UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
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 [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part IV of this Form 10-K or any amendment to this
Form 10-K. [X]
Based on the closing sale price on March 24, 1998, the aggregate
market value of the voting stock held by non-affiliates of the
Registrant was approximately $55,193,878.
At March 24, 1998, 10,692,209 shares of the Registrant's Common
Stock were outstanding.
<PAGE>
PART I
In addition to historical information, this Annual 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 anticipated opening of additional activation centers in 1997, 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. The forward-
looking statements contained herein are subject to certain risks and
uncertainties that could cause actual results to differ materially from
those reflected in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to , those
discussed in the section entitled "Risk Factors that May Affect Future
Results" at the end of this Item 1. and in Management's Discussion and
Analysis of Financial Condition and Results of Operations; the
availability of financing to fund the Company's operations for the
fiscal year ended December 31, 1998; the number of potential subscribers
in a target market; the existence of strategic alliances and
relationships; technological, regulatory or other developments in the
Company's business; changes in the competitive climate in which the
Company operates; the ability of the Company to operate as a reseller;
and the emergence of future opportunities. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after the date hereof.
ITEM 1. BUSINESS
On May 15, 1995 U.S. Communications, Inc., a privately held Delaware
corporation, completed a merger (the "Merger") with Trinity Six Inc., a
publicly owned Delaware corporation ("Trinity"). Prior to the Merger,
Trinity had not conducted any business activities other than seeking to
effect a merger, exchange of capital stock, asset acquisition or other
similar business combination with an operating business. Upon
completion of the Merger, U.S. Communications, Inc. became a wholly-
owned subsidiary of Trinity, which contemporaneously changed its name to
USCI, Inc. As used herein, all references to the "Company" shall be
deemed to include U.S. Communications, Inc. prior to the Merger and
USCI, Inc. and its subsidiaries subsequent to the Merger, including
Ameritel Communications, Inc., U.S. Communications, Inc. and Wireless
Communication Centers, Inc., unless the context indicates to the
contrary.
GENERAL
The Company is a national reseller of wireless services in the United
States and has created of the largest geographic footprints in the
wireless services industry by entering into contracts with non-affiliated
wireless services carriers covering substantially all of the continental
United States, Alaska, Puerto Rico and the Virgin Islands. In November
1996, the Company, through its wholly-owned subsidiary, Ameritel
Communications, Inc. ("Ameritel"), initiated a planned transition from a
cellular activation processing agent for major United States cellular and
paging carriers to a reseller of cellular and paging services through
mass market distribution channels including some of the largest national
retailers in the United States. The Company established Ameritel with the
objective of becoming a national reseller of multiple wireless
communications services through mass merchandising and direct marketing
response channels of distribution to consumers and small and medium-sized
businesses.
The Company obtains blocks of cellular telephone numbers and purchases
cellular access and airtime from facilities-based carriers at wholesale
rates, and then resells the cellular access, airtime and related services
to its subscribers at retail rates. The Company also resells paging
services. The Company's subscriber base is expanding rapidly. As of March
24, 1998, the Company had approximately 56,000 cellular subscribers
(compared to 3,950 as of June 30, 1997) and approximately 20,000 pagers
in service (compared to 2,040 as of June 30, 1997). For the quarter ended
December 31, 1997, the Company's monthly average revenue per unit
("ARPU") was approximately $56.00 and $9.00 for cellular and paging,
respectively. In view of the Company's limited operating history as a
reseller, there is no assurance and no representation is made that the
monthly average revenue enjoyed by the Company for both cellular and
paging will continue in the future.
The Company believes that the combination of its national distribution
capabilities and its extensive retail reach to mass market consumers
provides it with a significant competitive advantage which, at present,
is difficult for other wireless resellers and facilities-based carriers
to replicate due to the regional nature of their operations. The Company
has focused primarily on selling its wireless services in established
retail store locations where consumers already shop. Through leveraging
the consumer traffic and retail advertising efficiencies of established
United States mass merchants, the Company has achieved lower subscriber
acquisition costs than most other wireless carriers that utilize their
own dedicated retail outlets and direct sales forces.
The Company resells its wireless services under the Ameritel (Service
Mark) brand name principally through a network of national mass
merchandisers including a portion or all of the stores operated by
RadioShack, a division of Tandy Corp. ("RadioShack"), Ritz Camera,
Staples, OfficeMax, Inc. ("OfficeMax"), Sav-On, a division of American
Stores Co. ("Osco/Savon Drugs"), Sun Television and Appliances, Inc.
("SunTV") Target Stores Inc. a subsidiary Dayton Hudson Corp. ("Target
Stores") and Walgreen Co. ("Walgreen's") RadioShack is currently the
leading retailer of cellular telephones in the United States, and
accounted for approximately 15% of the entire cellular telephone retail
market in 1997. As of March 24, 1998, the Company provided cellular
services and paging services through approximately 1,000 and 3,000
national mass market retail locations, respectively. Many of the
Company's distribution agreements with national retailers contain
exclusivity provisions. The Company also markets its wireless services
through major direct response marketing companies including Fingerhut
Companies, Inc. ("Fingerhut"), QVC, Inc. ("QVC"), and Shop at Home, Inc.
("Shop at Home").
As a wireless reseller, Ameritel has long-term agreements to purchase, at
contractually agreed upon wholesale rates, cellular telephone and paging
services from operating subsidiaries of the following facilities-based
wireless carriers: AirTouch Communications, Inc. ("AirTouch"), Ameritech
Communications, Inc. ("Ameritech"), AT&T Corp. ("AT&T"), Bell Atlantic
Corp. ("Bell Atlantic"), BellSouth Corp. ("BellSouth"), Comcast Cellular
Communications ("Comcast"), First Cellular of Southern Illinois ("First
Cellular"), Frontier Corp. ("Frontier"), GTE Corp. ("GTE"), Puerto Rico
Telephone Company ("PRTC"), SBC Communications, Inc. ("SBC"),
Southwestern Bell Mobile Systems, Inc. ("SWB"), Springwich Cellular
Limited Partnership's ("SNET"), 360? Communications, Inc. ("360?"),
U.S.V.I. Cellular Telephone Company ("V.I. Tel. Co."), Metrocall, Inc.
("Metrocall") and Paging Network Inc. ("PageNet"). As of March 24, 1998,
the Company was offering its Ameritel (Service Mark) cellular services in
372 Metropolitan Statistical Areas ("MSAs") and Rural Statistical Areas
("RSAs") covering a population of approximately 214 million people
("POPs"), and paging services to over 248 million POPs.
The Company has developed proprietary software applications to support
centralized computer-based information and activation processing for
wireless communication services for use by retail mass merchandisers and
direct response marketing companies on a regional and national basis.
Activation is the process by which a wireless communication device, such
as a cellular telephone or pager, is placed on line to the wireless
service carrier. This process encompasses the Company's evaluation and
approval of the customer's credit status (for certain types of service),
the subscriber's entry into a service agreement with the Company and the
Company's subsequent activation of the subscriber's telephone or pager
affording it access to the carrier's operating network.
The Company's activation and information services, provided through the
Company's Activation Service Network ("ASN"), a proprietary computer -
based automated electronic work flow software platform, give access to a
prospective subscriber concerning the cost of a variety of wireless
communications service plans available for purchase at a specific retail
location. ASN provides information to the telephone or paging carrier
regarding the activation, including a credit review for cellular and PCS
subscribers, the subscriber's completed service agreement, the mobile or
cap code number and the service plan purchased. The ASN system both
expedites and simplifies the complex administrative functions necessary
to initiate, complete and support activations of wireless telephones and
pagers from multiple locations in the continental U.S., Alaska, Hawaii
and Puerto Rico.
During the fourth quarter of 1996, the Company, through its wholly owned
subsidiary, Ameritel Communications, Inc., entered into agreements with
GTE Mobilenet Service Corp. ("GTE") and Airtouch Cellular pursuant to
the terms of which the Company was authorized to resell cellular
telephone service provided by these carriers. Through its wholly owned
subsidiary, U.S. Paging Services, Inc. ("USPSI"), the Company acted as a
non-exclusive paging service agent for the GTE operating telephone
companies. In November 1996, the Company began operating as a reseller
of Metrocall paging services and products in a pilot program with
Staples, Inc. ("Staples"). The Company commenced its cellular reseller
operations in certain markets in Alabama, Tennessee, Kentucky, Indiana
and New Mexico in November 1996 and expanded coverage to markets
throughout the United States.
On October 23, 1997, the Company entered into a strategic alliance with
Cable & Wireless, Inc. ("Cable & Wireless"), the sixth largest US long
distance telephone company and a subsidiary of Cable and Wireless PLC.
Cable & Wireless will make Ameritel's cellular and paging services
available to its small and mid-sized business subscribers. This
agreement will provide the Company with access to business accounts
served by Cable & Wireless's sales force. The agreement became
operational in January 1998. The agreement is for a term of 12 months and
will automatically renew for successive 12-month terms unless either party
gives notice of its intention not to renew at least ninety (90) days prior
to the expiration of the then-current term. In addition, Cable &
Wireless may terminate the agreement at any time if certain conditions are
not met.
On October 21, 1997, the Company concluded a agreement with RadioShack, a
division of Tandy Corporation, one of the largest mass market retailers
in the United States. Under the agreement the Company serves as the
exclusive provider of cellular communications services to RadioShack's
305 retail locations in the New York metropolitan region (which includes
the five boroughs of New York City, Westchester and Rockland Counties,
Long Island, Southern Connecticut and New Jersey), Puerto Rico, the U.S.
Virgin Islands and part of Missouri. The Company launched its Ameritel
cellular service in the greater New York region on October 1, 1997 and
the initial results were highly favorable. The agreement was amended on
December 8, 1997, retroactive to November 21, 1997, to cover Puerto Rico
and the Virgin Islands. RadioShack accounted for approximately 70% of
the subscribers secured by the Company as of March 24, 1998. The loss of
the RadioShack account could have a material adverse effect on the
Company's current business operations.
On October 13, 1997, the Company concluded an agreement with Sun
Television and Appliances, Inc. ("SunTV"), a specialty retailer of
consumer electronics and home appliances with revenues of $683 million
for the fiscal year ended March 31, 1997. SunTV currently operates 41
retail stores in Ohio, Kentucky, Pennsylvania and West Virginia. Under
the terms of this agreement, the Company initially launched its Ameritel
cellular services in 23 SunTV stores in Ohio in the fourth quarter of
1997. The agreement is terminable at will by either party on sixty (60)
days notice.
On November 21, 1997, Ameritel entered into an agreement with Ritz
Camera Centers, Inc. ("Ritz Camera") under which Ameritel agreed, in a
pilot program, to provide cellular telephone service on an exclusive
basis to customers at Ritz Camera's 12 retail locations in Norfolk,
Virginia. The agreement also gives Ameritel the right, but not the
obligation, to provide cellular telephone service to any additional
stores subsequently opened by Ritz Camera in the Norfolk market. The
agreement may be terminated by either party, without cause, on 60 days
prior notice, subject to Ameritel's obligation to continue the agreement
through March 31, 1998.
The Company is transitioning to a full-service reseller of paging
services, and is pursuing a strategy similar and complementary to that
of its cellular operations. The Company has signed reseller agreements
with two national facilities-based paging companies and has
substantially transitioned Osco/Savon Drugs and opened Walgreen's under
this platform. The Company has developed the "Family Link" paging
concept, which targets families and consists of an off-the-shelf pager
bundled with a low fee and a month-to-month service contract.
As of March 24, 1998, the Company had approximately 20,000 Ameritel
paging subscribers, which represents approximately 10 times its paging
subscriber base of approximately 2,000 as of June 30, 1997.
In October 1995, the Company commenced processing the activation of
cellular telephones marketed by QVC, the country's largest home shopping
television network, pursuant to a written agreement and in the third
quarter of 1996 entered into an agreement with QVC to provide pagers and
paging activation services to QVC customers on a non-exclusive basis.
The Company also markets its paging services through Fingerhut
Corporation, a direct marketing company.
The following table sets forth certain statistical information regarding
the Company's business for the three years ended December 31, 1997.
Year Ended
December 31,
1997 1996 1995
------------------------------------
Agency Activations 53,623 50,266 14,200
Activation Commissions $2,993,483 $4,991,461 $4,305,217
Subscribers (net additions) 54,250 600 -
Subscriber Sales $6,281,825 $29,656 -
The total number of activations increased significantly in 1996, due
primarily to an increase in paging activations which result in
commissions lower than those earned for cellular activations. The total
number of activations increased significantly in 1997, due to the
Company's focus on reselling and the amount of business generated
through RadioShack in the last quarter of the year.
The Company's agreements with retail mass merchandisers and direct
response channels, which in the aggregate are material to the continued
production of revenue for the Company, require the Company to provide
the following services, generally, to each retail location at which the
Company processes activation of cellular telephones:
- -Off-site activation for subscribers.
- -Cellular carrier credit review for prospective subscribers of cellular
telephone service.
- -Electronic work flow to support the completion of all cellular Company
service agreements.
- -Assignment of mobile telephone numbers to credit approved subscribers
who purchase cellular telephones and transfer of information for the
activation of the cellular service through the Company's automated
activation system to the appropriate carrier network .
- -Merchandising and field support to assist in the training of client
sales personnel.
- -The Company creates national air time programs for wireless services.
- -Central customer care and customer support services for activations,
technical support and billing management.
Cellular telephones are frequently sold by retailers to subscribers at
prices below their direct cost to a retail mass merchandiser. The
difference between the direct cost of the cellular telephone paid by the
retail mass merchandiser (plus a profit margin to the retailer) and the
price to the subscriber is customarily offset by a part of the
activation commission payments paid by the Company to the retailer.
In general, the Company has contracted to provide exclusive cellular
telephone services at the locations designated by the mass merchandiser.
The retail mass merchandiser may designate the number of such locations
except in certain agreements where it has committed to use the Company's
services in all locations.
The Company intends to continue adding additional retail mass
merchandiser and direct marketing distribution channels in 1998.
AMERITEL COMMUNICATIONS, INC.
The Company organized a wholly owned subsidiary, Ameritel
Communications, Inc. ("Ameritel") , to act as a non-facilities based
service provider, or reseller, of wireless communications services. The
Company began active operations in November 1996.
The Company intends to continue to expand the scope and coverage of its
reseller operations in 1998 and is negotiating additional reseller
agreements with several cellular and PCS carriers. The Company's
ability to expand its reseller operations as planned is not assured and
is subject to certain risks and uncertainties as described in the
subsection entitled "Risk Factors That May Affect Future Results"
appearing in this Annual Report.
Suppliers
Carrier Relationships
The Company provides Ameritel cellular and paging services by purchasing
access and airtime from facilities-based carriers at wholesale rates and
reselling this access and airtime at retail rates. The Company has been
able to negotiate favorable carrier agreements that provide coverage
throughout substantially all of the United States and do not require
"take-or-pay conditions." These multiple carrier agreements give the
Company the ability to control the structure of its national rate plans
and distribute its service through its mass market distribution channels.
The Company's uniform national rate plans permit it and its mass market
retailers to advertise on a national and regional basis.
As of March 24, 1998, the Company has entered into carrier agreements
with 15 nonaffiliated facilities-based cellular service providers. These
agreements authorize the Company to resell the cellular service provided
by the carriers in a total of 372 MSAs and RSAs covering a population of
approximately of 214 million people.
In November 1996, the Company began reselling national paging services on
a pilot basis, through Staples, a national chain of office supply stores.
In November 1997 the Company began reselling national paging services
through Walgreen's, a national chain of over 2,300 stores and American
Stores (Osco/SavOn), a chain of approximately 800 stores. As of March
24, 1998, the Company was offering paging products and services on both
the Metrocall and PageNet national networks in over 3,000 retail store
locations throughout the United States.
AMERITEL CARRIER AGREEMENTS
AirTouch GTE Mobilnet
Ameritech Metrocall (paging)
AT&T Wireless Services PageNet (paging)
Bell Atlantic Mobile Puerto Rico Telephone Co.
BellSouth SBC Communications
Comcast Southwestern Bell
First Cellular 360? Communications
Frontier Cellular US V.I. Tel. Co.
Southern New England Telephone
Equipment Distributor Relationships
The Company does not inventory or sell paging or wireless equipment.
However, it assists in the negotiations, if required, by the retailer
with the supplier of both cellular and paging equipment.
Business Overview
The Company is one of the few national resellers of wireless services in
the United States, and as such, the Company has created one of the
largest geographic footprints in the wireless services industry by
entering into contracts with nonaffiliated wireless service carriers
covering substantially all of the continental United States, Puerto Rico
and the Virgin Islands. In November 1996, the Company, through its
wholly-owned subsidiary, Ameritel, began a planned transition from an
activation processing agent for major United States cellular and paging
carriers to a reseller of cellular and paging services through mass
market distribution channels including some of the largest national
retailers in the United States. The Company established Ameritel with the
objective of becoming a national reseller of multiple wireless
communications services to consumers and small and medium-sized
businesses.
The Company obtains blocks of cellular telephone numbers, and purchases
cellular access and airtime from facilities-based carriers at wholesale
rates, and then resells the cellular access, airtime and related services
to its subscribers at retail rates. The Company also resells paging
services. The Company's subscriber base is expanding rapidly. As of March
24, 1998, the Company had approximately 56,000 cellular subscribers
(compared to 3,950 as of June 30, 1997) and approximately 20,000 pagers
in service (compared to 2,040 as of June 30, 1997). For the quarter
ended December 31, 1997 monthly average revenue per unit ("ARPU") was
approximately $56.00 for cellular subscribers and $9.00 for paging
subscribers.
The Company believes that the combination of its centralized standard
automated process, national wireless coverage, and its growing retail
distribution to mass market consumers provides it with a significant
competitive advantage which at present is difficult for other wireless
resellers and facilities-based carriers to replicate due to the localized
nature of their operations. The Company has focused primarily on selling
its wireless services in established retail store locations where
consumers already shop. Through leveraging the consumer traffic and
retail advertising efficiencies of established mass merchants, the
Company has achieved lower subscriber acquisition costs than most other
wireless carriers that utilize their own direct and indirect or wholly
owned and non-company owned retail outlets and direct sales forces. In
addition, the Company does not compete with its retail channels of
distribution as do the carriers who have their own dedicated retail
outlets.
The Company resells its wireless services under the Ameritel (Service
Mark) brand name principally through a network of national mass
merchandisers including OfficeMax, Osco/Savon Drugs, RadioShack, SunTV,
Target Stores, Staples, Ritz Camera and Walgreen's. RadioShack is
currently the leading retailer of cellular telephones in the U.S., and
accounted for approximately 15% of the entire cellular telephone retail
market in 1997. As of March 24, 1998, the Company provided cellular and
paging services under the brand name of "Ameritel" through approximately
1,000 and 3,000 national mass market retail locations, respectively.
Many of the Company's distribution agreements with national retailers
contain exclusivity provisions. The Company also markets its wireless
services through major direct response marketing companies including
Fingerhut, QVC, and Shop at Home.
As a wireless reseller, Ameritel has long-term agreements to purchase, at
contractually agreed upon wholesale rates, cellular telephone and paging
services from selected operating subsidiaries of the following
facilities-based wireless carriers: AirTouch, Ameritech, AT&T Wireless
Services, Bell Atlantic Mobile, BellSouth, Comcast, First Cellular,
Frontier Cellular, GTE Mobilenet, Puerto Rico Telephone Co., SBC
Communications, SNET, Southwestern Bell, 360? Communications,
U.S.V.I.Tel.Co., Metrocall and PageNet. These agreements do not require
"take-or-pay" conditions. As of March 24, 1998, the Company was offering
its Ameritel (Service Mark) cellular services in 372 MSAs and RSAs
covering a population of approximately 214 million people, or "POPs", and
paging services to over 248 million POPs.
The Company believes that facilities-based carriers value relationships
with resellers due to the nominal incremental acquisition cost to add a
new subscriber through a reseller, the significant reduction to the
carrier in marketing costs and credit risk attributable to reseller
subscribers, and the reseller's responsibility to provide all customer
service to its subscribers. The Company intends to pursue a strategy of
using its enhanced competitive position resulting from anticipated rapid
growth in subscribers to negotiate more favorable terms, including lower
wholesale rates from facilities-based carriers, and thereby continue to
maintain its gross margins.
The Company believes it is strategically positioned to benefit from the
continued rapid growth in the overall utilization of cellular, PCS, and
paging services, and particularly from the anticipated growth in the
utilization of wireless services by the mass consumer market which is
currently underpenetrated relative to the business and professional
markets. As a result of increased competition and technological advances,
prices for cellular services and cellular handsets have declined
dramatically in recent years, and the Company believes that cellular
service is currently affordable to a larger percentage of the US
population than ever before. Going forward, this trend of increasing
affordability is expected to stimulate the usage of cellular and PCS as
viable substitutes for landline telephones.
The Company believes that its relationships with large national retailing
chains that have nationwide distribution will provide it with unique
access to mass market consumers. Large national retailers place a premium
on standardization, uniformity, centralization, and wide geographic
coverage. As a national reseller of wireless services, the Company offers
national mass merchandisers uniform national rate plans and standardized
airtime promotions supported by a centralized, proprietary activation and
processing platform. This enables national mass merchandisers to utilize,
for the first time, nationwide printed newspaper supplements, nationwide
catalogs, and national television advertising and promotions in the
marketing of cellular telephone and paging services.
The Company provides mass market retailers with the ability to offer
cellular and paging services from a single provider, thus eliminating the
logistical difficulties and advertising inefficiencies inherent in
dealing with multiple regional cellular and paging providers. Merchants
were required to enter into separate cellular carrier contracts with
carriers in different geographic coverage areas in order to sell cellular
phone services in multiple store locations throughout the country. This
patchwork approach required retailers to rely on multiple vendors and
processing systems, thereby resulting in diverse local rate plans,
decentralized advertising, and non-uniform customer service. The
Company's uniform national rate plans and centralized back office support
systems have simplified the wireless selling process for national retail
chains and their mass market customers.
Business Strategy
The Company's objective is to become the first truly national reseller of
wireless services with uniform rate plans and centralized information
processing systems to consumers through mass market distribution
channels. The Company has implemented the following strategic elements to
meet its objective:
o Expand reseller geographic coverage areas. The Company has converted
markets in which it previously had existing cellular agency agreements
with facilities-based carriers into reseller markets, and plans to enter
into additional resale agreements with carriers in selected markets where
the Company does not yet have a presence. The Company is currently
operational (i.e., offers cellular service through its distribution
network) as a cellular reseller in 372 MSAs and RSAs covering 214 million
POPs.
o Increase penetration of existing distribution network. The Company is
continuing its efforts to expand its subscriber base by increasing the
number of stores through which it sells Ameritel services and increasing
the number of sales per store. The Company has only recently began to
exploit the potential wireless market opportunity represented by existing
distribution agreements with national retailers and direct response
marketing companies. In most cases, the Company has not yet fully
leveraged its exclusive national distribution agreements by establishing
a presence in a majority of stores in a given retail chain. The Company
expects that its promotion of uniform national rate plans will increase
its penetration of existing retail outlets and expand its overall
cellular and paging subscriber base.
o Further expand distribution network. The Company intends to enter into
new national distribution agreements with mass merchants and direct
response marketing companies to further expand its distribution network.
The Company has recently expanded into new distribution channels,
including a definitive wireless resale agreement with a large US long
distance carrier, and is currently in negotiations to provide wireless
services to customers of a national cable television provider.
o Reduce costs. The Company intends to pursue a strategy of using its
enhanced competitive position resulting from continued rapid subscriber
growth to negotiate lower wholesale rates from facilities-based carriers
and thereby increase its gross margins. For example, the Company has
recently negotiated significantly improved wholesale rates in the New
York market and plans to aggressively pursue rate reductions in other
markets as its carrier agreements come up for renewal. The Company is
also able to lower its airtime costs by aggregating volume across
multiple markets served by the same carrier. Furthermore, the Company
intends to maintain relatively low subscriber acquisition costs by
continuing to negotiate lower commission payments to mass merchants
consistent with the declining trend in wireless retail pricing plans.
The Company may also continuously improve its operating costs through the
use of its centralized automated service order processing and activations
technology platform. The platform is comprised of efficient, salable
operating systems, which operate more cost effectively as order
processing volume increases.
o Provide excellent customer service. The Company seeks to provide an
excellent level of customer service to its two primary subscriber groups,
namely, (i) its network of mass merchant and direct response distributors
and (ii) its cellular and paging subscribers. Compared to the activation
services typically provided by facilities-based carriers to mass
merchants offering wireless services, the Company believes that its
proprietary activation processing platform provides mass merchants with a
superior level of customer service through greater automation,
uniformity, and simplicity. The Company provides national retailers with
the convenience of dealing with a single wireless vendor, instead of a
patchwork of multiple vendors with different processing systems, rate
plans and procedures. The Company also utilizes account management
representatives to provide on-site training and subscriber and product
support. The Company strives to retain its existing subscribers and
attract new ones by providing superior customer service, customized
billing options, and competitive rates to minimize churn.
oProvide new wireless and other communications services. The Company
intends to use its position as a leading reseller of cellular and paging
services to enter the resale market for new forms of wireless
communications services such as PCS, digital cellular, prepaid cellular,
and interactive paging. The Company believes that the ability to offer
the telecommunications user multiple communications services from one
source will confer the Company with a competitive advantage in the highly
competitive telecommunications market. To that end, the Company intends
to investigate adding other services, including long distance and
Internet access, to its current services and offering discounts to
subscribers purchasing multiple services. The Company currently has no
arrangements or commitments with the providers of any such services.
oDevelop Ameritel (Service Mark) wireless brand name and identity. The
Company resells its wireless services under the Ameritel (Service Mark)
brand name. With its network of national mass merchandisers, the Company
stands to significantly benefit from the powerful national advertising
campaigns and co-branding initiatives that are customary in the retailing
industry. which promote the Ameritel (Service Mark) brand name in
conjunction with the name of a well-known national retailer, such as
RadioShack, provide the Company with immediate and significant brand
recognition. Initial results of targeted newspaper advertising and
promotions utilizing the Ameritel (Service Mark) brand name have been
highly favorable. The Company has already created several proprietary
sub-brands, including "Cellular on the Go (Service Mark) " and "Family
Link," which also benefit from retail advertising campaigns.
Company Operations
Ameritel Wireless Communications Services
In November 1996, the Company began its transition to a wireless reseller
in select markets across the United States. The Company has developed a
mass market distribution strategy which it believes is unique in the
wireless industry, and as of March 24, 1998, was offering its Ameritel
services through approximately 1,000 retail stores and served multiple
direct response channels. The Company has developed an off-the-shelf
cellular telephone package, bundled with an entry level rate plan called
"Cellular on the GoSM", for distribution through several mass market
channels. The product has been developed to simplify the sale of cellular
telephones by retail mass merchandisers.
As a reseller, the Company purchases its cellular telephone access and
airtime from facilities-based carriers at wholesale rates. The Company
receives these wholesale rates due to scale purchasing economies and
because it absorbs substantially all selling, marketing, bad debt and
subscriber care costs that facilities-based carriers would otherwise
assume. The Company then resells, at retail rates, the cellular services
directly to its subscribers. Reselling wireless services enables the
Company to obtain a recurring revenue stream rather than a one-time
agency commission, and provides it with the ability to market additional
communications services to its existing subscriber base.
By entering into agreements with facilities-based carriers nationwide,
the Company can provide its mass merchandising and other distribution
outlets with uniform rate plans that permit them to advertise price and
promotions on a national basis. In addition, the Company's mass market
retailers benefit from the Company's centralized platform for credit
verification, service activation, subscriber care and billing. The
Company can offer prices competitive with those of facilities-based
carriers and can provide subscribers with a greater selection of services
and the ability to roam in multiple areas throughout the United States.
The Company believes that the bundling of communications services will
increase revenue per subscriber and reduce subscriber turnover rates.
Subscriber acquisition costs account for the majority of the Company's
upfront expenses, and primarily include equipment costs and commissions
paid to its network of distribution channels and outside sales
representatives, as well as advertising and promotional costs. The
Company's acquisition costs are generally lower than those of its
competitors due to the efficiencies of national advertising, greater
control over equipment costs, increased automation of customer service
functions, and greater cost efficiencies provided by national
distribution. The Company also lowers its costs by entering into joint
promotion and advertising agreements with vendors, retailers and
carriers.
The Company's agreements with mass market retail chains require the
provision of specified services at all retail locations designated by the
retailer. The Company's support services consist of the following:
Off-site activation for subscribers. By using the Company's Remote
Activation Process ("RAP"), subscribers nationwide can activate
communications services from the convenience of their home or office.
Credit analysis and review. The Company provides an automated
process for immediate review of a prospective subscriber's credit
history, which helps determine an individual's eligibility to receive
cellular telephone service.
A multiple port voice response unit ("VRU"). This system has the
capacity to process multiple simultaneous transactions, and allows the
completion and delivery of all activation information to the carrier's
activation and billing system in a paperless format.
Assignment of mobile telephone numbers. The Company has the ability
to assign mobile numbers to either specific store locations or directly
to subscribers, determined by their home or office telephone number. This
process enables the Company to assign and control mobile numbers in
multiple markets throughout the country.
Merchandising and field support. The Company assists in the training
of client sales personnel and local customer service support,
particularly with respect to the use of national rate plans and airtime
promotions. The Company presently utilizes 60 account management
representatives for on-site training and subscriber and product support.
As of March 24, 1998, the Company had approximately 56,000 Ameritel
cellular subscribers, which is approximately fourteen times the number of
its June 30, 1997 cellular subscriber base of approximately 4,000.
The Company is transitioning to a full-service reseller of paging
services, and is pursuing a strategy similar and complementary to that
of its cellular operations. The Company has signed reseller agreements
with two national facilities-based paging companies, and has
substantially transitioned its mass market retailing clients to the
Ameritel platform. This permits the Company to achieve the same cost
and service benefits with paging comparable to cellular service.
As of March 24, 1998, the Company had approximately 20,000 Ameritel
paging subscribers, which is approximately ten times the number of its
paging subscriber base of approximately 2,000 as of June 30, 1997.
Distribution Channels
The Company's business strategy is to offer wireless communications
services through various mass market distribution channels. The Company
has chosen to utilize several different channels of distribution to
access mass market consumers:
Retail Mass Merchandisers
The Company utilizes the retail mass market channel as a major source of
distribution for cellular services. The Company has entered into
distribution agreements with several national and regional retail chains
including RadioShack, Target Stores, OfficeMax, Staples, Walgreen's, Ritz
Camera and SunTV. Under these agreements, the Company sells and markets
its Ameritel cellular service to consumers and provides comprehensive
activation and subscriber support services to new subscribers. The
Company believes that the market for cellular services will continue to
grow, and the mass market consumer will represent much of this growth.
This will allow the Company to increase its subscriber base while
steadily decreasing its per subscriber acquisition costs.
Remote Activation Process ("RAP"). The Company believes that a
simplified purchase and automated activation process is critical to
growing its subscriber base through its mass market distribution
channels. The Company's off-site Remote Activation Process ("RAP")
permits the subscriber to activate Ameritel cellular service in a
simplified and expeditious manner. The subscriber completes a RAP
agreement at the retail store location, calls a toll-free number to
select a rate plan and obtains the required credit approval. This
process generally takes 10 to 20 minutes to complete, at which time the
carrier is electronically notified to activate the phone. Activation of
the telephone by the carrier generally occurs within two hours.
RESEARCH AND SOFTWARE DEVELOPMENT
The Company's research and software development efforts emphasize both
the continuous enhancement of its present systems and the development of
additional related systems. Research and development efforts are
designed to support retailer and carrier needs and maintain the
efficiency of the Company's RAP system. In addition to its in-house
staff, the Company utilizes outside contractors on a project-by-project
basis.
Research and development expenses for the years ended December 31, 1997,
1996 and 1995 aggregated $129,592, $110,222 and $87,062, respectively.
In addition, the Company incurred capital costs of $731,529, $752,506
and $472,693 in the years ended December 31, 1997, 1996 and 1995,
respectively, for purchased and developed software. Management
anticipates the need for substantial on-going research and development
expenditures by the Company with an emphasis on the internal growth of
its Management Information System ("MIS") department.
INTELLECTUAL PROPERTY
The Company does not own any patents and has not filed any patent
applications covering its software. The Company currently relies on
unpatented proprietary technology, which may be duplicated. The Company
employs various methods, including confidentiality agreements with
employees and consultants, to protect its proprietary technology. Such
methods, however, may not afford complete protection and there can be no
assurance that others will not independently develop such technology or
otherwise obtain access to it, which could have a material adverse
effect on the Company's competitive business position.
The Company has filed trademark applications for "RAP," "Cellular on the
Go" and "Family Link."
COMPETITION
The wireless communications industry is highly competitive and is
characterized by rapidly changing technologies. In the cellular industry,
the Company's principal competitors are cellular and PCS carriers and
other resellers who market their services directly to the public. In
every area where the Company offers its cellular services, it competes
with at least two incumbent local cellular service providers in the
region, as well as with PCS providers that operate on both a local and a
national basis. The Company believes that it can effectively compete with
these companies based upon the strength of its national distribution
network comprised of the retail mass merchandisers and direct response
marketing companies under contract with the Company. In addition, the
Company believes it is one of the truly national resellers of cellular
and paging services besides MCI Wireless (a division of MCI
Communications Corp.).
The Company also competes with a large number of paging carriers that
provide local, regional and national service and who market their
services primarily through direct sales and retailing arrangements. Some
of these paging carriers include SkyTel, Metrocall, PageNet, and other
regional or local paging service providers located throughout the
Company's coverage area. The Company believes that most paging carriers
do not have strong brand name recognition, have utilized a standard
marketing approach and have limited retail marketing experience.
Continuing technological advances in telecommunications, such as the
development of ESMR systems and increasing use of satellite-based
communications, make it difficult to predict future competition. However,
as each of these and other similar technologies require activation, the
Company's systems have been developed to be compatible with all such
technologies. The Company believes that new wireless communication
technologies will be increasingly offered to subscribers through retail
mass merchandisers and direct response companies and, accordingly,
believes that it will be able to effectively compete in this market.
EMPLOYEES
As of March 24, 1998 the Company employed a total of 303 people,
including its four corporate officers, a senior vice president of
operations and a director of marketing for Ameritel, a chief technical
officer, a manager for paging services, information systems personnel,
customer service and support personnel, clerical and administrative staff
and account representatives. The Company also utilizes three independent
sales representative organizations and, on an as-needed basis, other
independent contractors. The Company has to date successfully recruited a
number of trained computer programmers (internal staff and outside
contractors) and experienced cellular and paging sales and marketing
personnel. None of the Company's employees is represented by a labor
union or is subject to a collective bargaining agreement. The Company
believes that its relations with its employees are good.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
History of Losses; Uncertain Future Profitability
The Company, which has never operated at a profit, has experienced
increasing losses since its inception in 1991. Such losses continued in
1997 and are expected to continue in 1998. As of December 31, 1997, the
Company had an accumulated deficit of approximately $43 million. There
can be no assurance that the Company will ever achieve profitability. The
Company expects to continue to incur significant losses in future periods
in connection with the expansion of its reseller 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. 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.
Need For Additional Financing
The wireless resale industry is very capital intensive, particularly for
growing resellers, at substantial costs are incurred in connection with
the acquisition of subscribers. The Company will require substantial
additional financing in order to fund operations at current growth levels
and to increase its growth rate. If the additional capital and/or actual
cash flow proves to be insufficient to fund the Company's operations or
expansion requirements (due to unanticipated expenses, operating
difficulties, or otherwise), or the Company's strategy changes, the
assumptions underlying its projections change or prove to be inaccurate
the Company will be required to curtail its operations. The availability
of financing on terms acceptable to the Company is not assured. Thus,
there can be no assurance that the Company's planned expansion and
operation of its reseller business will be successful.
Continuance as a Going Concern
The Company's significant growth in subscribers has created a working
capital deficiency due to the 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.
Uncertain Management of Growth
The Company's business plan will, if successfully implemented, result in
rapid expansion of its reseller operations. Rapid expansion of the
Company's operations will significantly strain on the Company's
management, financial and other resources. The Company's ability to
manage future growth, should it occur, will depend upon its ability to
monitor operations, control costs, maintain regulatory compliance,
maintain effective quality controls and significantly expand the
Company's internal management, technical, information and accounting
systems and to attract, assimilate and retain additional qualified
personnel. See "-Dependence on Key Personnel." Furthermore, as the
Company's business develops and expands, the Company will need additional
facilities for its growing work force. There can be no assurance that
the Company will successfully implement and maintain such operational and
financial systems or successfully obtain, integrate and utilize the
employees and management, operational and financial resources necessary
to manage a developing and expanding business in an evolving and
increasingly competitive industry. Any failure to expand these areas and
to implement and improve such systems, procedures and controls in an
efficient manner at a pace consistent with the growth of the Company's
business could have a material adverse effect on the business, financial
condition and results of operations of the Company.
If the Company is unable to hire staff, expand such facilities, retain
labor, increase the capacity of its information systems and/or
successfully manage and integrate such additional resources, subscribers
could experience delays in activation of service and/or lower levels of
customer service. Failure by the Company to meet the demands of
subscribers and to manage the expansion of its business and operations
could have a material adverse effect on the Company's business, financial
condition and results of operations.
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 Wireless Carriers
The Company is dependent upon facilities-based cellular telephone and
paging service providers for the supply of service to be resold to the
Company's subscribers. The Company would be adversely affected if its
suppliers failed to provide adequate service 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 charges by the carriers would inhibit the Company's
ability to control operating costs.
Dependence on Major Channel of Distribution
Of the Company's approximately 56,000 cellular subscribers at March 24,
1998, approximately 70% were enrolled at RadioShack stores, the Company's
principal channel of distribution. 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.
Seasonality
The Company's revenue and operating income tends to fluctuate over the
course of the year, and increases notably 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.
Maintenance of Subscriber Base
The Company does not enter 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.
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. Although the various cellular carriers have
taken steps to prevent fraud, including requiring or recommending the use
of PIN numbers and/or authenticated phones, as well as implementing the
rollout of digital cellular service which is more difficult to clone,
there is no certainty that fraud will not continue to be a significant
problem in the wireless telecommunications industry. Under its agreements
with certain carriers, the Company may be liable for a portion of charges
incurred for fraud occurring in the carriers' home and roaming markets.
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.
Potential Adverse Effect of Competition
The wireless communications industry is highly competitive and rapidly
changing. The Company's principal competitors are cellular, PCS and
paging service providers (both facilities and non-facilities-based) who
market their services directly to the public and through non-exclusive
agents and resellers such as the Company. Most wireless service
providers, particularly facilities-based carriers, have substantially
greater financial, marketing and technological resources than the Company
and have been marketing their services for a substantial period of time
in the geographical areas in which the Company provides its services.
Competition in the wireless communications industry is expected to
continue to intensify. Due to the rapid introduction of PCS, enhanced
specialized mobile radio ("ESMR") 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.
Accordingly, there can be no assurance that the Company can operate
successfully in the increasingly competitive wireless telecommunications
market.
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 and state regulation as a common carrier radio
telephone service. Although these regulations do not currently have a
material impact on the operation of the Company's reseller business,
there can be no assurance that changes in government regulation will not
have an adverse impact on the Company's business or results of
operations.
Lack of Patent Protection
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 or patent computer software and hardware that is 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 name "Ameritel" may infringe on trademarks and service marks of
others in certain states.
Equipment Failure; Natural Disaster
The Company maintains its centralized platform for subscriber activation,
subscriber care, and billing at two sites in Georgia. Although the
platform has redundancies, a major equipment or software failure or a
natural disaster could have a material, adverse effect on the Company's
operations.
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.
Dilution
Shareholders may suffer dilution as a result of future financings, the
exercise of existing options and warrants or those granted in the future,
and other transactions.
No Anticipated Dividends on Common Stock
The Company has never paid cash dividends on its Common Stock, and it
does not anticipate paying such dividends in the foreseeable future. The
Company intends to reinvest any funds that might otherwise be available
for the payment of such dividends in the further development of its
business.
ITEM 2. PROPERTIES
The Company's executive offices and other facilities are located in
Norcross, Georgia, a suburb of Atlanta. The premises, comprising
approximately 22,300 square feet, are occupied pursuant to a lease that
expires on January 31, 1999 and requires current monthly rent payments
of approximately $12,400, increasing to approximately $12,770 in
December 1998. In addition to its offices, the facility houses the
Company's Voice Center, and software development and computer
facilities. The Company is seeking to lease additional space in the
Atlanta, Georgia area to accommodate its expanding operations and
believes that adequate facilities are available at commercially
reasonable rentals.
ITEM 3. LEGAL PROCEEDINGS
(a) The Company is not a party to any material pending legal
proceedings.
(b) The Company was not a party to any material legal proceeding that
was terminated during the fourth quarter of the fiscal year ended
December 31, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security
holders during the fourth quarter of the fiscal year ended December 31,
1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) The Company's Common Stock is quoted on the NASDAQ National Market
System ("NNM") under the symbol "USCM." The following table sets forth
the range of high and low sales prices on the NNM for the periods
indicated.
SALE PRICE
--------------
THREE MONTHS ENDED HIGH LOW
- ------------------ ------ -----
March 31, 1996 10 3/4 6 5/8
June 30, 1996 9 5/8 6 3/8
September 30, 1996 7 5/8 4 1/2
December 31, 1996 7 3/4 4 1/4
March 31, 1997 6 3/8 3 7/8
June 30, 1997 4 3/8 2 13/16
September 30, 1997 6 1/8 3 3/64
December 31, 1997 8 1/2 5 10/32
As of March 24, 1998, there were 92 holders of record of the Company's
Common Stock. The Company believes there were in excess of 3,000
beneficial holders of the Common Stock as of such date.
The Company has not declared any cash dividends on its Common Stock and
does not intend to pay cash dividends on its Common Stock for the
foreseeable future.
(b) Recent Sales of Unregistered Securities
On October 30, 1997, and PaineWebber Incorporated ("PaineWebber"), an
investment banking firm, entered into a letter agreement (the
("PaineWebber Agreement") pursuant to which PaineWebber agreed to
establish through October 1998 for Ameritel's account irrevocable
standby letter of credit financing in the aggregate amount of up to
$3.75 million for the purpose of enabling Ameritel to satisfy its
security obligations under agreements with RadioShack and certain
cellular service providers from whom it purchases cellular service for
resale. Under the PaineWebber Agreement the Company is required to
pledge, as a condition precedent to the issuance of any letter of credit
by PaineWebber, such number of shares of the Company's common stock
valued at $7.00 per share, as shall equal 125% of the principal amount
of each letter of credit to be issued. The agreement further requires
the Company to replace any such pledged shares with cash, U.S.
government obligations or other obligations guaranteed by the U.S.
government in the amount of 125% of the aggregate principal amount of
all outstanding letters of credit (i.e. up to $4,718,750) on or prior to
the earlier to occur of the completion of the Company's pending private
placement or January 30, 1998. In addition, USCI and Ameritel executed
guarantees of each other's obligations under the PaineWebber Agreement.
To provide the shares of Common Stock required to be pledged as
collateral under the PaineWebber Agreement, the Company entered into an
agreement dated as of October 30, 1997 with certain of its stockholders
(the "Stockholders") including Mr. Hahn, Mr. Kostrinsky and two of the
Company's directors, under which the Stockholders agreed to deposit with
the Company an aggregate of 545,045 shares of the Company's common stock
owned by them for delivery, as and when needed, to PaineWebber. As
consideration for this agreement, the Company issued to the Stockholders
non-qualified five year options to purchase an aggregate of 54,505
shares of the Company's Common Stock at $6.00 per share.
As consideration to PaineWebber for providing the letter of credit
financing, the Company issued to PaineWebber a five-year warrant to
purchase up to 600,000 shares of the Company's Common Stock at a
purchase price of $6.00 per share.
On November 18, 1997, the Company obtained an unsecured loan in the
amount of $4.0 million from George Karfunkel and Michael Karfunkel. The
loan bears interest at 8.5% per annum and is payable on December 31,
1997, or completion of the Company's pending private placement,
whichever is sooner. As additional consideration for the loan, the
Company issued to each of the lenders a five-year warrant exercisable to
purchase up to 400,000 shares of the Company's Common Stock at an
exercise price of $6.00 per share. On December 30, 1997, the Company
issued to each of the lenders an additional five-year warrant to
purchase 200,000 shares of Common Stock at $6.00 per share in
consideration of the lenders' extension of the due date of the loans
until January 31, 1998 The Warrants were subsequently rescinded as part
of a transaction which occurred in February 1998.
On January 2, 1998, the Company obtained an unsecured bridge loan in the
amount of $250,000 from Decameron Partners, and on January 5, 1998, the
Company received an unsecured bridge loan in the amount of $250,000 from
Mr. Alan R. Dresher. Each loan bears interest at 10% per annum and is
payable upon the earlier to occur of January 31, 1998 or the completion
of the Company's pending private placement. As additional consideration
for the loans, the Company issued to each lender a five-year warrant to
purchase 50,000 shares of Common Stock at $6.00 per share. The Company
also issued a five-year warrant to purchase 25,000 shares of Common
Stock at $6.00 per share to Alan Baron, the principal of Decameron
Partners, as a finder's fee. These loans have been repaid.
On February 2, 1998, the Company issued to each of Decameron Partners,
Inc. and Alan R. Dresher, additional five-year warrants to purchase
50,000 shares of Common Stock at $6.00 per share in consideration of the
lenders' extension of the due date of each of their $250,000 unsecured
bridge loans (dated November 18, 1997) from January 31, 1998 to February
28, 1998 (which loans were paid in full). The Company also issued a
five-year warrant to purchase 25,000 shares of Common Stock at $6.00 per
share to Alan Baron, the principal of Decameron Partners in
consideration for his assistance in obtaining the extension of the
loans.
On February 24, 1998, pursuant to the terms and conditions of a Private
Placement Purchase Agreement of even date among the Company, George
Karfunkel, Michael Karfunkel, Huberfeld Bodner Family Foundation, Inc.,
Laura Huberfeld/Naomi Bodner Partnership and Ace Foundation, Inc.: (a)
George Karfunkel and Michael Karfunkel each sold $1 million principal
amount of Notes of the Company to Laura Huberfeld/Naomi Bodner
Partnership and Huberfeld Bodner Family Foundation at a purchase price
equal to the face amount of the Notes (b) the 1,600,000 warrants issued
by the Company to George Karfunkel and Michael Karfunkel were cancelled
and rescinded together with the $4,000,000 Replacement Promissory Notes
dated November 18, 1997 issued to George Karfunkel and Michael
Karfunkel; and (c) the Company issued Convertible Restated Notes as
follows: $1,000,000 to George Karfunkel, $1,000,000 to Michael
Karfunkel, $1,250,000 to Laura Huberfeld/Naomi Bodner Partnership and
$750,000 to Huberfeld Bodner Family Foundation, Inc. The Company
agreed, for each month or portion thereof, from and after November 1,
1997 until the principal of the Convertible Restated Notes and all
accrued interest is paid in full, to issue 100,000 Primary Warrants for
each $1 million principal amount outstanding under the Convertible
Restated Notes. To cover the period from November 1, 1997 through March
31, 1998, the Company issued five-year warrants to purchase 500,000
shares of the Company's Common Stock to each of George Karfunkel and
Michael Karfunkel, five-year warrants to purchase 625,000 shares to
Laura Huberfeld/Naomi Bodner Partnership and five-year warrants to
purchase 375,000 shares to Huberfeld Bodner Family Foundation
(collectively, the "Primary Warrants"), each Primary Warrant with an
exercise price of $5.00, and each providing for the issuance of one
warrant ("Secondary Warrants") with the same terms and conditions for
each Primary Warrant exercised.
In addition, pursuant to the Private Placement Purchase Agreement, the
Company, in a private transaction exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"), sold for investment Convertible Notes in the amount of $750,000
to each of George Karfunkel and Ace Foundation.
The Convertible Notes and the Convertible Restated Notes are due and
payable on or before August 1, 1998 and accrue interest until maturity
at the rate of 10% per annum and after maturity, at the rate of 15% per
annum. In the event that the principal and all accrued interest on the
Notes have not been paid in full by the maturity date, at the option of
the Note holder, the principal and accrued interest shall be convertible
into shares of Common Stock of the Company at a conversion price equal
to the lesser of $5.00 per share or 80% of the average closing sales
price of the Common Stock during the last five trading days prior to
conversion.
The Company has agreed to include the shares of Common Stock issuable
upon exercise of the Primary Warrants, Secondary Warrants and upon
conversion of the Convertible Notes and Convertible Restated Notes in a
registration statement to be filed for the purpose of permitting the
resale of such shares. If the registration statement is not declared
effective by the Securities and Exchange Commission ("Effective Date")
by June 30, 1998 or September 30, 1998, then the interest rate under the
unpaid Notes increases to 18% and 24% per annum, respectively, until the
Effective Date.
Notwithstanding the foregoing, no conversion of any Convertible Note or
any Convertible Restated Note, and no exercise of any of the Primary
Warrants or Secondary Warrants shall occur if it causes the holder to
then be the "beneficial owner", as defined in Section 13(d) of the
Securities Exchange Act of 1934, as amended, of more than 4.99% of the
then outstanding Common Stock of the Company.
On March 5, 1998, the Company sold for investment 173,913 shares of
Common Stock to Alan R. Dresher and 250,000 shares of Common Stock to
Bulldog Capital Management at a purchase price of $5.75 per share, and
issued five-year warrants to purchase one share of Common Stock for each
ten shares purchased at an exercise price of $7.1875 per share to each
purchaser. The Company also paid $170,625 and issued a five-year
warrant to purchase 42,391 shares of Common Stock at $7.1875 per share
to Alan Baron as a finder's fee.
On March 24, 1998, the Company entered into a Convertible Preferred
Stock Purchase Agreement with JNC Opportunity Fund Ltd. ("JNC"), an
institutional investor, under the terms of which JNC agreed to purchase
up to $15 million in convertible preferred stock of the Company, of
which $5 million was funded on March 24, 1998. The 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 precedent 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 receive five-year warrants to purchase 149,522 shares
of Common Stock at a purchase price of $6.89 per share. The Company
paid a finder's fee of 10% of the gross proceeds of the intial tranche
to Wharton Capital Ltd. ("Wharton"), a New York-based financial
consulting firm and Donald Drum. Wharton Capital also received five-
year warrants to purchase 62,500 shares of Common Stock at a purchase
price of $6.89 per share. The shares issuable upon conversion of the
Preferred Stock and exercise of the Warrants are subject to registration
rights. The purchase of the balance of $10 million is subject tot he
satisfaction of certain conditions. Reference is made to the
Certificate of Designation and the financing documents which are filed
as exhibits to this Annual Report for a complete description of all
terms.
All unregistered securities were issued by the Company in private
transactions exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY
The following selected financial data have been derived from the
Company's consolidated financial statements which have been audited by
Arthur Andersen LLP, independent public accountants. The following data
should be read in conjunction with the Company's consolidated financial
statements and related notes appearing elsewhere in this Report on Form
10-K.
<TABLE>
<CAPTION>
Statement of Operations Data:
Year Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Total revenues $9,811,890 $ 7,073,167 $ 4,757,149 $ 1,606,961 $ 441,341
Operating Expenses
Commissions pass-through
and other direct costs 5,052,205 3,598,952 3,111,946 1,175,918 281,073
Selling, general and
administrative 18,967,189 12,128,111 4,907,527 1,981,171 519,547
Restructuring and Other
Charges: 1,100,000 - - - -
Subscriber Acquisition and
Promotional Costs 12,385,662 114,986 - - -
Operating loss (27,692,986) (8,768,882) (3,302,226) (1,550,128) (359,279)
Loss before extraordinary item (28,786,604) (7,783,713) (3,441,376) (1,721,628) (360,069)
Extraordinary item 0 0 (679,178) 0 0
Net loss $(28,786,604) $(7,783,713) $(4,120,554) $(1,721,628) $(360,069)
Net loss per
common share $(2.81) $(0.76) $(0.74) $(0.57) $(0.16)
Basic and diluted weighted
average common shares
outstanding 10,251,402 10,187,909 5,557,120 3,004,131 2,184,174
<CAPTION>
Balance Sheet Data
At December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $(12,643,491) $13,177,931 $24,131,288 $ 1,053,715 $ 150,820
Total assets 13,594,047 26,394,982 30,083,295 3,990,238 979,773
Subordinated debentures, net
of original issue discounts - - - 2,531,619 -
Accumulated deficit (43,122,580) (14,335,976) (6,552,263) (2,431,709) (710,081)
Total stockholders'
equity (deficit) $ (6,312,978) $19,312,420 $18,049,456 $ (299,539) $414,061
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 is 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. As of March 24, 1998,
the Company was offering, 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 year ended December 31, 1997, agency
commissions were $3.0 million and reseller revenues were $6.3 million.
Since the company has substantially completed its transition to becoming
a reseller, in the future, it will not receive material revenues from
agency commissions.
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.
The Company experienced significant growth in its resale operations in
the latter half of 1997 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 and added a Chief Operating Officer, a Senior Vice President
and other employees in 1997. 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 See "Risk
Factors-Limited History of Losses; Uncertainty of Future Profitability"
and "Need For Additional Financing." 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
YEAR ENDED DECEMBER 31, 1997 COMPARED TO
YEAR ENDED DECEMBER 31, 1996
Revenues
Total revenues for the year ended December 31, 1997 ("1997"), consisting
primarily of subscriber sales, activation commissions and market
development funds, were $9,811,890 as compared to $7,073,167 for the
year ended December 31, 1996 ("1996").
The increased revenues for 1997 are attributable to increased sales of
the Company's Ameritel brand cellular and paging services. Cellular and
paging subscriber revenues amounted to $6,281,825 for 1997 compared to
$29,656 for 1996.
Agency activation commissions, which the Company receives from other
wireless carriers for which it performs activation processing services,
decreased significantly from 1997 to 1996 due to the Company's
transition from agent to reseller. Agency commissions in 1997 were
$2,993,483 as compared to $4,991,461 in 1996. Other operating revenues,
which consisted primarily of market development funds, declined to
$536,582 for 1997 from $2,052,050 for 1996, due in part to the Company's
transition from agent to reseller.
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 $3,375,004 and $11,362 for 1997
and 1996, respectively. The Company did not initiate its reselling
operations until the last quarter of 1996 and thus did not incur any of
the costs relating to the resale operations until the fourth quarter of
1996. The gross margin for subscriber sales was $2,906,821 or 46.3% and
$18,294 or 61.7% for 1997 and 1996, respectively.
Agency commission expenses amounted to $1,357,121 and $3,519,394 for
1997 and 1996, respectively. Such expenses consist primarily of
commissions paid to the Company's mass market distribution channels.
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 and outside sales representatives, below
cost discounts granted to subscribers when purchasing cellular or paging
services, rebates issued to subscribers and certain advertising costs.
Subscriber acquisition and promotional costs amounted to $12,385,662 and
$114,986 for 1997 and 1996, respectively.
Restructuring and other charges include $1.1 million recorded by the
Company in 1997, due to the impairment of certain assets in connection
with the Company's planned transition from agent to reseller.
Selling, general and administrative expenses for 1997 aggregated
$18,967,189 as compared to $12,128,111 for 1996, reflecting the
Company's growth. Salaries and related employee benefits increased by
82% to approximately $7,500,000 for 1997 from $4,122,000 for 1996,
reflecting the Company's hiring of executive, managerial, customer
service and information systems personnel to support its growth.
Telecommunications expense increased by 35% to $1,223,304 for 1997 from
$907,449 for 1996 and billing and credit review services increased by
599% to $383,919 in 1997 from $54,904 in 1996, due, in substantial part,
to increased activity and growth of the reseller business. Depreciation
and amortization for 1997 was $2,404,065 as compared to $1,555,807 for
1996 as the Company incurred additional software development costs and
purchased and placed into service additional communications devices,
cellular and paging displays, computers, computer peripherals and other
capital equipment. Rebate expense increased by $308,333 as the Company
expanded its subscriber base.
Interest expense (net of income) aggregated $1,093,618 in 1997 and
interest income (net of expense) aggregated $985,169 for 1996. The
change to interest expense during 1997 from interest income in 1996 is
related to the decrease in cash and cash equivalents due to the
Company's use of cash and cash equivalents to fund increased operating
expenses and capital expenditures discussed above, and approximately
$1.4 million of interest expense attributable to the fair value of
warrants issued in connection with two financings. See "Liquidity and
Capital Resources."
The Company incurred net losses of $28,786,604 and $7,783,713 for 1997
and 1996, respectively.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO
YEAR ENDED DECEMBER 31, 1995.
Total revenues for the year ended December 31, 1996 ("1996"), consisting
primarily of commissions paid to the Company as a non-exclusive customer
service and activation agent for cellular and paging carriers, were
$7,073,167 as compared to $4,757,149 for the year ended December 31, 1995
("1995").
The 48.7% increase in revenues between 1995 and 1996 is attributable to
several factors. The Company opened approximately 3,000 new activation
centers at retail mass merchandiser locations, including OfficeMax,
Service Merchandise, Meijer, Target Stores, and Montgomery Ward in 1996.
During the fourth quarter, the Company completed installation of its
activation centers in over 90% of OfficeMax locations, 70% of Montgomery
Ward locations and 100% of Meijer and Osco Drug locations, which
permitted these channels of distribution, for the first time, to engage
in chain-wide advertising of cellular products and services on a national
basis. In addition, the 1996 holiday retail sales season was considerably
stronger than in 1995. As a result, Company cellular telephone
activations increased to approximately 15,530 in 1996 (of which 45%
occurred in the fourth quarter) from approximately 13,500 in 1995. Paging
activations, which were initiated in a pilot program in the third quarter
of 1995, increased to 34,736 in 1996 (of which 78% occurred in the fourth
quarter) from 700 in 1995. Other operating revenue, consisting primarily
of market development funds, increased to $2,052,050 for 1996 from
$451,932 for 1995. Market development funds consist of payments or
obligations from carriers and manufacturers for promotional expenditures,
and increased primarily due to increased activity at existing activation
centers, the opening of new retail centers and a significant increase in
promotional advertising activity.
Operating expenses, consisting primarily of commission pass-throughs to
retail mass merchandisers, and selling, general and administrative
expenses, increased to $15,842,049 for 1996 from $8,059,375 for 1995. The
increase was directly related to the expansion of the Company's
operations and the opening of substantial numbers of new cellular and
paging centers.
Commission pass-throughs to retail merchandisers, which average between
70% and 75% of the activation fees paid by cellular carriers to the
Company under agency agreements and approximately 10% of the activation
fees paid by the paging carrier, aggregated $3,530,756 for 1996 as
compared to $3,111,946 for 1995. The 13.5% increase reflects the increase
in the number of cellular telephone and pager activations.
Selling, general and administrative expenses for 1996 aggregated
$12,128,111 as compared to $4,907,527 for 1995 reflecting the Company's
growth. Salaries and related employee benefits increased significantly,
reflecting the Company's expanded hiring of executive, managerial,
customer service and information systems personnel to support its growth.
Increases in the scope and volume of operations resulted in substantial
increases in business travel expenses, telephone service costs, office
expenses and advertising-related costs. Business insurance and franchise
taxes increased primarily due to the increase in the scope of the
Company's operations and its change in status to that of a publicly held
company. Legal and accounting fees increased significantly from 1995 to
1996 due primarily to negotiation of contractual relationships with
retail mass merchandisers, direct marketing response companies and
additional cellular carriers. Fixed assets depreciation and amortization
increased substantially from 1995 to 1996 primarily due to an increase in
capital spending for promotional displays, communications devices,
computers, computer peripherals and software placed into service during
1996.
Interest income, net of interest expense , aggregated $985,169 for 1996
compared to interest expense of $139,150 for 1995, due to the substantial
increase in the Company's cash reserves resulting from the exercise of
its outstanding warrants in November 1995, and the repayment in full in
May 1995 of outstanding debentures in the principal amount of $3,450,000.
As a result of the acceleration of the repayment of this debt, the
remaining unamortized discount and other unamortized debenture related
costs of $679,178 were charged against income as an extraordinary item
for 1995.
The Company incurred net losses of $7,783,713 and $4,120,554 for 1996 and
1995, respectively.
Liquidity and Capital Resources
Working capital deficiency at December 31, 1997 was $12,643,491 compared
to positive working capital of $13,177,931 at December 31, 1996. Cash
and cash equivalents at December 31, 1997 totaled $1,105,530 (of which
$731,500 was restricted) compared to $15,581,244 at December 31, 1996.
There was a Stockholders' deficit of $6,312,978 December 31, 1997
compared to Stockholders' equity of $19,312,420 December 31, 1996. The
decrease in working capital, cash and Stockholders' equity is
attributable to the Company's operating loss in 1997 resulting from the
substantial expansion of its reseller operations. The principal reason
for the increased 1997 losses is attributable to the subscriber
acquisition and promotional costs incurred in connection with the
substantial increase in the size of the Company's reselling subscriber
base directly attributable to increased activity during the fourth
quarter of 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 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.
To date, the Company has funded its operations and growth primarily
through financing activities. As a consequence of the merger with
Trinity Six in May 1995, the Company received cash and cash equivalents
of approximately $9,750,000 of which $3,450,000 was used to repay debt
to private lenders. In November 1995, the Company received net proceeds
of approximately $21,850,000 from the exercise, following a notice of
redemption, of outstanding common stock purchase warrants.
In order to fund its operations and capital requirements in the fourth
quarter of 1997 and the first quarter of 1998, the Company obtained
letter of credit financing in the amount of approximately $3.1 million
from its investment banker, and short term loans totaling $6.0 million
from private individuals (of which $500,000 was repaid in the first
quarter of 1998). In addition, the Company raised approximately $2.4
million from the private sale of Common Stock and $5 million from the
private sale of Convertible Preferred Stock in the first quarter of
1998. Under the terms of the Convertible Stock Purchase Agreement, the
Company will receive an additional $10 million upon the satisfaction of
certain conditions imposed by the investor. The $3.1 million letter of
credit financing is collateralized by Company stock pledged by officers,
directors and other stockholders. The Company is obligated to replace
this collateral with 125% cash or cash equivalent (Treasury Bills) of
approximately $3,825,000. This obligation was due on January 31, 1998
and has been orally extended. In connection with these financings, the
Company issued warrants to the lenders to purchase an aggregate of
1,600,000 shares of Common Stock as of December 31, 1997 at an exercise
price of $6.00 per share. The Company is also in the process of
completing bank financing consisting of a revolving and term loan in the
initial amount of $20 million. Availability under this financing will
be dependent upon meeting certain formulas. There is no assurance and
no representation is made that the bank line will be funded, or that the
funding of the balance of the Preferred Stock will take place.
Based upon the Company's current growth rate, the closing of the bank
line as proposed, of which there can be no assurance, the deferral or
conversion to Common Stock of $5.5 million in bridge loans, the
obtaining of agreements to extend the due dates for payment of certain
short-term obligations and the extension of the $3.1 million letter of
credit until 1999 and the funding of the $10 million Convertible
Preferred Stock private placement, the Company believes that it will be
able to satisfy its capital requirements through 1998. However, there
is no assurance and no representation is made that the Company will be
successful in reaching these objectives. In the event that it is unable
to do so, it will be required to seek other sources of funding and
further restructure the payment schedule of certain short-term
obligations and/or substantially reduce current operations to the extent
that one or more of the foregoing financing sources is not funded.
The Company expects that its capital requirements for 1998, if it were
to execute a plan of current client store expansion to increase
subscriber growth, will require it to obtain additional financing which
may include the sale or issuance of additional equity and debt
securities to one or more strategic investors. The Company also intends
to restructure its short-term debt and to negotiate further deferrals of
certain accounts and commissions payable. There can be no assurance
that the Company will be successful in raising sufficient additional
capital on upon terms acceptable to the Company or that the Company will
be successful in negotiating deferrals of certain of its short term
obligations. In the event that the Company is not successful in
obtaining adequate financing or in restructuring its debt, the Company
will be required to seek other sources of funding and further
restructure the payment schedule for certain short-term obligations
and/or substantially reduce current operations to the extent that one or
more of the foregoing financing sources is not funded. See "Risk
Factors-Need For and Availability of Additional Financing."
Because the Company's cost of expanding its distribution network and
operating business, as well as the Company's revenues, will depend on a
variety of factors (including the ability of the Company to negotiate
additional distribution agreements and increase its penetration of
existing distribution channels, the ability of the Company to negotiate
favorable wholesale prices from carriers, the number of customers and
the services for which they subscribe, the nature and penetration of new
services that may be offered by the Company, regulatory changes and
changes in technology), actual costs and revenues will vary from
expected amounts, possibly to a material degree, and such variations are
likely to affect the Company's future capital requirements.
Accordingly, there can be no assurance that the Company's actual capital
requirements will not exceed the anticipated amounts described above or
that the Company will be successful in obtaining such capital and if so,
on terms satisfactory to the Company. Further, the exact amount of the
Company's future capital requirements will depend upon many factors,
including the extent of competition and pricing of telecommunications
services in its markets, the acceptance of the Company's services and
the development of new products.
INFLATION
To date, inflation has not had any significant impact on the Company's
business.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements for the Years
Ended December 31, 1997, 1996, and 1995 and Notes thereto together with
Auditors' Report comprising a portion of this Annual Report on Form 10-
K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are as follows:
NAME AGE POSITION
Bruce A. Hahn 48 Chairman of the Board; Chief Executive Officer
Mario Martinez 38 President; Chief Operating Officer
Robert J. Kostrinsky 39 Executive Vice President; Treasurer;
Chief Financial Officer
Basil H. Ford 53 Vice President-Corporate Development and
Investor Relations; Secretary
Albert T. Bodamer 35 Senior Vice President-Ameritel Communications
Edgar R. Puthuff(1)(2) 61 Director
Jerome S. Baron(1)(3) 71 Director
Salvatore T. DiMascio(2)(3)58 Director
Stephen E. Pazian 48 Director
- --------------------
(1) Member of the Compensation and Personnel Committee
(2) Member of the Finance Committee
(3) Member of the Audit Committee
Bruce A. Hahn, Chairman of the Board and Chief Executive Officer. Mr.
Hahn has been a director of U.S. Communications, Inc. since its inception
in January 1991, its Chairman since November 1991 and Chief Executive
Officer since December 1992. He has held the same positions with the
Company since the completion of the merger with Trinity Six Inc. in May
1995 (the "Effective Time"). From June 1985 to February 1992, Mr. Hahn
was the Chief Executive Officer, Chairman of the Board, and, from June
1985 to October 1989, and July 1990 to February 1992, President of
International Consumer Brands, Inc., a company engaged in the manufacture
and sale of consumer products. International Consumer Brands filed a
petition for reorganization under Chapter 11 of the federal bankruptcy
laws in April 1992, which is still pending. From April 1984 to June 1985,
Mr. Hahn was Executive Vice President and General Manager of Cosmo
Communications Corp., a manufacturer of consumer communications and
electronics products. From April 1980 to March 1984, Mr. Hahn was
employed by Conair Corporation, a leading manufacturer of personal care
appliances and residential telephone products, first as new products
marketing manager and subsequently as Vice President and General Manager,
Conair Appliance and Electronics Division.
Mario Martinez, President and Chief Operating Officer. Mr. Martinez
joined the Company as President and Chief Operating Officer in August
1997. Mr. Martinez has 14 years experience of general management, sales,
marketing and business development in the wireless and wireline
telecommunications industries. Prior to joining the Company, Mr. Martinez
was President of AT&T Florida, Consumer Markets Division, a division of
AT&T, with overall responsibility for AT&T's core consumer long distance
business throughout the state of Florida. From November 1992 to June
1994, Mr. Martinez was Managing Director, Wireless Markets, for CSC
Intelicom, a division of Computer Sciences Corporation, with
responsibility for marketing wireless products in North America and
Puerto Rico. From October 1990 to November 1992, Mr. Martinez was Vice
President, US Direct Sales, for SkyTel, with responsibility for its
direct sales and telemarketing organization and, from June 1984 to
October 1990, Director, National Accounts Business Development, for
Sprint, Inc.
Robert J. Kostrinsky, Executive Vice President Treasurer and Chief
Financial Officer. Mr. Kostrinsky has been Secretary-Treasurer of U.S.
Communications, Inc. since November 1991 and Executive Vice President
since November 1994. He has been Executive Vice President and Treasurer
of the Company since the Effective Time, was Secretary of the Company
from the Effective Time until July 1996, and became Chief Financial
Officer in April 1996. From April 1987 to July 1992, Mr. Kostrinsky was
Secretary-Treasurer of International Consumer Brands, Inc., which filed a
petition for reorganization under Chapter 11 of the Federal Bankruptcy
Laws in April 1992. Mr. Kostrinsky, a certified public accountant, was
employed from 1981 to April 1987 by the accounting firm of Grant
Thornton. At the time he joined International Consumer Brands, Inc., he
was an audit manager for Grant Thornton.
Basil H. Ford, Vice President - Corporate Development and Investor
Relations. Mr. Ford joined the Company as Vice President - Corporate
Development and Investor Relations in June 1996, and became Secretary of
the Company in July 1996. From 1993 to 1996, Mr. Ford was employed by
Sonoco Products Company, a publicly held multinational packaging company,
serving from 1994 to 1996 as Vice President of Investor Relations. From
1982 until its acquisition by Sonoco Products in 1993, Mr. Ford was
employed by Engraph Inc., a publicly held packaging company, most
recently (1988 to 1993) as Vice President - Investor Relations/Corporate
Development/Strategic Planning.
Albert T. Bodamer, Senior Vice President - Ameritel Communications. Mr.
Bodamer joined the Company in February 1997 as Senior Vice President,
Ameritel Communications, with responsibility for the Company's non-
facilities-based carrier operations. Mr. Bodamer has had substantial
experience in the cellular industry. Prior to joining the Company, Mr.
Bodamer was Vice President and General Manger for the southern New York
region of PriCellular Corp. His previous experience included serving as
general manager for resale and paging services at Rochester, New York
based Frontier Cellular Corp.
Edgar R. Puthuff, Director. Mr. Puthuff has been a director of U.S.
Communications, Inc. since June 1992 and a director of the Company since
the Effective Time. Mr. Puthuff has been Chairman of Puthuff Littleton &
Smith, Inc. (formerly Miller Puthuff Associates, Inc.), a sales/marketing
representative for major accounts such as Kmart Corporation, for more
than 20 years. Mr. Puthuff is also currently a director of General Energy
Corp., and served briefly as director of International Consumer Brands,
Inc.
Jerome S. Baron, Director. Mr. Baron has been a director of U.S.
Communications, Inc. since December 1993 and a director of the Company
since the Effective Time. Mr. Baron is President of Brean Murray & Co.,
Inc., a New York Stock Exchange and American Stock Exchange member firm.
Mr. Baron is also a director of CAS Medical Systems, Inc., a public
company engaged in the manufacture and marketing of blood pressure
monitors and other medical products principally for the neonatal care
market.
Salvatore T. DiMascio, Director. Mr. DiMascio became a director of the
Company in July 1996. Since 1986, Mr. DiMascio has been President of
DiMascio Venture Management, Inc., a management and investment firm.
From June 1994 until June 1997, Mr. DiMascio was Executive Vice President
and Chief Financial Officer of Anchor Gaming, a publicly held diversified
gaming company. From 1978 to 1986, Mr. DiMascio was Senior Vice
President and Chief Financial Officer of Conair Corporation. Mr.
DiMascio is also a director of Fotoball U.S.A., a public company which
develops and manufactures custom sports related products, and H.E.R.C.
Products, Inc., a public company in the water treatment business. Mr.
DiMascio is a certified public accountant.
Stephen E. Pazian, Director. Mr. Pazian became a director of the Company
in December 1997. He is currently the Chief Executive Officer and
President of Edison Enterprises, a division of Edison International
engaged in the provision of various non-regulated products and services.
From 1996 to 1997 Mr. Pazian was President of Ameritech Security
Monitoring Services with responsibility for strategic management and
business development. From 1988 to 1996 Mr. Pazian was an officer at
Bell South Corporation, serving from 1989 to 1996 as President and Chief
Executive Officer of MobileComm., Bell South's paging and voice-messaging
company. From 1986 to 1988, Mr. Pazian was a Vice President, and then
Executive Vice President, at Bell Atlantic Mobile Systems.
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth information
concerning compensation for services in all capacities awarded to,
earned by or paid to the Chief Executive Officer of the Company and the
one other executive officer whose compensation exceeded $100,000 ("named
executive officers") during the fiscal year ended December 31, 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
-------------------------------------
Annual Compensation Awards Payouts
------------------------------------ ------------------------- -------
Other Restricted Securities All
Annual Stock Underlying LTIP Other
Name and Principal Salary Bonus Compensation Awards Options/SARs Payouts Compen-
Position Year ($) ($) ($) ($) (#) ($) sation
- ------------------ ---- ------ ---- ----------- ------- ------------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bruce A. Hahn (1) 1997 245,819 - 18,000 - 35,000 - -
Chairman, President 1996 200,266 - 18,000 - - - -
Chief Executive Officer 1995 158,000 - 18,000 - 118,437 - -
Robert J. Kostrinsky (2) 1997 145,819 - 9,000 - 5,250 - -
Executive Vice 1996 100,266 - 15,000 - - - -
President, Chief 1995 75,000 - 12,000 - 59,217 -
Financial Officer
<FN>
(1) Salary payments include commissions paid pursuant to Mr. Hahn's employment agreement.
Such commissions totaled $45,819, $266 and $0 for the years ended December 31, 1997, 1996
and 1995, respectively. Mr. Hahn has been Chairman and Chief Executive Officer of U.S.
Communications, Inc since its inception and assumed those positions with the Company upon
completion of the Merger with Trinity on May 15, 1995.
(2) Salary payments include commissions paid pursuant to Mr. Kostrinsky's employment
agreement. Such commissions totalled $55,819, $10,266 and $0 for the years ended December
31, 1997, 1996 and 1995, respectively.
</FN>
</TABLE>
The following table sets forth information concerning option grants
and option holdings for the fiscal year ended December 31, 1997 with
respect to the named executive officers.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
% of Total Potential Realizable Value
No. of Options/ at Assumed Annual Rates
Securities SARs of Stock Price Alternative
Underlying Granted to Exercise or Appreciation to (f) & (g)
Options/ Employees Base/Market for Option Term ---------------
SARs in Fiscal Price Expiration --------------- Grant Date
Name Granted(#) Year ($/Sh) Date 5%($) 10%($) Present Value $
(a) (b) (c) (d) (e) (f) (g) (h)
<S> <C> <C> <C> <C> <C> <C> <C>
Bruce A. Hahn 35,000 6.7% 6.00/6.938 10/30/02 99,890 181,055 -
Robert J. Kostrinsky 5,350 1.0% 6.00/6.938 10/30/02 15,269 26,676 -
</TABLE>
The following table sets forth information concerning option exercises
and option holdings for the fiscal year ended December 31, 1997 with
respect to the named executive officers.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value
Realized
(Market
price at Value of Unexercised in-
exercise the-money options at FY-
Shares less Number of Securities End (Market price of
acquired on exercise Underlying Unexercised shares at FY-End ($7.00)
Name exercise(#) price ($) Options at FY-End (1) less exercise price)
- ---------------- ----------- ---------- -------------------------- ---------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bruce A. Hahn - - 153,437 - $413,998 -
Robert J. Kostrinsky - - 59,752 - $194,844 -
</TABLE>
The Company made no Long-Term Incentive Plan Awards during the fiscal
year ended December 31, 1997.
The Company has no defined benefit or actuarial plan.
The Company did not, during the fiscal year ended December 31, 1997,
adjust or amend the exercise price of options previously awarded to the
named executive officers.
Compensation Committee Interlocks and Insider Participation
Lawrence Burstein, a member of the Company's Compensation and Personnel
Committee, until his resignation as a director in September 1997 was an
executive officer of Trinity Six Inc. until the Merger in May 1995.
Compensation of Directors
Non-employee directors currently receive reimbursement of out-of-pocket
expenses, for attendance at each meeting of the Company's Board and any
committee meeting thereof not held in conjunction with a Board Meeting.
Each non-employee director also receives an annual grant of non-
qualified stock options to acquire shares of the Company's Common Stock
in an amount to be determined each year by the entire Board of
Directors. In 1997, each non-employee director received nonqualified
five-year options to purchase 25,000 shares of Common Stock at exercise
prices ranging from $4.25 to $6.25 per share.
Employment Contracts
As a condition to the Merger with Trinity Six Inc., Bruce A. Hahn
entered into a three-year employment agreement with the Company,
effective retroactively to January 1, 1995, and subsequently amended in
January 1996, which provides for an annual base salary of $150,000 in
1995, increasing to $200,000 for 1996 and 1997. As additional
compensation, Mr. Hahn is entitled to receive a commission for the
calendar year ended December 31, 1996 of $1.00 per net wireless
activation (as defined in the agreement ("NWA")) for NWAs in excess of
the first 50,000 and $2.00 per NWA for each NWA in excess of 100,000,
not to exceed $500,000 in that year. Mr. Hahn's additional compensation
for the calendar year ending December 31, 1997 shall be computed in the
same manner as that of calendar 1996, but with no limitation as to the
aggregate amount of commissions payable to Mr. Hahn for that calendar
year. Mr. Hahn receives a monthly car allowance of $1,500 and
reimbursement of business expenses, and is eligible to participate in
any Company sponsored benefit plans. Mr. Hahn also received five-year
options, exercisable at $3.80 per share, to purchase an aggregate of
118,437 shares of the Company's Common Stock, vesting to the extent of
39,479 of such options on December 31, 1995, 1996 and 1997,
respectively.
Robert Kostrinsky's employment agreement with the Company provides for
an annual base salary of $75,000 in 1995, increasing to $90,000 for 1996
and 1997. As additional compensation, Mr. Kostrinsky is entitled to
receive a commission for the year ended December 31, 1996 of $1.00 per
NWA for NWAs in excess of the first 40,000 and $1.50 per NWA for each
NWA in excess of 100,000 not to exceed $200,000 in that year. Mr.
Kostrinsky's additional compensation for the calendar year ending
December 31, 1997 shall be computed in the same manner as that of
calendar 1996, but the aggregate amount of commissions payable to Mr.
Kostrinsky for that calendar year shall not exceed $250,000. Mr.
Kostrinsky receives a monthly car allowance of $750 and reimbursement of
business expenses, and is eligible to participate in any Company
sponsored benefit plans. Mr. Kostrinsky also received five-year
options, exercisable at $3.80 per share, to purchase an aggregate of
59,217 shares of the Company's Common Stock, vesting to the extent of
19,739 of such options on December 31, 1995, 1996 and 1997,
respectively.
The employment contracts of Messrs. Hahn and Kostrinsky terminated
December 31, 1997 and are being renegotiated.
The Company has entered into a three year employment agreement with
Mario Martinez which runs through July 31, 2000 and provides for an
annual base salary of $175,000 in the first year, $200,000 in the second
year and $225,000 in the final year. As additional compensation, Mr.
Martinez is entitled to receive a bonus based on the number of
Activations of cellular telephones (including PCS telephones) and pagers
by subscribers to the Company's Ameritel services and by subscribers to
the services of other carriers for which the Company acts as agent. For
each of the three calendar years ending December 31, 1999, the bonus is
$0.75 per Activation in excess of 50,000 Activations and $1.25 for each
Activation in excess of 100,000 Activations for such year. The bonus in
each year for paging Activations is $0.50 per Activation. The minimum
bonus in each year is $25,000 and the maximum bonus payable is $350,000
in 1997, $700,000 in 1998 and $1,250,000 in 1999. Mr. Martinez also
receives a monthly car allowance of $1,000 and is eligible to
participate in any Company sponsored benefits plans. Mr. Martinez also
received five-year options to purchase 325,000 shares of the Company's
Common Stock at an exercise price of $3.50 share, of which options
covering 150,000 shares became exercisable immediately and options
covering 35,000 shares become exercisable on December 31, 1997. The
options covering the remaining 140,000 shares become exercisable, in
installments of 35,000 shares, on each of December 31, 1998, 1999, 2000
and 2001. Notwithstanding this vesting schedule, for each $2.00 price
increase above the $3.50 exercise price of the options in the Company's
Common Stock as reported on the Nasdaq National Market system, 20% of
the not yet vested options will immediately become exercisable. As of
March 24, 1998, 255,000 options are exercisable. In addition, provided
he is employed by the Company in August 1, 1998 and August 1, 1999, Mr.
Martinez is to receive on each date an option to purchase 25,000 shares
of the Company's Common Stock, exercisable at a price equal to the last
reported sale price of the Common Stock on such date. The agreement
further provides for payment to Mr. Martinez, in the event of a change
of control of the Company (as defined in the agreement) and the
termination of Mr. Martinez' employment within six months prior to or
two years following such change in control, of certain termination
amounts based on his then current annual salary and bonuses earned prior
to termination. In addition, any unvested stock options would vest
immediately.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 24, 1998, based
on information obtained from the persons named below, with respect to
the beneficial ownership of shares of the Company's Common Stock held by
(i) each person known by the Company to be the owner of more than 5% of
the outstanding shares of the Company's Common Stock, (ii) each
director, (iii) each named executive officer, and (iv) all executive
officers and directors as a group:
Name and Address Number of Shares Percentage
of Beneficial Owner Beneficially Owned (1) of Class (2)
- ----------------------------------------------------------------------------
Bruce A. Hahn
6115A Jimmy Carter Blvd.
Norcross GA 1,227,242 (3) 11.3%
Edgar Puthuff 210,520 (4) 2.3%
Jerome S. Baron 115,776 (5) 1.9%
Salvatore T. DiMascio 52,000 (6) *
Stephen E. Pazian 25,000 (7) *
Robert J. Kostrinsky 229,067 (8) 2.1%
Basil H. Ford 27,100 (9) *
Mario H. Martinez 256,000 (10) 2.3%
All directors and executive officers
as a group (eight persons) 2,142,705 (11) 18.7%
- ---------------
* Less than 1%.
(1) Unless otherwise indicated, each beneficial owner has both sole voting and
sole investment power with respect to the shares beneficially owned by such
person, entity or group. The number of shares shown as beneficially owned
include all options, warrants and convertible securities held by such person,
entity or group which are exercisable or convertible within 60 days of March
24, 1998.
(2) The percentages of beneficial ownership as to each person, entity or group
assume the exercise or conversion of all options, warrants and convertible
securities held by such person, entity or group which are exercisable or
convertible within 60 days, but not the exercise or conversion of options,
warrants and convertible securities held by others shown in the table.
(3) Includes 153,437 shares issuable upon the exercise of currently
exercisable options at $3.80 per share (118,437 shares) and $6.00 per share
(35,000 shares) and 110,000 shares held by members of Mr. Hahn's immediate
family.
(4) Includes 93,743 shares issuable upon the exercise of currently exercisable
options, at $4.25 (25,000 shares),$4.43 (39,479 shares), $6.00 (4,264) and
$8.25 (25,000 shares) per share; also includes 54,138 shares held by the
Puthuff Littleton & Smith, Inc. Pension and Profit Sharing Plan, of which Mr.
Puthuff is the trustee, and 20,000 shares issuable upon the exercise of
currently exercisable options at $5.75 per share held by Puthuff Littleton &
Smith, Inc., of which Mr. Puthuff is a principal.
(5) Includes 91,870 shares issuable upon the exercise of currently exercisable
options, at $4.43 (39,479 shares), $4.25 (25,000 shares), $6.00 (2,391
shares) and $8.25 (25,000 shares) per share.
(6) Includes 50,000 shares issuable upon the exercise of currently exercisable
options, at $4.25 (25,000 shares) and $6.75 (25,000 shares) per share.
(7) Includes 25,000 shares issuable upon the exercise of currently exercisable
options, at $6.25 per share.
(8) Includes 64,567 shares issuable upon the exercise of currently exercisable
options at $3.80 (59,217 shares) and $6.00 (5,350 shares) per share.
(9) Includes 10,000 shares issuable upon the exercise of currently exercisable
options at $8.25 per share and 4,000 shares held by members of Mr. Ford's
immediate family.
(10) Includes 255,000 shares issuable upon the exercise of currently
exercisable options at $3.50 per share.
(11) Includes the shares described in footnotes (3) through (10) above.
VOTING AGREEMENT
Simultaneously with the consummation of the Merger on May 15, 1995, the
Company's directors and executive officers and certain other
stockholders entered into a voting agreement (the "Voting Agreement")
which provides that, for a three-year period, each of the parties will
use all reasonable efforts to cause management of the Company to
nominate as directors of the Company one designee of the parties who
were previously affiliates of Trinity and up to six designees of the
other parties to the Voting Agreement and to vote their shares in favor
of the election as directors of such designated nominees. This
agreement terminates on May 15, 1998.
There are no arrangements known to the Company the operation of
which may at a subsequent date result in a change in control of
the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 30, 1997, the Company's wholly owned subsidiary, Ameritel, and
PaineWebber Incorporated ("PaineWebber"), an investment banking firm,
entered into a letter agreement (the "PaineWebber Agreement") pursuant to
which PaineWebber agreed to establish through October 1998 for Ameritel's
account irrevocable standby letter of credit financing in the aggregate
amount of up to $3.75 million for the purpose of enabling Ameritel to
satisfy its security obligations under agreements with RadioShack and
certain cellular service providers from whom it purchases cellular
service for resale. Under the PaineWebber Agreement the Company is
required to pledge, as a condition precedent to the issuance of any
letter of credit by PaineWebber, such number of shares of the Company's
common stock valued at $7.00 per share, as shall equal 125% of the
principal amount of each letter of credit to be issued. The Agreement
further requires the Company to replace any such pledged shares with
cash, U.S. government obligations or other obligations guaranteed by the
U.S. government in the amount of 125% of the aggregate principal amount
of all outstanding letters of credit (i.e. up to $4,718,750) on or prior
to the earlier to occur of the completion of the Company's pending
private placement or January 30, 1998, which date has been orally
extended. In addition, the Company and Ameritel executed guarantees of
each other's obligations under the PaineWebber Agreement.
To provide the shares of Common Stock required to be pledged as
collateral under the PaineWebber Agreement, the Company entered into an
agreement dated as of October 30, 1997 with certain of the Company's
stockholders (the "Stockholders") including Mr. Hahn, Mr. Kostrinsky and
two of the Company's directors, under which the Stockholders agreed to
deposit with the Company an aggregate of 545,045 shares of the Company's
common stock owned by them for delivery, as and when needed, to
PaineWebber. As consideration for this agreement, the Company agreed to
issue to the Stockholders non-qualified five year options to purchase an
aggregate of 54,505 shares of the Company's Common Stock at $6.00 per
share.
As consideration to PaineWebber for providing the letter of credit
financing, the Company issued to PaineWebber a five-year warrant to
purchase up to 600,000 shares of the Company's Common Stock for
investment at a purchase price of $6.00 per share. PaineWebber received
certain registration rights for the for the Common Stock issuable upon
exercise of the warrant.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) FINANCIAL STATEMENTS
USCI, Inc.
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because the conditions
requiring their filing do not exist or the information required thereby
is included in the financial statements filed, including the notes
thereto.
(b) REPORTS ON FORM 8-K
On November 3, 1997, the Registrant filed a report on Form 8-K
disclosing that it had retained an investment bank to act as agent with
respect to a proposed private placement of $15 to $25 million of
convertible preferred securities.
(c) EXHIBITS
NUMBER DESCRIPTION OF EXHIBIT
3.1 Certificate of Incorporation of Trinity Six Inc.(1)
3.2 Certificate of Amendment of Certificate of
Incorporation of Trinity Six Inc. (4)
3.2A Certificate of Designation for Series A Convertible Preferred
Stock (11)
3.3 By-Laws of Registrant (1).
4.1 Form of Certificate evidencing shares of Common
Stock (5).
4.4 Form of Representative's Warrant between the Registrant
and Gaines, Berland, Inc. (1)
10.1 Amended and Restated 1992 Stock Option Plan (6).
10.1A 1997 Stock Option Plan. (7)
10.2 Employment Agreement, dated as of January 1, 1995,
between U.S. Communications, Inc. and
Bruce A. Hahn (3).
10.2A Amendment No. 1 to Employment Agreement, dated as of
January 1, 1996, between U.S. Communications, Inc. and
Bruce A. Hahn (7).
10.3 Employment Agreement, dated as of January 1, 1995,
between U.S. Communications, Inc. and Robert J.
Kostrinsky (3)
10.3A Amendment No. 1 to Employment Agreement, dated as of
January 1, 1996, between U.S. Communications, Inc. and
Robert J. Kostrinsky (7).
10.4 Employment Agreement dated August 1997 between the Registrant
and Mario Martinez (11)
10.5 Lease for premises at 6140-C Northbelt Parkway,
Norcross, Georgia 30017, as amended (3)
10.5A Amendment No. 5 to Lease for premises at 6140 Northbelt
Pkwy., Suites B, C & F and 6115 Jimmy Carter Blvd.,
Suite A, Norcross, Georgia 30071 (7)
10.6 Agreement dated January 26, 1993 between U.S.
Communications, Inc. and OfficeMax, Inc., as
amended (3).
10.7 Agreement dated October 5, 1993 between U.S.
Communications, Inc. and Kmart Corporation (3)
10.13 Employment Agreement dated June 10, 1996
between U.S. Communications, Inc. and Basil H. Ford (7)
10.16 Agreement dated June 30, 1995 between U.S.
Communications, Inc. and QVC, Inc. (5)
10.17 Agreement dated September 13, 1995 between
U.S. Communications, Inc. and Montgomery Ward & Co., Inc.(5)
10.19 Agreement dated June 22, 1995 between U.S.
Communications, Inc. and Meijer, Inc. (5).
10.20 Agreement dated October 18, 1995 between U.S. Paging
Services, Inc. and Fingerhut Corporation (5).
10.21 Fourth Amendment to Lease for premises at 6140-C
Northbelt Parkway, Norcross, Georgia 30017 (5)
10.22 Agreement dated June 19, 1995 between U.S.
Communications, Inc. and GTE (7)
10.27 Agreement dated February 1996 between U.S. Paging
Services, Inc. and American Drug Stores, Inc. (7)
10.28 Agreement dated October 1996 between Ameritel
Communications, Inc. and GTE Mobilenet Service Corp. (7)
10.29* Agreement between Ameritel Communications, Inc. and Sun
Television and Appliances, Inc. dated August 29, 1997.(9)
10.30* Agreement between Ameritel Communications, Inc. and CompUSA
dated September 30, 1997.(9)
10.31* Agreement between Ameritel Communications, Inc. and Cable &
Wireless, Inc. dated September 1997 and Addendum No. 1
thereto dated October 15, 1997.(9)
10.32* Agreement between Ameritel Communications, Inc. and
RadioShack, a division of Tandy Corporation, effective as of
October 1, 1997 and Amendment 1 thereto effective as of
November 21, 1997.(9)
10.33* Agreement between Ameritel Communications, Inc. and Ritz
Camera Centers, Inc. dated November 21, 1997.(9)
10.34 Agreement between the Registrant and PaineWebber dated
October 30, 1997.(9)
10.35 Stock Option Agreements dated as of October 30, 1997 with
certain stockholders of the Registrant.(9)
10.36 Warrant Agreement dated October 30, 1997 between the
Registrant and PaineWebber.(9)
10.37 Shareholder Collateral Agreement dated as of October 30,
1997. (9)
10.38 Warrant issued by the Registrant to Alan R. Dresher.(9)
10.39 Promissory Note issued by the Registrant to Alan R.
Dresher. (9)
10.40 Warrant issued by the Registrant to Decameron Partners.(9)
10.41 Promissory Note issued by the Registrant to Decameron
Partners.(9)
10.42 Warrant issued by the Registrant to Alan Baron. (9)
10.43 Warrant dated February 2, 1998 issued by the Registrant to
Decameron Partners, Inc.(10)
10.44 Warrant dated February 2, 1998 issued by the Registrant to
Alan R. Dresher.(10)
10.45 Warrant dated February 2, 1998 issued by the Registrant to
Alan Baron.(10)
10.46 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.(10)
10.47 Convertible Restated Note dated February 24, 1998 issued by
the Registrant in favor of George Karfunkel.(10)
10.48 Convertible Restated Note dated February 24, 1998 issued by
the Registrant in favor of Michael Karfunkel.(10)
10.49 Convertible Restated Note dated February 24, 1998 issued by
the Registrant in favor of Laura Huberfeld/Naomi Bodner
Partnership.(10)
10.50 Convertible Restated Note dated February 24, 1998 issued by
the Registrant in favor of Huberfeld Bodner Family
Foundation, Inc.(10)
10.51 Warrant dated February 24, 1998 issued by the Registrant to
George Karfunkel.(10)
10.52 Warrant dated February 24, 1998 issued by the Registrant to
Michael Karfunkel.(10)
10.53 Warrant dated February 24, 1998 issued by the Registrant to
Laura Huberfeld/Naomi Bodner Partnership.(10)
10.54 Warrant dated February 24, 1998 issued by the Registrant to
Huberfeld Bodner Family Foundation, Inc.(10)
10.55 Convertible Note dated February 24, 1998 issued by the
Registrant in favor of George Karfunkel.(10)
10.56 Convertible Note dated February 24, 1998 issued by the
Registrant in favor of Ace Foundation.(10)
10.57 Warrant dated March 5, 1998 issued by the Registrant to Alan
R. Dresher.(10)
10.58 Warrant dated March 5, 1998 issued by the Registrant to
Bulldog Capital Management.(10)
10.59 Warrant dated March 5, 1998 issued by the Registrant to Alan
Baron. (10)
10.60 Convertible Preferred Stock Purchase Agreement between the
Registrant and JNC Opportunity Fund Ltd. dated March 24, 1998(11).
10.61 Registration Rights Agreement dated March 24, 1998 between
the Registrant and JNC Opportunity Fund, Ltd. (11)
10.62 Escrow Agreement dated March 24, 1998 among the Registrant,
JNC Opportunity Fund, Ltd. and Robinson Silverman Pearce Aronsohn &
Berman LLP (11)
10.63 Warrant dated March 24, 1998 granted by the Registrant to
JNC Opportunity Fund Ltd. (11)
10.64 Warrant dated March 24, 1998 granted by the Registrant to
Wharton Capital Partners, Ltd. (11)
11 Computation of Earnings per Share (11)
21.1 Subsidiaries of Registrant (11)
23.1 Consent of Arthur Andersen LLP (11)
27 Financial Data Schedule (11)
- ----------------------------
(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 Exhibit C of Trinity's Proxy
Statement dated April 17, 1995.
(3) Incorporated by reference to an Exhibit filed as part of the
Registrant's Registration Statement on Form S-1 on Form S-4 (File
No. 33-88828).
(4) Incorporated by reference to an Exhibit to the Registrant's
Transition Report on Form 10-K for the Transition Period from
October 1, 1994 to May 14, 1995.
(5) Incorporated by reference to an Exhibit filed as part of
Post-Effective Amendment No. 1 on Form S-3 to the Registrant's
Registration Statement on Form S-1 on Form S-4 (File No. 33-88828).
(6) Incorporated by reference to an Exhibit filed as part of the
Registrant's Registration Statement on Form S-8 (File No. 333-16291).
(7) Incorporated by reference to an Exhibit filed as part of the Registrant's
Registration Statement on Form S-8 (File No. 333-37329).
(8) Incorporated by reference to an Exhibit filed as part of the Registrant's
Form 10-K for the period ended December 31, 1996.
(9) Incorporated by reference to an Exhibit filed as part of the Registrant's
Form 8-K dated and filed on January 13, 1998.
(10) Incorporated by reference to an Exhibit filed as part of the Registrant's
Form 8-K dated and filed on March 12, 1998.
(11) Filed herewith.
* PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT
<PAGE>
USCI, Inc.
and Subsidiaries
Consolidated Financial Statements
for the Years Ended December 31, 1997, 1996, and 1995
Together With
Auditors' Report
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
USCI, Inc.:
We have audited the accompanying consolidated balance sheets of USCI, INC. (a
Delaware corporation) AND SUBSIDIARIES as of December 31, 1997 and 1996 and
the related consolidated statements of operations, stockholders' (deficit)
equity, and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of USCI, Inc. and subsidiariesas
of December 31, 1997 and 1996 and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 9 to the
financial statements, the Company has suffered recurring losses from
operations, has a net capital deficiency and has not yet obtained sufficient
financing commitments to support the current or anticipated level of
operations. These matters raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these
matters, including financing commitments obtained to date, are also described
in Note 9. The financial statements do not include any adjustments relating
to the recoverability and classification of asset carrying amounts or the
amount and classification of liabilities that might result should the Company
be unable to continue as a going concern.
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 26, 1998
<PAGE>
USCI, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents, including restricted
cash of $731,500 in 1997 and $0 in 1996 $ 1,105,530 $15,581,244
Accounts receivable--trade, net of allowances of
$1,250,000 in 1997 and $437,000 in 1996 4,895,952 2,581,251
Accounts receivable--other, net of allowances of
$137,000 in 1997 and $0 in 1996 1,102,084 1,680,112
Inventory 25,458 351,652
Prepaid expenses 134,510 66,234
------------ ------------
Total current assets 7,263,534 20,260,493
PROPERTY AND EQUIPMENT, net 3,422,476 4,829,621
OTHER ASSETS 2,908,037 1,304,868
------------ ------------
$13,594,047 $26,394,982
============ =============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Notes payable $ 3,305,000 $ 0
Commissions payable 6,651,597 1,779,733
Accounts payable 3,939,212 2,886,772
Accrued expenses 4,315,161 1,015,583
Promotional deposits 1,696,055 1,400,474
------------ ------------
Total current liabilities 19,907,025 7,082,562
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' (DEFICIT) EQUITY:
Preferred stock, $.01 par value; 5,000 shares authorized,
no shares issued or outstanding in 1997 and 1996 0 0
Common stock, $.0001 par value; 100,000,000 shares
authorized; 10,267,309 shares issued at December 31,
1997 and 10,225,746 shares issued at December 31, 1996 1,027 1,023
Additional paid-in capital 33,714,625 33,675,423
Warrants 3,122,000 0
Accumulated deficit (43,122,580) (14,335,976)
Treasury stock, at cost, 5,500 shares in 1997 and 1996 (28,050) (28,050)
------------ -------------
Total stockholders' (deficit) equity (6,312,978) 19,312,420
------------ -------------
$13,594,047 $26,394,982
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
<PAGE>
USCI, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -------------
REVENUES:
<S> <C> <C> <C>
Subscriber sales $ 6,281,825 $ 29,656 $ 0
Activation commissions 2,993,483 4,991,461 4,305,217
Other operating revenue 536,582 2,052,050 451,932
-------------- -------------- -------------
Total revenues 9,811,890 7,073,167 4,757,149
============== ============= =============
COST OF SALES:
Cost of subscriber sales 3,375,004 11,362 0
Cost of agency commissions 1,357,121 3,519,394 3,111,946
Cost of other operating revenue 319,900 68,196 39,902
-------------- -------------- -------------
Total cost of sales 5,052,025 3,598,952 3,151,848
-------------- -------------- -------------
GROSS MARGIN 4,759,865 3,474,215 1,605,301
SELLING, GENERAL, AND ADMINISTRATIVE 18,967,189 12,128,111 4,907,527
SUBSCRIBER ACQUISITION AND PROMOTIONAL COSTS 12,385,662 114,986 0
RESTRUCTURING AND OTHER CHARGES (Note 6) 1,100,000 0 0
-------------- -------------- -------------
OPERATING LOSS (27,692,986) (8,768,882) (3,302,226)
-------------- -------------- -------------
INTEREST (EXPENSE) INCOME:
Interest income 353,187 1,001,337 276,770
Interest expense and amortization of debt
discounts and deferred financing costs (1,446,805) (16,168) (415,920)
-------------- -------------- -------------
Total interest (expense) income (1,093,618) 985,169 (139,150)
-------------- -------------- -------------
LOSS BEFORE BENEFIT FOR INCOME TAXES
AND EXTRAORDINARY ITEM (28,786,604) (7,783,713) (3,441,376)
BENEFIT FOR INCOME TAXES 0 0 0
------------- ------------- -------------
LOSS BEFORE EXTRAORDINARY ITEM (28,786,604) (7,783,713) (3,441,376)
EXTRAORDINARY ITEM, loss on early
extinguishment of subordinated debentures 0 0 (679,178)
------------- ------------- --------------
NET LOSS $(28,786,604) $ (7,783,713) $(4,120,554)
============= ============= ===============
BASIC AND DILUTED LOSS PER SHARE:
Loss before extraordinary item $(2.81) $(0.76) $(0.62)
Extraordinary item 0.00 0.00 (0.12)
------------- ------------- ---------------
Basic and diluted net loss per share $(2.81) $(0.76) $(0.74)
============= ============= ===============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted 10,251,402 10,187,909 5,577,120
============= ============= ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
USCI, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
Common Stock Additional
-------------------- Paid-In Accumulated Treasury
Shares Amount Capital Warrants Deficit Stock Total
--------- -------- ------------ ---------- ------------ ------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 3,244,075 $ 325 $ 2,071,845 $ 60,000 $(2,431,709) $ 0 $ (299,539)
Issuance of common stock and
warrants in connection with
issuance of subordinated
debentures 5,925 6 26,244 2,500 0 0 28,750
Merger of Trinity Six, Inc. and
U.S. Communications, Inc. 3,030,278 297 9,377,495 0 0 0 9,377,792
Reclassification of common stock
subject to rescission (3,250,000) (325) (10,829,159) 0 0 0 (10,829,484)
Sale of shares subject to
rescission 528,229 53 1,758,950 0 0 0 1,759,003
Purchase of treasury stock 0 0 0 0 0 (28,050) (28,050)
Issuance of common stock upon
exercise of warrants 87,525 8 312,718 (1,400) 0 0 311,326
Issuance of common stock from
call of Class A and
Class B warrants 3,818,464 382 21,910,930 (61,100) 0 0 21,850,212
Net loss 0 0 0 0 (4,120,554) 0 (4,120,554)
---------- ------ ------------ --------- ----------- ------- ------------
BALANCE, December 31, 1995 7,464,496 746 24,629,023 0 (6,552,263) (28,050) 18,049,456
Exercise of stock options 39,479 4 37,311 0 0 0 37,315
Expiration of recession rights 2,721,771 273 9,086,056 0 0 0 9,086,329
Costs associated with prior
year stock offering 0 0 (76,967) 0 0 0 (76,967)
Net loss 0 0 0 0 (7,783,713) 0 (7,783,713)
------------ ------ ------------ --------- ----------- ------- -------------
BALANCE, December 31, 1996 10,225,746 1,023 33,675,423 0 (14,335,976) (28,050) 19,312,420
Exercise of stock options 41,563 4 39,202 0 0 0 39,206
Warrants issued in connection
with letter of credit 0 0 0 1,243,000 0 0 1,243,000
Warrants issued in connection
with debt financings 0 0 0 1,879,000 0 0 1,879,000
Net loss 0 0 0 0 (28,786,604) 0 (28,786,604)
------------ ------ ------------ --------- ----------- ------- ------------
BALANCE, December 31, 1997 10,267,309 $1,027 $33,714,625 $3,122,000 $(43,122,580) $(28,050) $(6,312,978)
=========== ======= =========== =========== ============= ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
USCI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $(28,786,604) $ (7,783,713) $ (4,120,554)
------------- ------------- -------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,404,065 1,555,807 844,839
Amortization of discount on notes payable 1,184,000 0 0
Amortization of deferred financing costs 207,000 0 0
Provision for losses on accounts receivable 950,351 253,029 170,055
Loss on disposal of fixed assets 0 74,150 0
Extraordinary item--loss on early extinguishment
of debentures 0 0 679,178
Restructuring and other special charges 1,100,000 0 0
Changes in operating assets and liabilities:
Accounts receivable:
Trade (3,777,701) (1,326,509) (1,129,175)
Other 441,028 (1,084,941) (459,507)
Inventory 326,195 (351,652) 0
Prepaids and other assets 96,024 (687,549) 97,663
Commissions payable 4,871,864 526,946 337,364
Accounts payable and accrued expenses 4,302,018 2,430,163 649,990
Promotional deposits 295,581 1,115,874 201,998
------------ ------------ -------------
Total adjustments 12,400,425 2,505,318 1,392,405
------------ ------------ -------------
Net cash used in operating activities (16,386,179) (5,278,395) (2,728,149)
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including capitalized and
purchased software (2,128,741) (4,028,898) (2,512,170)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 4,000,000 0 9,377,792
Proceeds realized through merger with Trinity
Six, Inc., net of costs 0 0 100,000
Repayment of subordinated debentures 0 0 (3,450,000)
Exercise of stock options 39,206 37,315 0
Issuance of stock upon exercise of warrants 0 0 22,161,538
Purchase of treasury stock 0 0 (28,050)
Cost associated with prior year stock offering 0 (76,967) 0
------------- ------------ -------------
Net cash provided by (used in)
financing activities 4,039,206 (39,652) 28,161,280
------------- -------------- -------------
NET (DECREASE) INCREASE IN CASH (14,475,714) (9,346,945) 22,920,961
CASH AND CASH EQUIVALENTS, beginning of year 15,581,244 24,928,189 2,007,228
------------- ------------- ---------------
CASH AND CASH EQUIVALENTS, end of year $ 1,105,530 $15,581,244 $24,928,189
============= ============= ==============
SUPPLEMENTAL INFORMATION:
Interest paid $ 0 $ 0 $ 276,770
============= ============== ==============
Financing activities:
Reclassification of 2,721,771 shares of
common stock that were previously
subject to rescission $ 0 $ 9,086,329 $ 0
============= ============= ===============
Warrants issued in connection with
letter of credit $ 1,243,000 $ 0 $ 0
============= ============== ===============
Warrants issued in connection with
debt financings $ 1,879,000 $ 0 $ 0
============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
USCI, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
1. NATURE OF BUSINESS
Trinity Six, Inc. ("Trinity") was incorporated in the state of Delaware on
September 16, 1992 to serve as a vehicle to effect a merger, exchange of
capital stock, asset acquisition, or other similar business combination
with an operating business. All activity of Trinity since incorporation
related to its formation, fund-raising, and search to effect a business
combination. In 1993, Trinity received net proceeds of $9,981,000 (after
deduction of underwriting and offering expenses) from an offering of
1,916,667 units, each of which consisted of one share of Trinity's common
stock and two redeemable warrants.
On May 15, 1995, Trinity completed a merger (the "Merger") with U.S.
Communications, Inc., a privately held Delaware company incorporated in
1991. Under the terms of the Merger each outstanding share of U.S.
Communications, Inc. stock was exchanged for approximately .79 share of
Trinity stock. In connection therewith, Trinity issued 3,250,000 shares
of its common stock in exchange for all of the issued and outstanding
shares of U.S. Communications, Inc. As a result of the Merger, U.S.
Communications, Inc. became a wholly owned subsidiary of Trinity and
Trinity's certificate of incorporation was amended as of the effective
date of the Merger to change Trinity's name to USCI, Inc. All references
to the "Company" include U.S. Communications, Inc. and its subsidiaries
prior to the Merger and USCI, Inc. and its subsidiaries subsequent to the
Merger. The Merger has been accounted for as a recapitalization of U.S.
Communications, Inc. All costs incurred in connection with the Merger in
1995 were charged to equity as a reduction of additional paid-in capital.
Such costs amounted to $596,290.
Prior to the fourth quarter of 1996, the Company was a nationwide agent
for companies providing cellular and paging communication services. The
Company offered the services of a particular carrier at client customers
throughout the United States and Puerto Rico. The Company's contracted
retail clients serve to solicit orders for cellular telephone and pager
activations at client store locations and provide credit approvals if
necessary. The Company provided the order processing and credit approval
services for the carriers under agreements with terms ranging from one to
three years with automatic renewals.
Beginning fourth quarter of 1996, the Company began reselling cellular and
paging services to subscribers via reselling agreements with carriers
through its wholly-owned subsidiary, Ameritel Communications, Inc. The
subscribers are obtained through existing retail channels and through new
"store within a store" kiosks that stock and sell products to the
consumer.
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation .
REVENUE RECOGNITION
Revenues from subscriber sales are recorded for charges to customers for
monthly access, cellular and paging airtime, roaming and long distance as
such services are rendered.
The Company recognizes an activation commission pursuant to the activation
of cellular and paging devices with a contracted carrier at a contracted
amount per activation. The Company simultaneously recognizes a related
commission pass-through expense at a contracted amount per activation.
The Company reserves a portion of these commission revenues for estimated
chargebacks to the Company arising from deactivations of cellular and
paging devices by customers during specified contract periods. This
reserve is reflected as a reduction of trade accounts receivable in the
accompanying consolidated balance sheets.
CASH AND CASH EQUIVALENTS
The Company considers all higher liquid investments with original
maturities of three months or less to be cash equivalents. Included in
cash and cash equivalents at December 31, 1997 was $731,500 of
certificates of deposit restricted to cover letters of credit required as
security by cellular carriers.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
The estimated useful lives are five years for equipment and furniture and
fixtures and the shorter of the useful life or lease term for leasehold
improvements. Property and equipment, at cost, consist of the following
at December 31, 1997 and 1996:
1997 1996
---------- -----------
Equipment $3,282,023 $2,880,169
Furniture and fixtures 212,408 187,424
Promotional displays 3,578,002 2,945,199
Leasehold improvements 644,573 693,524
----------- ------------
7,717,006 6,706,316
Less accumulated depreciation (4,294,530) (1,876,695)
----------- ------------
Property and equipment, net $3,422,476 $4,829,621
=========== ============
Promotional displays consist of freestanding structures at retail
locations that house an automatic dial phone, cellular and paging
information which aids in attracting and assisting customers selecting
cellular and paging service, and fax machines at selected locations. The
Company retains ownership of the promotional displays and capitalizes the
displays at cost. The displays are depreciated using the straight-line
<PAGE>
method over three years. The Company capitalized $354,987 and $1,842,090
for promotional displays in the years ended December 31, 1997 and 1996,
respectively, and depreciation expense on the promotional displays was
$734,096, $728,105 and $151,959 in 1997, 1996 and 1995, respectively.
Additionally, during 1997 the Company recorded a write-down of promotional
displays of $400,000 in connection with the Company's review of its agency
assets (Note 6).
OTHER ASSETS
Other assets at December 31, 1997 and 1996 consisted of the following:
1997 1996
---------- -----------
Systems development costs and
purchased software, net $1,480,817 $1,135,810
Deferred financing costs (Note 5) 1,036,000 0
Deposits 233,534 39,058
Deferred costs 141,537 130,000
Other 16,149 0
----------- -----------
$2,908,037 $1,304,868
=========== ===========
Systems development costs include capitalized costs of internally
generated software for internal use relating to the Company's cellular
activation system network projects. The capitalized amounts consist of
costs incurred after the design phases of the software projects are
complete and technological feasibility has been determined based on a
detailed system design. Systems development costs and purchased software
are amortized on a straight-line basis over the estimated remaining
economic life of the software of five years. Amortization expense was
$386,522, $218,354, and $91,824 in 1997, 1996, and 1995, respectively. As
of December 31, 1997 and 1996, accumulated amortization was $750,511 and
$363,989, respectively .
PROMOTIONAL DEPOSITS
Promotional deposits consist of obligations to various retailers to
provide partial reimbursement of advertising costs. Such obligations
generally require the retailer to seek USCI, Inc. approval of the
advertisement prior to placement.
RESEARCH AND DEVELOPMENT
Costs incurred on research and development activities related to
internally developed software before technological feasibility has been
determined are expensed as incurred. Research and development expense
included in selling, general, and administrative expenses was $129,592,
$110,222, and $87,062 for the years ended December 31, 1997, 1996, and
1995, respectively.
SUBSCRIBER ACQUISITION AND PROMOTIONAL COSTS
Subscriber acquisition costs and promotional costs include costs incurred
to acquire subscribers, including commissions, discounts given to
consumers for reduced airtime and other promotions, and advertising.
<PAGE>
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share," effective for fiscal years ending after December 15, 1997.
The Company has adopted the new guidelines for the calculation and
presentation of earnings per share, and all prior periods have been
restated. Basic earnings per share are based on the weighted average
number of shares outstanding. For 1996 and 1995, weighted average shares
include shares that were subject to recision (Note 5). 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements as well as reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
LONG-LIVED ASSETS
The Company periodically evaluates the carrying values of its long-lived
assets, such as property and equipment and systems development costs, to
determine whether any impairments are other than temporary. Management
believes the long-lived assets in the accompanying balance sheets are
appropriately valued.
SIGNIFICANT CONCENTRATIONS
Certain customers made up greater than 10% of the Company's total revenues
during 1997, 1996, and 1995. During 1997, one customer accounted for 57%
of activation commission revenues, or 17% of total revenues.
Additionally, for the year ended December 31, 1997, approximately 60% of
subscriber revenue was attributable to one merchandiser's activations with
the Company. The Company has a contractual relationship with the
merchandiser, which may be terminated by either party upon giving 90 days
notice. Termination of this relationship could have a material adverse
impact on the Company's ability to expand its subscriber base.
Furthermore, a substantial portion of the merchandisers activations relate
to subscribers located in one metropolitan area. At December 31, 1997,
receivables from subscribers in that metropolitan area approximated 22% of
total trade receivables. During 1996, two customers accounted for 22% of
total revenues. During 1995, one customer accounted for 32% of the
Company's total revenues.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Under
SOP 98-1, computer software costs incurred in the preliminary project
stage are expensed as incurred. Additionally, specified upgrades and
enhancements may be capitalized; however, external costs related to
maintenance, unspecified upgrades, and enhancements should be recognized
as expense over the contract period on a systematic basis. Internal costs
<PAGE>
incurred for maintenance should be expensed as incurred. SOP 98-1 is
effective for the Company's fiscal year beginning January 1, 1999. In the
opinion of management, the adoption of SOP 98-1 will not have a material
effect on the Company.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
3. EXTRAORDINARY ITEM
Of the net proceeds made available through the Merger, $3,450,000 was used
to repay in full the outstanding subordinated debentures of USCI, Inc.
(Note 5). As a result of the acceleration of the repayment of this debt,
the remaining unamortized discount and other unamortized bond related
costs of $679,178 have been charged against income as an extraordinary
item during the year ended December 31, 1995.
4. NOTES PAYABLE
On November 18, 1997, the Company obtained an unsecured loan in the amount
of $4,000,000 from two individuals, both of whom are also company
stockholders. The loan bears interest at 8.5% per annum and was payable
on December 31, 1997. As additional consideration for the loan, the
Company issued to each of the lenders a five-year warrant exercisable to
purchase up to 400,000 shares of common stock at an exercise price of
$6.00 per share. On December 30, 1997, the Company issued to each of the
lenders an additional five-year warrant to purchase 200,000 shares of
common stock at $6.00 per share in consideration of the lenders' extension
of the due date of the loans until January 31, 1998. The Company also
agreed that for each share of common stock acquired upon the exercise of
the warrants ("Primary Warrants"), the Company will issue an additional
warrant ("Secondary Warrants") to purchase one share of common stock at an
exercise price equal to (a) the conversion price of the Company's
convertible preferred stock being offered in a pending private placement,
or (b) $7 if the private placement has not been completed. The Company
further agreed to issue additional warrants to purchase 400,000 shares of
Common Stock on these same terms and conditions, for each month or portion
thereof in which the indebtedness to the lenders remains unpaid after
January 31, 1998.
The values of the warrants issued in November and December were determined
to be $1,184,000 and $695,000, respectively, based on the relative fair
value of the warrants to the debt. A corresponding amount of the proceeds
that has been allocated to the warrants has been accounted for as a debt
discount and is being amortized over the life of the related debt. At
December 31, 1997, the unamortized debt discount amounted to $695,000.
RESTATED NOTES AND DEBT ISSUED SUBSEQUENT TO YEAR END
On January 31, 1998, pursuant to the terms of the above agreement, the
Company issued warrants to purchase an additional 400,000 shares of common
stock. On February 24, 1998, the 1,600,000 warrants issued in November
1997, December 1997 and January 1998 together with the $4,000,000 in notes
payable were cancelled and rescinded. Concurrently, the Company issued
$4,000,000 in restated notes ("Restated Notes") along with 1,600,000
Primary and Secondary Warrants each with an exercise price of $5.00 per
share. The Restated Notes mature August 1, 1998 ("Maturity") and bear
<PAGE>
interest at 8%, payable at Maturity. In addition, the Company sold
additional notes ("New Notes") in the amount of $1,500,000. The New Notes
also mature August 1, 1998 ("Maturity"), but bear interest at 10%. The
Restated Notes and the New Notes are hereafter referred to as the "Notes".
In the event the Notes are not paid in full by Maturity, the Notes begin
accruing interest at 15% and become convertible into shares of the
Company's Common Stock at the lesser of $5.00 per share or 80% of the
average closing price during the five days of trading prior to the
conversion.
In addition to the 1,600,000 Primary and Secondary Warrants issued with
the Restated Notes, the Company has agreed, for each month or portion
thereof, from March 1, 1998 until all principal and interest due under the
Restated Notes are paid in full, to issue 100,000 Primary Warrants for
each $1,000,000 principal amount outstanding under the Restated Notes.
The Company also agreed to include the shares of common stock issuable
upon the exercise of the Primary Warrants, Secondary Warrants and upon
conversion of the Notes (in the event the Notes are not paid by Maturity)
in a registration statement to be filed for the purpose of permitting the
resale of such shares. If the registration statement is not declared
effective by the Securities and Exchange Commission ("Effective Date") by
June 30, 1998 or September 30, 1998, then the interest rate under the
unpaid Notes increases to 18% and 24%, respectively, until the Effective
Date.
On January 2, 1998 and January 5, 1998, the Company obtained two unsecured
loans, each in the amount of $250,000. Each loan bears interest at 10%
per annum and is payable upon the earlier to occur of February 28, 1998 or
the completion of a pending private placement of convertible preferred
stock. In connection with the issuance of the loans, the Company issued
to each party five-year warrants to purchase 75,000 shares of common stock
at $6.00 per share. In addition, the Company issued five-year warrants to
purchase 25,000 shares of common stock to a related party as a finder's
fee. Additionally, the lender of one of the $250,000 loans is a related
party. On February 2, 1998, the Company issued two additional five-year
warrants to purchase 50,000 shares of common stock at $6.00 per share in
consideration of the lenders' extension of the due dates to February 28.
The loans were paid in full with the proceeds of the March 5, 1998 equity
offering (Note 5). The Company also issued a five-year warrant to
purchase 25,000 shares of common stock at $6 per share to a related party
as consideration for assistance in obtaining the extension of the loans.
5 . STOCKHOLDERS' (DEFICIT) EQUITY
PRIVATE PLACEMENT DEBT AND EQUITY OFFERINGS
On March 16, 1994, the Company authorized a private placement of 20 units,
each consisting of one $100,000 10% subordinated debenture (the
"Debentures") and 3,950 shares of common stock. On November 14, 1994, the
Company authorized an additional private placement up to 25 units, each
unit to consist of one $100,000 Debenture, 5,925 shares of common stock,
and warrants to purchase 3,950 shares of common stock at any time during
the two-year period commencing November 15, 1994 at a price of $3.80.
During 1994, the Company received gross proceeds of $3,350,000 in three
tranches from the sale of 33.5 units of the Debentures. On January 6,
1995, the Company received gross proceeds of $100,000 from the sale of the
remaining unit of the placement authorized by the Company on November 14,
1994. Pertinent details relating to the sale of these units are as
follows:
<PAGE>
<TABLE>
<CAPTIOM>
April August December January
1994 1994 1994 1995
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Number of units sold 5 4.5 24 1
Face value of debentures sold $500,000 $450,000 $2,400,000 $100,000
Number of shares of common stock issued 19,750 26,663* 142,200 5,925
Number of warrants issued to
purchase one share of common stock 0 17,775* 94,800 3,950
Exercise price per share of
warrants issued N/A $3.80* $3.80 $3.80
Allocation of proceeds:
Debentures, net of discount $387,500 $348,750 $1,710,000 $ 71,250
Common stock 112,500 101,250 630,000 26,250
Warrants 0 0 60,000 2,500
--------- --------- ----------- ----------
$500,000 $450,000 $2,400,000 $100,000
<FN>
*In December 1994, the Company issued an aggregate of 26,663 shares of
common stock and 17,775 $3.80 warrants to the investors who purchased
Debentures in August 1994 in exchange for 35,550 $5.70 warrants originally
issued to those investors.
</FN>
</TABLE>
The Company recorded the fair value of the equity components of the
Debentures as original issue discounts which are amortized over the life
of the related debt component of the Debenture using the effective
interest rate method. The Company amortized $254,985 of these original
issue discounts as interest expense during 1995 prior to repaying the debt
from proceeds available through the Merger.
Costs of $177,054 incurred in connection with the sale of the Debentures
were allocated to the debt and equity components of the Debentures based
on their relative values. Costs relating to the debt component of the
Debentures were amortized over the life of the debt. The Company
amortized $36,049 of costs relating to the debt component of the
Debentures as interest loss during 1995 prior to repaying the debt from
proceeds available through the Merger.
On May 15, 1995, the Company repaid the amount outstanding on the
Debentures of $3,450,000 with the proceeds made available through the
Merger. The remaining unamortized original issue discount and unamortized
deferred debt financing costs of $679,178 have been recorded as an
extraordinary loss in the accompanying financial statements.
In November 1995, the Company issued 3,818,464 shares of common stock upon
the exercise of redeemable warrants held by Trinity stockholders. These
redeemable warrants were offered and sold to the public in August 1993 as
part of Trinity's initial public offering. The warrants exercised
consisted of 1,906,967 Class A redeemable common stock purchase warrants
and 1,911,497 Class B redeemable common stock purchase warrants,
exercisable at $5.50 and $6, respectively. The Company received proceeds
of $21,850,212, net of related expenses.
EQUITY OFFERINGS SUBSEQUENT TO YEAR-END
On March 5, 1998, the Company, in two private transactions, sold 423,913
shares of common stock at a purchase price of $5.75 per share and issued
five-year warrants to purchase 42,391 shares of common stock at an
exercise price of $7.19 per share. As consideration for these transactions,
the Company agreed to pay $170,625 and issue a five-year warrant to purchase
42,391 shares of common stock at $7.19 per share to a related party as a
finder's fee. A portion of the proceeds were used to pay $500,000 in notes
payable issued January 2, 1998 and January 5, 1998 (Note 4).
<PAGE>
On March 24, 1998, the Company entered into an agreement for the private
placement of up to $15,000,000 in convertible preferred stock, of which
$5,000,000 was currently provided to the Company for the first tranche.
The remaining two tranches are scheduled to be provided in the second and
third quarters of 1998 based on the Company meeting certain conditions,
including effecting a registration statement of the underlying common
stock and maintaining a minimum trading price of the Company's common
stock. The holder of the convertible preferred securities are entitled to
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.
Additionally, the holder is entitled to one warrant for every eight shares
of common stock that are issuable pursuant to the conversion feature. The
exercise price of each warrant is 120% of the average closing price for
five days immediately preceding the closing date. The securities are
mandatorily redeemable by the Company upon the occurrence of certain events,
primarily the failure to effect a registration statement. In connection
with the financing, the Company paid a finder's fee of $500,000 and issued
five-year warrants to purchase 62,500 shares of common stock at an exercise
price of $6.89 per share.
STOCK OPTIONS
The Company's 1992 Stock Option Plan (the "1992 Plan"), as amended,
provides for the issuance of up to 750,000 incentive and nonqualified
stock options to key employees and nonemployee directors. In March 1997,
the Company adopted the 1997 Stock Option Plan (the "1997 Plan"), which
also provides for the issuance of up to 750,000 incentive and nonqualified
stock options. The 1992 Plan and the 1997 Plan are hereafter referred to
as the "Option Plans."
Options are granted at an exercise price which is not less than fair value
as estimated by the board of directors and become exercisable as
determined by the board of directors, generally over a period of four to
five years. Options granted under the Option Plans expire ten years from
the date of grant. At December 31, 1997, options to purchase 315,411 of
shares of common stock were available for future grant under the Option
Plans.
Additionally, the Company grants options outside of the Option Plans to
nonemployee directors, employees, and consultants. During 1997, 1996, and
1995, the Company granted 54,505, 0, and 189,479 options, respectively,
outside the Option Plans.
In June 1995, the Company granted a five-year option to acquire 50,000
shares of the Company's common stock at an exercise price of $5.75 per
share to one of the Company's sales organizations whose chairman also
serves as a director of the Company.
<PAGE>
Transactions related to stock options for each of the three years in the
period ended December 31, 1997 are as follows:
Weighted Average
Shares Exercise Price
Options outstanding at December 31, 1994 225,030 $4.31
Granted 586,873 5.29
--------- ------
Options outstanding at December 31, 1995 811,903 4.68
Granted 380,000 7.12
Forfeited (189,219) 5.68
Exercised (39,479) 0.95
---------- ------
Options outstanding at December 31, 1996 963,205 5.58
Granted 701,005 4.46
Forfeited (117,200) 6.45
Exercised (40,579) 1.00
---------- ------
Options outstanding at December 31, 1997 1,506,431 5.13
==========
Exercisable at December 31, 1997 855,425 5.02
==========
The following table summarizes information about stock options outstanding
at December 31, 1997:
Options Outstanding Options Exercisable
_____________________________ ___________________
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Exercise Number Exercise Contractual Number Exercise
Prices of Shares Price Life of Shares Price
- ------------ --------- -------- ----------- --------- ---------
$0.95-$ 3.49 25,700 $2.94 4.33 1,900 $2.94
$3.50-$ 4.60 741,247 3.83 2.75 473,541 3.82
$5.00-$ 6.75 539,484 5.86 3.23 294,984 6.06
$7.50-$ 8.25 185,000 8.14 5.73 79,000 8.07
$9.50-$10.13 15,000 9.92 1.61 6,000 9.92
---------- -------
1,506,431 5.13 3.30 855,425 5.02
========== =======
The Company accounts for the stock purchase and stock option plans under
Accounting Principles Board ("APB") Opinion No. 25, which requires
compensation costs to be recognized only when the option price differs
from the market price at the grant date. SFAS No. 123 allows a company to
follow APB Opinion No. 25 with additional disclosure that shows what the
Company's net income and earnings per share would have been using the
compensation model under SFAS No. 123.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants:
<PAGE>
1997 1996 1995
-------- -------- --------
Risk-free interest rate 6.18% 6.16% 6.62%
Expected dividend yield 0.00 0.00 0.00
Expected lives 5 years 5 years 5 years
Expected volatility 50% 50% 50%
The total values of the options granted during the years ended
December 31, 1997, 1996, and 1995 were computed as approximately
$1,346,000, $1,301,000, and $517,000, respectively, which would be
amortized over the vesting period of the options. If the Company had
accounted for these plans in accordance with SFAS No. 123, the Company's
reported pro forma net loss and pro forma net loss per share for the years
ended December 31, 1997, 1996, and 1995 would have been as follows:
1997 1996 1995
------------- ------------ ------------
Net income:
As reported $(28,786,604) $(7,783,713) $(4,120,554)
Pro forma (30,128,120) (8,224,453) (4,321,674)
Basic and diluted loss per share:
As reported $(2.81) $(0.76) $(0.74)
Pro forma (2.94) (0.81) (0.77)
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years.
LETTER OF CREDIT WARRANT
On October 30, 1997, the Company and an investment banking firm entered
into a letter-of-credit agreement (the "LOC Agreement") pursuant to which
the investment banking firm agreed to establish irrevocable standby
letters of credit of up to $3,750,000 for the purpose of enabling the
Company to satisfy its security obligations under certain client and
carrier arrangements. Under the LOC Agreement, the Company was required
to pledge shares of the Company's common stock which, at that time,
equaled 125% of the principal amount of each letter of credit to be
issued. The agreement further requires the Company to replace any such
pledged shares with cash, U.S. government obligations or other obligations
guaranteed by the U.S. government on or prior to the earlier to occur of
the completion of a pending private placement of convertible preferred
stock or January 30, 1998.
To provide the shares of common stock required to be pledged as collateral
under the LOC Agreement, the Company entered into an agreement with
certain of the Company's officers, directors, and other stockholders (the
"Stockholders"), under which the Stockholders agreed to deposit with the
Company an aggregate of 545,045 shares of the Company's common stock. As
consideration for this agreement, the Company agreed to issue to the
Stockholders nonqualified options to purchase an aggregate of 54,505
shares of the Company's common stock at $6.00 per share.
As consideration to the investment banking firm for providing the
letter-of-credit financing, the Company issued a five-year warrant to
purchase up to 600,000 shares of the Company's common stock at a purchase
<PAGE>
price of $6.00 per share. The investment banking firm received certain
registration rights for the common stock issuable upon exercise of the
warrant.
The fair value of the warrant was determined to be $1,243,000 using a
Black-Scholes pricing model. A corresponding amount has been accounted
for as deferred financing costs and is being amortized over the life of
the letter of credit of one year. At December 31, 1997, $1,036,000 of
deferred financing costs were included in other assets .
6. RESTRUCTURING AND OTHER SPECIAL CHARGES
During 1997, the Company implemented its change in business strategy from
being a cellular activation agent to a nonfacilities based cellular
provider. In connection with the change in business strategy, the Company
reviewed all assets associated with the agency business for possible
impairment. Accordingly, the Company has recorded restructuring and other
nonrecurring charges of $1,100,000 in the year ended December 31, 1997.
This charge included a write-down of displays to estimated fair value,
shutdown costs associated with the closing of its Interactive Display
Technologies, Inc. subsidiary, and a write-off of a portion of agency
receivables which has been deemed uncollectible.
7. COMMITMENTS AND CONTINGENCIES
Upon consummation of the Merger and issuance of Trinity's common stock to
the U.S. Communications, Inc. stockholders, such issuance by Trinity, when
viewed in the context of the manner in which the U.S. Communications, Inc.
stockholders approved the Merger transaction, may have constituted a
violation of the registration requirements of Section 5 of the Securities
Act of 1933, as amended.
Assuming the occurrence of such violation, each U.S. Communications, Inc.
stockholder would have a statutory right of rescission, exercisable for a
period of one year from when the violation was, or reasonably should have
been, discovered, but in no event longer than three years after the common
stock was bona fide offered. The exercise of such rescission right by a
stockholder may require the Company upon tender of the Company's common
stock acquired by the stockholder, as a consequence of the Merger, to
return the tendering stockholder's U.S. Communications, Inc. common stock
or, alternatively, to pay such stockholder a cash sum equal to the
consideration paid by such stockholder for the Company's common stock with
interest thereon, less the amount of any income received thereon (the
"Contingent Liability"). Accordingly, on December 31, 1995, the Company
recorded this stockholders' Contingent Liability as a liability until the
rescission period expired during 1996, at which time the remaining
Contingent Liability was reclassified to equity.
OPERATING LEASE COMMITMENTS
The Company leases certain office space, telecommunications and office
equipment, and space under noncancelable operating leases. At
December 31, 1997, future minimum lease payments under noncancelable
operating leases are as follows:
<PAGE>
1998 $420,549
1999 306,326
2000 11,700
Thereafter 0
--------
$738,575
========
The expenses for operating leases were $317,138, $144,456, and $80,862 for
the three years ended December 31, 1997, 1996, and 1995, respectively.
EMPLOYEE AGREEMENT
In August 1997, a president was hired under a three-year employment
agreement which, in the event of termination by the Company without cause,
entitles the individual to immediate vesting of all options granted plus
the lesser of a six-month severance or the remainder of the contractual
salary.
EMPLOYEE BENEFITS
The Company does not provide postretirement or postemployment benefits to
its employees, nor does the Company offer company-sponsored savings or
pension plans.
8. INCOME TAXES
The Company and its subsidiaries file a consolidated income tax return.
At December 31, 1997 and 1996, the Company had net operating loss
carryforwards totaling approximately $37,929,000 and $12,655,000,
respectively, which expire at various times beginning in 2006. Due to the
operating losses since inception, a valuation allowance has been provided
against the entire amount of its net operating loss carryforwards and
other net deferred tax assets. A portion of the net operating loss
carryforwards is subject to substantial limitation due to the change of
control of the Company (Note 1).
The components of the net deferred tax asset as of December 31, 1997 and
1996 are as follows:
1997 1996
Accrued expenses $ 809,000 $ 357,000
Accounts receivable allowance 961,000 170,000
Capitalized software costs 211,000 93,000
Net operating loss carryforwards 14,754,000 4,936,000
-------------- -------------
Total deferred tax asset 16,735,000 5,556,000
Valuation allowance (16,735,000) (5,556,000)
---------------- -------------
$ 0 $ 0
=============== =============
A reconciliation of income tax benefit at the statutory federal income tax
rate to the Company's tax benefit as reported in the accompanying
consolidated statements of operations is as follows:
<PAGE>
1997 1996 1995
------------- ------------ -------------
Benefit at federal statutory rate $(10,075,000) $(2,724,000) $(1,442,000)
State income tax benefit, net of
federal benefit (1,123,000) (311,000) (165,000)
Entertainment expenses 19,000 14,000 9,000
------------- ------------ -------------
(11,179,000) (3,021,000) (1,598,000)
Valuation allowance 11,179,000 3,021,000 1,598,000
-------------- ----------- -------------
Provision for income tax $ 0 $ 0 $ 0
============== ============ =============
9. OPERATIONS AND LIQUIDITY
The Company, which has never operated at a profit, has experienced
increasing losses since its inception in 1991. Such losses aggregated
approximately $28.8 million, $7.8 million, and $4.1 million for the years
ending December 31, 1997, 1996, and 1995, respectively, and are
continuing. Additionally, at December 31, 1997, the Company had an
accumulated deficit of approximately $43.1 million and a working capital
deficit of $12.6 million.
The Company expects to continue to incur losses in the near future,
principally attributable to the Company's intended expansion of its
wireless communication reseller operations. There can be no assurance
that the Company's existing retail mass merchandisers will expand their
use of the Company's services, that the Company will obtain additional
subscribers, that the Company will successfully develop as a reseller of
wireless communications services, or that the Company will achieve
profitability in the future.
The success of the Company's reseller expansion plan is subject to a
number of risks. This includes its ability to negotiate additional
reseller agreements on commercially reasonable terms, the increasingly
competitive nature of the wireless telecommunications industry, the
possible eventual elimination of the obligation of facilities-based
wireless carriers to make their services available for resale, and the
overall effects of the trend toward deregulation of the telecommunications
industry.
The Company will require substantial financing for working capital to
operate its proposed expanded reseller operations for a significant period
of time until profitability is achieved, if ever. In addition to the
March 1998 equity and debt offering discussed in Note 5, the Company is in
current negotiations to raise equity capital sufficient to meet its
current and anticipated level of operations. However, the Company has no
firm commitments for such financing, and accordingly, the availability of
such financing on terms acceptable to the Company is not assured.
The above factors raise substantial doubt about the ability of the Company
to continue as a going concern. The accompanying consolidated financial
statements have been prepared assuming the Company will continue as a
going concern, which contemplates realization of assets and liabilities in
the normal course of business. Accordingly, the financial statements do
not include any adjustments relating to the recoverability and
classification of liabilities that might be necessary should the Company
be unable to continue as a going concern.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Bruce A. Hahn
Bruce A. Hahn, Chairman,
Chief Executive Officer
By: /s/ Robert J. Kostrinsky
Robert J. Kostrinsky,
Chief Financial Officer
March 31, 1998
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the date indicated.
By: /s/ Bruce A. Hahn
Bruce A. Hahn, Chairman
President, Chief Executive Officer
By: /s/ Jerome S. Baron
Jerome S. Baron, Director
By: /s/ Stephen Pazian
Stephen Pazian, Director
By: /s/ Edgar Puthuff
Edgar Puthuff, Director
By: /s/ Salvatore T. DiMascio
Salvatore T. DiMascio, Director
March 31, 1998
EXHIBIT 3.2A
CERTIFICATE OF DESIGNATION
OF
USCI, INC.
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
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is dated as of the ____ day of
August, 1997 by and between USCI, Inc., Delaware corporation
having its principal office at 6115-A Jimmy Carter Boulevard,
Norcross, Georgia 30071 (the "Corporation"), and MARIO MARTINEZ,
an individual residing at 222 Lake View Avenue, Penthouse 6, West
Palm Beach, Florida 33401 ("Employee").
W I T N E S S E T H:
WHEREAS, the Corporation desires to employ Employee as
President and Chief Operating Officer of the Corporation in
connection with the conduct of the business of the Corporation,
and Employee desires to accept such employment on the terms and
conditions herein set forth.
NOW, THERFORE, in consideration of the foregoing and the
mutual covenants contained herein, the parties hereto agree as
follows:
1. Employment. Employee as its President and Chief
Operating Officer, and Employee hereby accepts such
employment, upon the terms and conditions hereinafter
set forth.
2. Term.
(a) The term of employment of Employee under this
Agreement (the "Term") shall commence on the date of this
Agreement and shall continue, unless terminated earlier in
accordance with the terms hereof, until July 31, 2000, subject to
extension as provided in paragraph 2(b).
(b) The Term shall be extended automatically for
successive three year periods unless either party elects not to
extend the Term further by giving written notice of such election
to the other party at least sixty (60 days prior to the
expiration of the then-current Term.
3. Office and Duties.
(a) During the Term, Employee shall serve as the
President and Chief Operating Officer of the Corporation and
shall report to the Chairman (the "Chairman") of the Board of
Directors of the Corporation (the "Board"). Subject to any
restrictions set forth in the By-Laws of the Corporation, as
presently constituted or as amended from time to time, Employee
shall perform such duties as are customary for the President and
Chief Operating Officer of a communications company in the United
States and consistent with such position and status, and such
other executive and administrative duties consistent therewith as
may from time to time be assigned to him by the Chairman.
(b) During the Term, the principal place of
employment of Employee shall be the Corporation's principal
office in Norcross, Georgia, or such other office located in the
State of Georgia as may be selected for the Corporation's
principal office, although it is understood that in connection
with the performance of his duties under this Agreement, Employee
will be required to travel to and perform services at other
locations.
(c) Employee shall perform well and faithfully the
duties which may be assigned to him from time to time by the
Chairman. Employee shall devote all of his business time,
attention and energies to the business and affairs of the
Corporation, shall use his best efforts to advance the best
interests of the Corporation, and shall not during the Term be
actively engaged in any other business activity, whether or not
such business activity is pursued for gain, profit or other
pecuniary advantage, provided that the employee may invest his
personal assets for his own or his family's account in business
entities which do not compete with the business of the
Corporation or its subsidiaries, as long as such investments do
not require Employee to render any personal services for or on
behalf of any such business entities during the term hereof and
further provided that Employee may purchase stock in any public
corporation which is a competitor of the Corporation, provided
(A) the total amount purchased shall not exceed five (5%) of the
issued and outstanding stock of such public corporation and (B)
employee does not directly or indirectly acquire or assume any
management responsibilities in such public corporation.
(d) The Corporation shall promptly pay to Employee
the approved reasonable expenses incurred by him in the
performance of his duties hereunder, including, without
limitation, those incurred in connection with business related
travel or entertainment, or, if such expenses are paid directly
by Employee, shall promptly reimburse him for such payment,
provided that Employee properly accounts therefor in accordance
with the Corporation's policy.
4. Compensation. As full compensation for the services
to be rendered hereunder by Employee, the Corporation agrees to
pay to Employee:
(a) During the twelve months ended July 31, 1998, a
base salary at the initial annual rate of $175,000, payable in
bi-weekly installments in accordance with the Corporation's usual
payroll practices, which base salary shall be increased to
$200,000 for the twelve months ended July 31, 2000.
(b) As additional compensation, the Employee, during
the term of this Agreement or any renewals thereof, will be paid
a bonus (the "Bonus") based upon all Net Activations processed by
the Corporation. The term "Net Activations" shall mean the
aggregate number of persons and entities enrolled as new
subscribers (i) to the Corporation's non-facilities based
wireless services and (ii) by the Corporation, acting as agent,
to the wireless services of facilities based carriers, less such
number of new subscribers whose wireless service is deactivated
or otherwise terminated prior to completion of any mandatory
minimum service period.
(i) For each of the three calendar
years ending December 31, 1999, such Bonus shall be paid at the
rate of Seventy-five ($.75) Cents per Net Activation in excess of
50,000 cellular and PCS subscribers in such calendar year and One
and 25/100 ($1.25) Dollars for each Net Activation for cellular
and PCS subscribers in excess of 100,000 in such calendar year.
(ii) For each of the three calendar
years ending December 31, 1999, such Bonus shall be paid at the
rate of Fifty ($.50) Cents for each Net Activation of a paging
subscriber.
(iii) For each of the three calendar
years ending December 31, 1999, the Employee shall be paid a
minimum Bonus of Twenty-five Thousand ($25,000) Dollars which
shall be deducted from the Bonus, if any, received pursuant to
paragraph 4(b)(i) and 4(b)(ii) for such calendar years.
(iv) Subject to paragraph 4(b)(iii), the
aggregate Bonus paid pursuant to paragraphs 4(b)(i) and 4 (b)(ii)
during each calendar year ending December 31 set forth below
shall not exceed the following amounts:
(A) 1997 - $ 350,000
(B) 1998 - $ 700,000
(C) 1999 - $1,250,000
(v) The Bonus for each year shall be
paid to Employee in its entirety within ten (10) days following
the acceptance by the Board of the financial statements of the
Corporation for such year, but in no event more than ninety (90)
days after the end of such year.
(c) In each year during the term of this Agreement,
in addition to the initial grants of stock options to the
Employee pursuant to paragraph 5 hereof, Employee shall be
eligible for award of stock options in an amount to be determined
by the Board or the committee of the Board charged with making
such awards, based on his relative position and responsibilities
within the Corporation. The terms and conditions of the stock
options to be awarded to Employee shall be determined in
accordance with the terms of a separate stock option agreement
and stock option plan adopted or to be adopted by the Corporation
for all or certain of its employees.
(d) In thee event that the Corporation's services are
expanded to include wireline and other telecommunications
services, the parties agree to negotiate additional bonus grants
with respect to such services comparable to the bonus grants
provided herein.
5. Stock Option.
(a) The Corporation hereby agrees to grant to
Employee an incentive stock option to purchase 325,000 shares of
the Corporation's Common Stock, par value $.0001 per share, at an
exercise price per share equal to the last reported sale price of
the Corporation's Common Stock on the Nasdaq National Market
System on the date hereof, and on the terms and conditions set
forth in the form of Incentive Stock Option Agreement and the
USCI, Inc. 1997 Stock Option Plan attached hereto.
(b) Provided the Employee is employed by the
Corporation on August 1, 1998 and on August 1, 1999, the
Corporation hereby agrees to grant Employee a stock option to
purchase 25,000 shares of the Corporation's Common Stock par
value $.0001 per share to vest immediately on each anniversary
date at an exercise price equal to the last reported sale price
on the NASDAQ National Market System on such anniversary date.
6. Other Benefits.
(a) Employee shall participate in the Corporation's
benefit plans based on his relative position, service and
responsibilities with the Corporation.
Nothing contained herein shall be deemed to limit or affect
the right of Employee to receive bonuses or other forms of
additional compensation or to participate in any retirement,
disability, profit sharing, stock option, cash or stock bonus or
other plan or arrangement, or in any other benefits now or
hereafter provided by the Corporation for its employees at the
sole discretion of the Board.
(b) Employee shall be entitled to a paid vacation
(taken consecutively or in segments) of four (4) weeks during
each calendar year. Such vacation may be taken at such times as
are reasonably consistent with proper performance by Employee of
his duties and responsibilities hereunder. The carryover of
unused vacation time to the following calendar year will require
written approval by the Board.
(c) For the purposes of local business travel, the
Corporation shall pay the Employee an automobile allowance of
$1,000 per month to cover the Employee's reasonable expenses in
connection with the insurance, operation, and maintenance of such
automobile.
(d) The Employer shall reimburse the direct moving
costs incurred by Employee in relocating from Florida to the
Atlanta, Georgia area not to exceed $_______.
(e) The Employer shall reimburse the weekly
transportation costs incurred by the Employee in commuting from
Florida to the Corporation's principal offices in Norcross,
Georgia for a period not to exceed ninety (90) days.
(f) The Corporation shall reimburse the Employee for
the premium cost of a life insurance policy, which the premium
cost shall not exceed $1,650 in each year.
7. Termination for Death or Disability.
(a) The employment of Employee shall terminate
immediately in the event of the death of Employee. At the
election of the Corporation, the employment of Employee shall
terminate in the event that Employee shall fail to render and
perform the services required of him under this Agreement because
of any physical or mental incapacity or disability for a total of
one hundred eighty (180) days or more during any consecutive
twelve (12) month period ("Disability"). The employment of
Employee shall terminate for Disability forty-five (45) days
after Employee has received written notice from the Corporation
of said termination, provided that Employee has not returned to
full-time service with the Corporation on or before such date.
In the event Employee dies during the period of employment or in
the event the Corporation elects to terminate the employment of
Employee of Disability, all obligations of the Corporation under
this Agreement will cease as of the date of termination, except
that the Corporation shall pay, and Employee or his personal
representative, as the case may be, shall be entitled to receive,
the following:
(i) the continuation of the base salary
in effect at the time of death or termination for Disability for
a period of twelve (12) full months after the month in which
death or termination for Disability occurs, to be paid in
accordance with paragraph 1(a). Notwithstanding the foregoing,
in the event of a termination for Disability, the payments
described in this paragraph 7(a)(i) shall be reduced each month
to the extent of the payments, if any, that Employee receives
during such month under any disability insurance coverage
maintained by the Corporation for the benefit of Employee;
(ii) any unpaid bonus earned by Employee
for any prior or current fiscal year of the Corporation, which
shall be paid in accordance with paragraph 4(b);
(iii) a payment in respect of any accrued
but unused vacation time based on Employee's rate of base salary
immediately prior to this death or termination for Disability;
(iv) a payment of any amounts owing or
accrued under any welfare or pension benefit plans or programs in
which Employee participated as of his death or termination for
Disability under the terms and conditions of the plan or program
pursuant to which such benefits were granted.
(b) If there should be any dispute between the
parties as to whether Employee has a Disability, such question
shall be determined in accordance with the opinion of an
impartial, reputable physician agreed upon for this purpose by
the parties or their representatives. The opinion of such
physician as to the matter in dispute shall be final and binding
upon the parties.
8. Termination of Employment For Other Than Death or
Disability.
(a) The Corporation may terminate the employment of
Employee for cause ("Cause") upon thirty (30) days' written
notice to Employee. Termination for Cause shall mean discharge
by the Corporation on the following grounds:
(i) Employee's conviction in a court of
law of an Offense, as defined below, which conviction prevents
Employee from effective management of the Corporation or
materially adversely affects the reputation or business of the
Corporation. For purposes of this paragraph, an "Offense" shall
mean any felony and any other infraction that would constitute
either (x) a misdemeanor other than a petty offense under federal
law; or
(ii) Employee's continuing willful
failure or refusal to perform his duties required by this
Agreement. Notwithstanding the foregoing, Employee may not be
terminated for Cause unless Employee shall have first received
written notice from the Board stating with specificity the
grounds for termination and affording Employee and his counsel a
reasonable opportunity to be heard before the Board and not less
than thirty (30) days to correct the acts or omissions complained
of, if correctable. For purposes of this paragraph, an act, or
failure to act, on Employee's part shall be considered "willful
if it was done, or omitted to be done, by him in bad faith or if
it was done without reasonable belief that his action or omission
was in the best interests of the Corporation or in direct
contravention of specific directives of the Board. Upon a
termination for Cause, all obligations of the Corporation under
this Agreement will cease as of the date of termination, except
that the Corporation shall pay Employee, and Employee shall be
entitled to receive, the following:
(A) the unpaid portion of base
salary being paid to Employee at the time of termination, pro
rated through the date of termination, to be paid in accordance
with paragraph 4(a);
(B) any unpaid bonus earned by
Employee for any prior or current fiscal year of the Corporation,
which shall be paid in accordance with paragraph 4(b); and
(C) a payment of any amounts owing
or accrued under any welfare or pension benefit plans or programs
in which Employee participated as of such termination under the
terms and conditions of the plan or program pursuant to which
such benefits were granted.
(b) The Corporation may terminate this Agreement
without Cause upon ninety (90) days' written notice to Employee.
IN the event of termination of Employee without Cause, other than
by reason of the death or Disability of Employee, all obligations
of the Corporation under this Agreement will cease as of the date
of termination, except that the Corporation shall pay Employee,
and Employee shall be entitled to receive, the following:
(i) the continuation of the base salary in
effect at the time of termination for the lesser of (x) a period
of six (6) full months after the month in which such termination
occurs, or (y) the balance of the Term, which shall be paid in
accordance with paragraph 4(a);
(ii) any unpaid Bonus earned by Employee for
any prior or current fiscal year of the Corporation, which shall
be paid in accordance with paragraph 4(b);
(iii) a payment in respect of any accrued but
unused vacation time based on Employee's rate of base salary
immediately prior or current to such termination by the
Corporation;
(iv) a payment of any amounts owing or
accrued under any welfare or pension benefit plans or programs in
which Employee participated as of his termination under the and
conditions of the plan or program pursuant to which such benefits
were granted; and
(v) the vesting of all options granted
hereunder or any subsequent period.
(c) Employee may terminate this Agreement by giving
the Corporation ninety (90) days written notice. The Corporation
in its sole discretion may waive such notice period and determine
an earlier termination date. Upon a termination by Employee, all
obligations of the Corporation under this Agreement will cease as
of the date of termination, except that the Corporation shall pay
Employee, and Employee shall be entitled to receive, the
following:
(i) the unpaid portion of base salary being
paid at the time of termination, pro rated through the date of
termination, to be paid in accordance with paragraph 4(a);
(ii) any unpaid bonus earned by Employee for
any prior or current fiscal year of the Corporation, which shall
be paid in accordance with paragraph 4 (b) or the applicable
bonus plan, whichever is sooner;
(iii) a payment in respect of any accrued but
unused vacation time based on Employee's rate of base salary
immediately prior to such termination by Employee; and
(iv) a payment of any amounts owing or
accrued under any welfare or pension benefit plans or programs in
which Employee participated as of his termination under the terms
and conditions of the plan or program pursuant to which such
benefits were granted.
9. Restrictive Covenants and Confidentiality; Injunctive
Relief.
(a) Employee agrees, as a condition to the
performance by the Corporation of its obligations hereunder,
particularly its obligations under paragraphs 4, 5, 6, 7 and 8
hereof, that during the Term and for a period of two (2) years
thereafter, Employee shall not, without the prior written
approval of the Board, directly or indirectly, through any other
person, firm or corporation:
(i) solicit, raid, entice or induce any
person, firm or corporation that presently is, or at any time
during the Term shall be, a client or customer of the Corporation
or its affiliates to become a client or customer of any other
person, firm or corporation unless such person, firm or
corporation will only be performing services for such client or
customer that do not in any way compete, directly or indirectly,
with the business of the Corporation or its affiliates.
Furthermore, Employee shall not approach any such person, firm or
corporation for such purpose or authorize or knowingly approve
the taking of such actions by any other person;
(ii) solicit, raid, entice or induce any
person who presently is, or at any time during the Term shall be,
an employee of the Corporation or its affiliates to become
employed by any other person, firm or corporation. Furthermore,
Employee shall not approach any such employee for such purpose or
authorize or knowingly approve the taking of such actions by any
other person; or
(iii) engage in any business that competes
directly or indirectly with the business being conducted by the
Corporation or its affiliates as of the date of Employee's
termination, except that Employee may purchase stock in any
public corporation which is a competitor of the Corporation,
provided (A) the total amount purchased shall not exceed five
(5%) percent of the issued and outstanding stock of such public
corporation and (B) Employee does not directly or indirectly
acquire or assume any management responsibilities in such public
corporation.
(b) Employee acknowledges that during the Term, he
will have access to confidential information of the Corporation
and its affiliates, including plans for future developments, and
information about costs, customers, profits, markets, sales,
products, key personnel, pricing policies, operational methods,
technical processes and other business affairs and methods and
other information not available to the public or in the public
domain (hereinafter referred to as "Confidential Information").
In recognition of the foregoing, Employee covenants and agrees
that, except as required by his duties to the Corporation,
Employee will keep secret all Confidential Information of the
Corporation and its affiliates and will not, directly or
indirectly, either during the Term of his employment hereunder or
at any time thereafter, disclose or disseminate to anyone or make
use of, for any purpose whatsoever, any Confidential Information,
and upon termination or his employment, Employee will promptly
deliver to the Corporation all tangible Confidential Information
(including all copies thereof, whether prepared by Employee or
others) which he may possess or control.
(c) Employee acknowledges that the services to be
rendered by him are of a special, unique and extraordinary
character and, in connection with such services, he may have
access to Confidential Information vital to the Corporation's or
its affiliates' business. By reason of the foregoing, Employee
consents and agrees that if he violates any of the provisions of
this paragraph 9, the Corporation would sustain irreparable harm
and, therefore, in addition to any other remedies which the
Corporation may have under this Agreement or otherwise, the
Corporation shall be entitled to apply to any court or competent
jurisdiction for an injunction restraining Employee or any third
party from committing or continuing any such violation (or
participating therein) of this Agreement.
(d) For a period of three (3) years following
Employee's termination of employment, Employee shall be available
to the Corporation and assist the Corporation in connection with
any litigation brought by or against the Corporation relating to
the period during which Employee was employed by the Corporation;
provided, however, that all reasonable costs and expenses in
connection with the foregoing shall be borne by the Corporation.
(e) The provisions of this paragraph 9 shall survive
the termination or expiration of this Agreement in accordance
with the terms hereof.
10. Ownership of Inventions and Ideas. Employee
acknowledges that the Corporation shall be the sole owner of all
the fruits and proceeds of Employee's services hereunder,
including, but not limited to, all inventions, developments,
discoveries and other improvements relating to equipment,
methods, or processes connected with the Corporation's business
that Employee may develop or create in connection with and during
the Term of Employee's employment hereunder, free and clear of
any claims by Employee (or any successor or assignee of him) of
any kind or character whatsoever other that Employee's right to
compensation hereunder. Employee agrees that he shall, at the
request of the Board, execute such assignments, certificates or
other instruments as the Board from time to time reasonably deems
necessary or desirable to evidence, establish, maintain, perfect,
protect, enforce or defend the Corporation's right, title and
interest in or to any such properties. The provisions of this
paragraph 10 shall survive the termination or expiration of this
Agreement in accordance with the terms hereof.
11. Indemnification. The Corporation agrees to indemnify
and hold harmless Employee against claims in his capacity as an
officer and employee of the Corporation to the full extent
permitted by the Delaware General Corporation Law.
12. Change in Control.
(a) Notwithstanding anything to the contrary
contained in this Agreement, including, but not limited to
paragraph 8 hereof, in the event that a Change in Control (as
hereinafter defined) occurs during the Term, and an Involuntary
Termination (as hereinafter defined) of Employee's employment
with the Corporation occurs during the period (the "Covered
Period") commencing six (6) months prior to the date of the
Change of Control and ending two (2) years after the date of the
Change in Control, Employee shall be entitled to receive the
following:
(i) the compensation and benefits
provided for in paragraphs 8(b)(i), (ii), (iii) and (iv), except
that payment of such amounts shall be made within thirty (30)
days after the termination of Employee's employment pursuant to
this paragraph 12;
(ii) an amount equal to the sum (A) the
annual base salary being paid at the time of such termination,
prorated over the greater of the remainder of the term or twelve
months, and (B) the average of all Bonuses, if any, paid or
payable to Employee for the two (2) complete fiscal years of the
Corporation immediately preceding such termination or twelve
months, whichever is greater:
(iii) for a period of thirty-six (36)
months after the month in which Employee's termination occurs,
all benefits under all welfare or pension benefit plans or
programs in which the Employee participated as of the date of
termination shall continue pursuant to the terms and conditions
of the plan or program pursuant to which such benefits were
granted. In lieu of having such benefits continue, Employee may
elect to receive a cash payment from the Corporation equal to the
present value of such benefits (determined on a replacement cost
basis) within thirty (30) days after such election. In order to
make such an election, Employee shall notify the Corporation in
writing within thirty (30) days after such termination; and
(b) For purposes hereof, the following definitions
shall apply:
(i) A "Change of Control" shall be deemed to
have occurred upon the earliest to occur of the following events:
(A) the date the stockholders of the Corporation (or the Board,
if stockholder action is not required) approve a plan or other
arrangement pursuant to which the Corporation will be dissolved
or liquidated, or (B) the date the stockholders of the
Corporation (or the Board, if stockholder action is not required)
approve a definitive agreement to sell or otherwise dispose of
substantially all of the assets of the Corporation, or (C) the
date the stockholders of the Corporation (or the Board, if
stockholder action is not required) and the stockholders of the
other constituent corporation (or its board of directors if
stockholder action is not required) have approved a definitive
agreement to merge or consolidate the Corporation with or into
such other corporation, other than, in either case, a merger or
consolidation of the Corporation in which holders of shares of
the Corporation's Common Stock immediately prior to the merger or
consolidation will have at least a majority of the voting power
of the surviving corporation's voting securities immediately
after the merger or consolidation, which voting securities are to
be held in the same proportion as such holders' ownership of
Common Stock of the Corporation immediately before the merger or
consolidation, or (C) the date any entity, person or group,
within the meaning of Section 13(d)(3) or Section 14(d)(2) of the
Securities Exchange Act of 1934, as amended ("Exchange Act")
(other than (x) the Corporation or any of its subsidiaries or any
employee benefit plan (or related trust) sponsored or maintained
by the Corporation or any of its subsidiaries, or (y) any other
person who, on the date the Plan is effective, shall have been
the beneficial owner (within the meaning of Rule 13-d-3
promulgated under the Exchange Act) of more than thirty percent
(30%) of outstanding shares of the Corporation's Common Stock),
shall have become the beneficial owner of, or shall have obtained
voting control over, more than thirty (30%) of the outstanding
shares of the Corporation's Common Stock, or (E) the first day
subsequent to the date hereof when directors are elected such
that a majority of the Board of Directors shall have been members
of the Board of Directors for less than two (2) years, unless the
nomination for election of each new director who was not a
director at the beginning of such two (2) year period was
approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of such
period.
(ii) An "Involuntary Termination" shall mean
any termination of Employee's employment with the Corporation
during the Covered Period which:
(A) results from a termination by Employee
following a Change in Responsibilities (as hereinafter defined);
or
(B) results from any other termination by
the Corporation of Employee's employment, other than for Cause.
Involuntary Termination shall not include termination as a
result of death, Disability, or voluntary termination by
Employee, other than a termination pursuant to paragraph
12(c)(ii)(A).
(iii) A "Change in Responsibilities" shall
mean any one or more of the following occurring during the
Covered Period:
(A) a reduction in the nature or scope of
Employee's authority, duties, powers or functions compared with
his authority, duties, powers or functions immediately prior to
the Covered Period, the assignment to Employee of any duties not
consistent with his position immediately prior to the Covered
Period, or a change in Employee's reporting relationship;
(B) a reduction in Employee's offices or
titles or failure to elect Employee to any positions held at the
beginning of the Covered Period (unless Employee is elected to a
more senior position);
(C) a reduction in Employee's base salary
or other material element of Employee's compensation below the
base salary or compensation in effect immediately prior to the
Covered Period. For purpose of this paragraph 12(b)(iii)(C),
Employee's Bonus shall be deemed a material element of
compensation;
(D) a material breach by the Corporation
of the terms of this Agreement.
13. Miscellaneous.
(a) Neither this Agreement nor the rights or
obligations hereunder of any party hereto shall be assignable
without consent of (i) the Corporation, with respect to an
assignment or attempted assignment by Employee and (ii) Employee,
with respect to an assignment or attempted assignment by the
Corporation; provided that no consent of Employee shall be
required for assignment whereby the assignee, by operation of law
or otherwise, continues to carry on substantially the business of
the Corporation prior to the assignment. Any assignment or
attempted assignment in violation of this paragraph shall be void
and of no effect. This Agreement shall be binding upon and inure
to the benefit of the successors and permitted assigns of the
Corporation.
(b) Whenever under this Agreement it becomes
necessary to give notice, such notice shall be in writing, signed
by the party or parties giving or making the same, and shall be
served on the person or persons for whom it is intended or who
should be advised or notified, by Federal Express or other
similar overnight service or by certified or registered mail,
return receipt requested, postage prepaid and addressed to such
party at the address set forth above or at such other address as
may be designated by such party by like notice. In the case of
Federal Express or other similar overnight service, such notice
or advice shall be effective when sent, and, in the cases of
certified or registered mail, shall be effective two (2) days
after delivery to the U.S. Post Office.
(c) The invalidity of any portion of this Agreement
shall not be deemed to render the remainder of this Agreement
invalid.
(d) This Agreement may be amended or modified only by
an instrument in writing signed by the Corporation and Employee.
(e) The headings of this Agreement are for
convenience of reference only and do not constitute a part
hereof.
(f) The failure of any party at any time to require
performance by any other party of any provision hereof or resort
to any remedy provided herein or at law or in equity shall in no
way affect the right of such party to require such performance or
resort to such remedy at any time thereafter, nor shall the
waiver by any party of a breach of any of the provisions hereof
be deemed to be a waiver of any subsequent breach of such
provisions. No such waiver shall be effective unless in writing
and signed by the party against whom such waiver is sought to be
enforced.
(g) Employee may at any time or from time to time
waive any or all of the rights and benefits provided for herein
which have not been received by Employee at the time of such
waiver. In addition, prior to the last day of the calendar year
in which Employee's termination occurs, Employee may waive any or
all rights and benefits provided for herein which have been
received by Employee during such calendar year; provided that
prior to the end of such year Employee repays to the Corporation
(or if the benefit was received from an employee benefit plan, to
such plan) the amount of the benefit received together with
interest thereon at the minimum rate required to avoid imputed
income. Any waiver of benefits pursuant to this paragraph 13(g)
shall be irrevocable and shall be required to be in writing.
14. Controlling Law; Arbitration.
(a) The validity, interpretation, construction,
performance and enforcement of this Agreement shall be governed
by the laws of the State of Georgia without regard to choice of
law principles.
(b) If a dispute arises between the parties
respecting the terms of this Agreement or Employee's employment
with the Corporation, including, with limitation, any dispute
with respect to the validity of this Agreement or this
arbitration clause, such dispute shall be finally resolved by
binding arbitration as follows. Any party may require that the
dispute be submitted to binding arbitration, and in such event
the dispute shall be settled by arbitration in accordance with
the Commercial Arbitration Rules of the American Arbitration
Association. If a mater is submitted to arbitration, each of the
parties shall choose one arbitrator. The arbitrators selected by
the two parties shall choose a third arbitrator who shall act as
chairman and shall be an attorney and a member of the panel of
the American Arbitration Association. Each party shall agree to
a speedy hearing upon the matter in dispute and the judgment upon
the award rendered by the arbitrators maybe entered in any court
having jurisdiction thereof. The place of arbitration shall be
Atlanta, Georgia. The parties agree that pre-hearing discovery
shall be permitted in the arbitration proceeding. Employee shall
be entitled to receive reimbursement of his reasonable legal fees
and out of pocket expenses from the Corporation with respect to a
dispute arising hereunder (a) in connection with the arbitration
proceedings and the enforcement of the arbitration award, unless
it is determined in the arbitration proceeding that Employee
commenced such proceedings on frivolous grounds or in bad faith
and (b) in the event settlement of a dispute is reached without
arbitration proceedings or a final arbitration decision, if
proceedings are instituted.
IN WITNESS WHEREOF, Employee has hereto set his hand and
the Corporation has caused this instrument to be duly
executed as of the day and year first above written.
Employee
________________________
Mario Martinez
USCI, Inc.
By: ____________________
Bruce A. Hahn
Chairman of the Board
EXHIBIT 10.60
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement"), dated
as of March 24, 1998, between USCI, Inc., a Delaware corporation (the
"Company"), and JNC Opportunity Fund Ltd., a Cayman Islands corporation
(the "Purchaser").
WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Company desires to issue and sell to the Purchaser and
the Purchaser desires to purchase from the Company, shares of the
Company's 6% Series A Convertible Preferred Stock, par value $.01 per
share (the "Series A Preferred"), the Company's 6% Series B Convertible
Preferred Stock, par value $.01 per share (the "Series B Preferred"),
and the Company's 6% Series C Convertible Preferred Stock, par value
$.01 per share (the "Series C Preferred" and, together with the Series A
Preferred and the Series B Preferred, the "Preferred Stock").
IN CONSIDERATION of the mutual covenants contained in this Agreement,
the Company and Purchaser agree as follows:
ARTICLE I
PURCHASE AND SALE OF PREFERRED STOCK
1.1 Purchase and Sale. (a) Subject to the terms and conditions set
forth herein, the Company shall issue and sell to the Purchaser, and the
Purchaser shall purchase from the Company: (i) 500 shares of Series A
Preferred (the "Series A Shares"); (ii) up to 500 shares of Series B
Preferred (the "Series B Shares"); and (iii) up to 500 shares of Series
C Preferred (the "Series C Shares" and, together with the Series A
Shares and the Series B Shares, the "Shares").
(b) The Series A Preferred shall have the respective rights, preferences
and privileges set forth in Exhibit A attached hereto (the "Series A
Terms"), which shall be incorporated into a Certificate of Designation
to be approved by the Purchaser and filed prior to the Series A Closing
Date (as defined below) by the Company with the Secretary of State of
Delaware (the "Series A Designation"). The Series B Preferred and the
Series C Preferred shall have respective rights, preferences and
privileges identical to the Series A Terms, mutatis mutandis, and shall
rank pari passu with the Series A Preferred with regard to dividends,
liquidation, voting rights and any other preferential rights designated
therein, except that the Conversion Price (as defined below) for
conversion of the Series B Shares and Series C Shares shall be
determined as of the Original Issue Date (as defined below) for such
Series B Shares and Series C Shares, and the case may be.
The Series B Preferred and the Series C Preferred shall be authorized
pursuant to Certificates of Designation prepared by the Company, subject
to the approval of the Purchaser, and filed prior to the Series B
Closing Date (as defined below) or the Series C Closing Date (as defined
below), as applicable, by the Company with the Secretary of State of
Delaware (such Certificates of Designation and the Series A Designation
are collectively, the "Certificates of Designation").
For purposes of this Agreement, "Conversion Price," "Original Issue
Date," "Conversion Date," "Trading Day" and "Per Share Market Value"
shall have the meanings set forth in Exhibit A; and "Market Price" as at
any date shall mean the average Per Share Market Value for the five (5)
Trading Days immediately preceding such date.
1.2 Purchase Price. The purchase price per Share shall be $10,000.
1.3 The Closings.
(a) The Series A Closing. (i) The closing of the purchase and sale
of the Series A Shares (the "Series A Closing") shall take place at the
offices of Robinson Silverman Pearce Aronsohn & Berman LLP (the "Escrow
Agent"), 1290 Avenue of the Americas, New York, New York 10104,
immediately following the execution hereof or such later date as the
parties shall agree. The date of the Series A Closing is hereinafter
referred to as the "Series A Closing Date."
(ii) At the Series A Closing, the parties shall deliver or shall
cause to be delivered to the Escrow Agent such items as are required to
be delivered by them in accordance with and subject to the terms and
conditions of the Escrow Agreement, dated as of the date hereof, by and
among the Company, the Purchaser and the Escrow Agent, in the form of
Exhibit E (the "Escrow Agreement"), including the following: (a) the
Company shall deliver to the Purchaser (1) stock certificates
representing 250,000 Series A Shares registered in the name of the
Purchaser, (2) a common stock purchase warrant in the form of Exhibit B
(the "Series A Warrant") to purchase an aggregate of 149,522 shares of
the Company's common stock, $.0001 par value per share (the "Common
Stock"), at an exercise price equal to 120% of the Market Price on the
Series A Closing Date, exercisable for three years from the Original
Issue Date, registered in the name of the Purchaser, (3) the legal
opinion of the Law Offices of Leonard R. Glass, P.A., outside counsel to
the Company, substantially in the form attached hereto as Exhibit D, and
(4) all other documents, instruments and writings required to have been
delivered at or prior to the Series A Closing by the Company pursuant to
this Agreement and the Registration Rights Agreement, dated the date
hereof, by and between the Company and the Purchaser, in the form of
Exhibit C (the "Registration Rights Agreement"); and (b) the Purchaser
shall deliver to the Company (1) $5,000,000 in United States dollars in
immediately available funds by wire transfer to an account designated in
writing by the Company for such purpose prior to the Series A Closing
Date, and (2) all documents, instruments and writings required to have
been delivered at or prior to the Series A Closing by the Purchaser
pursuant to this Agreement and the Registration Rights Agreement.
(b) The Series B Closing. (i) Subject to the terms and conditions
set forth in this Agreement, the Purchaser and the Company shall have
the right to deliver a written notice to the other (a "Series B
Subsequent Financing Notice") requiring such other party to either sell
or buy, as the case may be, Series B Shares and Series B Warrants (as
defined below), for a purchase price of $10,000 per Series B Share. A
Series B Subsequent Financing Notice may be delivered no earlier than 60
Trading Days after the effective date of the Underlying Shares
Registration Statement (as defined in the Registration Rights Agreement)
relating to the Underlying Shares (as defined in Section 2.1(d))
issuable upon conversion or exercise (as the case may be) of the Shares
and the Warrants and no later than 150 days after such effective date.
The closing of the purchase and sale of the Series B Shares (the "Series
B Closing") shall take place at the offices of the Escrow Agent on the
date indicated in the Series B Subsequent Financing Notice (which may
not be prior to the 15th Trading Day or subsequent to the 30th Trading
Day after receipt by the other party of the Subsequent Financing Notice,
or as otherwise agreed to by the parties); provided that in no case
shall the Series B Closing take place unless and until the conditions
listed in Section 4.1 have been satisfied or waived by the appropriate
party. The date of the Series B Closing is hereinafter referred to as
the "Series B Closing Date."
(ii) At the Series B Closing, the parties shall deliver or shall
cause to be delivered to the Escrow Agent such items as are required to
be delivered by them in accordance with and subject to the terms and
conditions of an Escrow Agreement, in the form of Exhibit E, to be
executed by and among the Company, the Purchaser and the Escrow Agent,
prior to the Series B Closing Date, including the following: (a) the
Company shall deliver to the Purchaser (1) such number of Series B
Shares as indicated on the Series B Subsequent Financing Notice (as
adjusted pursuant to the terms and conditions hereof), registered in the
name of the Purchaser, (2) a common stock purchase warrant in the form
of Exhibit B (the "Series B Warrants") to purchase a number of shares of
the Common Stock as would equal 0.125 multiplied by the number of shares
of Common Stock issuable upon conversion in full of the Series B Shares
to be issued at the Series B Closing (assuming that such conversion
occurred on the Series B Closing Date) at an exercise price equal to
120% of the Market Price on the Series B Closing Date, exercisable for
three years from the Series B Closing Date registered in the name of the
Purchaser, (3) the legal opinion referenced in Section 4.1(xii),
substantially in the form attached hereto as Exhibit D, and (4) all
other documents, instruments and writings required to have been
delivered at or prior to the Series B Closing by the Company to the
Purchaser pursuant to this Agreement; and (b) the Purchaser shall
deliver to the Company (1) the product of $10,000 and the number of
Series B Shares to be issued and sold at the Series B Closing, in United
States dollars in immediately available funds by wire transfer to an
account designated in writing by the Company for such purpose prior to
the Series B Closing Date and (2) all documents, instruments and
writings required to have been delivered at or prior to the Series B
Closing by such Purchaser pursuant to this Agreement.
(c) The Series C Closing. (i) Subject to the terms and conditions set
forth in this Agreement, the Purchaser and the Company shall have the
right to deliver a written notice to the other (a "Series C Subsequent
Financing Notice") requiring such other party to either sell or buy, as
the case may be, Series C Shares and the Series C Warrants (as defined
below), for a purchase price of $10,000 per Series C Share. A Series C
Subsequent Financing Notice may be delivered no earlier than the later
to occur of (i) the 60th Trading Day after the effective date of the
Underlying Shares Registration Statement (provided, that in the event
that the Underlying Shares Registration Statement filed in connection
with the Series A Closing does not cover the Underlying Shares issuable
upon conversion or exercise of the Series B Shares and Series B
Warrants, then such 60 Trading Day period shall commence upon the
effective date of the Underlying Shares Registration Statement that
covers such Underlying Shares) and (ii) in the event that the Underlying
Shares Registration Statement filed in connection with the Series A
Closing covers the Underlying Shares issuable upon conversion or
exercise (as the case may be) of the Series B Shares and Series B
Warrants, 60 Trading Days after the Series B Closing Date, and no later
than 150 days after the later to occur of the applicable effective date
and the Series B Closing Date. The closing of the purchase and sale of
the Series C Shares (the "Series C Closing") shall take place at the
offices of the Escrow Agent on the date indicated in the Series C
Subsequent Financing Notice (which may not be prior to the 15th Trading
Day or subsequent to the 30th Trading Day after receipt by the other
party of the Subsequent Financing Notice, or as otherwise agreed to by
the parties); provided that in no case shall the Series C Closing take
place unless and until the conditions listed in Section 4.2 have been
satisfied or waived by the appropriate party. The date of the Series C
Closing is hereinafter referred to as the "Series C Closing Date."
(ii) At the Series C Closing, the parties shall deliver or shall cause
to be delivered to the Escrow Agent such items as are required to be
delivered by them in accordance with and subject to the terms and
conditions of an Escrow Agreement, in the form of Exhibit E, to be
executed by and among the Company, the Purchaser and the Escrow Agent,
prior to the Series C Closing Date, including the following: (a) the
Company shall deliver to the Purchaser (1) such number of Series C
Shares, as indicated in the Series C Subsequent Financing Notice (as
adjusted pursuant to the terms and conditions hereof), registered in the
name of the Purchaser, (2) a common stock purchase warrant in the form
of Exhibit B (the "Series C Warrants" and together with the Series A
Warrants and the Series B Warrants, the "Warrants") to purchase a number
of shares of the Common Stock as would equal 0.125 multiplied by the
number of shares of Common Stock issuable upon conversion in full of the
Series C Shares to be issued at the Series C Closing (assuming that such
conversion occurred on the Series C Closing Date) at an exercise price
equal to 120% of the Market Price on the Series C Closing Date,
exercisable for three years from the Series C Closing Date, registered
in the name of the Purchaser, (3) the legal opinion referenced in
Section 4.2(xii), substantially in the form attached hereto as Exhibit
D, and (4) all other documents, instruments and writings required to
have been delivered at or prior to the Series C Closing by the Company
to the Purchaser pursuant to this Agreement; and (b) the Purchaser shall
deliver to the Company (1) the product of $10,000 and the number of
Series C Shares to be issued and sold at the Series C Closing, in United
States dollars in immediately available funds by wire transfer to an
account designated in writing by the Company for such purpose prior to
the Series C Closing Date and (2) all documents, instruments and
writings required to have been delivered at or prior to the Series C
Closing by such Purchaser pursuant to this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations, Warranties and Agreements of the Company. The
Company hereby makes the following representations and warranties to the
Purchaser:
(a)Organization and Qualification. The Company is a corporation, duly
incorporated, validly existing and in good standing under the laws of
the State of Delaware, with the requisite corporate power and authority
to own and use its properties and assets and to carry on its business as
currently conducted. The Company has no subsidiaries other than as set
forth in Schedule 2.1(a) (collectively the "Subsidiaries"). Each of the
Subsidiaries is a corporation, duly incorporated, validly existing and
in good standing under the laws of the jurisdiction of its incorporation
or organization (as applicable), with the full corporate power and
authority to own and use its properties and assets and to carry on its
business as currently conducted. Each of the Company and the
Subsidiaries is duly qualified to do business and is in good standing as
a foreign corporation in each jurisdiction in which the nature of the
business conducted or property owned by it makes such qualification
necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not, individually or in the
aggregate, (x) adversely affect the legality, validity or enforceability
of the Securities (as defined below) or any of the Transaction Documents
(as defined below) in any material respect, (y) have or result in a
material adverse effect on the results of operations, assets, prospects,
or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole or (z) adversely impair the Company's
ability to perform fully on a timely basis its obligations under any of
this Agreement, the Certificates of Designation, the Warrants, the
Escrow Agreements or the Registration Rights Agreement (collectively,
the "Transaction Documents") (any of (x), (y) or (z), being a "Material
Adverse Effect").
(b) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the
transactions contemplated by each of the Transaction Documents, and
otherwise to carry out its obligations thereunder. The execution and
delivery of each of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated hereby and thereby
have been duly authorized by all necessary action on the part of the
Company and no further action is required by the Company. Each of the
Transaction Documents has been duly executed by the Company and when
delivered in accordance with the terms hereof will constitute the valid
and binding obligation of the Company enforceable against the Company in
accordance with its terms, except as such enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally the
enforcement of, creditors' rights and remedies or by other equitable
principles of general application. Neither the Company nor any
Subsidiary is in violation of any of the provisions of its respective
certificate of incorporation, articles, by-laws or other charter
documents. Prior to the Series A Closing Date, the Series B Closing
Date and the Series C Closing Date (each a "Closing Date"), as the case
may be, the respective Certificates of Designation shall have been filed
with the Secretary of State of the State of Delaware and will be in full
force and effect, enforceable against the Company in accordance with the
terms thereof.
(c)Capitalization. The authorized, issued and outstanding capital
stock of the Company is set forth in Schedule 2.1(c). No shares of
Common Stock are entitled to preemptive or similar rights, nor is any
holder of the Common Stock entitled to preemptive or similar rights
arising out of any agreement or understanding with the Company by virtue
of any of the Transaction Documents. Except as disclosed in Schedule
2.1(c), there are no outstanding options, warrants, script rights to
subscribe to, calls or commitments of any character whatsoever relating
to, or, except as a result of the purchase and sale of the Shares and
the Warrants, securities, rights or obligations convertible into or
exchangeable for, or giving any person any right to subscribe for or
acquire any shares of Common Stock, or contracts, commitments,
understandings, or arrangements by which the Company or any Subsidiary
is or may become bound to issue additional shares of Common Stock, or
securities or rights convertible or exchangeable into shares of Common
Stock. To the knowledge of the Company, except as specifically
disclosed in the SEC Documents (as defined below) or Schedule 2.1(c), no
Person or group of related Persons beneficially owns (as determined
pursuant to Rule 13d-3 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) or has the right to acquire by
agreement with or by obligation binding upon the Company beneficial
ownership of in excess of 5% of the Common Stock. A "Person" means an
individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company,
joint stock company, government (or an agency or subdivision thereof) or
other entity of any kind.
(d) Issuance of the Shares and the Warrants. The Shares and the
Warrants are duly authorized, and, when issued and paid for in
accordance with the terms hereof, shall have been validly issued, fully
paid and nonassessable, free and clear of all liens, encumbrances and
rights of first refusal of any kind (collectively, "Liens"). The
Company has on the date hereof and will, at each Closing Date, have, and
at all times while the Shares and any Warrants are outstanding will
maintain an adequate reserve of duly authorized shares of Common Stock,
to enable it to perform its conversion, exercise and other obligations
under this Agreement, the Warrants and the Certificate of Designation
with respect to the number of Shares and Warrants issued at such Closing
Date, and in no circumstances shall such reserved and available shares
of Common Stock be less than the sum of (i) 200% of the maximum number
of shares of Common Stock which would be issuable upon conversion in
full of the Shares issued pursuant to the terms hereof assuming such
conversion were effected on the Original Issue Date for such Shares,
(ii) the number of shares of Common Stock issuable upon exercise of the
Warrants, and (iii) the number of shares Common Stock which would be
issuable upon payment of dividends on the Shares, assuming each Share is
outstanding for three years and all dividends are paid in shares of
Common Stock. All such authorized shares of Common Stock shall be duly
reserved for such issuance to the holders of such Shares and Warrants.
The shares of Common Stock issuable upon conversion of the Shares, as
payment of dividends thereon, or upon exercise of the Warrants are
collectively referred to herein as the "Underlying Shares." The Shares,
the Warrants and Underlying Shares are, collectively, the "Securities".
When issued in accordance with the Certificates of Designation, and
upon exercise of the Warrants, the Underlying Shares have been duly
authorized, validly issued, fully paid and nonassessable, free and clear
of all Liens.
(e)No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company
of the transactions contemplated thereby do not and will not (i)
conflict with or violate any provision of its certificate of
incorporation, bylaws or other charter documents (each as amended
through the date hereof) or (ii) subject to obtaining the consents
referred to in Section 2.1(f), conflict with, or constitute a default
(or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument
(evidencing a Company debt or otherwise) to which the Company is a party
or by which any property or asset of the Company is bound or affected,
or (iii) result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or
governmental authority to which the Company is subject (including
Federal and state securities laws and regulations), or by which any
material property or asset of the Company is bound or affected, except
in the case of each of clauses (ii) and (iii), such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as
could not, individually or in the aggregate, have or result in a
Material Adverse Effect. The business of the Company is not being
conducted in violation of any law, ordinance or regulation of any
governmental authority, except for violations which, individually or in
the aggregate, would not have a Material Adverse Effect.
(f) Consents and Approvals. Except as specifically set forth in
Schedule 2.1(f), neither the Company nor any Subsidiary is required to
obtain any consent, waiver, authorization or order of, give any notice
to, or make any filing or registration with, any court or other Federal,
state, local or other governmental authority or other Person in
connection with the execution, delivery and performance by the Company
of the Transaction Documents, other than (i) the filings of the
Certificates of Designation with the Secretary of State of Delaware,
(ii) the filing of Underlying Shares Registration Statement with the
Securities and Exchange Commission (the "Commission"), (iii) the
application(s) or any letter(s) acceptable to the Nasdaq National Market
System (the "NASDAQ") for the listing of the Underlying Shares with the
NASDAQ (and with any other national securities exchange or market on
which the Common Stock is then listed), and (iv) in all other cases
where the failure to obtain such consent, waiver, authorization or
order, or to give such notice or make such filing or registration could
not have or result in, individually or in the aggregate, a Material
Adverse Effect (together with the consents, waivers, authorizations,
orders, notices and filings referred to in Schedule 2.1(f), the
"Required Approvals").
(g) Litigation; Proceedings. Except as specifically disclosed in the
Disclosure Materials (as hereinafter defined) there is no action, suit,
notice of violation, proceeding or investigation pending or, to the
knowledge of the Company, threatened against or affecting the Company or
any of its Subsidiaries or any of their respective properties before or
by any court, governmental or administrative agency or regulatory
authority (Federal, state, county, local or foreign) which (i) adversely
affects or challenges the legality, validity or enforceability of any of
the Transaction Documents or the Securities or (ii) could individually
or in the aggregate, have a Material Adverse Effect.
(h) No Default or Violation. Neither the Company nor any Subsidiary
(i) is in default under or in violation of any indenture, loan or credit
agreement or any other agreement or instrument to which it is a party or
by which it or any of its properties is bound, (ii) is in violation of
any order of any court, arbitrator or governmental body applicable to
it, or (iii) is in violation of any statute, rule or regulation of any
governmental authority to which it is subject, except as could not, in
any such case (individually or in the aggregate) have or result in a
Material Adverse Effect.
(i)Schedules. The Schedules to this Agreement furnished by or on
behalf of the Company do not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they
were made, not misleading.
(j) Private Offering. Neither the Company nor any Person acting on its
behalf has taken or will take any action which might subject the
offering, issuance or sale of the Securities to the registration
requirements of the Securities Act of 1933, as amended (the "Securities
Act").
(k) SEC Documents; Financial Statements; No Adverse Change. The
Company has filed all reports required to be filed by it under the
Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for
the three years preceding the date hereof (or such shorter period as the
Company was required by law to file such material) (the foregoing
materials being collectively referred to herein as the "SEC Documents"
and, together with the Schedules to this Agreement the "Disclosure
Materials") on a timely basis or has received a valid extension of such
time of filing and has filed any such SEC Documents prior to the
expiration of any such extension. As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, and none of the SEC Documents, when
filed, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances
under which they were made, not misleading. All material agreements to
which the Company is a party or to which the property or assets of the
Company are subject have been filed as exhibits to the SEC Documents as
required; neither the Company nor any of its subsidiaries is in breach
of any agreement where such breach would have or result in a Material
Adverse Effect. The financial statements of the Company included in the
SEC Documents comply in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with
respect thereto as in effect at the time of filing. Such financial
statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods
involved, except as may be otherwise specified in such financial
statements or the notes thereto, and fairly present in all material
respects the financial position of the Company as of and for the dates
thereof and the results of operations and cash flows for the periods
then ended, subject, in the case of unaudited statements, to normal
year-end audit adjustments. Since the date of the financial statements
included in the Company's last filed Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, there has been no event, occurrence
or development that has had or could result in a Material Adverse Effect
which has not been specifically disclosed to the Purchaser by the
Company. The Company last filed audited financial statements with the
Commission on December 31, 1996, and has not received any comments from
the Commission in respect thereof.
(l) Seniority. No class of equity securities of the Company is senior
to the Preferred Stock in right of payment, whether upon liquidation,
dissolution or otherwise.
(m) Investment Company. The Company is not, and is not controlled by
or under common control with an affiliate (an "Affiliate") of, an
"investment company" within the meaning of the Investment Company Act of
1940, as amended.
(n) Certain Fees. Except for certain fees payable by the Company to
Wharton Capital Partners, Ltd. and to Donald Drum, no fees or
commissions will be payable by the Company to any broker, financial
advisor or consultant, finder, placement agent, investment banker, or
bank with respect to the transactions contemplated by this Agreement.
The Purchaser shall have no obligation with respect to any fees or with
respect to any claims made by or on behalf of other Persons for fees of
a type contemplated in this Section that may be due in connection with
the transactions contemplated by this Agreement. The Company shall
indemnify and hold harmless the Purchaser, its employees, officers,
directors, agents, and partners, and their respective Affiliates (as
such term is defined under Rule 405 promulgated under the Securities
Act), from and against all claims, losses, damages, costs (including the
costs of preparation and attorney's fees) and expenses suffered in
respect of any such claimed or existing fees, as such fees and expenses
are incurred.
(o) Solicitation Materials. The Company has not (i) distributed any
offering materials in connection with the offering and sale of the
Securities, other than the Disclosure Materials and any amendments and
supplements thereto or (ii) solicited any offer to buy or sell the
Securities by means of any form of general solicitation or advertising.
None of the Disclosure Materials or any other information provided to
the Purchaser by or on behalf of the Company contain any untrue
statement of material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading.
(p) Form S-3 Eligibility. The Company is, and at each Closing Date
will be, eligible to register securities for resale with the Commission
under Form S-3 promulgated under the Securities Act.
(q) Exclusivity. The Company shall not issue and sell the Preferred
Stock to any Person other than the Purchaser pursuant to this Agreement
other than with the specific prior written consent of the Purchaser,
provided the Purchaser has not failed to purchase the Series B Shares or
Series C Shares, as the case may be, if obligated to do so hereunder.
(r) Listing and Maintenance Requirements Compliance. The Company has
not in the two years preceding the date hereof received notice (written
or oral) from the NASDAQ or any other stock exchange, market or trading
facility on which the Common Stock is or has been listed (or on which it
has been quoted) to the effect that the Company is not in compliance
with the listing or maintenance requirements of such exchange or market.
The Company is in compliance with all such maintenance requirements.
(s) Patents and Trademarks. The Company has, or has rights to use, all
patents, patent applications, trademarks, trademark applications,
service marks, trade names, copyrights, licenses and rights
(collectively, the "Intellectual Property Rights") which are necessary
for use in connection with its business, as currently conducted and as
described in the SEC Documents, and which the failure to so have would
have a Material Adverse Effect. To the best knowledge of the Company,
there is no existing infringement by another Person of any of the
Intellectual Property Rights which are necessary for use in connection
with the Company's business.
(t) Acknowledgement of Dilution. The Company acknowledges that the
issuance of the Underlying Shares upon (i) conversion of the Shares and
payment of dividends thereon in accordance with the Certificates of
Designation, and (ii) exercise of the Warrants may result in dilution of
the outstanding shares of Common Stock, which dilution may be
substantial under certain market conditions. The Company further
acknowledges that its obligation to issue Underlying Shares upon (x)
conversion of the Shares and payment of dividends thereon in accordance
with the Certificates of Designation, and (y) exercise of the Warrants
is unconditional and absolute, subject to the limitations set forth
herein in the Certificates of Designation or pursuant to the Warrants,
regardless of the effect of any such dilution.
(u) Registration Rights; Rights of Participation. Except as described
on Schedule 2.1(u) hereto, (A) the Company has not granted or agreed to
grant to any Person any rights (including "piggy-back" registration
rights) to have any securities of the Company registered with the
Commission or any other governmental authority which has not been
satisfied and (B) no Person, including, but not limited to, current or
former shareholders of the Company, underwriters, brokers, financial
consultants or advisors or agents, has any right of first refusal,
preemptive right, right of participation, or any similar right to
participate in the transactions contemplated by this Agreement or any
other Transaction Document.
(v) Title. The Company and the Subsidiaries have good and marketable
title in fee simple to all real property and personal property owned by
them which is material to the business of the Company and its
Subsidiaries, in each case free and clear of all Liens, except for
liens, claims or encumbrances as do not materially affect the value of
such property and do not interfere with the use made and proposed to be
made of such property by the Company and its Subsidiaries. Any real
property and facilities held under lease by the Company and its
Subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings
by the Company and its Subsidiaries.
(w) Regulatory Permits. The Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate
Federal, state or foreign regulatory authorities necessary to conduct
their respective businesses as described in the SEC Documents except
where the failure to possess such permits would not, individually or in
the aggregate, have a Material Adverse Effect ("Material Permits"), and
neither the Company nor any such Subsidiary has received any notice of
proceedings relating to the revocation or modification of any Material
Permit.
2.2 Representations and Warranties of the Purchaser. The Purchaser
hereby represents and warrants to the Company as follows:
(a) Organization; Authority
The Purchaser is a corporation duly
incorporated or a limited partnership duly formed, validly existing and
in good standing under the laws of the jurisdiction of its incorporation
or formation with the requisite power and authority, corporate or
otherwise, to enter into and to consummate the transactions contemplated
hereby and by the Registration Rights Agreement and otherwise to carry
out its obligations hereunder and thereunder. The purchase by the
Purchaser of the Securities hereunder has been duly authorized by all
necessary action on the part of the Purchaser. Each of this Agreement
and the Registration Rights Agreement has been duly executed and
delivered by the Purchaser and constitutes the valid and legally binding
obligation of the Purchaser, enforceable against the Purchaser, in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights generally and
to general principles of equity.
(b) Investment Intent
The Purchaser is acquiring the Securities for its own account
for investment purposes only and not with a view to or for distributing
or reselling such Securities or any part thereof or interest therein,
without prejudice, however, to the Purchaser's right, subject to the
provisions of this Agreement and the Registration Rights Agreement, at
all times to sell or otherwise dispose of all or any part of such
Securities pursuant to an effective registration statement under the
Securities Act and in compliance with applicable state securities laws
or under an exemption from such registration.
(c) Purchaser Status
At the time the Purchaser was offered the Shares and the
Warrants, it was, and at the date hereof, it is, and at each Closing
Date and each exercise date under the Warrants, it will be, an
"accredited investor" as defined in Rule 501(a) under the Securities
Act.
(d) Experience of the Purchaser. The Purchaser either alone or
together with its representatives, has such knowledge, sophistication
and experience in business and financial matters so as to be capable of
evaluating the merits and risks of the prospective investment in the
Securities, and has so evaluated the merits and risks of such
investment.
(e) Ability of the Purchaser to Bear Risk of Investment. The Purchaser
is able to bear the economic risk of an
investment in the Securities and, at the present time, is able to afford
a complete loss of such investment.
(f) Access to Information. The Purchaser acknowledges receipt of
the Disclosure Materials and further acknowledges that it has been
afforded (i) the opportunity to ask such questions as it has deemed
necessary of, and to receive answers from, representatives of the
Company concerning the terms and conditions of the offering of the
Securities and the merits and risks of investing in the Securities; (ii)
access to information about the Company and the Company's financial
condition, results of operations, business, properties, management and
prospects sufficient to enable it to evaluate its investment; and (iii)
the opportunity to obtain such additional information which the Company
possesses or can acquire without unreasonable effort or expense that is
necessary to make an informed investment decision with respect to the
investment and to verify the accuracy and completeness of the
information contained in the Disclosure Materials.
(g) Reliance. The
Purchaser understands and acknowledges that (i) the Securities are being
offered and sold to it without registration under the Securities Act in
a private placement that is exempt from the registration provisions of
the Securities Act under Section 4(2) of the Securities Act or
Regulation D promulgated thereunder and (ii) the availability of such
exemption, depends in part on, and the Company will rely upon the
accuracy and truthfulness of, the foregoing representations and the
Purchaser hereby consents to such reliance.
(h) Organization. The Purchaser represents and warrants
that it has not been organized or recapitalized specifically for the
purpose of purchasing the Securities.
The Company acknowledges and agrees that the Purchaser makes
no representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in this
Section 2.2.
ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3.1 Transfer Restrictions.
(a) The Purchaser may only dispose of the Securities
held by it, pursuant to an effective registration statement under the
Securities Act, to the Company or pursuant to an available exemption
from the registration requirements of the Securities Act. In connection
with any transfer of Securities other than pursuant to an effective
registration statement or to the Company, except as otherwise set forth
herein, the Company may require the transferor thereof to provide to the
Company a written opinion of counsel experienced in the area of United
States securities laws selected by the transferor, the form and
substance of which opinion shall be reasonably satisfactory to counsel
to the Company, to the effect that such transfer does not require
registration of such transferred securities under the Securities Act.
Notwithstanding the foregoing, the Company hereby consents to and agrees
to register any transfer of Securities by the Purchaser to an Affiliate
of the Purchaser, or any transfer among any such Affiliates, provided
that transferee certifies to the Company that it is an "accredited
investor" as defined in Rule 501(a) under the Securities Act. Any such
transferee shall agree in writing to be bound by the terms of this
Agreement and shall have the rights of the Purchaser under this
Agreement and the Registration Rights Agreement.
(b) The Purchaser agrees to the imprinting, so long as is
required by this Section 3.1(b), of the following legend on the
Securities:
[NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE CONVERTIBLE HAVE] [THE SECURITIES REPRESENTED
HEREBY HAVE NOT] 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, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE
WITH APPLICABLE STATE SECURITIES LAWS.
[FOR SHARES ONLY] THE SHARES REPRESENTED BY THIS CERTIFICATE
ARE SUBJECT TO CERTAIN RESTRICTIONS ON CONVERSION SET FORTH IN A
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, DATED AS OF MARCH
24, 1998, EXECUTED BY THE ORIGINAL HOLDER HEREOF. A COPY OF THAT
AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF USCI, INC.
The Underlying Shares issuable upon conversion of the Shares
or as payment of dividends thereon or exercise of the Warrants shall not
contain the legend set forth above nor any other legend if the
conversion of such Shares or the payment of such dividends thereon or
exercise of the Warrants occurs at any time while an Underlying Shares
Registration Statement is effective under the Securities Act or in the
event there is not an effective Underlying Shares Registration Statement
at such time, if in the written opinion of counsel to the Company
experienced in the area of United States securities laws such legend is
not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the
staff of the Commission). The Company agrees that it will provide the
Purchaser, upon request, with a certificate or certificates representing
Underlying Shares, free from such legend at such time as such legend is
no longer required hereunder.
3.2 Stop Transfer Instruction.
The Company may not make any notation on its
records or give instructions to any transfer agent of the Company which
enlarge the restrictions of transfer set forth in Section 3.1.
3.3 Furnishing of Information. As long as the Purchaser owns
Securities, the Company covenants to timely file (or obtain extensions
in respect thereof and file within the applicable grace period) all
reports required to be filed by the Company after the date hereof
pursuant to Section 13(a) or 15(d) of the Exchange Act and to promptly
furnish the Purchaser with true and complete copies of all such filings.
As long as the Purchaser owns Securities, if the Company is not
required to file reports pursuant to Section 13(a) or 15(d) of the
Exchange Act, it will prepare and furnish to the Purchaser and make
publicly available in accordance with Rule 144(c) promulgated under the
Securities Act annual and quarterly financial statements, together with
a discussion and analysis of such financial statements in form and
substance substantially similar to those that would otherwise be
required to be included in reports required by Section 13(a) or 15(d) of
the Exchange Act, as well as any other information required thereby, in
the time period that such filings would have been required to have been
made under the Exchange Act. The Company further covenants that it will
take such further action as any holder of the Shares may reasonably
request, all to the extent required from time to time to enable such
Person to sell Underlying Shares without registration under the
Securities Act within the limitation of the exemptions provided by Rule
144 promulgated under the Securities Act, including the legal opinion
referenced above in this Section. Upon the request of any such Person,
the Company shall deliver to such Person a written certification of a
duly authorized officer as to whether it has complied with such
requirements.
3.4 Blue Sky Laws.
In accordance with the Registration Rights Agreement, the Company shall
qualify or exempt the issuance and sale of the Underlying Shares under
the securities or Blue Sky laws of such jurisdictions as the Purchaser
may request and shall continue such qualification or exemption at all
times through the third anniversary of the Closing Date; provided,
however, that neither the Company nor its Subsidiaries shall be required
in connection therewith to qualify as a foreign corporation where they
are not now so qualified or to take any action that would subject the
Company to general service of process in any such jurisdiction where it
is not then so subject or subject the Company to any material tax in any
such jurisdiction where it is not then so subject.
3.5 Integration.
The Company shall not sell, offer for sale or solicit offers to buy or
otherwise negotiate in respect of any security (as defined in Section 2
of the Securities Act) that would be integrated with the offer or sale of the
Securities in a manner that would require the registration under
the Securities Act of the sale of the Securities to the Purchaser.
3.6 Certain Agreements.
As long as the Purchaser owns Shares, the Company shall
not and shall cause the Subsidiaries not to, without the consent of the
holders of all of the Shares then outstanding, (i) amend its certificate
of incorporation, bylaws or other charter documents so as to adversely
affect any rights of any Purchaser; (ii) declare, authorize, set aside
or pay any dividend or other distribution with respect to the Common
Stock except as permitted under the Certificates of Designation and as
would not adversely affect the rights of any Purchaser hereunder or
under such Certificates of Designation; (iii) repay, repurchase or offer
to repay, repurchase or otherwise acquire shares of its Common Stock in
any manner; or (iv) enter into any agreement with respect to any of the
foregoing.
3.7 Listing and Reservation of Underlying Shares
(a) The Company shall (i) not later than the fifth Business Day following
the applicable Closing Date prepare and file with the NASDAQ (as well as
any other national securities exchange or market or trading or quotation
facility on which the Common Stock is then listed) an additional shares
listing application or a letter acceptable to the NASDAQ covering and
listing a number of shares of Common Stock which is at least equal to
the number of shares required to be reserved pursuant to Section 2.1(d),
(ii) take all steps necessary to cause the such shares to be approved
for listing in the NASDAQ (as well as on any other national securities
exchange or market or trading or quotation facility on which the Common
Stock is then listed) as soon as possible thereafter, and (iii) provide
to the Purchaser evidence of such listing, and the Company shall
maintain the listing of its Common Stock thereon. In the event that the
number of Underlying Shares as are issuable upon conversion in full of
the then number of outstanding Shares, as payment or dividends thereon,
and upon exercise of the then unexercised portion of the Warrants
exceeds 185% of the number of Underlying Shares previously listed on
account thereof with NASDAQ (and other required exchanges) the Company
shall take the necessary actions to immediately list a number of
Underlying Shares as equal to 200% of the number of Underlying Shares
then issuable upon conversion of the Shares and as payment of dividends
and exercise of Warrants.
(b) The Company shall reserve for issuance upon conversion
of the Shares and for payment of dividends thereupon in shares of Common
Stock pursuant to the terms of the Certificates of Designation and upon
exercise of the Warrants in accordance with their terms, as many shares
as may be required to fulfill such conversion, dividend and exercise
obligations, but in no event less than the number of shares to be listed
on the NASDAQ (and such other national securities exchange or market or
trading or quotation facility on which the Common Stock is then listed,
traded or quoted) as set forth in Section 3.7(a).
3.8 Purchaser Ownership of Common Stock The Purchaser agrees not
to convert Shares or exercise its Warrants to the extent such conversion
or exercise would result in the Purchaser beneficially owning (as
determined in accordance with Section 13(d) of the Exchange Act and the
rules thereunder) in excess of 4.999% of the then issued and outstanding
shares of Common Stock, including shares issuable upon conversion of the
Shares held by such Purchaser after application of this Section. To the
extent that the limitation contained in this Section applies, the
determination of whether Shares are convertible (in relation to other
securities owned by a Purchaser) and of which Shares are convertible
shall be in the sole discretion of the Purchaser, and the submission of
Shares for conversion shall be deemed to be such Purchaser's
determination of whether such Shares are convertible (in relation to
other securities owned by a Purchaser) and of which portion of such
Shares are convertible, in each case subject to such aggregate
percentage limitation, and the Company shall have no obligation to
verify or confirm the accuracy of such determination. Nothing
contained herein shall be deemed to restrict the right of the Purchaser
to convert Shares at such time as such conversion will not violate the
provisions of this Section. The provisions of this Section will not
apply to any conversion pursuant to Section 5(a)(ii) of the Certificates
of Designation, and may be waived by the Purchaser upon not less than 75
days prior notice to the Company, and the provisions of this Section
shall continue to apply until such 75th day (or later, if stated in the
notice of waiver).
3.9 No Violation of Applicable Law. Notwithstanding any provision of this
Agreement to the contrary, if the redemption of the Shares or Underlying
Shares otherwise required under this Agreement or the Registration
Rights Agreement would be prohibited by the relevant provisions of the
Delaware General Corporation Law, such redemption shall be effected as
soon as it is permitted under such law; provided, however, that from the
5th day after such redemption notice until such redemption price is paid
in full, interest on any such unpaid amount shall accrue at the rate of
15% per annum.
3.10 Notice of Breaches.
(a) Each of the Company and the Purchaser shall give
prompt written notice to the other of any breach of any representation,
warranty or other agreement contained in this Agreement or in the
Registration Rights Agreement, as well as any events or occurrences
arising after the date hereof and prior to the Series B Closing Date and
the Series C Closing Date which would reasonably be likely to cause any
representation or warranty or other agreement of such party, as the case
may be, contained herein to be incorrect or breached as of such Closing
Date. However, no disclosure by either party pursuant to this Section
3.9 shall be deemed to cure any breach of any representation, warranty
or other agreement contained herein or in the Registration Rights
Agreement.
(b) Notwithstanding the generality of Section 3.9(a), the
Company shall promptly notify the Purchaser of any notice or claim
(written or oral) that it receives from any lender of the Company to the
effect that the consummation of the transactions contemplated hereby and
by the Registration Rights Agreement violates or would violate any
written agreement or understanding between such lender and the Company,
and the Company shall promptly furnish by facsimile to the holders of
the Shares a copy of any written statement in support of or relating to
such claim or notice.
3.11 Conversion and Exercise Obligations of the Company. The Company covenants
to convert the Shares and to deliver
Underlying Shares in accordance with the terms and conditions and time
period set forth in the respective Certificates of Designation and to
deliver Underlying Shares upon exercise of Warrants in accordance with
the terms and conditions and time periods set forth in the Warrants.
3.12 Right of First Refusal; Subsequent Registrations; Certain Corporate
Actions. (a) The Company
shall not, directly or indirectly, without the prior written consent of
Encore Capital Management, L.L.C. ("Encore"), offer, sell, grant any
option to purchase, or otherwise dispose of (or announce any offer,
sale, grant or any option to purchase or other disposition) any of its
or its Affiliates' equity or equity-equivalent securities or any
instrument that permits the holder thereof to acquire Common Stock at
any time over the life of the security or investment at a price that is
less than the market price of the Common Stock at the time of issuance
of such security or investment (a "Subsequent Placement" for a period of
180 days after any Closing Date, except (i) the granting of options or
warrants to employees, officers and directors, and the issuance of
shares upon exercise of options granted, under any stock option plan
heretofore or hereinafter duly adopted by the Company, (ii) shares
issued upon exercise of any currently outstanding warrants and upon
conversion of any currently outstanding convertible preferred stock in
each case disclosed in Schedule 3.1(c), and (iii) shares of Common Stock
issued upon conversion of Shares, as payment of dividends thereon, or
upon exercise of the Warrants in accordance with their respective terms,
unless (A) the Company delivers to Encore a written notice (the
"Subsequent Placement Notice") of its intention effect such Subsequent
Placement, which Subsequent Placement Notice shall describe in
reasonable detail the proposed terms of such Subsequent Placement, the
amount of proceeds intended to be raised thereunder, the Person with
whom such Subsequent Placement shall be affected, and attached to which
shall be a term sheet or similar document relating thereto and (B)
Encore shall not have notified the Company by 5:00 p.m. (New York City
time) on the tenth (10th) Trading Day after its receipt of the
Subsequent Placement Notice of its willingness to cause the Purchaser to
provide (or to cause its sole designee to provide), subject to
completion of mutually acceptable documentation, financing to the
Company on substantially the terms set forth in the Subsequent Placement
Notice. If Encore shall fail to notify the Company of its intention to
enter into such negotiations within such time period, the Company may
effect the Subsequent Placement substantially upon the terms and to the
Persons (or Affiliates of such Persons) set forth in the Subsequent
Placement Notice; provided, that the Company shall provide Encore with a
second Subsequent Placement Notice, and Encore shall again have the
right of first refusal set forth above in this paragraph (a), if the
Subsequent Placement subject to the initial Subsequent Placement Notice
shall not have been consummated for any reason on the terms set forth in
such Subsequent Placement Notice within thirty (30) Trading Days after
the date of the initial Subsequent Placement Notice with the Person (or
an Affiliate of such Person) identified in the Subsequent Placement
Notice.
(b) Except Underlying Shares and other "Registrable
Securities" (as such term is defined in the Registration Rights
Agreement) required to be registered in accordance with the Registration
Rights Agreement and other securities of the Company permitted to be
registered pursuant to Section 6(b) of the Registration Rights
Agreement, and other than Company securities to be registered for resale
in connection with financings permitted pursuant to paragraph (a)(i)
through (iii) of this Section, the Company shall not, without the prior
written consent of the Purchaser, (i) issue or sell any of its or any of
its Affiliates' equity or equity-equivalent securities pursuant to
Regulation S promulgated under the Securities Act, or (ii) register for
resale any securities of the Company for a period of not less than 90
Trading Days after the later to occur of (1) the date that an Underlying
Shares Registration Statement is declared effective by the Commission
(provided, that in the event that the Underlying Shares Registration
Statement filed in connection with the Series A Closing does not cover
the Underlying Shares issuable upon conversion or exercise of the Series
B Shares, Series C Shares, Series B Warrants and Series C Warrants, then
each such 90 Trading Day period shall commence on the date that the
Underlying Shares Registration Statements covering the Underlying Shares
issuable in respect of the Series B Shares and Series B Warrants and
Series C Shares and Series C Warrants are respectively declared
effective by the Commission) and (2) the 90th Trading Day after the
Series B Closing Date and Series C Closing Date, as applicable. Any
days that the Purchaser is unable to sell Underlying Shares under an
Underlying Shares Registration Statement shall be added to such 90
Trading Day period.
3.13 Press Release. The Company shall issue a press release within two
Business Days of each Closing Date, as applicable, relating to the issue
and sale of the Shares and Warrants to the Purchaser at such Closing
Date, which press releases shall be approved by the Purchaser.
3.14 Annual Report on Form 10-K. The Company shall file an
Annual Report on Form 10-K for the fiscal year ended December 31, 1997
prior to March 31, 1998.
3.15 Use of Proceeds. The Company shall use all of the proceeds from
the sale of the Shares for working capital and general corporate
purposes and not for the satisfaction of any portion of Company
borrowings or to redeem Company equity or equity-equivalent securities.
Pending application of the proceeds of this placement in the manner
permitted hereby, the Company will invest such proceeds in interest
bearing accounts and/or short-term, investment grade interest bearing
securities.
3.16 Reimbursement . In the event that the Purchaser, other than by
reason of its gross negligence or willful misconduct, becomes involved
in any capacity in any action, proceeding or investigation brought by or
against any Person, including stockholders of the Company, in connection
with or as a result of the consummation of the transactions contemplated
pursuant to the Transaction Documents, the Company will reimburse the
Purchaser for its reasonable legal and other expenses (including the
cost of any investigation and preparation) incurred in connection
therewith. In addition, other than with respect to any matter in which
the Purchaser is a named party, the Company will pay the Purchaser the
charges, as reasonably determined by the Purchaser, for the time of any
officers or employees of the Purchaser devoted to appearing and
preparing to appear as witnesses, assisting in preparation for hearings,
trials or pretrial matters, or otherwise with respect to inquiries,
hearings, trials, and other proceedings relating to the subject matter
of this Agreement. The reimbursement obligations of the Company under
this paragraph shall be in addition to any liability which the Company
may otherwise have, shall extend upon the same terms and conditions to
any Affiliate of the Purchaser and partners, directors, agents,
employees and controlling persons (if any), as the case may be, of the
Purchaser and any such Affiliate, and shall be binding upon and inure to
the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchaser and any such Affiliate and
any such Person. The Company also agrees that neither the Purchaser nor
any such Affiliates, partners, directors, agents, employees or
controlling persons shall have any liability to the Company or any
person asserting claims on behalf of or in right of the Company in
connection with or as a result of the consummation of the Transaction
Documents except to the extent that any losses, claims, damages,
liabilities or expenses incurred by the Company result from the gross
negligence or willful misconduct of the Purchaser or entity in
connection with the transactions contemplated by this Agreement. The
Purchaser shall not, without the prior written consent of the Company,
effect any settlement of any action in respect of which the Company is a
party.
ARTICLE IV
4.1 Conditions Precedent to the Obligation of the Purchaser to Purchase the
Series B Shares. The obligation of the Purchaser to acquire and pay for the
Series B Shares is subject to the satisfaction or waiver by the
Purchaser, at or before the Series B Closing of each of the following
conditions:
(i) Series A Closing . The Series A Closing shall have occurred;
(ii) Accuracy of the Company's Representations and Warranties The
representations and warranties of the Company contained herein shall
be true and correct in
all material respects as of the date when made and as of the Series B
Closing Date as though made on and as of the Series B Closing Date.
(iii) Performance by the Company . The Company shall have
performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by the Company at
or prior to the Series B Closing Date;
(iv) Underlying Shares Registration Statement
The Underlying Shares Registration Statement shall have been declared
effective under the Securities Act by the Commission. On the Series B
Closing Date, the Underlying Shares Registration Statement shall be
effective, not subject to any actual or threatened stop order and not be
subject to any actual or threatened suspension at any time between the
Series A Closing Date and the Series B Closing Date;
(v) No Injunction. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court of governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by the Transaction Documents relating to the issuance or
conversion of any of the Shares or exercise of the Warrants;
(vi) Adverse Changes Since the date of the financial statements
included in the Company's Quarterly Report on Form 10-Q or Annual Report
on Form 10-K, whichever is more recent, last filed prior to the date of
this Agreement, no event which had a Material Adverse Effect and no
material adverse change in the condition (financial or otherwise) or
prospects of the Company shall have occurred which is not disclosed in
the Disclosure Materials;
(vii) Litigation. No material litigation shall have been instituted
or threatened against the Company;
(viii) Management. In the reasonable judgment of the Purchaser, there
have been no substantial changes in the senior management of the
Company;
(ix) No Suspensions of Trading in Common Stock. The
trading in the Common Stock shall not have been suspended by the
Commission or on the NASDAQ (except for any suspension of trading of
limited duration solely to permit dissemination of material information
regarding the Company) at any time since the Series A Closing Date;
(x) Listing of Common Stock The Common Stock shall have been at
all times since the Series A Closing Date listed for trading on the
NASDAQ;
(xi) Change of Control No Change of Control in the Company shall
have occurred. "Change of Control" means the occurrence of any of (i)
an acquisition after the date hereof by an individual or legal entity or
"group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange
Act) of in excess of 33% of the voting securities of the Company, (ii) a
replacement of more than one-half of the members of the Company's board
of directors which is not approved by those individuals who are members
of the board of directors on the date hereof in one or a series of
related transactions, (iii) the merger of the Company with or into
another entity, consolidation or sale of all or substantially all of the
assets of the Company in one or a series of related transactions or (iv)
the execution by the Company of an agreement to which the Company is a
party or by which it is bound, providing for any of the events set forth
above in (i), (ii) or (iii);
(xii) Legal Opinion.
The Company shall have delivered to the Purchaser the
opinion of the Company's outside counsel, in substantially the form
attached hereto as Exhibit D dated the Series B Closing Date;
(xiii) Required Approvals. All Required Approvals shall have been
obtained;
(xiv) Shares of Common Stock. On the Series B Closing Date, the
Company shall have duly reserved the number of Underlying Shares
required by this Agreement to be reserved for issuance upon conversion
of Series B Shares and payment of dividends thereon;
(xv) Delivery of Stock Certificates . The Company shall have
delivered to the Purchaser or its designee the stock certificate(s)
representing the Series B Shares, registered in the name of the
Purchaser or its designee, each in form satisfactory to the Purchaser;
(xvi) Performance of Conversion/Exercise Obligations.
The Company shall have (a) delivered Underlying Shares
upon conversion of Series A Shares and otherwise performed its
obligations in accordance with the terms, conditions and timing
requirements of the Series A Certificate of Designation and (b)
delivered Underlying Shares upon exercise of the Series A Warrants and
otherwise performed its obligations in accordance with the terms of the
Series A Warrants;
(xvii) Closing Threshold
For the thirty (30) Trading Days immediately prior
to the Series B Closing Date, (i) the Per Share Market Value shall have
been equal to or greater than $4.00, (ii) there shall be a minimum of
twelve (12) market makers actively making a market in the Common Stock,
and (iii) the average weekly dollar volume of the Common Stock traded on
the NASDAQ shall be at least $1,000,000;
(xviii) Transfer Agent Instructions
The Irrevocable Transfer Agent Instructions, in the form of Exhibit F
attached hereto, shall have been delivered to and acknowledged in
writing by the Company's transfer agent; and
(xix) Shareholder Approval. No approval of the shareholders of the
Company shall be required in order to issue the Underlying Shares
issuable upon conversion in full of the Series B Shares to be issued and
sold at the Series B Closing.
(xx) Officer's Certificate. On the Series B Closing Date the Company
shall deliver to the Purchaser an Officer's Certificate dated the Series
B Closing Date and signed by an executive officer of the Company
confirming the accuracy of the Company's representations, warranties and
covenants as of the Series B Closing Date and confirming the compliance
by the Company with the conditions precedent set forth in this Section
4.1 as of the Series B Closing Date.
4.2 Conditions Precedent to the Obligation of the Purchaser to
Purchase the Series C Shares.
The obligation of the Purchaser to acquire and pay for the
Series C Shares is subject to the satisfaction or waiver by the
Purchaser, at or before the Series C Closing of each of the following
conditions:
(i) Series B Closing. The Series B Closing shall have occurred;
(ii) Accuracy of the Company's Representations and Warranties
The representations and
warranties of the Company contained herein shall be true and correct in
all material respects as of the date when made and as of the Series C
Closing Date as though made on and as of the Series C Closing Date;
(iii) Performance by the Company The Company shall have
performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by the Company at
or prior to the Series C Closing Date;
(iv) Underlying Shares Registration Statement
The Underlying Shares Registration Statement covering the Series B
Shares and Series B Warrants shall have been declared effective under
the Securities Act by the Commission. On the Series C Closing Date,
such Underlying Shares Registration Statement shall be effective, not
subject to any actual or threatened stop order and not be subject to any
actual or threatened suspension at any time between the Series B Closing
Date and the Series C Closing Date;
(v) No Injunction. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court of governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by the Transaction Documents relating to the issuance or
conversion of any of the Shares or exercise of the Warrants;
(vi) Adverse Changes. Since the date of the financial statements
included in the Company's Quarterly Report on Form 10-Q or Annual Report
on Form 10-K, whichever is more recent, last filed prior to the date of
this Agreement, no event which had a Material Adverse Effect and no
material adverse change in the condition (financial or otherwise) or
prospects of the Company shall have occurred which is not disclosed in
the Disclosure Materials;
(vii) Litigation. No material litigation shall have been instituted
or threatened against the Company;
(viii) Management. In the reasonable judgment of each Purchaser, there
have been no substantial changes in the senior management of the
Company;
(ix) No Suspensions of Trading in Common Stock The
trading in the Common Stock shall not have been suspended by the
Commission or on the NASDAQ (except for any suspension of trading of
limited duration solely to permit dissemination of material information
regarding the Company at any time since the Series A Closing Date);
(x) Listing of Common Stock The Common Stock shall have been at
all times since the Series A Closing Date listed for trading on the
NASDAQ;
(xi) Change of Control. No Change of Control in the Company shall
have occurred;
(xii) Legal Opinion.
The Company shall have delivered to the Purchaser the
opinion of the Company's outside counsel, in substantially the form
attached hereto as Exhibit D dated the Series C Closing Date;
(xiii) Required Approvals.
All Required Approvals shall have been obtained;
(xiv) Shares of Common Stock. On the Series C Closing Date, the
Company shall have duly reserved the number of Underlying Shares
required by this Agreement to be reserved for issuance upon conversion
of Series C Shares and payment of dividends thereon;
(xv) Delivery of Stock Certificates. The Company shall have
delivered to the Purchaser or its designee the stock certificate(s)
representing the Series C Shares, registered in the name of the
Purchaser or its designee, each in form satisfactory to the Purchaser;
(xvi) Performance of Conversion/Exercise Obligations.
The Company shall have (a) delivered Underlying Shares
upon conversion of Series A Shares and Series B Shares and otherwise
performed its obligations in accordance with the terms, conditions and
timing requirements of each of the Series A Certificate of Designation
and Series B Certificate of Designation and (b) delivered Underlying
Shares upon exercise of the Series A Warrants and the Series B Warrants
(as the case may be) and otherwise performed its obligations in
accordance with the terms of such Warrants;
(xvii) Closing Threshold.
For the thirty (30) Trading Days immediately prior
to the Series C Closing Date, (i) the Per Share Market Value shall have
been equal or greater than $4.00, (ii) there shall be a minimum of
twelve (12) market makers actively making a market in the Common Stock,
and (iii) the average weekly dollar volume of the Common Stock traded on
NASDAQ shall be a minimum of $1,000,000;
(xviii) Transfer Agent Instructions
The Irrevocable Transfer Agent Instructions, in the form of Exhibit F
attached hereto, shall have been delivered to and acknowledged in
writing by the Company's transfer agent; and
(xix) Shareholder Approval. No approval of the shareholders of the
Company shall be required in order to issue the Underlying Shares
issuable upon conversion in full of the Series C Shares to be issued and
sold at the Series C Closing.
(xx) Officer's Certificate. On the Series C Closing Date the Company
shall deliver to the Purchaser an Officer's Certificate dated the Series
C Closing Date and signed by an executive officer of the Company
confirming the accuracy of the Company's representations, warranties and
covenants as of the Series C Closing Date and confirming the compliance
by the Company with the conditions precedent set forth in this Section
4.2 as of the Series C Closing Date.
ARTICLE IV
MISCELLANEOUS
5.1 Fees and Expenses.
At the Series A Closing, the Company shall pay $15,000 to
the Escrow Agent, in connection with the preparation and negotiation
of the Transaction Documents, and $5,000 to the Purchaser or its
designee for due diligence expenses. At each of the Series B Closing
and Series C Closing, the Company will pay to the Escrow Agent, $7,500
the preparation of any documentation for such Closing. Otherwise,
each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred
by such party incident to the negotiation, preparation, execution,
delivery and performance of this Agreement, except as set forth in the
Registration Rights Agreement. The Company shall pay all stamp and
other taxes and duties levied in connection with the issuance of the
Shares pursuant hereto.
5.2 Entire Agreement; Amendments. This Agreement, together with
the Exhibits and Schedules hereto, the Registration Rights Agreement,
the Certificates of Designation, the Escrow Agreement and the Warrants
contain the entire understanding of the parties with respect to the
subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters.
5.3 Notices.
Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be deemed to have been
received (a) upon hand delivery (receipt acknowledged) or delivery by
telex (with correct answer back received), telecopy or facsimile (with
transmission confirmation report) at the address or number designated
below (if delivered on a business day during normal business hours
where such notice is to be received), or the first business day
following such delivery (if delivered on a business day after during
normal business hours where such notice is to be received) or (b) on
the second business day following the date of mailing by express
courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The
addresses for such communications shall as set forth below each
parties name on Schedule 1, and if to the Company with copies to the
Law Offices of Leonard R. Glass, P.A., 45 Central Avenue, P.O. Box
579, Tenafly, N.J. 07670 (fax: 201-894-1718) Attn: Leonard R. Glass,
Esq., and if to any Purchaser with copies to Robinson Silverman Pearce
Aronsohn & Berman LLP, 1290 Avenue of the Americas, New York, NY
10104, Attn: Eric L. Cohen, Esq., fax: (212) 541-4630, or such other
address as may be designated in writing hereafter, in the same manner,
by such Person.
5.4 Amendments; Waivers. No provision of this Agreement may be
waived or amended except in a written instrument signed, in the case
of an amendment, by both the Company and the Purchaser; or, in the
case of a waiver, by the party against whom enforcement of any such
waiver is sought. No waiver of any default with respect to any
provision, condition or requirement of this Agreement shall be deemed
to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or
omission of either party to exercise any right hereunder in any manner
impair the exercise of any such right accruing to it thereafter.
Notwithstanding the foregoing, no such amendment shall be effective to
the extent that it applies to less than all of the holders of the
Shares outstanding.
5.5 Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit
or affect any of the provisions hereof.
5.6 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and
permitted assigns. The Company may not assign this Agreement or any
rights or obligations hereunder without the prior written consent of
the Purchaser. No Purchaser may assign this Agreement (other than to
an Affiliate of the Purchaser) or any rights or obligations hereunder
without the prior written consent of the Company, except that any
Purchaser may assign its rights hereunder and under the Transaction
Documents without the consent of the Company as long as such assignee
demonstrates to the reasonable satisfaction of the Company its
satisfaction of the representations and warranties set forth in
Section 2.2. This provision shall not limit the Purchaser's right to
transfer securities or transfer or assign rights hereunder or under
the Registration Rights Agreement.
5.7 No Third-Party Beneficiaries. This Agreement is
intended for the benefit of the parties hereto and their respective
permitted successors and assigns and is not for the benefit of, nor
may any provision hereof be enforced by, any other person.
5.8 Governing Law. This Agreement 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. Each party hereby irrevocably submits to the non-exclusive
jurisdiction of the state and Federal courts sitting in the City of
New York, borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of any
such court, that such suit, action or proceeding is improper. Each
party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address in
effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and
notice thereof. Nothing contained herein shall be deemed to limit in
any way any right to serve process in any manner permitted by law.
5.9 Survival. The representations, warranties, agreements and
covenants contained herein shall survive each Closing and the delivery
and conversion or exercise (as the case may be) of the Shares and
Warrants.
5.10 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one
and the same agreement and shall become effective when counterparts
have been signed by each party and delivered to the other party, it
being understood that both parties need not sign the same counterpart.
In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid and binding
obligation of the party executing (or on whose behalf such signature
is executed) the same with the same force and effect as if such
facsimile signature page were an original thereof.
5.11 Publicity. The Company and the Purchaser shall consult with
each other in issuing any press releases or otherwise making public
statements with respect to the transactions contemplated hereby and
neither party shall issue any such press release or otherwise make any
such public statement without the prior written consent of the other,
which consent shall not be unreasonably withheld or delayed, except
that no prior consent shall be required if such disclosure is required
by law, in which such case the disclosing party shall provide the
other party with prior notice of such public statement. The Company
shall not publicly or otherwise disclose the name of the Purchaser
without the Purchaser's prior written consent.
5.12 Severability. In case any one or more of the provisions of
this Agreement shall be invalid or unenforceable in any respect, the
validity and enforceability of the remaining terms and provisions of
this Agreement shall not in any way be affecting or impaired thereby
and the parties will attempt to agree upon a valid and enforceable
provision which shall be a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this
Agreement.
5.13 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, the
Purchaser will be entitled to specific performance of the obligations
of the Company under the Transaction Documents. Each of the Company
and the Purchaser (severally and not jointly) agree that monetary
damages may not be adequate compensation for any loss incurred by
reason of any breach of its obligations described in the foregoing
sentence and hereby agrees to waive in any action for specific
performance of any such obligation the defense that a remedy at law
would be adequate.
5.14 No Reliance.
Each party acknowledges that (i) it has such knowledge in
business and financial matters as to be fully capable of evaluating
this Agreement, the other Transaction Documents and the transactions
contemplated hereby and thereby, (ii) it is not relying on any advice
or representation of the other party in connection with entering into
this Agreement, the other Transaction Documents or such transactions
(other than the representations made in this Agreement or the other
Transaction Documents), (iii) it has not received from such party any
assurance or guarantee as to the merits (whether legal, regulatory,
tax, financial or otherwise) of entering into this Agreement or the
other Transaction Documents or the performance of its obligations
hereunder and thereunder, and (iv) it has consulted with its own
legal, regulatory, tax, business, investment, financial and accounting
advisors to the extent that it has deemed necessary, and has entered
into this Agreement and the other Transaction Documents based on its
own independent judgment and on the advice of its advisors as it has
deemed necessary, and not on any view (whether written or oral)
expressed by such party.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties hereto have caused this
Convertible Preferred Stock Purchase Agreement to be duly executed by
their respective authorized signatories as of the date first indicated
above.
USCI, INC.
By:_____________________________________
Name:
Title:
JNC OPPORTUNITY FUND LTD.
By:_____________________________________
Name:
Title:
<PAGE>
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
Between
USCI, INC.
and
JNC OPPORTUNITY FUND LTD.
Dated as of March 24, 1998
Schedule 1
Company:
USCI, Inc.
6115-A Jimmy Carter Boulevard
Norcross, Georgia 30071
Facsimile: (770) 840-0905
Attn: Robert J. Kostrinsky
Purchaser:
JNC Opportunity Fund Ltd.
Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
Williams House, 20 Reid Street
Hamilton HM11, Bermuda
Facsimile: (441) 295-2305
Attn: Director
With copies to:
Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive, Suite 460
Reston, VA 20191
Facsimile: (703) 476-7711
Attn: Neil T. Chau
EXHIBIT 10.61
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made
and entered into as of March 24, 1998, between USCI, Inc., a Delaware
corporation (the "Company"), and JNC Opportunity Fund Ltd., a Cayman
Islands corporation (the "Purchaser").
This Agreement is made pursuant to the Convertible Preferred
Stock Purchase Agreement, dated as of the date hereof between the
Company and the Purchaser (the "Purchase Agreement").
The Company and the Purchaser hereby agree as follows:
1. Definitions
Capitalized terms used and not otherwise defined herein shall
have the meanings given such terms in the Purchase Agreement. As used
in this Agreement, the following terms shall have the following
meanings:
"Advice" shall have meaning set forth in Section 3(o).
"Affiliate" means, with respect to any Person, any other
Person that directly or indirectly controls or is controlled by or under
common control with such Person. For the purposes of this definition,
"control," when used with respect to any Person, means the possession,
direct or indirect, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of
voting securities, by contract or otherwise; and the terms of
"affiliated," "controlling" and "controlled" have meanings correlative
to the foregoing.
"Business Day" means 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 generally are authorized or
required by law or other government actions to close.
"Closing Date" shall have the meaning set forth in the
Purchase Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, $.0001 par
value.
"Effectiveness Date" means the 90th day following the Closing
Date, or, if such day is not a Business Day, the next succeeding
Business Day.
"Effectiveness Period" shall have the meaning set forth in
Section 2(a).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Filing Date" means the earlier to occur of (a) the 30th day
after the filing by the Company of its Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 pursuant to Section 3.14 of the
Purchase Agreement and (b) April 30, 1998.
"Holder" or "Holders" means the holder or holders, as the
case may be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in
Section 5(c).
"Indemnifying Party" shall have the meaning set forth in
Section 5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture,
limited liability company, joint stock company, government (or an agency
or political subdivision thereof) or other entity of any kind.
"Preferred Stock" means the Company's shares of 6% Series A
Preferred Stock, $.01 par value, shares of 6% Series B Preferred Stock,
$.01 par value, and shares of 6% Series C Preferred Stock, $.01 par
value, to be issued to the Purchaser pursuant to the Purchase Agreement.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the
Registration Statement (including, without limitation, a prospectus that
includes any information previously omitted from a prospectus filed as
part of an effective registration statement in reliance upon Rule 430A
promulgated under the Securities Act), as amended or supplemented by any
prospectus supplement, with respect to the terms of the offering of any
portion of the Registrable Securities covered by the Registration
Statement, and all other amendments and supplements to the Prospectus,
including post-effective amendments, and all material incorporated by
reference in such Prospectus.
"Registrable Securities" means the shares of Common Stock
issuable upon (i) conversion in full of the Preferred Stock (ii)
exercise in full of the Warrants, and (iii) payment of dividends in
respect of the Preferred Stock, assuming all such dividends are paid in
shares of Common Stock, provided, however that in order to account for
the fact that the number of shares of Common Stock that is issuable upon
conversion of the Preferred Stock is determined in part upon the market
price of the Common Stock at the time of conversion, Registrable
Securities shall include (but not be limited to) a number of shares of
Common Stock equal to no less than the sum of (1) 200% times the maximum
number of shares of Common Stock into which the Preferred Stock are
convertible, assuming such conversion occurred on the Series A Closing
Date (as defined in the Purchase Agreement), (2) the number of shares of
Common Stock issuable upon exercise of the Warrants, and (3) the number
of shares of Common Stock issuable on payment of dividends on the
Preferred Stock assuming all dividends in respect of the Preferred Stock
are paid in shares of Common Stock. Notwithstanding anything herein
contained to the contrary, if the actual number of shares of Common
Stock into which the shares of Preferred Stock are convertible exceeds
twice the number of shares of Common Stock into which the shares of
Preferred Stock are convertible based upon a computation at a particular
Closing Date, the term "Registrable Securities" shall be deemed to
include such additional shares of Common Stock. The Company shall be
required to file additional Registration Statements to the extent the
actual number of shares of Common Stock into which the Preferred Stock
is convertible (together with dividends thereon) and Warrants are
exercisable exceeds the number of shares of Common Stock initially
registered in accordance with the immediately prior sentence. The
Company shall have fifteen (15) Business Days to file such additional
Registration Statement after notice of the requirement thereof, which
the Holders may give at such time when the number of shares of Common
Stock as are issuable upon conversion of Preferred Stock exceeds 185% of
the number of shares of Common Stock into which Preferred Stock are
convertible, assuming such conversion occurred on the Closing Date or
the Filing Date (whichever yields a lower Conversion Price).
"Registration Statement" means the registration statement and
any additional registration statements contemplated by Section 2(a),
including (in each case) the Prospectus, amendments and supplements to
such registration statement or Prospectus, including pre- and
post-effective amendments, all exhibits thereto, and all material
incorporated by reference in such registration statement.
"Rule 144" means Rule 144 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to
time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same effect as such Rule.
"Rule 158" means Rule 158 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to
time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to
time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as
amended.
"Series A Warrants" the common stock purchase warrant to be
issued to the Purchaser at the Series A Closing pursuant to the Purchase
Agreement and to Wharton Capital Partners, Ltd. in respect thereof.
"Series B Warrants" the common stock purchase warrant to be
issued to the Purchaser at the Series B Closing pursuant to the Purchase
Agreement and to Wharton Capital Partners, Ltd. in respect thereof.
"Series C Warrants" the common stock purchase warrant to be
issued to the Purchaser at the Series C Closing pursuant to the Purchase
Agreement and to Wharton Capital Partners, Ltd. in respect thereof.
"Special Counsel" means one special counsel to the Holders,
for which the Holders will be reimbursed by the Company pursuant to
Section 4.
"Underwritten Registration or Underwritten Offering" means a
registration in connection with which securities of the Company are sold
to an underwriter for reoffering to the public pursuant to an effective
registration statement.
"Warrants" means the Series A Warrants, Series B Warrants and
Series C Warrants.
2. Shelf Registration
(a) On or prior to the Filing Date, the Company shall
prepare and file with the Commission a "Shelf" Registration Statement
covering all Registrable Securities for an offering to be made on a
continuous basis pursuant to Rule 415. The Registration Statement shall
be on Form S-3 (except if otherwise directed by the Holders of a
majority in interest of the applicable Registrable Securities in
accordance herewith or if the Company is not then eligible to register
for resale the Registrable Securities on Form S-3, in which case such
registration shall be on another appropriate form in accordance
herewith). The Registration Statement shall state, to the extent
permitted by Rule 416 under the Securities Act, that it also covers such
indeterminate number of shares of Common Stock as may be required to
effect (i) conversion of the Preferred Stock to prevent dilution
resulting from stock splits, stock dividends or similar events, or by
reason of changes in the Conversion Price in accordance with the terms
of the Certificates of Designation (as defined in the Purchase
Agreement), and (ii) exercise of the Warrants in full to prevent
dilution resulting from stock splits, stock dividends or similar events,
or by reason of changes in the Exercise Price (as defined in the
Warrants) in accordance with the terms of the Warrants. The Company
shall use its best efforts to cause the Registration Statement to be
declared effective under the Securities Act as promptly as possible
after the filing thereof, but in any event prior to the Effectiveness
Date, and shall use its best efforts to keep such Registration Statement
continuously effective under the Securities Act until the date which is
three years after the date that such Registration Statement is declared
effective by the Commission or such earlier date when all Registrable
Securities covered by such Registration Statement have been sold or may
be sold without volume restrictions pursuant to Rule 144(k) as
determined by the counsel to the Company pursuant to a written opinion
letter, addressed and acceptable to the Company's transfer agent to such
effect (the "Effectiveness Period"), provided, however, that the Company
shall not be deemed to have used its best efforts to keep the
Registration Statement effective during the Effectiveness Period if it
voluntarily takes any action that would result in the Holders not being
able to sell the Registrable Securities covered by such Registration
Statement during the Effectiveness Period, unless such action is
required under applicable law or the Company has filed a post-effective
amendment to the Registration Statement and the Commission has not
declared it effective. If an additional Registration Statement is
required to be filed because the actual number of shares of Common Stock
into which the Preferred Stock is convertible plus shares issuable upon
payment of dividends and exercise of the Warrants exceeds the number of
shares of Common Stock initially registered, the Company shall, as
promptly as reasonably possible, but no later than 10 Business Days
thereafter, file such additional Registration Statement, and the Company
shall use its best efforts to cause such additional Registration
Statement to be declared effective by the Commission as soon as
possible.
(b) If the Holders of a majority of the Registrable
Securities so elect, an offering of Registrable Securities pursuant to
the Registration Statement may be effected on no more than two occasions
in the form of an Underwritten Offering. In such event, and, if the
managing underwriters advise the Company and such Holders in writing
that in their opinion the amount of Registrable Securities proposed to
be sold in such Underwritten Offering exceeds the amount of Registrable
Securities which can be sold in such Underwritten Offering, there shall
be included in such Underwritten Offering the amount of such Registrable
Securities which in the opinion of such managing underwriters can be
sold, and such amount shall be allocated pro rata among the Holders
proposing to sell Registrable Securities in such Underwritten Offering.
(c) If any of the Registrable Securities are to be sold in
an Underwritten Offering, the investment banker in interest that will
administer the offering will be selected by the Holders of a majority of
the Registrable Securities included in such offering
upon consultation with the Company. No Holder may participate in any
Underwritten Offering hereunder unless such Holder (i) agrees to sell
its Registrable Securities on the basis provided in any underwriting
agreements approved by the Persons entitled hereunder to approve such
arrangements and (ii) completes and executes all questionnaires, powers
of attorney, indemnities, underwriting agreements and other documents
required under the terms of such arrangements.
3. Registration Procedures
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the
Filing Date, a Registration Statement on Form S-3 (or if the Company is
not then eligible to register for resale the Registrable Securities on
Form S-3 such registration shall be on another appropriate form in
accordance herewith, or, in connection with an Underwritten Offering
hereunder, such other form agreed to by the Company and by the Holders
of Registrable Securities) in accordance with the method or methods of
distribution thereof as specified by the Holders (except if otherwise
directed by the Holders), and cause the Registration Statement to become
effective and remain effective as provided herein; provided, however,
that not less than five (5) Business Days prior to the filing of the
Registration Statement or any related Prospectus or any amendment or
supplement thereto (including any document that would be incorporated
therein by reference), the Company shall, (i) furnish to the Holders,
their Special Counsel and any managing underwriters, copies of all such
documents proposed to be filed, which documents (other than those
incorporated by reference) will be subject to the review of such
Holders, their Special Counsel and such managing underwriters, and (ii)
cause its officers and directors, counsel and independent certified pub-
lic accountants to respond to such inquiries as shall be necessary, in
the reasonable opinion of respective counsel to such Holders and such
underwriters, to conduct a reasonable investigation within the meaning
of the Securities Act. The Company shall not file the Registration
Statement or any such Prospectus or any amendments or supplements
thereto to which the Holders of a majority of the Registrable
Securities, their Special Counsel, or any managing underwriters, shall
reasonably object in writing within three (3) Business Days of their
receipt thereof.
(b) (i) Prepare and file with the Commission such
amendments, including post-effective amendments, to the Registration
Statement as may be necessary to keep the Registration Statement
continuously effective as to the applicable Registrable Securities for
the Effectiveness Period and prepare and file with the Commission such
additional Registration Statements in order to register for resale under
the Securities Act all of the Registrable Securities; (ii) cause the
related Prospectus to be amended or supplemented by any required Pro-
spectus supplement, and as so supplemented or amended to be filed
pursuant to Rule 424 (or any similar provisions then in force)
promulgated under the Securities Act; (iii) respond as promptly as
reasonably possible to any comments received from the Commission with
respect to the Registration Statement or any amendment thereto and as
promptly as reasonably possible provide the Holders true and complete
copies of all correspondence from and to the Commission relating to the
Registration Statement; and (iv) comply in all material respects with
the provisions of the Securities Act and the Exchange Act with respect
to the disposition of all Registrable Securities covered by the
Registration Statement during the applicable period in accordance with
the intended methods of disposition by the Holders thereof set forth in
the Registration Statement as so amended or in such Prospectus as so
supplemented.
(c) Notify the Holders of Registrable Securities to be
sold, their Special Counsel and any managing underwriters as promptly as
reasonably possible (and, in the case of (i)(A) below, not less than
five (5) days prior to such filing) and (if requested by any such
Person) confirm such notice in writing no later than one (1) Business
Day following the day (i)(A) when a Prospectus or any Prospectus
supplement or post-effective amendment to the Registration Statement is
proposed to be filed; (B) when the Commission notifies the Company
whether there will be a "review" of such Registration Statement and
whenever the Commission comments in writing on such Registration
Statement (the Company shall provide true and complete copies thereof
and all written responses thereto to each of the Holders); and (C) with
respect to the Registration Statement or any post-effective amendment,
when the same has become effective; (ii) of any request by the
Commission or any other Federal or state governmental authority for
amendments or supplements to the Registration Statement or Prospectus or
for additional information; (iii) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration
Statement covering any or all of the Registrable Securities or the
initiation of any Proceedings for that purpose; (iv) if at any time any
of the representations and warranties of the Company contained in any
agreement (including any underwriting agreement) contemplated hereby
ceases to be true and correct in all material respects; (v) of the
receipt by the Company of any notification with respect to the suspen-
sion of the qualification or exemption from qualification of any of the
Registrable Securities for sale in any jurisdiction, or the initiation
or threatening of any Proceeding for such purpose; and (vi) of the
occurrence of any event that makes any statement made in the
Registration Statement or Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material
respect or that requires any revisions to the Registration Statement,
Prospectus or other documents so that, in the case of the Registration
Statement or the Prospectus, as the case may be, it will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(d) Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (i) any order suspending the
effectiveness of the Registration Statement or (ii) any suspension of
the qualification (or exemption from qualification) of any of the
Registrable Securities for sale in any jurisdiction, at the earliest
practicable moment.
(e) If requested by any managing underwriter or the Holders
of a majority in interest of the Registrable Securities to be sold in
connection with an Underwritten Offering, (i) promptly incorporate in a
Prospectus supplement or post-effective amendment to the Registration
Statement such information as the Company reasonably agrees should be
included therein and (ii) make all required filings of such Prospectus
supplement or such post-effective amendment as soon as practicable after
the Company has received notification of the matters to be incorporated
in such Prospectus supplement or post-effective amendment; provided,
however, that the Company shall not be required to take any action
pursuant to this Section 3(e) that would, in the opinion of counsel for
the Company, violate applicable law or be materially detrimental to the
business prospects of the Company.
(f) Furnish to each Holder, their Special Counsel and any
managing underwriters, without charge, at least one conformed copy of
each Registration Statement and each amendment thereto, including finan-
cial statements and schedules, all documents incorporated or deemed to
be incorporated therein by reference, and all exhibits to the extent
requested by such Person (including those previously furnished or
incorporated by reference) promptly after the filing of such documents
with the Commission.
(g) Promptly deliver to each Holder, their Special Counsel,
and any underwriters, without charge, as many copies of the Prospectus
or Prospectuses (including each form of prospectus) and each amendment
or supplement thereto as such Persons may reasonably request; and the
Company hereby consents to the use of such Prospectus and each amendment
or supplement thereto by each of the selling Holders and any
underwriters in connection with the offering and sale of the Registrable
Securities covered by such Prospectus and any amendment or supplement
thereto.
(h) Prior to any public offering of Registrable Securities,
use its best efforts to register or qualify or cooperate with the
selling Holders, any underwriters and their Special Counsel in
connection with the registration or qualification (or exemption from
such registration or qualification) of such Registrable Securities for
offer and sale under the securities or Blue Sky laws of such
jurisdictions within the United States as any Holder or underwriter
requests in writing, to keep each such registration or qualification (or
exemption therefrom) effective during the Effectiveness Period and to do
any and all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Registrable Securities covered
by a Registration Statement; provided, however, that the Company shall
not be required to qualify generally to do business in any jurisdiction
where it is not then so qualified or to take any action that would
subject it to general service of process in any such jurisdiction where
it is not then so subject or subject the Company to any material tax in
any such jurisdiction where it is not then so subject.
(i) Cooperate with the Holders and any managing
underwriters to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be delivered to a
transferee pursuant to a Registration Statement, which certificates
shall be free, to the extent permitted by applicable law, of all
restrictive legends, and to enable such Registrable Securities to be in
such denominations and registered in such names as any such managing
underwriters or Holders may request at least two Business Days prior to
any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by
Section 3(c)(vi), as promptly as reasonably possible, prepare a supple-
ment or amendment, including a post-effective amendment, to the
Registration Statement or a supplement to the related Prospectus or any
document incorporated or deemed to be incorporated therein by reference,
and file any other required document so that, as thereafter delivered,
neither the Registration Statement nor such Prospectus will contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(k) Use its best efforts to cause all Registrable
Securities relating to such Registration Statement to be listed on the
NASDAQ National Market System (the "NASDAQ") and any other securities
exchange, quotation system, market or over-the-counter bulletin board,
if any, on which similar securities issued by the Company are then
listed as and when required pursuant to the Purchase Agreement.
(l) Enter into such agreements (including an underwriting
agreement in form, scope and substance as is customary in Underwritten
Offerings) and take all such other actions in connection therewith
(including those reasonably requested by any managing underwriters and
the Holders of a majority of the Registrable Securities being sold) in
order to expedite or facilitate the disposition of such Registrable
Securities, and whether or not an underwriting agreement is entered
into, (i) make such representations and warranties to such Holders and
such underwriters as are customarily made by issuers to underwriters in
underwritten public offerings, and confirm the same if and when
requested; (ii) in the case of an Underwritten Offering obtain and
deliver copies thereof to the managing underwriters, if any, of opinions
of counsel to the Company and updates thereof addressed to each such
underwriter, in form, scope and substance reasonably satisfactory to any
such managing underwriters and Special Counsel to the selling Holders
covering the matters customarily covered in opinions requested in
Underwritten Offerings and such other matters as may be reasonably
requested by such Special Counsel and underwriters; (iii) immediately
prior to the effectiveness of the Registration Statement, and, in the
case of an Underwritten Offering, at the time of delivery of any
Registrable Securities sold pursuant thereto, use its best reasonable
efforts to obtain and deliver copies to the Holders and the managing
underwriters, if any, of "cold comfort" letters and updates thereof from
the independent certified public accountants of the Company (and, if
necessary, any other independent certified public accountants of any
subsidiary of the Company or of any business acquired by the Company for
which financial statements and financial data is, or is required to be,
included in the Registration Statement), addressed to the Company in
form and substance as are customary in connection with Underwritten
Offerings; (iv) if an underwriting agreement is entered into, the same
shall contain indemnification provisions and procedures no less
favorable to the selling Holders and the underwriters, if any, than
those set forth in Section 6 (or such other provisions and procedures
acceptable to the managing underwriters, if any, and holders of a
majority of Registrable Securities participating in such Underwritten
Offering); and (v) deliver such documents and certificates as may be
reasonably requested by the Holders of a majority of the Registrable
Securities being sold, their Special Counsel and any managing
underwriters to evidence the continued validity of the representations
and warranties made pursuant to clause 3(l)(i) above and to evidence
compliance with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Company.
(m) Make available for inspection by the selling Holders,
any representative of such Holders, any underwriter participating in any
disposition of Registrable Securities, and any attorney or accountant
retained by such selling Holders or underwriters, at the offices where
normally kept, during reasonable business hours, all financial and other
records, pertinent corporate documents and properties of the Company and
its subsidiaries, and cause the officers, directors, agents and
employees of the Company and its subsidiaries to supply all information
in each case reasonably requested by any such Holder, representative,
underwriter, attorney or accountant in connection with the Registration
Statement; provided, however, that any information that is determined in
good faith by the Company in writing to be of a confidential nature at
the time of delivery of such information shall be kept confidential by
such Persons, unless (i) disclosure of such information is required by
court or administrative order or is necessary to respond to inquiries of
regulatory authorities; (ii) disclosure of such information, in the
opinion of counsel to such Person, is required by law; (iii) such
information becomes generally available to the public other than as a
result of a disclosure or failure to safeguard by such Person; or (iv)
such information becomes available to such Person from a source other
than the Company and such source is not known by such Person to be bound
by a confidentiality agreement with the Company.
(n) Comply with all applicable rules and regulations of the
Commission.
(o) The Company may require each selling Holder to furnish
to the Company information regarding such Holder and the distribution of
such Registrable Securities as is required by law to be disclosed in the
Registration Statement, and the Company may exclude from such
registration the Registrable Securities of any such Holder who
unreasonably fails to furnish such information within a reasonable time
after receiving such request.
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such
Holder shall have the right to require (if such reference to such Holder
by name or otherwise is not required by the Securities Act or any
similar Federal statute then in force) the deletion of the reference to
such Holder in any amendment or supplement to the Registration Statement
filed or prepared subsequent to the time that such reference ceases to
be required.
Each Holder covenants and agrees that (i) it will not sell
any Registrable Securities under the Registration Statement until it has
received copies of the Prospectus as then amended or supplemented as
contemplated in Section 3(g) and notice from the Company that such
Registration Statement and any post-effective amendments thereto have
become effective as contemplated by Section 3(c) and (ii) it and its
officers, directors or Affiliates, if any, will comply with the
prospectus delivery requirements of the Securities Act as applicable to
it in connection with sales of Registrable Securities pursuant to the
Registration Statement.
Each Holder agrees by its acquisition of such Registrable
Securities that, upon receipt of a notice from the Company of the
occurrence of any event of the kind described in Section 3(c)(ii),
3(c)(iii), 3(c)(iv), 3(c)(v) or 3(c)(vi), such Holder will forthwith
discontinue disposition of such Registrable Securities under the
Registration Statement until such Holder's receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement
contemplated by Section 3(j), or until it is advised in writing (the
"Advice") by the Company that the use of the applicable Prospectus may
be resumed, and, in either case, has received copies of any additional
or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement.
4. Registration Expenses
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company, except as and to the
extent specified in Section 4(b), shall be borne by the Company whether
or not pursuant to an Underwritten Offering and whether or not the
Registration Statement is filed or becomes effective and whether or not
any Registrable Securities are sold pursuant to the Registration
Statement. The fees and expenses referred to in the foregoing sentence
shall include, without limitation, (i) all registration and filing fees
(including, without limitation, fees and expenses (A) with respect to
filings required to be made with the NASDAQ or each other securities
exchange or market on which Registrable Securities are required
hereunder to be listed and (B) in compliance with state securities or
Blue Sky laws (including, without limitation, fees and disbursements of
counsel for the Holders in connection with Blue Sky qualifications or
exemptions of the Registrable Securities and determination of the
eligibility of the Registrable Securities for investment under the laws
of such jurisdictions as the managing underwriters, if any, or the
Holders of a majority of Registrable Securities may designate)), (ii)
printing expenses (including, without limitation, expenses of printing
certificates for Registrable Securities and of printing prospectuses if
the printing of prospectuses is requested by the managing underwriters,
if any, or by the holders of a majority of the Registrable Securities
included in the Registration Statement), (iii) messenger, telephone and
delivery expenses, (iv) fees and disbursements of counsel for the
Company and Special Counsel for the Holders, in the case of the Special
Counsel, (v) Securities Act liability insurance, if the Company so
desires such insurance, and (vi) fees and expenses of all other Persons
retained by the Company in connection with the consummation of the
transactions contemplated by this Agreement. In addition, the Company
shall be responsible for all of its internal expenses incurred in
connection with the consummation of the transactions contemplated by
this Agreement (including, without limitation, all salaries and expenses
of its officers and employees performing legal or accounting duties),
the expense of any annual audit, the fees and expenses incurred in
connection with the listing of the Registrable Securities on any
securities exchange as required hereunder.
(b) If the Holders require an Underwritten Offering
pursuant to the terms hereof, the Company shall be responsible for all
costs, fees and expenses in connection therewith, except for the fees
and disbursements of the Underwriters (including any underwriting
commissions and discounts) and their legal counsel and accountants
(which shall be borne by the Holders). Therefore, in such
circumstances, the Holder shall bear the expenses of the fees and
disbursements of any legal counsel or accounting firm retained by the
underwriters in connection with such Underwritten Offering and the costs
of any determination (but not filing) by the underwriters of the
eligibility of the Registrable Securities for investment under the
applicable state securities laws. By way of illustration which is not
intended to diminish from the provisions of Section 4(a), the Holders
shall not be responsible for, and the Company shall be required to pay
the fees or disbursements incurred by the Company (including by its
legal counsel and accountants) in connection with, the preparation and
filing of a Registration Statement and related Prospectus for such
offering, the maintenance of such Registration Statement in accordance
with the terms hereof, the listing of the Registrable Securities in
accordance with the requirements hereof, and printing expenses incurred
to comply with the requirements hereof.
5. Indemnification
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold
harmless each Holder, the officers, directors, agents (including any
underwriters retained by such Holder in connection with the offer and
sale of Registrable Securities), brokers (including brokers who offer
and sell Registrable Securities as principal as a result of a pledge or
any failure to perform under a margin call of Common Stock), investment
advisors and employees of each of them, each Person who controls any
such Holder (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) and the officers, directors, agents and
employees of each such controlling Person, to the fullest extent
permitted by applicable law, from and against any and all losses,
claims, damages, liabilities, costs (including, without limitation,
costs of preparation and attorneys' fees) and expenses (collectively,
"Losses"), as incurred, arising out of or relating to any untrue or
alleged untrue statement of a material fact contained in the
Registration Statement, any Prospectus or any form of prospectus or in
any amendment or supplement thereto or in any preliminary prospectus, or
arising out of or relating to any omission or alleged omission of a
material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or form of prospectus
or supplement thereto, in light of the circumstances under which they
were made) not misleading, except to the extent, but only to the extent,
that such untrue statements or omissions are based solely upon
information regarding such Holder furnished in writing to the Company by
such Holder expressly for use therein, which information was reasonably
relied on by the Company for use therein or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly
approved in writing by such Holder expressly for use in the Registration
Statement, such Prospectus or such form of Prospectus or in any
amendment or supplement thereto. The Company shall notify the Holders
promptly of the institution, threat or assertion of any Proceeding of
which the Company is aware in connection with the transactions
contemplated by this Agreement.
(b) Indemnification by Holders. Each Holder shall,
severally and not jointly, indemnify and hold harmless the Company, the
directors, officers, agents and employees, each Person who controls the
Company (within the meaning of Section 15 of the Securities Act and
Section 20 of the Exchange Act), and the directors, officers, agents or
employees of such controlling Persons, to the fullest extent permitted
by applicable law, from and against all Losses (as determined by a court
of competent jurisdiction in a final judgment not subject to appeal or
review) arising solely out of or based solely upon any untrue statement
of a material fact contained in the Registration Statement, any
Prospectus, or any form of prospectus, or in any amendment or supplement
thereto, or arising solely out of or based solely upon any omission of a
material fact required to be stated therein or necessary to make the
statements therein not misleading to the extent, but only to the extent,
that such untrue statement or omission is contained in any information
so furnished in writing by such Holder to the Company specifically for
inclusion in the Registration Statement or such Prospectus and that such
information was reasonably relied upon by the Company for use in the
Registration Statement, such Prospectus or such form of prospectus or to
the extent that such information relates to such Holder or such Holder's
proposed method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Holder expressly for
use in the Registration Statement, such Prospectus or such form of
Prospectus, or in any amendment or supplement thereto. In no event
shall the liability of any selling Holder hereunder be greater in amount
than the dollar amount of the net proceeds received by such Holder upon
the sale of the Registrable Securities giving rise to such
indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any
Proceeding shall be brought or asserted against any Person entitled to
indemnity hereunder (an "Indemnified Party"), such Indemnified Party
shall notify the Person from whom indemnity is sought (the "Indemnifying
Party") in writing within 10 calendar days, and the Indemnifying Party
shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to the Indemnified Party and the payment of all
fees and expenses incurred in connection with defense thereof; provided,
that the failure of any Indemnified Party to give such notice shall not
relieve the Indemnifying Party of its obligations or liabilities
pursuant to this Agreement, except (and only) to the extent that it
shall be finally determined by a court of competent jurisdiction (which
determination is not subject to appeal or further review) that such
failure shall have proximately and materially adversely prejudiced the
Indemnifying Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the
expense of such Indemnified Party or Parties unless: (1) the
Indemnifying Party has agreed in writing to pay such fees and expenses;
or (2) the Indemnifying Party shall have failed promptly to assume the
defense of such Proceeding and to employ counsel reasonably satisfactory
to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include
both such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that a conflict of
interest is likely to exist if the same counsel were to represent such
Indemnified Party and the Indemnifying Party (in which case, if such
Indemnified Party notifies the Indemnifying Party in writing that it
elects to employ separate counsel at the expense of the Indemnifying
Party, the Indemnifying Party shall not have the right to assume the
defense thereof and such counsel shall be at the expense of the
Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent,
which consent shall not be unreasonably withheld. No Indemnifying Party
shall, without the prior written consent of the Indemnified Party,
effect any settlement of any pending Proceeding in respect of which any
Indemnified Party is a party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability on
claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party,
as incurred, within 10 Business Days of written notice thereof to the
Indemnifying Party (regardless of whether it is ultimately determined
that an Indemnified Party is not entitled to indemnification hereunder;
provided, that the Indemnifying Party may require such Indemnified Party
to undertake to reimburse all such fees and expenses to the extent it is
finally judicially determined that such Indemnified Party is not
entitled to indemnification hereunder).
(d) Contribution. If a claim for indemnification under
Section 5(a) or 5(b) is unavailable to an Indemnified Party because of a
failure or refusal of a governmental authority to enforce such
indemnification in accordance with its terms (by reason of public policy
or otherwise), then each Indemnifying Party, in lieu of indemnifying
such Indemnified Party, shall contribute to the amount paid or payable
by such Indemnified Party as a result of such Losses, in such proportion
as is appropriate to reflect the relative fault of the Indemnifying
Party and Indemnified Party in connection with the actions, statements
or omissions that resulted in such Losses as well as any other relevant
equitable considerations. The relative fault of such Indemnifying Party
and Indemnified Party shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged
untrue statement of a material fact or omission or alleged omission of a
material fact, has been taken or made by, or relates to information sup-
plied by, such Indemnifying Party or Indemnified Party, and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid
or payable by a party as a result of any Losses shall be deemed to
include, subject to the limitations set forth in Section 5(c), any
reasonable attorneys' or other reasonable fees or expenses incurred by
such party in connection with any Proceeding to the extent such party
would have been indemnified for such fees or expenses if the
indemnification provided for in this Section was available to such party
in accordance with its terms.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 5(d) were determined
by pro rata allocation or by any other method of allocation that does
not take into account the equitable considerations referred to in the
immediately preceding paragraph. Notwithstanding the provisions of this
Section 5(d), no Holder shall be required to contribute, in the
aggregate, any amount in excess of the amount by which the proceeds
actually received by such Holder from the sale of the Registrable
Securities subject to the Proceeding exceeds the amount of any damages
that such Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No
Person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution
from any Person who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties
may have to the Indemnified Parties.
6. Miscellaneous
(a) Remedies. In the event of a breach by the Company or
by a Holder, of any of their obligations under this Agreement, each
Holder or the Company, as the case may be, in addition to being entitled
to exercise all rights granted by law and under this Agreement,
including recovery of damages, will be entitled to specific performance
of its rights under this Agreement. The Company and each Holder agree
that monetary damages would not provide adequate compensation for any
losses incurred by reason of a breach by it of any of the provisions of
this Agreement and hereby further agrees that, in the event of any
action for specific performance in respect of such breach, it shall
waive the defense that a remedy at law would be adequate.
(b) No Inconsistent Agreements. Neither the Company nor
any of its subsidiaries has, as of the date hereof, nor shall the
Company or any of its subsidiaries, on or after the date of this
Agreement, enter into any agreement with respect to its securities that
is inconsistent with the rights granted to the Holders in this Agreement
or otherwise conflicts with the provisions hereof. Except as and to the
extent specified in Schedule 6(b) hereto, neither the Company nor any of
its subsidiaries has previously entered into any agreement granting any
registration rights with respect to any of its securities to any Person.
Without limiting the generality of the foregoing, without the written
consent of the Holders of a majority of the then outstanding Registrable
Securities, the Company shall not grant to any Person the right to
request the Company to register any securities of the Company under the
Securities Act unless the rights so granted are subject in all respects
to the prior rights in full of the Holders set forth herein, and are not
otherwise in conflict or inconsistent with the provisions of this
Agreement.
(c) No Piggyback on Registrations. Except as and to the
extent specified in Schedule 6(b) hereto, neither the Company nor any of
its security holders (other than the Holders in such capacity pursuant
hereto) may include securities of the Company in the Registration
Statement other than the Registrable Securities, and the Company shall
not after the date hereof enter into any agreement providing any such
right to any of its security holders.
(d) Piggy-Back Registrations. If at any time when there is
not an effective Registration Statement covering Underlying Shares, the
Company shall determine to prepare and file with the Commission a
registration statement relating to an offering for its own account or
the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated
under the Securities Act) or their then equivalents relating to equity
securities to be issued solely in connection with any acquisition of any
entity or business or equity securities issuable in connection with
stock option or other employee benefit plans, the Company shall send to
each holder of Registrable Securities written notice of such
determination and, if within twenty (20) days after receipt of such
notice, any such holder shall so request in writing, the Company shall
include in such registration statement all or any part of such
Registrable Securities such holder requests to be registered; provided,
however, that the Company shall not be required to register any
Registrable Securities pursuant to this Section 7(d) that are eligible
for sale pursuant to Rule 144(k) of the Commission.
(e) Amendments and Waivers. The provisions of this
Agreement, including the provisions of this sentence, may not be
amended, modified or supplemented, and waivers or consents to departures
from the provisions hereof may not be given, unless the same shall be in
writing and signed by the Company and the Holders of at least two-thirds
of the then outstanding Registrable Securities; provided, however, that,
for the purposes of this sentence, Registrable Securities that are
owned, directly or indirectly, by the Company, or an Affiliate of the
Company are not deemed outstanding. Notwithstanding the foregoing, a
waiver or consent to depart from the provisions hereof with respect to a
matter that relates exclusively to the rights of Holders and that does
not directly or indirectly affect the rights of other Holders may be
given by Holders of at least a majority of the Registrable Securities to
which such waiver or consent relates; provided, however, that the
provisions of this sentence may not be amended, modified, or
supplemented except in accordance with the provisions of the immediately
preceding sentence.
(f) Notices. Any and all notices or other communications
or deliveries required or permitted to be provided 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 prior to 5:00 p.m. (New York City time) on a Business Day, (ii)
the Business Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone
number specified in the Purchase Agreement later than 5:00 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the Business Day following the date of
mailing, if sent by nationally recognized overnight courier service, or
(iv) upon actual receipt by the party to whom such notice is required to
be given to each Holder at its address set forth under its name on
Schedule 1 attached hereto or such other address as may be designated in
writing hereafter, in the same manner, by such Person. Copies of
notices to any Holder shall be sent to Robinson Silverman Pearce
Aronsohn & Berman LLP, 1290 Avenue of the Americas, New York, NY 10104,
Attn: Eric L. Cohen, Esq., fax: (212) 541-4630 and copies of all
notices to the Company shall be sent to the Law Firm of Leonard R.
Glass, P.A., 45 Central Avenue, P.O. Box 579, Tenafly, NJ 07670, Attn:
Leonard R. Glass, Esq., fax: (201) 894-1718.
(g) Successors and Assigns. This Agreement shall inure to
the benefit of and be binding upon the successors and permitted assigns
of each of the parties and shall inure to the benefit of each Holder.
The Company may not assign its rights or obligations hereunder without
the prior written consent of each Holder. Each Purchaser may assign its
rights hereunder in the manner and to the Persons as permitted under the
Purchase Agreement.
(h) Assignment of Registration Rights. The rights of each
Holder hereunder, including the right to have the Company register for
resale Registrable Securities in accordance with the terms of this
Agreement, shall be automatically assignable by each Holder to any
Affiliate of such Holder, any other Holder or Affiliate of any other
Holder and up to four other assignees of all or a portion of the shares
of Preferred Stock, the Warrants or the Registrable Securities if: (i)
the Holder agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company
within a reasonable time after such assignment, (ii) the Company is,
within a reasonable time after such transfer or assignment, furnished
with written notice of (a) the name and address of such transferee or
assignee, and (b) the securities with respect to which such registration
rights are being transferred or assigned, (iii) following such transfer
or assignment the further disposition of such securities by the
transferee or assignees is restricted under the Securities Act and
applicable state securities laws, (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this Section,
the transferee or assignee agrees in writing with the Company to be
bound by all of the provisions of this Agreement, and (v) such transfer
shall have been made in accordance with the applicable requirements of
the Purchase Agreement. The rights to assignment shall apply to the
Holders (and to subsequent) successors and assigns.
(i) Counterparts. This Agreement may be executed in any
number of counterparts, each of which when so executed shall be deemed
to be an original and, all of which taken together shall constitute one
and the same Agreement. In the event that any signature is delivered by
facsimile transmission, such signature shall create a valid binding
obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile
signature were the original thereof.
(j) Governing Law; Submission to Jurisdiction. This
Agreement shall be governed by and construed in accordance with the laws
of the State of New York, without regard to principles of conflicts of
law. Each party hereby irrevocably submits to the non-exclusive
jurisdiction of any New York state court sitting in the Borough of
Manhattan, the state and federal courts sitting in the City of New York
or any federal court sitting in the Borough of Manhattan in the City of
New York (collectively, the "New York Courts") in respect of any
Proceeding arising out of or relating to this Agreement, and irrevocably
accepts for itself and in respect of its property, generally and
unconditionally, jurisdiction of the New York Courts. The Company
irrevocably waives to the fullest extent it may effectively do so under
applicable law any objection that it may now or hereafter have to the
laying of the venue of any such proceeding brought in any New York Court
and any claim that any such Proceeding brought in any New York Court has
been brought in an inconvenient forum. Nothing herein shall affect the
right of any Holder. Each party hereby irrevocably waives personal
service of process and consents to process being served in any such
suit, action or proceeding by receiving a copy thereof sent to such
party at the address in effect for notices to it under this Agreement
and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall
be deemed to limit in any way any right to serve process in any manner
permitted by law.
(k) Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(l) Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent
jurisdiction to be invalid, illegal, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions set forth
herein shall remain in full force and effect and shall in no way be
affected, impaired or invalidated, and the parties hereto shall use
their reasonable efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby
stipulated and declared to be the intention of the parties that they
would have executed the remaining terms, provisions, covenants and
restrictions without including any of such that may be hereafter
declared invalid, illegal, void or unenforceable.
(m) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect
the meaning hereof.
(n) Shares Held by The Company and its Affiliates.
Whenever the consent or approval of Holders of a specified percentage of
Registrable Securities is required hereunder, Registrable Securities
held by the Company or its Affiliates (other than any Holder or
transferees or successors or assigns thereof if such Holder is deemed to
be an Affiliate solely by reason of its holdings of such Registrable
Securities) shall not be counted in determining whether such consent or
approval was given by the Holders of such required percentage.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE TO FOLLOW]
IN WITNESS WHEREOF, the parties have executed this
Registration Rights Agreement as of the date first written above.
USCI, INC.
By:_____________________________________
Name:
Title:
JNC OPPORTUNITY FUND LTD.
By:_____________________________________
Name:
Title:
<PAGE>
Schedule 1
Company:
USCI, Inc.
6115 Jimmy Carter Boulevard
Norcross, Maryland 30071
Facsimile: (770) 840-0905
Attn: Robert J. Kostrinsky
Purchaser:
JNC Opportunity Fund Ltd.
Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
Williams House, 20 Reid Street
Hamilton HM11, Bermuda
Facsimile: (441) 295-2305
Attn: Director
With copies to:
Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive, Suite 460
Reston, VA 20191
Facsimile: (703) 476-7711
Attn: Neil T. Chau
Schedule 6(b)
See Schedule 2.1(u) to the Purchase Agreement.
EXHIBIT 10.62
ESCROW AGREEMENT
ESCROW AGREEMENT (this "Agreement"), dated as of March 24, 1998,
by and among USCI, Inc. (the "Company"), JNC Opportunity Fund Ltd. (the
"Purchaser") and Robinson Silverman Pearce Aronsohn & Berman LLP (the
"Escrow Agent").
Recitals
A. Simultaneously with the execution of this Agreement,
the Company and the Purchaser have entered into a Convertible Preferred
Stock Purchase Agreement, dated as of the date hereof (the "Purchase
Agreement"), pursuant to which the Company is selling to the Purchaser
500 shares of 6% Series A Convertible Preferred Stock, par value $.01
per share (the "Preferred Stock") and a certain common stock purchase
warrant of the Company (the "Warrant"). Capitalized terms that are used
and not otherwise defined in this Agreement that are defined in the
Purchase Agreement shall have the meaning set forth in the Purchase
Agreement.
B. The Escrow Agent is willing to act as escrow agent
pursuant to the terms of this Agreement with respect to the receipt and
then delivery of the Series A Purchase Price to be paid for the
Preferred Stock pursuant to Section 1.3(a)(ii) of the Purchase Agreement
less any amounts the Purchaser is to be reimbursed by the Company under
the Purchase Agreement (the "Purchase Price") and the delivery of the
Preferred Stock and the Warrant, together with the Ancillary Closing
Documents (as defined below) and the Purchase Price (collectively, the
"Consideration").
C. Upon the closing of the transaction contemplated by the
Purchase Agreement (the "Closing") and the occurrence of an event
described in Section 2 below, the Escrow Agent shall cause the
distribution of the Consideration in accordance with the terms of this
Agreement.
NOW, THEREFORE, IT IS AGREED:
1. Deposit of Consideration.
a. Concurrently with the execution of this Agreement,
the Purchaser shall deposit with the Escrow Agent the portion of the
Purchase Price due for the Preferred Stock and the Warrant to be
purchased by it at the Closing in accordance with Section 1.3(a) of the
Purchase Agreement and the Company shall deliver to the Escrow Agent the
shares of Preferred Stock and the Warrant, registered in the name of the
Purchaser, in accordance with Section 1.3(a) of the Purchase Agreement
and wiring instructions for transfer of the Purchase Price by the Escrow
Agent into an account specified by the Company for such purpose. In
addition, the Purchaser and the Company shall deposit with the Escrow
Agent all other certificates and other documents required under the
Purchase Agreement to be delivered by them at the Closing (such
certificates and other documents being hereinafter referred to as the
"Ancillary Closing Documents").
(i) The Purchase Price shall be delivered by the
Purchaser to the Escrow Agent by wire transfer to the following account:
Citibank, N.A.
153 East 53rd Street
New York, NY 10043
ABA No.: 021-000-089
For the Account of
Robinson Silverman Pearce Aronsohn
& Berman LLP
Attorney Trust Account
Account No.: 37-204-162
Attention: Alexis Laurenceau
Reference: USCI, Inc. (10739- 19)
(ii) The Preferred Stock, Warrant and the
Ancillary Documents shall be delivered to the Escrow Agent at its
address for notice indicated in Section 5(a).
b. Until termination of this Agreement as set forth
in Section 2, all additional Consideration paid by or which becomes
payable between the Company and the Purchaser shall be deposited with
the Escrow Agent.
c. The Purchaser and the Company understand that all
Consideration delivered to the Escrow Agent pursuant to Section 1(a)
hereof shall be held in escrow in the Escrow Agent's interest bearing
business account until the Closing. After the Purchase Price has been
received by the Escrow Agent and all other conditions of Closing are
met, the parties hereto hereby authorize and instruct the Escrow Agent
to promptly effect the Closing.
d. At the Closing, Escrow Agent is authorized and
directed to deduct from the Purchase Price (i) $300,000 which will be
paid to Wharton Capital Partners, Ltd. ("Wharton") in accordance with
the engagement letter between the Company and Wharton relating to the
transactions contemplated by the Purchase Agreement (the "Engagement
Letter"), for remittance to Wharton in accordance with its instructions,
(ii) $15,000 which will be retained by the Escrow Agent in accordance
with the Purchase Agreement and (iii) $5,000, which will be remitted to
or as directed by the Purchaser pursuant to the Purchase Agreement. In
addition, the portion of the Purchase Price released to the Company
hereunder shall be reduced by all wire transfer fees incurred in
connection with the wire transfers contemplated hereby.
2. Terms of Escrow.
a. The Escrow Agent shall hold the Consideration in
escrow until the earlier to occur of (i) the receipt by the Escrow Agent
of the Purchase Price, the Preferred Stock, the Warrant and the
Ancillary Closing Documents and a writing instructing the Closing and
(ii) the receipt by the Escrow Agent of a written notice, executed by
the Company or the Purchaser, stating that the Purchase Agreement has
been terminated in accordance with its terms and instructing the Escrow
Agent with respect to the Purchase Price, the Preferred Stock, the
Warrant and the Ancillary Closing Documents.
b. If the Escrow Agent receives the items referenced
in clause (i) of Section 2(a) prior to its receipt of the notice
referenced in clause (ii) of Section 2(a), then, promptly thereafter,
the Escrow Agent shall deliver (i) the Preferred Stock, the Warrant, any
interest earned on account of the Purchase Price through the Closing and
the amounts payable to the Purchaser pursuant to Section 1(d), (ii) the
Purchase Price (net of amounts described under Section 1(d)) to the
Company, (ii) the amounts payable to Wharton under the Engagement Letter
to Wharton or in accordance with its instructions and (iv) the Ancillary
Closing Documents to the party entitled to receive the same. In
addition, the Escrow Agent shall retain $15,000 of the Purchase Price on
account of its fees pursuant to the Purchase Agreement.
c. If the Escrow Agent receives the notice referenced
in clause (ii) of Section 2(a) prior to its receipt of the items
referenced in clause (i) of Section 2(a), then the Escrow Agent shall
promptly upon receipt of such notice return (i) the Purchase Price
(together with any interest earned thereon through such date) to the
Purchaser, (ii) the Preferred Stock and Warrant to the Company and (iii)
the Ancillary Closing Documents to the party that delivered the same.
d. If the Escrow Agent, prior to delivering or
causing to be delivered the Consideration in accordance herewith,
receives notice of objection, dispute, or other assertion in accordance
with any of the provisions of this Agreement, the Escrow Agent shall
continue to hold the Consideration until such time as the Escrow Agent
shall receive (i) written instructions jointly executed by the Purchaser
and the Company, directing distribution of such Consideration, or (ii) a
certified copy of a judgment, order or decree of a court of competent
jurisdiction, final beyond the right of appeal, directing the Escrow
Agent to distribute said Consideration to any party hereto or as such
judgment, order or decree shall otherwise specify (including any such
order directing the Escrow Agent to deposit the Consideration into the
court rendering such order, pending determination of any dispute between
any of the parties). In addition, the Escrow Agent shall have the right
to deposit any of the Consideration with a court of competent
jurisdiction pursuant to Section 1006 of the New York Civil Practice Law
and Rules without liability to any party if said dispute is not resolved
within 30 days of receipt of any such notice of objection, dispute or
otherwise.
3. Duties and Obligations of the Escrow Agent.
a. The parties hereto agree that the duties and
obligations of the Escrow Agent are only such as are herein specifically
provided and no other. The Escrow Agent's duties are as a depositary
only, and the Escrow Agent shall incur no liability whatsoever, except
as a direct result of its willful misconduct.
b. The Escrow Agent may consult with counsel of its
choice, and shall not be liable for any action taken, suffered or
omitted by it in accordance with the advice of such counsel.
c. The Escrow Agent shall not be bound in any way by
the terms of any other agreement to which the Purchaser and the Company
are parties, whether or not it has knowledge thereof, and the Escrow
Agent shall not in any way be required to determine whether or not any
other agreement has been complied with by the Purchaser and the Company,
or any other party thereto. The Escrow Agent shall not be bound by any
modification, amendment, termination, cancellation, rescission or
supersession of this Agreement unless the same shall be in writing and
signed by each of the Purchaser and the Company, and agreed to in
writing by the Escrow Agent.
d. In the event that the Escrow Agent shall be
uncertain as to its duties or rights hereunder or shall receive
instructions, claims or demands which, in its opinion, are in conflict
with any of the provisions of this Agreement, it shall be entitled to
refrain from taking any action, other than to keep safely, all
Considerations held in escrow until it shall jointly be directed
otherwise in writing by the Purchaser and the Company or by a final
judgment of a court of competent jurisdiction.
e. The Escrow Agent shall be fully protected in
relying upon any written notice, demand, certificate or document which
it, in good faith, believes to be genuine. The Escrow Agent shall not
be responsible for the sufficiency or accuracy of the form, execution,
validity or genuineness of documents or securities now or hereafter
deposited hereunder, or of any endorsement thereon, or for any lack of
endorsement thereon, or for any description therein; nor shall the
Escrow Agent be responsible or liable in any respect on account of the
identity, authority or rights of the persons executing or delivering or
purporting to execute or deliver any such document, security or
endorsement.
f. The Escrow Agent shall not be required to
institute legal proceedings of any kind and shall not be required to
defend any legal proceedings which may be instituted against it or in
respect of the Consideration.
g. If the Escrow Agent at any time, in its sole
discretion, deems it necessary or advisable to relinquish custody of the
Consideration, it may do so by giving five (5) days written notice to
the parties of its intention and thereafter delivering the Consideration
to any other escrow agent mutually agreeable to the Purchaser and the
Company and, if no such escrow agent shall be selected within three days
of the Escrow Agent's notification to the Purchaser and the Company of
its desire to so relinquish custody of the Consideration, then the
Escrow Agent may do so by delivering the Consideration (a) to any bank
or trust company in the Borough of Manhattan, City and State of New
York, which is willing to act as escrow agent thereunder in place and
instead of the Escrow Agent, or (b) to the clerk or other proper officer
of a court of competent jurisdiction as may be permitted by law within
the State, County and City of New York. The fee of any such bank or
trust company or court officer shall be borne one-half by the Purchaser
and one-half by the Company. Upon such delivery, the Escrow Agent shall
be discharged from any and all responsibility or liability with respect
to the Consideration and the Company and the Purchaser shall promptly
pay to the Escrow Agent all monies which may be owed it for its services
hereunder, including, but not limited to, reimbursement of its out-of-
pocket expenses pursuant to paragraph (i) below.
h. This Agreement shall not create any fiduciary duty
on the Escrow Agent's part to the Purchaser or the Company, nor
disqualify the Escrow Agent from representing either party hereto in any
dispute with the other, including any dispute with respect to the
Consideration. The Company understands that the Escrow Agent has acted
and will continue to act as counsel to the Purchaser.
i. The reasonable out-of-pocket expenses paid or
incurred by the Escrow Agent in the administration of its duties
hereunder, including, but not limited to, all counsel and advisors' and
agents' fees and all taxes or other governmental charges, if any, shall
be paid by one-half by the Purchaser and one-half by the Company.
4. Indemnification. The Purchaser and the Company,
jointly and severally, hereby indemnify and hold the Escrow Agent, its
employees, partners, members and representatives harmless from and
against any and all losses, damages, taxes, liabilities and expenses
that may be incurred, directly or indirectly, by the Escrow Agent and/or
any such person, arising out of or in connection with its acceptance of
appointment as the Escrow Agent hereunder and/or the performance of its
duties pursuant to this Agreement, including, but not limited to, all
legal costs and expenses of the Escrow Agent and any such person
incurred defending itself against any claim or liability in connection
with its performance hereunder and the costs of recovery of amounts
pursuant to this Section 4.
5. Miscellaneous.
a. All notices, requests, demands and other
communications hereunder shall be in writing, with copies to all the
other parties hereto, and shall be deemed to have been duly given when
(i) if delivered by hand, upon receipt, (ii) if sent by facsimile, upon
receipt of proof of sending thereof, (iii) if sent by nationally
recognized overnight delivery service (receipt requested), the next
business day or (iv) if mailed by first-class registered or certified
mail, return receipt requested, postage prepaid, four days after posting
in the U.S. mails, in each case if delivered to the following addresses:
If to the Company: 6115 Jimmy Carter Boulevard
Norcross, Maryland 30071
Facsimile: (770) 840-0905
Attn: Robert J. Kostrinsky
With copies to: The Law Firm of Leonard R. Glass,
P.A.
45 Central Avenue, P.O. Box 579
Tenafly, NJ 07670
Facsimile: (201) 894-1718
Attn: Leonard R. Glass, Esq.
If to the
Purchaser: JNC Opportunity Fund Ltd.
Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda)
Ltd.
Williams House, 20 Reid Street
Hamilton HM11, Bermuda
Facsimile No.: (441) 295-2305
Attn: Director
With copies to: Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive, Suite
460
Reston, VA 20191
Facsimile No.: (703) 476-7711
Attn: Neil T. Chau
-and-
Robinson Silverman Pearce
Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen, Esq.
If to the Escrow Agent Robinson Silverman Pearce
Aronsohn &
(the Escrow Agent shall Berman LLP
receive copies of all 1290 Avenue of the Americas
communications under New York, NY 10104
this Agreement) Facsimile No.: (212) 541-
4630
Attn: Eric L. Cohen, Esq.
or at such other address as any of the parties to this Agreement may
hereafter designate in the manner set forth above to the others.
(b) This Agreement shall be construed and enforced in
accordance with the law of the State of New York applicable to contracts
entered into and performed entirely within New York.
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SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Escrow Agreement to be signed the day and year first above written.
USCI, INC.
By: ___________________________
Name:
Title:
JNC OPPORTUNITY FUND LTD.
By: ___________________________
Name:
Title:
ROBINSON SILVERMAN PEARCE
ARONSOHN & BERMAN LLP
By: ___________________________
A Member of the Firm
EXHIBIT 10.63
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. 1 Dated March 24, 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 149,522 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
$6.89 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 March 24, 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 the Purchase Agreement of even date herewith between the
Holder, the Company and the other purchasers named therein (the
"Purchase Agreement"). 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.
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[SIGNATURE PAGE FOLLOWS]
<PAGE>
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 10.64
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. 2 Dated March 24, 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 $6.89 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
March 24, 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 the Purchase Agreement of even date herewith between the
Holder, the Company and the other purchasers named therein (the
"Purchase Agreement"). 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.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS]
<PAGE>
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>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Loss from continuing operations (28,786,604) (7,783,713) (3,441,376)
Extraordinary Loss 0 0 (679,178)
----------- ----------- -----------
Net Loss (28,706,604) (7,783,713) (4,120,554)
=========== =========== ===========
Basic and diluted weighted
shares outstanding 10,251,402 10,187,909 5,577,120
Basic and diluted net loss per
common share:
Loss from continued operations (2.81) (0.76) (0.62)
Extraordinary Loss 0 0.00 (0.12)
----------- ----------- -----------
Net Loss (2.81) (0.76) (0.74)
=========== =========== ===========
</TABLE>
EXHIBIT 21.1
SUBSIDIARIES
NAME STATE OF INCORPORATION
Ameritel Communications, Inc. Delaware
Blue Chip Marketing, Inc. Delaware (inactive)
Interactive Display Technologies, Inc. Delaware
International Cellular Communications Ltd. Delaware (inactive)
U.S. Communications, Inc. Delaware
Ameritel Communications of Puerto Rico, Inc. Puerto Rico
U.S. Paging Services, Inc. Delaware
U.S. Personal Communications, Inc. Delaware (inactive)
Wireless Communication Centers, Inc. Delaware
EXHIBIT 23.1
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K into
the Company's previously filed Registration Statements on
Form S-3 (File No. 33-88828) and on Form S-8 (File No. 333-16291
and File No. 333-37329).
/s/Arthur Andersen LLP
Atlanta, Georgia
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,105,530
<SECURITIES> 0
<RECEIVABLES> 6,145,952
<ALLOWANCES> 1,250,000
<INVENTORY> 25,458
<CURRENT-ASSETS> 7,263,534
<PP&E> 7,717,007
<DEPRECIATION> 4,394,531
<TOTAL-ASSETS> 13,594,047
<CURRENT-LIABILITIES> 19,907,025
<BONDS> 0
0
0
<COMMON> 1,027
<OTHER-SE> (6,314,005)
<TOTAL-LIABILITY-AND-EQUITY> 13,594,047
<SALES> 0
<TOTAL-REVENUES> 9,811,890
<CGS> 0
<TOTAL-COSTS> 5,052,025
<OTHER-EXPENSES> 31,502,500
<LOSS-PROVISION> 950,351
<INTEREST-EXPENSE> 1,446,805
<INCOME-PRETAX> (28,786,604)
<INCOME-TAX> 0
<INCOME-CONTINUING> (28,786,604)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,786,604)
<EPS-PRIMARY> (2.81)
<EPS-DILUTED> (2.81)
</TABLE>
