
(whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgement, decree or
order of any court, or any order, rule or regulation of any
administrative or governmental body):
(i) the failure of the Registration Statement to be declared effective
by the Commission on or prior to the 180th day after the Original Issue
Date;
(ii) if, during the "Effectiveness Period" (as defined in Registration
Rights Agreement), the effectiveness of the Registration Statement
lapses for any reason or the Holder shall not be permitted to resell
Registrable Securities (as defined in the Registration Rights Agreement)
under the Underlying Shares Registration Statement;
(iii) the failure of the Common Stock to be listed on the Nasdaq
National Market or the Nasdaq SmallCap Market for a period of 15 days
(which need not be consecutive days);
(iv) the Company shall fail for any reason to deliver certificates
representing Underlying Shares issuable upon a conversion hereunder that
comply with the provisions hereof prior to the 10th day after the
Conversion Date or the Company shall provide notice to any Holder,
including by way of public announcement, at any time, of its intention
not to comply with requests for conversion of any Preferred Stock in
accordance with the terms hereof;
(v) the Company shall be a party to any merger or consolidation pursuant
to which the Company shall not be the surviving entity or shall sell,
transfer or otherwise dispose of in excess of 50% of its assets or
voting securities in one or more transactions, or shall redeem more than
a de minimis number of shares of Common Stock or other Junior Securities
(other than redemptions of Underlying Shares);
(vi) an Event shall not have been cured to the satisfaction of the
Holder prior to the expiration of thirty (30) days from the Event Date
relating thereto;
(vii) the Company shall fail for any reason to deliver the certificate
or certificates required pursuant to a Buy-In and Section 5(b)(iii)
within seven (7) days after notice is deemed delivered hereunder;
(viii) the Company shall fail to have available a sufficient number of
authorized and unreserved shares of Common Stock to issue to such Holder
upon a conversion hereunder.
Section 7. Redemption at Option of Company.
(a) The Company shall have the right, exercisable at any time upon 20
Trading Days notice (an "Optional Redemption Notice") to the Holders of
the Preferred Stock given at any time after the Original Issue Date to
redeem all or any portion of the shares of Preferred Stock which have
not previously been converted or redeemed, at a price equal to the
Optional Redemption Price (as defined below). The entire Optional
Redemption Price shall be paid in cash. Holders of Preferred Stock may
convert (and the Company shall honor such conversions in accordance with
the terms hereof) any shares of Preferred Stock, including shares
subject to an Optional Redemption Notice, during the period from the
date thereof through the 20th Trading Day after the receipt of an
Optional Redemption Notice.
(b) If any portion of the Optional Redemption Price shall not be paid by
the Company within seven (7) calendar days after the 20th Trading Day
after the delivery of an Optional Redemption Notice, interest shall
accrue thereon at the rate of 15% per annum until the Optional
Redemption Price plus all such interest is paid in full (any such amount
shall be paid as liquidated damages and not as a penalty). In addition,
if any portion of the Optional Redemption Price remains unpaid for more
than seven (7) calendar days after the date due, the Holder of the
Preferred Stock subject to such redemption may elect, by written notice
to the Company given at any time thereafter, to either (i) demand
conversion in accordance with the formula and the time frame therefor
set forth herein of all or any portion of the shares of Preferred Stock
for which such Optional Redemption Price, plus accrued liquidated
damages thereof, has not been paid in full (the "Unpaid Redemption
Shares"), in which event the Per Share Market Value for such shares
shall be the lower of the Per Share Market Value calculated on the date
the Optional Redemption Price was originally due and the Per Share
Market Value as of the Holder's written demand for conversion, or
(ii) invalidate ab initio such redemption, notwithstanding anything
herein contained to the contrary. If the Holder elects option
(i) above, the Company shall within three (3) Trading Days of its
receipt of such election deliver to the Holder the shares of Common
Stock issuable upon conversion of the Unpaid Redemption Shares subject
to such Holder conversion demand and otherwise perform its obligations
hereunder with respect thereto; or, if the Holder elects option
(ii) above, the Company shall promptly, and in any event not later than
three (3) Trading Days from receipt of Holder's notice of such election,
return to the Holder all of the Unpaid Redemption Shares.
(c) The "Optional Redemption Price" shall equal the sum of (i) the
product of (A) the number of shares of Preferred Stock to be redeemed
and (B) the product of (1) the average Per Share Market Value for the
five (5) Trading Days immediately preceding (x) the date of the Optional
Redemption Notice or (y) the date of payment in full by the Company of
the Optional Redemption Price, whichever is greater, and (2) the
Conversion Ratio calculated on the date of the Optional Redemption
Notice, and (ii) all other amounts, costs, expenses and liquidated
damages due in respect of such shares of Preferred Stock.
Section 8. Definitions. For the purposes hereof, the following terms
shall have the following meanings:
"Common Stock" means the Company's common stock, $.0001 par value, and
stock of any other class into which such shares may hereafter have been
reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, of which the
numerator is Stated Value plus accrued but unpaid dividends (including
any accrued but unpaid late fees thereon) but only to the extent not
paid in shares of Common Stock in accordance with the terms hereof, and
of which the denominator is the Conversion Price at such time.
"Junior Securities" means the Common Stock and all other equity
securities of the Company, other than the Series B Stock and Series C
Stock, provided they are issued to the Holders of the Preferred Stock.
"Mandatory Redemption Amount" means the sum of (i) the product of (A)
the number of shares of Preferred Stock to be redeemed and (B) the
product of (1) the average Per Share Market Value for the five (5)
Trading Days immediately preceding (x) the date of the Triggering Event
or (y) the date of payment in full by the Company of the applicable
redemption price, whichever is greater, and (2) the Conversion Ratio
calculated on the date of the Triggering Event, and (ii) all other
amounts, costs, expenses and liquidated damages due in respect of such
shares of Preferred Stock.
"Original Issue Date" shall mean the date of the first issuance of any
shares of the Preferred Stock regardless of the number of transfers of
any particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"Per Share Market Value" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on the NASDAQ or
any other stock exchange or quotation system on which the Common Stock
is then listed or if there is no such price on such date, then the
closing bid price on such exchange or quotation system on the date
nearest preceding such date, or (b) if the Common Stock is not listed
then on the NASDAQ or any stock exchange or quotation system, the
closing bid price for a share of Common Stock in the over-the-counter
market, as reported by the National Quotation Bureau Incorporated or
similar organization or agency succeeding to its functions of reporting
prices) at the close of business on such date, or (c) if the Common
Stock is not then reported by the National Quotation Bureau Incorporated
(or similar organization or agency succeeding to its functions of
reporting prices), then the average of the "Pink Sheet" quotes for the
relevant conversion period, as determined in good faith by the Holder,
or (d) if the Common Stock is not then publicly traded the fair market
value of a share of Common Stock as determined by an Appraiser selected
in good faith by the Holders of a majority in interest of the shares of
the Preferred Stock; provided, however, that the Company, after receipt
of the determination by such Appraiser, shall have the right to select
an additional Appraiser, in which case, the fair market value shall be
equal to the average of the determinations by each such Appraiser; and
provided, further that all determinations of the Per Share Market Value
shall be appropriately adjusted for any stock dividends, stock splits or
other similar transactions during such period.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"Purchase Agreement" means the Convertible Preferred Stock Purchase
Agreement, dated as of the Original Issue Date, among the Company and
the original Holder of the Preferred Stock.
"Registration Rights Agreement" means the Registration Rights Agreement,
dated as of the Original Issue Date, by and among the Company and the
original Holder of the Preferred Stock.
"Trading Day" means (a) a day on which the Common Stock is traded on the
NASDAQ or other stock exchange or market on which the Common Stock has
been listed, or (b) if the Common Stock is not listed on the NASDAQ or
on such other stock exchange or market, a day on which the Common Stock
is traded, on the Nasdaq SmallCap Market, or (c) if the Common Stock is
not listed on the Nasdaq SmallCap Market or any stock exchange or
market, a day on which the Common Stock is traded in the
over-the-counter market, as reported by the OTC Bulletin Board, or (c)
if the Common Stock is not quoted on the OTC Bulletin Board, a day on
which the Common Stock is quoted in the over-the-counter market as
reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions of reporting prices);
provided, however, that in the event that the Common Stock is not listed
or quoted as set forth in (a), (b) and (c) hereof, then Trading Day
shall mean any day except Saturday, Sunday and any day which shall be a
legal holiday or a day on which banking institutions in the State of New
York are authorized or required by law or other government action to
close.
"Underlying Shares" means shares of Common Stock into which the
Preferred Stock are convertible, the shares of Common Stock issuable
upon payment of dividends thereon and the shares of Common Stock
issuable upon exercise of the Warrant in accordance with the terms
hereof, the Purchase Agreement and the Warrant.
"Warrant" means the common stock purchase warrant issued to the original
Holder pursuant to the Purchase Agreement.
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of
Series A Convertible Preferred Stock indicated below, into shares
of Common Stock, $.0001 par value (the "Common Stock"), of USCI,
INC. (the "Company") according to the conditions hereof, as of the
date written below. If shares are to be issued in the name of a
person other than undersigned, the undersigned will pay all
transfer taxes payable with respect thereto and is delivering
herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. No fee will be charged to
the Holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations:
Date to Effect Conversion
Number of shares of Preferred Stock to be Converted
Number of shares of Common Stock to be Issued
Applicable Conversion Price
Signature
Name
Address
IN WITNESS WHEREOF, the corporation has caused this certificate to
be executed under its corporate seal this 23rd day of March, 1998.
USCI, Inc.
By: /s/ Robert J. Kostrinsky
Robert J. Kostrinsky,
Executive Vice President
ATTEST:
/s/ Basil H. Ford, Secretary
Basil H. Ford, Secretary
<PAGE>
CERTIFICATE OF DESIGNATION
OF
USCI, INC. (filed with the Delaware Secretary of State on May 5, 1998)
The undersigned corporation hereby certifies as follows:
FIRST: The name of the corporation is USCI, Inc.
SECOND: The following resolutions establishing a new series of
Preferred Shares were adopted by the Board of Directors in accordance
with Section 151 of the General Corporation Laws of the State of
Delaware:
RESOLVED, that 500 Preferred shares, with a par value of
$.01 per share, are to be designated Series B; and be it
further
RESOLVED, that the relative rights, privileges,
preferences, restrictions and/or limitations or those
shares designated Series B are as follows:
Terms of Series B Preferred Stock
Section 1. Designation, Amount and Par Value. The series of preferred
stock shall be designated as 6% Series B Convertible Preferred Stock
(the "Preferred Stock") and the number of shares so designated shall be
500 (which shall not be subject to increase without the consent of the
holders of the Preferred Stock ("Holder"). Each share of Preferred
Stock shall have a par value of $.01 per share and a stated value of
$10,000.00 per share (the "Stated Value").
Section 2. Dividends.
(a) Holders of Preferred Stock shall be entitled to receive, when and
as declared by the Board of Directors out of funds legally available
therefor, and USCI, Inc. (the "Company") shall pay, cumulative dividends
at the rate per share (as a percentage of the Stated Value per share)
equal to 6% per annum, payable on a quarterly basis on March 31, June
30, September 30 and December 31 of each year during the term hereof
(each a "Dividend Payment Date"), commencing on June 30, 1998, in cash
or shares of Common Stock (as defined in Section 8) at (subject to the
terms and conditions set fort herein) the option of the Company. Any
dividends not paid on any Dividend Payment Date shall accrue and shall
be due and payable upon conversion of the Preferred Stock. A party that
holds shares of Preferred Stock on a Dividend Payment Date will be
entitled to receive such dividend payment and any other accrued and
unpaid dividends which accrued prior to such Dividend Payment Date,
without regard to any sale or disposition of such Preferred Stock
subsequent to the applicable record date. All overdue accrued and
unpaid dividends and other amounts due herewith shall entail a late fee
at the rate of 15% per annum (to accrue daily, from the date such
dividend is due hereunder through and including the date of payment).
Except as otherwise provided herein, if at any time the Company pays
less than the total amount of dividends then accrued on account of the
Preferred Stock, such payment shall be distributed ratably among the
holders of the Preferred Stock based upon the number of shares held by
each Holder. Payment of dividends on the Preferred Stock is further
subject to the provisions of Section 5(c)(i). The Company shall provide
the Holders notice of its intention to pay dividends in cash or shares
of Common Stock not less than 10 Trading Days prior to the Dividend
Payment Date for so long as shares of Preferred Stock are outstanding,
and in the event the Company fails to provide such notice, it shall pay
such dividends in shares of Common Stock. If dividends are paid in
shares of Common Stock, the number of shares of Common Stock payable as
such dividend to each Holder shall be equal to the cash amount of such
dividend payable to such Holder on such Dividend Payment Date divided by
the Conversion Price at such time (as defined below).
(b) Notwithstanding anything to the contrary contained herein, the
Company may not issue shares of Common Stock in payment of dividends
(and must deliver cash in respect thereof) on the Preferred Stock if:
(i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes is insufficient to pay such
dividends in shares of Common Stock;
(ii) the shares of Common Stock to be issued in respect of such
dividends are not registered for resale pursuant to an effective
registration statement that names the recipient of such dividend as a
selling stockholder thereunder and may not be sold without volume
restrictions pursuant to Rule 144 promulgated under the Securities Act
of 1933, as amended (the "Securities Act"), as determined by counsel to
the Company pursuant to a written opinion letter, addressed to the
Company's transfer agent in the form and substance acceptable to the
Holder and such transfer agent;
(iii) the shares of Common Stock to be issued in respect of such
dividends are not listed on the Nasdaq National Market System (the
"NASDAQ") and any other exchange or quotation system on which the Common
Stock is then listed for trading;
(iv) the Company has failed to timely satisfy its obligations pursuant
to any Conversion Notice (as defined in Section 5(a)(ii)); or
(v) the issuance of such shares would result in the recipient thereof
beneficially owning, as determined in accordance with Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), more than 4.999% of the then issued and outstanding
shares of Common Stock.
(c) So long as any Preferred Stock shall remain outstanding, neither
the Company nor any subsidiary thereof shall redeem, purchase or
otherwise acquire directly or indirectly any Junior Securities (as
defined in Section 8), nor shall the Company directly or indirectly pay
or declare any dividend or make any distribution (other than a dividend
or distribution described in Section 5) upon, nor shall any distribution
be made in respect of, any Junior Securities, nor shall any monies be
set aside for or applied to the purchase or redemption (through a
sinking fund or otherwise) of any Junior Securities or shares pari passu
with the Preferred Stock, except for repurchases effected by the Company
on the open market, pursuant to a direct stock purchase plan.
Section 3. Voting Rights. Except as otherwise provided herein and as
otherwise required by law, the Preferred Stock shall have no voting
rights. However, so long as any shares of Preferred Stock are
outstanding, the Company shall not and shall cause its subsidiaries not
to, without the affirmative vote of the Holders of all of the shares of
the Preferred Stock then outstanding, (a) alter or change adversely the
powers, preferences or rights given to the Preferred Stock, (b) alter or
amend this Certificate of Designation, (c) authorize or create any class
of stock ranking as to dividends or distribution of assets upon a
Liquidation (as defined in Section 4) or otherwise senior to the
Preferred Stock, except for any series of Preferred Stock issued and
sold in accordance with the Purchase Agreement, (d) amend its
Certificate of Incorporation, bylaws or other charter documents so as to
affect adversely any rights of any Holders, (e) increase the authorized
number of shares of Preferred Stock, or (f) enter into any agreement
with respect to the foregoing.
Section 4. Liquidation. Upon any liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary (a "Liquidation"), the
Holders shall be entitled to receive out of the assets of the Company,
whether such assets are capital or surplus, for each share of Preferred
Stock an amount equal to the Stated Value plus all due but unpaid
dividends per share, whether declared or not, before any distribution or
payment shall be made to the holders of any Junior Securities, and if
the assets of the Company shall be insufficient to pay in full such
amounts, then the entire assets to be distributed to the Holders of
Preferred Stock shall be distributed among the Holders of Preferred
Stock ratably in accordance with the respective amounts that would be
payable on such shares if all amounts payable thereon were paid in full.
A sale, conveyance or disposition of all or substantially all of the
assets of the Company or the effectuation by the Company of a
transaction or series of related transactions in which more than 50% of
the voting power of the Company is disposed of, or a consolidation or
merger of the Company with or into any other company or companies shall
not be treated as a Liquidation, but instead shall be subject to the
provisions of Section 5. The Company shall mail written notice of any
such Liquidation, not less than 45 days prior to the payment date stated
therein, to each record Holder of Preferred Stock.
Section 5. Conversion.
(a)(i) Each share of Preferred Stock (in minimum amounts of $50,000 or
such lesser amounts as the Company agrees or as may then be held by the
converting Holder) shall be convertible into shares of Common Stock
(subject to reduction pursuant to Section 5(a)(iii) hereof and Section
3.8 of the Purchase Agreement) at the Conversion Ratio (as defined in
Section 6) at the option of the Holder in whole or in part at any time
after the earlier of (i) the 90th day following the Original Issue Date
(as defined in Section 8) or (ii) the date the Underlying Shares
Registration Statement is declared effective by Securities and Exchange
Commission (the "Commission"). The Holders shall effect conversions by
surrendering the certificate or certificates representing the shares of
Preferred Stock to be converted to the Company, together with the form
of conversion notice attached hereto as Exhibit A (a "Conversion
Notice"). Each Conversion Notice shall specify the number of shares of
Preferred Stock to be converted and the date on which such conversion is
to be effected, which date may not be prior to the date the Holder
delivers such Conversion Notice by facsimile (the "Conversion Date").
If no Conversion Date is specified in a Conversion Notice, the
Conversion Date shall be the date that the Conversion Notice is deemed
delivered pursuant to Section 5(i). Subject to Sections 5(b) and
5(a)(iii) hereof, each Conversion Notice, once given, shall be
irrevocable. If the Holder is converting less than all shares of
Preferred Stock represented by the certificate or certificates tendered
by the Holder with the Conversion Notice, or if a conversion hereunder
cannot be effected in full for any reason, the Company shall promptly
deliver to such Holder (in the manner and within the time set forth in
Section 5(b)) a certificate for such number of shares as have not been
converted.
(ii) Any outstanding shares of Preferred Stock not theretofore converted
on the third anniversary of the Original Issue Date shall automatically
be converted into shares of Common Stock at the Conversion Price then in
effect. Notwithstanding the foregoing, no such conversion shall occur
unless (a) the Underlying Shares that would then be issuable upon such
conversion could either be resold by such Holder pursuant to Rule
144(k) promulgated under the Securities Act or there is then an
effective Underlying Shares Registration Statement naming the recipient
of such shares as a selling stockholder thereunder, (b) the Company has
a sufficient number of authorized and unreserved Common Stock to issue
upon such conversion. Further, the number of shares of Preferred Stock
that are subject to conversion pursuant to this section shall be limited
to the number of Underlying Shares which may be issued upon such
conversion at the prevailing Conversion Price in accordance with Rule
4460(i) promulgated under the Rules of the Nasdaq Stock Market. Any
shares of Preferred Stock which cannot be converted at the then
Conversion Price as a result of such Rule shall be subject to the
provisions of Section 5(a)(iii).
(iii) If on any Conversion Date (A) the Common Stock is listed for
trading on the Nasdaq National Market or the Nasdaq SmallCap Market, (B)
the Conversion Price then in effect is such that the aggregate number of
shares of Common Stock that would then be issuable upon conversion in
full of all then outstanding shares of Preferred Stock, together with
any shares of the Common Stock previously issued upon conversion of the
shares of Preferred Stock and as payment of interest thereon, would
equal or exceed 20% of the number of shares of the Common Stock
outstanding on the Original Issue Date (such number of shares as would
not equal or exceed such 20% limit, the "Issuable Maximum"), and (C) the
Company shall not have previously obtained the vote of shareholders (the
"Shareholder Approval"), if any, as may be required by the rules and
regulations of The Nasdaq Stock Market applicable to approve the
issuance of Common Stock in excess of the Issuable Maximum in a private
placement whereby shares of Common Stock are deemed to have been issued
at a price that is less than the greater of book or fair market value of
the Common Stock, then the Company shall issue to the Holder so
requesting a conversion a number of shares of Common Stock equal to the
Issuable Maximum and, with respect to the remainder of the aggregate
stated value of the shares of Preferred Stock then held by such Holder
for which a conversion in accordance with the Conversion Price would
result in an issuance of Common Stock in excess of the Issuable Maximum,
the converting Holder shall have the option to require the Company to
either (1) use its best efforts to obtain the Shareholder Approval
applicable to such issuance as soon as is possible, but in any event not
later than the 60th day after such request, or (2)(i) issue and deliver
to such Holder a number of shares of Common Stock as equals (x) the
aggregate stated value of the shares of Preferred Stock tendered for
conversion in respect of the Conversion Notice at issue but for which a
conversion in accordance with the other terms hereof would result in an
issuance of Common Stock in excess of the Issuable Maximum, divided by
(y) the Initial Conversion Price (as defined below), and (ii) cash in an
amount equal to the product of (x) the Per Share Market Value on the
Conversion Date and (y) the number of shares of Common Stock in excess
of such Holder's pro rata portion of the Issuable Maximum that would
have otherwise been issuable to the Holder in respect of such conversion
but for the provisions of this Section (such amount of cash being
hereinafter referred to as the "Discount Equivalent"), or (3) pay cash
to the converting Holder in an amount equal to the Mandatory Redemption
Amount (as defined in Section 5(b)(ii) hereunder) for the number of
Underlying Shares in or issuable upon such conversion in excess of the
Issuable Maximum. If the Company fails to pay the Discount Equivalent
or the Mandatory Redemption Amount, as the case may be, in full pursuant
to this Section within seven (7) days after the date payable, the
Company will pay interest thereon at a rate of 15% per annum to the
converting Holder, accruing daily from the Conversion Date until such
amount, plus all such interest thereon, is paid in full.
(b) (i) Not later than three (3) Trading Days after any Conversion
Date, the Company will deliver to the Holder (i) a certificate or
certificates which shall be free of restrictive legends and trading
restrictions (other than those required by Section 3.1(b) of the
Purchase Agreement) representing the number of shares of Common Stock
being acquired upon the conversion of shares of Preferred Stock (subject
to reduction pursuant to Section 5(a)(iii) and Section 3.8 of the
Purchase Agreement), (ii) one or more certificates representing the
number of shares of Preferred Stock tendered for conversion that were
not requested to be converted (or that the Company is prohibited from
converting), (iii) a bank check in the amount of accrued and unpaid
dividends (if the Company has elected to pay accrued dividends in cash),
and (iv) if the Company has elected and is permitted hereunder to pay
accrued dividends in shares of Common Stock, certificates, which shall
be free of restrictive legends and trading restrictions (other than
those required by Section 3.1 (b) of the Purchase Agreement),
representing such number of shares of Common Stock as equals such
dividend divided by the Conversion Price on the Dividend Payment Date;
provided, however, that the Company shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon
conversion of any shares of Preferred Stock until certificates
evidencing such shares of Preferred Stock are either delivered for
conversion to the Company or any transfer agent for the Preferred Stock
or Common Stock, or the Holder of such Preferred Stock notifies the
Company that such certificates have been lost, stolen or destroyed and
provides a bond (or other adequate security) reasonably satisfactory to
the Company to indemnify the Company from any loss incurred by it in
connection therewith. The Company shall, upon request of the Holder, if
available, use its best efforts to deliver any certificate or
certificates required to be delivered by the Company under this Section
electronically through the Depository Trust Corporation or another
established clearing corporation performing similar functions. If in
the case of any Conversion Notice such certificate or certificates,
including for purposes hereof, any shares of Common Stock to be issued
on the Conversion Date on account of accrued but unpaid dividends
hereunder, are not delivered to or as directed by the applicable Holder
by the third Trading Day after the Conversion Date, the Holder shall be
entitled by written notice to the Company at any time on or before its
receipt of such certificate or certificates thereafter, to rescind such
conversion, in which event the Company shall immediately return the
certificates representing the shares of Preferred Stock tendered for
conversion, (such recision shall be in addition to, and not in lieu of,
the rights set forth elsewhere herein).
(ii) If the Company fails to deliver to the Holder such certificate or
certificates pursuant to Section 5(b)(i), including for purposes hereof,
any shares of Common Stock to be issued on the Conversion Date on
account of accrued but unpaid dividends hereunder, prior to the third
Trading Day after the Conversion Date, the Company shall pay to such
Holder, in cash, as liquidated damages and not as a penalty, $5,000 for
each day after such third Trading Day until such certificates are
delivered. Nothing herein shall limit a Holder's right to pursue actual
damages for the Company's failure to deliver certificates representing
shares of Common Stock upon conversion within the period specified
herein (including, without limitation, damages relating to any purchase
of shares of Common Stock by such Holder to make delivery on a sale
effected in anticipation of receiving certificates representing shares
of Common Stock upon conversion, such damages to be in an amount equal
to (A) the aggregate amount paid by such Holder for the shares of Common
Stock so purchased minus (B) the aggregate amount of net proceeds, if
any, received by such Holder from the sale of the shares of Common Stock
issued by the Company pursuant to such conversion), and such Holder
shall have the right to pursue all remedies available to it at law or in
equity including, without limitation, a decree of specific performance
and/or injunctive relief. The exercise of any such rights shall not
prohibit the Holders from seeking to enforce damages pursuant to any
other Section hereof or under applicable law.
(iii) In addition to any other rights available to the Holder, if the
Company fails to deliver to the Holder such certificate or certificates
pursuant to Section 5(b)(i), including for purposes hereof, any shares
of Common Stock to be issued on the Conversion Date on account of
accrued but unpaid dividends hereunder, prior to the third Trading Day
after the Conversion Date, and if after such the third Trading Day the
Holder purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by such Holder of the
Underlying Shares which the Holder anticipated receiving upon such
conversion (a "Buy-In"), then the Company shall pay in cash to the
Holder (in addition to any remedies available to or elected by the
Holder) the amount by which (x) the Holder's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock
so purchased exceeds (y) the aggregate stated value of the shares of
Preferred Stock for which such conversion was not timely honored. For
example, if the Holder purchases shares of Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an attempted
conversion of $10,000 aggregate stated value of the shares of Preferred
Stock, the Company shall be required to pay the Holder $1,000. The
Holder shall provide the Company written notice indicating the amounts
payable to the Holder in respect of the Buy-In.
(c) (i) The conversion price for each share of Preferred Stock (the
"Conversion Price") in effect on any Conversion Date shall be the lesser
of (a) 120% of the average of the Per Share Market Values for the five
(5) Trading Days immediately preceding the Original Issue Date (the
"Initial Conversion Price") or (b) 85% of the average of the three (3)
lowest Per Share Market Values during the twenty five (25) Trading Days
prior to the date of the applicable Conversion Notice, which Per Share
Market Values shall be chosen by the converting Holder; provided,
however, that, (a) if the Underlying Shares Registration Statement (as
defined in the Registration Rights Agreement) is not filed on or prior
to the Filing Date (as defined in the Registration Rights Agreement), or
(b) if the Company fails to file with the Commission a request for
acceleration in accordance with Rule 12d1-2 promulgated under the
Exchange Act within five (5) days of the date that the Company is
notified (orally or in writing, whichever is earlier) by the Commission
that an Underlying Shares Registration Statement will not be "reviewed,"
or not subject to further review, or (c) if the Underlying Shares
Registration Statement is not declared effective by the Commission on or
prior to the 90th day after the Original Issue Date, or (d) if such
Underlying Shares Registration Statement is filed with and declared
effective by the Commission but thereafter ceases to be effective as to
all Registrable Securities (as such term is defined in the Registration
Rights Agreement) at any time prior to the expiration of the
"Effectiveness Period" (as such term is defined in the Registration
Rights Agreement), without being succeeded within 10 Trading Days by a
subsequent Underlying Shares Registration Statement filed with and
declared effective by the Commission, or (e) if trading in the Common
Stock shall be suspended, or if the Common Stock shall be delisted, for
more than three (3) Trading Days, or (f) if the conversion rights of the
Holders are suspended for any reason, or if a Holder is not permitted to
resell Registrable Securities under an Underlying Shares Registration
Statement, or (g) if the Company is required to convene a shareholders
meeting pursuant to Section 5(a)(iii) and fails to convene a meeting of
shareholders within the time periods specified in Section 5(a)(iii) or
does so convene a meeting of shareholders within such time period but
fails to obtain Shareholder Approval at such meeting, or (h) if an
amendment to the Underlying Securities Registration Statement is not
filed by the Company with the Commission within ten (10) days of the
Commission's notifying the Company that such amendment is required in
order for the Underlying Securities Registration Statement to be
declared effective, or (j) the Company fails to comply with requests for
conversion of any Preferred Stock into shares of Common Stock in
accordance with the terms hereof (any such failure or breach being
referred to as an "Event," and for purposes of clauses (a), (c), (f) and
(g) the date on which such Event occurs, or for purposes of clause (b)
the date on which such five (5) day period is exceeded, or for purposes
of clauses (d) and (h) the date which such 10 Trading Day-period is
exceeded, or for purposes of clause (e) the date on which such three
Trading Day period is exceeded, being referred to as "Event Date"), the
Conversion Price shall be decreased by 2.5% each month (i.e., the
Conversion Price would decrease by 2.5% as of the Event Date and an
additional 2.5% as of each monthly anniversary of the Event Date) until
the earlier to occur of the second month anniversary after the Event
Date and such time as the applicable Event is cured. Commencing the
second month anniversary after the Event Date, the Company shall pay to
each Holder 2.5% of the product of the Stated Value and the number of
shares of Preferred Stock then held by such Holder, in cash as
liquidated damages, and not as a penalty, on the first day of each
monthly anniversary of the Event Date until such time as the applicable
Event, is cured. Any decrease in the Conversion Price pursuant to this
Section shall continue notwithstanding the fact that the Event causing
such decrease has been subsequently cured.
(ii) If the Company, at any time while any shares of Preferred Stock
are outstanding, shall (a) pay a stock dividend or otherwise make a
distribution or distributions on shares of its Junior Securities or pari
passu securities (other than with respect to the Series A Preferred
Stock or Series C Stock) payable in shares of Common Stock, (b)
subdivide outstanding shares of Common Stock into a larger number of
shares, (c) combine outstanding shares of Common Stock into a smaller
number of shares, or (d) issue by reclassification of shares of Common
Stock any shares of capital stock of the Company, the Initial Conversion
Price shall be multiplied by a fraction of which the numerator shall be
the number of shares of Common Stock outstanding before such event and
of which the denominator shall be the number of shares of Common Stock
outstanding after such event. Any adjustment made pursuant to this
Section 5(c)(ii) shall become effective immediately after the record
date for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately after
the effective date in the case of a subdivision, combination or
re-classification.
(iii) If the Company, at any time while any shares of Preferred Stock
are outstanding, shall issue rights or warrants to all holders of Common
Stock entitling them to subscribe for or purchase shares of Common Stock
at a price per share less than the Per Share Market Value of the Common
Stock at the record date mentioned below, the Initial Conversion Price
shall be multiplied by a fraction, of which the denominator shall be the
number of shares of Common Stock (excluding treasury shares, if any)
outstanding on the date of issuance of such rights or warrants plus the
number of additional shares of Common Stock offered for subscription or
purchase, and of which the numerator shall be the number of shares of
Common Stock (excluding treasury shares, if any) outstanding on the date
of issuance of such rights or warrants plus the number of shares which
the aggregate offering price of the total number of shares so offered
would purchase at such Per Share Market Value. Such adjustment shall be
made whenever such rights or warrants are issued, and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such rights or warrants. However, upon
the expiration of any right or warrant to purchase Common Stock the
issuance of which resulted in an adjustment in the Initial Conversion
Price pursuant to this Section 5(c)(iii), if any such right or warrant
shall expire and shall not have been exercised, the Initial Conversion
Price shall immediately upon such expiration be recomputed and effective
immediately upon such expiration be increased to the price which it
would have been (but reflecting any other adjustments in the Initial
Conversion Price made pursuant to the provisions of this Section 5 after
the issuance of such rights or warrants) had the adjustment of the
Initial Conversion Price made upon the issuance of such rights or
warrants been made on the basis of offering for subscription or purchase
only that number of shares of Common Stock actually purchased upon the
exercise of such rights or warrants actually exercised.
(iv) If the Company, at any time while shares of Preferred Stock are
outstanding, shall distribute to all holders of Common Stock (and not to
Holders of Preferred Stock) evidences of its indebtedness or assets or
rights or warrants to subscribe for or purchase any security (excluding
those referred to in Sections 5(c)(ii) and (iii) above), then in each
such case the Conversion Price at which each share of Preferred Stock
shall thereafter be convertible shall be determined by multiplying the
Conversion Price in effect immediately prior to the record date fixed
for determination of stockholders entitled to receive such distribution
by a fraction of which the denominator shall be the Per Share Market
Value of Common Stock determined as of the record date mentioned above,
and of which the numerator shall be such Per Share Market Value of the
Common Stock on such record date less the then fair market value at such
record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as
determined by the Board of Directors in good faith; provided, however,
that in the event of a distribution exceeding ten percent (10%) of the
net assets of the Company, if the Holders of a majority in interest of
the Preferred Stock dispute such valuation, such fair market value shall
be determined by a nationally recognized or major regional investment
banking firm or firm of independent certified public accountants of
recognized standing (which may be the firm that regularly examines the
financial statements of the Company) (an "Appraiser") selected in good
faith by the Holders of a majority in interest of the shares of
Preferred Stock then outstanding; and provided, further, that the
Company, after receipt of the determination by such Appraiser shall have
the right to select an additional Appraiser, in good faith, in which
case the fair market value shall be equal to the average of the
determinations by each such Appraiser. In either case the adjustments
shall be described in a statement provided to the Holders of Preferred
Stock of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of
Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the
record date mentioned above.
(v) All calculations under this Section 5 shall be made to the nearest
cent or the nearest 1/100th of a share, as the case may be.
(vi) Whenever the Conversion Price is adjusted pursuant to Section
5(c)(i),(ii),(iii) or (iv), the Company shall promptly mail to each
Holder of Preferred Stock, a notice setting forth the Conversion Price
after such adjustment and setting forth a brief statement of the facts
requiring such adjustment.
(vii) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person
pursuant to which (i) a majority of the Company's Board of Directors
will not constitute a majority of the board of directors of the
surviving entity or (ii) less than 50% of the outstanding shares of the
capital stock of the surviving entity will be held by the same
shareholders of the Company prior to such reclassification,
consolidation or merger (a "Change of Control Transaction"), the sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is
converted into other securities, cash or property, the Holders of the
Preferred Stock then outstanding shall have the right thereafter to
convert such shares only into the shares of stock and other securities,
cash and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification, consolidation, merger,
sale, transfer or share exchange, and the Holders of the Preferred Stock
shall be entitled upon such event to receive such amount of securities,
cash or property as the shares of the Common Stock of the Company into
which such shares of Preferred Stock could have been converted
immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange would have been entitled. The terms of any
such consolidation, merger, sale, transfer or share exchange shall
include such terms so as to continue to give to the Holder of Preferred
Stock the right to receive the securities, cash or property set forth in
this Section 5(c)(vii) upon any conversion or redemption following such
consolidation, merger, sale, transfer or share exchange. This provision
shall similarly apply to successive reclassifications, consolidations,
mergers, sales, transfers or share exchanges. With respect to any such
reclassification, consolidation or merger, each Holder shall have the
option to require the Company to redeem its shares of Preferred Stock at
a price per share equal to the product of (i) the average Per Share
Market Value for the five (5) Trading Days immediately preceding (1) the
effective date, the date of the closing or the date of the announcement,
as the case may be, of the reclassification, consolidation, merger,
sale, transfer or share exchange the triggering such redemption right or
(2) the date of payment in full by the Company of the redemption price
hereunder, whichever is greater, and (ii) the Conversion Ratio
calculated on the date of the closing or the effective date, as the case
may be, of the reclassification, consolidation, merger, sale, transfer
or share exchange triggering such redemption right, as the case may be.
The entire redemption price shall be paid in cash, and if any portion of
the applicable redemption price shall not be paid by the Company within
seven (7) calendar days after the date due, late fees shall accrue
thereon at the rate of 15% per annum until the redemption price plus all
such late fees are paid in full (which amount shall be paid as
liquidated damages and not as a penalty). In addition, if any portion
of such redemption price remains unpaid for more than seven (7) calendar
days after the date due, the Holder of the Preferred Stock subject to
such redemption may elect, by written notice to the Company given within
30 days after the date due, to either (i) demand conversion in
accordance with the formula and the time frame therefor set forth in
Section 5 of all of the shares of Preferred Stock for which such
redemption price, plus accrued liquidated damages thereof, has not been
paid in full (the "Unpaid Redemption Shares"), in which event the Per
Share Market Value for such shares shall be the lower of the Per Share
Market Value calculated on the date such redemption price was originally
due and the Per Share Market Value as of the Holder's written demand for
conversion, or (ii) invalidate ab initio such redemption,
notwithstanding anything herein contained to the contrary. If the
Holder elects option (i) above, the Company shall within three (3)
Trading Days of its receipt of such election deliver to the Holder the
shares of Common Stock issuable upon conversion of the Unpaid Redemption
Shares subject to such Holder conversion demand and otherwise perform
its obligations hereunder with respect thereto; or, if the Holder elects
option (ii) above, the Company shall promptly, and in any event not
later than three (3) Trading Days from receipt of Holder's notice of
such election, return to the Holder all of the Unpaid Redemption Shares.
(viii) If:
A. the Company shall declare a dividend (or any other distribution) on
its Common Stock; or
B. the Company shall declare a special nonrecurring cash dividend on or
a redemption of its Common Stock; or
C. the Company shall authorize the granting to all holders of the Common
Stock rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights; or
D. the approval of any stockholders of the Company shall be required in
connection with any reclassification of the Common Stock of the Company,
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, of
any compulsory share of exchange whereby the Common Stock is converted
into other securities, cash or property; or
E. the Company shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of Preferred Stock, and shall
cause to be mailed to the Holders of Preferred Stock at their last
addresses as they shall appear upon the stock books of the Company, at
least 20 calendar days prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which a record
is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the
date as of which the holders of Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is expected to
become effective or close, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale,
transfer or share exchange; provided, however, that the failure to mail
such notice or any defect therein or in the mailing thereof shall not
affect the validity of the corporate action required to be specified in
such notice. Holders are entitled to convert shares of Preferred Stock
during the 20-day period commencing the date of such notice to the
effective date of the event triggering such notice.
(ix) If the Company (i) makes a public announcement that it intends to
enter into a Change of Control Transaction or (ii) any person, group or
entity (including the Company, but excluding a Holder or any affiliate
of a Holder) publicly announces a bona fide tender offer, exchange offer
or other transaction to purchase 50% or more of the Common Stock (such
announcement being referred to herein as a "Major Announcement" and the
date on which a Major Announcement is made, the "Announcement Date"),
then, in the event that a Holder seeks to convert shares of Preferred
Stock on or following the Announcement Date, the Conversion Price shall,
effective upon the Announcement Date and continuing through the earlier
to occur of the consummation of the proposed transaction or tender
offer, exchange offer or other transaction and the Abandonment Date (as
defined below), be equal to the lower of (x) the average Per Share
Market Value on the five Trading Days immediately preceding (but not
including) the Announcement Date and (y) the Conversion Price in effect
on the Conversion Date for such Preferred Stock. "Abandonment Date"
means with respect to any proposed transaction or tender offer, exchange
offer or other transaction for which a public announcement as
contemplated by this paragraph has been made, the date upon which the
Company (in the case of clause (i) above) or the person, group or entity
(in the case of clause (ii) above) publicly announces the termination or
abandonment of the proposed transaction or tender offer, exchange offer
or another transaction which caused this paragraph to become operative.
(d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the
purpose of issuance upon conversion of Preferred Stock and payment of
dividends on Preferred Stock, each as herein provided, free from
preemptive rights or any other actual contingent purchase rights of
persons other than the Holders of Preferred Stock, not less than such
number of shares of Common Stock as shall (subject to any additional
requirements of the Company as to reservation of such shares set forth
in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5(a) and Section 5(c)) upon the
conversion of all outstanding shares of Preferred Stock and payment of
dividends hereunder. The Company covenants that all shares of Common
Stock that shall be so issuable shall, upon issue, be duly and validly
authorized, issued and fully paid, nonassessable and freely tradeable,
subject to the legend requirements of Section 3.1 (b) of the Purchase
Agreement.
(e) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common
Stock, but may if otherwise permitted, make a cash payment in respect of
any final fraction of a share based on the Per Share Market Value at
such time. If the Company elects not, or is unable, to make such a cash
payment, the Holder of a share of Preferred Stock shall be entitled to
receive, in lieu of the final fraction of a share, one whole share of
Common Stock.
(f) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the
Holders thereof for any documentary stamp or similar taxes that may be
payable in respect of the issue or delivery of such certificate,
provided that the Company shall not be required to pay any tax that may
be payable in respect of any transfer involved in the issuance and
delivery of any such certificate upon conversion in a name other than
that of the Holder of such shares of Preferred Stock so converted and
the Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof
shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been
paid.
(g) Shares of Preferred Stock converted into Common Stock shall be
canceled and shall have the status of authorized but unissued shares of
undesignated stock.
(h) Any and all notices or other communications or deliveries to be
provided by the Holders of the Preferred Stock hereunder, including,
without limitation, any Conversion Notice, shall be in writing and
delivered personally, by facsimile or sent by a nationally recognized
overnight courier service, addressed to the attention of the Chief
Executive Officer of the Company at the facsimile telephone number or
address of the principal place of business of the Company as set forth
in the Purchase Agreement. Any and all notices or other communications
or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile or sent by a nationally
recognized overnight courier service, addressed to each Holder of
Preferred Stock at the facsimile telephone number or address of such
Holder appearing on the books of the Company, or if no such facsimile
telephone number or address appears, at the principal place of business
of the Holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the
date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section
prior to 8:00 p.m. (Eastern Standard Time), (ii) the date after the date
of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section
later than 8:00 p.m. (Eastern Standard Time) on any date and earlier
than 11:59 p.m. (Eastern Standard Time) on such date, (iii) upon
receipt, if sent by a nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required
to be given.
Section 6. Redemption Upon Certain Events. Upon the occurrence of a
Triggering Event (as defined below), each Holder shall (in addition to
all other rights it may have hereunder or under applicable law), have
the right, exercisable at the sole option of such Holder, to require the
Company to redeem all or a portion of the Preferred Stock then held by
such Holder for a redemption price, in cash, equal to the sum of (i) the
Mandatory Redemption Amount (as defined in Section 8) plus (ii) the
product of (A) the number of Underlying Shares issued in respect of
conversions or as payment of dividends hereunder and then held by the
Holder and (B) the Per Share Market Value on the date such redemption is
demanded or the date the redemption price hereunder is paid in full,
whichever is greater. For purposes of this Section, a share of
Preferred Stock is outstanding until such date as the Holder shall have
received Underlying Shares upon a conversion (or attempted conversion)
thereof.
A "Triggering Event" means any one or more of the following events
(whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgement, decree or
order of any court, or any order, rule or regulation of any
administrative or governmental body):
(i) the failure of the Registration Statement to be declared effective
by the Commission on or prior to the 180th day after the Original Issue
Date;
(ii) if, during the "Effectiveness Period" (as defined in Registration
Rights Agreement), the effectiveness of the Registration Statement
lapses for any reason or the Holder shall not be permitted to resell
Registrable Securities (as defined in the Registration Rights Agreement)
under the Underlying Shares Registration Statement;
(iii) the failure of the Common Stock to be listed on the Nasdaq
National Market or the Nasdaq SmallCap Market for a period of 15 days
(which need not be consecutive days);
(iv) the Company shall fail for any reason to deliver certificates
representing Underlying Shares issuable upon a conversion hereunder that
comply with the provisions hereof prior to the 10th day after the
Conversion Date or the Company shall provide notice to any Holder,
including by way of public announcement, at any time, of its intention
not to comply with requests for conversion of any Preferred Stock in
accordance with the terms hereof;
(v) the Company shall be a party to any merger or consolidation pursuant
to which the Company shall not be the surviving entity or shall sell,
transfer or otherwise dispose of in excess of 50% of its assets or
voting securities in one or more transactions, or shall redeem more than
a de minimis number of shares of Common Stock or other Junior Securities
(other than redemptions of Underlying Shares);
(vi) an Event shall not have been cured to the satisfaction of the
Holder prior to the expiration of thirty (30) days from the Event Date
relating thereto;
(vii) the Company shall fail for any reason to deliver the certificate
or certificates required pursuant to a Buy-In and Section 5(b)(iii)
within seven (7) days after notice is deemed delivered hereunder;
(viii) the Company shall fail to have available a sufficient number of
authorized and unreserved shares of Common Stock to issue to such Holder
upon a conversion hereunder.
Section 7. Redemption at Option of Company.
(a) The Company shall have the right, exercisable at any time upon 20
Trading Days notice (an "Optional Redemption Notice") to the Holders of
the Preferred Stock given at any time after the Original Issue Date to
redeem all or any portion of the shares of Preferred Stock which have
not previously been converted or redeemed, at a price equal to the
Optional Redemption Price (as defined below). The entire Optional
Redemption Price shall be paid in cash. Holders of Preferred Stock may
convert (and the Company shall honor such conversions in accordance with
the terms hereof) any shares of Preferred Stock, including shares
subject to an Optional Redemption Notice, during the period from the
date thereof through the 20th Trading Day after the receipt of an
Optional Redemption Notice.
(b) If any portion of the Optional Redemption Price shall not be paid by
the Company within seven (7) calendar days after the 20th Trading Day
after the delivery of an Optional Redemption Notice, interest shall
accrue thereon at the rate of 15% per annum until the Optional
Redemption Price plus all such interest is paid in full (any such amount
shall be paid as liquidated damages and not as a penalty). In addition,
if any portion of the Optional Redemption Price remains unpaid for more
than seven (7) calendar days after the date due, the Holder of the
Preferred Stock subject to such redemption may elect, by written notice
to the Company given at any time thereafter, to either (i) demand
conversion in accordance with the formula and the time frame therefor
set forth herein of all or any portion of the shares of Preferred Stock
for which such Optional Redemption Price, plus accrued liquidated
damages thereof, has not been paid in full (the "Unpaid Redemption
Shares"), in which event the Per Share Market Value for such shares
shall be the lower of the Per Share Market Value calculated on the date
the Optional Redemption Price was originally due and the Per Share
Market Value as of the Holder's written demand for conversion, or
(ii) invalidate ab initio such redemption, notwithstanding anything
herein contained to the contrary. If the Holder elects option
(i) above, the Company shall within three (3) Trading Days of its
receipt of such election deliver to the Holder the shares of Common
Stock issuable upon conversion of the Unpaid Redemption Shares subject
to such Holder conversion demand and otherwise perform its obligations
hereunder with respect thereto; or, if the Holder elects option
(ii) above, the Company shall promptly, and in any event not later than
three (3) Trading Days from receipt of Holder's notice of such election,
return to the Holder all of the Unpaid Redemption Shares.
(c) The "Optional Redemption Price" shall equal the sum of (i) the
product of (A) the number of shares of Preferred Stock to be redeemed
and (B) the product of (1) the average Per Share Market Value for the
five (5) Trading Days immediately preceding (x) the date of the Optional
Redemption Notice or (y) the date of payment in full by the Company of
the Optional Redemption Price, whichever is greater, and (2) the
Conversion Ratio calculated on the date of the Optional Redemption
Notice, and (ii) all other amounts, costs, expenses and liquidated
damages due in respect of such shares of Preferred Stock.
Section 8. Definitions. For the purposes hereof, the following terms
shall have the following meanings:
"Common Stock" means the Company's common stock, $.0001 par value, and
stock of any other class into which such shares may hereafter have been
reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, of which the
numerator is Stated Value plus accrued but unpaid dividends (including
any accrued but unpaid late fees thereon) but only to the extent not
paid in shares of Common Stock in accordance with the terms hereof, and
of which the denominator is the Conversion Price at such time.
"Junior Securities" means the Common Stock and all other equity
securities of the Company, other than the Series A Stock and Series C
Stock, provided they are issued to the Holders of the Preferred Stock.
"Mandatory Redemption Amount" means the sum of (i) the product of (A)
the number of shares of Preferred Stock to be redeemed and (B) the
product of (1) the average Per Share Market Value for the five (5)
Trading Days immediately preceding (x) the date of the Triggering Event
or (y) the date of payment in full by the Company of the applicable
redemption price, whichever is greater, and (2) the Conversion Ratio
calculated on the date of the Triggering Event, and (ii) all other
amounts, costs, expenses and liquidated damages due in respect of such
shares of Preferred Stock.
"Original Issue Date" shall mean the date of the first issuance of any
shares of the Preferred Stock regardless of the number of transfers of
any particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"Per Share Market Value" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on the NASDAQ or
any other stock exchange or quotation system on which the Common Stock
is then listed or if there is no such price on such date, then the
closing bid price on such exchange or quotation system on the date
nearest preceding such date, or (b) if the Common Stock is not listed
then on the NASDAQ or any stock exchange or quotation system, the
closing bid price for a share of Common Stock in the over-the-counter
market, as reported by the National Quotation Bureau Incorporated or
similar organization or agency succeeding to its functions of reporting
prices) at the close of business on such date, or (c) if the Common
Stock is not then reported by the National Quotation Bureau Incorporated
(or similar organization or agency succeeding to its functions of
reporting prices), then the average of the "Pink Sheet" quotes for the
relevant conversion period, as determined in good faith by the Holder,
or (d) if the Common Stock is not then publicly traded the fair market
value of a share of Common Stock as determined by an Appraiser selected
in good faith by the Holders of a majority in interest of the shares of
the Preferred Stock; provided, however, that the Company, after receipt
of the determination by such Appraiser, shall have the right to select
an additional Appraiser, in which case, the fair market value shall be
equal to the average of the determinations by each such Appraiser; and
provided, further that all determinations of the Per Share Market Value
shall be appropriately adjusted for any stock dividends, stock splits or
other similar transactions during such period.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"Purchase Agreement" means the Convertible Preferred Stock Purchase
Agreement, dated as of the Original Issue Date, among the Company and
the original Holder of the Preferred Stock.
"Registration Rights Agreement" means the Registration Rights Agreement,
dated as of the Original Issue Date, by and among the Company and the
original Holder of the Preferred Stock.
"Trading Day" means (a) a day on which the Common Stock is traded on the
NASDAQ or other stock exchange or market on which the Common Stock has
been listed, or (b) if the Common Stock is not listed on the NASDAQ or
on such other stock exchange or market, a day on which the Common Stock
is traded, on the Nasdaq SmallCap Market, or (c) if the Common Stock is
not listed on the Nasdaq SmallCap Market or any stock exchange or
market, a day on which the Common Stock is traded in the
over-the-counter market, as reported by the OTC Bulletin Board, or (c)
if the Common Stock is not quoted on the OTC Bulletin Board, a day on
which the Common Stock is quoted in the over-the-counter market as
reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions of reporting prices);
provided, however, that in the event that the Common Stock is not listed
or quoted as set forth in (a), (b) and (c) hereof, then Trading Day
shall mean any day except Saturday, Sunday and any day which shall be a
legal holiday or a day on which banking institutions in the State of New
York are authorized or required by law or other government action to
close.
"Underlying Shares" means shares of Common Stock into which the
Preferred Stock are convertible, the shares of Common Stock issuable
upon payment of dividends thereon and the shares of Common Stock
issuable upon exercise of the Warrant in accordance with the terms
hereof, the Purchase Agreement and the Warrant.
"Warrant" means the common stock purchase warrant issued to the original
Holder pursuant to the Purchase Agreement.
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of
Series B Convertible Preferred Stock indicated below, into shares
of Common Stock, $.0001 par value (the "Common Stock"), of USCI,
INC. (the "Company") according to the conditions hereof, as of the
date written below. If shares are to be issued in the name of a
person other than undersigned, the undersigned will pay all
transfer taxes payable with respect thereto and is delivering
herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. No fee will be charged to
the Holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations:
Date to Effect Conversion
Number of shares of Preferred Stock to be Converted
Number of shares of Common Stock to be Issued
Applicable Conversion Price
Signature
Name
Address
IN WITNESS WHEREOF, the corporation has caused this certificate to
be executed under its corporate seal this 5th day of May, 1998.
USCI, Inc.
By: /s/ Robert J. Kostrinsky
Robert J. Kostrinsky,
Executive Vice President
ATTEST:
/s/ Basil H. Ford, Secretary
Basil H. Ford, Secretary
<PAGE>
CERTIFICATE OF DESIGNATION
OF
USCI, INC. (filed with the Delaware Secretary of State on July 31, 1998)
The undersigned corporation hereby certifies as follows:
FIRST: The name of the corporation is USCI, Inc.
SECOND: The following resolutions establishing a new series of
Preferred Shares were adopted by the Board of Directors in accordance
with Section 151 of the General Corporation Laws of the State of
Delaware:
RESOLVED, that 500 Preferred shares, with a par value of
$.01 per share, are to be designated Series C; and be it
further
RESOLVED, that the relative rights, privileges,
preferences, restrictions and/or limitations or those
shares designated Series C are as follows:
Terms of Series C Preferred Stock
Section 1. Designation, Amount and Par Value. The series of preferred
stock shall be designated as 6% Series C Convertible Preferred Stock
(the "Preferred Stock") and the number of shares so designated shall be
500 (which shall not be subject to increase without the consent of the
holders of the Preferred Stock ("Holder"). Each share of Preferred
Stock shall have a par value of $.01 per share and a stated value of
$10,000.00 per share (the "Stated Value").
Section 2. Dividends.
(a) Holders of Preferred Stock shall be entitled to receive, when and
as declared by the Board of Directors out of funds legally available
therefor, and USCI, Inc. (the "Company") shall pay, cumulative dividends
at the rate per share (as a percentage of the Stated Value per share)
equal to 6% per annum, payable on a quarterly basis on March 31, June
30, September 30 and December 31 of each year during the term hereof
(each a "Dividend Payment Date"), commencing on September 30, 1998, in cash
or shares of Common Stock (as defined in Section 8) at (subject to the
terms and conditions set fort herein) the option of the Company. Any
dividends not paid on any Dividend Payment Date shall accrue and shall
be due and payable upon conversion of the Preferred Stock. A party that
holds shares of Preferred Stock on a Dividend Payment Date will be
entitled to receive such dividend payment and any other accrued and
unpaid dividends which accrued prior to such Dividend Payment Date,
without regard to any sale or disposition of such Preferred Stock
subsequent to the applicable record date. All overdue accrued and
unpaid dividends and other amounts due herewith shall entail a late fee
at the rate of 15% per annum (to accrue daily, from the date such
dividend is due hereunder through and including the date of payment).
Except as otherwise provided herein, if at any time the Company pays
less than the total amount of dividends then accrued on account of the
Preferred Stock, such payment shall be distributed ratably among the
holders of the Preferred Stock based upon the number of shares held by
each Holder. Payment of dividends on the Preferred Stock is further
subject to the provisions of Section 5(c)(i). The Company shall provide
the Holders notice of its intention to pay dividends in cash or shares
of Common Stock not less than 10 Trading Days prior to the Dividend
Payment Date for so long as shares of Preferred Stock are outstanding,
and in the event the Company fails to provide such notice, it shall pay
such dividends in shares of Common Stock. If dividends are paid in
shares of Common Stock, the number of shares of Common Stock payable as
such dividend to each Holder shall be equal to the cash amount of such
dividend payable to such Holder on such Dividend Payment Date divided by
the Conversion Price at such time (as defined below).
(b) Notwithstanding anything to the contrary contained herein, the
Company may not issue shares of Common Stock in payment of dividends
(and must deliver cash in respect thereof) on the Preferred Stock if:
(i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes is insufficient to pay such
dividends in shares of Common Stock;
(ii) the shares of Common Stock to be issued in respect of such
dividends are not registered for resale pursuant to an effective
registration statement that names the recipient of such dividend as a
selling stockholder thereunder and may not be sold without volume
restrictions pursuant to Rule 144 promulgated under the Securities Act
of 1933, as amended (the "Securities Act"), as determined by counsel to
the Company pursuant to a written opinion letter, addressed to the
Company's transfer agent in the form and substance acceptable to the
Holder and such transfer agent;
(iii) the shares of Common Stock to be issued in respect of such
dividends are not listed on the Nasdaq National Market System (the
"NASDAQ") and any other exchange or quotation system on which the Common
Stock is then listed for trading;
(iv) the Company has failed to timely satisfy its obligations pursuant
to any Conversion Notice (as defined in Section 5(a)(ii)); or
(v) the issuance of such shares would result in the recipient thereof
beneficially owning, as determined in accordance with Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), more than 4.999% of the then issued and outstanding
shares of Common Stock.
(c) So long as any Preferred Stock shall remain outstanding, neither
the Company nor any subsidiary thereof shall redeem, purchase or
otherwise acquire directly or indirectly any Junior Securities (as
defined in Section 8), nor shall the Company directly or indirectly pay
or declare any dividend or make any distribution (other than a dividend
or distribution described in Section 5) upon, nor shall any distribution
be made in respect of, any Junior Securities, nor shall any monies be
set aside for or applied to the purchase or redemption (through a
sinking fund or otherwise) of any Junior Securities or shares pari passu
with the Preferred Stock, except for repurchases effected by the Company
on the open market, pursuant to a direct stock purchase plan.
Section 3. Voting Rights. Except as otherwise provided herein and as
otherwise required by law, the Preferred Stock shall have no voting
rights. However, so long as any shares of Preferred Stock are
outstanding, the Company shall not and shall cause its subsidiaries not
to, without the affirmative vote of the Holders of all of the shares of
the Preferred Stock then outstanding, (a) alter or change adversely the
powers, preferences or rights given to the Preferred Stock, (b) alter or
amend this Certificate of Designation, (c) authorize or create any class
of stock ranking as to dividends or distribution of assets upon a
Liquidation (as defined in Section 4) or otherwise senior to the
Preferred Stock, except for any series of Preferred Stock issued and
sold in accordance with the Purchase Agreement, (d) amend its
Certificate of Incorporation, bylaws or other charter documents so as to
affect adversely any rights of any Holders, (e) increase the authorized
number of shares of Preferred Stock, or (f) enter into any agreement
with respect to the foregoing.
Section 4. Liquidation. Upon any liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary (a "Liquidation"), the
Holders shall be entitled to receive out of the assets of the Company,
whether such assets are capital or surplus, for each share of Preferred
Stock an amount equal to the Stated Value plus all due but unpaid
dividends per share, whether declared or not, before any distribution or
payment shall be made to the holders of any Junior Securities, and if
the assets of the Company shall be insufficient to pay in full such
amounts, then the entire assets to be distributed to the Holders of
Preferred Stock shall be distributed among the Holders of Preferred
Stock ratably in accordance with the respective amounts that would be
payable on such shares if all amounts payable thereon were paid in full.
A sale, conveyance or disposition of all or substantially all of the
assets of the Company or the effectuation by the Company of a
transaction or series of related transactions in which more than 50% of
the voting power of the Company is disposed of, or a consolidation or
merger of the Company with or into any other company or companies shall
not be treated as a Liquidation, but instead shall be subject to the
provisions of Section 5. The Company shall mail written notice of any
such Liquidation, not less than 45 days prior to the payment date stated
therein, to each record Holder of Preferred Stock.
Section 5. Conversion.
(a)(i) Each share of Preferred Stock (in minimum amounts of $50,000 or
such lesser amounts as the Company agrees or as may then be held by the
converting Holder) shall be convertible into shares of Common Stock
(subject to reduction pursuant to Section 5(a)(iii) hereof and Section
3.8 of the Purchase Agreement) at the Conversion Ratio (as defined in
Section 6) at the option of the Holder in whole or in part at any time
after the earlier of (i) the 90th day following the Original Issue Date
(as defined in Section 8) or (ii) the date the Underlying Shares
Registration Statement is declared effective by Securities and Exchange
Commission (the "Commission"). The Holders shall effect conversions by
surrendering the certificate or certificates representing the shares of
Preferred Stock to be converted to the Company, together with the form
of conversion notice attached hereto as Exhibit A (a "Conversion
Notice"). Each Conversion Notice shall specify the number of shares of
Preferred Stock to be converted and the date on which such conversion is
to be effected, which date may not be prior to the date the Holder
delivers such Conversion Notice by facsimile (the "Conversion Date").
If no Conversion Date is specified in a Conversion Notice, the
Conversion Date shall be the date that the Conversion Notice is deemed
delivered pursuant to Section 5(i). Subject to Sections 5(b) and
5(a)(iii) hereof, each Conversion Notice, once given, shall be
irrevocable. If the Holder is converting less than all shares of
Preferred Stock represented by the certificate or certificates tendered
by the Holder with the Conversion Notice, or if a conversion hereunder
cannot be effected in full for any reason, the Company shall promptly
deliver to such Holder (in the manner and within the time set forth in
Section 5(b)) a certificate for such number of shares as have not been
converted.
(ii) Any outstanding shares of Preferred Stock not theretofore converted
on the third anniversary of the Original Issue Date shall automatically
be converted into shares of Common Stock at the Conversion Price then in
effect. Notwithstanding the foregoing, no such conversion shall occur
unless (a) the Underlying Shares that would then be issuable upon such
conversion could either be resold by such Holder pursuant to Rule
144(k) promulgated under the Securities Act or there is then an
effective Underlying Shares Registration Statement naming the recipient
of such shares as a selling stockholder thereunder, (b) the Company has
a sufficient number of authorized and unreserved Common Stock to issue
upon such conversion. Further, the number of shares of Preferred Stock
that are subject to conversion pursuant to this section shall be limited
to the number of Underlying Shares which may be issued upon such
conversion at the prevailing Conversion Price in accordance with Rule
4460(i) promulgated under the Rules of the Nasdaq Stock Market. Any
shares of Preferred Stock which cannot be converted at the then
Conversion Price as a result of such Rule shall be subject to the
provisions of Section 5(a)(iii).
(iii) If on any Conversion Date (A) the Common Stock is listed for
trading on the Nasdaq National Market or the Nasdaq SmallCap Market, (B)
the Conversion Price then in effect is such that the aggregate number of
shares of Common Stock that would then be issuable upon conversion in
full of all then outstanding shares of Preferred Stock, together with
any shares of the Common Stock previously issued upon conversion of the
shares of Preferred Stock and as payment of interest thereon, would
equal or exceed 20% of the number of shares of the Common Stock
outstanding on the Original Issue Date (such number of shares as would
not equal or exceed such 20% limit, the "Issuable Maximum"), and (C) the
Company shall not have previously obtained the vote of shareholders (the
"Shareholder Approval"), if any, as may be required by the rules and
regulations of The Nasdaq Stock Market applicable to approve the
issuance of Common Stock in excess of the Issuable Maximum in a private
placement whereby shares of Common Stock are deemed to have been issued
at a price that is less than the greater of book or fair market value of
the Common Stock, then the Company shall issue to the Holder so
requesting a conversion a number of shares of Common Stock equal to the
Issuable Maximum and, with respect to the remainder of the aggregate
stated value of the shares of Preferred Stock then held by such Holder
for which a conversion in accordance with the Conversion Price would
result in an issuance of Common Stock in excess of the Issuable Maximum,
the converting Holder shall have the option to require the Company to
either (1) use its best efforts to obtain the Shareholder Approval
applicable to such issuance as soon as is possible, but in any event not
later than the 60th day after such request, or (2)(i) issue and deliver
to such Holder a number of shares of Common Stock as equals (x) the
aggregate stated value of the shares of Preferred Stock tendered for
conversion in respect of the Conversion Notice at issue but for which a
conversion in accordance with the other terms hereof would result in an
issuance of Common Stock in excess of the Issuable Maximum, divided by
(y) the Initial Conversion Price (as defined below), and (ii) cash in an
amount equal to the product of (x) the Per Share Market Value on the
Conversion Date and (y) the number of shares of Common Stock in excess
of such Holder's pro rata portion of the Issuable Maximum that would
have otherwise been issuable to the Holder in respect of such conversion
but for the provisions of this Section (such amount of cash being
hereinafter referred to as the "Discount Equivalent"), or (3) pay cash
to the converting Holder in an amount equal to the Mandatory Redemption
Amount (as defined in Section 5(b)(ii) hereunder) for the number of
Underlying Shares in or issuable upon such conversion in excess of the
Issuable Maximum. If the Company fails to pay the Discount Equivalent
or the Mandatory Redemption Amount, as the case may be, in full pursuant
to this Section within seven (7) days after the date payable, the
Company will pay interest thereon at a rate of 15% per annum to the
converting Holder, accruing daily from the Conversion Date until such
amount, plus all such interest thereon, is paid in full.
(b) (i) Not later than three (3) Trading Days after any Conversion
Date, the Company will deliver to the Holder (i) a certificate or
certificates which shall be free of restrictive legends and trading
restrictions (other than those required by Section 3.1(b) of the
Purchase Agreement) representing the number of shares of Common Stock
being acquired upon the conversion of shares of Preferred Stock (subject
to reduction pursuant to Section 5(a)(iii) and Section 3.8 of the
Purchase Agreement), (ii) one or more certificates representing the
number of shares of Preferred Stock tendered for conversion that were
not requested to be converted (or that the Company is prohibited from
converting), (iii) a bank check in the amount of accrued and unpaid
dividends (if the Company has elected to pay accrued dividends in cash),
and (iv) if the Company has elected and is permitted hereunder to pay
accrued dividends in shares of Common Stock, certificates, which shall
be free of restrictive legends and trading restrictions (other than
those required by Section 3.1 (b) of the Purchase Agreement),
representing such number of shares of Common Stock as equals such
dividend divided by the Conversion Price on the Dividend Payment Date;
provided, however, that the Company shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon
conversion of any shares of Preferred Stock until certificates
evidencing such shares of Preferred Stock are either delivered for
conversion to the Company or any transfer agent for the Preferred Stock
or Common Stock, or the Holder of such Preferred Stock notifies the
Company that such certificates have been lost, stolen or destroyed and
provides a bond (or other adequate security) reasonably satisfactory to
the Company to indemnify the Company from any loss incurred by it in
connection therewith. The Company shall, upon request of the Holder, if
available, use its best efforts to deliver any certificate or
certificates required to be delivered by the Company under this Section
electronically through the Depository Trust Corporation or another
established clearing corporation performing similar functions. If in
the case of any Conversion Notice such certificate or certificates,
including for purposes hereof, any shares of Common Stock to be issued
on the Conversion Date on account of accrued but unpaid dividends
hereunder, are not delivered to or as directed by the applicable Holder
by the third Trading Day after the Conversion Date, the Holder shall be
entitled by written notice to the Company at any time on or before its
receipt of such certificate or certificates thereafter, to rescind such
conversion, in which event the Company shall immediately return the
certificates representing the shares of Preferred Stock tendered for
conversion, (such recision shall be in addition to, and not in lieu of,
the rights set forth elsewhere herein).
(ii) If the Company fails to deliver to the Holder such certificate or
certificates pursuant to Section 5(b)(i), including for purposes hereof,
any shares of Common Stock to be issued on the Conversion Date on
account of accrued but unpaid dividends hereunder, prior to the third
Trading Day after the Conversion Date, the Company shall pay to such
Holder, in cash, as liquidated damages and not as a penalty, $5,000 for
each day after such third Trading Day until such certificates are
delivered. Nothing herein shall limit a Holder's right to pursue actual
damages for the Company's failure to deliver certificates representing
shares of Common Stock upon conversion within the period specified
herein (including, without limitation, damages relating to any purchase
of shares of Common Stock by such Holder to make delivery on a sale
effected in anticipation of receiving certificates representing shares
of Common Stock upon conversion, such damages to be in an amount equal
to (A) the aggregate amount paid by such Holder for the shares of Common
Stock so purchased minus (B) the aggregate amount of net proceeds, if
any, received by such Holder from the sale of the shares of Common Stock
issued by the Company pursuant to such conversion), and such Holder
shall have the right to pursue all remedies available to it at law or in
equity including, without limitation, a decree of specific performance
and/or injunctive relief. The exercise of any such rights shall not
prohibit the Holders from seeking to enforce damages pursuant to any
other Section hereof or under applicable law.
(iii) In addition to any other rights available to the Holder, if the
Company fails to deliver to the Holder such certificate or certificates
pursuant to Section 5(b)(i), including for purposes hereof, any shares
of Common Stock to be issued on the Conversion Date on account of
accrued but unpaid dividends hereunder, prior to the third Trading Day
after the Conversion Date, and if after such the third Trading Day the
Holder purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by such Holder of the
Underlying Shares which the Holder anticipated receiving upon such
conversion (a "Buy-In"), then the Company shall pay in cash to the
Holder (in addition to any remedies available to or elected by the
Holder) the amount by which (x) the Holder's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock
so purchased exceeds (y) the aggregate stated value of the shares of
Preferred Stock for which such conversion was not timely honored. For
example, if the Holder purchases shares of Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an attempted
conversion of $10,000 aggregate stated value of the shares of Preferred
Stock, the Company shall be required to pay the Holder $1,000. The
Holder shall provide the Company written notice indicating the amounts
payable to the Holder in respect of the Buy-In.
(c) (i) The conversion price for each share of Preferred Stock (the
"Conversion Price") in effect on any Conversion Date shall be the lesser
of (a) 120% of the average of the Per Share Market Values for the five
(5) Trading Days immediately preceding the Original Issue Date (the
"Initial Conversion Price") or (b) 85% of the average of the three (3)
lowest Per Share Market Values during the twenty five (25) Trading Days
prior to the date of the applicable Conversion Notice, which Per Share
Market Values shall be chosen by the converting Holder; provided,
however, that, (a) if the Underlying Shares Registration Statement (as
defined in the Registration Rights Agreement) is not filed on or prior
to the Filing Date (as defined in the Registration Rights Agreement), or
(b) if the Company fails to file with the Commission a request for
acceleration in accordance with Rule 12d1-2 promulgated under the
Exchange Act within five (5) days of the date that the Company is
notified (orally or in writing, whichever is earlier) by the Commission
that an Underlying Shares Registration Statement will not be "reviewed,"
or not subject to further review, or (c) if the Underlying Shares
Registration Statement is not declared effective by the Commission on or
prior to the 90th day after the Original Issue Date, or (d) if such
Underlying Shares Registration Statement is filed with and declared
effective by the Commission but thereafter ceases to be effective as to
all Registrable Securities (as such term is defined in the Registration
Rights Agreement) at any time prior to the expiration of the
"Effectiveness Period" (as such term is defined in the Registration
Rights Agreement), without being succeeded within 10 Trading Days by a
subsequent Underlying Shares Registration Statement filed with and
declared effective by the Commission, or (e) if trading in the Common
Stock shall be suspended, or if the Common Stock shall be delisted, for
more than three (3) Trading Days, or (f) if the conversion rights of the
Holders are suspended for any reason, or if a Holder is not permitted to
resell Registrable Securities under an Underlying Shares Registration
Statement, or (g) if the Company is required to convene a shareholders
meeting pursuant to Section 5(a)(iii) and fails to convene a meeting of
shareholders within the time periods specified in Section 5(a)(iii) or
does so convene a meeting of shareholders within such time period but
fails to obtain Shareholder Approval at such meeting, or (h) if an
amendment to the Underlying Securities Registration Statement is not
filed by the Company with the Commission within ten (10) days of the
Commission's notifying the Company that such amendment is required in
order for the Underlying Securities Registration Statement to be
declared effective, or (j) the Company fails to comply with requests for
conversion of any Preferred Stock into shares of Common Stock in
accordance with the terms hereof (any such failure or breach being
referred to as an "Event," and for purposes of clauses (a), (c), (f) and
(g) the date on which such Event occurs, or for purposes of clause (b)
the date on which such five (5) day period is exceeded, or for purposes
of clauses (d) and (h) the date which such 10 Trading Day-period is
exceeded, or for purposes of clause (e) the date on which such three
Trading Day period is exceeded, being referred to as "Event Date"), the
Conversion Price shall be decreased by 2.5% each month (i.e., the
Conversion Price would decrease by 2.5% as of the Event Date and an
additional 2.5% as of each monthly anniversary of the Event Date) until
the earlier to occur of the second month anniversary after the Event
Date and such time as the applicable Event is cured. Commencing the
second month anniversary after the Event Date, the Company shall pay to
each Holder 2.5% of the product of the Stated Value and the number of
shares of Preferred Stock then held by such Holder, in cash as
liquidated damages, and not as a penalty, on the first day of each
monthly anniversary of the Event Date until such time as the applicable
Event, is cured. Any decrease in the Conversion Price pursuant to this
Section shall continue notwithstanding the fact that the Event causing
such decrease has been subsequently cured.
(ii) If the Company, at any time while any shares of Preferred Stock
are outstanding, shall (a) pay a stock dividend or otherwise make a
distribution or distributions on shares of its Junior Securities or pari
passu securities (other than with respect to the Series A Preferred
or Series B Preferred) payable in shares of Common Stock, (b)
subdivide outstanding shares of Common Stock into a larger number of
shares, (c) combine outstanding shares of Common Stock into a smaller
number of shares, or (d) issue by reclassification of shares of Common
Stock any shares of capital stock of the Company, the Initial Conversion
Price shall be multiplied by a fraction of which the numerator shall be
the number of shares of Common Stock outstanding before such event and
of which the denominator shall be the number of shares of Common Stock
outstanding after such event. Any adjustment made pursuant to this
Section 5(c)(ii) shall become effective immediately after the record
date for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately after
the effective date in the case of a subdivision, combination or
re-classification.
(iii) If the Company, at any time while any shares of Preferred Stock
are outstanding, shall issue rights or warrants to all holders of Common
Stock entitling them to subscribe for or purchase shares of Common Stock
at a price per share less than the Per Share Market Value of the Common
Stock at the record date mentioned below, the Initial Conversion Price
shall be multiplied by a fraction, of which the denominator shall be the
number of shares of Common Stock (excluding treasury shares, if any)
outstanding on the date of issuance of such rights or warrants plus the
number of additional shares of Common Stock offered for subscription or
purchase, and of which the numerator shall be the number of shares of
Common Stock (excluding treasury shares, if any) outstanding on the date
of issuance of such rights or warrants plus the number of shares which
the aggregate offering price of the total number of shares so offered
would purchase at such Per Share Market Value. Such adjustment shall be
made whenever such rights or warrants are issued, and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such rights or warrants. However, upon
the expiration of any right or warrant to purchase Common Stock the
issuance of which resulted in an adjustment in the Initial Conversion
Price pursuant to this Section 5(c)(iii), if any such right or warrant
shall expire and shall not have been exercised, the Initial Conversion
Price shall immediately upon such expiration be recomputed and effective
immediately upon such expiration be increased to the price which it
would have been (but reflecting any other adjustments in the Initial
Conversion Price made pursuant to the provisions of this Section 5 after
the issuance of such rights or warrants) had the adjustment of the
Initial Conversion Price made upon the issuance of such rights or
warrants been made on the basis of offering for subscription or purchase
only that number of shares of Common Stock actually purchased upon the
exercise of such rights or warrants actually exercised.
(iv) If the Company, at any time while shares of Preferred Stock are
outstanding, shall distribute to all holders of Common Stock (and not to
Holders of Preferred Stock) evidences of its indebtedness or assets or
rights or warrants to subscribe for or purchase any security (excluding
those referred to in Sections 5(c)(ii) and (iii) above), then in each
such case the Conversion Price at which each share of Preferred Stock
shall thereafter be convertible shall be determined by multiplying the
Conversion Price in effect immediately prior to the record date fixed
for determination of stockholders entitled to receive such distribution
by a fraction of which the denominator shall be the Per Share Market
Value of Common Stock determined as of the record date mentioned above,
and of which the numerator shall be such Per Share Market Value of the
Common Stock on such record date less the then fair market value at such
record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as
determined by the Board of Directors in good faith; provided, however,
that in the event of a distribution exceeding ten percent (10%) of the
net assets of the Company, if the Holders of a majority in interest of
the Preferred Stock dispute such valuation, such fair market value shall
be determined by a nationally recognized or major regional investment
banking firm or firm of independent certified public accountants of
recognized standing (which may be the firm that regularly examines the
financial statements of the Company) (an "Appraiser") selected in good
faith by the Holders of a majority in interest of the shares of
Preferred Stock then outstanding; and provided, further, that the
Company, after receipt of the determination by such Appraiser shall have
the right to select an additional Appraiser, in good faith, in which
case the fair market value shall be equal to the average of the
determinations by each such Appraiser. In either case the adjustments
shall be described in a statement provided to the Holders of Preferred
Stock of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of
Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the
record date mentioned above.
(v) All calculations under this Section 5 shall be made to the nearest
cent or the nearest 1/100th of a share, as the case may be.
(vi) Whenever the Conversion Price is adjusted pursuant to Section
5(c)(i),(ii),(iii) or (iv), the Company shall promptly mail to each
Holder of Preferred Stock, a notice setting forth the Conversion Price
after such adjustment and setting forth a brief statement of the facts
requiring such adjustment.
(vii) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person
pursuant to which (i) a majority of the Company's Board of Directors
will not constitute a majority of the board of directors of the
surviving entity or (ii) less than 50% of the outstanding shares of the
capital stock of the surviving entity will be held by the same
shareholders of the Company prior to such reclassification,
consolidation or merger (a "Change of Control Transaction"), the sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is
converted into other securities, cash or property, the Holders of the
Preferred Stock then outstanding shall have the right thereafter to
convert such shares only into the shares of stock and other securities,
cash and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification, consolidation, merger,
sale, transfer or share exchange, and the Holders of the Preferred Stock
shall be entitled upon such event to receive such amount of securities,
cash or property as the shares of the Common Stock of the Company into
which such shares of Preferred Stock could have been converted
immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange would have been entitled. The terms of any
such consolidation, merger, sale, transfer or share exchange shall
include such terms so as to continue to give to the Holder of Preferred
Stock the right to receive the securities, cash or property set forth in
this Section 5(c)(vii) upon any conversion or redemption following such
consolidation, merger, sale, transfer or share exchange. This provision
shall similarly apply to successive reclassifications, consolidations,
mergers, sales, transfers or share exchanges. With respect to any such
reclassification, consolidation or merger, each Holder shall have the
option to require the Company to redeem its shares of Preferred Stock at
a price per share equal to the product of (i) the average Per Share
Market Value for the five (5) Trading Days immediately preceding (1) the
effective date, the date of the closing or the date of the announcement,
as the case may be, of the reclassification, consolidation, merger,
sale, transfer or share exchange the triggering such redemption right or
(2) the date of payment in full by the Company of the redemption price
hereunder, whichever is greater, and (ii) the Conversion Ratio
calculated on the date of the closing or the effective date, as the case
may be, of the reclassification, consolidation, merger, sale, transfer
or share exchange triggering such redemption right, as the case may be.
The entire redemption price shall be paid in cash, and if any portion of
the applicable redemption price shall not be paid by the Company within
seven (7) calendar days after the date due, late fees shall accrue
thereon at the rate of 15% per annum until the redemption price plus all
such late fees are paid in full (which amount shall be paid as
liquidated damages and not as a penalty). In addition, if any portion
of such redemption price remains unpaid for more than seven (7) calendar
days after the date due, the Holder of the Preferred Stock subject to
such redemption may elect, by written notice to the Company given within
30 days after the date due, to either (i) demand conversion in
accordance with the formula and the time frame therefor set forth in
Section 5 of all of the shares of Preferred Stock for which such
redemption price, plus accrued liquidated damages thereof, has not been
paid in full (the "Unpaid Redemption Shares"), in which event the Per
Share Market Value for such shares shall be the lower of the Per Share
Market Value calculated on the date such redemption price was originally
due and the Per Share Market Value as of the Holder's written demand for
conversion, or (ii) invalidate ab initio such redemption,
notwithstanding anything herein contained to the contrary. If the
Holder elects option (i) above, the Company shall within three (3)
Trading Days of its receipt of such election deliver to the Holder the
shares of Common Stock issuable upon conversion of the Unpaid Redemption
Shares subject to such Holder conversion demand and otherwise perform
its obligations hereunder with respect thereto; or, if the Holder elects
option (ii) above, the Company shall promptly, and in any event not
later than three (3) Trading Days from receipt of Holder's notice of
such election, return to the Holder all of the Unpaid Redemption Shares.
(viii) If:
A. the Company shall declare a dividend (or any other distribution) on
its Common Stock; or
B. the Company shall declare a special nonrecurring cash dividend on or
a redemption of its Common Stock; or
C. the Company shall authorize the granting to all holders of the Common
Stock rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights; or
D. the approval of any stockholders of the Company shall be required in
connection with any reclassification of the Common Stock of the Company,
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, of
any compulsory share of exchange whereby the Common Stock is converted
into other securities, cash or property; or
E. the Company shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of Preferred Stock, and shall
cause to be mailed to the Holders of Preferred Stock at their last
addresses as they shall appear upon the stock books of the Company, at
least 20 calendar days prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which a record
is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the
date as of which the holders of Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is expected to
become effective or close, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale,
transfer or share exchange; provided, however, that the failure to mail
such notice or any defect therein or in the mailing thereof shall not
affect the validity of the corporate action required to be specified in
such notice. Holders are entitled to convert shares of Preferred Stock
during the 20-day period commencing the date of such notice to the
effective date of the event triggering such notice.
(ix) If the Company (i) makes a public announcement that it intends to
enter into a Change of Control Transaction or (ii) any person, group or
entity (including the Company, but excluding a Holder or any affiliate
of a Holder) publicly announces a bona fide tender offer, exchange offer
or other transaction to purchase 50% or more of the Common Stock (such
announcement being referred to herein as a "Major Announcement" and the
date on which a Major Announcement is made, the "Announcement Date"),
then, in the event that a Holder seeks to convert shares of Preferred
Stock on or following the Announcement Date, the Conversion Price shall,
effective upon the Announcement Date and continuing through the earlier
to occur of the consummation of the proposed transaction or tender
offer, exchange offer or other transaction and the Abandonment Date (as
defined below), be equal to the lower of (x) the average Per Share
Market Value on the five Trading Days immediately preceding (but not
including) the Announcement Date and (y) the Conversion Price in effect
on the Conversion Date for such Preferred Stock. "Abandonment Date"
means with respect to any proposed transaction or tender offer, exchange
offer or other transaction for which a public announcement as
contemplated by this paragraph has been made, the date upon which the
Company (in the case of clause (i) above) or the person, group or entity
(in the case of clause (ii) above) publicly announces the termination or
abandonment of the proposed transaction or tender offer, exchange offer
or another transaction which caused this paragraph to become operative.
(d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the
purpose of issuance upon conversion of Preferred Stock and payment of
dividends on Preferred Stock, each as herein provided, free from
preemptive rights or any other actual contingent purchase rights of
persons other than the Holders of Preferred Stock, not less than such
number of shares of Common Stock as shall (subject to any additional
requirements of the Company as to reservation of such shares set forth
in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5(a) and Section 5(c)) upon the
conversion of all outstanding shares of Preferred Stock and payment of
dividends hereunder. The Company covenants that all shares of Common
Stock that shall be so issuable shall, upon issue, be duly and validly
authorized, issued and fully paid, nonassessable and freely tradeable,
subject to the legend requirements of Section 3.1 (b) of the Purchase
Agreement.
(e) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common
Stock, but may if otherwise permitted, make a cash payment in respect of
any final fraction of a share based on the Per Share Market Value at
such time. If the Company elects not, or is unable, to make such a cash
payment, the Holder of a share of Preferred Stock shall be entitled to
receive, in lieu of the final fraction of a share, one whole share of
Common Stock.
(f) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the
Holders thereof for any documentary stamp or similar taxes that may be
payable in respect of the issue or delivery of such certificate,
provided that the Company shall not be required to pay any tax that may
be payable in respect of any transfer involved in the issuance and
delivery of any such certificate upon conversion in a name other than
that of the Holder of such shares of Preferred Stock so converted and
the Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof
shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been
paid.
(g) Shares of Preferred Stock converted into Common Stock shall be
canceled and shall have the status of authorized but unissued shares of
undesignated stock.
(h) Any and all notices or other communications or deliveries to be
provided by the Holders of the Preferred Stock hereunder, including,
without limitation, any Conversion Notice, shall be in writing and
delivered personally, by facsimile or sent by a nationally recognized
overnight courier service, addressed to the attention of the Chief
Executive Officer of the Company at the facsimile telephone number or
address of the principal place of business of the Company as set forth
in the Purchase Agreement. Any and all notices or other communications
or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile or sent by a nationally
recognized overnight courier service, addressed to each Holder of
Preferred Stock at the facsimile telephone number or address of such
Holder appearing on the books of the Company, or if no such facsimile
telephone number or address appears, at the principal place of business
of the Holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the
date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section
prior to 8:00 p.m. (Eastern Standard Time), (ii) the date after the date
of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section
later than 8:00 p.m. (Eastern Standard Time) on any date and earlier
than 11:59 p.m. (Eastern Standard Time) on such date, (iii) upon
receipt, if sent by a nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required
to be given.
Section 6. Redemption Upon Certain Events. Upon the occurrence of a
Triggering Event (as defined below), each Holder shall (in addition to
all other rights it may have hereunder or under applicable law), have
the right, exercisable at the sole option of such Holder, to require the
Company to redeem all or a portion of the Preferred Stock then held by
such Holder for a redemption price, in cash, equal to the sum of (i) the
Mandatory Redemption Amount (as defined in Section 8) plus (ii) the
product of (A) the number of Underlying Shares issued in respect of
conversions or as payment of dividends hereunder and then held by the
Holder and (B) the Per Share Market Value on the date such redemption is
demanded or the date the redemption price hereunder is paid in full,
whichever is greater. For purposes of this Section, a share of
Preferred Stock is outstanding until such date as the Holder shall have
received Underlying Shares upon a conversion (or attempted conversion)
thereof.
A "Triggering Event" means any one or more of the following events
(whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgement, decree or
order of any court, or any order, rule or regulation of any
administrative or governmental body):
(i) the failure of the Registration Statement to be declared effective
by the Commission on or prior to the 180th day after the Original Issue
Date;
(ii) if, during the "Effectiveness Period" (as defined in Registration
Rights Agreement), the effectiveness of the Registration Statement
lapses for any reason or the Holder shall not be permitted to resell
Registrable Securities (as defined in the Registration Rights Agreement)
under the Underlying Shares Registration Statement;
(iii) the failure of the Common Stock to be listed on the Nasdaq
National Market or the Nasdaq SmallCap Market for a period of 15 days
(which need not be consecutive days);
(iv) the Company shall fail for any reason to deliver certificates
representing Underlying Shares issuable upon a conversion hereunder that
comply with the provisions hereof prior to the 10th day after the
Conversion Date or the Company shall provide notice to any Holder,
including by way of public announcement, at any time, of its intention
not to comply with requests for conversion of any Preferred Stock in
accordance with the terms hereof;
(v) the Company shall be a party to any merger or consolidation pursuant
to which the Company shall not be the surviving entity or shall sell,
transfer or otherwise dispose of in excess of 50% of its assets or
voting securities in one or more transactions, or shall redeem more than
a de minimis number of shares of Common Stock or other Junior Securities
(other than redemptions of Underlying Shares);
(vi) an Event shall not have been cured to the satisfaction of the
Holder prior to the expiration of thirty (30) days from the Event Date
relating thereto;
(vii) the Company shall fail for any reason to deliver the certificate
or certificates required pursuant to a Buy-In and Section 5(b)(iii)
within seven (7) days after notice is deemed delivered hereunder;
(viii) the Company shall fail to have available a sufficient number of
authorized and unreserved shares of Common Stock to issue to such Holder
upon a conversion hereunder.
Section 7. Redemption at Option of Company.
(a) The Company shall have the right, exercisable at any time upon 20
Trading Days notice (an "Optional Redemption Notice") to the Holders of
the Preferred Stock given at any time after the Original Issue Date to
redeem all or any portion of the shares of Preferred Stock which have
not previously been converted or redeemed, at a price equal to the
Optional Redemption Price (as defined below). The entire Optional
Redemption Price shall be paid in cash. Holders of Preferred Stock may
convert (and the Company shall honor such conversions in accordance with
the terms hereof) any shares of Preferred Stock, including shares
subject to an Optional Redemption Notice, during the period from the
date thereof through the 20th Trading Day after the receipt of an
Optional Redemption Notice.
(b) If any portion of the Optional Redemption Price shall not be paid by
the Company within seven (7) calendar days after the 20th Trading Day
after the delivery of an Optional Redemption Notice, interest shall
accrue thereon at the rate of 15% per annum until the Optional
Redemption Price plus all such interest is paid in full (any such amount
shall be paid as liquidated damages and not as a penalty). In addition,
if any portion of the Optional Redemption Price remains unpaid for more
than seven (7) calendar days after the date due, the Holder of the
Preferred Stock subject to such redemption may elect, by written notice
to the Company given at any time thereafter, to either (i) demand
conversion in accordance with the formula and the time frame therefor
set forth herein of all or any portion of the shares of Preferred Stock
for which such Optional Redemption Price, plus accrued liquidated
damages thereof, has not been paid in full (the "Unpaid Redemption
Shares"), in which event the Per Share Market Value for such shares
shall be the lower of the Per Share Market Value calculated on the date
the Optional Redemption Price was originally due and the Per Share
Market Value as of the Holder's written demand for conversion, or
(ii) invalidate ab initio such redemption, notwithstanding anything
herein contained to the contrary. If the Holder elects option
(i) above, the Company shall within three (3) Trading Days of its
receipt of such election deliver to the Holder the shares of Common
Stock issuable upon conversion of the Unpaid Redemption Shares subject
to such Holder conversion demand and otherwise perform its obligations
hereunder with respect thereto; or, if the Holder elects option
(ii) above, the Company shall promptly, and in any event not later than
three (3) Trading Days from receipt of Holder's notice of such election,
return to the Holder all of the Unpaid Redemption Shares.
(c) The "Optional Redemption Price" shall equal the sum of (i) the
product of (A) the number of shares of Preferred Stock to be redeemed
and (B) the product of (1) the average Per Share Market Value for the
five (5) Trading Days immediately preceding (x) the date of the Optional
Redemption Notice or (y) the date of payment in full by the Company of
the Optional Redemption Price, whichever is greater, and (2) the
Conversion Ratio calculated on the date of the Optional Redemption
Notice, and (ii) all other amounts, costs, expenses and liquidated
damages due in respect of such shares of Preferred Stock.
Section 8. Definitions. For the purposes hereof, the following terms
shall have the following meanings:
"Common Stock" means the Company's common stock, $.0001 par value, and
stock of any other class into which such shares may hereafter have been
reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, of which the
numerator is Stated Value plus accrued but unpaid dividends (including
any accrued but unpaid late fees thereon) but only to the extent not
paid in shares of Common Stock in accordance with the terms hereof, and
of which the denominator is the Conversion Price at such time.
"Junior Securities" means the Common Stock and all other equity
securities of the Company, other than the Series A Preferred and Series B
Preferred, provided they are issued to the Holders of the Preferred Stock.
"Mandatory Redemption Amount" means the sum of (i) the product of (A)
the number of shares of Preferred Stock to be redeemed and (B) the
product of (1) the average Per Share Market Value for the five (5)
Trading Days immediately preceding (x) the date of the Triggering Event
or (y) the date of payment in full by the Company of the applicable
redemption price, whichever is greater, and (2) the Conversion Ratio
calculated on the date of the Triggering Event, and (ii) all other
amounts, costs, expenses and liquidated damages due in respect of such
shares of Preferred Stock.
"Original Issue Date" shall mean the date of the first issuance of any
shares of the Preferred Stock regardless of the number of transfers of
any particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"Per Share Market Value" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on the NASDAQ or
any other stock exchange or quotation system on which the Common Stock
is then listed or if there is no such price on such date, then the
closing bid price on such exchange or quotation system on the date
nearest preceding such date, or (b) if the Common Stock is not listed
then on the NASDAQ or any stock exchange or quotation system, the
closing bid price for a share of Common Stock in the over-the-counter
market, as reported by the National Quotation Bureau Incorporated or
similar organization or agency succeeding to its functions of reporting
prices) at the close of business on such date, or (c) if the Common
Stock is not then reported by the National Quotation Bureau Incorporated
(or similar organization or agency succeeding to its functions of
reporting prices), then the average of the "Pink Sheet" quotes for the
relevant conversion period, as determined in good faith by the Holder,
or (d) if the Common Stock is not then publicly traded the fair market
value of a share of Common Stock as determined by an Appraiser selected
in good faith by the Holders of a majority in interest of the shares of
the Preferred Stock; provided, however, that the Company, after receipt
of the determination by such Appraiser, shall have the right to select
an additional Appraiser, in which case, the fair market value shall be
equal to the average of the determinations by each such Appraiser; and
provided, further that all determinations of the Per Share Market Value
shall be appropriately adjusted for any stock dividends, stock splits or
other similar transactions during such period.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"Purchase Agreement" means the Convertible Preferred Stock Purchase
Agreement, dated as of March 24, 1998, among the Company and
the original Holder of the Preferred Stock.
"Registration Rights Agreement" means the Registration Rights Agreement,
dated as of the March 24, 1998, by and among the Company and the
original Holder of the Preferred Stock.
"Series A Preferred" shall have the same meaning as set forth in the
Purchase Agreement.
"Series B Preferred" shall have the same meaning as set forth in the
Purchase Agreement.
"Trading Day" means (a) a day on which the Common Stock is traded on the
NASDAQ or other stock exchange or market on which the Common Stock has
been listed, or (b) if the Common Stock is not listed on the NASDAQ or
on such other stock exchange or market, a day on which the Common Stock
is traded, on the Nasdaq SmallCap Market, or (c) if the Common Stock is
not listed on the Nasdaq SmallCap Market or any stock exchange or
market, a day on which the Common Stock is traded in the
over-the-counter market, as reported by the OTC Bulletin Board, or (c)
if the Common Stock is not quoted on the OTC Bulletin Board, a day on
which the Common Stock is quoted in the over-the-counter market as
reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions of reporting prices);
provided, however, that in the event that the Common Stock is not listed
or quoted as set forth in (a), (b) and (c) hereof, then Trading Day
shall mean any day except Saturday, Sunday and any day which shall be a
legal holiday or a day on which banking institutions in the State of New
York are authorized or required by law or other government action to
close.
"Underlying Shares" means shares of Common Stock into which the
Preferred Stock are convertible, the shares of Common Stock issuable
upon payment of dividends thereon and the shares of Common Stock
issuable upon exercise of the Warrant in accordance with the terms
hereof, the Purchase Agreement and the Warrant.
"Warrant" means the common stock purchase warrant issued to the original
Holder pursuant to the Purchase Agreement.
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of
Series C Convertible Preferred Stock indicated below, into shares
of Common Stock, $.0001 par value (the "Common Stock"), of USCI,
INC. (the "Company") according to the conditions hereof, as of the
date written below. If shares are to be issued in the name of a
person other than undersigned, the undersigned will pay all
transfer taxes payable with respect thereto and is delivering
herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. No fee will be charged to
the Holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations:
Date to Effect Conversion
Number of shares of Preferred Stock to be Converted
Number of shares of Common Stock to be Issued
Applicable Conversion Price
Signature
Name
Address
IN WITNESS WHEREOF, the corporation has caused this certificate to
be executed under its corporate seal this 31st day of July, 1998.
USCI, Inc.
By: /s/ Bruce A. Hahn
Bruce A. Hahn, Chairman and
Chief Executive Officer
ATTEST:
By: /s/ Robert J. Kostrinsky
Robert J. Kostrinsky,
Executive Vice President
<PAGE>
CERTIFICATE OF DESIGNATION
OF
USCI, INC. (filed with the Delaware Secretary of State on July 29, 1998)
The undersigned corporation hereby certifies as follows:
FIRST: The name of the corporation is USCI, Inc.
SECOND: The following resolutions establishing a new series of
Preferred Shares were adopted by the Board of Directors in accordance with
Section 151 of the General Corporation Laws of the State of Delaware:
RESOLVED, that 500 Preferred shares, with a par value of $.01 per
share, are to be designated Series D; and be it further
RESOLVED, that the relative rights, privileges, preferences,
restrictions and/or limitations or those shares designated Series
D are as follows:
Terms of Series D Preferred Stock
Section 1. Designation, Amount and Par Value. The series of
preferred stock shall be designated as 6% Series D Convertible Preferred Stock
(the "Preferred Stock") and the number of shares so designated shall be 500
(which shall not be subject to increase without the consent of the holders of
the Preferred Stock ("Holder"). Each share of Preferred Stock shall have a par
value of $.01 per share and a stated value of $8,000.00 per share (the "Stated
Value").
Section 2. Dividends.
(a) Holders of Preferred Stock shall be entitled to receive, when
and as declared by the Board of Directors out of funds legally available
therefor, and USCI, Inc. (the "Company") shall pay, cumulative dividends at the
rate per share (as a percentage of the Stated Value per share) equal to 6% per
annum, payable on a quarterly basis on March 31, June 30, September 30 and
December 31 of each year during the term hereof (each a "Dividend Payment
Date"), commencing on September 30, 1998, in cash or shares of Common Stock (as
defined in Section 8) at (subject to the terms and conditions set fort herein)
the option of the Company. Any dividends not paid on any Dividend Payment Date
shall accrue and shall be due and payable upon conversion of the Preferred
Stock. A party that holds shares of Preferred Stock on a Dividend Payment Date
will be entitled to receive such dividend payment and any other accrued and
unpaid dividends which accrued prior to such Dividend Payment Date, without
regard to any sale or disposition of such Preferred Stock subsequent to the
applicable record date. All overdue accrued and unpaid dividends and other
amounts due herewith shall entail a late fee at the rate of 15% per annum (to
accrue daily, from the date such dividend is due hereunder through and
including the date of payment). Except as otherwise provided herein, if at any
time the Company pays less than the total amount of dividends then accrued on
account of the Preferred Stock, such payment shall be distributed ratably among
the holders of the Preferred Stock based upon the number of shares held by each
Holder. Payment of dividends on the Preferred Stock is further subject to the
provisions of Section 5(c)(i). The Company shall provide the Holders notice of
its intention to pay dividends in cash or shares of Common Stock not less than
10 Trading Days prior to the Dividend Payment Date for so long as shares of
Preferred Stock are outstanding, and in the event the Company fails to provide
such notice, it shall pay such dividends in shares of Common Stock. If
dividends are paid in shares of Common Stock, the number of shares of Common
Stock payable as such dividend to each Holder shall be equal to the cash amount
of such dividend payable to such Holder on such Dividend Payment Date divided
by the Conversion Price at such time (as defined below).
(b) Notwithstanding anything to the contrary contained herein, the
Company may not issue shares of Common Stock in payment of dividends (and must
deliver cash in respect thereof) on the Preferred Stock if:
(i) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes is insufficient to pay
such dividends in shares of Common Stock;
(ii) the shares of Common Stock to be issued in respect of
such dividends are not registered for resale pursuant to an effective
registration statement that names the recipient of such dividend as a selling
stockholder thereunder and may not be sold without volume restrictions pursuant
to Rule 144 promulgated under the Securities Act of 1933, as amended (the
"Securities Act"), as determined by counsel to the Company pursuant to a
written opinion letter, addressed to the Company's transfer agent in the form
and substance acceptable to the Holder and such transfer agent;
(iii) the shares of Common Stock to be issued in respect of
such dividends are not listed on the Nasdaq National Market System (the
"NASDAQ") and any other exchange or quotation system on which the Common Stock
is then listed for trading;
(iv) the Company has failed to timely satisfy its
obligations pursuant to any Conversion Notice (as defined in Section 5(a)(ii));
or
(v) the issuance of such shares would result in the
recipient thereof beneficially owning, as determined in accordance with Rule
13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), more than 4.999% of the then issued and outstanding shares of
Common Stock.
(c) So long as any Preferred Stock shall remain outstanding,
neither the Company nor any subsidiary thereof shall redeem, purchase or
otherwise acquire directly or indirectly any junior securities, nor shall the
Company directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described in Section 5)
upon, nor shall any distribution be made in respect of, any junior securities,
nor shall any monies be set aside for or applied to the purchase or redemption
(through a sinking fund or otherwise) of any junior securities or shares pari
passu with the Preferred Stock, except for repurchases effected by the Company
on the open market, pursuant to a direct stock purchase plan.
Section 3. Voting Rights. Except as otherwise provided herein and
as otherwise required by law, the Preferred Stock shall have no voting rights.
However, so long as any shares of Preferred Stock are outstanding, the Company
shall not and shall cause its subsidiaries not to, without the affirmative vote
of the Holders of all of the shares of the Preferred Stock then outstanding,
(a) alter or change adversely the powers, preferences or rights given to the
Preferred Stock, (b) alter or amend this Certificate of Designation, (c)
authorize or create any class of stock ranking as to dividends or distribution
of assets upon a Liquidation (as defined in Section 4) or otherwise senior to
the Preferred Stock, except for any series of Preferred Stock issued and sold
in accordance with the Purchase Agreement, (d) amend its Certificate of
Incorporation, bylaws or other charter documents so as to affect adversely any
rights of any Holders, (e) increase the authorized number of shares of
Preferred Stock, or (f) enter into any agreement with respect to the foregoing.
Section 4. Liquidation. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a "Liquidation"),
the Holders shall be entitled to receive out of the assets of the Company,
whether such assets are capital or surplus, for each share of Preferred Stock
an amount equal to the Stated Value plus all due but unpaid dividends per
share, whether declared or not, before any distribution or payment shall be
made to the holders of any junior securities, and if the assets of the Company
shall be insufficient to pay in full such amounts, then the entire assets to be
distributed to the Holders of Preferred Stock shall be distributed among the
Holders of Preferred Stock ratably in accordance with the respective amounts
that would be payable on such shares if all amounts payable thereon were paid
in full. A sale, conveyance or disposition of all or substantially all of the
assets of the Company or the effectuation by the Company of a transaction or
series of related transactions in which more than 50% of the voting power of
the Company is disposed of, or a consolidation or merger of the Company with or
into any other company or companies shall not be treated as a Liquidation, but
instead shall be subject to the provisions of Section 5. The Company shall
mail written notice of any such Liquidation, not less than 45 days prior to the
payment date stated therein, to each record Holder of Preferred Stock.
Section 5. Conversion.
(a)(i) Each share of Preferred Stock (in minimum amounts of
$50,000 or such lesser amounts as the Company agrees or as may then be held by
the converting Holder) shall be convertible into shares of Common Stock
(subject to reduction pursuant to Section 5(a)(iii) hereof and Section 3.8 of
the Purchase Agreement) at the Conversion Ratio (as defined in Section 6) at
the option of the Holder in whole or in part at any time after the earlier of
(i) the 90th day following the Original Issue Date (as defined in Section 8) or
(ii) the date the Underlying Shares Registration Statement is declared
effective by Securities and Exchange Commission (the "Commission"). The
Holders shall effect conversions by surrendering the certificate or
certificates representing the shares of Preferred Stock to be converted to the
Company, together with the form of conversion notice attached hereto as Exhibit
A (a "Conversion Notice"). Each Conversion Notice shall specify the number of
shares of Preferred Stock to be converted and the date on which such conversion
is to be effected, which date may not be prior to the date the Holder delivers
such Conversion Notice by facsimile (the "Conversion Date"). If no Conversion
Date is specified in a Conversion Notice, the Conversion Date shall be the date
that the Conversion Notice is deemed delivered pursuant to Section 5(i).
Subject to Sections 5(b) and 5(a)(iii) hereof, each Conversion Notice, once
given, shall be irrevocable. If the Holder is converting less than all shares
of Preferred Stock represented by the certificate or certificates tendered by
the Holder with the Conversion Notice, or if a conversion hereunder cannot be
effected in full for any reason, the Company shall promptly deliver to such
Holder (in the manner and within the time set forth in Section 5(b)) a
certificate for such number of shares as have not been converted.
(ii) Any outstanding shares of Preferred Stock not
theretofore converted on the third anniversary of the Original Issue Date shall
automatically be converted into shares of Common Stock at the Conversion Price
then in effect. Notwithstanding the foregoing, no such conversion shall occur
unless (a) the Underlying Shares that would then be issuable upon such
conversion could either be resold by such Holder pursuant to Rule 144(k)
promulgated under the Securities Act or there is then an effective Underlying
Shares Registration Statement naming the recipient of such shares as a selling
stockholder thereunder, (b) the Company has a sufficient number of authorized
and unreserved Common Stock to issue upon such conversion. Further, the number
of shares of Preferred Stock that are subject to conversion pursuant to this
section shall be limited to the number of Underlying Shares which may be issued
upon such conversion at the prevailing Conversion Price in accordance with Rule
4460(i) promulgated under the Rules of the Nasdaq Stock Market. Any shares of
Preferred Stock which cannot be converted at the then Conversion Price as a
result of such Rule shall be subject to the provisions of Section 5(a)(iii).
(iii) If on any Conversion Date (A) the Common Stock is
listed for trading on the Nasdaq National Market or the Nasdaq SmallCap Market,
(B) the Conversion Price then in effect is such that the aggregate number of
shares of Common Stock that would then be issuable upon conversion in full of
all then outstanding shares of Preferred Stock, together with any shares of the
Common Stock previously issued upon conversion of the shares of Preferred Stock
and as payment of interest thereon, would equal or exceed 20% of the number of
shares of the Common Stock outstanding on the Original Issue Date (such number
of shares as would not equal or exceed such 20% limit, the "Issuable Maximum"),
and (C) the Company shall not have previously obtained the vote of shareholders
(the "Shareholder Approval"), if any, as may be required by the rules and
regulations of The Nasdaq Stock Market applicable to approve the issuance of
Common Stock in excess of the Issuable Maximum in a private placement whereby
shares of Common Stock are deemed to have been issued at a price that is less
than the greater of book or fair market value of the Common Stock, then the
Company shall issue to the Holder so requesting a conversion a number of shares
of Common Stock equal to the Issuable Maximum and, with respect to the
remainder of the aggregate stated value of the shares of Preferred Stock then
held by such Holder for which a conversion in accordance with the Conversion
Price would result in an issuance of Common Stock in excess of the Issuable
Maximum, the converting Holder shall have the option to require the Company to
either (1) use its best efforts to obtain the Shareholder Approval applicable
to such issuance as soon as is possible, but in any event not later than the
60th day after such request, or (2)(i) issue and deliver to such Holder a
number of shares of Common Stock as equals (x) the aggregate stated value of
the shares of Preferred Stock tendered for conversion in respect of the
Conversion Notice at issue but for which a conversion in accordance with the
other terms hereof would result in an issuance of Common Stock in excess of the
Issuable Maximum, divided by (y) the Initial Conversion Price (as defined
below), and (ii) cash in an amount equal to the product of (x) the Per Share
Market Value on the Conversion Date and (y) the number of shares of Common
Stock in excess of such Holder's pro rata portion of the Issuable Maximum that
would have otherwise been issuable to the Holder in respect of such conversion
but for the provisions of this Section (such amount of cash being hereinafter
referred to as the "Discount Equivalent"), or (3) pay cash to the converting
Holder in an amount equal to the Mandatory Redemption Amount (as defined in
Section 5(b)(ii) hereunder) for the number of Underlying Shares in or issuable
upon such conversion in excess of the Issuable Maximum. If the Company fails
to pay the Discount Equivalent or the Mandatory Redemption Amount, as the case
may be, in full pursuant to this Section within seven (7) days after the date
payable, the Company will pay interest thereon at a rate of 15% per annum to
the converting Holder, accruing daily from the Conversion Date until such
amount, plus all such interest thereon, is paid in full.
(b) (i) Not later than three (3) Trading Days after any
Conversion Date, the Company will deliver to the Holder (i) a certificate or
certificates which shall be free of restrictive legends and trading
restrictions (other than those required by Section 3.1(b) of the Purchase
Agreement) representing the number of shares of Common Stock being acquired
upon the conversion of shares of Preferred Stock (subject to reduction pursuant
to Section 5(a)(iii) and Section 3.8 of the Purchase Agreement), (ii) one or
more certificates representing the number of shares of Preferred Stock tendered
for conversion that were not requested to be converted (or that the Company is
prohibited from converting), (iii) a bank check in the amount of accrued and
unpaid dividends (if the Company has elected to pay accrued dividends in cash),
and (iv) if the Company has elected and is permitted hereunder to pay accrued
dividends in shares of Common Stock, certificates, which shall be free of
restrictive legends and trading restrictions (other than those required by
Section 3.1 (b) of the Purchase Agreement), representing such number of shares
of Common Stock as equals such dividend divided by the Conversion Price on the
Dividend Payment Date; provided, however, that the Company shall not be
obligated to issue certificates evidencing the shares of Common Stock issuable
upon conversion of any shares of Preferred Stock until certificates evidencing
such shares of Preferred Stock are either delivered for conversion to the
Company or any transfer agent for the Preferred Stock or Common Stock, or the
Holder of such Preferred Stock notifies the Company that such certificates have
been lost, stolen or destroyed and provides a bond (or other adequate security)
reasonably satisfactory to the Company to indemnify the Company from any loss
incurred by it in connection therewith. The Company shall, upon request of the
Holder, if available, use its best efforts to deliver any certificate or
certificates required to be delivered by the Company under this Section
electronically through the Depository Trust Corporation or another established
clearing corporation performing similar functions. If in the case of any
Conversion Notice such certificate or certificates, including for purposes
hereof, any shares of Common Stock to be issued on the Conversion Date on
account of accrued but unpaid dividends hereunder, are not delivered to or as
directed by the applicable Holder by the third Trading Day after the Conversion
Date, the Holder shall be entitled by written notice to the Company at any time
on or before its receipt of such certificate or certificates thereafter, to
rescind such conversion, in which event the Company shall immediately return
the certificates representing the shares of Preferred Stock tendered for
conversion, (such recision shall be in addition to, and not in lieu of, the
rights set forth elsewhere herein).
(ii) If the Company fails to deliver to the Holder such
certificate or certificates pursuant to Section 5(b)(i), including for purposes
hereof, any shares of Common Stock to be issued on the Conversion Date on
account of accrued but unpaid dividends hereunder, prior to the third Trading
Day after the Conversion Date, the Company shall pay to such Holder, in cash,
as liquidated damages and not as a penalty, $5,000 for each day after such
third Trading Day until such certificates are delivered. Nothing herein shall
limit a Holder's right to pursue actual damages for the Company's failure to
deliver certificates representing shares of Common Stock upon conversion within
the period specified herein (including, without limitation, damages relating to
any purchase of shares of Common Stock by such Holder to make delivery on a
sale effected in anticipation of receiving certificates representing shares of
Common Stock upon conversion, such damages to be in an amount equal to (A) the
aggregate amount paid by such Holder for the shares of Common Stock so
purchased minus (B) the aggregate amount of net proceeds, if any, received by
such Holder from the sale of the shares of Common Stock issued by the Company
pursuant to such conversion), and such Holder shall have the right to pursue
all remedies available to it at law or in equity including, without limitation,
a decree of specific performance and/or injunctive relief. The exercise of any
such rights shall not prohibit the Holders from seeking to enforce damages
pursuant to any other Section hereof or under applicable law.
(iii) In addition to any other rights available to the Holder, if
the Company fails to deliver to the Holder such certificate or certificates
pursuant to Section 5(b)(i), including for purposes hereof, any shares of
Common Stock to be issued on the Conversion Date on account of accrued but
unpaid dividends hereunder, prior to the third Trading Day after the Conversion
Date, and if after such the third Trading Day the Holder purchases (in an open
market transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by such Holder of the Underlying Shares which the Holder
anticipated receiving upon such conversion (a "Buy-In"), then the Company shall
pay in cash to the Holder (in addition to any remedies available to or elected
by the Holder) the amount by which (x) the Holder's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (y) the aggregate stated value of the shares of Preferred
Stock for which such conversion was not timely honored. For example, if the
Holder purchases shares of Common Stock having a total purchase price of
$11,000 to cover a Buy-In with respect to an attempted conversion of $10,000
aggregate stated value of the shares of Preferred Stock, the Company shall be
required to pay the Holder $1,000. The Holder shall provide the Company
written notice indicating the amounts payable to the Holder in respect of the
Buy-In.
(c) (i) The conversion price for each share of Preferred Stock
(the "Conversion Price") in effect on any Conversion Date shall be the lesser
of (a) 120% of the average of the Per Share Market Values for the five (5)
Trading Days immediately preceding the Original Issue Date (the "Initial
Conversion Price") or (b) 85% of the average of the three (3) lowest Per Share
Market Values during the twenty five (25) Trading Days prior to the date of the
applicable Conversion Notice, which Per Share Market Values shall be chosen by
the converting Holder; provided, however, that such Conversion Price shall not
be less than $4.00 per share (the "Floor") and shall not exceed $6.00 per share
(the "Cap"), and further provided, that notwithstanding the formula set forth
above, if the Company does not close a High Yield Debt Offering by October 15,
1998, the Conversion Price for the shares of Preferred Share shall be the
lesser of $5.00 per share or 80% of the average closing price per share of
Common Stock during the last five trading days prior to conversion. If on any
such date, there are no sales, the closing bid price per share of Common Stock
on such date shall be used, and further provided, however, (a) if the
Underlying Shares Registration Statement (as defined in the Registration Rights
Agreement) is not filed on or prior to the Filing Date (as defined in the
Registration Rights Agreement), or (b) if the Company fails to file with the
Commission a request for acceleration in accordance with Rule 12d1-2
promulgated under the Exchange Act within five (5) days of the date that the
Company is notified (orally or in writing, whichever is earlier) by the
Commission that an Underlying Shares Registration Statement will not be
"reviewed," or not subject to further review, or (c) if the Underlying Shares
Registration Statement is not declared effective by the Commission on or prior
to the 90th day after the Original Issue Date, or (d) if such Underlying Shares
Registration Statement is filed with and declared effective by the Commission
but thereafter ceases to be effective as to all Registrable Securities (as such
term is defined in the Registration Rights Agreement) at any time prior to the
expiration of the "Effectiveness Period" (as such term is defined in the
Registration Rights Agreement), without being succeeded within 10 Trading Days
by a subsequent Underlying Shares Registration Statement filed with and
declared effective by the Commission, or (e) if trading in the Common Stock
shall be suspended, or if the Common Stock shall be delisted, for more than
three (3) Trading Days, or (f) if the conversion rights of the Holders are
suspended for any reason, or if a Holder is not permitted to resell Registrable
Securities under an Underlying Shares Registration Statement, or (g) if the
Company is required to convene a shareholders meeting pursuant to Section
5(a)(iii) and fails to convene a meeting of shareholders within the time
periods specified in Section 5(a)(iii) or does so convene a meeting of
shareholders within such time period but fails to obtain Shareholder Approval
at such meeting, or (h) if an amendment to the Underlying Securities
Registration Statement is not filed by the Company with the Commission within
ten (10) days of the Commission's notifying the Company that such amendment is
required in order for the Underlying Securities Registration Statement to be
declared effective, or (i) the Company fails to comply with requests for
conversion of any Preferred Stock into shares of Common Stock in accordance
with the terms hereof (any such failure or breach being referred to as an
"Event," and for purposes of clauses (a), (c), (f) and (g) the date on which
such Event occurs, or for purposes of clause (b) the date on which such five
(5) day period is exceeded, or for purposes of clauses (d) and (h) the date
which such 10 Trading Day-period is exceeded, or for purposes of clause (e) the
date on which such three Trading Day period is exceeded, being referred to as
"Event Date"), the Conversion Price shall be decreased by 2.5% each month
(i.e., the Conversion Price would decrease by 2.5% as of the Event Date and an
additional 2.5% as of each monthly anniversary of the Event Date) until the
earlier to occur of the second month anniversary after the Event Date and such
time as the applicable Event is cured. Commencing the second month anniversary
after the Event Date, the Company shall pay to each Holder 2.5% of the product
of the Stated Value and the number of shares of Preferred Stock then held by
such Holder, in cash as liquidated damages, and not as a penalty, on the first
day of each monthly anniversary of the Event Date until such time as the
applicable Event, is cured. Any decrease in the Conversion Price pursuant to
this Section shall continue notwithstanding the fact that the Event causing
such decrease has been subsequently cured.
(ii) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall (a) pay a stock dividend or otherwise
make a distribution or distributions on shares of its junior securities or pari
passu securities payable in shares of Common Stock, (b) subdivide outstanding
shares of Common Stock into a larger number of shares, (c) combine outstanding
shares of Common Stock into a smaller number of shares, or (d) issue by
reclassification of shares of Common Stock any shares of capital stock of the
Company, the Initial Conversion Price shall be multiplied by a fraction of
which the numerator shall be the number of shares of Common Stock outstanding
before such event and of which the denominator shall be the number of shares of
Common Stock outstanding after such event. Any adjustment made pursuant to
this Section 5(c)(ii) shall become effective immediately after the record date
for the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or re-classification.
(iii) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall issue rights or warrants to all holders
of Common Stock entitling them to subscribe for or purchase shares of Common
Stock at a price per share less than the Per Share Market Value of the Common
Stock at the record date mentioned below, the Initial Conversion Price shall be
multiplied by a fraction, of which the denominator shall be the number of
shares of Common Stock (excluding treasury shares, if any) outstanding on the
date of issuance of such rights or warrants plus the number of additional
shares of Common Stock offered for subscription or purchase, and of which the
numerator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding on the date of issuance of such rights or warrants
plus the number of shares which the aggregate offering price of the total
number of shares so offered would purchase at such Per Share Market Value.
Such adjustment shall be made whenever such rights or warrants are issued, and
shall become effective immediately after the record date for the determination
of stockholders entitled to receive such rights or warrants. However, upon the
expiration of any right or warrant to purchase Common Stock the issuance of
which resulted in an adjustment in the Initial Conversion Price pursuant to
this Section 5(c)(iii), if any such right or warrant shall expire and shall not
have been exercised, the Initial Conversion Price shall immediately upon such
expiration be recomputed and effective immediately upon such expiration be
increased to the price which it would have been (but reflecting any other
adjustments in the Initial Conversion Price made pursuant to the provisions of
this Section 5 after the issuance of such rights or warrants) had the
adjustment of the Initial Conversion Price made upon the issuance of such
rights or warrants been made on the basis of offering for subscription or
purchase only that number of shares of Common Stock actually purchased upon the
exercise of such rights or warrants actually exercised.
(iv) If the Company, at any time while shares of Preferred
Stock are outstanding, shall distribute to all holders of Common Stock (and not
to Holders of Preferred Stock) evidences of its indebtedness or assets or
rights or warrants to subscribe for or purchase any security (excluding those
referred to in Sections 5(c)(ii) and (iii) above), then in each such case the
Conversion Price at which each share of Preferred Stock shall thereafter be
convertible shall be determined by multiplying the Conversion Price in effect
immediately prior to the record date fixed for determination of stockholders
entitled to receive such distribution by a fraction of which the denominator
shall be the Per Share Market Value of Common Stock determined as of the record
date mentioned above, and of which the numerator shall be such Per Share Market
Value of the Common Stock on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness
so distributed applicable to one outstanding share of Common Stock as
determined by the Board of Directors in good faith; provided, however, that in
the event of a distribution exceeding ten percent (10%) of the net assets of
the Company, if the Holders of a majority in interest of the Preferred Stock
dispute such valuation, such fair market value shall be determined by a
nationally recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which may be
the firm that regularly examines the financial statements of the Company) (an
"Appraiser") selected in good faith by the Holders of a majority in interest of
the shares of Preferred Stock then outstanding; and provided, further, that the
Company, after receipt of the determination by such Appraiser shall have the
right to select an additional Appraiser, in good faith, in which case the fair
market value shall be equal to the average of the determinations by each such
Appraiser. In either case the adjustments shall be described in a statement
provided to the Holders of Preferred Stock of the portion of assets or
evidences of indebtedness so distributed or such subscription rights applicable
to one share of Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date mentioned above.
(v) All calculations under this Section 5 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be.
(vi) Whenever the Conversion Price is adjusted pursuant to
Section 5(c)(i),(ii),(iii) or (iv), the Company shall promptly mail to each
Holder of Preferred Stock, a notice setting forth the Conversion Price after
such adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(vii) In case of any reclassification of the Common Stock,
any consolidation or merger of the Company with or into another person pursuant
to which (i) a majority of the Company's Board of Directors will not constitute
a majority of the board of directors of the surviving entity or (ii) less than
50% of the outstanding shares of the capital stock of the surviving entity will
be held by the same shareholders of the Company prior to such reclassification,
consolidation or merger (a "Change of Control Transaction"), the sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, the Holders of the Preferred Stock then
outstanding shall have the right thereafter to convert such shares only into
the shares of stock and other securities, cash and property receivable upon or
deemed to be held by holders of Common Stock following such reclassification,
consolidation, merger, sale, transfer or share exchange, and the Holders of the
Preferred Stock shall be entitled upon such event to receive such amount of
securities, cash or property as the shares of the Common Stock of the Company
into which such shares of Preferred Stock could have been converted immediately
prior to such reclassification, consolidation, merger, sale, transfer or share
exchange would have been entitled. The terms of any such consolidation,
merger, sale, transfer or share exchange shall include such terms so as to
continue to give to the Holder of Preferred Stock the right to receive the
securities, cash or property set forth in this Section 5(c)(vii) upon any
conversion or redemption following such consolidation, merger, sale, transfer
or share exchange. This provision shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or share
exchanges. With respect to any such reclassification, consolidation or merger,
each Holder shall have the option to require the Company to redeem its shares
of Preferred Stock at a price per share equal to the product of (i) the average
Per Share Market Value for the five (5) Trading Days immediately preceding (1)
the effective date, the date of the closing or the date of the announcement, as
the case may be, of the reclassification, consolidation, merger, sale, transfer
or share exchange the triggering such redemption right or (2) the date of
payment in full by the Company of the redemption price hereunder, whichever is
greater, and (ii) the Conversion Ratio calculated on the date of the closing or
the effective date, as the case may be, of the reclassification, consolidation,
merger, sale, transfer or share exchange triggering such redemption right, as
the case may be. The entire redemption price shall be paid in cash, and if any
portion of the applicable redemption price shall not be paid by the Company
within seven (7) calendar days after the date due, late fees shall accrue
thereon at the rate of 15% per annum until the redemption price plus all such
late fees are paid in full (which amount shall be paid as liquidated damages
and not as a penalty). In addition, if any portion of such redemption price
remains unpaid for more than seven (7) calendar days after the date due, the
Holder of the Preferred Stock subject to such redemption may elect, by written
notice to the Company given within 30 days after the date due, to either (i)
demand conversion in accordance with the formula and the time frame therefor
set forth in Section 5 of all of the shares of Preferred Stock for which such
redemption price, plus accrued liquidated damages thereof, has not been paid in
full (the "Unpaid Redemption Shares"), in which event the Per Share Market
Value for such shares shall be the lower of the Per Share Market Value
calculated on the date such redemption price was originally due and the Per
Share Market Value as of the Holder's written demand for conversion, or
(ii) invalidate ab initio such redemption, notwithstanding anything herein
contained to the contrary. If the Holder elects option (i) above, the Company
shall within three (3) Trading Days of its receipt of such election deliver to
the Holder the shares of Common Stock issuable upon conversion of the Unpaid
Redemption Shares subject to such Holder conversion demand and otherwise
perform its obligations hereunder with respect thereto; or, if the Holder
elects option (ii) above, the Company shall promptly, and in any event not
later than three (3) Trading Days from receipt of Holder's notice of such
election, return to the Holder all of the Unpaid Redemption Shares.
(viii) If:
A. the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
B. the Company shall declare a special nonrecurring
cash dividend on or a redemption of its Common
Stock; or
C. the Company shall authorize the granting to all
holders of the Common Stock rights or warrants to
subscribe for or purchase any shares of capital
stock of any class or of any rights; or
D. the approval of any stockholders of the Company
shall be required in connection with any
reclassification of the Common Stock of the
Company, any consolidation or merger to which the
Company is a party, any sale or transfer of all
or substantially all of the assets of the
Company, of any compulsory share of exchange
whereby the Common Stock is converted into other
securities, cash or property; or
E. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding
up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained
for the purpose of conversion of Preferred Stock, and shall cause to be mailed
to the Holders of Preferred Stock at their last addresses as they shall appear
upon the stock books of the Company, at least 20 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be
taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, however,
that the failure to mail such notice or any defect therein or in the mailing
thereof shall not affect the validity of the corporate action required to be
specified in such notice. Holders are entitled to convert shares of Preferred
Stock during the 20-day period commencing the date of such notice to the
effective date of the event triggering such notice.
(ix) If the Company (i) makes a public announcement that it
intends to enter into a Change of Control Transaction or (ii) any person, group
or entity (including the Company, but excluding a Holder or any affiliate of a
Holder) publicly announces a bona fide tender offer, exchange offer or other
transaction to purchase 50% or more of the Common Stock (such announcement
being referred to herein as a "Major Announcement" and the date on which a
Major Announcement is made, the "Announcement Date"), then, in the event that a
Holder seeks to convert shares of Preferred Stock on or following the
Announcement Date, the Conversion Price shall, effective upon the Announcement
Date and continuing through the earlier to occur of the consummation of the
proposed transaction or tender offer, exchange offer or other transaction and
the Abandonment Date (as defined below), be equal to the lower of (x) the
average Per Share Market Value on the five Trading Days immediately preceding
(but not including) the Announcement Date and (y) the Conversion Price in
effect on the Conversion Date for such Preferred Stock. "Abandonment Date"
means with respect to any proposed transaction or tender offer, exchange offer
or other transaction for which a public announcement as contemplated by this
paragraph has been made, the date upon which the Company (in the case of clause
(i) above) or the person, group or entity (in the case of clause (ii) above)
publicly announces the termination or abandonment of the proposed transaction
or tender offer, exchange offer or another transaction which caused this
paragraph to become operative.
(d) The Company covenants that it will at all times reserve and
keep available out of its authorized and unissued Common Stock solely for the
purpose of issuance upon conversion of Preferred Stock and payment of dividends
on Preferred Stock, each as herein provided, free from preemptive rights or any
other actual contingent purchase rights of persons other than the Holders of
Preferred Stock, not less than such number of shares of Common Stock as shall
(subject to any additional requirements of the Company as to reservation of
such shares set forth in the Purchase Agreement) be issuable (taking into
account the adjustments and restrictions of Section 5(a) and Section 5(c)) upon
the conversion of all outstanding shares of Preferred Stock and payment of
dividends hereunder. The Company covenants that all shares of Common Stock
that shall be so issuable shall, upon issue, be duly and validly authorized,
issued and fully paid, nonassessable and freely tradeable, subject to the
legend requirements of Section 3.1 (b) of the Purchase Agreement.
(e) Upon a conversion hereunder the Company shall not be required
to issue stock certificates representing fractions of shares of Common Stock,
but may if otherwise permitted, make a cash payment in respect of any final
fraction of a share based on the Per Share Market Value at such time. If the
Company elects not, or is unable, to make such a cash payment, the Holder of a
share of Preferred Stock shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.
(f) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the Holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such shares of Preferred
Stock so converted and the Company shall not be required to issue or deliver
such certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(g) Shares of Preferred Stock converted into Common Stock shall
be canceled and shall have the status of authorized but unissued shares of
undesignated stock.
(h) Any and all notices or other communications or deliveries to
be provided by the Holders of the Preferred Stock hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered
personally, by facsimile or sent by a nationally recognized overnight courier
service, addressed to the attention of the Chief Executive Officer of the
Company at the facsimile telephone number or address of the principal place of
business of the Company as set forth in the Purchase Agreement. Any and all
notices or other communications or deliveries to be provided by the Company
hereunder shall be in writing and delivered personally, by facsimile or sent by
a nationally recognized overnight courier service, addressed to each Holder of
Preferred Stock at the facsimile telephone number or address of such Holder
appearing on the books of the Company, or if no such facsimile telephone number
or address appears, at the principal place of business of the Holder. Any
notice or other communication or deliveries hereunder shall be deemed given and
effective on the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section prior to 8:00 p.m. (Eastern Standard Time), (ii) the
date after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section later than 8:00 p.m. (Eastern Standard Time) on any date and earlier
than 11:59 p.m. (Eastern Standard Time) on such date, (iii) upon receipt, if
sent by a nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given.
Section 6. Redemption Upon Certain Events. Upon the occurrence of
a Triggering Event (as defined below), each Holder shall (in addition to all
other rights it may have hereunder or under applicable law), have the right,
exercisable at the sole option of such Holder, to require the Company to redeem
all or a portion of the Preferred Stock then held by such Holder for a
redemption price, in cash, equal to the sum of (i) the Mandatory Redemption
Amount (as defined in Section 8) plus (ii) the product of (A) the number of
Underlying Shares issued in respect of conversions or as payment of dividends
hereunder and then held by the Holder and (B) the Per Share Market Value on the
date such redemption is demanded or the date the redemption price hereunder is
paid in full, whichever is greater. For purposes of this Section, a share of
Preferred Stock is outstanding until such date as the Holder shall have
received Underlying Shares upon a conversion (or attempted conversion) thereof.
A "Triggering Event" means any one or more of the following events
(whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgement, decree or order of
any court, or any order, rule or regulation of any administrative or
governmental body):
(i) the failure of the Registration Statement to be
declared effective by the Commission on or prior to the 180th day after the
Original Issue Date;
(ii) if, during the "Effectiveness Period" (as defined in
Registration Rights Agreement), the effectiveness of the Registration Statement
lapses for any reason or the Holder shall not be permitted to resell
Registrable Securities (as defined in the Registration Rights Agreement) under
the Underlying Shares Registration Statement;
(iii) the failure of the Common Stock to be listed on the
Nasdaq National Market or the Nasdaq SmallCap Market for a period of 15 days
(which need not be consecutive days);
(iv) the Company shall fail for any reason to deliver
certificates representing Underlying Shares issuable upon a conversion
hereunder that comply with the provisions hereof prior to the 10th day after
the Conversion Date or the Company shall provide notice to any Holder,
including by way of public announcement, at any time, of its intention not to
comply with requests for conversion of any Preferred Stock in accordance with
the terms hereof;
(v) the Company shall be a party to any merger or
consolidation pursuant to which the Company shall not be the surviving entity
or shall sell, transfer or otherwise dispose of in excess of 50% of its assets
or voting securities in one or more transactions, or shall redeem more than a
de minimis number of shares of Common Stock or other junior securities (other
than redemptions of Underlying Shares);
(vi) an Event shall not have been cured to the satisfaction of
the Holder prior to the expiration of thirty (30) days from the Event Date
relating thereto;
(vii) the Company shall fail for any reason to deliver the
certificate or certificates required pursuant to a Buy-In and Section 5(b)(iii)
within seven (7) days after notice is deemed delivered hereunder;
(viii) the Company shall fail to have available a sufficient
number of authorized and unreserved shares of Common Stock to issue to such
Holder upon a conversion hereunder.
Section 7. Redemption at Option of Company.
(a) The Company shall have the right, exercisable at any time
upon 20 Trading Days notice (an "Optional Redemption Notice") to the Holders of
the Preferred Stock given at any time after the Original Issue Date to redeem
all or any portion of the shares of Preferred Stock which have not previously
been converted or redeemed, at a price equal to the Optional Redemption Price
(as defined below). The entire Optional Redemption Price shall be paid in
cash. Holders of Preferred Stock may convert (and the Company shall honor such
conversions in accordance with the terms hereof) any shares of Preferred Stock,
including shares subject to an Optional Redemption Notice, during the period
from the date thereof through the 20th Trading Day after the receipt of an
Optional Redemption Notice.
(b) If any portion of the Optional Redemption Price shall not be
paid by the Company within seven (7) calendar days after the 20th Trading Day
after the delivery of an Optional Redemption Notice, interest shall accrue
thereon at the rate of 15% per annum until the Optional Redemption Price plus
all such interest is paid in full (any such amount shall be paid as liquidated
damages and not as a penalty). In addition, if any portion of the Optional
Redemption Price remains unpaid for more than seven (7) calendar days after the
date due, the Holder of the Preferred Stock subject to such redemption may
elect, by written notice to the Company given at any time thereafter, to either
(i) demand conversion in accordance with the formula and the time frame
therefor set forth herein of all or any portion of the shares of Preferred
Stock for which such Optional Redemption Price, plus accrued liquidated damages
thereof, has not been paid in full (the "Unpaid Redemption Shares"), in which
event the Per Share Market Value for such shares shall be the lower of the Per
Share Market Value calculated on the date the Optional Redemption Price was
originally due and the Per Share Market Value as of the Holder's written demand
for conversion, or (ii) invalidate ab initio such redemption, notwithstanding
anything herein contained to the contrary. If the Holder elects option
(i) above, the Company shall within three (3) Trading Days of its receipt of
such election deliver to the Holder the shares of Common Stock issuable upon
conversion of the Unpaid Redemption Shares subject to such Holder conversion
demand and otherwise perform its obligations hereunder with respect thereto;
or, if the Holder elects option (ii) above, the Company shall promptly, and in
any event not later than three (3) Trading Days from receipt of Holder's notice
of such election, return to the Holder all of the Unpaid Redemption Shares.
(c) The "Optional Redemption Price" shall equal the sum of (i) the
product of (A) the number of shares of Preferred Stock to be redeemed and (B)
the product of (1) the average Per Share Market Value for the five (5) Trading
Days immediately preceding (x) the date of the Optional Redemption Notice or
(y) the date of payment in full by the Company of the Optional Redemption
Price, whichever is greater, and (2) the Conversion Ratio calculated on the
date of the Optional Redemption Notice, and (ii) all other amounts, costs,
expenses and liquidated damages due in respect of such shares of Preferred
Stock.
Section 8. Definitions. For the purposes hereof, the following
terms shall have the following meanings:
"Common Stock" means the Company's common stock, $.0001 par value,
and stock of any other class into which such shares may hereafter have been
reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, of which the
numerator is Stated Value plus accrued but unpaid dividends (including any
accrued but unpaid late fees thereon) but only to the extent not paid in shares
of Common Stock in accordance with the terms hereof, and of which the
denominator is the Conversion Price at such time.
"Mandatory Redemption Amount" means the sum of (i) the product of
(A) the number of shares of Preferred Stock to be redeemed and (B) the product
of (1) the average Per Share Market Value for the five (5) Trading Days
immediately preceding (x) the date of the Triggering Event or (y) the date of
payment in full by the Company of the applicable redemption price, whichever is
greater, and (2) the Conversion Ratio calculated on the date of the Triggering
Event, and (ii) all other amounts, costs, expenses and liquidated damages due
in respect of such shares of Preferred Stock.
"Original Issue Date" shall mean the date of the first issuance of
any shares of the Preferred Stock regardless of the number of transfers of any
particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the NASDAQ or
any other stock exchange or quotation system on which the Common Stock is then
listed or if there is no such price on such date, then the closing bid price on
such exchange or quotation system on the date nearest preceding such date, or
(b) if the Common Stock is not listed then on the NASDAQ or any stock exchange
or quotation system, the closing bid price for a share of Common Stock in the
over-the-counter market, as reported by the National Quotation Bureau
Incorporated or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date, or (c) if the Common
Stock is not then reported by the National Quotation Bureau Incorporated (or
similar organization or agency succeeding to its functions of reporting
prices), then the average of the "Pink Sheet" quotes for the relevant
conversion period, as determined in good faith by the Holder, or (d) if the
Common Stock is not then publicly traded the fair market value of a share of
Common Stock as determined by an Appraiser selected in good faith by the
Holders of a majority in interest of the shares of the Preferred Stock;
provided, however, that the Company, after receipt of the determination by such
Appraiser, shall have the right to select an additional Appraiser, in which
case, the fair market value shall be equal to the average of the determinations
by each such Appraiser; and provided, further that all determinations of the
Per Share Market Value shall be appropriately adjusted for any stock dividends,
stock splits or other similar transactions during such period.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Purchase Agreement" means the Convertible Preferred Stock Purchase
Agreement, dated as of the Original Issue Date, among the Company and the
original Holder of the Preferred Stock.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the Original Issue Date, by and among the Company and
the original Holder of the Preferred Stock.
"Trading Day" means (a) a day on which the Common Stock is traded
on the NASDAQ or other stock exchange or market on which the Common Stock has
been listed, or (b) if the Common Stock is not listed on the NASDAQ or on such
other stock exchange or market, a day on which the Common Stock is traded, on
the Nasdaq SmallCap Market, or (c) if the Common Stock is not listed on the
Nasdaq SmallCap Market or any stock exchange or market, a day on which the
Common Stock is traded in the over-the-counter market, as reported by the OTC
Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin
Board, a day on which the Common Stock is quoted in the over-the-counter market
as reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions of reporting prices); provided,
however, that in the event that the Common Stock is not listed or quoted as set
forth in (a), (b) and (c) hereof, then Trading Day shall mean any day except
Saturday, Sunday and any day which shall be a legal holiday or a day on which
banking institutions in the State of New York are authorized or required by law
or other government action to close.
"Underlying Shares" means shares of Common Stock into which the
Preferred Stock are convertible, the shares of Common Stock issuable upon
payment of dividends thereon in accordance with the terms hereof and the
Purchase Agreement.
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of Series D
Convertible Preferred Stock indicated below, into shares of Common Stock,
$.0001 par value (the "Common Stock"), of USCI, INC. (the "Company") according
to the conditions hereof, as of the date written below. If shares are to be
issued in the name of a person other than undersigned, the undersigned will pay
all transfer taxes payable with respect thereto and is delivering herewith such
certificates and opinions as reasonably requested by the Company in accordance
therewith. No fee will be charged to the Holder for any conversion, except for
such transfer taxes, if any.
Conversion calculations:
Date to Effect Conversion
Number of shares of Preferred Stock to be Converted
______________________
Number of shares of Common Stock to be Issued
Applicable Conversion Price
Signature
Name
Address
<PAGE>
IN WITNESS WHEREOF, the corporation has caused this certificate to be executed
under its corporate seal this 29th day of July, 1998.
USCI, Inc.
By: /s/ Robert J. Kostrinsky
Robert J. Kostrinsky,
Executive Vice President
ATTEST:
/s/ Basil H. Ford.
Basil H. Ford, Secretary
EXHIBIT 10.30
NEITHER THIS WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH APPLICABLE
STATE SECURITIES OR BLUE SKY LAWS.
USCI, INC.
WARRANT
Warrant No. 5 Dated July 31, 1998
USCI, Inc., a corporation organized and existing under the laws of
Delaware (the "Company"), hereby certifies that, for value received, JNC
Opportunity Fund Ltd. or its registered assigns ("Holder"), is entitled,
subject to the terms set forth below, to purchase from the Company up to
a total of 332,226 shares of Common Stock, $.0001 par value per share
(the "Common Stock"), of the Company (each such share, a "Warrant Share"
and all such shares, the "Warrant Shares") at an exercise price equal to
$5.31 per share (as adjusted from time to time as provided in Section 8,
the "Exercise Price"), at any time and from time to time from and after
the date hereof and through and including July 31, 2003 (the
"Expiration Date"), and subject to the following terms and conditions:
1. Registration of Warrant. The Company shall register
this Warrant, upon records to be maintained by the Company for that
purpose (the "Warrant Register"), in the name of the record Holder
hereof from time to time. The Company may deem and treat the registered
Holder of this Warrant as the absolute owner hereof for the purpose of
any exercise hereof or any distribution to the Holder, and for all other
purposes, and the Company shall not be affected by notice to the
contrary.
2. Registration of Transfers and Exchanges.
(a) The Company shall register the transfer of any
portion of this Warrant in the Warrant Register, upon surrender of this
Warrant, with the Form of Assignment attached hereto duly completed and
signed, to the Company at the office specified in or pursuant to Section
3(b). Upon any such registration or transfer, a new warrant to purchase
Common Stock, in substantially the form of this Warrant (any such new
warrant, a "New Warrant"), evidencing the portion of this Warrant so
transferred shall be issued to the transferee and a New Warrant
evidencing the remaining portion of this Warrant not so transferred, if
any, shall be issued to the transferring Holder. The acceptance of the
New Warrant by the transferee thereof shall be deemed the acceptance of
such transferee of all of the rights and obligations of a holder of a
Warrant.
(b) This Warrant is exchangeable, upon the surrender
hereof by the Holder to the office of the Company specified in or
pursuant to Section 3(b) for one or more New Warrants, evidencing in the
aggregate the right to purchase the number of Warrant Shares which may
then be purchased hereunder. Any such New Warrant will be dated the
date of such exchange.
3. Duration and Exercise of Warrants.
(a) This Warrant shall be exercisable by the
registered Holder on any business day before 5:30 P.M., Eastern Standard
Time, at any time and from time to time on or after the date hereof to
and including the Expiration Date. At 5:30 P.M., Eastern Standard Time
on the Expiration Date, the portion of this Warrant not exercised prior
thereto shall be and become void and of no value. This Warrant may not
be redeemed by the Company.
(b) Subject to Sections 2(b), 6 and 11, upon surrender
of this Warrant, with the Form of Election to Purchase attached hereto
duly completed and signed, to the Company at its address for notice set
forth in Section 11 and upon payment of the Exercise Price multiplied by
the number of Warrant Shares that the Holder intends to purchase
hereunder, in lawful money of the United States of America, in cash or
by certified or official bank check or checks, all as specified by the
Holder in the Form of Election to Purchase, the Company shall promptly
(but in no event later than 3 business days after the Date of Exercise
(as defined herein)) issue or cause to be issued and cause to be
delivered to or upon the written order of the Holder and in such name or
names as the Holder may designate, a certificate for the Warrant Shares
issuable upon such exercise, free of restrictive legends other than as
required by applicable law. Any person so designated by the Holder to
receive Warrant Shares shall be deemed to have become holder of record
of such Warrant Shares as of the Date of Exercise of this Warrant.
A "Date of Exercise" means the date on which the
Company shall have received (i) this Warrant (or any New Warrant, as
applicable), with the Form of Election to Purchase attached hereto (or
attached to such New Warrant) appropriately completed and duly signed,
and (ii) payment of the Exercise Price for the number of Warrant Shares
so indicated by the holder hereof to be purchased.
(c) This Warrant shall be exercisable, either in its
entirety or, from time to time, for a portion of the number of Warrant
Shares. If less than all of the Warrant Shares which may be purchased
under this Warrant are exercised at any time, the Company shall issue or
cause to be issued, at its expense, a New Warrant evidencing the right
to purchase the remaining number of Warrant Shares for which no exercise
has been evidenced by this Warrant.
4. Piggyback Registration Rights. During the term of this
Warrant, the Company may not file any registration statement with the
Securities and Exchange Commission (other than registration statements
of the Company filed on Form S-8 or Form S-4, each as promulgated under
the Securities Act of 1933, as amended (the "Securities Act"), pursuant
to which the Company is registering securities pursuant to a Company
employee benefit plan or pursuant to a merger, acquisition or similar
transaction including supplements thereto, but not additionally filed
registration statements in respect of such securities) at any time when
there is not an effective registration statement covering the resale of
the Warrant Shares and naming the Holder as a selling stockholder
thereunder, unless the Company provides the Holder with not less than 20
days notice to each of the Holder and Robinson Silverman Pearce Aronsohn
& Berman LLP, attention Eric L. Cohen, notice of its intention to file
such registration statement and provides the Holder the option to
include any or all of the applicable Warrant Shares therein. The
piggyback registration rights granted to the Holder pursuant to this
Section shall continue until all of the Holder's Warrant Shares have
been sold in accordance with an effective registration statement or upon
the expiration of this Warrant. The Company will pay all registration
expenses in connection therewith.
5. Payment of Taxes. The Company will pay all documentary
stamp taxes attributable to the issuance of Warrant Shares upon the
exercise of this Warrant; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any
transfer involved in the registration of any certificates for Warrant
Shares or Warrants in a name other than that of the Holder, and the
Company shall not be required to issue or cause to be issued or deliver
or cause to be delivered the certificates for Warrant Shares unless or
until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to
the satisfaction of the Company that such tax has been paid. The Holder
shall be responsible for all other tax liability that may arise as a
result of holding or transferring this Warrant or receiving Warrant
Shares upon exercise hereof.
6. Replacement of Warrant. If this Warrant is mutilated,
lost, stolen or destroyed, the Company shall issue or cause to be issued
in exchange and substitution for and upon cancellation hereof, or in
lieu of and substitution for this Warrant, a New Warrant, but only upon
receipt of evidence reasonably satisfactory to the Company of such loss,
theft or destruction and indemnity, if reasonably satisfactory to it.
Applicants for a New Warrant under such circumstances shall also comply
with such other reasonable regulations and procedures and pay such other
reasonable charges as the Company may prescribe.
7. Reservation of Warrant Shares. The Company covenants
that it will at all times reserve and keep available out of the
aggregate of its authorized but unissued Common Stock, solely for the
purpose of enabling it to issue Warrant Shares upon exercise of this
Warrant as herein provided, the number of Warrant Shares which are then
issuable and deliverable upon the exercise of this entire Warrant, free
from preemptive rights or any other actual contingent purchase rights of
persons other than the Holder (taking into account the adjustments and
restrictions of Section 8). The Company covenants that all Warrant
Shares that shall be so issuable and deliverable shall, upon issuance
and the payment of the applicable Exercise Price in accordance with the
terms hereof, be duly and validly authorized, issued and fully paid and
nonassessable.
8. Certain Adjustments. The Exercise Price and number of
Warrant Shares issuable upon exercise of this Warrant are subject to
adjustment from time to time as set forth in this Section 8. Upon each
such adjustment of the Exercise Price pursuant to this Section 8, the
Holder shall thereafter prior to the Expiration Date be entitled to
purchase, at the Exercise Price resulting from such adjustment, the
number of Warrant Shares obtained by multiplying the Exercise Price in
effect immediately prior to such adjustment by the number of Warrant
Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price
resulting from such adjustment.
(a) If the Company, at any time while this Warrant is
outstanding, (i) shall pay a stock dividend or otherwise make a
distribution or distributions on shares of its Common Stock or on any
other class of capital stock (and not the Common Stock) payable in
shares of Common Stock, other than the dividends payable under the
Purchase Agreement, (ii) subdivide outstanding shares of Common Stock
into a larger number of shares, or (iii) combine outstanding shares of
Common Stock into a smaller number of shares, the Exercise Price shall
be multiplied by a fraction of which the numerator shall be the number
of shares of Common Stock (excluding treasury shares, if any)
outstanding before such event and of which the denominator shall be the
number of shares of Common Stock (excluding treasury shares, if any)
outstanding after such event. Any adjustment made pursuant to this
Section shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective
date in the case of a subdivision or combination, and shall apply to
successive subdivisions and combinations.
(b) In case of any reclassification of the Common
Stock, any consolidation or merger of the Company with or into another
person, the sale or transfer of all or substantially all of the assets
of the Company in which the consideration therefor is equity or equity
equivalent securities or any compulsory share exchange pursuant to which
the Common Stock is converted into other securities or property, then
the Holder shall have the right thereafter to exercise this Warrant only
into the shares of stock and other securities and property receivable
upon or deemed to be held by holders of Common Stock following such
reclassification, consolidation, merger, sale, transfer or share
exchange, and the Holder shall be entitled upon such event to receive
such amount of securities or property of the Company's business
combination partner equal to the amount of Warrant Shares such Holder
would have been entitled to had such Holder exercised this Warrant
immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange. The terms of any such consolidation,
merger, sale, transfer or share exchange shall include such terms so as
to continue to give to the Holder the right to receive the securities or
property set forth in this Section 8(b) upon any exercise following any
such reclassification, consolidation, merger, sale, transfer or share
exchange.
(c) If the Company, at any time while this Warrant is
outstanding, shall distribute to all holders of Common Stock (and not to
holders of this Warrant) evidences of its indebtedness or assets or
rights or warrants to subscribe for or purchase any security (excluding
those referred to in Sections 8(a), (b) and (d)), then in each such case
the Exercise Price shall be determined by multiplying the Exercise Price
in effect immediately prior to the record date fixed for determination
of stockholders entitled to receive such distribution by a fraction of
which the denominator shall be the Exercise Price determined as of the
record date mentioned above, and of which the numerator shall be such
Exercise Price on such record date less the then fair market value at
such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of
Common Stock as determined by a nationally recognized or major regional
investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) (an "Appraiser")
mutually selected in good faith by the holders of a majority in interest
of the Warrants then outstanding and the Company. Any determination
made by the Appraiser shall be final.
(d) If, at any time while this Warrant is outstanding,
the Company shall issue or cause to be issued rights or warrants to
acquire or otherwise sell or distribute shares of Common Stock to all
holders of Common Stock for a consideration per share less than the Per
Share Market Value (as defined in the Purchase Agreement) in effect on
the date of issuance of such rights or warrants, then, forthwith upon
such issue or sale, the Exercise Price shall be reduced to the price
(calculated to the nearest cent) determined by dividing (i) an amount
equal to the sum of (A) the number of shares of Common Stock outstanding
immediately prior to such issue or sale multiplied by the Exercise
Price, and (B) the consideration, if any, received or receivable by the
Company upon such issue or sale by (ii) the total number of shares of
Common Stock outstanding immediately after such issue or sale.
(e) For the purposes of this Section 8, the following
clauses shall also be applicable:
(i) Record Date. In case the Company shall take
a record of the holders of its Common Stock for the purpose of entitling
them (A) to receive a dividend or other distribution payable in Common
Stock or in securities convertible or exchangeable into shares of Common
Stock, or (B) to subscribe for or purchase Common Stock or securities
convertible or exchangeable into shares of Common Stock, then such
record date shall be deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or
the date of the granting of such right of subscription or purchase, as
the case may be.
(ii) Treasury Shares. The number of shares of
Common Stock outstanding at any given time shall not include shares
owned or held by or for the account of the Company, and the disposition
of any such shares shall be considered an issue or sale of Common Stock.
(f) All calculations under this Section 8 shall be
made to the nearest cent or the nearest 1/100th of a share, as the case
may be.
(g) If:
(i) the Company shall declare a dividend (or any other distribution) on
its Common Stock; or
(ii) the Company shall declare a special nonrecurring cash dividend on
or a redemption of its Common Stock; or
(iii) the Company shall authorize the granting to all holders of the
Common Stock rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights;
or
(iv) the approval of any stockholders of the Company shall be required
in connection with any reclassification of the Common Stock of the Company,
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, or any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property; or
(v) the Company shall authorize the voluntary dissolution, liquidation
or winding up of the affairs of the Company,
then the Company shall cause to be mailed to each Holder at their last
addresses as they shall appear upon the Warrant Register, at least 30
calendar days prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which a record
is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the
date as of which the holders of Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is expected to
become effective or close, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale,
transfer, share exchange, dissolution, liquidation or winding up;
provided, however, that the failure to mail such notice or any defect
therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
9. Payment of Exercise Price. The Holder may pay the
Exercise Price in one of the following manners:
(a) Cash Exercise. The Holder shall deliver
immediately available funds; or
(b) Cashless Exercise. The Holder shall surrender
this Warrant to the Company together with a notice of cashless exercise,
in which event the Company shall issue to the Holder the number of
Warrant Shares determined as follows:
X = Y (A-B)/A
where:
X = the number of Warrant Shares to be issued to
the Holder.
Y = the number of Warrant Shares with respect to
which this Warrant is being exercised.
A = the closing sale prices of the Common Stock
for the Trading Day immediately prior to the Date
of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is
intended, understood and acknowledged that the Warrant Shares issued in
a cashless exercise transaction shall be deemed to have been acquired by
the Holder, and the holding period for the Warrant Shares shall be
deemed to have been commenced, on the issue date.
10. Fractional Shares. The Company shall not be required
to issue or cause to be issued fractional Warrant Shares on the exercise
of this Warrant. The number of full Warrant Shares which shall be
issuable upon the exercise of this Warrant shall be computed on the
basis of the aggregate number of Warrant Shares purchasable on exercise
of this Warrant so presented. If any fraction of a Warrant Share would,
except for the provisions of this Section 10, be issuable on the
exercise of this Warrant, the Company shall, at its option, (i) pay an
amount in cash equal to the Exercise Price multiplied by such fraction
or (ii) round the number of Warrant Shares issuable, up to the next
whole number.
11. Notices. Any and all notices or other communications
or deliveries hereunder shall be in writing and shall be deemed given
and effective on the earliest of (i) the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section, (ii) the business day
following the date of mailing, if sent by nationally recognized
overnight courier service, or (iii) upon actual receipt by the party to
whom such notice is required to be given. The addresses for such
communications shall be: (1) if to the Company, to 6115 Jimmy Carter
Boulevard, Norcross, Georgia 30071, or to Facsimile No.: (770) 840-0905
Attention: Chief Financial Officer, or (ii) if to the Holder, to the
Holder at the address or facsimile number appearing on the Warrant
Register or such other address or facsimile number as the Holder may
provide to the Company in accordance with this Section 11.
12. Warrant Agent.
(a) The Company shall serve as warrant agent under
this Warrant. Upon thirty (30) days' notice to the Holder, the Company
may appoint a new warrant agent.
(b) Any corporation into which the Company or any new
warrant agent may be merged or any corporation resulting from any
consolidation to which the Company or any new warrant agent shall be a
party or any corporation to which the Company or any new warrant agent
transfers substantially all of its corporate trust or shareholders
services business shall be a successor warrant agent under this Warrant
without any further act. Any such successor warrant agent shall
promptly cause notice of its succession as warrant agent to be mailed
(by first class mail, postage prepaid) to the Holder at the Holder's
last address as shown on the Warrant Register.
13. Miscellaneous.
(a) This Warrant shall be binding on and inure to the
benefit of the parties hereto and their respective successors and
permitted assigns. This Warrant may be amended only in writing signed
by the Company and the Holder.
(b) Subject to Section 13(a), above, nothing in this
Warrant shall be construed to give to any person or corporation other
than the Company and the Holder any legal or equitable right, remedy or
cause under this Warrant; this Warrant shall be for the sole and
exclusive benefit of the Company and the Holder.
(c) This Warrant shall be governed by and construed
and enforced in accordance with the internal laws of the State of New
York without regard to the principles of conflicts of law thereof.
(d) The headings herein are for convenience only, do
not constitute a part of this Warrant and shall not be deemed to limit
or affect any of the provisions hereof.
(e) In case any one or more of the provisions of this
Warrant shall be invalid or unenforceable in any respect, the validity
and enforceability of the remaining terms and provisions of this Warrant
shall not in any way be affected or impaired thereby and the parties
will attempt in good faith to agree upon a valid and enforceable
provision which shall be a commercially reasonable substitute therefor,
and upon so agreeing, shall incorporate such substitute provision in
this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed by its authorized officer as of the date first indicated
above.
USCI, INC.
By:_______________________________
Name:_____________________________
Title:____________________________
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares
of Common Stock under the foregoing Warrant)
To USCI, Inc.:
In accordance with the Warrant enclosed with this Form of Election
to Purchase, the undersigned hereby irrevocably elects to purchase
[___________] shares of Common Stock, $.0001 par value, of USCI, Inc.
(the "Common Stock") and encloses herewith $________ in cash or
certified or official bank check or checks, which sum represents the
aggregate Exercise Price (as defined in the Warrant) for the number of
shares of Common Stock to which this Form of Election to Purchase
relates, together with any applicable taxes payable by the undersigned
pursuant to the Warrant.
The undersigned requests that certificates for the shares of
Common Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
(Please print name and address)
If the number of shares of Common Stock issuable upon this
exercise shall not be all of the shares of Common Stock which the
undersigned is entitled to purchase in accordance with the enclosed
Warrant, the undersigned requests that a New Warrant (as defined in the
Warrant) evidencing the right to purchase the shares of Common Stock not
issuable pursuant to the exercise evidenced hereby be issued in the name
of and delivered to:
(Please print name and address)
Dated: , Name of Holder:
(Print)
(By:)
(Name:)
(Title:)
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
<PAGE>
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ________________________________ the right represented by
the within Warrant to purchase ____________ shares of Common Stock of
USCI, Inc. to which the within Warrant relates and appoints
________________ attorney to transfer said right on the books of USCI,
Inc. with full power of substitution in the premises.
Dated:
_______________, ____
_______________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
_______________________________________
Address of Transferee
_______________________________________
_______________________________________
In the presence of:
__________________________
EXHIBIT 10.31
NEITHER THIS WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH APPLICABLE
STATE SECURITIES OR BLUE SKY LAWS.
USCI, INC.
WARRANT
Warrant No. 6 Dated July 31, 1998
USCI, Inc., a corporation organized and existing under the laws of
Delaware (the "Company"), hereby certifies that, for value received,
Wharton Capital Partners, Ltd. or its registered assigns ("Holder"), is
entitled, subject to the terms set forth below, to purchase from the
Company up to a total of 62,500 shares of Common Stock, $.0001 par value
per share (the "Common Stock"), of the Company (each such share, a
"Warrant Share" and all such shares, the "Warrant Shares") at an
exercise price equal to $5.31 per share (as adjusted from time to time
as provided in Section 8, the "Exercise Price"), at any time and from
time to time from and after the date hereof and through and including
July 31, 2003 (the "Expiration Date"), and subject to the following
terms and conditions:
1. Registration of Warrant. The Company shall register
this Warrant, upon records to be maintained by the Company for that
purpose (the "Warrant Register"), in the name of the record Holder
hereof from time to time. The Company may deem and treat the registered
Holder of this Warrant as the absolute owner hereof for the purpose of
any exercise hereof or any distribution to the Holder, and for all other
purposes, and the Company shall not be affected by notice to the
contrary.
2. Registration of Transfers and Exchanges.
(a) The Company shall register the transfer of any
portion of this Warrant in the Warrant Register, upon surrender of this
Warrant, with the Form of Assignment attached hereto duly completed and
signed, to the Company at the office specified in or pursuant to Section
3(b). Upon any such registration or transfer, a new warrant to purchase
Common Stock, in substantially the form of this Warrant (any such new
warrant, a "New Warrant"), evidencing the portion of this Warrant so
transferred shall be issued to the transferee and a New Warrant
evidencing the remaining portion of this Warrant not so transferred, if
any, shall be issued to the transferring Holder. The acceptance of the
New Warrant by the transferee thereof shall be deemed the acceptance of
such transferee of all of the rights and obligations of a holder of a
Warrant.
(b) This Warrant is exchangeable, upon the surrender
hereof by the Holder to the office of the Company specified in or
pursuant to Section 3(b) for one or more New Warrants, evidencing in the
aggregate the right to purchase the number of Warrant Shares which may
then be purchased hereunder. Any such New Warrant will be dated the
date of such exchange.
3. Duration and Exercise of Warrants.
(a) This Warrant shall be exercisable by the
registered Holder on any business day before 5:30 P.M., Eastern Standard
Time, at any time and from time to time on or after the date hereof to
and including the Expiration Date. At 5:30 P.M., Eastern Standard Time
on the Expiration Date, the portion of this Warrant not exercised prior
thereto shall be and become void and of no value. This Warrant may not
be redeemed by the Company.
(b) Subject to Sections 2(b), 6 and 11, upon surrender
of this Warrant, with the Form of Election to Purchase attached hereto
duly completed and signed, to the Company at its address for notice set
forth in Section 11 and upon payment of the Exercise Price multiplied by
the number of Warrant Shares that the Holder intends to purchase
hereunder, in lawful money of the United States of America, in cash or
by certified or official bank check or checks, all as specified by the
Holder in the Form of Election to Purchase, the Company shall promptly
(but in no event later than 3 business days after the Date of Exercise
(as defined herein)) issue or cause to be issued and cause to be
delivered to or upon the written order of the Holder and in such name or
names as the Holder may designate, a certificate for the Warrant Shares
issuable upon such exercise, free of restrictive legends other than as
required by applicable law. Any person so designated by the Holder to
receive Warrant Shares shall be deemed to have become holder of record
of such Warrant Shares as of the Date of Exercise of this Warrant.
A "Date of Exercise" means the date on which the
Company shall have received (i) this Warrant (or any New Warrant, as
applicable), with the Form of Election to Purchase attached hereto (or
attached to such New Warrant) appropriately completed and duly signed,
and (ii) payment of the Exercise Price for the number of Warrant Shares
so indicated by the holder hereof to be purchased.
(c) This Warrant shall be exercisable, either in its
entirety or, from time to time, for a portion of the number of Warrant
Shares. If less than all of the Warrant Shares which may be purchased
under this Warrant are exercised at any time, the Company shall issue or
cause to be issued, at its expense, a New Warrant evidencing the right
to purchase the remaining number of Warrant Shares for which no exercise
has been evidenced by this Warrant.
4. Piggyback Registration Rights. During the term of this
Warrant, the Company may not file any registration statement with the
Securities and Exchange Commission (other than registration statements
of the Company filed on Form S-8 or Form S-4, each as promulgated under
the Securities Act of 1933, as amended (the "Securities Act"), pursuant
to which the Company is registering securities pursuant to a Company
employee benefit plan or pursuant to a merger, acquisition or similar
transaction including supplements thereto, but not additionally filed
registration statements in respect of such securities) at any time when
there is not an effective registration statement covering the resale of
the Warrant Shares and naming the Holder as a selling stockholder
thereunder, unless the Company provides the Holder with not less than 20
days notice to each of the Holder and Robinson Silverman Pearce Aronsohn
& Berman LLP, attention Eric L. Cohen, notice of its intention to file
such registration statement and provides the Holder the option to
include any or all of the applicable Warrant Shares therein. The
piggyback registration rights granted to the Holder pursuant to this
Section shall continue until all of the Holder's Warrant Shares have
been sold in accordance with an effective registration statement or upon
the expiration of this Warrant. The Company will pay all registration
expenses in connection therewith.
5. Payment of Taxes. The Company will pay all documentary
stamp taxes attributable to the issuance of Warrant Shares upon the
exercise of this Warrant; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any
transfer involved in the registration of any certificates for Warrant
Shares or Warrants in a name other than that of the Holder, and the
Company shall not be required to issue or cause to be issued or deliver
or cause to be delivered the certificates for Warrant Shares unless or
until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to
the satisfaction of the Company that such tax has been paid. The Holder
shall be responsible for all other tax liability that may arise as a
result of holding or transferring this Warrant or receiving Warrant
Shares upon exercise hereof.
6. Replacement of Warrant. If this Warrant is mutilated,
lost, stolen or destroyed, the Company shall issue or cause to be issued
in exchange and substitution for and upon cancellation hereof, or in
lieu of and substitution for this Warrant, a New Warrant, but only upon
receipt of evidence reasonably satisfactory to the Company of such loss,
theft or destruction and indemnity, if reasonably satisfactory to it.
Applicants for a New Warrant under such circumstances shall also comply
with such other reasonable regulations and procedures and pay such other
reasonable charges as the Company may prescribe.
7. Reservation of Warrant Shares. The Company covenants
that it will at all times reserve and keep available out of the
aggregate of its authorized but unissued Common Stock, solely for the
purpose of enabling it to issue Warrant Shares upon exercise of this
Warrant as herein provided, the number of Warrant Shares which are then
issuable and deliverable upon the exercise of this entire Warrant, free
from preemptive rights or any other actual contingent purchase rights of
persons other than the Holder (taking into account the adjustments and
restrictions of Section 8). The Company covenants that all Warrant
Shares that shall be so issuable and deliverable shall, upon issuance
and the payment of the applicable Exercise Price in accordance with the
terms hereof, be duly and validly authorized, issued and fully paid and
nonassessable.
8. Certain Adjustments. The Exercise Price and number of
Warrant Shares issuable upon exercise of this Warrant are subject to
adjustment from time to time as set forth in this Section 8. Upon each
such adjustment of the Exercise Price pursuant to this Section 8, the
Holder shall thereafter prior to the Expiration Date be entitled to
purchase, at the Exercise Price resulting from such adjustment, the
number of Warrant Shares obtained by multiplying the Exercise Price in
effect immediately prior to such adjustment by the number of Warrant
Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price
resulting from such adjustment.
(a) If the Company, at any time while this Warrant is
outstanding, (i) shall pay a stock dividend or otherwise make a
distribution or distributions on shares of its Common Stock or on any
other class of capital stock (and not the Common Stock) payable in
shares of Common Stock, other than the dividends payable under the
Purchase Agreement, (ii) subdivide outstanding shares of Common Stock
into a larger number of shares, or (iii) combine outstanding shares of
Common Stock into a smaller number of shares, the Exercise Price shall
be multiplied by a fraction of which the numerator shall be the number
of shares of Common Stock (excluding treasury shares, if any)
outstanding before such event and of which the denominator shall be the
number of shares of Common Stock (excluding treasury shares, if any)
outstanding after such event. Any adjustment made pursuant to this
Section shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective
date in the case of a subdivision or combination, and shall apply to
successive subdivisions and combinations.
(b) In case of any reclassification of the Common
Stock, any consolidation or merger of the Company with or into another
person, the sale or transfer of all or substantially all of the assets
of the Company in which the consideration therefor is equity or equity
equivalent securities or any compulsory share exchange pursuant to which
the Common Stock is converted into other securities or property, then
the Holder shall have the right thereafter to exercise this Warrant only
into the shares of stock and other securities and property receivable
upon or deemed to be held by holders of Common Stock following such
reclassification, consolidation, merger, sale, transfer or share
exchange, and the Holder shall be entitled upon such event to receive
such amount of securities or property of the Company's business
combination partner equal to the amount of Warrant Shares such Holder
would have been entitled to had such Holder exercised this Warrant
immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange. The terms of any such consolidation,
merger, sale, transfer or share exchange shall include such terms so as
to continue to give to the Holder the right to receive the securities or
property set forth in this Section 8(b) upon any exercise following any
such reclassification, consolidation, merger, sale, transfer or share
exchange.
(c) If the Company, at any time while this Warrant is
outstanding, shall distribute to all holders of Common Stock (and not to
holders of this Warrant) evidences of its indebtedness or assets or
rights or warrants to subscribe for or purchase any security (excluding
those referred to in Sections 8(a), (b) and (d)), then in each such case
the Exercise Price shall be determined by multiplying the Exercise Price
in effect immediately prior to the record date fixed for determination
of stockholders entitled to receive such distribution by a fraction of
which the denominator shall be the Exercise Price determined as of the
record date mentioned above, and of which the numerator shall be such
Exercise Price on such record date less the then fair market value at
such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of
Common Stock as determined by a nationally recognized or major regional
investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) (an "Appraiser")
mutually selected in good faith by the holders of a majority in interest
of the Warrants then outstanding and the Company. Any determination
made by the Appraiser shall be final.
(d) If, at any time while this Warrant is outstanding,
the Company shall issue or cause to be issued rights or warrants to
acquire or otherwise sell or distribute shares of Common Stock to all
holders of Common Stock for a consideration per share less than the Per
Share Market Value (as defined in the Purchase Agreement) in effect on
the date of issuance of such rights or warrants, then, forthwith upon
such issue or sale, the Exercise Price shall be reduced to the price
(calculated to the nearest cent) determined by dividing (i) an amount
equal to the sum of (A) the number of shares of Common Stock outstanding
immediately prior to such issue or sale multiplied by the Exercise
Price, and (B) the consideration, if any, received or receivable by the
Company upon such issue or sale by (ii) the total number of shares of
Common Stock outstanding immediately after such issue or sale.
(e) For the purposes of this Section 8, the following
clauses shall also be applicable:
(i) Record Date. In case the Company shall take
a record of the holders of its Common Stock for the purpose of entitling
them (A) to receive a dividend or other distribution payable in Common
Stock or in securities convertible or exchangeable into shares of Common
Stock, or (B) to subscribe for or purchase Common Stock or securities
convertible or exchangeable into shares of Common Stock, then such
record date shall be deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or
the date of the granting of such right of subscription or purchase, as
the case may be.
(ii) Treasury Shares. The number of shares of
Common Stock outstanding at any given time shall not include shares
owned or held by or for the account of the Company, and the disposition
of any such shares shall be considered an issue or sale of Common Stock.
(f) All calculations under this Section 8 shall be
made to the nearest cent or the nearest 1/100th of a share, as the case
may be.
(g) If:
(i) the Company shall declare a dividend
(or any other distribution) on its Common Stock; or
(ii) the Company shall declare a special nonrecurring cash dividend on
or a redemption of its Common Stock; or
(iii) the Company shall authorize the granting to all holders of the
Common Stock rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights;
or
(iv) the approval of any stockholders of the Company shall be required
in connection with any reclassification of the Common Stock of the Company,
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, or any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property; or
(v) the Company shall authorize the voluntary dissolution, liquidation
or winding up of the affairs of the Company,
then the Company shall cause to be mailed to each Holder at their last
addresses as they shall appear upon the Warrant Register, at least 30
calendar days prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which a record
is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the
date as of which the holders of Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is expected to
become effective or close, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale,
transfer, share exchange, dissolution, liquidation or winding up;
provided, however, that the failure to mail such notice or any defect
therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
9. Payment of Exercise Price. The Holder may pay the
Exercise Price in one of the following manners:
(a) Cash Exercise. The Holder shall deliver
immediately available funds; or
(b) Cashless Exercise. The Holder shall surrender
this Warrant to the Company together with a notice of cashless exercise,
in which event the Company shall issue to the Holder the number of
Warrant Shares determined as follows:
X = Y (A-B)/A
where:
X = the number of Warrant Shares to be issued to
the Holder.
Y = the number of Warrant Shares with respect to
which this Warrant is being exercised.
A = the closing sale prices of the Common Stock
for the Trading Day immediately prior to the Date
of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is
intended, understood and acknowledged that the Warrant Shares issued in
a cashless exercise transaction shall be deemed to have been acquired by
the Holder, and the holding period for the Warrant Shares shall be
deemed to have been commenced, on the issue date.
10. Fractional Shares. The Company shall not be required
to issue or cause to be issued fractional Warrant Shares on the exercise
of this Warrant. The number of full Warrant Shares which shall be
issuable upon the exercise of this Warrant shall be computed on the
basis of the aggregate number of Warrant Shares purchasable on exercise
of this Warrant so presented. If any fraction of a Warrant Share would,
except for the provisions of this Section 10, be issuable on the
exercise of this Warrant, the Company shall, at its option, (i) pay an
amount in cash equal to the Exercise Price multiplied by such fraction
or (ii) round the number of Warrant Shares issuable, up to the next
whole number.
11. Notices. Any and all notices or other communications
or deliveries hereunder shall be in writing and shall be deemed given
and effective on the earliest of (i) the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section, (ii) the business day
following the date of mailing, if sent by nationally recognized
overnight courier service, or (iii) upon actual receipt by the party to
whom such notice is required to be given. The addresses for such
communications shall be: (1) if to the Company, to 6115 Jimmy Carter
Boulevard, Norcross, Georgia 30071, or to Facsimile No.: (770) 840-0905
Attention: Chief Financial Officer, or (ii) if to the Holder, to the
Holder at the address or facsimile number appearing on the Warrant
Register or such other address or facsimile number as the Holder may
provide to the Company in accordance with this Section 11.
12. Warrant Agent.
(a) The Company shall serve as warrant agent under
this Warrant. Upon thirty (30) days' notice to the Holder, the Company
may appoint a new warrant agent.
(b) Any corporation into which the Company or any new
warrant agent may be merged or any corporation resulting from any
consolidation to which the Company or any new warrant agent shall be a
party or any corporation to which the Company or any new warrant agent
transfers substantially all of its corporate trust or shareholders
services business shall be a successor warrant agent under this Warrant
without any further act. Any such successor warrant agent shall
promptly cause notice of its succession as warrant agent to be mailed
(by first class mail, postage prepaid) to the Holder at the Holder's
last address as shown on the Warrant Register.
13. Miscellaneous.
(a) This Warrant shall be binding on and inure to the
benefit of the parties hereto and their respective successors and
permitted assigns. This Warrant may be amended only in writing signed
by the Company and the Holder.
(b) Subject to Section 13(a), above, nothing in this
Warrant shall be construed to give to any person or corporation other
than the Company and the Holder any legal or equitable right, remedy or
cause under this Warrant; this Warrant shall be for the sole and
exclusive benefit of the Company and the Holder.
(c) This Warrant shall be governed by and construed
and enforced in accordance with the internal laws of the State of New
York without regard to the principles of conflicts of law thereof.
(d) The headings herein are for convenience only, do
not constitute a part of this Warrant and shall not be deemed to limit
or affect any of the provisions hereof.
(e) In case any one or more of the provisions of this
Warrant shall be invalid or unenforceable in any respect, the validity
and enforceability of the remaining terms and provisions of this Warrant
shall not in any way be affected or impaired thereby and the parties
will attempt in good faith to agree upon a valid and enforceable
provision which shall be a commercially reasonable substitute therefor,
and upon so agreeing, shall incorporate such substitute provision in
this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed by its authorized officer as of the date first indicated
above.
USCI, INC.
By:_______________________________
Name:_____________________________
Title:____________________________
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares
of Common Stock under the foregoing Warrant)
To USCI, Inc.:
In accordance with the Warrant enclosed with this Form of Election
to Purchase, the undersigned hereby irrevocably elects to purchase
[___________] shares of Common Stock, $.0001 par value, of USCI, Inc.
(the "Common Stock") and encloses herewith $________ in cash or
certified or official bank check or checks, which sum represents the
aggregate Exercise Price (as defined in the Warrant) for the number of
shares of Common Stock to which this Form of Election to Purchase
relates, together with any applicable taxes payable by the undersigned
pursuant to the Warrant.
The undersigned requests that certificates for the shares of
Common Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
(Please print name and address)
If the number of shares of Common Stock issuable upon this
exercise shall not be all of the shares of Common Stock which the
undersigned is entitled to purchase in accordance with the enclosed
Warrant, the undersigned requests that a New Warrant (as defined in the
Warrant) evidencing the right to purchase the shares of Common Stock not
issuable pursuant to the exercise evidenced hereby be issued in the name
of and delivered to:
(Please print name and address)
Dated: , Name of Holder:
(Print)
(By:)
(Name:)
(Title:)
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
<PAGE>
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ________________________________ the right represented by
the within Warrant to purchase ____________ shares of Common Stock of
USCI, Inc. to which the within Warrant relates and appoints
________________ attorney to transfer said right on the books of USCI,
Inc. with full power of substitution in the premises.
Dated:
_______________, ____
_______________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
_______________________________________
Address of Transferee
_______________________________________
_______________________________________
In the presence of:
__________________________
EXHIBIT 11
COMPUTATIONS OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Loss from continuing operations $(21,507,868) $(7,083,841) $(9,949,179) $(3,967,477)
Loss from discontinued operations 0 0 0 0
----------- ------------ ------------ ------------
Net Loss $(21,507,868) $(7,083,841) $(9,949,179) $(3,967,477)
============ ============ ============ =============
Basic and Diluted Weighted
Average Shares Outstanding 10,557,309 10,237,660 10,718,925 10,249,574
Basic and diluted net loss per share:
Loss from continued operations $ (2.05) $ (0.69) (0.94) (0.39)
Loss from discontinued operations 0.00 0.00 0.00 0.00
----------- ----------- ----------- -----------
Net Loss $ (2.05) $ (0.69) $ (0.94) $ (0.39)
=========== =========== ========== =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000907069
<NAME> USCI, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 810,455
<SECURITIES> 0
<RECEIVABLES> 19,083,778
<ALLOWANCES> 3,442,000
<INVENTORY> 7,870
<CURRENT-ASSETS> 17,217,927
<PP&E> 7,874,865
<DEPRECIATION> 5,281,054
<TOTAL-ASSETS> 21,793,315
<CURRENT-LIABILITIES> 28,953,524
<BONDS> 0
0
10
<COMMON> 1,104
<OTHER-SE> (10,814,848)
<TOTAL-LIABILITY-AND-EQUITY> 21,793,315
<SALES> 0
<TOTAL-REVENUES> 21,759,117
<CGS> 0
<TOTAL-COSTS> 12,707,947
<OTHER-EXPENSES> 25,220,800
<LOSS-PROVISION> 16,169,630
<INTEREST-EXPENSE> 5,338,238
<INCOME-PRETAX> (21,507,868)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,507,868)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,507,868)
<EPS-PRIMARY> (2.05)
<EPS-DILUTED> (2.05)
</TABLE>
Exhibit 99.1
RISK FACTORS
History of Losses; Uncertain Future Profitability; Limited Operating
History as a Reseller
The Company, which has never operated at a profit, has experienced
increasing losses and negative operating cash flow since its inception
in 1991, and such losses and negative operating cash flow are expected
to continue for at least the next several years as the Company pursues
its growth strategy. As of June 30, 1998, the Company had an
accumulated deficit of approximately $64,750,000. There can be no
assurance that the Company will ever achieve profitability or positive
operating cash flow. The Company has also experienced a persistent
working capital deficiency. The Company expects to continue to incur
significant losses and negative operating cash flow in future periods
in connection with the expansion of its resale operations, as revenues
from the sale of cellular telephone service are generally insufficient
during the early periods of service to recover the initial costs of
acquiring subscribers. In addition, the Company expects to incur
further start-up expenses associated with the provision of wireless
communication services at new or additional retail locations. The
successful expansion of the Company's subscriber base is necessary for
the Company to meet its working capital and debt service requirements.
If such expansion is not achieved, the Company may not be able to make
required payments on its outstanding indebtedness and may have to
refinance its outstanding indebtedness in order to repay such
obligations. There can be no assurance that the Company will
successfully develop as a profitable reseller of wireless services,
that the Company's existing retail mass merchandiser distribution
channels will expand their use of the Company's services or that the
Company will obtain additional channels of distribution.
The Company was organized in 1991 and commenced operations in mid-1993
as an agent selling wireless services on behalf of carriers. In the
fourth quarter of 1996, the Company began a planned transition to
becoming a national reseller of wireless communications services.
Prospective investors, therefore, have limited historical financial
information about the Company's operations as a reseller of wireless
communications services on which to base an evaluation of the
Company's future performance. To date, the Company has had limited
capital with which to fund the up-front costs of acquiring new
subscribers and has, therefore, been forced to control its subscriber
growth both by limiting marketing activities in its distribution
points and growth in the number of distribution points. There can be
no assurance that the Company's strategy to increase the number of
subscribers by increasing its marketing activities in its existing
mass market channels and by adding additional mass market channels
will be successful.
Need For Additional Financing
The wireless resale industry is highly capital intensive, particularly
for expanding resellers such as the Company, as substantial costs are
incurred in connection with the acquisition of new subscribers. The
Company will require substantial additional capital in the future to
fully implement its growth strategy, including funding the acquisition
costs of new subscribers, expanding operations in existing markets,
funding start-up expenses in additional distribution channels and
funding anticipated future net operating losses, which could be
substantial. If the Company is unable to control its subscriber
growth, if it experiences unanticipated costs or pricing or other
competitive pressures, if the Foothill Credit Facility is terminated or
if the Company's plans or assumptions change or otherwise prove to be
inaccurate, the Company may be required to seek additional capital
earlier or slow the implementation of its growth strategy. The Company
may seek to raise such additional capital from public or private equity
or debt sources. However, no assurance can be given that the Company
will be able to obtain such additional capital on acceptable terms or
at all. If the Company decides to raise additional funds through the
incurrence of debt, the Company may become subject to additional or
more restrictive financial covenants. If additional funds are raised
by issuing equity securities, the Company's stockholders may experience
dilution. Further, such equity securities may have rights, preferences
or privileges senior to those of the Common Stock. If the Company is
unable to obtain such additional capital on acceptable terms or at all,
the Company will be required to curtail its planned expansion and/or
current operations, which could materially adversely affect the
Company's business, results of operations and financial condition and
its ability to compete.
Continuance as a Going Concern
The Company's significant growth in subscribers has created a working
capital deficiency due to the initial acquisition costs associated
with the high rate of subscriber growth. The Company currently
requires substantial amounts of capital to fund both current
operations and to expand its subscriber base. Due to recurring losses
from operations, a net capital deficiency and Company's inability to
date to obtain sufficient financing commitments to support current and
anticipated levels of operations, the Company's independent public
accountants audit opinion states that these matters raise substantial
doubt about the Company's ability to continue as a going concern.
Development of Wireless Reseller Operations
A crucial component of the Company's strategy is its ongoing
development as a national wireless reseller. Since November 1996, the
Company has been operating as a reseller of the services of a number
of cellular carriers and two national paging carriers, and is
continuing to negotiate agreements with other carriers. The success
of the Company's expansion plan is subject to certain risks. These
risks include the Company's ability to negotiate additional reseller
agreements on commercially reasonable terms, the increasingly
competitive nature of the wireless telecommunications industry,
including the effect of the development and introduction of new
technologies, the ability to attract additional management personnel,
and the overall effects of the trend toward deregulation of the
telecommunications industry. These regulatory changes include the
possible elimination of the obligation of facilities-based wireless
carriers to make their services available for resale.
Dependence on Major Channels of Distribution
Of the Company's approximately 65,000 cellular subscribers at July 31,
1998, approximately 73% were enrolled at RadioShack stores in the New
York metropolitan area, Puerto Rico, the U.S. Virgin Islands and a
portion of Missouri, the Company's principal channel of distribution.
Cellular subscribers enrolled at RadioShack stores accounted for 78%
of the Company's revenues in the second quarter of 1998, as compared
to 78% and 62% during the first quarter of 1998 and the fourth quarter
of 1997, respectively. There can be no assurance that the Company's
distribution contract with RadioShack will remain in effect or be
renewed when it expires in October 1998. The Company's growth would
be materially and adversely affected if RadioShack terminates or
elects not to renew its contract with the Company or reduces the
number of its retail locations at which the Company provides its
services. RadioShack has the option at its sole discretion to add or
delete stores at which the Company's services are offered, as long as
the Company's services are offered at 250 stores, and RadioShack may
terminate the agreement at any time upon 90 days' notice and earlier
under certain circumstances. In addition, RadioShack also distributes
Sprint PCS products. There can be no assurance that RadioShack will
continue to devote the same level of attention to distribution of the
Company's wireless services or that RadioShack will not begin to
delete stores at which the Company's services are offered and instead
distribute wireless services of the Company's competitors in such
stores. The termination of, or a default under, the agreement with
RadioShack constitutes an event of default under the Foothill Credit
Facility.
In addition to RadioShack, the Company also markets its services
through other mass market channels, including Target Stores,
Walgreen's, Staples and QVC. The loss of any of these mass market
channels could have an adverse effect on the Company's growth
strategy. Additionally, the Company believes that mass market
channels are turning away from contractual relationships with
resellers. To the extent the Company's relationships with mass market
channels are no longer defined by written agreements, it may be easier
for a mass market channel to cease marketing the Company's services
and, instead, market those of a competitor.
A significant component of the Company's growth strategy is the
expansion of its relationships with existing mass market channels and
the addition of new mass market channels to sell the Company's
wireless services. Accordingly, the Company's successful growth will
be dependent in large part on the efforts of third parties, whose
efforts will depend on their own financial, competitive, marketing and
strategic considerations. Such considerations include the relative
advantages of alternate products being offered by competitors. There
can be no assurance that these mass market channels will devote
sufficient time, attention and energy to the marketing of the
Company's wireless services.
Dependence on Wireless Carriers
The Company is dependent upon facilities-based cellular telephone and
paging service providers for the supply of services to be resold to
the Company's subscribers as well as for information as to usage
needed by the Company to bill customers. The Company would be
adversely affected if its suppliers failed to renew existing service
contracts with the Company, failed to provide adequate service or
billing information or if they experienced financial, technical or
regulatory difficulties, or if future demand for service exceeds
current service capabilities. Further, an increase in the wholesale
rates charged by the carriers would force the Company to either
increase the rates it charges subscribers, which could adversely
affect its ability to attract new, and retain existing, subscribers,
or accept lower operating margins, which would adversely affect its
results of operations.
Potential Adverse Effect of Competition
The wireless communications industry is highly competitive and rapidly
changing. Competition for wireless services subscribers is based
principally upon the services and enhancements offered, the technical
quality of the system, customer service, system coverage, capacity and
price. The Company competes with both facilities-based and non-
facilities-based cellular, PCS and paging service providers, as well
as enhanced specialized mobile radio ("ESMR") companies and landline
telephone service providers. Many of these service providers,
including joint ventures involving some of the nation's largest
regional and long distance carriers, have substantially greater access
to capital than the Company, substantially greater marketing,
technological, sales and distribution resources than those of the
Company and significantly greater experience than the Company in
providing wireless services. Some of the Company's competitors are
expected to bundle their wireless services with other offerings, such
as landline telephone and cable services, or to operate, through joint
ventures and affiliation arrangements, wireless communications systems
that encompass most of the continental United States.
Competition in the wireless communications industry is expected to
continue to intensify. Due to the rapid introduction of PCS, ESMR,
satellite-based communications and the growth in the number of
facilities-based wireless carriers, many areas of the country which
previously were covered by two licensed cellular carriers are now, or
will soon be, served by several wireless providers. The trend toward
consolidation within the telecommunications industry, accelerated by
deregulation at the federal level, can also be expected to exert
increased competitive pressures on companies that remain independent.
There can be no assurance that new technologies that will compete with
the Company's wireless services will not evolve or that the Company
will be able to successfully operate in the increasingly competitive
wireless telecommunications market.
Dependence on Effective Information and Billing Systems; Year 2000
Technology Risks
The Company's operations are substantially dependent upon its
activation network, information and billing systems. The Company uses
these systems to enroll subscribers, monitor costs, bill and receive
payments from customers, manage credit exposure and achieve operating
efficiencies. The Company will have to upgrade and expand these
systems as the Company expands its operations. The Company has
limited experience in developing, managing and expanding these
systems, and there can be no assurance that the Company will be
successful in expanding and upgrading these systems. If the Company
were to fail in expanding and upgrading these systems as necessary, or
if the Company's systems were to fail for any period of time, the
Company's ability to conduct its operations and achieve operating
efficiencies would be severely hampered, which would materially
adversely affect the Company's business, financial condition and
results of operations.
The Company currently relies on a third party, Celltech, to perform
billing services. There can be no assurance that Celltech will
continue to perform such services competently or on a timely basis,
and any failure of Celltech to do so would have a material adverse
effect on the Company's business, relationships with mass market
channels, financial condition and results of operations.
Although the Company does not believe that any significant financial
expenditure or investment is expected to be required to make its
computer systems currently in use year 2000 compliant, the Company is
unable to predict whether the facilities-based cellular telephone and
paging service providers, which provide the Company with the usage
information needed to generate customer bills, or Celltech, have made
sufficient modifications to their computer systems to address the
potential problems of year 2000 software shortcomings. The failure of
these third parties to effectively upgrade their software and systems
for transition to year 2000 would have a material adverse effect on
the Company's business, financial condition and results of operations.
Seasonality
The Company's revenue and operating results tend to fluctuate over the
course of the year, particularly in the fourth quarter of the calendar
year. This is primarily attributable to increased retail sales during
the holiday season in November and December. This seasonal pattern
may place pressure on the Company's cash and working capital
positions, which may have an adverse effect on the Company's financial
liquidity.
Adverse Effect of Subscriber Disconnections
The Company's results of operations are significantly affected by
subscriber disconnections. In order to realize net growth in units in
service, disconnected users must be replaced, and additional users
must be added. However, the sales and marketing costs associated with
attracting new subscribers are substantial relative to the costs of
providing service to existing customers, and expenses associated with
each new unit placement exceed the average gross profit received by
the Company during the initial contract term. Because the Company's
business is characterized by relatively high fixed costs of
acquisition, disconnections directly and adversely affect operating
income. The Company believes its subscriber churn rates will
ultimately increase to industry averages, which are projected by
industry sources to range from 1.9% to 2.0% per month through 2002.
An increase in its rate of disconnections would adversely affect the
Company's results of operations. To date the Company has not entered
into contracts greater than one year in duration with most of its
cellular and paging subscribers. As its subscriber base grows, there
can be no assurance that substantial numbers of its subscribers will
continue to purchase wireless services from the Company. In the event
that a significant percentage of its subscribers choose to purchase
cellular telephone or paging service from another carrier or otherwise
cease to purchase service from the Company, there can be no assurance
that the Company will be able to replace its subscribers with new
cellular and paging subscribers. The Company is seeking to lengthen
its subscriber contracts to two years, although there can be no
assurance it will be able to do so.
Exposure to Fraudulent Use of Wireless Services
The cellular industry has been subject to telecommunications fraud
and, in particular, "cloning" of legitimate phone numbers leading to
the illegal use of such numbers. Under its existing agreements with
cellular carriers, the Company is generally not liable for access
fraud, which results from the unauthorized duplication of a cellular
telephone number. However, these agreements generally provide that
the Company is liable for subscriber fraud, which occurs when a
customer fraudulently uses another person's identification to become a
subscriber of the Company and obtain wireless services. There can be
no assurance that the Company will not in the future become subject to
increased liability for access fraud or that the Company's liability
for fraud will not have a material adverse effect on the Company's
business.
Dependence on Key Personnel
The Company's future success will depend upon the continued service of
several key personnel, particularly Bruce A. Hahn, the Company's
Chairman and Chief Executive Officer, as well as its ability to
attract and retain highly qualified managerial and operational
personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will retain its existing key
managerial, technical or other personnel or that it will attract and
retain such employees in the future. The loss of key personnel or the
inability to hire or retain qualified personnel in the future could
have a material adverse effect upon the Company's results of
operations. Mr. Hahn's employment agreement expired in December 1997
and the Company is currently negotiating a new agreement with him.
The Company does not maintain key man life insurance on any of its
personnel.
Rapid Technological Change
The market for the Company's telecommunications services is
characterized by rapid technological change and evolving industry
standards. The introduction of services embodying new technology and
the emergence of new industry standards can rapidly erode the
competitive position of existing telecommunications services. The
Company's success will be substantially dependent upon its ability to
anticipate changes in technology and industry standards and
successfully introduce new and enhanced services on a timely basis.
If the Company is unable for technological or other reasons to
introduce new services in a timely manner, it could have a material
adverse effect on the Company's business.
Government Regulation
The resale of interstate and intrastate cellular mobile telephone
service is subject to federal regulation as a commercial mobile radio
service ("CMRS") and, as such, to certain aspects of common carrier
regulation. Although the Federal Communications Commission ("FCC")
has the authority to do so, it has to date elected not to regulate
rates and the entry of wireless services providers, and states are
precluded, as a matter of federal law, from regulating the rates or
entry of CMRS resellers. However, the Company remains subject to the
general obligations of all common carriers, including the requirement
to charge just and reasonable rates and to service all customers in a
non-discriminatory manner. Because Congress has preempted all state
rate and entry regulation CMRS providers, the Company is not required
to obtain state certification or file state tariffs in connection with
its provision of wireless services. States, however, retain authority
to regulate other terms and conditions of wireless services. This has
been interpreted to include the ability of a state public utility
commission to act on a complaint regarding an underlying carrier's
alleged discrimination against a cellular reseller. The Company also
remains subject to state regulations generally affecting corporations
that do business within a state, including a state's consumer
protection laws.
Common carriers are currently required to make their services
available for resale. However, the FCC has determined to terminate
the resale obligations of cellular, PCS and ESMR providers on November
24, 2002. The FCC order terminating such resale obligations is
currently being reconsidered by the FCC. The Company cannot predict
the outcome of the FCC's reconsideration; however, if the FCC upholds
its decision to terminate the resale obligation of carriers, the
Company's business, results of operations and financial condition
could be adversely affected.
Effective January 1, 1998, a new universal service support system went
into effect to ensure the provision of service to rural, insular and
high-cost areas, to low-income individuals and to eligible schools,
libraries and rural healthcare providers. Under this system, the
Company is required to contribute a percentage of its revenues to
these universal service programs. Although these charges apply
equally to all carriers, to the extent that the charges increase the
rates charged by the Company, they could adversely affect the
Company's business.
The Company expects that there will continue to be numerous changes in
federal and state regulation of the telecommunications industry. The
Company is unable to predict the future course of such legislation and
regulation, and further changes in the regulatory framework could have
a material adverse effect on the Company's business, results of
operations and financial condition.
Intellectual Property Risks
The Company relies on copyrights, trade secret protection and non-
disclosure agreements to establish and protect its rights relating to
its proprietary software platform and other technology. The Company
does not hold any patents. Despite the Company's efforts to safeguard
and maintain its proprietary rights, there can be no assurance that it
will be successful in doing so, or that its competitors will not
independently develop and/or patent computer software and hardware
that is functionally substantially equivalent or superior to the
Company's Activation Services Network ("ASN") system, which could have
a material adverse effect on the Company's business. The Company has
also been advised that its use of the service mark and trade name
"Ameritel" and the service mark "Family Link" may infringe on
trademarks and service marks of others in certain states.
Additionally, the Company is aware that several other companies are
using the name "Ameritel" or similar names, and that it is unlikely
that the Company can obtain exclusive or even broad service mark
protection for the "Ameritel" name. There also can be no assurance
that other companies using the "Ameritel" name or a similar name will
not challenge the Company's right to use the "Ameritel" name and will
not seek to enjoin the Company from using such name. Accordingly, the
Company is in the process of exploring whether to seek a new name
under which to market its services; however, a change in name may
cause confusion in the marketplace and may adversely affect the
Company's business strategy of developing a brand name and identity,
which in turn may adversely affect the Company's growth, particularly
in the short-term.
Convertible Preferred Stock Dilution
The Company has $19 million of Convertible Preferred Stock
outstanding, which is convertible into shares of Common Stock at a
conversion price equal to the lesser of (i) 85% of the average of the
three lowest closing prices per share of Common Stock for the 25
trading days immediately preceding the conversion notice and (ii)
$6.89 per share in respect of $5.0 million of Convertible Preferred
Stock, $5.85 per share in respect of an additional $5.0 million of
Convertible Preferred Stock $5.31 per share in respect of an
additional $5.0 million of Convertible Preferred Stock and $5.51 per
share with respect to an additional $4.0 million of Convertible
Preferred Stock. Further, the conversion price of each series of
Convertible Preferred Stock is subject to reduction if the Company
does not comply with certain covenants within specified time periods.
Accordingly, a decline in the price of the Common Stock below the
fixed conversion price will result in the issuance of additional
shares of Common Stock and the number of such additional shares may be
material. In addition, holders of securities having conversion
features similar to those of the Convertible Preferred Stock tend to
sell their shares immediately upon conversion, which generally results
in a decline in the price of the Common Stock and an increase in the
number of shares issued upon the next conversion. Accordingly, any
conversion of the Convertible Preferred Stock is likely to increase
substantially the number of shares of Common Stock outstanding,
adversely affect the price of the Common Stock and result in dilution
to existing stockholders. In addition, under generally accepted
accounting principles a portion of the proceeds from the sale of the
Convertible Preferred Stock was allocated to this beneficial
conversion feature, and this discount is amortized; to the extent
conversion occurs prior to the full amortization of the discount, the
Company will be required to recognize the remainder of the discount in
the period of conversion, which will reduce earnings in that period.
Shares Eligible for Future Sale
Future sales of Common Stock by existing stockholders under Rule 144
promulgated under the Securities Act, or through the exercise of
registration rights or the issuance of shares upon the exercise of
options or warrants could materially adversely affect the market price
of shares of Common Stock and could materially impair the Company's
ability to raise capital through an offering of Common Stock. No
predictions can be made as to the effect, if any, market sales of such
shares or the availability of such shares for future sales will have
on the market price of shares of Common Stock prevailing from time to
time.
Possible Volatility of Stock Price
In recent years, the stock market in general, and the market for shares
of small capitalization companies (such as the Company) in particular,
have experienced extreme price fluctuations which have been unrelated
to changes in the operating performance of the affected companies. Over
the past 12 months, the Company also has experienced significant
volatility in its stock price, and there can be no assurance that such
fluctuations will not adversely affect the market price of the
Company's Common Stock in the future.
Absence of Dividends
The Company has not paid and does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. The Company
intends to retain its earnings, if any, for use in the Company's
growth and ongoing operations. In addition, the terms of the Foothill
Credit Facility restrict the ability of the Company to pay dividends
on the Common Stock.
