EXHIBIT A
DESCRIPTION OF
CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES A
Capitol Communities Corporation, a Nevada corporation (the "Company")
is offering up to 7,500,000 shares of Cumulative Convertible Preferred Stock,
Series A (the "Series A Preferred Stock"), for maximum amount of $7,500,000. The
Company's Articles of Incorporation authorize the Company to issue up to
10,000,000 shares of Preferred Stock at a par value of $.01 per share. To date
the Company has no outstanding and issued shares of Preferred Stock. The Board
of Directors of the Company has authorized the issuance of Series A Preferred
Stock on the terms and conditions set forth below.
The Series A Preferred Stock will be offered at a price of $1.00 per
share. The Series A Preferred Stock is subject to a minimum offering requirement
of not less than holders of 70% of the total promissory note debt outstanding
electing to convert debt into Series A Preferred Stock.
A. DIVIDENDS. Holders of Series A Preferred Stock will be entitled to
receive dividends, when and as declared by the Board of Directors, at the annual
rate of five and one quarter percent (5.25%) per share per annum, to the extent
funds are legally available therefor.
Upon issuance of the Series A Preferred Stock, shareholders shall
receive a prepaid dividend of 5.25% in cash for the period April 1, 2002 through
March 31, 2003. Thereafter, future dividends are payable quarterly on October
30, and April 30 of each year (each constituting a "Dividend Payment Date"),
commencing April 1, 2003, with the first dividend payment due October 30, 2003,
except that if any such date is a Saturday, Sunday or legal holiday, then such
dividend shall be payable on the next day that is not a Saturday, Sunday or
legal holiday. Dividends will accrue and be cumulative and will be payable to
holders of record as they appear on the stock books of the Company on such
record dates as are fixed by the Board of Directors. Notwithstanding the
foregoing, no dividends may be declared or paid on the Series A Preferred Stock
if the declaration or payment of such dividends would violate, or constitute a
breach or default under, any present or future agreement for money borrowed to
which the Company is a party or by which it is bound.
The amount of dividends payable per Series A Preferred Stock for each
semi-annual dividend period will be computed by dividing the annual dividend
amount by two. The amount of dividends payable for the initial dividend period
and any period shorter than a full dividend period will be computed on the basis
of a 360-day year. No interest will be payable in respect of any dividend
payment on the Series A Preferred Stock which may be in arrears.
B. RANKING. The Series A Preferred Stock will be on parity as to
dividends with any other series of preferred stock hereafter issued by the
Company. The Series A Preferred Stock will have priority as to dividends over
the Common Stock. The Company may not pay dividends on any class or series of
the Company's stock having parity with the Series A Preferred Stock as to
dividends, if any such stock is hereafter issued, (the "Parity Dividend Stock")
unless it has paid or declared and set apart for payment, or contemporaneously
pays or declares and sets apart for payment, all accrued and unpaid dividends
for all prior periods on the Series A Preferred Stock; and the Company may not
pay dividends on the Series A Preferred Stock unless it has paid or declared and
set apart for payment or contemporaneously pays or declares and sets apart for
payment, all accrued and unpaid dividends for all prior periods on the Parity
Dividend Stock. Whenever all accrued dividends are not paid in full on the
Series A Preferred Stock or any Parity Dividend Stock, all dividends declared on
the Series A Preferred Stock and such Parity Dividend Stock will be declared or
made pro rata so that the amount of dividends declared per Series A Preferred
Stock and such parity dividend stock will bear the same ratio that accrued and
unpaid dividends per Series A Preferred Stock and such Parity Dividend Stock
bear to each other.
The holders of Series A Preferred Stock are not entitled to any
additional dividends beyond the cumulative dividends specified in this Section
B.
C. VOTING RIGHTS. The holders of the Series A Preferred Stock will have
no voting rights except as required by Nevada law. In exercising any such vote,
each outstanding Series A Preferred Stock will be entitled to one vote.
D. OPTIONAL REDEMPTION. The Series A Preferred Stock may not be
redeemed prior to 90 days from the date of issuance. Thereafter the Series A
Preferred Shares are redeemable for cash, in whole or in part, at the option of
the Company, at $1.00 per share plus all accrued and unpaid dividends, whether
or not declared, up to an including the date of redemption (the "Series A
Redemption Price"); provided that no amounts may be set aside or applied to the
redemption or purchase of any Series A Preferred Stock at any time when the
terms and provisions of any agreement to which the Company is a party relating
to an indebtedness of money the Company has borrowed which specifically
prohibits or limits such action, or such action would constitute a breach or
default thereunder. In addition, in the event the Company has failed to pay
accrued dividends on the Series A Preferred Stock, it may not redeem any of the
outstanding shares of Series A Preferred Stock until all such accrued and unpaid
dividends and (except with respect to shares to be redeemed) the then current
quarterly dividends have been paid in full.
If fewer than all of the outstanding Series A Preferred Stock are to be
redeemed, the Company will select those Series A Preferred shares to be redeemed
pro rata or by lot or in such manner as the Board of Directors may determine.
Notice of redemption will be mailed at least thirty-five (35) but not more than
sixty (60) days before the redemption date to each holder of record of Series A
Preferred Stock to be redeemed at the holder's address shown on the stock
transfer books of the Company. After the redemption date, unless there shall
have been a default in payment of the redemption price, dividends will cease to
accrue on the Series A Preferred Stock called for redemption and all rights of
the holders of such shares will terminate, except the right to receive the
redemption price without interest.
E. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding up of the Company, holders of Series A Preferred Stock are entitled to
receive the liquidation preference of $1.00 per share, plus an amount equal to
any accrued and unpaid dividends to the payment date, and no more, before any
payment or distribution is made to the holders of Common Stock. The holders of
Series A Preferred Stock rank on parity with all series or classes of the
Company's preferred stock hereafter issued that rank on a parity as to
liquidation rights with the Series A Preferred Stock and are entitled to share
ratably in accordance with the respective preferential amounts payable on such
stock, in any distribution (after payment of the liquidation preference of the
senior liquidation stock) which is not sufficient to pay in full the aggregate
of the amounts payable thereon.
After payment in full of the liquidation preference of the Series A
Preferred Stock, the holders of such shares will not be entitled to any further
participation in any distribution of the assets by the Company. Neither a
consolidation, merger or other business combination of the Company with or into
another corporation or other entity nor a sale or transfer of all or part of the
Company's assets for cash, securities or other property will be considered a
liquidation, dissolution or winding up of the Company.
F. MANDATORY REDEMPTION. Commencing sixty (60) days after issuance, but
not sooner than August 15, 2002, and for as long as any of the Series A
Preferred Stock is outstanding, the Company shall have the option to require
mandatory conversion of the Series A Preferred Stock for the Company's Common
Stock. Each Series A Preferred Stock shall automatically convert into one share
of Common Stock for each share of Series A Preferred Share held by Investor,
predicated upon certain events ("Triggered Events"). The Triggered Event shall
occur, when and if, the Company's stock, based on the average of the high and
low prices of the Common Shares for a consecutive period of ten (10) trading
days, as reported by the National Quotation Bureau, Inc. ("NQB"), and reflect
inter-dealer prices as reported on the NASDAQ electronic bulletin board, reaches
a price of $1.50 per share of Common Stock.
G. REGISTRATION RIGHTS. If the Company elects to require mandatory
conversion, it
shall use its best effort to register under the Securities Act of 1933, such
common stock shares for resale within 180 days from the date of conversion, or
as soon as practicable, use its diligent best efforts to effect all
registration, qualification, and compliance (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
compliance with regulations issued under the Securities Act and any other
governmental requirements or regulations) that is requested, and will permit or
facilitate the sale and distribution of the registrable securities.
H. CONVERSION. The holder of any Series A Preferred Stock will have
the right, at the holder's option, to convert any or all such shares into Common
Stock (the "Conversion Shares"), at any time after 90 days from the issuance
date of the Series A Preferred Stock (the "Purchase Date"); except for those
shares of Series A Preferred Stock that have been called for redemption. Such
conversion rights will terminate at the close of business on the business day
called for redemption (unless the Company defaults in the payment of the Series
A redemption price). Each share of Series A Preferred Stock is convertible into
Common Stock pursuant to the following terms and conditions:
(1) Conversion Right. Subject to and upon compliance with the
provisions of this Section H, and to the Mandatory Redemption Rights of the
Company pursuant to Section F, the holder of any shares of Series A Preferred
Stock may at such holder's option, at any time after 90 days from the Purchase
Date, or from time to time thereafter, convert at a price of $1.00 per share any
or all such shares into fully paid and non-assessable shares of Common Stock at
the following rate: One (l) share of Series A Preferred Stock shall be
convertible into one (1) share of Common Stock (the "Conversion Rate").
(2) Dividend Upon Conversion or Redemption. No payment or adjustment
shall be made by the Company to any holder of shares of Series A Preferred Stock
surrendered for conversion or redemption in respect of dividends accrued since
the last preceding Dividend Payment Date on the shares of Series A Preferred
Stock surrendered for conversion; provided however that if shares of the Series
A Preferred Stock shall be converted or redeemed subsequent to any record date
with respect to any Dividend Payment Date and prior to the next such succeeding
Dividend Payment Date, the dividend falling due on such Dividend Payment Date
shall be payable on such Dividend Payment Date notwithstanding such conversion
or redemption, and such dividend (whether or not punctually paid or duly
provided for) shall be paid to the person in whose name such shares are
registered at the close of business on such record date.
(3) Method of Conversion.
(i) The surrender of any shares of Series A Preferred Stock
for conversion shall be made by the holder thereof by delivering the certificate
or certificates evidencing ownership of such shares with proper endorsement or
instruments of transfer to the Company at the office or agency to be maintained
by the Company for that purpose, and such holder shall give written notice to
the Company at said office or agency that he or she elects to convert such
shares of Series A Preferred Stock in accordance with the provisions thereof and
of this Section H . Such notice shall also state the number of whole shares of
Series A Preferred Stock and the name or names (with addresses) in which the
certificate or certificates evidencing ownership of Common Stock which shall be
issuable on such conversion shall be issued. In the case of lost or destroyed
certificates evidencing ownership of shares of Series A Preferred Stock to be
surrendered for conversion, the holder shall submit proof of loss or destruction
and such indemnity as shall be required by the Company.
(ii) Subject to the provisions of paragraph (6) below of this
Section H, every such notice of election to convert shall constitute a contract
between the holder of such shares of Series A Preferred Stock and the Company,
whereby such holder shall be deemed to subscribe for the amount of the Common
Stock which he will be entitled to receive upon such conversion and, in payment
and satisfaction of such subscription, to surrender such shares of Series A
Preferred Stock and to release the Company from all obligations thereon (subject
to the payment of accrued dividends in accordance with paragraph (2) of this
Section H above), and whereby the Company shall be deemed to agree that the
surrender of such shares of Series A Preferred Stock and the extinguishment of
its obligation thereon (except as aforesaid), shall constitute full payment for
the Common Stock so subscribed for and to be issued upon such conversion.
(iii) As soon as practicable after its receipt of such notice
and the certificate or certificates evidencing ownership of such shares of
Series A Preferred Stock, the Company shall issue and shall deliver at said
office or agency to the person for whose account such shares of Series A
Preferred Stock were so surrendered, or on his or her written order, a
certificate or certificates for the number of such shares of Common Stock into
which the Series A Preferred Stock surrendered is to be converted and a check or
cash payment (if any) to which such holder is entitled with respect to
fractional shares as determined by the Company, in accordance with paragraph (5)
below of this Section H, at the close of business on the date of conversion.
(iv) Such conversion shall be deemed to have been effected on
the date on which the Company shall have received such notice and the
certificate or certificates for such shares of Series A Preferred Stock; and the
person or persons in whose name or names any certificate or certificates for
Common Stock shall be issuable upon such conversion shall be deemed to have
become on said date the holder or holders of record of the shares represented
thereby; provided that any such surrender on any date when the stock transfer
books of the Company shall be closed shall become effective for all purposes on
the next succeeding day on which such stock transfer books are open, but such
conversion shall be at the Conversion Rate in effect on the date upon which such
surrender occurs.
(4) Adjustment to Conversion Rate. The Conversion Rate shall be subject
to adjustments from time to time as follows:
(i) In case the Company shall at any time shall (I) declare a
dividend on the Common Stock in shares of its capital stock, (II) subdivide its
outstanding Common Stock, (III) combine the outstanding Common Stock into a
smaller number of shares, (IV) any reclassification including stock splits or
reverse stock splits, or (V) issue any shares of its capital stock by
reclassification of the Common Stock (including any such reclassification in
connection with a consolidation or merger in which the Company is the surviving
corporation), the Conversion Rate in effect on the record date for such dividend
or on the effective date of such subdivision, combination or reclassification
shall be proportionately adjusted so that the holder of any Series A Preferred
Stock converted after such time shall be entitled to receive the aggregate
number and kind of shares which, if such Series A Preferred Stock had been
converted immediately prior to such time, the holder would have owned upon such
conversion and been entitled to receive by virtue of such dividend, subdivision,
combination or reclassification. Such adjustment shall be made successively
whenever any event listed above shall occur.
(ii) In case the Company shall issue rights or warrants to all
holders of its Common Stock (which rights or warrants are not available on an
equivalent basis to holders of the Series A Preferred Stock on conversion)
entitling them to subscribe for or purchase Common Stock, the Conversion Rate in
effect on the record date for such issuance of rights or warrants shall be
proportionately adjusted (subject to the limitations contained in subparagraph
(iv) of this paragraph 4, Section H) so that the holders of any Series A
Preferred Stock converted after such time shall be entitled to receive the
aggregate number and kind of shares which, if such Series A Preferred Stock had
been converted immediately prior such time, the holder would have owned upon
such conversion and been entitled to receive by virtue of such issuance of
rights or warrant. Such adjustment shall become effective at the close of
business on such record date; however, to the extent that Common Stock is not
delivered after the expiration of such rights or warrants, the Conversion Rate
shall be readjusted (but only with respect to Series A Preferred Stock converted
at such expiration) to the Conversion Rate which would then be in effect had the
adjustments made upon the issuance of such rights or warrants been made upon the
basis of delivery of only the number of shares of Common Stock actually issued.
(iii) In case the Company shall distribute to all holders of
Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the surviving corporation)
evidences of its indebtedness or assets (including securities but excluding cash
dividends or distributions paid out of retained earnings and dividends payable
in Common Stock) or subscription rights or warrants (excluding those referred to
in subparagraph (ii) of this paragraph (4) and Section H), the Conversion Rate
shall be proportionately adjusted (subject to the limitations contained in
subparagraph (iv) of this paragraph (4)) so that the holder of any Series A
Preferred Stock converted after such time shall be entitled to receive the
aggregate number and kind of shares which, if such Series A Preferred Stock had
been converted immediately prior to such time, the holder would have owned upon
such conversion and been entitled to receive by virtue of such distribution.
Such adjustment shall become effective at the close of business on such record
date.
(iv) In the case of any consolidation of the Company with, or
merger of the Company into, any other entity, any merger of another entity into
the Company (other than a merger which does not result in any reclassification,
conversion, exchange or cancellation of outstanding shares of Common Stock of
the Company), any sale or transfer of all or substantially all of the assets of
the Company, or any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or other property, each holder of a share
of Series A Preferred Stock then outstanding shall have the right thereafter to
convert such share only into the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, sale, transfer or
compulsory exchange by a holder of the number of shares of Common Stock of the
Company into which such shares of Series A Preferred Stock might have been
converted immediately prior to such consolidation, merger, sale, transfer or
compulsory exchange assuming such holder of Common Stock of the Company is not
an entity with which the Company consolidated or into which the Company merged
or which merged into the Company or to which such sale or transfer was made, as
the case may be ("Constituent Entity"), or an affiliate of a Constituent Entity,
and assuming such holder failed to exercise his rights of election, if any, as
to the kind or amount of securities, cash and other property receivable upon
such consolidation, merger, sale, transfer or compulsory exchange (provided that
if the kind or amount of securities, cash and other property receivable upon
such consolidation, merger, sale, transfer or compulsory exchange is not the
same for each share of Common Stock of the Company held immediately prior to
such consolidation, merger, sale, transfer or compulsory exchange by other than
a Constituent Entity or an affiliate thereof in respect of which such rights of
election shall not have been exercised ("Non-Electing Share"), then for the
purpose of this subparagraph (iv) the kind and amount of securities, cash and
other property receivable upon such consolidation, merger, sale, transfer or
compulsory exchange by each Non-Electing Share shall be deemed to be the kind
and amount so receivable per share by a plurality of the Non-Electing Shares).
If necessary, appropriate adjustment shall be made in the application of the
provisions set forth herein with respect to the rights and interests thereafter
of the holders of shares of Series A Preferred Stock, to the end that the
provisions set forth herein shall thereafter correspondingly be made applicable,
as nearly as may reasonably be, in relation to any shares of stock or other
securities or property thereafter deliverable on the conversion of the shares.
The above provisions shall similarly apply to successive consolidations,
mergers, sales, transfers or compulsory exchanges. The Company shall not effect
any such consolidation, merger or sale unless prior to or simultaneously with
the consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation purchasing such
assets or other appropriate corporation or entity shall assume, by written
instrument, the obligation to deliver to the holder of each share of the Series
A Preferred Stock such shares of stock, securities or assets as, in accordance
with the foregoing provisions, such holder may be entitled to receive under this
paragraph (4) of Section H.
(v) The Company may make such adjustments in the Conversion
Rate, in addition to those required by subparagraphs (i) through (iv) of this
paragraph (4) of Section H, as it considers to be advisable in order that any
event treated for Federal income tax purposes as a dividend of stock or stock
rights shall not be taxable to the recipients.
(5) Fractional Shares. No fractional shares or script representing
fractional shares shall be issued upon the conversion of any shares of Series A
Preferred Stock, but the holder thereof will receive in cash an amount equal to
the value of the book value of the Common Stock on the fifth day prior to the
date of conversion as determined by the Company's appointed certified public
accountant. If more than one share of Series A Preferred Stock shall be
surrendered for conversion at one time by the same holder, the number of full
shares issuable upon conversion thereof shall be computed on the basis of the
aggregate number of such shares so surrendered.
(6) Payment of Taxes. The Company shall pay any tax in respect of the
issue of stock certificates on conversion of shares of Series A Preferred Stock.
The Company shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of stock in any
name other than that of the holder of the shares converted, and the Company
shall not be required to issue or deliver any such stock certificate unless and
until the person or persons requesting the issuance hereof shall have paid the
Company the amount of any such tax or shall have established to the satisfaction
of the Company that such tax has been paid.
(7) Common Stock Reserved for Conversion. The Company shall at all
times reserve and keep available out of its authorized and unissued Common Stock
or have available in its treasury the full number of shares of Common Stock
deliverable upon the conversion of all outstanding shares of Series A Preferred
Stock and shall take all such action as may be required from time to time in
order that it may validity and legally issue fully paid and non-assessable
shares of Common Stock upon conversion of the Series A Preferred Stock.
(8) Notice. In the event:
(i) the Company shall declare a dividend (or any other
distribution) on its Common Stock (other than a cash dividend payable out of
retained earnings); or
(ii) the Company shall authorize the issuance to holders of
its Common Stock of rights or warrants to subscribe for or purchase Common
Stock; or
(iii) of any reclassification of the Common Stock of the
Company (other than a subdivision or combination of its outstanding Common
Stock, or a change in par value, or from par value to no par value, or from no
par value to par value) or of any consolidation or merger to which the Company
is a party or of the sale or transfer of all or substantially all of the assets
of the Company or compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property and for which approval of any
stockholders of the Company is required; or
(iv) of the voluntary or involuntary dissolution, liquidation
or winding up of the Company; then, and in each event, the Company shall cause
to be mailed to each holder of Series A Preferred Stock, at his or her address
as the same shall appear on the stock transfer books of the Company as promptly
as possible but in any event at least fifteen (15) days prior the applicable
date hereinafter specified, a notice stating (I) the date on which a record is
to be taken for the purpose of such dividend, distribution, rights or warranty,
or, if a record is not to be taken, the date as of which the holders of Common
Stock of record to be entitled to such dividend, distribution or rights are to
be determined, and the nature and amount of such dividend, distribution, rights
or warrants or (II) the date on which such reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding up is expected to
become effective.
(9) "Common Stock". For the purposes of this Section H, "Common Stock"
shall mean stock of the Company of any class, whether now or hereafter
authorized, which has the right to participate in the distribution of either
earnings or assets of the Company without limit as to the amount or percentage,
including without limitation, the Common Stock. In case by reason of the
operation of paragraph (4) of this Section H the shares of Series A Preferred
Stock shall be convertible into any other shares of stock or other securities or
property of the Company or of any other corporation, any reference herein to the
conversion of shares of Series A Preferred Stock pursuant to Section H shall be
deemed to refer to and include the conversion of shares of Series A Preferred
Stock into such other shares of stock or other securities or property.