New Preferred I and Convertible Debentures
From the Amended 1998 Form 10-K
Series I Preferred
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On April 6, 1999, the Company also entered into a Subscription Agreement with
Charlton whereby the Company agreed to issue to Charlton 138 shares of its
Series I, 7% Convertible Preferred Stock. The Company's Board of Directors
established the value of the Series I Preferred at $10,000 per share.
Consideration for the subscription was paid as follows:
(1) Forgiveness of approximately $725,795 in interest due and payable
in connection with the Series B convertible preferred stock.
(2) Settlement and dismissal, with prejudice, of all litigation
concerning the Series B convertible preferred stock and the
exchange of mutual releases.
(3) Cancellation of 112,500 Warrants that were issued with the Series B
Convertible Preferred Stock; and
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(4) The amendment of the Series B Preferred designation to impose a
limitation on the owner(s) of the Series B Convertible Preferred
Stock to ownership of not more than 4.99% of the Company's
outstanding common stock at any one time.
The number of fully paid and non-assessable shares of common stock, no par
value, of the Company to be issued upon conversion will be determined by
dividing (i) the sum of $10,000 (ii) the Conversion Price (determined as
hereinafter provided) in effect at the time of conversion. The "Conversion
Price" is equal to seventy five percent (75%) of the Average Closing Price of
the Company's Common Stock for the five-day trading period ending on the day
prior to the date of the conversion. The shares can be converted at any time
without additional consideration. Pursuant to the Series I Designation and the
Subscription Agreement, the Series I Holder, or any subsequent holder of the
Preferred Shares, is prohibited from converting any portion of the Preferred
Stock which would result in the Holder being deemed the beneficial owner, in
accordance with the provisions of Rule 13d-3 of the Securities Exchange Act of
1934, as amended, of 4.99% or more of the then issued and outstanding Common
Stock of the Company. Due to this contractual ownership limitation, the Series I
Preferred Shares can only be converted in increments that, together with all
shares of the Company's common stock held by the Holder, would not exceed 4.99%.
Since the conversion price of the Series I Preferred is based on 75% of the
Average Price, without a limit on the number of shares that can be issued upon
conversion, in the event that the price of the Company's common stock decreases,
the percentage of shares outstanding that will be held by the Series I Holders
upon conversion will increase accordingly. The lower the Average Price, the
greater the number of shares to be issued to the Holders upon conversion, thus
increasing the potential profits to the Holder when the price per share
increases and the Holder sells the Common Shares. The preferred stocks potential
for increased share issuance and profit in addition to a stock overhang of an
undeterminable amount may depress the price of the Company's common stock.
In the event of a voluntarily or involuntarily liquidation of the Company while
the Series I Preferred is outstanding the holders are entitled to a preference
in distribution of the Company's property available for distribution equal to
$10,000 per share.
The offering was conducted pursuant to Regulation D as promulgated under the
Securities Act of 1933, as amended (the "Regulation D Sale"). At the time the
placement was concluded, the average bid and ask price of the Company's common
stock was approximately $.39 per share.
Convertible Debenture
---------------------
The Company also entered into a Subscription Agreement with Charlton, pursuant
to which Charlton purchased $1,100,000 of the Company's Debentures. In addition,
the Company may draw down a second tranche in the amount of $825,000) anytime
thirty (30) days after the effective date of the Registration Statement as long
as the Company maintains an average closing bid price of $.45 for the ten (10)
trading days immediately prior to the date the Company requests the second
funding tranche. The Company may draw down a third tranche in the amount of
$825,000) anytime sixty (60) days after the effective date of the Registration
Statement as long as the Company maintains an average closing bid price of $.45
for the ten (10) trading days immediately prior to the date the Company requests
the third funding tranche. When concluded, assuming all the conditions set forth
above are met, the proceeds from the Debenture offering will be $2,750,000.
The Debentures pay a 7% premium, to be paid in cash or freely trading Common
Stock in the Company's sole discretion, at the time of each conversion and is
secured by mortgage on the Company's corporate office building. The Debentures
are subject to automatic conversion at the end of two years from the date of
issuance. The Mortgage will be released after the Registration Statement
covering the Common Stock underlying the Debentures has been declared effective
and upon the earlier of (a) the day the Company qualifies for listing on AMEX or
NASDAQ, as long as said listing requirements are not being met through a reverse
split of the Company's Common Stock or (b) 180 days from the date the Company
receives the third tranche, as described above.
The number of fully paid and non-assessable shares of common stock, no par
value, of the Company to be issued upon conversion will be determined by
dividing (i) the sum of $10,000 (ii) the Conversion Price (determined as
hereinafter provided) in effect at the time of conversion. The "Conversion
Price" is equal to seventy five percent (75%) of the Average Closing Price of
the Company's Common Stock for the five-day trading period ending on the day
prior to the date of the conversion. The Debenture can be converted at any time
without additional consideration. Pursuant to the Subscription Agreement, the
Debenture Holder, or any subsequent holder of the Debenture, is prohibited from
converting any portion of the Debenture which would result in the Holder being
deemed the beneficial owner, in accordance with the provisions of Rule 13d-3 of
the Securities Exchange Act of 1934, as amended, of 4.99% or more of the then
issued and outstanding Common Stock of the Company. Due to this contractual
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ownership limitation, the Debentures can only be converted in increments that,
together with all shares of the Company's common stock held by the Holder, would
not exceed 4.99%.
Since the conversion price of the Debenture is based on 75% of the Average
Price, without a limit on the number of shares that can be issued upon
conversion, in the event that the price of the Company's common stock decreases,
the percentage of shares outstanding that will be held by the Series I Holders
upon conversion will increase accordingly. The lower the Average Price, the
greater the number of shares to be issued to the Holders upon conversion, thus
increasing the potential profits to the Holder when the price per share
increases and the Holder sells the Common Shares. The preferred stocks potential
for increased share issuance and profit in addition to a stock overhang of an
undeterminable amount may depress the price of the Company's common stock.
In the event of a voluntarily or involuntarily liquidation of the Company while
the Debenture is outstanding the holders are entitled to a preference in
distribution of the Company's property available for distribution equal to the
Debentures then outstanding principal and interest and will be able to foreclose
against the Mortgage.
The offering was conducted pursuant to Regulation D as promulgated under the
Securities Act of 1933, as amended (the "Regulation D Sale"). At the time the
placement was concluded, the average bid and ask price of the Company's common
stock was approximately $.39 per share.
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