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NASDAQ MATTERS
Effective February 23, 1998, and while the March Transactions were being negotiated, the NASDAQ SmallCap Market ("NASDAQ") implemented additional new corporate governance requirements. Rule 4310(c)(25)(H) of the NASDAQ Stock Rules provides that stockholder approval is required if a plan or arrangement to issue common stock (or securities convertible into or exercisable for common stock) if
the shares being issued are equal to twenty percent (20%) or more of the common stock of the listed company, or twenty percent or more of the voting power, outstanding before the issuance, and the issuance is for less than the greater of book or market value of the relevant common stock. The March Transaction was structured with the intent to satisfy these requirements and, as noted above, since the Company intends to continue to comply with the NASDAQ rules pending
the appeal, Proposals II, III and IV are being submitted to the stockholders for approval.
However, subsequent to the March Transactions, NASDAQ requested
information with respect to the structure and technical aspects of the March Transactions. After meetings and further correspondence with NASDAQ , NASDAQ indicated in August that it intended to delist the Company absent a showing that it could comply with the listing requirements. A Hearing was held on October 16, 1998 at which the Company undertook to confirm its compliance. However, the Company's Common Stock was delisted from the NASDAQ SmallCap Market on November
25, 1998.
The delisting resulted from the conclusion of a NASDAQ Listing
Qualifications Panel that, principally in connection with the March and September Transactions, the Company had not complied with NASDAQ's shareholder approval rule by issuing shares which resulted in a change in control. In addition, the Panel concluded that the transactions constituted a "reverse acquisition" which required the Registrant to meet the requirements of NASDAQ for initial inclusion in accordance with NASD Marketplace Rule 4330(f), that the terms given to Zulu-tek with regard to the Preferred Stock constitute a violation of NASDAQ's voting rights policy, that the Company's public statements regarding the transactions with Zulu-tek in March 1998 failed to fully disclose
the transactions and other matters, and that the Company does not currently meet the net tangible assets requirement for either initial or continued inclusion.
The Company has formally appealed the delisting of its Common Stock and has been advised that Company submission must be made by March 10, 1999 after which the Review Council will consider the appeal. In the interim, the Company will undertake to continue to comply with the NASDAQ rules. The Company's Common Stock has been traded on the over-the-counter market on the [OTC Bulletin Board]
[and on the pink sheets of the National Quotation Bureau from November 25, 1998 until ].
As a result of the delisting of the Company's Common Stock, investors
could find it more difficult to dispose of, or to obtain accurate quotations as to the price of the Company's Common
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Stock. In addition, the Company's Common Stock is subject to rules promulgated under the Exchange Act applicable to penny stocks. The Securities Exchange Commission (the "Commission") has adopted regulations that generally define a "penny stock" to be an equity security that has a market price (as determined pursuant to regulations adopted by the Commission) or exercise price of less
than $5.00 per share, subject to certain exceptions. By virtue of being listed on the NASDAQ SmallCap Market, the Company's Common Stock was exempt from the definition of "penny stock." However, following the delisting of the Company's Common Stock from the NASDAQ SmallCap Market, the Company's securities became subject to the penny stock rules that impose additional sales practice requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors. Those penny stock rules may affect the ability of broker-dealers to sell the Company's Common Stock and may affect the ability of purchasers of Company's Common Stock to sell such securities in the secondary market. |
