-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SruM7/C00U4muY41ZDMpv/5XfnR4mey2+tAvETK20nhGpocK2ZkHOLY60tXwpml6 nl9wOtQ0Kr9dDGKfl5WDLw== 0000948830-99-000275.txt : 19990603 0000948830-99-000275.hdr.sgml : 19990603 ACCESSION NUMBER: 0000948830-99-000275 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990602 FILER: COMPANY DATA: COMPANY CONFORMED NAME: U S TRUCKING INC CENTRAL INDEX KEY: 0000820408 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 680133692 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 033-16417-LA FILM NUMBER: 99638993 BUSINESS ADDRESS: STREET 1: 3125 ASHLEY PHOSPHATE ROAD STREET 2: SUITE 128 CITY: NORTH CHARLESTON STATE: SC ZIP: 29418 BUSINESS PHONE: 8437679197 MAIL ADDRESS: STREET 1: 3125 ASHLEY PHOSPHATE ROAD STREET 2: SUITE 128 CITY: NORTH CHARLESTON STATE: SC ZIP: 29418 FORMER COMPANY: FORMER CONFORMED NAME: NORTHERN DANCER CORP DATE OF NAME CHANGE: 19930723 10QSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Three Months Ended March 31, 1999 Commission File Number: 33-9640-LA U. S. TRUCKING, INC. -------------------------------------------------- (Exact Name of Issuer as Specified in its Charter) COLORADO 68-0133692 - ------------------------------- --------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) 3125 Ashley Phosphate Road, Suite 128, North Charleston, S.C. 29418 ------------------------------------------------------------------- (Address of Principal Executive Offices) (843) 767-9197 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ] There were 6,484,591 shares of the Registrant's common stock outstanding as of March 31, 1999. Item 1: FINANCIAL STATEMENTS U. S. TRUCKING, INC. FORM 10-QSB INDEX Page Number PART I: FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Consolidated Balance Sheets (Unaudited) - March 31, 1999 and December 31, 1998 3 Consolidated Statement of Income (Unaudited) - Three Months Ended March 31, 1999 and 1998 4 Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis or Plan of Operation 8 PART II: OTHER INFORMATION Item 1. Legal Proceedings 12 Item 2. Changes in Securities 12 Item 3. Defaults Upon Senior Securities 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES 13 2 U.S. TRUCKING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, 1999 December 31, 1998 (UNAUDITED) (UNAUDITED) Assets Current Assets Cash in Bank $ 433,235 $ 22,976 Trade Accounts Receivable - net 4,613,718 3,447,570 Accounts Receivable - Other 164,430 141,673 Parts and Supply Inventory 252,698 257,030 Prepaid Expenses and Other 529,986 162,036 ----------- ----------- Total Current Assets 5,994,067 4,031,285 ----------- ----------- Transportation & Other Equipment - 8,417,971 9,718,805 at cost - Less accumulated depreciation and amortization Other Assets Restricted Cash - Owner Operators 2,320 2,320 Restricted Cash - Letters of Credit 40,000 10,000 Restricted Cash - Captive Insurance 196,000 - Due from Related Party 100,000 100,000 Due from Captive Insurer 389,301 355,321 Security Deposits 12,575 12,575 Intangible Assets - net of accumulated amortization 1,995,062 2,082,055 ----------- ----------- Total Other Assets 2,735,258 2,562,271 ----------- ----------- Total Assets $17,147,296 $16,312,361 =========== =========== Liabilities and Stockholders' Equity Current Liabilities Accounts Payable - Trade $ 1,378,561 $ 1,443,415 Revolving Credit Line 2,662,027 1,795,888 Accruals & Other Current Liabilities 1,154,462 669,957 Current Portion - Long Term Debt 1,998,102 2,034,756 ----------- ----------- Total Current Liabilities 7,193,151 5,944,016 ----------- ----------- Other Liabilities Owner Operator Escrow 87,787 55,874 Long-Term Notes Payable - net of current portion 4,184,365 5,224,092 ----------- ----------- Total Other Liabilities 4,272,152 5,279,966 ----------- ----------- Total Liabilities 11,465,304 11,223,982 ----------- ----------- Stockholders' Equity Preferred Stock (no par value - 20,000,000 shares authorized, 990,000 issued and outstanding) 762 Common Stock -(no par value - 75,000,000 shares authorized, 6,484,591 issued and outstanding on March 31, 1999, and 16,074,591 on December 31, 1998) 2,867,238 2,796,000 Additional Paid in Capital 4,223,480 3,821,812 Accumulated Deficit (1,289,488) (1,409,433) Subscription Receivable (120,000) (120,000) ----------- ----------- Total Stockholders' Equity 5,681,992 5,088,379 ----------- ----------- Total Liabilities & Stockholders' Equity $17,147,296 $16,312,361 =========== =========== 3 U.S.TRUCKING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME March 31, 1999 March 31, 1998 (UNAUDITED) (UNAUDITED) Net Revenues 7,661,372 100.0% 5,067,331 100.0% Operating Expenses Purchased Transportation & Rentals 2,670,015 34.9% 1,556,955 30.7% Salaries, Wages & Benefits 2,055,129 26.8% 1,281,918 25.3% Fuel 715,099 9.3% 562,427 11.1% Operating Supplies & Maintenance 322,187 4.2% 302,350 6.0% Insurance & Claims 223,428 2.9% 170,963 3.4% Misc. Operating Expenses 201,787 2.6% 141,121 2.8% Taxes & Licenses 115,493 1.5% 101,441 2.0% Insurance Captive Expense 271,136 3.5% - 0.0% Occupancy Costs 85,030 1.1% 69,903 1.4% Depreciation and Amortization 550,635 7.2% 434,655 8.6% ----------- ----- ----------- ----- Total Operating Expenses 7,209,939 94.1% 4,621,732 91.2% General Administrative Expenses 372,746 4.9% 176,546 3.5% Operating Income 78,687 1.0% 269,053 5.3% Interest Expense (108,796) -1.4% (141,074) -2.8% Gain on Sale of Equipment 124,114 1.6% - 0.0% Interest Income 42 0.0% 185 0.0% Other Income 25,899 0.3% 9,436 0.2% ----------- ----- ----------- ----- Net Income before Taxes 119,946 1.6% 137,600 2.7% Provision for Income Taxes 46,800 0.6% 53,700 1.1% Tax Benefit of Net Operating Loss Carryforward (46,800) -0.6% (53,700) -1.1% ----------- ----- ----------- ----- Net Income $ 119,946 1.6% $ 137,600 2.7% =========== ===== =========== ===== Accumulated Deficit-beginning (1,409,434) (1,531,200) ----------- ----------- Accumulated Deficit-ending $(1,289,488) $(1,393,600) =========== =========== Earnings per Common Share $ 0.01 $ 0.01 Fully Diluted Earnings per Share $ 0.01 $ 0.01 Average Number of Shares Outstanding 10,863,310 13,000,000 4 U.S. TRUCKING, INC. STATEMENT OF CASH FLOWS FOR THE THREE MONTHS Consolidated Consolidated 3/31/99 3/31/98 (Unaudited) (Unaudited) Cash Flows From Operating Activities Net Income 119,946 137,599 Adjustments to Reconcile Net Income to Net Cash Used in Operating Activities Depreciation & Amortization 550,635 428,656 Gain on Sale of Equipment (124,114) - (Increase ) Decrease - Assets Restricted Cash (226,000) (167,664) Accounts Receivable (1,222,885) 238,267 Parts & Supply Inventory - (5,688) Prepaid Expenses & Other Current Assets (363,619) (123,646) Increase (Decrease) - Liabilities Accounts Payable and Revolving Credit Line 801,285 (210,934) Accrued Expenses and Other liabilities 516,419 52,746 ----------- ----------- Total Adjustments (68,279) 211,737 Net Cash Provided by Operating Activities 51,667 349,336 ----------- ----------- Cash Flows From Investing Activities Purchase of Equipment (142,808) (16,287) Sale of Transportation and Other Equipment 1,104,114 - Payment for Re-financing of Acquisition Debt - (55,274) Proceeds from Sale of Common Stock and Additional Paid in Capital 473,668 - ----------- ----------- Net Cash Provided(Used) by Investing Activities 1,434,974 (71,561) Cash Flows from Financing Activities Principal Payments on Long-Term Debt (1,076,382) (166,476) Principal Payments on Capital Lease Obligations - (79,274) ----------- ----------- Net Cash Used by Financing Activities (1,076,382) (245,750) Net Increase in Cash 410,259 32,025 Cash at Beginning of Year 22,976 60,099 ----------- ----------- Cash at End of Period 433,235 92,124 Supplementary Disclosure of Cash Flow Information Cash Paid during the period Interest Expense 108,796 143,952 Income Taxes - - 5 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 1 - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although management believes these disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments necessary for fair presentation for the periods presented has been reflected and are of a normal recurring nature. These condensed consolidated financials statements and the notes thereto for the three years ended December 31, 1998, 1997, and 1996, as filed with the Securities and Exchange Commission as part of the Company's Annual Report on Form 10-KSB. Results of operations for the interim periods are not necessarily indicative of the results to be expected for the year. NOTE 2 - Earnings per Share Earnings per common share amounts are based on the weighted average number of common shares outstanding and diluted earnings per share amounts are based on the weighted average number of common shares outstanding plus the incremental shares that would have been outstanding upon the assumed exercise of all dilutive preferred shares. NOTE 3 - Segment Information Description of the types of services from which each reportable segment derives its revenues. The Company has three major business segments: long- haul trucking of refrigerated and non refrigerated products, interstate freight brokerage and a captive insurance program for liability insurance for the trucking industry. During the fourth quarter of 1998, the company adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131). The adoption of SFAS 131 requires the presentation of descriptive information about reportable segments which is consistent with that made available to the management of U.S. Trucking to assess performance. As a result of this change, the company now reports information on its truck brokerage operation. In addition, during 1998, the company added the captive liability insurance program (business) and reports that segment's performance similarly. In determining the net income of each segment of the company, 100% of the interest expense is allocated to long-haul trucking and effective tax rates are determined for each business segment. The Company evaluates performance and allocates resources based on net profit and loss from operations The Company's reportable segments are business units that offer different transportation services. The reportable segments are each managed separately because of their distinct differences in the operations. 6
THREE MONTH PERIOD ENDED MARCH 31, 1999 Long Haul Truck Liability Intersegment Total Trucking Brokerage Insurance Sales 7,066,758 345,119 473,861 (224,366) 7,661,372 Net Income 95,283 (19,366) 33,980 10,048 119,945 Assets 15,618,943 219,460 1,308,893 - 17,147,296 Depreciation & Amortization 550,035 600 550,635 THREE MONTH PERIOD ENDED MARCH 31, 1998 Long Haul Truck Liability Intersegment Total Trucking Brokerage Insurance Sales 4,545,773 600,554 - (78,996) 5,067,331 Net Income 120,959 16,641 - - 137,600 Assets 9,719,940 374,486 - - 10,094,426 Depreciation & Amortization 400,820 600 - - 401,420
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the Company's financial condition and results of operations for the three months ended March 31, 1999 and 1998 should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto contained elsewhere in this report. GENERAL The Company was established in January of 1997 by combining under U.S. Trucking-Nevada the operations of Gulf Northern, a mid- to long-haul truckload carrier, Mencor, a third party logistics (brokerage) company, selected assets of another truckload company, and the customer base of a small specialized truckload air freight company. The Company consolidated operations and implemented manpower reductions and blending of all trucking operations under Gulf Northern and all brokerage operations under Mencor. The Company's operating results are primarily driven by the results of the truckload business of its primary operating subsidiary, Gulf Northern Transport, Inc. as well as the implementation of a Captive Insurance Program for Auto-Liability for trucking. The Company reported a profit in the year ended December 31, 1998, by significantly decreasing the operating losses in its trucking division and by initially showing a profit in its Auto-Liability Captive Insurance Program. THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 Revenues for the three months ended March 31, 1999, increased by 51.2% to $7.7 million as compared to $5.1 million for the three months ended March 31, 1998. The increase in revenues was primarily due to revenues generated by Mid-Cal Express, Inc., which was acquired by U.S. Trucking on December 30, 1998. Company driver generated revenue increased by 24% to $4.2 million for the three months ended March 31, 1999 from $3.2 million for the same period in 1998. Independent contractor generated revenues increased by 85% to $2.4 million in 1999 from $1.3 million in 1998. Third-party brokerage decreased 58% to $345 thousand in 1999 from $600 thousand in 1998. Another factor which caused revenue to increase was the addition during the second quarter of 1998 of a captive insurance program for auto-liability insurance provided to third party trucking companies. Captive insurance revenues increased to $305 thousand in 1999 from zero in 1998. Operating expenses for the three months ended March 31, 1999 were $7.2 million, or 94% of revenues, as compared to $4.6 million, or 91% of revenues, for the same period in 1998. The increase as a percentage of revenues is primarily costs related to the acquisition of the assets of Mid-Cal Express, Inc. Fuel expenses increased $153 thousand to $715 thousand (17% of revenues generated by company drivers) in 1999 from $562 thousand (18% of revenues generated by company drivers) in 1998. Company driver payroll increased $442 thousand to $1.2 million (28.6% of revenues generated by company drivers) in 1999 from $758 thousand (24% of revenues generated by company drivers) in 1998. Repairs and maintenance costs increased $20 thousand to $322 thousand (4.6% of revenues generated by the trucking segment) in 1999 from $302 thousand (6.8% of revenues generated by the trucking segment) in 1998. Lower repair and maintenance costs as a percentage of revenues from the trucking segment were due both from the replacement of older equipment in the fleet and the product of better management in decreasing the outsourcing of major repairs and increased dedication to preventive maintenance. 8 Expenses related to the captive insurance program such as paid losses, reserved losses, reinsurance and administrative fees increased to $271 thousand in 1999 from zero in 1998. All expenses related to insurance in the truckload division increased $52 thousand to $223 thousand (2.9% of all revenues) in 1999 from $171 thousand (3.4% of all revenues) in 1998. This represents a decrease as a percentage of revenues and is a direct result of lower premiums paid in the internal captive insurance program. General and other administrative expenses for the three months ended March 31, 1999, were $372 thousand or 4.8% of revenues, compared to $176 thousand or 3.5% of revenues, for the same period in 1998. The increase was due to the completed acquisition of the assets of Mid-Cal Express, Inc. Administrative payroll increased $114 thousand to $341 thousand (4.5% of all revenues) in 1999 from $227 thousand (4.5% of all revenues) in 1998. This increase is directly related to the increase in revenues. Depreciation and amortization expenses for the three months ended March 31, 1999 were $551 thousand, or 7.2% of revenue, as compared to $435 thousand or 8.6% of revenue for the same period in 1998. This increase in the dollar amount is primarily due to amortization of goodwill on the acquisition of Mid- Cal Express, Inc. Normal recurring depreciation and amortization did not significantly change. Interest expense was $109 thousand or 1.4% of revenue for the quarter ended March 31, 1999 as compared to $141 thousand or 2.8% of revenue, for the same period in 1998. The decrease in interest as a percent of revenue is the result of (1) the restructure of the original acquisition loan, (2) lower receivable financing costs due to the transfer of the factoring relationship to a revolving line of credit facility and (3) the restructuring of some equipment debt to operating leases. Freight settlements paid to outside carriers decreased $221 thousand to $308 thousand (89% of brokerage generated revenues) for the quarter ended March 31, 1999 as compared to $529 thousand or 88% of revenues for the same period in 1998. This decrease resulted from fewer loads being brokered in 1999 because of increased competition in the industry. Income taxes have been provided at the statutory federal and state rates, adjusted for certain permanent differences between financial statement and income tax reporting. The Company has net operating losses available to offset future income for financial reporting expiring in the year 2012. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1999, the Company had a working capital deficit of approximately $1,199,084 as compared to a deficit of approximately $1,912,731 at March 31, 1998. The Company's working capital deficit improved primarily as a result of the $1,104,114 received from the sale of transportation equipment during the three months ended March 31, 1999. Net cash provided by operating activities was approximately $52,000 for the first three months of 1999 compared to $349,000 for the corresponding period in 1998. The Company has historically funded its working capital requirements through a combination of funds provided from operations, the Company's working capital facility with GE Capital and invested capital. In order to continue with its growth plans, the Company intends to raise additional funds through private placements of equity and/or debt securities. 9 Since March 31, 1999, the Company has raised approximately $500,000 in gross proceeds from the sale of Series B Convertible Preferred Stock and approximately $600,000 in gross proceeds from the sale of a convertible debenture to a foreign investor. INFLATION Many of the Company's operating expenses, including fuel costs and fuel taxes, are sensitive to the effects of inflation, which could result in higher operating costs. The effects of inflation on the Company's business during the three months ended March 31, 1999, were negligible. SEASONALITY The results of operations are often impacted by seasonality in the transportation industry. Seasonal variations may result from adverse weather or from a customer's reduced shipments after busy holidays or as a result of geographic location. The Company has operated in the mid-west, southeast and eastern regions of the United States until recently adding a west coast operation facility with the asset purchase of Mid-Cal Express, Inc. which is predominately a fresh produce long-haul division, which by its nature is subject to weather conditions that could expose the Company to greater operating variances in the future. YEAR 2000 COMPLIANCE The Company is in the midst of implementing its plan to ensure year 2000 compliance of its computer hardware and software. The plan is centered around the purchase of a new hardware system consisting of a Compaq proliant P2 300 300 MHz processor, 320 MB RAM, 2/9.1 GB mirror hard drive, and a Server Tower which is installed in the Charleston, South Carolina, location. From the system will be generated all functions of the Company's operating systems including, but not limited to, the initiation of loads, dispatch, billing, accounts payable and receivable, general ledger functions and preparation of financial statements. All maintenance records for all of the trucks, inventory records for all parts and supplies, claim records and accident records as well as fuel and mileage for taxing bodies will be supplied. Information from the Company's fuel provider, Comdata, will be downloaded into the system over the Internet on a daily basis. The Company has received data from Comdata with respect to their program for year 2000 compliance and is satisfied that they will be in total compliance. The new software system has been fully operational for the agent program and brokerage business since November 1998, and the complete system is now operating Company-wide. At present, the Company is working with its hardware provider to have installed PC workstations for use with a Windows NT User Network, MS Exchange 50 User Internal E-mail. Each workstation is a Compaq Deskpro EP Pentium 333 Mhz. Protrip software from Computerized Management Services of Sioux Falls, South Dakota, will be used. The Company is currently also preparing and reviewing its database information on its current system for transfer to the new system in an effort to streamline the flow of information from one system to the other. The Company may also be vulnerable to the failure of other companies to be year 2000 compliant. The Company has commenced its assessment of whether third parties with whom the Company has material relationships are year 2000 compliant. The Company is evaluating its vendors and suppliers to determine if there would be a material effect on the Company's business if they do not timely become year 2000 compliant. The same analysis is being made for 10 significant customers. The Company has not yet initiated formal contingency planning processes to mitigate the risk to the Company if any vendors or customers are not prepared for the year 2000, but the Company intends to complete this process by June 30, 1999. Although the Company expects its internal systems to be year 2000 compliant, the failure of any of its significant vendors or customers to correct a material year 2000 problem could result in an interruption in certain normal business activities and operations. Due to the general uncertainty inherent in the year 2000 problem, resulting in part from the uncertainty of the year 2000 readiness of third parties which the Company relies on, the Company is unable to determine at this time whether the consequences of year 2000 failures will have a material adverse impact on the Company's results of operations, but the Company believes that with the implementation of its new computer system and completion of its assessment of its vendors and customers, the possibility of significant interruptions of normal operations should be reduced. 11 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. CHANGES IN SECURITIES. None ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS. Exhibit Number Description Location 3.5 Articles of Amendment dated April 29, Filed herewith 1999, regarding Series B Convertible electronically Preferred Stock 10.12 10% Convertible Debenture due May 31, Filed herewith 2002 for $600,000 electronically 27 Financial Data Schedule Filed herewith electronically (b) REPORTS ON FORM 8-K. None. 12 SIGNATURES In accordance with the requirements of the Exchange Act, the Issuer caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. U. S. TRUCKING, INC. By:/s/ Dan L. Pixler Dan L. Pixler, President Dated: June 2, 1999 13 EXHIBIT INDEX EXHIBIT METHOD OF FILING - ------- ---------------- 3.5 Articles of Amendment dated April 29, Filed herewith 1999, regarding Series B Convertible electronically Preferred Stock 10.12 10% Convertible Debenture due May 31, Filed herewith 2002 for $600,000 electronically 27 Financial Data Schedule Filed herewith electronically EX-3.5 2 ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF U.S. TRUCKING, INC. (SERIES B CONVERTIBLE PREFERRED STOCK) FIRST: That pursuant to authority expressly granted and vested in the Board of Directors (the "Board of Directors" or the "Board") of this Corporation under the Colorado Business Corporation Act and the provisions of the Articles of Incorporation, the Board of Directors, on April 29, 1999, adopted the following resolution setting forth the designations, powers, preferences and rights of its Series B Convertible Preferred Stock (the "Statement of Designation"). RESOLVED: That the designations, powers, preferences and rights of the Series B Convertible Preferred Stock be, and they hereby are, as set forth below: I. DESIGNATION AND AMOUNT The designation of this series, which consists of 2,000 shares of Preferred Stock, is the Series B Convertible Preferred Stock (the "Series B Preferred Stock") and the stated value shall be One Thousand U.S. Dollars ($1,000.00) per share (the "Stated Value"). II. NO DIVIDENDS The Series B Preferred Stock will bear no dividends, and the holders of the Series B Preferred Stock shall not be entitled to receive dividends on the Series B Preferred Stock. III. CERTAIN DEFINITIONS For purposes of this Statement of Designation, the following terms shall have the following meanings: A. "Closing Bid Price" means, for any security as of any date, the closing bid price of such security on the over-the-counter market on the electronic bulletin board (the "Bulletin Board") or principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg Financial Markets or if Bloomberg Financial Markets is not then reporting closing bid prices of such security a comparable reporting service of national reputation selected by the Corporation and reasonably acceptable to holders of a majority of the then outstanding shares of Series B Preferred Stock (collectively, "Bloomberg"). If the foregoing does not apply, if no bid price is reported for such security by Bloomberg, the average of the bid prices of any market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value as reasonably determined by an investment banking firm selected by the Corporation and reasonably acceptable to holders of a majority of the then outstanding shares of Series B Preferred Stock, with the costs of such appraisal to be borne by the Corporation. B. "Conversion Date" means, for any Conversion, the date on which the notice of conversion in the form attached hereto (the "Notice of Conversion") is delivered by fax, as evidenced by a mechanically or electronically generated confirmation thereof, (or delivered by other means resulting in notice) to the Corporation before 6:00 p.m., New York City time on the Conversion Date indicated in the Notice of Conversion. The holder shall confirm, by overnight courier, in person (by courier or otherwise) or by telephone (to an authorized officer of the Corporation or his or her administrative assistant), the delivery of the Notice of Conversion to the Corporation on the date on which the Notice of Conversion is delivered or before 9:00 a.m., New York City time on the trading day immediately succeeding such date; provided that an overnight courier delivery which is signed for or refused by the Corporation prior to 12:00 noon, New York City time on a given day shall be deemed to have been delivered before 9:00 a.m. New York City time on such day. If the Notice of Conversion is not so faxed or otherwise delivered or the overnight courier, in-person or telephone confirmation is not so made or deemed to be made before such applicable times, then the Conversion Date shall be the date as of which both such conditions are satisfied (i.e., the Notice of Conversion is delivered on or before 6:00 p.m. New York City time on a given day and the overnight courier, in-person or telephone confirmation is made or deemed to be made either on such day of delivery or before 9:00 a.m. New York City time on the immediately succeeding trading day). C. "Conversion Price" means the lower of the Fixed Conversion Price and the Variable Conversion Price, each in effect as of such date and subject to adjustment as provided herein. D. "First Conversion Date" means, with respect to Series B Preferred Stock issued on any Issue Date the earliest of (i) the 181st day following the Initial Issuance Date, (ii) the date the Corporation makes a public announcement that it intends to merge or consolidate with any other entity (other than a merger in which the Corporation is the surviving or continuing entity and the voting capital stock of the Corporation immediately prior to such merger represents at least 50% of the voting power of the capital stock of the Corporation after the merger) or to sell or transfer all or substantially all of the assets of the Corporation, (iii) the date any person, group or entity (including the Corporation) publicly announces a tender offer, exchange offer or another transaction to purchase 50% or more of the Corporation's outstanding Common Stock or otherwise publicly announces an intention to replace a majority of the Corporation's Board of Directors by waging proxy battle or otherwise, or (iv) the date on which a Redemption Event described in Article VIII.A(iv) occurs. E. "Fixed Conversion Price" means $2.59 (the average of the Closing Bid Prices for the Corporation's common stock, no par value per share ("Common Stock") during the five (5) consecutive trading days ending on the day immediately prior to the Initial Issuance Date), and shall be subject to adjustment as provided herein. F. "Initial Issuance Date" means the date of the First Closing under that certain Securities Purchase Agreement dated as of April 29, 1999 by and among the Corporation and the other signatories thereto (the "Securities Purchase Agreement"). G. "Issuance Date" means for each share of Series B Preferred Stock, the date on which such share is first issued by the Corporation. 2 H. "Market Price," as of any date, (i) means the average of the closing bid prices for the shares of Common Stock as reported on the Bulletin Board by Bloomberg for the ten consecutive trading days immediately preceding such date, or (ii) if the Bulletin Board is not the principal trading market for the shares of Common Stock, the average of the closing bid prices as reported by Bloomberg on the principal trading market or exchange for the Common Stock during the same period, or, if there is no sale price for such period, the last reported bid price as reported by Bloomberg for such period, or (iii) if market value cannot be calculated as of such date on any of the foregoing bases, the Market Price shall be the average fair market value as reasonably determined by an investment banking firm selected by the Corporation and reasonably acceptable to the holder, with the costs of the appraisal to be borne by the Corporation. The manner of determining the Market Price of the Common Stock set forth in the foregoing definition shall apply with respect to any other security in respect of which a determination as to market value must be made hereunder. I. "N" means, with respect to each share of Series B Preferred Stock, the number of days from, but excluding, the Issuance Date until the date Premium is first redeemed in accordance with Article IV.D hereof on such share and thereafter the number of days from and including the date on which Premium was last redeemed in accordance with Article IV.D hereof until the date Premium is next redeemed on such share.. J. "Variable Conversion Price" means, as of any date of determination, the amount obtained by multiplying 0.90 by the average of the Closing Bid Prices for the Common Stock for any three (3) consecutive trading days chosen by the holder of Series B Preferred Stock during the period beginning on the twentieth trading day prior to the Conversion Date for such Conversion and ending on such Conversion Date (subject to equitable adjustment for any stock splits, stock dividends, reclassifications or similar events during such trading day period), and shall be subject to adjustment as provided herein; provided, however, beginning on that date which is one hundred eighty days after the Initial Issuance Date, such twenty day period shall be increased by one additional trading day for each thirty day period thereafter. K. "Premium" means an amount equal to (X)x(N/365) x (1,000), where "X" means twelve hundredths (.12). IV. CONVERSION; REDEMPTION OF PREMIUM A. Conversion at the Option of the Holder. Subject to the limitations on conversions contained in Paragraph C of this Article IV and to the Corporation's right of redemption contained in Article VIII.D, each holder of shares of Series B Preferred Stock may, at any time and from time to time on or after the First Conversion Date, convert (a "Conversion") each of its shares of Series B Preferred Stock into a number of fully paid and nonassessable shares of Common Stock determined in accordance with the following formula: $1,000 Conversion Price B. Mechanics of Conversion. In order to effect a Conversion, a holder shall: (x) fax (or otherwise deliver) a copy of the fully executed Notice of Conversion to the Corporation or the transfer agent for the Common Stock and 3 (y) surrender or cause to be surrendered the original certificates representing the Series B Preferred Stock being converted (the "Preferred Stock Certificates"), duly endorsed, along with a copy of the Notice of Conversion as soon as practicable thereafter to the Corporation or the transfer agent. The holder shall confirm by overnight courier, in person (by courier or otherwise) or by telephone (to an authorized officer of the Corporation or his or her administrative assistant), the delivery of the Notice of Conversion to the Corporation on the date on which the Notice of Conversion is delivered or before 9:00 a.m. New York City time on the trading day immediately succeeding such date; provided that an overnight courier delivery which is signed for or refused by the Corporation prior to 12:00 noon, New York City time on a given day shall be deemed to have been delivered before 9:00 a.m. New York City time on such day. Upon receipt by the Corporation of the Notice of Conversion by fax from a holder, the Corporation shall, within one business day, following the later of the Corporation's receipt of such Notice of Conversion and the holder's overnight courier, in-person or telephone confirmation of the delivery of such Notice of Conversion, send, via fax, a confirmation (the "Notice of Conversion Confirmation") to such holder stating that the Notice of Conversion has been received, the date upon which the Corporation expects to deliver the Common Stock issuable upon such conversion, the name and telephone number of a contact person at the Corporation regarding the conversion. The Corporation shall not be obligated to issue shares of Common Stock upon a conversion unless either the Preferred Stock Certificates are delivered to the Corporation or the transfer agent as provided above, or the holder notifies the Corporation or the transfer agent that such certificates have been lost, stolen or destroyed and delivers the documentation to the Corporation required by Article XIV.B hereof. (i) Delivery of Common Stock Upon Conversion. Upon the surrender of Preferred Stock Certificates from a holder of Series B Preferred Stock accompanied by a Notice of Conversion, the Corporation shall, subject to the Corporation's redemption rights set forth in Article VIII.D, no later than the later of (a) the third business day following the Conversion Date and (b) the business day following the date of such surrender (or, in the case of lost, stolen or destroyed certificates, after provision of documentation pursuant to Article XIV.B) (the "Delivery Period"), issue and deliver to the holder or its nominee, after registration of the resale of such shares under the Securities Act of 1933, as amended (the "Securities Act"), or delivery of documentation reasonably satisfactory to the Corporation that the registration of such shares is not required, to such holder's nominee, (x) that number of shares of Common Stock issuable upon conversion of such shares of Series B Preferred Stock being converted and (y) a certificate representing the number of shares of Series B Preferred Stock not being converted, if any. If the Corporation's transfer agent is participating in the Depository Trust Corporation ("DTC") Fast Automated Securities Transfer program, and so long as the certificates therefor do not bear a legend and the holder thereof is not then required to return such certificate for the placement of a legend thereon, the Corporation may cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to the holder by crediting the account of the holder or its nominee with DTC through its Deposit Withdrawal Agent Commission system ("DTC Transfer"). If the aforementioned conditions to a DTC Transfer are not satisfied or a DTC Transfer is otherwise not effected, the Corporation shall deliver to the holder physical certificates representing the Common Stock issuable upon conversion. Further, a holder may instruct the Corporation to deliver to the holder physical certificates representing the Common Stock issuable upon conversion in lieu of delivering such shares by way of DTC Transfer. 4 (ii) Taxes. The Corporation shall pay any and all taxes which may be imposed upon the Corporation with respect to the issuance and delivery of the shares of Common Stock upon the conversion of the Series B Preferred Stock other than transfer taxes due upon conversion, if such holder has transferred to another party the Series B Preferred Stock or the right to receive Common Stock upon the holder's conversion thereof. (iii) No Fractional Shares. If any conversion of Series B Preferred Stock would result in the issuance of a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon conversion of the Series B Preferred Stock shall be rounded up or down to the nearest whole share, it being understood that .5 of one share shall be rounded up to the next highest share. (iv) Conversion Disputes. In the case of any dispute with respect to a conversion, the Corporation shall promptly issue such number of shares of Common Stock as are not disputed in accordance with subparagraph (i) above. If such dispute involves the calculation of the Conversion Price, the Corporation shall submit the disputed calculations to the Corporation's outside auditors reasonably acceptable to the holder of Series B Preferred Stock being converted via facsimile at any time prior to the expiration of the Delivery Period. The accountant, at the Corporation's expense, shall audit the calculations and notify the Corporation and the holder of the results as soon as practicable following the date it receives the disputed calculations. The accountant's calculation shall be deemed conclusive, absent manifest error. The Corporation shall then issue the appropriate number of shares of Common Stock in accordance with subparagraph (i) above. C. Limitations on Conversions. The conversion of shares of Series B Preferred Stock shall be subject to the following limitations (each of which limitations shall be applied independently): (i) Cap Amount. If, notwithstanding the representations and warranties of the Corporation contained in the Securities Purchase Agreement, the Corporation is prohibited by the rules or regulations of any securities exchange or quotation system on which the Common Stock is then listed or traded, from listing or issuing a number of shares of Common Stock in excess of a prescribed amount (the "Cap Amount") without the approval of the Corporation's shareholders, then the Corporation shall not be required to list or issue, as applicable, shares in excess of the Cap Amount unless the Corporation has obtained the required approvals. The Cap Amount shall be allocated pro rata to the holders of Series B Preferred Stock as provided in Article XIV.C. In the event a holder of Series B Preferred Stock submits a Notice of Conversion and the Corporation is prohibited from listing or issuing shares of Common Stock to satisfy such Notice of Conversion as a result of the operation of this subparagraph (i), such holder shall be entitled to the rights set forth in Article VII hereof. (ii) No Five Percent Holders. Unless a holder of shares of Series B Preferred Stock delivers a waiver in accordance with the last sentence of this subparagraph (ii), in no event shall a holder of shares of Series B Preferred Stock be entitled to receive shares of Common Stock upon a conversion to the extent that the sum of (x) the number of shares of Common Stock beneficially owned by the holder and its affiliates (exclusive of shares issuable upon conversion of the unconverted portion of the shares of Series B Preferred Stock or the unexercised or unconverted portion of any other securities of the Corporation (including, without limitation, the warrants (the "Warrants") 5 issued by the Corporation pursuant to the Securities Purchase Agreements) subject to a limitation on conversion or exercise analogous to the limitations contained herein) and (y) the number of shares of Common Stock issuable upon the conversion of the shares of Series B Preferred Stock with respect to which the determination of this subparagraph is being made, would result in beneficial ownership by the holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock. For purposes of this subparagraph, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13 D-G thereunder, except as otherwise provided in clause (x) above. Except as provided in the immediately succeeding sentence, the restriction contained in this subparagraph (ii) shall not be altered, amended, deleted or changed in any manner whatsoever unless the holders of a majority of the outstanding shares of Common Stock and each holder of outstanding shares of Series B Preferred Stock shall approve such alteration, amendment, deletion or change. Notwithstanding the foregoing, a holder of shares of Series B Preferred Stock may, by providing written notice to the Corporation, adjust the restriction set forth in this subparagraph (ii) so that the limitation on beneficial ownership of 4.99% of the outstanding shares of Common Stock referred to above shall be increased to 9.99%, which adjustment shall not take effect until the 61st day after the date of such notice. (iii) Percentage Limits on Conversion. Notwithstanding anything to the contrary contained herein, no holder of shares of Series B Preferred Stock may, without the prior written consent of the Corporation, on any one trading day convert into shares of Common Stock a number of shares of Series B Preferred Stock in excess of ten percent (10%) of the aggregate number of shares of Series B Preferred Stock purchased by such holder from the Corporation. D. Redemption of Premium. The Corporation shall, on the fifteenth (15th) day of each calendar month, redeem in cash any and all accrued and unpaid Premium as of such date. All such redemption payments hereunder shall be paid in lawful money of the United States of America at such address for the holder as appears on the record books of the Corporation (or at such other address as such holder shall hereafter give to the Corporation by written notice). V. RESERVATION OF SHARES OF COMMON STOCK A. Reserved Amount. On the Issuance Date of shares of Series B Preferred Stock, the Corporation shall reserve 200% of the number of shares which would be issuable if the outstanding shares of Series B Preferred Stock were converted in their entirety on the such Issuance Date based on the Conversion Price in effect on such Issuance Date of the authorized but unissued shares of Common Stock for issuance upon conversion of the Series B Preferred Stock and thereafter the number of authorized but unissued shares of Common Stock so reserved (the "Reserved Amount") shall not be decreased and shall at all times be sufficient to provide for the conversion of the Series B Preferred Stock outstanding at the then current Conversion Price thereof. The Reserved Amount shall be allocated to the holders of Series B Preferred Stock as provided in Article XIV.C. B. Increases to Reserved Amount. If the Reserved Amount for any three consecutive trading days (the last of such three trading days being the "Authorization Trigger Date") shall be less than 135% of the number of shares of Common Stock issuable upon conversion of the then outstanding shares of Series B Preferred Stock, the Corporation shall immediately notify the holders 6 of Series B Preferred Stock of such occurrence and shall take immediate action (including, if necessary, seeking shareholder approval to authorize the issuance of additional shares of Common Stock) to increase the Reserved Amount to 200% of the number of shares of Common Stock then issuable upon conversion of the outstanding Series B Preferred Stock. In the event the Corporation fails to so increase the Reserved Amount within 90 days after an Authorization Trigger Date (such event being the "Reserved Amount Trigger Event"), each holder of Series B Preferred Stock shall thereafter have the option, exercisable in whole or in part at any time and from time to time by delivery of a Redemption Notice (as defined in Article VIII.C) to the Corporation, to require the Corporation to purchase for cash, at an amount per share equal to the Redemption Amount (as defined in Article VIII.B), a portion of the holder's Series B Preferred Stock such that, after giving effect to such purchase, the holder's allocated portion of the Reserved Amount exceeds 135% of the total number of shares of Common Stock issuable to such holder upon conversion of its Series B Preferred Stock. If the Corporation fails to redeem any of such shares within five (5) business days after its receipt of such Redemption Notice, then such holder shall be entitled to the remedies provided in Article VIII.C. C. Adjustment to Conversion Price. If the Corporation is prohibited, at any time, from issuing shares of Common Stock upon conversion of Series B Preferred Stock to any holder because the Corporation does not then have available a sufficient number of authorized and reserved shares of Common Stock, then the Fixed Conversion Price in respect of any shares of Series B Preferred Stock held by any holder (including shares of Series B Preferred Stock submitted to the Corporation for conversion, but for which shares of Common Stock have not been issued to any such holder) shall be adjusted as provided in Article VI.A. D. Limitations on Redemption Right. Notwithstanding the provisions of Paragraph B of this Article V, the holders of Series B Preferred Stock shall have no right to require the Corporation to effect a redemption of their outstanding shares of Series B Preferred Stock as provided in Paragraph B of this Article V so long as (i) the Corporation has not, at any time, decreased the Reserved Amount below that number of shares of Common Stock computed as set forth in Article V.A.; (ii) the Corporation shall have taken immediate action following the applicable Authorization Trigger Date (including, if necessary, seeking stockholder approval to authorize the issuance of additional shares of Common Stock) to increase the Reserved Amount to 200% of the number of shares of Common Stock then issuable upon conversion of the outstanding Series B Preferred Stock; and (iii) the Corporation continues to use all commercially reasonable good faith best efforts (including the resolicitation of stockholder approval to authorize the issuance of additional shares of Common Stock) to increase the Reserved Amount to 200% of the number of shares of Common Stock then issuable upon conversion of the outstanding Series B Preferred Stock. The Corporation will be deemed to be using "all commercially reasonable good faith best efforts" to increase the Reserved Amount so long as it solicits stockholder approval to authorize the issuance of additional shares of Common Stock not less than three (3) times during each twelve month period following the applicable Authorization Trigger Date during which any shares of Series B Preferred Stock remain outstanding. VI. FAILURE TO SATISFY CONVERSIONS A. Conversion Defaults. The following shall constitute a "Conversion Default": (i) following the submission by a holder of shares of Series B Preferred Stock of a Notice of Conversion, the Corporation fails for any 7 reason (other than because of an event described in clause (iii) below) to deliver, on or prior to the tenth business day following the expiration of the Delivery Period for such conversion, such number of shares of Common Stock without a restrictive legend covered by an effective registration statement to which such holder is entitled upon such conversion, (ii) the Corporation provides notice to any holder of Series B Preferred Stock at any time of its intention not to issue freely tradeable shares of Common Stock upon exercise by any holder of its conversion rights in accordance with the terms of this Statement of Designation (other than because of an event described in clause (iii) below), or (iii) the Corporation is prohibited, at any time, from listing shares of Common Stock or from issuing shares of Common Stock upon conversion of Series B Preferred Stock to any holder because the Corporation (A) does not at the date of such conversion have available a sufficient number of authorized and reserved shares of Common Stock or (B) such listing or issuance would exceed the then unissued portion of such holder's Cap Amount. In the case of a Conversion Default described in clause (i) or (iii) above, the Fixed Conversion Price in respect of any shares of Series B Preferred Stock held by such holder (including shares of Series B Preferred Stock submitted to the Corporation for conversion, but for which shares of Common Stock have not been issued to such holder) shall thereafter be the lesser of (x) the Fixed Conversion Price on the date of the Conversion Default and (y) the lowest Conversion Price in effect during the period beginning on, and including, such date through and including (A) in the case of a Conversion Default referred to in clause (i) above, the earlier of (1) the day such shares of Common Stock are delivered to the holder and (2) the day on which the holder regains its rights as a holder of Series B Preferred Stock with respect to such unconverted shares of Series B Preferred Stock pursuant to the provisions of Article XIV.F hereof, and (B) in the case of a Conversion Default referred to in clause (iii) above, the date on which the prohibition on listing or issuance of Common Stock terminates. In the case of a Conversion Default described in clause (ii) above, the Fixed Conversion Price with respect to any conversion thereafter shall be the lowest Conversion Price in effect at any time during the period beginning on, and including, the date of the occurrence of such Conversion Default through and including the Default Cure Date (as defined below). Following any adjustment to the Fixed Conversion Price pursuant to this Article VI.A, the Fixed Conversion Price shall thereafter be subject to further adjustment for any events described in Article XI. Upon the occurrence of each reset of the Fixed Conversion Price pursuant to this Paragraph A, the Corporation, at its expense, shall promptly compute the new Fixed Conversion Price and prepare and furnish to each holder of Series B Preferred Stock a certificate setting forth such new Fixed Conversion Price and showing in detail each Conversion Price in effect during such reset period. "Default Cure Date" means (i) with respect to a Conversion Default described in clause (i) of its definition, the date the Corporation effects the conversion of the full number of shares of Series B Preferred Stock, (ii) with respect to a Conversion Default described in clause (ii) of its definition, the date the Corporation issues shares of Common Stock without a restrictive legend covered by an effective registration statement in satisfaction of all conversions of Series B Preferred Stock in accordance with Article IV.A, and (iii) with respect to a Conversion Default described in clause (i) or clause (ii) of its definition, the date on which the Corporation redeems shares of Series B Preferred Stock held by such holder pursuant to paragraph C of this Article VI. B. Intentionally Omitted. 8 C. Redemption Right. If the Corporation fails, and such failure continues uncured for five (5) business days after the Corporation has been notified thereof in writing by the holder, for any reason (other than because such issuance would exceed such holder's allocated portion of the Reserved Amount or Cap Amount, for which failures the holders shall have the remedies set forth in Articles V and VII, respectively) to issue shares of Common Stock within 10 business days after the expiration of the Delivery Period with respect to any conversion of Series B Preferred Stock, then the holder may elect at any time and from time to time prior to the Default Cure Date for such Conversion Default, by delivery of a Redemption Notice to the Corporation, to have all of such holder's shares of Series B Preferred Stock which were submitted for conversion purchased by the Corporation for cash, at an amount per share equal to the Redemption Amount (as defined in Article VIII.B). If the Corporation fails to redeem any of such shares within five business days after its receipt of such Redemption Notice, then such holder shall be entitled to the remedies provided in Article VIII.C. D. Void Notice of Conversion. If for any reason a holder has not received all of the shares of Common Stock prior to the tenth (10th) business day after the expiration of the Delivery Period with respect to a conversion of Series B Preferred Stock and such shares are not subject to a redemption notice from the holder thereof, then the holder, upon written notice to the Corporation's transfer agent, with a copy to the Corporation, may void its Notice of Conversion with respect to, and retain or have returned, as the case may be, any shares of Series B Preferred Stock that have not been converted pursuant to such holder's Notice of Conversion; provided that the voiding of a holder's Notice of Conversion shall not affect such holders rights and remedies which have accrued prior to the date of such notice pursuant to Article VI hereof or otherwise. VII. INABILITY TO LIST OR CONVERT DUE TO CAP AMOUNT A. Obligation to Cure. If at any time after April 30, 1999 the then unissued portion of any holder's Cap Amount is less than 135% of the number of shares of Common Stock then issuable upon conversion of such holder's shares of Series B Preferred Stock (a "Trading Market Trigger Event"), the Corporation shall immediately notify the holders of Series B Preferred Stock of such occurrence and shall take immediate action (including, if necessary, seeking the approval of its shareholders to authorize the listing or issuance of the full number of shares of Common Stock which would be issuable upon the conversion of the then outstanding shares of Series B Preferred Stock but for the Cap Amount) to eliminate any prohibitions under applicable law or the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Corporation or any of its securities on the Corporation's ability to list or issue shares of Common Stock in excess of the Cap Amount ("Trading Market Prohibitions"). In the event the Corporation fails to eliminate all such Trading Market Prohibitions within 120 days after the Trading Market Trigger Event, then each holder of Series B Preferred Stock shall thereafter have the option, exercisable in whole or in part at any time and from time to time until such date that all such Trading Market Prohibitions are eliminated, by delivery of a Redemption Notice (as defined in Article VIII.C) to the Corporation, to require the Corporation to purchase for cash, at an amount per share equal to the Redemption Amount, a number of the holder's shares of Series B Preferred Stock such that, after giving effect to such redemption, the then unissued portion of such holder's Cap Amount exceeds 135% of the total number of shares of Common Stock issuable upon conversion of such holder's shares of Series B 9 Preferred Stock. If the Corporation fails to redeem any of such shares within five (5) business days after its receipt of such Redemption Notice, then such holder shall be entitled to the remedies provided in Articles VII.B and VIII.C. B. Remedies. If the Corporation fails to redeem any shares of Series B Preferred Stock pursuant to Article VII.A within five business days after its receipt of such Redemption Notice, and thereafter the Corporation is prohibited, at any time, from listing shares of Common Stock or from issuing shares of Common Stock upon conversion of Series B Preferred Stock to any holder because such listing or issuance would exceed the then unissued portion of such holder's Cap Amount because of applicable law or the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Corporation or its securities, any holder who is so prohibited from converting its Series B Preferred Stock because the shares of Common Stock underlying such Series B Preferred Stock may not be listed or issued, may elect either or both of the following additional remedies: (i) to require, with the consent of holders of at least fifty percent (50%) of the outstanding shares of Series B Preferred Stock (including any shares of Series B Preferred Stock held by the requesting holder), the Corporation to terminate the trading of its Common Stock on the Bulletin Board (or any other stock exchange, interdealer quotation system or trading market) and to cause its Common Stock to be eligible for trading on the "pink sheets"; or (ii) to require the Corporation to issue shares of Common Stock in accordance with such holder's Notice of Conversion at a conversion price equal to the average of the Closing Bid Prices for the Common Stock during the five consecutive trading days ending on the trading day immediately preceding the date of the holder's written notice to the Corporation of its election to receive shares of Common Stock pursuant to this subparagraph (ii) (subject to equitable adjustment for any stock splits, stock dividends, reclassifications or similar events during such five trading day period). C. Adjustment to Conversion Price. If the Corporation is prohibited, at any time, from listing shares of Common Stock or from issuing shares of Common Stock upon conversion of Series B Preferred Stock to any holder because such listing or issuance would exceed the then unissued portion of such holder's Cap Amount because of applicable law or the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Corporation or its securities, then the Fixed Conversion Price in respect of any shares of Series B Preferred Stock held by any holder (including shares of Series B Preferred Stock submitted to the Corporation for conversion, but for which shares of Common Stock have not been issued) shall be adjusted as provided in Article VI.A. VIII. REDEMPTION A. Redemption by Holder. In the event (each of the events described in clauses (i)-(vii) below after expiration of the applicable cure period (if any) being a "Redemption Event"): (i) the Common Stock (including, from and after the First Conversion Date, any of the shares of Common Stock issuable upon conversion of the Series B Preferred Stock) is suspended from trading on any of, or is not listed (and authorized) for trading on at least one of, the Bulletin Board, 10 NASDAQ Small Cap Market, the NASDAQ National Market, the New York Stock Exchange or the American Stock Exchange for an aggregate of 10 full trading days in any nine month period; (ii) the Corporation fails to remove any restrictive legend on any certificate or any shares of Common Stock issued to the holders of Series B Preferred Stock (a "Legend Removal Failure") upon conversion of the Series B Preferred Stock as and when required by this Statement of Designation, the Securities Purchase Agreement or that certain Registration Rights Agreement (the "Registration Rights Agreement") by and among the Corporation and the other signatories thereto entered into in connection with the Securities Purchase Agreement and any such failure continues uncured for ten business days after the Corporation has been notified thereof in writing by the holder; (iii) the Corporation provides notice to any holder of Series B Preferred Stock, including by way of public announcement, at any time, of its intention not to issue, or otherwise refuses to issue, shares of Common Stock to any holder of Series B Preferred Stock upon conversion in accordance with the terms of this Statement of Designation (other than due to the circumstances contemplated by Articles V or VII for which the holders shall have the remedies set forth in such Articles); (iv) the Corporation shall: (a) sell, convey or dispose of all or substantially all of its assets (the presentation of any such transaction for stockholder approval being conclusive evidence that such transaction involves the sale of all or substantially all of the assets of the Corporation); or (b) merge, consolidate or engage in any other business combination with any other entity (other than pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the Corporation and other than pursuant to a merger in which the Corporation is the surviving or continuing entity and the voting capital stock of the Corporation immediately prior to such merger represents at least 50% of the voting power of the capital stock of the Corporation after the merger) and its capital stock is unchanged; or (c) have fifty percent (50%) or more of the voting power of its capital stock owned beneficially by one person, entity or "group" (as such term is used under Section 13(d) of the Securities Exchange Act of 1934, as amended), other than Logistics Management LLC and its current affiliates; (v) the Corporation otherwise shall breach any material term hereunder or under the Securities Purchase Agreement or the Registration Rights Agreement and such breach continues for 5 business days after the Corporation has been notified thereof in writing by the holder; or (vi) as of the last day of any Trading Volume Valuation Period (defined below) and the Trading Volume Value (defined below) for such Trading Volume Valuation Period shall not equal or exceed $150,000. The term "Trading Volume Valuation Period" shall mean any twenty (20) consecutive trading day period during the period beginning on the one hundred eightieth (180th) day after the Initial Issuance Date and continuing thereafter. The term "Trading Volume Value" shall mean, for any Trading Volume Valuation Period, the average of the products obtained by multiplying (i) the Closing Bid Price for 11 the Common Stock on a trading day by (ii) the total actual number of shares of Common Stock purchased on the Bulletin Board or the principal exchange or market on which the Common Stock is traded on such trading day for each trading day in such Trading Volume Valuation Period. then, upon the occurrence of any such Redemption Event, each holder of shares of Series B Preferred Stock shall thereafter have the option, exercisable in whole or in part at any time and from time to time by delivery of a Redemption Notice (as defined in Paragraph C below) to the Corporation while such Redemption Event continues, to require the Corporation to purchase for cash any or all of the then outstanding shares of Series B Preferred Stock held by such holder for an amount per share equal to the Redemption Amount (as defined in Paragraph B below) in effect at the time of the redemption hereunder. For the avoidance of doubt, the occurrence of any event described in clauses (i), (iii) or (iv) above shall immediately constitute a Redemption Event and there shall be no cure period. Upon the Corporation's receipt of any Redemption Notice hereunder (other than during the three trading day period following the Corporation's delivery of a Redemption Announcement (as defined below) to all of the holders in response to the Corporation's initial receipt of a Redemption Notice from a holder of Series B Preferred Stock), the Corporation shall immediately (and in any event within one business day following such receipt) deliver a written notice (a "Redemption Announcement") to all holders of Series B Preferred Stock stating the date upon which the Corporation received such Redemption Notice and the amount of Series B Preferred Stock covered thereby. Subject to Article VIII.D, the Corporation shall not redeem any shares of Series B Preferred Stock during the three trading day period following the delivery of a required Redemption Announcement hereunder. At any time and from time to time during such three trading day period, each holder of Series B Preferred Stock may request (either orally or in writing) information from the Corporation with respect to the instant redemption (including, but not limited to, the aggregate number of shares of Series B Preferred Stock covered by Redemption Notices received by the Corporation) and the Corporation shall furnish (either orally or in writing) as soon as practicable such requested information to such requesting holder. Notwithstanding anything in this Article VIII.A to the contrary, the holders of Series B Preferred Stock shall have no right to deliver a Redemption Notice following the occurrence of a Redemption Event specified in clause (i) above if the Corporation pays to each holder within five (5) business days after the occurrence of such Redemption Event and on each three month anniversary thereafter, as liquidated damages for the decrease in the value of the Series B Preferred Stock (and the shares of the Corporation's Common Stock issuable upon conversion thereof) which will result from the occurrence of such Redemption Event, an amount (the "Damages Amount") equal to ten percent (10%) of the aggregate Stated Value of the shares of Series B Preferred Stock then held by each such holder. The Damages Amount shall be payable, at the Corporation's option, in cash or shares of Common Stock (based upon a price per share of Common Stock equal to eighty percent (80%) of the Variable Conversion Price in effect as of the date of such Redemption Event). Notwithstanding anything in this Article VIII.A to the contrary, if the holders of Series B Preferred Stock deliver a Redemption Notice following the occurrence of a Redemption Event specified in clause (vi) above, the Corporation may at its election in lieu of paying the Redemption Amount pay to the holders of Series B Preferred Stock the Trading Value Redemption Amount (as defined below). The "Trading Value Redemption Amount" with respect to a share of Series B Preferred Stock means an amount equal to the Stated Value hereof multiplied by 1.2 plus the accrued and unpaid Premium thereon through 12 the date of payment of the Trading Value Redemption Amount. Notwithstanding anything in this Article VIII.A to the contrary, the Trading Value Redemption Amount shall be payable, at the Corporation's option, in cash or shares of Common Stock (based upon a price per share of Common Stock equal to eighty percent (80%) of the Variable Conversion Price in effect as of the date of such Redemption Event). If the Corporation elects to pay such amount in shares of Common Stock such shares shall be issued not later than five (5) business days after the date the Trading Value Redemption Amount becomes due and such shares for all purposes shall constitute Registrable Securities (as defined in the Registration Rights Agreement). If the Corporation elects to pay such amount in cash, the Corporation shall pay such amount in twelve (12) equal monthly installments plus interest on such amount at a per annum, compounded rate of twelve percent (12%). Such interest will begin to accrue and the first of such payments shall be made on the date the Trading Value Redemption Amount becomes due. The Corporation shall have the right to prepay any such cash amount. B. Definition of Redemption Amount. The "Redemption Amount" with respect to a share of Series B Preferred Stock means an amount equal to: V x M C P where: "V" means the Stated Value thereof, plus the accrued Premium thereon through the date of payment of the Redemption Amount; "CP" means the Conversion Price in effect on the date on which the Corporation receives the Redemption Notice; and "M" means the higher of (i) the highest Closing Bid Price of the Corporation's Common Stock during the period beginning on the date on which the Corporation receives the Redemption Notice and ending on the date immediately preceding the date of payment of the Redemption Amount and (ii) the fair market value, as of the date on which the Corporation receives the Redemption Notice, of the consideration payable to the holder of a share of Common Stock pursuant to the transaction which triggers the redemption. For purposes of this definition, "fair market value" shall be determined by the mutual agreement of the Corporation and holders of a majority-in-interest of the shares of Series B Preferred Stock then outstanding, or if such agreement cannot be reached within five business days prior to the date of redemption, by an investment banking firm selected by the Corporation and reasonably acceptable to holders of a majority-in-interest of the then outstanding shares of Series B Preferred Stock, with the costs of such appraisal to be borne by the Corporation. C. Redemption Defaults. If the Corporation fails to pay any holder the Redemption Amount or Trading Value Redemption Amount with respect to any share of Series B Preferred Stock within five business days after its receipt of a notice requiring such redemption (a "Redemption Notice"), then the holder of Series B Preferred Stock delivering such Redemption Notice (i) shall be entitled to interest on the Redemption Amount at a per annum rate equal to the lower of twenty-four percent (24%) and the highest interest rate permitted by applicable law from the date on which the Corporation receives the Redemption Notice until the date of payment of the Redemption Amount hereunder, and (ii) shall have the right, at any time and from time to time, to require the 13 Corporation, upon written notice, to immediately convert (in accordance with the terms of Paragraph A of Article IV) all or any portion of the Redemption Amount, plus interest as aforesaid, into shares of Common Stock at the lowest Conversion Price in effect during the period beginning on the date on which the Corporation receives the Redemption Notice and ending on the Conversion Date with respect to the conversion of such Redemption Amount. In the event the Corporation is not able to redeem all of the shares of Series B Preferred Stock subject to Redemption Notices delivered prior to the date upon which such redemption is to be effected, the Corporation shall redeem shares of Series B Preferred Stock from each holder pro rata, based on the total number of shares of Series B Preferred Stock outstanding at the time of redemption included by such holder in all Redemption Notices delivered prior to the date upon which such redemption is to be effected relative to the total number of shares of Series B Preferred Stock outstanding at the time of redemption included in all of the Redemption Notices delivered prior to the date upon which such redemption is to be effected. D. Void Redemption. In the event that the Corporation does not pay the Redemption Amount within the time period set forth in Article IV.D, Article VIII.A or Article VIII.D, at any time thereafter and until the Corporation pays such unpaid applicable Redemption Amount in full, a holder of Series B Preferred Stock shall have the option (the "Void Optional Redemption Option") to, in lieu of redemption, require the Corporation to promptly return to such holder any or all of the shares of Series B Preferred Stock that were submitted for redemption by such holder under this Article VIII and for which the applicable Redemption Amount (together with any interest thereon) has not been paid, by sending written notice thereof to the Corporation via facsimile and confirmed by overnight courier, in person (by courier or otherwise) or by telephone (to an authorized officer of the Corporation or his or her administrative assistant) (the "Void Optional Redemption Notice"). Upon the Corporation's receipt of such Void Optional Redemption Notice and overnight courier, in-person or telephone confirmation, (i) the Notice of Redemption shall be null and void with respect to those shares of Series B Preferred Stock subject to the Void Optional Redemption Notice, and (ii) the Corporation shall immediately return any shares of Series B Preferred Stock subject to the Void Optional Redemption Notice IX. RANK The Series B Preferred Stock shall rank (i) prior to the Corporation's Common Stock; (ii) prior to any class or series of capital stock of the Corporation hereafter created that, by its terms, ranks junior to the Series B Preferred Stock ("Junior Securities"); (iii) junior to any class or series of capital stock of the Corporation hereafter created (with the consent of the holders of Series B Preferred Stock, obtained in accordance with Article XIII hereof) specifically ranking, by its terms, senior to the Series B Preferred Stock ("Senior Securities"); and (iv) pari passu with the Series A Preferred Stock, the Series B Preferred Stock and any other class or series of capital stock of the Corporation hereafter created (with the consent of the holders of the Series B Preferred Stock obtained in accordance with Article XIII hereof) specifically ranking by its terms on parity with the Series B Preferred Stock ("Pari Passu Securities"), in each case as to distribution of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary. X. LIQUIDATION PREFERENCE 14 A. If the Corporation shall commence a voluntary case under the U.S. Federal bankruptcy laws or any other applicable bankruptcy, insolvency or similar law, or consent to the entry of an order for relief in an involuntary case under any law or to the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due, or if a decree or order for relief in respect of the Corporation shall be entered by a court having jurisdiction in the premises in an involuntary case under the U.S. Federal bankruptcy laws or any other applicable bankruptcy, insolvency or similar law resulting in the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and any such decree or order shall be unstayed and in effect for a period of 60 consecutive days and, on account of any such event, the Corporation shall liquidate, dissolve or wind up, or if the Corporation shall otherwise liquidate, dissolve or wind up, including, but not limited to, the sale or transfer of all or substantially all of the Corporation's assets in one transaction or in a series of related transactions (a "Liquidation Event"), no distribution shall be made to the holders of any shares of capital stock of the Corporation (other than Senior Securities and Pari Passu Securities) upon liquidation, dissolution or winding up unless prior thereto the holders of shares of Series B Preferred Stock shall have received the Liquidation Preference with respect to each share. If, upon the occurrence of a Liquidation Event, the assets and funds available for distribution among the holders of the Series B Preferred Stock and holders of Pari Passu Securities shall be insufficient to permit the payment to such holders of the preferential amounts payable thereon, then the entire assets and funds of the Corporation legally available for distribution to the Series B Preferred Stock and the Pari Passu Securities shall be distributed ratably among such shares in proportion to the ratio that the Liquidation Preference payable on each such share bears to the aggregate Liquidation Preference payable on all such shares. B. The purchase or redemption by the Corporation of stock of any class, in any manner permitted by law, shall not, for the purposes hereof, be regarded as a liquidation, dissolution or winding up of the Corporation. Neither the consolidation or merger of the Corporation with or into any other entity nor the sale or transfer by the Corporation of less than substantially all of its assets shall, for the purposes hereof, be deemed to be a liquidation, dissolution or winding up of the Corporation. C. The "Liquidation Preference" with respect to a share of Series B Preferred Stock means an amount equal to the Stated Value thereof, plus the accrued Premium thereon through the date of final distribution. The Liquidation Preference with respect to any Pari Passu Securities shall be as set forth in the Statement of Designation filed in respect thereof. XI. ADJUSTMENTS TO THE CONVERSION PRICE The Conversion Price shall be subject to adjustment from time to time as follows: A. Stock Splits, Stock Dividends, Etc. If, at any time on or after the Initial Issuance Date, the number of outstanding shares of Common Stock is increased by a stock split, stock dividend, combination, reclassification or other similar event, the Fixed Conversion Price shall be proportionately 15 reduced, or if the number of outstanding shares of Common Stock is decreased by a reverse stock split, combination or reclassification of shares, or other similar event, the Fixed Conversion Price shall be proportionately increased. In such event, the Corporation shall notify the Corporation's transfer agent of such change on or before the effective date thereof. B. Adjustment Due to Merger, Consolidation, Etc. If, at any time after the Initial Issuance Date, there shall be (i) any reclassification or change of the outstanding shares of Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), (ii) any consolidation or merger of the Corporation with any other entity (other than a merger in which the Corporation is the surviving or continuing entity and its capital stock is unchanged), (iii) any sale or transfer of all or substantially all of the assets of the Corporation or (iv) any share exchange pursuant to which all of the outstanding shares of Common Stock are converted into other securities or property (each of (i) - (iv) above being a "Corporate Change"), then the holders of Series B Preferred Stock shall thereafter have the right to receive upon conversion, in lieu of the shares of Common Stock otherwise issuable, such shares of stock, securities and/or other property as would have been issued or payable in such Corporate Change with respect to or in exchange for the number of shares of Common Stock which would have been issuable upon conversion (without giving effect to the limitations contained in Article IV.C) had such Corporate Change not taken place, and in any such case, appropriate provisions (in form and substance reasonably satisfactory to the holders of a majority of the Series B Preferred Shares then outstanding) shall be made with respect to the rights and interests of the holders of the Series B Preferred Stock to the end that the economic value of the shares of Series B Preferred Stock are in no way diminished by such Corporate Change and that the provisions hereof (including, without limitation, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is not the Corporation, an immediate adjustment of the Fixed Conversion Price so that the Fixed Conversion Price immediately after the Corporate Change reflects the same relative value as compared to the value of the surviving entity's common stock that existed between the Fixed Conversion Price and the value of the Corporation's Common Stock immediately prior to such Corporate Change and an immediate revision to the Variable Conversion Price so that it is determined as provided in Article III.H but based on the price of the common stock of the surviving entity and the market in which such common stock is traded) shall thereafter be applicable, as nearly as may be practicable in relation to any shares of stock or securities thereafter deliverable upon the conversion thereof. The Corporation shall not effect any Corporate Change unless (i) each holder of Series B Preferred Stock has received written notice of such transaction along with the notice sent to the holders of the Common Stock of the Corporation, but in no event later than 20 days prior to the record date for the determination of shareholders entitled to vote with respect thereto, and (ii) the resulting, successor or acquiring entity (if not the Corporation) assumes by written instrument (in form and substance reasonably satisfactory to the holders of a majority of the Series B Preferred Shares then outstanding) the obligations of this Statement of Designation. The above provisions shall apply regardless of whether or not there would have been a sufficient number of shares of Common Stock authorized and available for issuance upon conversion of the shares of Series B Preferred Stock outstanding as of the date of such transaction, and shall similarly apply to successive reclassifications, consolidations, mergers, sales, transfers or share exchanges. 16 C. Adjustment Due to Major Announcement. In the event the Corporation at any time after the Initial Issuance Date (i) makes a public announcement that it intends to consolidate or merge with any other entity (other than a merger in which the Corporation is the surviving or continuing entity and its capital stock is unchanged) or to sell or transfer all or substantially all of the assets of the Corporation or (ii) any person, group or entity (including the Corporation) publicly announces a tender offer, exchange offer or another transaction to purchase 50% or more of the Corporation's Common Stock or otherwise publicly announces an intention to replace a majority of the Corporation's Board of Directors by waging or proxy battle or otherwise (the date of the announcement or commencement referred to in clause (i) or (ii) of this Paragraph C is hereinafter referred to as the "Announcement Date"), then the Conversion Price shall, effective upon the Announcement Date and continuing through the tenth trading day following the earlier of the consummation of the proposed transaction or tender offer, exchange offer or another transaction or the Abandonment Date (as defined below) (the earlier of such dates being the "Adjusted Conversion Price Termination Date"), be equal to the lower of (x) the Conversion Price which would have been applicable for a Conversion occurring on the Announcement Date and (y) the Conversion Price determined in accordance with Article III.C on the Conversion Date set forth in the Notice of Conversion for the Conversion. After the Adjusted Conversion Price Termination Date, the Conversion Price shall be determined as set forth in Article III.C. "Abandonment Date" means with respect to any proposed transaction or tender offer, exchange offer or another transaction for which a public announcement or an action contemplated by this Paragraph C has been made or commenced, the date upon which the Corporation (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 C to become operative. D. Adjustment Due to Distribution. If, at any time after the Initial Issuance Date, the Corporation shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a partial liquidating dividend, by way of return of capital or otherwise (including any dividend or distribution to the Corporation's common shareholders in shares (or rights to acquire shares) of capital stock of a subsidiary (i.e. a spin-off)) (a "Distribution"), then the holders of Series B Preferred Stock shall be entitled, upon any conversion of shares of Series B Preferred Stock after the date of record for determining shareholders entitled to such Distribution, to receive the amount of such assets which would have been payable to the holder with respect to the shares of Common Stock issuable upon such conversion (without giving effect to the limitations contained in Article IV.C) had such holder been the holder of such shares of Common Stock on the record date for the determination of shareholders entitled to such Distribution. E. Issuance of Other Securities. (i) If at any time after the Initial Issuance Date the Corporation issues or sells or in accordance with Article XI.E(ii) is deemed to have issued and sold any shares of Common Stock for no consideration or for a consideration per share less than the Dilutive Price (as defined in this subparagraph) on the date of issuance (a "Dilutive Issuance"), then effective immediately upon the Dilutive Issuance, the Conversion Price will be adjusted in accordance with the formula below. For purposes of this subparagraph, "Dilutive Price" means the Market Price. The Conversion Price will be adjusted in accordance with the following formula: 17 C' = C x O + P/M; CSDO where: C' = the adjusted Conversion Price; C = the then current Conversion Price; M = the then current Market Price; O = the number of shares of Common Stock outstanding immediately prior to the Dilutive Issuance; P = the aggregate consideration, calculated as set forth herein, received by the Corporation upon such Dilutive Issuance; and CSDO = the total number of shares of Common Stock deemed outstanding immediately after the Dilutive Issuance. (ii) Effect on Conversion Price of Certain Events. For purposes of determining the adjusted Conversion Price under Article XI.E(i) hereof, the following will be applicable: (a) Issuance of Rights or Options. If the Corporation in any manner issues or grants any warrants, rights or options, whether or not immediately exercisable, to subscribe for or to purchase Common Stock or other securities exercisable, convertible into or exchangeable for Common Stock ("Convertible Securities") (such warrants, rights and options to purchase Common Stock or Convertible Securities are hereinafter referred to as "Options") and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Dilutive Price in effect on the date of issuance of such Options ("Below Market Options"), then the maximum total number of shares of Common Stock issuable upon the exercise of all such Below Market Options (assuming full exercise, conversion or exchange of Convertible Securities, if applicable) will, as of the date of the issuance or grant of such Below Market Options, be deemed to be outstanding and to have been issued and sold by the Corporation for such price per share. For purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon the exercise of such Below Market Options" is determined by dividing (i) the total amount, if any, received or receivable by the Corporation as consideration for the issuance or granting of all such Below Market Options, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the exercise of all such Below Market Options, plus, in the case of Convertible Securities issuable upon the exercise of such Below Market Options, the minimum aggregate amount of additional consideration payable upon the exercise, conversion or exchange thereof at the time such Convertible Securities first become exercisable, convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Below Market Options (assuming full conversion of Convertible Securities, if applicable). No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon the exercise of such Below Market Options or upon the exercise, conversion or exchange of Convertible Securities issuable upon exercise of such Below Market Options. (b) Issuance of Convertible Securities. (A) If the Corporation in any manner issues or sells any Convertible Securities, whether or not immediately convertible (other than where the same are issuable upon the exercise of Options) and the price per share for which Common Stock is issuable upon such exercise, conversion or 18 exchange (as determined pursuant to Article XI.E(ii)(b)(A) if applicable) is less than the Dilutive Price in effect on the date of issuance of such Convertible Securities, then the maximum total number of shares of Common Stock issuable upon the exercise, conversion or exchange of all such Convertible Securities will, as of the date of the issuance of such Convertible Securities, be deemed to be outstanding and to have been issued and sold by the Corporation for such price per share. For the purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon such exercise, conversion or exchange" is determined by dividing (i) the total amount, if any, received or receivable by the Corporation as consideration for the issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the exercise, conversion or exchange thereof at the time such Convertible Securities first become exercisable, convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the exercise, conversion or exchange of all such Convertible Securities. No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon exercise, conversion or exchange of such Convertible Securities. (B) If the Corporation in any manner issues or sells any Convertible Securities with a fluctuating conversion or exercise price or exchange ratio (a "Variable Rate Convertible Security"), then the "price per share for which Common Stock is issuable upon such exercise, conversion or exchange" for purposes of the calculation contemplated by Section 4(b)(ii)(A) shall be deemed to be the lowest price per share which would be applicable (assuming all holding period and other conditions to any discounts contained in such Convertible Security have been satisfied) if the Dilutive Price on the date of issuance of such Convertible Security was 75% of the Dilutive Price on such date (the "Assumed Variable Market Price"). Further, if the Dilutive Price at any time or times thereafter is less than or equal to the Assumed Variable Market Price last used for making any adjustment under this Section 4 with respect to any Variable Rate Convertible Security, the Conversion Price in effect at such time shall be readjusted to equal the Conversion Price which would have resulted if the Assumed Variable Market Price at the time of issuance of the Variable Rate Convertible Security had been 75% of the Dilutive Price existing at the time of the adjustment required by this sentence. (c) Change in Option Price or Conversion Rate. If there is a change at any time in (i) the amount of additional consideration payable to the Corporation upon the exercise of any Options; (ii) the amount of additional consideration, if any, payable to the Corporation upon the exercise, conversion or exchange of any Convertible Securities; or (iii) the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock (in each such case, other than under or by reason of provisions designed to protect against dilution), the Conversion Price in effect at the time of such change will be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. (d) Treatment of Expired Options and Unexercised Convertible Securities. If, in any case, the total number of shares of Common Stock issuable upon exercise of any Option or upon exercise, conversion or exchange of any Convertible Securities is not, in fact, issued and the rights to 19 exercise such Option or to exercise, convert or exchange such Convertible Securities shall have expired or terminated, the Conversion Price then in effect will be readjusted to the Conversion Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination (other than in respect of the actual number of shares of Common Stock issued upon exercise or conversion thereof), never been issued. (e) Calculation of Consideration Received. If any Common Stock, Options or Convertible Securities are issued, granted or sold for cash, the consideration received therefor for purposes hereof will be the amount received by the Corporation therefor, before deduction of reasonable commissions, underwriting discounts or allowances or other reasonable expenses paid or incurred by the Corporation in connection with such issuance, grant or sale. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration part or all of which shall be other than cash, the amount of the consideration other than cash received by the Corporation will be the fair market value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Corporation will be the Market Price thereof as of the date of receipt. In case any Common Stock, Options or Convertible Securities are issued in connection with any merger or consolidation in which the Corporation is the surviving corporation, the amount of consideration therefor will be deemed to be the fair market value of such portion of the net assets and business of the non-surviving corporation as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair market value of any consideration other than cash or securities will be determined in good faith by an investment banker or other appropriate expert of national reputation selected by the Corporation and reasonably acceptable to the holder hereof, with the costs of such appraisal to be borne by the Corporation. In case any Common Stock, Options or Convertible Securities are issued in connection with the issuance of debt securities the amount of consideration therefor shall be the cash received by the Corporation and the value of the securities issued by the Corporation shall be the fair market value of all securities and instruments issued in such transaction, with fair market value being determined by agreement between the holder thereof and the Corporation or if no such agreement is reached pursuant to the immediately preceding sentence. For all Options and Warrants the fair market value thereof shall be determined in accordance with the Black Scholes methodology. (f) Exceptions to Adjustment of Conversion Price. No adjustment to the Conversion Price will be made (i) upon the exercise of any warrants, options or convertible securities issued and outstanding on the Issue Date and set forth on Schedule 3(d) of the Securities Purchase Agreement in accordance with the terms of such securities as of such date or (ii) upon the grant or exercise of any stock or options which may hereafter be granted or exercised under any employee benefit plan of the Corporation now existing or to be implemented in the future, so long as the issuance of such stock or options is approved by a majority of the non-employee members of the Board of Directors of the Corporation, if any, or a majority of the members of a committee of non-employee directors established for such purpose; (iii) upon the issuance of securities pursuant to an underwriters public offering; or (iv) upon issuance of shares in connection with the acquisition of Prostar, Inc. 20 F. Purchase Rights. If, at any time after the Initial Issuance Date, the Corporation issues any securities which are convertible into or exchangeable for Common Stock, or rights to purchase stock, warrants, securities or other property (the "Purchase Rights") pro rata to the record holders of any class of Common Stock, then the holders of Series B Preferred Stock will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete conversion of the Series B Preferred Stock (without giving effect to the limitations contained in Article IV.C) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. G. Notice of Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Article XI, the Corporation, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish to each holder of Series B Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series B Preferred Stock, furnish to such holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of a share of Series B Preferred Stock. XII. VOTING RIGHTS The holders of the Series B Preferred Stock have no voting power whatsoever, except as otherwise provided by the Colorado Business Corporation Act (the "Business Corporation Act") and in Article XIII below. Notwithstanding the above, the Corporation shall provide each holder of Series B Preferred Stock with prior notification of any meeting of the shareholders (and copies of proxy materials and other information sent to shareholders) at the same time such notice and materials are provided to the holders of Common Stock. If the Corporation takes a record of its shareholders for the purpose of determining shareholders entitled to (a) receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including by way of merger consolidation or recapitalization) any share of any class or any other securities or property, or to receive any other right, or (b) to vote in connection with any proposed sale, lease or conveyance of all or substantially all of the assets of the Corporation, or any proposed merger, consolidation, liquidation, dissolution or winding up of the Corporation, the Corporation shall mail a notice to each holder, at least 20 days prior to the record date specified therein (but in no event earlier than public announcement of such proposed transaction), of the date on which any such record is to be taken for the purpose of such dividend, distribution, right or other event, and a brief statement regarding the amount and character of such dividend, distribution, right or other event to the extent known at such time. To the extent that under the Business Corporation Act the vote of the holders of the Series B Preferred Stock, voting separately as a class or series, as applicable, is required to authorize a given action of the Corporation, the affirmative vote or consent of the holders of at least a 21 majority of the then outstanding shares of the Series B Preferred Stock represented at a duly held meeting at which a quorum is present or by written consent of the holders of at least a majority of the then outstanding shares of Series B Preferred Stock (except as otherwise may be required under the Business Corporation Act) shall constitute the approval of such action by the class. To the extent that under the Business Corporation Act holders of the Series B Preferred Stock are entitled to vote on a matter with holders of Common Stock, voting together as one class, each share of Series B Preferred Stock shall be entitled to a number of votes equal to the number of shares of Common Stock into which it is then convertible (subject to the limitations contained in Article IV.C(ii)) using the record date for the taking of such vote of shareholders as the date as of which the Conversion Price is calculated. XIII. PROTECTION PROVISIONS So long as any shares of Series B Preferred Stock are outstanding, the Corporation shall not without first obtaining the approval (by vote or written consent, as provided by the Business Corporation Act) of a majority in interest of the holders of the then outstanding shares of Series B Preferred Stock: (a) alter or change the rights, preferences or privileges of the Series B Preferred Stock; (b) alter or change the rights, preferences or privileges of any previously issued shares of capital stock of the Corporation so as to affect adversely the Series B Preferred Stock; (c) create any new class or series of capital stock having a preference over the Series B Preferred Stock as to distribution of assets upon liquidation, dissolution or winding up of the Corporation (as previously defined in Article IX hereof, "Senior Securities"); (d) create any new class or series of capital stock ranking pari passu with the Series B Preferred Stock as to distribution of assets upon liquidation, dissolution or winding up of the Corporation (as previously defined in Article IX hereof, "Pari Passu Securities"); (e) increase the authorized number of shares of Series B Preferred Stock; (f) issue any shares of Senior Securities; (g) issue any shares of Series B Preferred Stock other than pursuant to the Securities Purchase Agreement; (h) redeem, or declare or pay any cash dividend or distribution on, any Junior Securities; or (i) increase the par value of the Common Stock. Notwithstanding the foregoing, no change pursuant to this Article XIII shall be effective to the extent that, by its terms, it applies to less than all of the holders of shares of Series B Preferred Stock then outstanding. 22 XIV. MISCELLANEOUS A. Cancellation of Series B Preferred Stock. If any shares of Series B Preferred Stock are converted pursuant to Article IV, the shares so converted shall be canceled, shall return to the status of authorized, but unissued preferred stock of no designated series, and shall not be issuable by the Corporation as Series B Preferred Stock. B. Lost or Stolen Certificates. Upon receipt by the Corporation of (i) evidence of the loss, theft, destruction or mutilation of any Preferred Stock Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of indemnity (without any bond or other security) reasonably satisfactory to the Corporation, or (z) in the case of mutilation, upon surrender and cancellation of the Preferred Stock Certificate(s), the Corporation shall execute and deliver new Preferred Stock Certificate(s) of like tenor and date. However, the Corporation shall not be obligated to reissue such lost or stolen Preferred Stock Certificate(s) if the holder contemporaneously requests the Corporation to convert such Series B Preferred Stock. C. Allocation of Cap Amount and Reserved Amount. The initial Cap Amount and Reserved Amount shall be allocated pro rata among the holders of Series B Preferred Stock based on the number of shares of Series B Preferred Stock issued to each holder. Each increase to the Cap Amount and the Reserved Amount shall be allocated pro rata among the holders of Series B Preferred Stock based on the number of shares of Series B Preferred Stock held by each holder at the time of the increase in the Cap Amount or Reserved Amount. In the event a holder shall sell or otherwise transfer any of such holder's shares of Series B Preferred Stock, each transferee shall be allocated a pro rata portion of such transferor's Cap Amount and Reserved Amount. Any portion of the Cap Amount or Reserved Amount which remains allocated to any person or entity which does not hold any Series B Preferred Stock shall be allocated to the remaining holders of shares of Series B Preferred Stock, pro rata based on the number of shares of Series B Preferred Stock then held by such holders. D. Quarterly Statements of Available Shares. For each calendar quarter beginning in the quarter in which the initial registration statement required to be filed pursuant to the Registration Rights Agreement is declared effective and thereafter so long as any shares of Series B Preferred Stock are outstanding, the Corporation shall deliver (or cause its transfer agent to deliver) to each holder a written report notifying the holders of any occurrence which prohibits the Corporation from issuing Common Stock upon any such conversion. The report shall also specify (i) the total number of shares of Series B Preferred Stock outstanding as of the end of such quarter, (ii) the total number of shares of Common Stock issued upon all conversions of Series B Preferred Stock prior to the end of such quarter, (iii) the total number of shares of Common Stock which are reserved for issuance upon conversion of the Series B Preferred Stock as of the end of such quarter and (iv) the total number of shares of Common Stock which may thereafter be listed or issued by the Corporation upon conversion of the Series B Preferred Stock before the Corporation would exceed the Cap Amount and the Reserved Amount. The Corporation (or its transfer agent) shall deliver the report for each quarter to each holder prior to the tenth day of the calendar month following the quarter to which such report relates. In addition, the Corporation (or its transfer agent) shall provide, within 15 days after delivery to the Corporation of a written request by any holder, any of the information enumerated in clauses (i) - (iv) of this Paragraph D as of the date of such request. 23 E. Payment of Cash; Defaults. Whenever the Corporation is required to make any cash payment to a holder under this Statement of Designation (upon redemption or otherwise), such cash payment shall be made to the holder within five business days after delivery by such holder of a notice specifying that the holder elects to receive such payment in cash and the method (e.g., by check, wire transfer) in which such payment should be made. If such payment is not delivered within such five business day period, such holder shall thereafter be entitled to interest on the unpaid amount at a per annum rate equal to the lower of twenty-four percent (24%) and the highest interest rate permitted by applicable law until such amount is paid in full to the holder. F. Status as Stockholder. Upon submission of a Notice of Conversion by a holder of Series B Preferred Stock, (i) the shares covered thereby (other than the shares, if any, which cannot be issued because their listing or issuance would exceed such holder's allocated portion of the Reserved Amount or Cap Amount) shall be deemed converted into shares of Common Stock and (ii) the holder's rights as a holder of such converted shares of Series B Preferred Stock shall cease and terminate, excepting only the right to receive certificates for such shares of Common Stock and to any remedies provided herein or otherwise available at law or in equity to such holder because of a failure by the Corporation to comply with the terms of this Statement of Designation. Notwithstanding the foregoing, if a holder has not received certificates for all shares of Common Stock prior to the tenth business day after the expiration of the Delivery Period with respect to a conversion of Series B Preferred Stock for any reason, then (unless the holder otherwise elects to retain its status as a holder of Common Stock by so notifying the Corporation within five business days after the expiration of such 10 business day period) the holder shall regain the rights of a holder of Series B Preferred Stock with respect to such unconverted shares of Series B Preferred Stock and the Corporation shall, as soon as practicable, return such unconverted shares to the holder. In all cases, the holder shall retain all of its rights and remedies (including, without limitation, the right to have the Conversion Price with respect to subsequent conversions determined in accordance with Article VI.A) for the Corporation's failure to convert Series B Preferred Stock. G. Remedies Cumulative. The remedies provided in this Statement of Designation shall be cumulative and in addition to all other remedies available under this Statement of Designation, at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit a holder's right to pursue actual damages for any failure by the Corporation to comply with the terms of this Statement of Designation. The Corporation acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the holders of Series B Preferred Stock and that the remedy at law for any such breach may be inadequate. The Corporation therefore agrees, in the event of any such breach or threatened breach, that the holders of Series B Preferred Stock shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required. 24 IN WITNESS WHEREOF, the undersigned Corporation has caused these Articles of Amendment to the Articles of Incorporation to be signed by a duly authorized officer and duly attested by another such officer, to be hereunto affixed on this 29th day of April 1999. U.S. TRUCKING, INC.. By: /s/ Dan Pixler Dan Pixler, President ATTEST: /s/ Marion W. Huff Marion W. Huff, Secretary 25 NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert the Series B Preferred Stock) The undersigned hereby irrevocably elects to convert ____________ shares of Series B Preferred Stock (the "Conversion"), represented by stock certificate Nos(s). ___________ (the "Preferred Stock Certificates"), into shares of common stock ("Common Stock") of U.S. TRUCKING, INC. (the "Corporation") according to the conditions of the Statement of Designation, Rights and Preferences of the Series B Convertible Preferred Stock of U.S. Trucking, Inc. (the "Statement of Designation"), as of the date written below. If securities are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. No fee will be charged to the holder for any conversion, except for transfer taxes, if any. A copy of each Preferred Stock Certificate is attached hereto (or evidence of loss, theft or destruction thereof). The undersigned requests that the Corporation electronically transmit the Common Stock issuable pursuant to this Notice of Conversion to the account of the undersigned or its nominee (which is _________________) with DTC through its Deposit Withdrawal Agent Commission System ("DTC Transfer"). The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable to the undersigned upon conversion of the Series B Preferred Stock shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the "Act"), or pursuant to an exemption from registration under the Act. In lieu of receiving the shares of Common Stock issuable pursuant to this Notice of Conversion by way of DTC Transfer, the undersigned hereby requests that the Corporation issue and deliver to the undersigned physical certificates representing such shares of Common Stock. Date of Conversion: Applicable Conversion Price: Number of Shares of Common Stock to be Issued: Signature: Name: Address:_______________________________________ _______________________________________ _______________________________________ EX-10.12 3 THIS DEBENTURE, AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE CONVERSION HEREOF, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR FILED OR REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR WITH THE SECURITIES REGULATORY AUTHORITY OF ANY STATE, BUT ARE BEING ISSUED PURSUANT TO CERTAIN EXEMPTIONS THEREUNDER. THIS DEBENTURE, AND SUCH SHARES OF COMMON STOCK, HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR BY THE SECURITIES REGULATORY AUTHORITY OF ANY STATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS DEBENTURE, AND SUCH SHARES OF COMMON STOCK, ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE, AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION THEREUNDER OR EXEMPTION THEREFROM US$600,000. Debenture No. 1 U. S. TRUCKING, INC. 10% Convertible Debenture Due May 31, 2002 THIS DEBENTURE is one of a duly authorized issue of US$5,000,000 of 10% Convertible Debentures due May 31, 2002 (the "Debentures"), of U. S. Trucking, Inc., a corporation duly organized and existing under the laws of the State of Colorado (the "Company") designated as its 10% Convertible Debentures Due May 31, 2002 FOR VALUE RECEIVED, the Company promises to pay to the order of Thomson Kernaghan & Co. Ltd., as Nominee, or other registered holder hereof (collectively, the "Holder"), the principal sum of Six Hundred Thousand Dollars in lawful currency of the United States of America (US $600,000) on May 31, 2002 (the "Maturity Date"), and to pay interest on the principal sum outstanding from time to time on the Maturity Date at the rate of Ten Percent (10%) per year accruing from the date of initial issuance. Subject to the provisions of paragraph 4 below, the principal of and interest on this Debenture are payable at the option of the Holder, in shares of the Company's Common Stock, no par value, ("Common Stock"). The Company will pay the principal of and interest upon this Debenture on the Maturity Date to the Holder in immediately available funds, in care of Thomson Kernaghan & Co. Ltd. as Agent (the "Agent"), at the Agent's address, 365 Bay Street, Tenth Floor, Toronto, Ontario M5H 2V2, Canada, or at such other address as the Agent shall designate by written notice to the Company. The delivery of such funds to the Agent shall constitute a payment and shall satisfy and discharge the liability for principal and interest on this Debenture to the extent of the sum represented by such payment. This Debenture is subject to the following additional provisions: 1. The Debentures are issuable in denominations of One Hundred Thousand United States Dollars (US $100,000) and integral multiples thereof. The Debentures are exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holders surrendering the same. No service charge will be made for such registration or transfer or exchange. 2. This Debenture may be transferred only in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and other applicable state and foreign securities laws, pursuant to registration thereunder or exemption therefrom. In the event of any proposed transfer of this Debenture, the Company may require, prior to issuance of a new Debenture in the name of such other person, that it receive reasonable transfer documentation including opinions that the issuance of the Debenture in such other name does not and will not cause a violation of the Securities Act or any applicable state or foreign securities laws. Prior to due presentment for transfer of this Debenture, the Company and any agent of the Company may treat the person in whose name this Debenture is duly registered on the Company's Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture be overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. 3. Registration under the Securities Act of 1933. (a) As soon as possible, and in any event on or before June 15, 1999, the Company shall, at no cost or expense to the Holder, file a registration statement (the "Registration Statement") under the Securities Act, for the purpose of registering the issuance of 3,333,333 shares of Common Stock into which the Debentures are convertible. The Company shall cause the Registration Statement to be declared effective by the SEC as soon as possible, and in any event on or before August 15, 1999. The Company shall cause the Registration Statement to continuously remain effective, and shall cause the Common Stock to be continuously registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and continuously quoted on the OTC Bulletin Board or listed on the Nasdaq Small Cap Market, until the thirtieth (30th) day after this Debenture shall have been fully converted, or matured, or redeemed, whichever occurs first. (b) In connection with the filing the Registration Statement, the Company shall: (i) notify the Holder as to the filing thereof and of all amendments thereto filed prior to the effective date; (ii) notify the Holder, promptly after it shall have received notice thereof, of the time when the Registration Statement becomes effective or any supplement to any prospectus forming a part of the Registration Statement has been filed; (iii) prepare and file without expense to the Holder any necessary amendment or supplement to such registration statement or prospectus as may be necessary to comply with the Securities Act or advisable in connection with the proposed distribution of the securities; (iv) take all reasonable steps to qualify the Warrant Stock being registered for sale under the securities or blue sky laws in such reasonable number of states as the Holder may designate in writing and to register or obtain the approval of any federal or state authority that may be required in connection with the proposed distribution, except in jurisdictions in which the Company must either qualify to do business or file a general consent to service of process as a condition to the qualification of such securities; (v) notify the Holder of any stop order suspending the effectiveness of the registration statement and use reasonable efforts to remove such stop order; and (vi) furnish to the Holder, as soon as available, copies of any such registration statement and each preliminary or final prospectus and any supplement or amendment, including all exhibits thereto, required to be prepared pursuant to this paragraph. (c) The Company acknowledges and agrees that the Holder will be substantially damaged if the Company does not cause the Registration Statement to be effective by August 15, 1999, but those damages would be difficult, if 2 not impossible to ascertain. Accordingly, if the Registration Statement has not been declared effective by August 15, 1999, then, (i) for each day to and including September 15, 1999, that the Registration Statement is not effective, the Company shall pay the Holder, as liquidated damages and not as a penalty, an amount per day equal to 2% per month of the principal amount of this Debenture; and (ii) for each day after September 15, 1999, that the Registration Statement is not effective, the Company shall pay the Holder, as liquidated damages and not as a penalty, an amount per day equal to 3% per month of the purchase price of this Debenture, until the Registration Statement is effective. 4. The Holder of this Debenture is entitled, at its option, to convert at any time and from time to time beginning on the thirtieth (30th) day after the Initial Funding Date, all or any part of the principal amount of the Debenture, plus accrued interest. No fraction of Shares or scrip representing fractions of shares will be issued on conversion, but the number of shares issuable shall be rounded to the nearest whole share. To convert this Debenture, this Debenture must be surrendered at the principal executive office of the Escrow Agent pursuant to an Escrow Agreement between the Company and Thomson Kernaghan & Co. Ltd., dated May 13, 1999, accompanied by written notice of conversion substantially in the form of Exhibit A to this Debenture, with appropriate insertions. The date upon which the conversion shall be effective (the "Conversion Date") shall be deemed to be the date on which the Holder has delivered this Debenture, with the conversion notice duly executed to Escrow Holder, or if earlier, the date set forth in such notice of conversion if the Debenture and such conversion notice is received by the Escrow Holder within three (3) business days therefrom. The Escrow Holder will deliver certificates representing the Common Stock into which the Debenture is converted within three (3) business days following receipt of the Debenture and conversion notice. The price per share of Common Stock into which this Debenture is convertible (the "Conversion Price") shall be the higher of (i) US$1.50, or (ii) the lower of (x) 80% of the average closing bid price of the Common Stock quoted on the OTC Bulletin Board for the three trading days preceding the conversion date or (y) $2.37; i.e., in no event shall the Conversion Price be less that US$1.50 per share of Common Stock. 5. No provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on, this Debenture at the time, place and rate, and in the coin or currency herein prescribed. This Debenture and all other Debentures now or hereafter issued of similar terms are direct obligations of the Company. 6. If the Company merges or consolidates with another corporation or sells or transfers all or substantially all of its assets to another person and the holders of the Common Stock are entitled to receive stock, securities or property in respect of or in exchange for Common Stock, then as a condition of such merger, consolidation, sale or transfer, the Company and any such successor, purchaser or transferee shall amend this Debenture to provide that it may thereafter be converted on the terms and subject to the conditions set forth above into the kind an amount of stock, securities or property receivable upon such merger, consolidation, sale or transfer by a holder of the number of shares of Common Stock into which this Debenture might have been converted immediately before such merger, consolidation, sale or transfer, subject to adjustments which shall be a nearly equivalent as may be practicable. In the event of any proposed merger, consolidation or sale or transfer of all or substantially all of the assets of the Company (a "Sale"), the Holder hereof shall have the right to convert by delivering a Notice of 3 Conversion to the Company within fifteen (15) days of receipt of notice of such Sale from the Company. In the event the Holder hereof shall elect not to convert, the Company may prepay all outstanding principal and accrued interest on this Debenture, less all amounts required by law to be deducted, upon which tender of payment following such notice, the right of conversion shall terminate. 7. This Debenture shall be governed by and construed in accordance with the laws of the State of Kentucky, provided however, that if any provision of this Debenture is unenforceable under the laws of Kentucky but is enforceable under the laws of the Province of Ontario, Canada, then that provision shall be governed by and construed in accordance with the laws the Province of Ontario. Any controversy or claim arising out of or relating to this Debenture (whether in contract or tort, or both) shall be determined by binding arbitration at Toronto, Canada, in accordance with the commercial arbitration rules of the International Chamber of Commerce. The prevailing party in any arbitration proceeding shall be awarded reasonable attorneys fees and costs of the proceeding. The arbitration award shall be final, and may be entered in any court having jurisdiction. 8. The following constitute an "Event of Default": a. The Company shall default in the payment of principal or interest on this Debenture; or b. Any of the representations or warranties made by the Company herein or in any certificate or financial or other written statements heretofore or hereafter furnished by the Company in connection with the execution and delivery of this Debenture shall be false or misleading in any material respect at the time made; or c. The Company shall fail to perform or observe, in any material respect, any other covenant, term, provision, condition, agreement or obligation of the Company under this Debenture and such failure shall continue uncured for a period of thirty (30) days after written notice from the Holder of such failure; d. The Company shall (1) admit in writing its inability to pay its debts generally as they mature; (2) make an assignment for the benefit of creditors or commence proceedings for its dissolution; or (3) apply for or consent to the appointment of a trustee, liquidator or receiver for it or a for a substantial part of its property or business; or e. A trustee, liquidator or receiver shall be appointed for the Company or for a substantial part of its property or business without its consent and shall not be discharged within sixty (60) days after such appointment; f. Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of the Company and shall not be dismissed within sixty (60) days thereafter; g. Any money judgment, writ or warrant of attachment, or similar process in excess of One Hundred Thousand Dollars ($100,000) in the aggregate shall be entered or filed against the Company or any of its properties or other assets, and shall remain unpaid, unvacated, unbonded or unstayed for a period of sixty (60) days in or in any event later than five (5) days prior to the date of any proposed sale thereunder; or 4 h. Bankruptcy, reorganization, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Company and, if instituted against the Company, shall not be dismissed within one hundred twenty (120) days after such institution or the Company shall by any action or answer approve of, consent to, or acquiesce in any such proceedings or admit the material allegations of, or default in answering a petition filed in any such proceeding; or i. The Company shall fail to timely file the Registration Statement or cause it to become and remain effective as provided in this Debenture; or j. The Company shall fail to timely file all reports required of it under the Exchange Act, or the Common Stock shall fail to be registered under the Exchange Ac, or the Company, for any reason, shall not be a reporting company under the Exchange Act; or k. The Company shall have its Common Stock suspended or delisted from an exchange or suspended from over-the-counter market from trading. Then, or at any time thereafter, and in each and every case, unless such Event of Default shall have been waived in writing by the Holder (which waiver shall not be deemed to be a waiver of any subsequent default) at the option of the Holder and in the Holder's sole discretion, the Holder may consider this Debenture immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, anything herein or in any note or other instruments contained to the contrary notwithstanding, and the Holder may immediately enforce any and all of the Holder's rights and remedies provided herein or any other rights or remedies afforded by law. 11. Nothing contained in this Debenture shall be construed as conferring upon the Holder the right to vote or to receive dividends or to consent or receive notice as a shareholder in respect of any meeting of shareholders or any rights whatsoever as a shareholder of the Company, unless and to the extent converted in accordance with the terms hereof. 12. The Company may prepay this Debenture in whole or in part prior to the Maturity Date by payment of an amount equal to the outstanding principal amount being repaid plus all accrued interest to date of payment plus a redemption premium of 20% of such prepaid principal amount. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed by an officer thereunto duly authorized. Dated: ______________________________ U. S. Trucking, Inc. By Name _________________________________ Title ________________________________ ATTEST: ____________________________________ 5 EXHIBIT "A" NOTICE OF CONVERSION To be executed by the Registered Holder in order to Convert the Debenture) TO U. S. TRUCKING, INC. C/O THOMSON KERNAGHAN & CO. LTD The undersigned hereby irrevocably elects to convert $________________ of the principal amount of the above Debenture No. ______ into Shares of Common Stock of U. S. Trucking, Inc. (the "Company") according to the conditions hereof, as of the date written above. Date of Conversion Applicable Conversion Price Signature Name __________________________________________________________ Address:_______________________________________________________ 6 EX-27 4
5 This schedule contains summary financial information extracted from the consolidated balance sheets and consolidated statements of operations found on pages 3, 4 and 5 of the Company's Form 10-Q for the year to date, and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-1999 MAR-31-1999 433,235 0 4,778,148 0 252,698 5,994,067 8,417,971 0 17,147,296 7,193,151 0 2,867,238 0 0 2,813,992 17,147,296 7,661,372 7,661,372 0 7,209,939 372,746 0 108,796 119,946 0 119,946 0 0 0 119,946 .01 .01
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