SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant (X)
Filed by a Party other than the Registrant ( )
Check the appropriate box:
(X) Preliminary Proxy Statement ( ) Confidential, for Use
of the Commission Only (as
permitted by Rule
14a-6(e)(2))
( ) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
INTERACTIVE MAGIC, INC.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
(X) No fee required
( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
( ) Fee paid previously with preliminary materials.
( ) Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule, or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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INTERACTIVE MAGIC, INC.
215 Southport Drive, Suite 1000
Morrisville, North Carolina 27560
---------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER __, 1999
---------------
TO THE SHAREHOLDERS OF INTERACTIVE MAGIC, INC.:
You are invited to attend the Annual Meeting of Shareholders of
Interactive Magic, Inc., a North Carolina corporation (the "Company"), to be
held at the Company's principal executive office located at 215 Southport Drive,
Suite 1000, Morrisville, North Carolina on _______, December __, 1999 at ____
_.m., for the following purposes:
1. To elect a board of five directors;
2. To amend the Company's Articles of Incorporation to change the
Company's name to iEntertainment Network, Inc.;
3. To reserve an additional 1,000,000 shares of common stock for
issuance under the Company's 1998 Stock Plan;
4. To ratify the Series D preferred stock financing of the Company;
5. To ratify the appointment of Ernst & Young LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1999;
and
6. To act upon such other matters as may properly come before the
meeting or any adjournment thereof.
These matters are more fully described in the attached Proxy Statement.
The Board of Directors has fixed the close of business on November 30,
1999 as the record date for the determination of shareholders entitled to notice
of and to vote at the meeting or any adjournment or adjournments thereof.
Accordingly, only shareholders of record at the close of business on November
30, 1999 are entitled to notice of and to vote at the meeting. You are cordially
invited to attend the meeting in person. However, to assure your representation
at the meeting, you are urged to mark, sign, date and return the enclosed proxy
card as promptly as possible in the postage-prepaid envelope enclosed for that
purpose. You may vote in person at the meeting, even if you returned a proxy.
The Company's Proxy Statement and proxy is submitted herewith along
with the Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1998 and its Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1999, June 30, 1999 and September 30, 1999.
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IMPORTANT -- YOUR PROXY IS ENCLOSED
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, WE URGE YOU TO EXECUTE AND
PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE. NO POSTAGE IS
REQUIRED FOR MAILING IN THE UNITED STATES.
By Order of the Board of Directors
MICHAEL PEARCE,
CHIEF EXECUTIVE OFFICER
Morrisville, North Carolina
December __, 1999
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INTERACTIVE MAGIC, INC.
215 Southport Drive, Suite 1000
Morrisville, North Carolina 27560
---------------
PROXY STATEMENT
---------------
ANNUAL MEETING OF SHAREHOLDERS
DECEMBER __, 1999
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL INFORMATION
The enclosed proxy is solicited by the Board of Directors of
Interactive Magic, Inc., a North Carolina corporation (the "Company"), for use
at the Company's Annual Meeting of Shareholders to be held at the principal
executive office of the Company located at 215 Southport Drive, Suite 1000,
Morrisville, North Carolina at _____ _.m. on December __, 1999, and any
adjournments thereof (the "Meeting").
The cost of soliciting proxies will be borne by the Company. In
addition to solicitation of proxies by mail, employees of the Company, without
extra remuneration, may solicit proxies personally or by telephone. The Company
will reimburse brokerage firms and other custodians, nominees and fiduciaries
for their reasonable out-of-pocket expenses for forwarding proxy materials to
beneficial owners and seeking instruction with respect thereto. The mailing
address of the principal executive office of the Company is 215 Southport Drive,
Suite 1000, Morrisville, North Carolina 27560.
Copies of this Proxy Statement and accompanying proxy card and other
materials were mailed to shareholders on or about December __, 1999.
REVOCABILITY OF PROXIES
You have the power to revoke your proxy at any time before it is voted
by giving a later proxy or written notice to the Company (Attention: Corporate
Secretary), or by attending the Meeting and voting in person.
VOTING OF PROXIES
When the enclosed proxy is properly executed and returned (and not
subsequently properly revoked), the shares it represents will be voted in
accordance with the directions indicated thereon, or, if no direction is
indicated thereon, it will be voted:
(1) FOR the election of the five nominees for director identified
below;
(2) FOR the amendment of the Company's Articles of Incorporation to
change the
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Company's name to iEntertainment Network, Inc.;
(3) FOR the reservation of an additional 1,000,000 shares for issuance
under the Company's 1998 Stock Plan;
(4) FOR approval of the Series D preferred stock financing of the
Company;
(5) FOR ratification of the appointment of Ernst & Young LLP, Raleigh,
North Carolina, as independent auditors of the Company for the
fiscal year ending December 31, 1999; and
(6) in the discretion of the proxies with respect to any other matters
properly brought before the shareholders at the Meeting.
The Company is not aware of any other business expected to come before
the meeting, but it is intended that as to any such other business the proxies
will be voted in accordance with the judgment of the persons acting thereunder.
RECORD DATE
Only the holders of record of the Company's common stock at the close
of business on the record date, November 30, 1999 (the "Record Date"), are
entitled to notice of and to vote at the Meeting. On the Record Date,
14,673,337 shares of common stock were outstanding. Shareholders will be
entitled to one vote for each share of common stock held on the Record Date. A
quorum will be present at the meeting if a majority of the outstanding shares of
Common Stock is present at the meeting in person or by proxy.
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
Shareholder proposals submitted for inclusion in the Company's proxy
materials for the 2000 Annual Meeting of Shareholders must be received by the
Company by (MONTH) (DAY), 2000 and must comply with certain rules of the
Securities and Exchange Commission. In addition, management's proxy holders will
have discretion to vote proxies given to them on any shareholder proposal of
which the Company does not have notice prior to _______ __, 2000. Any
shareholder proposal submitted for consideration at the 1999 Annual Meeting,
including nominations for election to the Board of Directors, must also comply
with Article III, Section 12 of the Company's Bylaws, which requires that a
shareholder give written notice to the Company at least 50 but not more than 90
days before the meeting date. Any such proposals should be sent via means that
afford proof of delivery to: Corporate Secretary, Interactive Magic, Inc., 215
Southport Drive, Suite 1000, Morrisville, North Carolina 27560.
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PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
NOMINEES
The Company's Articles of Incorporation provide that the number of
directors constituting the Board of Directors shall be no less than five and no
greater than fifteen. The number of directors is currently five, and the number
authorized to be elected at the Meeting is five. Therefore, five directors are
to be elected to serve for one year, until the election and qualification of
their successors, and it is intended that proxies, not limited to the contrary,
will be voted FOR all of the management nominees named below. The Company is not
aware of any nominee who will be unable or will decline to serve as director. In
the event that any such nominee is unable or declines to serve as a director at
the time of the Meeting, the individuals named in the enclosed proxy may
exercise their discretion to vote for any substitute proposed by the Board of
Directors. Under the Company's Bylaws, shareholders desiring to nominate a
person for election at the Annual Meeting were required to give notice to the
Secretary by [DATE], 1999. Because no timely notice has been received,
shareholder nominations will not be permitted.
None of the directors or nominees is related by blood, marriage or
adoption to any other nominee or any executive officer of the Company.
The names of the Company's directors and nominees for director and
certain information about them are set forth below.
Name of Nominee Age Director Since
--------------- --- --------------
Jacob Agam..................................... 44 1999
Marc Goldfarb.................................. 35 N/A
Michael Pearce................................. 38 N/A
W. Joseph McClelland........................... 52 1997
J.W. Stealey................................... 50 1995
Current Directors Not Standing for Re-election
----------------------------------------------
J. Nicholas England III........................ 52 1997
David H. Kestel................................ 65 1997
JACOB AGAM was elected as Chairman of the Board in August 1999. Mr.
Agam also serves as the Chairman of Vertical Financial Holdings, a member of the
Vertical Group. The Vertical Group is a private international merchant banking
firm specializing in providing equity capital to mid-sized growth companies
operating in a variety of industries, including technology. Mr. Agam has also
served since October 1996 as the Chairman of the Board and since April
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1998 as the Chief Executive Officer of IAT Multimedia, Inc., a publicly traded
marketer of personal computers and PC components and peripherals. Mr. Agam has
also served as the Chairman of the Board of Gruppo Spigadoro NV, a privately
held Dutch holding company engaged in the food and animal feed business, since
its inception in August 1998. Mr. Agam received his J.D. from Tel Aviv
University in 1984 and his L.L.M. in Securities and Corporate Finance from the
University of Pennsylvania in 1986.
MARC S. GOLDFARB is a director nominee. Mr. Goldfarb has served as a
director of IAT Multimedia, Inc., a public company, since September 1999. Since
August 1998, Mr. Goldfarb has been the President and Managing Director of Orida
Capital USA, Inc., a consulting firm that is the U.S. representative of the
Vertical Group. Prior to joining Orida Capital, Mr. Goldfarb was a corporate
and securities attorney for over 10 years, most recently as a partner at
Bachner, Tally & Polevoy LLP in New York, where he specialized in corporate
finance, venture capital and mergers and acquisitions. Mr. Goldfarb holds a B.S.
degree in Management and Industrial Relations from Cornell University and a J.D.
degree from the University of Pennsylvania Law School.
MIKE PEARCE is a director nominee. Mr. Pearce has served as Chief
Executive Officer of the Company since November 1999. Prior to joining
iEntertainment Network, Mr. Pearce held a variety of technology industry
positions, including serving as Senior Vice President of Sales and Marketing at
VocalTec Communications Inc., a public company specializing in Internet
telephony, from 1996-1998. He also provided consulting services to VocalTec
during 1999. Previously, Mr. Pearce served as Senior Vice President of Sales and
Marketing for Ventana Communications, Inc., a publisher of software and computer
reference books, from 1995-1996. During 1990-1993, he was Vice President, Sales
at Librex Computer Systems, a wholly-owned subsidiary of Nippon Steel, Tokyo,
Japan, engaged in the manufacture and marketing of portable computers. From
1987-1990, Mr. Pearce was employed by Hyundai Electronics America, a
wholly-owned subsidiary of Hyundai Group, Seoul, Korea, ultimately in the
capacity of National Sales Manager for this manufacturer of personal computers
and peripherals.
W. JOSEPH MCCLELLAND has served as a director of the Company since
February 1997. Since 1990, Mr. McClelland has been Vice President and a Member
of the Board of GEC-Marconi Defense Systems Inc., an Arlington, Virginia-based
subsidiary of GEC-Marconi Ltd., which produces and sells electronic warfare
equipment to government customers. From 1988 to 1990, he was Director, Avionics,
Armament and Electronic Combat, at the HQ United States Air Force Systems
Command at Andrews Air Force Base in Maryland, where he supervised headquarters
staff and provided corporate oversight of advanced programs. From 1986 to 1988,
he was Director, United States Air Force Research and Development Liaison Office
in London, England, where he initiated and managed U.S./U.K. cooperative
research and development programs. Mr. McClelland received a B.S. in Engineering
Mechanics and Mathematics from the United States Air Force Academy. He received
an M.S. in Applied Mechanics from the University of Utah. Mr. McClelland is a
graduate of the United States Air Force Test Pilot School.
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J. W. STEALEY served as Chairman of the Board of Directors and Chief
Executive Officer of the Company from January 1995 to August 1999. Previously,
he was founder, Chairman and Chief Executive Officer of MicroProse, Inc., a
developer and publisher of flight simulation and strategy software titles from
1982 to 1993. Prior to 1982, Mr. Stealey was Group Director of Business
Development of General Instruments. Prior to joining General Instruments
Corporation, Mr. Stealey held management consulting positions with Cresap,
McCormick and Paget and McKinsey & Co. in New York, New York. Mr. Stealey earned
a B.S. degree in Aeronautical Engineering from the United States Air Force
Academy. After graduation from the Academy, Mr. Stealey spent six years as an
operational pilot in the United States Air Force. Mr. Stealey also received an
M.B.A. in finance and strategic management from the Wharton School of Business
of the University of Pennsylvania.
DIRECTORS NOT STANDING FOR RE-ELECTION
J. NICHOLAS ENGLAND III has served as a director of the Company since
February 1997. Since 1993, Mr. England has been a Research Professor in the
Department of Computer Science at the University of North Carolina at Chapel
Hill. From 1987 to 1993, he worked as Director of Product Development for
advanced graphics, imaging and visualization hardware and software for Sun
Microsystems, Inc. Previously, Mr. England founded two computer graphics
companies. He received a B.S. in Electrical Engineering from North Carolina
State University.
DAVID H. KESTEL, CLU, has served as a director of the Company since
February 1997. Since 1992, Mr. Kestel has served as President of The Kestel
Group, Inc., an estate planning, executive compensation and employee benefits
company based in Potomac, Maryland. From 1978 to 1992, he worked at Blue Cross
and Blue Shield of the National Capital Area, most recently as Senior Vice
President, Marketing, and served as President of two domestic life insurance
companies and two offshore reinsurance companies. Mr. Kestel received a B.B.A.
and an M.B.A. from the University of Michigan. Mr. Kestel is a Member, Chartered
Life Underwriter.
INFORMATION CONCERNING THE BOARD OF DIRECTORS AND ITS COMMITTEES
The business of the Company is under the general management of the
Board of Directors as provided by the laws of North Carolina and the Bylaws of
the Company. During the fiscal year ended December 31, 1998, the Board of
Directors held seven formal meetings, excluding actions by unanimous written
consent. Each Member of the Board attended at least [75%] of the fiscal 1998
meetings of Board of Directors and Board committees of which he was a member.
The Board of Directors has created an Audit Committee and a
Compensation Committee. The Audit Committee currently consists of Messrs.
England and McClelland. During 1998, the Audit Committee held two formal
meetings, excluding actions by unanimous consent. The Audit Committee recommends
the appointment of independent auditors to the Board of Directors and reviews
the results and scope of the audit and other services provided by the Company's
independent auditors. The Compensation Committee currently consists of Messrs.
Stealey, Kestel and McClelland. During 1998, the Compensation Committee held
three formal meetings, excluding actions by unanimous consent. The Compensation
Committee makes recommendations to the Board of Directors regarding salaries and
incentive compensation for all officers of the Company except those officers who
are also members of the Executive or
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Compensation and Benefits Committees.
VOTE REQUIRED
The five nominees receiving the highest number of affirmative votes of
the shares present or represented and entitled to be voted at the Meeting shall
be elected as directors of the Company. In accordance with North Carolina law,
votes withheld from any director will be counted for purposes of determining the
presence or absence of a quorum for the transaction of business. However,
because directors are elected by a plurality vote, abstentions in the election
of directors have no effect once a quorum exists. Furthermore, shares
represented by proxies returned by a broker holding such shares in nominee or
"street" name will be counted as present or represented for purposes of
determining the presence or absence of a quorum for the transaction of business,
even if such shares are not voted in matters where discretionary voting by the
broker is not allowed ("broker non-votes"). Withheld votes and broker non-votes,
if any, are not treated as votes cast and therefore, will have no effect on the
proposal to elect directors.
THE BOARD OF DIRECTORS HAS APPROVED AND RECOMMENDS THAT SHAREHOLDERS
VOTE "FOR" THE ELECTION OF THE MANAGEMENT NOMINEES LISTED ABOVE.
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PROPOSAL NO. 2 - APPROVAL OF AMENDMENT OF THE ARTICLES OF
INCORPORATION TO CHANGE THE COMPANY'S NAME
The Board of Directors of the Company has authorized an amendment to
the Company's Articles of Incorporation changing the Company's name to
"iEntertainment Network, Inc." The Board also recommended that the proposed
amendment be submitted to the Company's shareholders for consideration at the
Meeting. To effect the name change, the Articles would be amended by deleting
Article I in its entirety and inserting the following in lieu thereof:
"The name of the corporation is iEntertainment Network, Inc."
The Board is recommending the proposed change so that the name
of the Company will reflect the operating name of its major business. The name
change will not affect the validity or transferability of currently outstanding
stock certificates, and shareholders will not be requested to surrender for
exchange any stock certificates they hold. Management has chosen iEntertainment
Network, Inc. as the Company's primary operating name and plans to use it as its
universal brand name for its key businesses. Accordingly, the Board believes
alignment of the Company's name with its operating name will enhance the
Company's brand equity and strengthen recognition of the Company by its
customers, partners and shareholders.
If the proposal is approved, officers of the Company will promptly make
appropriate filings in the State of North Carolina and take any other actions
necessary to implement the name change.
VOTE REQUIRED
The affirmative vote of the holders of at least a majority of the
shares of the Company's outstanding common stock will be required to approve
this proposal. In accordance with North Carolina law, votes withheld on this
proposal will be counted for purposes of determining the presence or absence of
a quorum for the transaction of business. Furthermore, shares represented by
proxies returned by a broker holding such shares in nominee or "street" name
will be counted as present or represented for purposes of determining the
presence or absence of a quorum for the transaction of business. Withheld votes
and broker non-votes, if any, will have the same effect as a negative vote on
this proposal.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND RECOMMENDS A VOTE
"FOR" THE PROPOSED NAME CHANGE.
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PROPOSAL NO. 3 -- APPROVAL OF AMENDMENT
TO THE 1998 STOCK PLAN
The Company's 1998 Stock Plan (the "1998 Plan") was adopted by the
Board of Directors and approved by the shareholders of the Company in May 1998.
A total of 1,800,000 shares of common stock have been reserved for issuance
under the 1998 Plan, 1,000,000 of which are subject to shareholder approval at
the Meeting. As of November 30, 1999, 26,347 shares had been issued upon
exercise of options granted under the 1998 Plan, and options for 323,250 shares
were outstanding thereunder at a weighted exercise price of $3.01 per share.
Absent shareholder approval of this proposal, only 450,403 shares remain
available for issuance under the 1998 Plan as incentive stock options and all
future grants from the 1,000,000 shares subject to this proposal will not
qualify as incentive stock options.
The 1998 Plan provides for grants to employees of incentive stock
options. In addition, the Plan provides for grants of nonqualified stock options
and stock purchase rights to employees, directors and consultants of the
Company. As of November 30, 1999, approximately 60 persons were eligible to
receive grants under the 1998 Plan. The Plan is administered by the Board of
Directors or by a Committee appointed by the Board. The administrator determines
the terms of options and stock purchase rights granted, including the exercise
price and the number of shares subject to option or stock purchase right. The
exercise price of incentive stock options granted under the Plan must be at
least equal to the fair market value of the Company's common stock on the date
of the grant. The maximum term of options granted under the plan is 10 years.
In the event of a merger of the Company with or into another
corporation, all outstanding options will automatically become fully vested and
exercisable.
The Board may amend the 1998 Plan at any time or may terminate it
without the approval of the shareholders, except as otherwise provided by law.
However, no action by the Board or the shareholders can alter any option
previously granted. The Board may accelerate the exercisability of any option or
waive any condition or restriction pertaining to an option. The 1998 Plan will
expire by its terms in May 2008.
TAX CONSEQUENCES OF OPTIONS
An optionee who is granted an incentive stock option will generally not
recognize taxable income either at the time the option is granted or upon its
exercise, although the exercise will increase the optionee's alternative minimum
taxable income by an amount equal to the difference, if any, between the fair
market value of the shares at the time of exercise and the option's exercise
price, and therefore may subject the optionee to the alternative minimum tax.
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Upon the sale or exchange of the shares more than two years after grant of the
option and more than one year after exercising the option, any gain or loss will
be treated as long-term capital gain or loss. If these holding periods are not
satisfied, the optionee will recognize ordinary income at the time of sale or
exchange equal to the difference between the exercise price and the lower of (1)
the fair market value of the shares at the date of the option's exercise or (2)
the sale price of the shares. The Company will be entitled to a deduction in the
same amount as the ordinary income recognized by the optionee. Any gain or loss
recognized on such a premature disposition of the shares in excess of the amount
treated as ordinary income will be characterized as long-term or short-term
capital gain or loss, depending on the optionee's holding period with respect to
such shares.
All other options that do not qualify as incentive stock options are
referred to as nonstatutory options. Generally, an optionee will not recognize
any taxable income at the time he or she is granted a nonstatutory option. Upon
its exercise, however, the optionee will generally recognize taxable ordinary
income measured as the excess of the then fair market value of the shares
acquired over the exercise price of the option. Any taxable income recognized in
connection with an option exercise by an optionee who is also an employee of the
Company will be subject to tax withholding by the Company. The Company will be
entitled to a tax deduction in the same amount as the ordinary income recognized
by the optionee with respect to shares acquired upon exercise of a nonstatutory
option. Upon resale of such shares by the optionee, any difference between the
sales price received and the fair market value for the shares on the date of
exercise of the option will be treated as long-term or short-term capital gain
or loss, depending on the optionee's holding period with respect to such shares.
The foregoing is only a summary, based on the current Code and Treasury
Regulations thereunder, of the federal income tax consequences to the optionee
and the Company with respect to the grant and exercise of options under the 1998
Plan, does not purport to be complete, and does not discuss the tax consequences
of the optionee's death or the income tax laws of any municipality, state or
foreign country in which an optionee may reside.
PROPOSED AMENDMENT
The Board of Directors has adopted an amendment to the 1998 Plan to
increase the number of shares reserved for issuance thereunder by 1,000,000
shares, from 800,000 shares to 1,800,000 shares (the "Share Amount Amendment").
Without giving effect to the Share Amount Amendment, as of November 30, 1999,
only 450,403 shares remained available for future grant as incentive stock
options under the 1998 Plan, which will not allow the Company to meet its
anticipated needs with respect to the issuance of such additional options to
employees and consultants of the Company. Absent shareholder approval, all
future grants from the 1,000,000 additional shares subject to this proposal will
fail to qualify for favorable tax treatment as incentive stock options.
At the Meeting, the shareholders are being asked to approve the Share
Amount Amendment.
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VOTE REQUIRED
The affirmative vote of the holders of a majority of the shares of the
Company's common stock present or represented and voting on this proposal at the
Meeting will be required to approve the Share Amount Amendment. Failure to
obtain shareholder approval of the Share Amount Amendment will prevent the
Company from granting incentive stock options out of the additional 1,000,000
shares, but will not necessarily prevent the Company from otherwise granting
other awards under the 1998 Plan.
In accordance with North Carolina law, votes withheld on this proposal
will be counted for purposes of determining the presence or absence of a quorum
for the transaction of business. Furthermore, shares represented by proxies
returned by a broker holding such shares in nominee or "street" name will be
counted as present or represented for purposes of determining the presence or
absence of a quorum for the transaction of business. Withheld votes and broker
non-votes, if any, are not treated as votes cast, and therefore will not affect
the approval of this proposal.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND RECOMMENDS A VOTE "FOR"
THE PROPOSED AMENDMENT TO THE 1998 PLAN.
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PROPOSAL NO. 4 -- RATIFICATION OF SERIES D PREFERRED STOCK FINANCING
On November 9, 1999, the Company entered into a Securities Purchase and
Exchange Agreement (the "Agreement") with RGC International Investors, LDC
("RGC") pursuant to which the Company issued 4,910.844 shares of its Series D
preferred stock, with a stated value of $1,000 per share, to RGC in exchange for
$1,100,000 in cash and the cancellation of $3,810,844 of the Company's
outstanding obligations to RGC under a convertible note (the "Note") issued on
January 26, 1999 (the "Exchange"). As a part of the Exchange, the Company
granted RGC the right to have the shares of common stock underlying the Series D
preferred stock registered for resale, which the Company intends to commence
promptly after the Meeting.
REASONS FOR THE EXCHANGE
The Board of Directors believes that the Exchange improves the
Company's financial position by eliminating debt, decreasing debt-service
expenses and by strengthening the Company's balance sheet. The Exchange also
helped the Company comply with Nasdaq's net tangible assets requirement, thereby
reducing the likelihood that the stock would be delisted. Nasdaq has required
the Company to maintain total net tangible assets of a value greater than
$3,700,000. After giving effect to the Exchange, and certain other transactions
undertaken by the Company in early November 1999, the Company had total net
tangible assets in excess of $3,700,000 on a pro forma basis as of September 30,
1999.
TERMS OF THE SERIES D PREFERRED STOCK
The terms of the Series D preferred stock are complex. Any summary of
these terms will be general in nature and must be qualified by reference to the
actual terms as set forth in the Company's Articles of Amendment establishing
the Series D preferred stock, a copy of which is attached hereto as Appendix A.
We urge you to read Appendix A if you want a full understanding of the exact
terms of the Series D preferred stock.
DIVIDENDS
There are no dividends automatically payable on the Series D preferred
stock. No dividends may be paid upon the common stock while any Series D
preferred stock is outstanding.
LIQUIDATION PREFERENCE
Upon a change in control, liquidation, dissolution or winding up of the
Company, before anything can be paid to the holders of common stock, the holders
of the Series D preferred stock will be entitled to receive $1,000 per share,
plus an amount equal to a 6% annual return on that amount since November 1999
and any penalty amounts due thereunder, if any.
REDEMPTION
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The Series D preferred stock must be redeemed by the Company if it is
requested to do so by the holders of a majority of the outstanding Series D
preferred stock upon:
(1) failure by the Company to comply with certain terms of the
Articles, the Securities Purchase and Exchange Agreement or the
related Registration Rights Agreement with respect to the Series D
preferred stock;
(2) bankruptcy of the Company;
(3) certain changes in control of the Company; or
(4) failure by the Company to obtain shareholder approval of this
proposal.
In any such event, the redemption price would be equal to the greater of (1)
$1,200 per share, plus an amount equal to a 6% annual return since November 1999
on the $1,000 paid for each share and any penalty amounts due under the terms of
the Series D preferred stock (including, but not limited to, as a result of the
failure to convert or deliver shares on a timely basis), and (2) the "parity
value" of the shares, which equals the product of (a) the number of shares of
common stock into which the Series D preferred stock could have been converted
multiplied by (b) the highest reported closing price per share of the common
stock between the event triggering the right to request redemption and the
payment of the redemption price.
CONVERSION
Prior to shareholder approval of this proposal, the Series D preferred
stock is convertible into a maximum of 436,103 shares of common stock. At any
time after shareholder approval of this proposal, a holder of Series D preferred
stock may convert all of those shares into common stock. Each share of Series D
preferred stock was initially convertible into 1,000 shares of common stock. The
number of shares of common stock issuable upon conversion of a share of Series D
preferred stock increases over time to provide the holder additional common
stock equal to a 6% annual return since November 1999 and any penalty amounts
otherwise due thereunder. Subject to certain conditions, the Series D preferred
stock will automatically convert into common stock in November 2002.
VOTING
The Series D preferred stock has no voting rights other than as
provided by law and except that the approval of the holders of a majority of the
outstanding Series D preferred stock is required for:
(1) any adverse change to the rights of the Series D preferred stock;
(2) the creation of securities having senior or equal rights;
(3) an increase in the authorized number of shares of Series D
preferred stock;
15
<PAGE>
(4) an increase in the par value of the common stock; or
(5) any action that would result in certain taxes being imposed on the
Series D preferred stock.
PROPOSAL
This proposal is submitted for shareholder ratification pursuant to
Nasdaq Marketplace Rule 4310(c)(25)(H)(i), which is one of several
non-quantitative designation criteria required of a Nasdaq SmallCap Market
issuer, such as the Company. One of the events that necessitate prior
shareholder ratification pursuant to Rule 4310(c)(25)(H)(i) is as follows:
in connection with a transaction other than a public offering involving
... the sale or issuance by the issuer of common stock (or securities
convertible into or exercisable for common stock) equal to 20% or more
of the common stock or 20% or more of the voting power outstanding
before the issuance for less than the greater of book or market value
of the stock.
Due to a Nasdaq Marketplace Rule similar to the rule set forth above,
the Note was convertible into a maximum of 2,119,889 shares of common stock.
Prior to the Exchange, the Company had issued 1,683,786 shares of common stock
upon partial conversion of the Note, leaving 436,103 shares of common stock
available for issuance upon conversion of the Note. Because the Note was
exchanged for Series D preferred stock, the maximum number of shares of common
stock the Company can issue upon conversion of the Series D preferred stock is
436,103 shares of common stock. As a result, and because the Series D preferred
stock is potentially convertible into more than 4,910,844 shares of common
stock, we are seeking shareholder ratification of the issuance of the Series D
preferred stock and the common stock issuable upon conversion thereof. Absent
such ratification, the Company is limited pursuant to the terms of the Series D
preferred stock to issuing no more than 436,103 shares of common stock upon
conversion of shares of Series D preferred stock.
If the shareholders fail to ratify this proposal, the holders of the
Series D preferred stock may demand redemption of the stock on the terms
described above. In this case, it is likely that the Company will not be in
compliance with Nasdaq's net tangible assets requirement. That noncompliance
would likely lead to the delisting of the stock from the Nasdaq SmallCap Market.
Should the Common Stock be delisted from Nasdaq SmallCap Market trading, the
market price of the common stock may be adversely impacted and you may find it
difficult to dispose, or obtain accurate quotations as to the market value, of
your shares of Common Stock. In addition, the Company could find it more
difficult to obtain future financing.
VOTE REQUIRED
The affirmative vote of the holders of at least a majority of the
shares of the Company's common stock present or represented and voting on this
proposal at the Meeting will be required to ratify this proposal. In accordance
with North Carolina law, votes withheld on this proposal will be counted for
purposes of determining the presence or absence of a quorum for the
16
<PAGE>
transaction of business. Furthermore, shares represented by proxies returned by
a broker holding such shares in nominee or "street" name will be counted as
present or represented for purposes of determining the presence or absence of a
quorum for the transaction of business. Withheld votes and broker non-votes, if
any, are not treated as votes cast, and therefore will not affect the approval
of this proposal.
Holders of a majority of the Company's outstanding common stock,
including director J.W. Stealey and entities affiliated with Chairman of the
Board Jacob Agam, have entered into a Voting Agreement to approve this proposal.
Therefore, this proposal will be approved.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND RECOMMENDS A VOTE
"FOR" THE RATIFICATION OF THE SERIES D PREFERRED STOCK FINANCING.
17
<PAGE>
PROPOSAL NO. 5 -- RATIFICATION OF SELECTION
OF INDEPENDENT AUDITORS
The Board of Directors of the Company has appointed the firm of Ernst &
Young LLP, Raleigh, North Carolina, to serve as the independent auditors of the
Company for the fiscal year ending December 31, 1999, and recommends that the
shareholders ratify such action. Ernst & Young has audited the accounts of the
Company since 1995 and has advised the Company that it does not have, and has
not had, any direct or indirect financial interest in the Company or its
subsidiaries in any capacity other than that of serving as independent auditors.
Representatives of Ernst & Young are expected to attend the Meeting. They will
have an opportunity to make a statement, if they desire to do so, and will also
be available to respond to appropriate questions.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the shares of the
Company's common stock present or represented and voting on this proposal at the
Meeting shall constitute ratification of the appointment of Ernst & Young. In
accordance with North Carolina law, votes withheld on this proposal will be
counted for purposes of determining the presence or absence of a quorum for the
transaction of business. Furthermore, shares represented by proxies returned by
a broker holding such shares in nominee or "street" name will be counted as
present or represented for purposes of determining the presence or absence of a
quorum for the transaction of business. Withheld votes and broker non-votes, if
any, are not treated as votes cast, and therefore will not affect the approval
of this proposal.
If the appointment of Ernst & Young is not ratified by the
shareholders, the Board of Directors will reconsider its selection.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND RECOMMENDS A VOTE
"FOR" THE RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG AS INDEPENDENT
AUDITORS OF THE COMPANY FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999.
18
<PAGE>
OTHER INFORMATION
PRINCIPAL SHAREHOLDERS AND SHARE OWNERSHIP BY MANAGEMENT
The following table sets forth certain information regarding the
ownership of shares of the Company's common stock as of the Record Date by (1)
each person known by the Company to beneficially own more than 5% of the
outstanding shares of common stock, (2) each director and director nominee of
the Company, (3) each of the Named Officers, as listed under "-- Executive
Compensation -- Summary Compensation" below, and (4) all directors and
executive officers of the Company as a group. As of the Record Date, the
Company had outstanding 14,673,337 shares of Common Stock. Share ownership
includes shares issuable upon exercise of options and warrants that may be
exercised within 60 days after the Record Date for purposes of computing the
percentage of Common Stock owned by such person but not for purposes of
computing the percentage owned by any other person. Except as indicated in the
footnotes to this table, the persons named in this table have sole voting and
investment power with respect to all shares of stock indicated below.
<TABLE>
<CAPTION>
- ------------------------------------------- -------------------------------- -----------------------------
Name and Address Shares Beneficially Owned Percent of Shares Outstanding
- ------------------------------------------- -------------------------------- -----------------------------
<S> <C> <C>
J.W. Stealey 3,954,367 (1) 26.1%
215 Southport Drive
Morrisville, NC 27560
Director
- ------------------------------------------- -------------------------------- -----------------------------
Vertical Financial Holdings 2,745,649 (2) 18.7%
Hambrechtikerstrasse 61
Ch-8640 Rapperswil
Switzerland
- ------------------------------------------- -------------------------------- -----------------------------
Elliott Bossen 1,066,880 7.3%
- ------------------------------------------- -------------------------------- -----------------------------
Robert L. Pickens (3) 252,588 (4) 1.7%
- ------------------------------------------- -------------------------------- -----------------------------
Joseph Rutledge 266,663 (5) 1.8%
- ------------------------------------------- -------------------------------- -----------------------------
Raymond Rutledge 242,019 (6) 1.6%
- ------------------------------------------- -------------------------------- -----------------------------
Doug Kubel (7) 187,582 (8) 1.3%
- ------------------------------------------- -------------------------------- -----------------------------
Michael Pearce 133,333 (9) 0.9%
- ------------------------------------------- -------------------------------- -----------------------------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------- -------------------------------- -----------------------------
J. Nicholas England III 66,000 (9) 0.4%
Director
- ------------------------------------------- -------------------------------- -----------------------------
David H. Kestel 66,000 (9) 0.4%
Director
- ------------------------------------------- -------------------------------- -----------------------------
W. Joseph McClelland 66,000 (9) 0.4%
Director
- ------------------------------------------- -------------------------------- -----------------------------
All directors and executive officers as a 4,285,700 27.7%
group (5 directors and 2 executive
officers) (10)
- ------------------------------------------- -------------------------------- -----------------------------
</TABLE>
(1) Includes 228,750 shares subject to options and 236,389 shares subject to
warrants. Excludes 600,000 shares held in trusts for Mr. Stealey's
children. Mr. Stealey has neither voting power nor dispositive power over
the shares held in the trusts. Mr. Stealey disclaims beneficial ownership
of the shares held in the trusts.
(2) Includes 427,394 shares owned by entities beneficially owned by Vertical
Financial Holdings and 1,220,084 shares owned by other entities over which
Vertical Financial Holdings has voting power pursuant to a proxy agreement.
(3) Mr. Pickens resigned as President effective October 23,1998.
(4) Includes 13,845 shares subject to warrants.
(5) Includes 260,000 shares subject to options. Mr. Rutledge left the Company
in October 1999.
(6) Includes 232,813 shares subject to options. Mr. Rutledge left the Company
in October 1999.
(7) Mr. Kubel resigned as Vice President effective March 15, 1999.
(8) Includes 180,000 shares subject to options.
(9) Consists of shares subject to warrants or options.
(10) Includes the shares discussed in the relevant footnotes above.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth all compensation paid by the Company for
services rendered to it in all capacities for the fiscal years ended December
31, 1997 and 1998 to the
20
<PAGE>
Company's Chief Executive Officer, the Company's four other highest-paid
executive officers who earned at least $100,000 in the respective fiscal year
and up two additional executive officers who otherwise would have been
includable in such table on the basis of their 1998 compensation but for the
fact that they were no longer executive officers of the Company at the end of
1998 (collectively, the "Named Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
----------------------------------------- ---------------------------
Annual Compensation Long Term Awards
- ------------------------- -------- ----------------------------------------- --------------------------- -------------
Other Securities All Other
Annual Underlying Compensation
Name and Principal Year Salary $ Bonus $(2) Compensation Options / ($)
Position SARs
- ------------------------- -------- ---------- -------------- --------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
J.W. Stealey, 1998 170,742 - 14,306(3) 50,000
Chief Executive
Officer(1)
- ------------------------- -------- ---------- -------------- --------------- ------------ -------------- -------------
1997 160,000 - 25,380(3) - -
- ------------------------- -------- ---------- -------------- --------------- ------------ -------------- -------------
Robert L. Pickens 1998 138,750 20,000 7,215(3)
President (4)
- ------------------------- -------- ---------- -------------- --------------- ------------ -------------- -------------
1997 114,000 - 5,071(3) - 3,833(4)
- ------------------------- -------- ---------- -------------- --------------- ------------ -------------- -------------
Joseph Rutledge, 1998 125,000 12,508 - 50,000
Senior Vice
President,
Technology (5)
- ------------------------- -------- ---------- -------------- --------------- ------------ -------------- -------------
Raymond Rutledge, 1998 120,000 24,396 - 50,000
Vice President
Licensing (5)
- ------------------------- -------- ---------- -------------- --------------- ------------ -------------- -------------
Douglas B. Kubel, 1998 120,000 14,746 - 30,000
Vice President (6)
- ------------------------- -------- ---------- -------------- --------------- ------------ -------------- -------------
</TABLE>
(1) Mr. Stealey resigned as Chief Executive Officer in August 1999.
(2) Amount paid during year, earned in prior year.
(3) Use of Company auto and country club expenses
(4) Mr. Pickens resigned as President in October 1998.
(5) Joseph and Raymond Rutledge left the Company in October 1999.
(6) Mr. Kubel resigned in March 1999.
21
<PAGE>
OPTION GRANTS, EXERCISES AND HOLDINGS AND FISCAL YEAR-END OPTION VALUES
No options were exercised by the Named Officers during 1998. The following
table summarizes all option grants during the year ended December 31, 1998 to
the Named Officers:
<TABLE>
<CAPTION>
- ------------------------- --------------- ----------------- -------------- --------------- -------------------------------
% of Total
Number Options
Of Securities Granted to Potential Realizable Value at
Underlying Employees in Exercise or Assumed Annual Rates of Stock
Options Fiscal Year Base Price Expiration Price Appreciation for the
Name Granted (1) ($ / Share) Date(2) Option Term(3)
- ------------------------- --------------- ----------------- -------------- --------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
5% 10%
- ------------------------- --------------- ----------------- -------------- --------------- --------------- ---------------
Douglas Kubel 30,000 6% $4.1250 10/8/03 $77,826 $197,226
- ------------------------- --------------- ----------------- -------------- --------------- --------------- ---------------
Robert Pickens
- ------------------------- --------------- ----------------- -------------- --------------- --------------- ---------------
Joseph Rutledge 50,000 10% $4.1250 10/8/03 $129,710 $328,709
- ------------------------- --------------- ----------------- -------------- --------------- --------------- ---------------
Raymond Rutledge 50,000 10% $4.1250 10/8/03 $129,710 $328,709
- ------------------------- --------------- ----------------- -------------- --------------- --------------- ---------------
J.W. Stealey 50,000 10% $4.1250 10/8/03 $129,710 $328,709
- ------------------------- --------------- ----------------- -------------- --------------- --------------- ---------------
</TABLE>
(1) Based upon 484,750 total options granted.
(2) Options granted in October 1998, vesting ratably over five years.
(3) The compounding assumes a 10-year exercise period for all option grants.
These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent on the future performance
of the Common Stock and overall stock market conditions. The amounts reflected
in this table may not be necessarily achieved.
The following table sets forth certain information concerning the number
and value of unexercised options held by the Named Officers as of December 31,
1998:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options at In-the-Money Options
December 31, 1998 at December 31, 1998(1)
------------------------------------- --------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Name
- ------------------------ ----------------- ------------------- ------------------- -------------------
Douglas Kubel 97,554 82,446 $ 270,391 $ 160,829
- ------------------------ ----------------- ------------------- ------------------- -------------------
Robert Pickens 62,813 64,687 $ 206,089 $ 212,238
- ------------------------ ----------------- ------------------- ------------------- -------------------
Joseph Rutledge 138,125 111,875 $ 453,188 $ 210,812
- ------------------------ ----------------- ------------------- ------------------- -------------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------------ ----------------- ------------------- ------------------- -------------------
Raymond Rutledge 124,938 105,062 $ 409,921 $ 188,458
- ------------------------ ----------------- ------------------- ------------------- -------------------
J.W. Stealey 37,500 243,750 $ 123,038 $ 643,494
- ------------------------ ----------------- ------------------- ------------------- -------------------
</TABLE>
(1) Options are considered in-the-money if the market value of shares covered
thereby is greater than the option exercise price. Value is calculated based
on the difference between the fair market value of the shares of Common
Stock at December 31, 1998 ($4.28), as quoted on the Nasdaq Stock Market,
and the exercise price of the options.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with J. W. Stealey and
Robert L. Pickens effective January 1995. Each employment agreement had an
initial term of three years that automatically renewed for an additional
one-year term. During the term of employment, the parties had the right to
terminate the employment for any reason upon notice. If the termination was for
any reason other than voluntary termination by the employee or by the Company
for cause, the Company was obligated to make the following payments to the
employee:
(1) any unpaid base compensation for services performed prior to the
date of termination;
(2) the amount of any accrued annual vacation pay and other accrued
but unpaid benefits; and
(3) an amount as liquidated damages equal to twice the amount of the
employee's (A) annual base salary then in effect, (B) any earned
incentive compensation due but unpaid, and (C) such incentive
compensation as would have been earned from January 1 of the year
of termination through the date of termination pursuant to
performance criteria established by the Board of Directors.
With respect to Mr. Pickens, the Company's failure to extend his employment
agreement for an additional year on an anniversary of the effective date would
have been a termination by the Company without cause. If the termination was
voluntary by the employee or by the Company for cause, the Company would have
had to pay the employee
(1) any unpaid compensation for services performed prior to the date
of termination,
(2) the amount of any accrued annual vacation pay, and
(3) such incentive compensation as would have been earned from January
1 of the year of termination through the date of termination
pursuant to performance criteria established by the Board of
Directors.
Voluntary termination did not include termination by the employee as a result of
(1) a material change in the employee's duties, responsibilities or
authority, including the sale
23
<PAGE>
or other disposition of a substantial part of the business of the
Company that would decrease the scope of the employee's position,
(2) failure to obtain the assumption of the obligation to perform the
agreement by any successor,
(3) breach of the employment agreement by the Company, or
(4) relocation of the employee's office to a location more than 50
miles from the employee's residence or the Company's principal
offices.
The employment agreements each included a non-competition provision, effective
during the term of the employment agreement and for a period of one year (two
years for Mr. Stealey) following termination of employment, pursuant to which
the employee cannot compete with the Company within 250 miles of any location at
which the Company maintains its principal administrative headquarters by
becoming interested, directly or indirectly, as a partner, officer, director,
shareholder, advisor, employee or in any other capacity with any competitive
business engaged in the design, manufacture or sale of games used on personal
computers. The employment agreements each prohibited disclosure of any
confidential information about the Company. The Company and Mr. Pickens
terminated his agreement when he left the Company in October 1998, and the
Company and Mr. Stealey terminated his agreement when he left the Company in
August 1999. The terms of Mr. Stealey's severance are described in "Certain
Transactions".
In November 1998, the Company entered into a severance agreement with Mr.
Pickens, pursuant to which the Company agreed to pay Mr. Pickens severance equal
to 100% of his salary through December 31, 1998 and 50% of his salary thereafter
through March 31, 1999. The Company also agreed to accelerate the vesting of Mr.
Picken's right to purchase 9,750 shares and extended the exercise date on these
options (together with 53,062 existing options that were already vested) until
March 31, 2000.
The Company entered into an employment agreement with Michael Pearce in
November 1999. The agreement has an initial term of three years that
automatically renews for additional one-year terms absent notice of non-renewal
by either party at least sixty days prior to expiration of the term. In lieu of
receiving the stated annual salary for his position of $180,000, pursuant to the
agreement Mr. Pearce elected instead to receive options to purchase a total of
800,000 shares of common stock with an exercise price of $1.09 per share. These
options are exercisable as follows: 133,333 are immediately exercisable, 133,333
become exercisable on the first anniversary of the grant date and 266,667 become
exercisable on each of the second and third anniversaries of the grant date. If
Mr. Pearce is terminated because of death, extended illness, disability or
without cause, all of these options that would have vested at any time during
the calendar year of termination become fully exercisable, provided Mr. Pearce,
or his estate, must exercise such options within six months following
termination. Mr. Pearce and his family are entitled to participate in such
employee benefit plans as the Company may offer from time to time to its senior
officers.
COMPENSATION OF DIRECTORS
The Company reimburses each director for out-of-pocket expenses
incurred in connection with the rendering of services as a director. In 1998,
the Company granted warrants to purchase shares of Common Stock to each
non-officer director at an exercise price equal to fair market value at the date
of grant as follows:
NAME OPTION SHARES
---- -------------
J. W. Stealey 834
Avi Suriel 75,000
Joseph McClelland 12,500
J. Nicholas England 12,500
David Kestel 12,500
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The Board of Directors of the Company established a Compensation
Committee in May 1998. The Compensation Committee is responsible for
establishing compensation policy and administering the compensation programs of
the Company's executive officers. The purpose of this report is to inform
shareholders of the Company's compensation policies for executive officers and
the rationale for the compensation paid to executive officers in 1998.
COMPENSATION PHILOSOPHY
The Company's executive compensation program has three objectives:
24
<PAGE>
(1) to align the interests of the executive officers with the
interests of the Company's shareholders by basing a significant
portion of the executive officers' potential total compensation on
the Company's performance;
(2) to attract and retain highly talented and productive executive
officers; and
(3) to provide incentives for superior performance by the Company's
executive officers.
To achieve these objectives, the Company has developed a flexible compensation
program that consists of base salary, short-term incentive compensation in the
form of cash bonuses and long-term incentive compensation in the form of equity.
In addition to these elements of compensation, executive officers participate in
the Company's general benefit programs that are offered to all employees.
Each year, the Compensation Committee reviews the Company's executive
compensation program. In its review, the Compensation Committee studies the
compensation packages for executive officers of companies
--at a comparable stage of development (the Company is currently in an
early, risky stage of development, calling for skilled management, but providing
significant opportunity via long-term equity compensation), and
--in the Company's geographic area (the employment market in the
Research Triangle area is extremely competitive, with one of the lowest
unemployment rates in the nation).
The Compensation Committee assesses the competitiveness of the Company's
executive compensation program and reviews the Company's financial and
operational performance for the previous year, which was good in 1997 and the
first half of 1998, although it has struggled since. In its review, the
Compensation Committee does not refer directly to data for the companies whose
stocks are included in the performance graph below, because it believes that
they represent too broad a spectrum of companies to be relevant in the context
of executive compensation.
EXECUTIVE OFFICER COMPENSATION PROGRAM
Each element of the Company's executive officer compensation program is
discussed in more detail below.
BASE SALARIES. The Compensation Committee reviews the base salaries of
the Company's executive officers at least annually. The base salaries for the
Company's executive officers for 1998 were established at the beginning of that
year, or when the executive joined the Company, in the case of executive
officers who joined the Company during the year. In addition to considering the
factors discussed above that provide the basis of the Company's executive
officer compensation philosophy generally, the Compensation Committee reviews
the responsibilities of the specific executive position and the experience and
knowledge of the individual in that position. The Compensation Committee also
measures individual performance based on a number of factors, including
25
<PAGE>
--the Company's historic and recent financial and operational
performance,
--the individual's contributions to that performance,
--the individual's performance relative to other goals, and
--other contributions of the individual to the Company's overall
performance.
The Compensation Committee gives each of these factors relatively equal weight,
without confining its analysis to a strict mathematical formula. As is typical
of most corporations, the actual payment of an executive officer's base salary
is not conditioned on the achievement of any performance targets or goals.
SHORT-TERM INCENTIVE COMPENSATION. The Compensation Committee intends
to motivate executive officers with short-term incentive compensation in the
form of cash bonuses for the achievement of individual or Company performance
goals. Because the Company has been in an early stage of development, it has not
historically paid cash bonuses. In 1998, however, the Company did pay some cash
bonuses to executive officers because of its successful growth during 1997. The
Compensation Committee does not follow a strict mathematical formula in
determining potential cash bonuses for executive officers, but establishes
general target bonus levels based in relatively equal measures on
--achievement of Company financial goals,
--achievement of Company operational goals,
--Company stock price performance, and
--individual performance goals.
Because of the dynamic nature of the Company's markets, these goals might change
during any fiscal year to better reflect the environment in which the Company
and its executive officers are operating, and to continue to provide the
executive officers appropriate short-term incentives.
LONG-TERM INCENTIVE COMPENSATION. The Company's long-term incentive
compensation plan for its executive officers is based on the Company's stock
plans. The Compensation Committee believes that paying a portion of executive
officers' potential total compensation in the form of stock and stock options
achieves three important objectives:
(1) it aligns the interests of the Company's executive officers
directly with those of the Company's shareholders;
(2) it gives the Company's executive officers a significant long-term
interest in the Company's success; and
(3) it helps the Company hire, motivate and retain high quality
executive officers.
In determining the number of shares or stock options to grant to an
executive officer, the
26
<PAGE>
Compensation Committee primarily considers
--the executive officer's past performance,
--the executive officer's ability to influence the Company's future
performance,
--the degree to which giving the executive officer long-term incentive
might benefit the Company and its shareholders, and
--the number of shares and options already beneficially owned by the
executive officer.
Stock options generally have an exercise price equal to fair market value on the
date of grant, and vest over time based on continued employment. The options
granted to executive officers in October 1998 had five-year terms and vested
ratably over five years. Therefore, because each of the executive officers to
whom these grants were made have left the Company, the bulk of these options did
not vest and the underlying shares returned to the reserve that the Company has
available for future grants to other executive officers, employees and
consultants.
OTHER BENEFITS. The Compensation Committee believes that the Company
must offer a competitive program of other benefits to attract and retain
executive officers. During 1998, the Company provided its executive officers the
substantially similar medical and other benefits to its executive officers as
those generally available to its other full-time employees. The Company also
provided Messrs. Stealey and Pickens with use of Company automobiles and paid
certain country club expenses on their behalf, in order to remain competitive
with compensation practices of other relevant companies.
CHIEF EXECUTIVE OFFICER COMPENSATION
The Company bases the compensation paid to the Company's Chief
Executive Officer on the same elements and measurements of performance that it
uses to determine the compensation of the Company's other executive officers. In
particular, the Board of Directors approved Mr. Stealey's employment agreement
(as described in "Employment Agreements" above) and his base salary for 1998,
did not pay him any cash bonus during 1998 and granted him a significant number
of stock options to incentivize his future performance. As noted above, Mr.
Stealey resigned from the Company in August 1999.
SECTION 162(m) OF THE CODE
It is the responsibility of the Compensation Committee to address the
issues raised by Section 162(m) of the Code. Revisions to this Section made
certain non-performance based compensation in excess of $1,000,000 to executives
of public companies non-deductible to such companies beginning in 1994. The
Compensation Committee has reviewed these issues and has determined that it is
not necessary for the Company to take any action at this time with regard to
these issues.
Neither the material in this report, nor the Performance Graph below,
is soliciting material, is or will be deemed filed with the Securities and
Exchange Commission or is or will be incorporated by reference in any filing of
the Company under the Securities Act of 1933 or the
27
<PAGE>
Securities Exchange Act of 1934, whether made before or after the date of this
proxy statement and irrespective of any general incorporation language in such
filing.
Submitted by: THE BOARD OF DIRECTORS
Jacob Agam
J. Nicholas England III
David H. Kestel
W. Joseph McClelland
J.W. Stealey
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In May 1998, the Company established a Compensation Committee which is
responsible for the approval of compensation arrangements for the officers of
the Company, their view of the Company's compensation plans and the
administration of the Company's employee benefit plans. The Compensation
Committee consists of Messrs. Kestel, McClelland and Stealey. Except for Mr.
Stealey, who was Chief Executive Officer of the Company until August 1999, no
member of the Compensation Committee is or has been an executive officer or
employee of the Company. No executive officer of the Company serves as a member
of the board of directors or compensation committee of any company which has one
or more executive officers serving on the Company's Board of Directors or its
Compensation Committee.
28
<PAGE>
[PERFORMANCE GRAPH APPEARS BELOW]
The following graph shows a comparison of cumulative total shareholder
returns(1) for the Company, the CRSP Total Market Return Index of the Nasdaq
Stock Market and CRSP Nasdaq Non-Financial Stocks Total Return Index. (The
"CRSP" is the Center for Research in Securities Prices at the University of
Chicago.) The graph assumes that $100 was invested on November 26, 1996 (the
effective date of the Company's initial public offering) in each of the
Company's Common Stock, the stocks in the CRSP Total Market Return Index of the
Nasdaq Stock Market and the stocks in the CRSP Nasdaq Non-Financial Stocks
Index.
- ---------------------- ---------- ---------- --------- ----------
7/22/98 12/31/98 6/30/99 11/30/99
- ---------------------- ---------- ---------- --------- ----------
IENT (IENTC) 100.00 47.24 22.76
- ---------------------- ---------- ---------- --------- ----------
NASDAQ CRSP Total 100.00
- ---------------------- ---------- ---------- --------- ----------
NASDAQ Non-Financial 100.00
- ---------------------- ---------- ---------- --------- ----------
(1) Total return assumes reinvestment of dividends.
(2) Total returns for the Nasdaq Stock Market and the Nasdaq Non-Financial
Stocks indices are weighted based on market capitalization.
CERTAIN TRANSACTIONS
The Company, Mr. Stealey and Robert Pickens, former President of the
Company, are parties to a January 3, 1995 Stock Purchase and Stockholder
Agreement (the "Co-Sale Agreement"). The Co-Sale Agreement grants Mr. Pickens a
co-sale right to participate in any transfer of shares of Common Stock by Mr.
Stealey on the same terms and conditions as offered to the third party by Mr.
Stealey. The co-sale right entitles Mr. Pickens to participate in such transfer
in the same proportion to the number of shares to be sold by Mr. Stealey that
the number of shares of Common Stock owned by Mr. Pickens prior to the transfer
bears to the number of shares of Common Stock owned by Mr. Stealey prior to the
transfer. Mr. Pickens resigned from his position as President of the Company in
October 1998.
The Company has also entered into a marketing agreement, dated January
3, 1995, with Mr. Stealey, pursuant to which Mr. Stealey makes his T-28 Trojan
aircraft and his services as a pilot available to the Company in consideration
for which the Company pays all of the expenses
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to store, operate and maintain such aircraft and to maintain Mr. Stealey's pilot
license. This marketing agreement was terminated in November 1999.
On March 6, 1995, the Company issued a demand Promissory Note to Mr.
Pickens in the principal amount of $600,000 at an annual interest rate of 12%,
which increased to 14% on June 30, 1996 because the balance thereunder exceeded
$400,000 on that date. In consideration of this loan, the Company issued
warrants to Mr. Pickens to purchase 13,845 shares of Common Stock at an exercise
price of $1.00 per share. In connection with the Company's Series B Preferred
Stock financing, Mr. Pickens, on February 4, 1998, converted the outstanding
principal of $600,000 into 132,744 shares of Series C Preferred Stock, which
shares will be converted into 132,744 shares of Common Stock in connection with
the Recapitalization. Also in connection with the Recapitalization, Mr. Pickens
has forgiven $50,000 of the accrued interest outstanding in connection with this
loan in payment of the $1.00 per share exercise price of his 50,000
Recapitalization Options. The Company paid Mr. Pickens $111,421 of the remaining
$183,864 in accrued interest due to him under this loan upon the consummation of
the Company's initial public offering in July 1998.
On April 11, 1995, the Company entered into a joint development
agreement with NDL for the development of the Company's DEMON technology. J.
Nicholas England, a director of the Company, is a director of NDL. To date, the
Company has paid $322,500 to NDL for the rights to the technology which includes
amounts paid pursuant to a royalty of 1% of net sales based on products that
incorporate the DEMON technology.
On December 4, 1995, the Company entered into a leasehold agreement
with Southport Business Park Limited Partnership ("Southport") for the Company's
principal executive offices located at 215 Southport Drive in Morrisville, North
Carolina. The term of the lease is for a period of five years commencing April
1, 1996 at a monthly rent of $13,962, subject to adjustment in certain
circumstances. J. W. Stealey has executed a personal guarantee in favor of
Southport in connection with the leasehold agreement.
Since the Company's inception, Mr. Stealey has executed several
personal guaranties and pledges of personal collateral in favor of BB&T, one of
the Company's primary bank creditors, in connection with revolving and term
loans extended by BB&T to the Company. On January 24, 1997, the Company issued a
$2,500,000 Promissory Note to BB&T secured by Mr. Stealey's guarantee and pledge
of collateral. The January 24, 1997 note has been paid in full, and Mr.
Stealey's guarantee and pledge in respect thereof have been extinguished. On
August 25, 1997, the Company issued a $2,750,000 Promissory Note to BB&T secured
by Mr. Stealey's guarantee and pledge of collateral in replacement of the
January 24, 1997 note. On November 25, 1997, the Company issued a $250,000
Promissory Note to BB&T secured by Mr. Stealey's guarantee and pledge of
collateral. The November 25, 1997 note has been paid in full, and Mr. Stealey's
guarantee and pledge in respect thereof have been extinguished. On March 27,
1998, the Company issued a $250,000 Promissory Note to BB&T secured by Mr.
Stealey's guarantee and pledge of collateral. In connection with his guaranties
to BB&T, the Company became obligated to pay Mr. Stealey a fee equal to 6% per
annum of the indebtedness borrowed. All of such indebtedness has been repaid and
Mr. Stealey waived all payment rights relating to his guaranties.
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On May 20, 1996, the Company issued a Promissory Note to Mr. Stealey in
the principal amount of $1,000,000, payable on November 17, 1996, with interest
at the annual rate of 15%, increasing to 17% if the Company did not repay Mr.
Stealey by November 17, 1996. In connection with this loan, the Company issued
warrants to Mr. Stealey to purchase 25,000 shares of Common Stock at a price of
$2.00 per share. Under the original terms of the note, if the note was not
repaid by November 17, 1996, the Company was obligated to issue additional
warrants to Mr. Stealey to purchase 25,000 shares of Common Stock per 180 days
prorated over the time until repayment occurred. On March 20, 1997, in
connection with a loan to the Company made by Petra, Mr. Stealey waived his
right under the note to accrue additional warrants after November 16, 1997. On
February 4, 1998, in connection with the Company's Series B Preferred Stock
financing, Mr. Stealey converted the $1,000,000 principal outstanding under the
May 20, 1996 note into 221,239 shares of Common Stock. In connection with the
Recapitalization effected in connection with the Company's initial public
offering in July 1998 (the "Recapitalization"), Mr. Stealey has forgiven
$268,750 of the accrued interest outstanding under this note in payment of the
$1.00 per share exercise price of his 268,750 Recapitalization options.
On July 10, 1996, the Company issued a Promissory Note to Mr. Stealey
in the principal amount of $1,000,000, payable on January 6, 1997, with interest
at the annual rate of 15%, increasing to 17% if the Company did not repay Mr.
Stealey by January 6, 1997. In connection with this loan, the Company issued
warrants to Mr. Stealey to purchase 50,000 shares of Common Stock at a price of
$6.00 per share. Under the original terms of the note, if the note was not
repaid by January 6, 1997, the Company was obligated to issue additional
warrants to Mr. Stealey to purchase 250,000 shares of Common Stock per 180 days
prorated over the time until repayment occurred. On March 20, 1997, in
connection with a loan to the Company by Petra, Mr. Stealey waived his right
under the note to accrue additional warrants after January 6, 1998. On February
4, 1998, in connection with the Company's Series B Preferred Stock financing,
Mr. Stealey converted the $1,000,000 principal outstanding under the July 10,
1996 note into 221,239 shares of Common Stock. The Company paid Mr. Stealey
$234,729 accrued interest due to him in connection with the loan upon
consummation of the Company's initial public offering.
The Company has borrowed approximately $870,000 from Laura M. Stealey,
the former wife of Mr. Stealey, under a $1,000,000 credit line established by
Ms. Stealey in favor of the Company, which is guaranteed by Mr. Stealey,
pursuant to a Letter Agreement dated October 31, 1996. In consideration of the
credit line, the Company granted to Ms. Stealey a warrant exercisable for 14,948
shares of Common Stock at a purchase price of $5.82 per share. On March 24,
1997, in connection with a loan to the Company by Petra, Ms. Stealey waived her
right to convert debt under the credit line into shares of the Company's Common
Stock. The Company repaid the entire principal amount, plus the $117,175 in
accrued interest thereon through March 31, 1998, of this credit line upon the
consummation of the Company's initial public offering.
On February 4, 1998, Vertical Financial Holdings, Suriel Financial
Consulting and several other investors purchased an aggregate of 778,746 shares
of the Company's Series B Preferred Stock for $3,500,000. At that time
Mr. Suriel was a director of the Company and of Vertical Financial Holdings,
as well as founder and a principal of Suriel Financial Consulting. All of the
Series B Preferred Stock investors have signed a proxy agreement with Vertical
Financial
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Holdings granting Vertical Financial Holdings voting rights with respect to
their shares. In connection with the Recapitalization, the 778,746 shares of
Series B Preferred Stock converted into 2,045,649 shares of Common Stock.
The Company and General Capital, an affiliate of Vertical Financial
Holdings, have also signed a Marketing Agreement dated February 4, 1998,
pursuant to which the Company is obligated to pay $400,000 to General Capital
for marketing services when the Company's shareholders' equity equals or exceeds
$5,000,000. The Company satisfied such obligation upon the consummation of the
Company's initial public offering.
In August 1999, the Company and Mr. Stealey (the Company's founder and
then Chairman and CEO), entered into an agreement: (1) providing for the
resignation of Mr. Stealey from his position as Chairman and CEO; (2) appointing
Jacob Agam, a designee of Vertical Financial Holdings (a significant shareholder
of the Company), as Chairman of the Board to fill the vacancy created by the
departure of Avi Suriel; and (3) designating management's slate of nominees for
election to the Board at the annual meeting of shareholders (to include a total
of three designees from Vertical, together with Mr. Stealey and one designee of
Mr. Stealey). Vertical also signed the agreement for the purpose of agreeing to
vote its shares in favor of management's slate of nominees. As part of this
agreement, the Company also agreed to: (1) retain Mr. Stealey as a consultant
through December 31, 2000 at an annual fee of $180,000 and other benefits
identical to those provided his employment agreement, which agreement was
terminated, together with Mr. Stealey's severance rights thereunder (this
consulting arrangement was terminated in November 1999 as described below); (2)
undertake best efforts to have Mr. Stealey removed from personal guarantees he
made to secure approximately $1 million of Company indebtedness (Mr. Stealey
arranged to have the Company released from this indebtedness in November 1999 as
described below); (3) grant certain registration rights to Mr. Stealey with
respect to his shares; (4) sell to Mr. Stealey for $1,000 the Company's rights
to its old name, logo, and URL (imagicgames.com) following the Company's
transition to its new name; and (5) limit Mr. Stealey's noncompetition
restriction to nonsolicitation of Company employees for the next 17 months.
In November 1999, the Company effected a balance sheet reorganization
involving the following transactions, the following components of which were
consummated with affiliated parties:
A) Vertical Financial Holdings, a significant shareholder of the
Company, purchased 700,000 shares of common stock for $700,000.
Jacob Agam, the Chairman of the Company's Board of Directors, is
Chairman of Vertical Financial Holdings.
B) J.W. Stealey, the Company's founder, former CEO and current
director, arranged for the release of the Company from $1,000,000
of line-of-credit indebtedness to BB&T in exchange for 1,000,000
shares of common stock. In addition, Mr. Stealey's resignation
agreement dated August 16, 1999 was amended such that his
consulting services are no longer being used and the sole
remaining consideration due him was reduced to one lump sum
payment of $200,000 (less the value of 12
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months of health insurance payments and car lease payments
totaling approximately $20,000) and 50,000 shares of the Company's
common stock.
This payment was made on November 12, 1999. The Company also
agreed to convey to Mr. Stealey all trademarks and available
rights to the name Interactive Magic, pending shareholder approval
of the name change to iEntertainment Network. Mr. Stealey agreed
to waive the interest due him from the Company in the amount of
$183,000 under the terms of the line of credit agreement with BB&T
that he personally guaranteed.
The Company granted registration rights for the shares of common stock
underlying the Series D Preferred Stock and the shares of common stock
purchased in connection with the reorganization. In addition, Mr.
Stealey and Vertical Financial Holdings agreed to vote all of their
shares at the next annual meeting in favor of the Series D Preferred
Stock financing and the convertibility of such shares into common
stock.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16(a) of the Exchange Act, directors and executive
officers of the Company are required to file reports with the Securities and
Exchange Commission indicating their holdings of and transactions in the
Company's equity securities. To the Company's knowledge, based solely on a
review of the copies of such reports furnished to the Company and written
representations that no other reports were required, there were no reports
required under Section 16(a) of the Exchange Act which were not timely filed
during the fiscal year ended December 31, 1998.
OTHER MATTERS
The Board of Directors knows of no other business to be brought before
the Meeting, but it is intended that, as to any such other business, the shares
will be voted pursuant to the proxy in accordance with the best judgment of the
person or persons acting thereunder.
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APPENDIX A
ARTICLES OF AMENDMENT
OF
INTERACTIVE MAGIC, INC.
Pursuant to Section 55-6-02 of the North Carolina Business Corporation
Act, the undersigned corporation hereby submits these Articles of Amendment for
the purpose of amending its Articles of Incorporation to fix the preferences,
limitations and relative rights of a new series of its shares of Preferred
Stock:
1. The name of the corporation is Interactive Magic, Inc.
2. The amendment to the Articles of Incorporation of the corporation
attached hereto as Exhibit A was duly adopted by the Board of
Directors of the corporation effective the 5th day of November,
1999.
3. These Articles of Amendment will be effective upon filing.
This the 10th day of November, 1999.
INTERACTIVE MAGIC, INC.
By:
--------------------------------
Name: Mike Pearce
Title: Chief Executive Officer
<PAGE>
EXHIBIT A
1. Article IV of the Articles of Incorporation of Interactive Magic, Inc. (the
"Corporation") is hereby amended to delete the heading for Section 4.4 in its
entirety and to replace it to read as follows:
Section 4.4. Designation of Series A, Series B, Series C and Series D
Preferred Stock.
2. Article IV of the Corporation's Articles of Incorporation is hereby amended
to add a new subsection Section 4.4(d) which shall read in its entirety as
follows:
(d) Series D Convertible Preferred Stock.
(1) DESIGNATION AND AMOUNT. The designation of this series, which
consists of 4,910.844 shares of Preferred Stock, is Series D Convertible
Preferred Stock (the "SERIES D PREFERRED STOCK") and the stated value shall be
One Thousand Dollars ($1,000) per share (the "STATED VALUE").
(2) RANK. The Series D Preferred Stock shall rank (i) prior to the
Corporation's common stock, par value $.10 per share (the "COMMON STOCK"); (ii)
prior to the Corporation's Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock and Series C Preferred Stock; (iii) prior to any
class or series of capital stock of the Corporation hereafter created (unless,
with the consent of the holders of Series D Preferred Stock obtained in
accordance with Section 9 hereof, such class or series of capital stock
specifically, by its terms, ranks senior to or pari passu with the Series D
Preferred Stock) (collectively, with the Common Stock, Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock and the Series C Preferred
Stock, the "JUNIOR SECURITIES"); (iii) pari passu with any class or series of
capital stock of the Corporation hereafter created (with the consent of the
holders of Series D Preferred Stock obtained in accordance with Section 9
hereof) specifically ranking, by its terms, on parity with the Series D
Preferred Stock ("PARI PASSU SECURITIES"); and (iv) junior to any class or
series of capital stock of the Corporation hereafter created (with the consent
of the holders of Series D Preferred Stock obtained in accordance with Section 9
hereof) specifically ranking, by its terms, senior to the Series D Preferred
Stock ("SENIOR SECURITIES"), in each case as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary.
(3) DIVIDENDS. The Series D Preferred Stock shall not bear any
dividends. Except as provided below, in no event, so long as any Series D
Preferred Stock shall remain outstanding, shall any dividend whatsoever be
declared or paid upon, nor shall any distribution be made upon, any Junior
Securities, nor shall any shares of Junior Securities be purchased or redeemed
by the Corporation nor shall any moneys be paid to or made available for a
sinking fund for the purchase or redemption of any Junior Securities (other
than, in each case, a distribution of Junior Securities), without, in each such
case, the written consent of the holders of a majority of the outstanding shares
of Series D Preferred Stock, voting together as a class.
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(4) LIQUIDATION PREFERENCE
(a) LIQUIDATION EVENT. If the Corporation shall commence a
voluntary case under the federal bankruptcy laws or any other applicable federal
or state 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 federal bankruptcy
laws or any other applicable federal or state 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 30 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 (each such event being considered a "LIQUIDATION
EVENT"), no distribution shall be made to the holders of any shares of capital
stock of the Corporation (other than Senior Securities) upon liquidation,
dissolution or winding up unless prior thereto, the holders of shares of Series
D Preferred Stock, subject to Section 6, shall have received the Liquidation
Preference (as defined in Section 4(c)) 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 D Preferred Stock and holders of
Pari Passu Securities (including any dividends or distribution paid on any Pari
Passu Securities after the date of filing of these Articles of Amendment) 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 D 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. Any prior
dividends or distribution made after the date of filing of these Articles of
Amendment shall offset, dollar for dollar, the amount payable to the class or
series to which such distribution was made.
(b) LIQUIDATION PREFERENCE. For purposes of these Articles of
Amendment, the "LIQUIDATION PREFERENCE" with respect to a share of the Series D
Preferred Stock shall mean an amount equal to the sum of (i) the Stated Value
thereof, plus (ii) an amount equal to six percent (6%) per annum of such Stated
Value for the period beginning on the date of issuance thereof (the "ISSUE
DATE") and ending on the date of final distribution to the holder thereof
(prorated for any portion of such period), plus (iii) the amount of any
outstanding Conversion Default Payments (as defined in Section 6(e) below),
Delivery Default Payments (as defined in Section 6(d) below) and payments owed
to such holder pursuant to Section 2(c) of the Registration Rights Agreement (as
defined below). The liquidation preference with respect to any Pari Passu
Securities shall be as set forth in the Articles of Amendment filed in respect
thereof.
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(5) REDEMPTION.
(a) MANDATORY REDEMPTION. If any of the following events
(each, a "MANDATORY REDEMPTION EVENT") shall occur:
(i) The Corporation fails to issue shares of Common
Stock to the holders of Series D Preferred Stock upon exercise by the holders of
their conversion rights in accordance with the terms of these Articles of
Amendment (for a period of at least 60 days if such failure is solely as a
result of the circumstances governed by the second paragraph of Section 6(e)
below and the Corporation is using its best efforts to authorize a sufficient
number of shares of Common Stock as soon as practicable), fails to transfer or
to cause its transfer agent to transfer (electronically or in certificated form)
any certificate for shares of Common Stock issued to the holders upon conversion
of the Series D Preferred Stock as and when required by these Articles of
Amendment or the Registration Rights Agreement, dated as of the Closing Date (as
defined in the Purchase and Exchange Agreement (defined below)), among the
Corporation and the other signatories thereto (the "REGISTRATION RIGHTS
AGREEMENT"), fails to remove any restrictive legend (or to withdraw any stop
transfer instructions in respect thereof) on any certificate or any shares of
Common Stock issued to the holders of Series D Preferred Stock upon conversion
of the Series D Preferred Stock as and when required by these Articles of
Amendment, the Securities Purchase and Exchange Agreement, dated as of November
8, 1999, between the Corporation and the other signatories thereto (the
"PURCHASE AND EXCHANGE AGREEMENT") or the Registration Rights Agreement, or
fails to fulfill its obligations pursuant to Sections 4(c), 4(e), 4(g) or 5 of
the Purchase and Exchange Agreement (or makes any announcement, statement or
threat that it does not intend to honor the obligations described in this
paragraph) and any such failure shall continue uncured (or any announcement,
statement or threat not to honor its obligations shall not be rescinded in
writing) for 10 days after the Corporation shall have been notified thereof in
writing by any holder of Series D Preferred Stock;
(ii) The Corporation fails to obtain effectiveness
with the Securities and Exchange Commission (the "SEC") prior to 180 days after
the Closing Date (as defined in the Purchase and Exchange Agreement) of the
Registration Statement (as defined in the Registration Rights Agreement)
required to be filed pursuant to Section 2(a) of the Registration Rights
Agreement, or fails to obtain the effectiveness of any additional Registration
Statement (required to be filed pursuant to Section 3(b) of the Registration
Rights Agreement) within 60 days after the Registration Trigger Date (as defined
in the Registration Rights Agreement), or any such Registration Statement, after
its initial effectiveness and during the Registration Period (as defined in the
Registration Rights Agreement), lapses in effect or sales of all of the
Registrable Securities (as defined in the Registration Rights Agreement, the
"REGISTRABLE SECURITIES") otherwise cannot be made thereunder (whether by reason
of the Corporation's failure to amend or supplement the prospectus included
therein in accordance with the Registration Rights Agreement, the Corporation's
failure to file and obtain effectiveness with the SEC of an additional
Registration Statement required pursuant to Section 3(b) of the Registration
Rights
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<PAGE>
Agreement or otherwise) for more than 30 consecutive days or more than 60 days
in any 12-month period after such Registration Statement becomes effective;
(iii) The Corporation or any subsidiary of the
Corporation shall voluntarily make an assignment for the benefit of creditors,
or voluntarily apply for or consent to the appointment of a receiver or trustee
for it or for all or substantially all of its property or business;
(iv) Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for relief under any bankruptcy law
or any law for the relief of debtors shall be instituted voluntarily by the
Corporation or any subsidiary of the Corporation and, if not instituted
voluntarily by the Corporation or any such subsidiary, shall be consented to or
acquiesced in by the Corporation or such subsidiary or shall be converted to a
voluntary case;
(v) The sale, conveyance or disposition of all or
substantially all of the assets of the Corporation or the effectuation by the
Corporation of a transaction or series of related transactions in which more
than 50% of the voting power of the Corporation is disposed of (other than
transactions described in subparagraph (vi) or (vii) below, which shall be
governed by such subparagraphs) (PROVIDED, HOWEVER, that no transaction
described in this subparagraph shall constitute a Mandatory Redemption Event
unless the Board of Directors of the Corporation shall have approved such
transaction (including, in the case of a tender offer to, or proxy solicitation
of, the shareholders of the Corporation which results in the consummation of any
such transaction, the approval of the commencement of such tender offer or proxy
solicitation));
(vi) The consolidation, merger or other business
combination of the Corporation with or into any other individual, corporation,
limited liability company, partnership, association, trust or other entity or
organization (each a "PERSON") or Persons when the Corporation is not the
Survivor (as defined below) and either (i) the Survivor is not subject to the
periodic filing requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended (the "SEC FILING REQUIREMENTS"), or (ii) the Survivor is
subject to the SEC Filing Requirements and the consideration to be paid to the
shareholders of the Corporation in such transactions consists of cash or a
combination of cash and securities or other property (PROVIDED, HOWEVER, that no
transaction described in this subparagraph shall constitute a Mandatory
Redemption Event unless the Board of Directors of the Corporation shall have
approved such transaction (including, in the case of a tender offer to, or proxy
solicitation of, the shareholders of the Corporation which results in the
consummation of any such transaction, the approval of the commencement of such
tender offer or proxy solicitation));
(vii) The consolidation, merger or other business
combination of the Corporation with or into any other Person or Persons when the
Corporation is not the Survivor and (A) the Survivor is subject to the SEC
Filing Requirements, (B) the consideration to be paid to the stockholders of the
Corporation in such transaction consists solely of capital stock of the
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Survivor and (C) (i) the average of the Closing Bid Prices (defined below) of
the Common Stock for the 20 consecutive Trading Days (defined below) ending on
the later of (I) the third Trading Day immediately preceding the closing of such
transaction, and (II) the date such transaction is approved by the holders of
the requisite percentage of outstanding capital stock of the Corporation (such
later date, the "MEASUREMENT DATE") (such average being hereinafter referred to
as the "AVERAGE PRICE") is less than the product of (x) two, multiplied by (y)
the Conversion Price in effect on the Measurement Date or (ii) if the Average
Price is equal to or greater than the product of (x) two, multiplied by (y) the
Conversion Price in effect on the Measurement Date, the Closing Bid Price of the
Common Stock on the Trading Day immediately preceding the Measurement Date is
less than the Average Price (PROVIDED, HOWEVER, that no transaction described in
this subparagraph shall constitute a Mandatory Redemption Event unless the Board
of Directors of the Corporation shall have approved such transaction (including,
in the case of a tender offer to, or proxy solicitation of, the shareholders of
the Corporation which results in the consummation of any such transaction, the
approval of the commencement of such tender offer or proxy solicitation)); or
(viii) The Corporation shall fail (a) to prepare and
file with the SEC on or before November 24, 1999 a proxy statement in accordance
with Section 14 of the Securities Exchange Act of 1934, as amended, and the
rules and regulations of the SEC promulgated thereunder requesting the
shareholders of the Corporation to approve the issuance of the Series D
Preferred Stock and the shares of Common Stock issuable upon conversion of or
otherwise pursuant to the Series D Preferred Stock pursuant to Rule
4310(c)(25)(H)(i) of the Nasdaq Stock Market or any successor rule ("SHAREHOLDER
APPROVAL") or (b) to hold an annual or special meeting of its shareholders on or
before December 31, 1999 and to obtain at such meeting the Shareholder Approval;
provided that such date set forth in this clause (b) shall be extended to
February 15, 2000 if the staff of the SEC reviews and provides to the
Corporation written comments requiring changes to such proxy statement;
then, upon the occurrence and during the continuation of any Mandatory
Redemption Event specified in subparagraphs (i), (ii), (v), (vii) or (viii), at
the option of the holders of at least 50% of the then outstanding shares of
Series D Preferred Stock exercisable by delivery of written notice (the
"MANDATORY REDEMPTION NOTICE") to the Corporation of such Mandatory Redemption
Event, or upon the occurrence of any Mandatory Redemption Event specified in
subparagraphs (iii), (iv) or (vi), the then outstanding shares of Series D
Preferred Stock shall become immediately redeemable and the Corporation shall
purchase each holder's outstanding shares of Series D Preferred Stock for an
amount per share equal to the greater of (1) the sum of (a) 120% multiplied by
the Stated Value of the shares to be redeemed plus (b) an amount equal to six
percent (6%) per annum of such Stated Value for the period beginning on the
Issue Date and ending on the date of payment of the Mandatory Redemption Amount
(the "MANDATORY REDEMPTION DATE") plus (c) all Conversion Default Payments (as
defined in Section 6(e) below), Delivery Default Payments (as defined in Section
6(d) below)) and any other amounts
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owed to such holder pursuant to Section 2(c) of the Registration Rights
Agreement, and (2) the "PARITY VALUE" of the shares to be redeemed, where parity
value means (except as provided below with respect to a Mandatory Redemption
Event described in subparagraph (vi) above) the product of (a) the number of
shares of Common Stock issuable upon conversion of such shares of Series D
Preferred Stock in accordance with Section 6 below (without giving any effect to
any limitations on conversions of shares contained herein, and treating the
Trading Day immediately preceding the Mandatory Redemption Date as the
"CONVERSION DATE" (as defined in Section 6(d)(iv))), multiplied by (b) the
highest Closing Price (as defined below) for the Common Stock during the period
beginning on the date of first occurrence of the Mandatory Redemption Event and
ending one day prior to the Mandatory Redemption Date (the greater of such
amounts being referred to as the "MANDATORY REDEMPTION AMOUNT"); PROVIDED,
HOWEVER, in the case of any Mandatory Redemption Event described in subparagraph
(ii) above, the Corporation shall have the option, in lieu of redeeming the
Series D Preferred Stock as provided above, to pay to each holder thereof,
within five business days of the occurrence of such Mandatory Redemption Event,
an amount in cash equal to One Hundred Dollars ($100) per share of Series D
Preferred Stock not so redeemed (the "COVENANT DEFAULT AMOUNT"); PROVIDED,
FURTHER, that the Corporation shall only have the right to deliver the Covenant
Default Amount in respect of the Mandatory Redemption Event specified in
subparagraph (ii) above if it has used its best efforts to obtain or maintain
the effectiveness of any such Registration Statement in accordance with its
obligations under the Registration Rights Agreement. If the Corporation fails to
deliver the Covenant Default Amount within such five-business day period, it
shall forfeit its right to so deliver the Covenant Default Amount and the
Mandatory Redemption Amount shall become immediately payable. In the case of a
Mandatory Redemption Event described in subparagraph (vi) above, "parity value"
means the product of (a) the number of shares of Common Stock issuable upon
conversion of the shares of Series D Preferred Stock to be redeemed in
accordance with this Section 5 (without giving effect to any limitations on
conversions of the Series D Preferred Stock contained herein) multiplied by (b)
the highest Closing Price for the Common Stock during the period beginning on
the Announcement Date with respect to the transaction giving rise to such
Mandatory Redemption Event and ending on the Measurement Date (the "MEASUREMENT
PERIOD"). The Mandatory Redemption Amount, together with all other ancillary
amounts payable hereunder, shall immediately become due and payable, all without
demand, presentment or notice, all of which hereby are expressly waived,
together with all costs, including, without limitation, reasonable legal fees
and expenses of collection, and the holders of the Series D Preferred Stock
shall be entitled to exercise all other rights and remedies available at law or
in equity. For purposes of this Agreement, "SURVIVOR" means, with respect to any
consolidation, merger or other business combination to which the Corporation is
a party, the surviving entity of such transaction; PROVIDED, HOWEVER, if the
Corporation merges with and into another Person and more than 50% of the
outstanding voting stock of the Corporation (if the Corporation is the surviving
entity), or more than 50% of the outstanding voting stock of such Person (if
such Person is the surviving entity), is owned by another Person that is subject
to the SEC Filing Requirements, then the Person subject to such requirements
shall be deemed the Survivor. "CLOSING PRICE," as of any date, means the last
sale price of the Common Stock on Nasdaq SmallCap as reported by Bloomberg
Financial Markets or
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an equivalent reliable reporting service mutually acceptable to and hereafter
designated by the holders of a majority in interest of the shares of Series D
Preferred Stock and the Corporation ("BLOOMBERG") or, if Nasdaq is not the
principal trading market for such security, the last sale price of such security
on the principal securities exchange or trading market where such security is
listed or traded as reported by Bloomberg, or if the foregoing do not apply, the
last sale price of such security in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if no
last sale price of such security is available in the over-the-counter market on
the electronic bulletin board for such security or in any of the foregoing
manners, the average of the bid prices of any market makers for such security
that are listed in the "pink sheets" by the National Quotation Bureau, Inc. If
the Closing Price cannot be calculated for such security on such date in the
manner provided above, the Closing Price shall be the fair market value as
mutually determined by the Corporation and the holders of a majority in interest
of shares of Series D Preferred Stock being converted for which the calculation
of the Closing Price is required in order to determine the Conversion Price of
such Series D Preferred Stock. "CLOSING BID PRICE" means, for any security as of
any date, the closing bid price on Nasdaq as reported by Bloomberg or, if Nasdaq
is not the principal trading market for such security, the closing bid price of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the closing bid price of such security in the over-the-counter market
on the electronic bulletin board for such security as reported by Bloomberg, or,
if no closing bid price of such security is available in the over-the-counter
market on the electronic bulletin board for such security or in any of the
foregoing manners, the average of the bid prices of any market makers for such
security that are listed in the "pink sheets" by the National Quotation Bureau,
Inc. If the Closing Bid Price cannot be calculated for such security on such
date in the manner provided above, the Closing Bid Price shall be the fair
market value as mutually determined by the Corporation and the holders of a
majority in interest of shares of Series D Preferred Stock being converted for
which the calculation of the Closing Bid Price is required in order to determine
the Conversion Price of such Series D Preferred Stock. "TRADING DAY" shall mean
any day on which the Common Stock is traded for any period on Nasdaq, or on the
principal securities exchange or other securities market on which the Common
Stock is then being traded. "ANNOUNCEMENT Date" means the date on which the
Corporation (i) makes a public announcement that it intends to consolidate or
merge with any other corporation (other than a merger in which the Corporation
is the surviving or continuing corporation and its capital stock is unchanged)
or 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 to purchase 50% or more of the Corporation's Common Stock (or any
other takeover scheme).
(b) FAILURE TO PAY MANDATORY REDEMPTION AMOUNT. In the case of
a Mandatory Redemption Event, if the Corporation fails to pay the Mandatory
Redemption Amount within five business days of written notice that such amount
is due and payable, then (assuming there are sufficient authorized shares) in
addition to all other available remedies, each holder of Series D Preferred
Stock shall have the right at any time and from time to time, so long
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as the Mandatory Redemption Event continues, to require the Corporation, upon
written notice, to immediately issue (in accordance with and subject to the
terms of Section 6 below), in lieu of the Mandatory Redemption Amount, the
number of shares of Common Stock of the Corporation equal to such applicable
amount divided by any Conversion Price, as chosen in the sole discretion of the
holder of Series D Preferred Stock, in effect from the date of the Mandatory
Redemption Event until the date such holder elects to exercise its rights
pursuant to this Section 5(b).
(6) CONVERSION AT THE OPTION OF THE HOLDER
(a) CONVERSION AMOUNT. Each holder of shares of Series D
Preferred Stock may, at its option at any time and from time to time, upon
surrender of the certificates therefor, convert any or all of its shares of
Series D Preferred Stock into Common Stock as set forth below (an "OPTIONAL
CONVERSION"); provided, however, the Series D Preferred Stock shall not be
convertible into more than 436,103 shares of Common Stock until such time as the
Corporation shall have obtained Shareholder Approval or at such time as
Shareholder Approval is no longer required, whether because the Common Stock is
no longer listed on Nasdaq or otherwise. Each share of Series D Preferred Stock
shall be convertible into such number of fully paid and nonassessable shares of
Common Stock as such Common Stock exists on the Issue Date, or any other shares
of capital stock or other securities of the Corporation into which such Common
Stock is thereafter changed or reclassified, as is determined by dividing (1)
the sum of (i) the Stated Value thereof plus (ii) the Premium Amount (as defined
below) plus (iii) at the option of such holder of the Series D Preferred Stock,
any Conversion Default Payments (as defined in Section 6(e) below), Delivery
Default Payments (as defined in Section 6(d) below) and any other amounts owed
to such holder pursuant to Section 2(c) of the Registration Rights Agreement
(the sum of (i), (ii) and (iii) being collectively referred to as the
"CONVERSION AMOUNT"), by (2) the then effective Conversion Price (as defined
below); PROVIDED, HOWEVER, that in no event shall a holder of shares of Series D
Preferred Stock be entitled to convert any such shares in excess of that number
of shares upon conversion of which the sum of (x) the number of shares of Common
Stock beneficially owned by the holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of the shares of Series D Preferred Stock or the unexercised
or unconverted portion of any other securities of the Corporation), 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 D Preferred Stock with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by a holder and such holder's affiliates of more than 4.99% of the
outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13D-G thereunder, except as otherwise provided in clause
(x) of such proviso. The "PREMIUM AMOUNT" means the product of the Stated Value,
multiplied by .06, multiplied by (N/365), where "N" equals the number of days
elapsed from the Issue Date to and including the Conversion Date (as defined in
Section (6)(d)).
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(b) CONVERSION PRICE. The Conversion Price shall be $1.00
(subject to adjustment for stock splits, stock dividends and similar events)
(the "CONVERSION PRICE"). The Conversion Price shall be subject to adjustments
pursuant to the provisions of Section 6(c) below.
(c) ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price
shall be subject to adjustment from time to time as follows:
(i) ADJUSTMENT DUE TO STOCK SPLIT, STOCK DIVIDEND,
ETC. If, at any time when Series D Preferred Stock is issued and outstanding,
the number of outstanding shares of Common Stock is increased or decreased by a
stock split, stock dividend, combination, reclassification, or other similar
event, then the Conversion Price shall be proportionately adjusted to give
effect to the stock split, stock dividend, combination, reclassification or
other similar event. In such event, the Corporation shall notify the Transfer
Agent of such change on or before the effective date thereof.
(ii) ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC.
If, at any time when Series D Preferred Stock is issued and outstanding, there
shall be any merger, consolidation, exchange of shares, recapitalization,
reorganization, sale of assets or other similar event (other than a transaction
described in Section 7(b)), as a result of which shares of Common Stock of the
Corporation shall be changed into the same or a different number of shares of
another class or classes of stock or securities of the Corporation or another
entity, or in case of any sale or conveyance of all or substantially all of the
assets of the Corporation other than in connection with a plan of complete
liquidation of the Corporation, then the holders of Series D Preferred Stock
shall thereafter have the right to receive upon conversion of the Series D
Preferred Stock, upon the basis and upon the terms and conditions specified
herein and in lieu of the shares of Common Stock immediately theretofore
issuable upon conversion, such stock, securities or assets which the holders of
Series D Preferred Stock would have been entitled to receive in such transaction
had the Series D Preferred Stock been converted in full immediately prior to
such transaction (without regard to any limitations on conversion contained
herein), and in any such case appropriate provisions shall be made with respect
to the rights and interests of the holders of Series D Preferred Stock to the
end that the provisions hereof (including, without limitation, provisions for
adjustment of the Conversion Price and of the number of shares of Common Stock
issuable upon conversion of the Series D Preferred Stock) shall thereafter be
applicable, as nearly as may be practicable in relation to any securities or
assets thereafter deliverable upon the conversion of Series D Preferred Stock.
The Corporation shall not effect any transaction described in this subsection
(ii) unless (A) it first gives, to the extent practical, prior written notice of
the record date of the special meeting of stockholders to approve, or if there
is no such record date, the consummation of, such merger, consolidation,
exchange of shares, recapitalization, reorganization, sale of assets or other
similar event to the extent required by law (during which time the holders of
Series D Preferred Stock shall be entitled to convert the Series D Preferred
Stock), which notice shall be given concurrently with the first public
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announcement of such transaction and (B) the resulting successor or acquiring
entity (if not the Corporation) and, if an entity different from the successor
or acquiring entity, the entity whose capital stock or assets the holders of
Common Stock of the Corporation are entitled to receive as a result of such
merger, consolidation, exchange of shares, recapitalization, reorganization,
sale of assets or other similar event, assumes by written instrument all of the
obligations of these Articles of Amendment, including this subsection (ii). The
above provisions shall similarly apply to successive consolidations, mergers,
sales, transfers or share exchanges.
(iii) ADJUSTMENT DUE TO DISTRIBUTION. Subject to
Section 3, if the Corporation shall declare or make any distribution of its
assets (or rights to acquire its assets) to holders of Common Stock as a
dividend, stock repurchase, by way of return of capital or otherwise (including
any dividend or distribution to the Corporation's shareholders in cash or shares
(or rights to acquire shares) of capital stock of a subsidiary (i.e., a
spin-off)) (a "DISTRIBUTION"), then the holders of Series D Preferred Stock
shall be entitled, upon any conversion of shares of Series D 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 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.
(iv) ADJUSTMENTS TO CONVERSION PRICE UPON ISSUANCE OF
PURCHASE RIGHTS. Subject to Section 3, if at any time when any Series D
Preferred Stock is issued and outstanding, the Corporation issues any
convertible securities 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 D 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 D Preferred Stock (without regard to any limitations on
conversion contained herein) 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.
(d) MECHANICS OF CONVERSION. In order to convert Series D
Preferred Stock into full shares of Common Stock, a holder of Series D Preferred
Stock shall: (i) submit a copy of the fully executed notice of conversion in the
form attached hereto as Exhibit B ("NOTICE OF CONVERSION") to the Corporation by
facsimile dispatched prior to Midnight, New York City time (the "CONVERSION
NOTICE DEADLINE"), on the date specified therein as the Conversion Date (or by
other means resulting in, or reasonably expected to result in, notice to the
Corporation on the Conversion Date) to the office of the Corporation or its
designated Transfer Agent for the Series D Preferred Stock, which notice shall
specify the number of shares of Series D Preferred Stock to be converted, the
applicable Conversion Price and a calculation of the number of shares of
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Common Stock issuable upon such conversion (together with a copy of the first
page of each certificate to be converted); and (ii) surrender the original
certificates representing the Series D Preferred Stock being converted (the
"PREFERRED STOCK CERTIFICATES"), duly endorsed, along with a copy of the Notice
of Conversion to the office of the Corporation or the Transfer Agent for the
Series D Preferred Stock as soon as practicable thereafter. The Corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such conversion, unless either the Preferred Stock
Certificates are delivered to the Corporation or its Transfer Agent as provided
above, or the holder notifies the Corporation or its Transfer Agent that such
certificates have been lost, stolen or destroyed (subject to the requirements of
subparagraph (i) below). In the case of a dispute as to the calculation of the
Conversion Price, the Corporation shall promptly issue such number of shares of
Common Stock that are not disputed in accordance with subparagraph (ii) below.
The Corporation shall submit the disputed calculations to its outside accountant
via facsimile within two business days of receipt of the Notice of Conversion.
The accountant shall audit the calculations and notify the Corporation and the
holder of the results no later than 48 hours from the time it receives the
disputed calculations. The accountant's calculation shall be deemed conclusive
absent manifest error.
(i) LOST OR STOLEN CERTIFICATES. Upon receipt by the
Corporation of evidence of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing shares of Series D Preferred Stock,
and (in the case of loss, theft or destruction) of indemnity reasonably
satisfactory to the Corporation, and upon surrender and cancellation of the
Preferred Stock Certificate(s), if mutilated, the Corporation shall execute and
deliver new Preferred Stock Certificate(s) of like tenor and date.
(ii) DELIVERY OF COMMON STOCK UPON CONVERSION. Upon
the surrender of certificates as described above together with a Notice of
Conversion, the Corporation shall issue and, within three business days after
such surrender (or, in the case of lost, stolen or destroyed certificates, after
provision of agreement and indemnification pursuant to subparagraph (i) above)
(the "DELIVERY PERIOD"), deliver (or cause its Transfer Agent to so issue and
deliver) in accordance with the terms hereof and the Purchase and Exchange
Agreement (including, without limitation, in accordance with the requirements of
Section 2(g) of the Purchase and Exchange Agreement) to or upon the order of the
holder (A) that number of shares of Common Stock for the shares of Series D
Preferred Stock converted as shall be determined in accordance herewith and (B)
a certificate representing the balance of the shares of Series D Preferred Stock
not converted, if any. In addition to any other remedies available to the
holder, including actual damages and/or equitable relief, the Corporation shall
pay to a holder $2,000 per day in cash for each day beyond a three-day grace
period following the Delivery Period that the Corporation fails to deliver
Common Stock (a "DELIVERY DEFAULT") issuable upon surrender of shares of Series
D Preferred Stock with a Notice of Conversion until such time as the Corporation
has delivered all such Common Stock (the "DELIVERY DEFAULT PAYMENTS"); PROVIDED,
HOWEVER, in the event of a failure by the Corporation to deliver shares upon
conversion as a result of a Conversion Default (as defined below), the holder
shall not be entitled to receive
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Delivery Default Payments but shall be entitled to receive Conversion Default
Payments in accordance with Section 6(e). Such Delivery Default Payments shall
be paid to such holder by the fifth day of the month following the month in
which it has accrued or, at the option of the holder (by written notice to the
Corporation by the first day of the month following the month in which it has
accrued), shall be convertible into Common Stock in accordance with the terms of
this Section 6.
In lieu of delivering physical certificates
representing the Common Stock issuable upon conversion, provided the
Corporation's Transfer Agent is participating in the Depository Trust Company
("DTC") Fast Automated Securities Transfer ("FAST") program, upon request of the
holder and its compliance with the provisions contained in Section 6(a) and in
this Section 6(d), the Corporation shall use its best efforts to cause its
Transfer Agent to electronically transmit the Common Stock issuable upon
conversion to the holder by crediting the account of holder's Prime Broker with
DTC through its Deposit Withdrawal Agent Commission ("DWAC") system. The time
periods for delivery and penalties described in the immediately preceding
paragraph shall apply to the electronic transmittals described herein.
(iii) NO FRACTIONAL SHARES. If any conversion of
Series D Preferred Stock would result in a fractional share of Common Stock or
the right to acquire 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 D Preferred Stock shall be the next higher number of
shares.
(iv) CONVERSION DATE. The "CONVERSION DATE" shall be
the date specified in the Notice of Conversion, provided that the Notice of
Conversion is submitted by facsimile (or by other means resulting in, or
reasonably expected to result in, notice) to the Corporation or its Transfer
Agent before Midnight, New York City time, on the date so specified, otherwise
the Conversion Date shall be the first business day after the date so specified
on which the Notice of Conversion is actually received by the Corporation or its
Transfer Agent. The person or persons entitled to receive the shares of Common
Stock issuable upon conversion shall be treated for all purposes as the record
holder or holders of such securities as of the Conversion Date and all rights
with respect to the shares of Series D Preferred Stock surrendered shall
forthwith terminate except the right to receive the shares of Common Stock or
other securities or property issuable on such conversion and except that the
holders' preferential rights as holders of Series D Preferred Stock shall
survive to the extent the Corporation fails to deliver such securities.
(e) RESERVATION OF SHARES. A number of shares of the
authorized but unissued Common Stock sufficient to provide for the conversion of
the Series D Preferred Stock outstanding shall at all times be reserved by the
Corporation, free from preemptive rights, for such conversion or exercise. As of
the date of issuance of the Series D Preferred Stock, 5,794,796 authorized and
unissued shares of Common Stock have been duly reserved for
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issuance upon conversion of the Series D Preferred Stock (the "RESERVED
AMOUNT"). The Reserved Amount shall be increased from time to time in accordance
with the Corporation's obligations pursuant to Section 4(e) of the Purchase and
Exchange Agreement. In addition, if the Corporation shall issue any securities
or make any change in its capital structure which would change the number of
shares of Common Stock into which each share of the Series D Preferred Stock
shall be convertible, the Corporation shall at the same time also make proper
provision so that thereafter there shall be a sufficient number of shares of
Common Stock authorized and reserved, free from preemptive rights, for
conversion of the outstanding Series D Preferred Stock.
If at any time a holder of shares of Series D Preferred Stock
submits a Notice of Conversion, and the Corporation does not have sufficient
authorized but unissued shares of Common Stock available to effect such
conversion in accordance with the provisions of this Section 6 (a "CONVERSION
DEFAULT"), subject to Section 10, the Corporation shall issue to the holder all
of the shares of Common Stock which are available to effect such conversion. The
number of shares of Series D Preferred Stock included in the Notice of
Conversion which exceeds the amount which is then convertible into available
shares of Common Stock (the "EXCESS AMOUNT") shall, notwithstanding anything to
the contrary contained herein, not be convertible into Common Stock in
accordance with the terms hereof until (and at the holder's option at any time
after) the date additional shares of Common Stock are authorized by the
Corporation to permit such conversion, at which time the Conversion Price in
respect thereof shall be the lesser of (A) the Conversion Price on the
Conversion Default Date (as defined below) and (B) the Conversion Price on the
Conversion Date elected by the holder in respect thereof. The Corporation shall
use its best efforts to effect an increase in the authorized number of shares of
Common Stock as soon as possible following the earlier of (x) such time that a
holder of Series D Preferred Stock notifies the Corporation or that the
Corporation otherwise becomes aware that there are or likely will be
insufficient authorized and unissued shares to allow full conversion thereof and
(y) a Conversion Default. In addition, the Corporation shall pay to the holder
payments ("CONVERSION DEFAULT PAYMENTS") for a Conversion Default in the amount
of (a) .24, multiplied by (b) the sum of the Stated Value plus the Premium
Amount per share of Series D Preferred Stock held by such holder through the
Authorization Date (as defined below), multiplied by (c) (N/365), where N = the
number of days from the day the holder submits a Notice of Conversion giving
rise to a Conversion Default (the "CONVERSION DEFAULT DATE") to the date (the
"AUTHORIZATION DATE") that the Corporation authorizes a sufficient number of
shares of Common Stock to effect conversion of the full number of shares of
Series D Preferred Stock. The Corporation shall send notice to the holder of the
authorization of additional shares of Common Stock, the Authorization Date and
the amount of holder's accrued Conversion Default Payments. The accrued
Conversion Default Payment for each calendar month shall be paid in cash or
shall be convertible into Common Stock at the applicable Conversion Price, at
the holder's option, as follows:
(i) In the event the holder elects to take such
payment in cash, cash
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payment shall be made to the holder by the fifth day of the month following the
month in which it has accrued; and
(ii) In the event the holder elects to take such
payment in Common Stock, the holder may convert such payment amount into Common
Stock at the Conversion Price (as in effect at the time of Conversion) at any
time after the fifth day of the month following the month in which it has
accrued in accordance with the terms of this Section 6 (so long as there is then
a sufficient number of authorized shares of Common Stock).
The holder's election shall be made in writing to the
Corporation at any time prior to 9:00 p.m., New York City Time, on the third day
of the month following the month in which Conversion Default payments have
accrued. If no election is made, the holder shall be deemed to have elected to
receive cash. Nothing herein shall limit the holder's right to pursue actual
damages (to the extent in excess of the Conversion Default Payments) for the
Corporation's failure to maintain a sufficient number of authorized shares of
Common Stock, and each holder shall have the right to pursue all remedies
available at law or in equity (including a decree of specific performance and/or
injunctive relief).
(f) NOTICE OF CONVERSION PRICE ADJUSTMENTS. Upon the
occurrence of each adjustment or readjustment of the Conversion Price pursuant
to this Section 6, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of Series D 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 D Preferred Stock, furnish or cause
to be furnished 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 D Preferred Stock.
(g) STATUS AS STOCKHOLDERS. Upon submission of a Notice of
Conversion by a holder of Series D Preferred Stock, (i) the shares covered
thereby (other than the shares, if any, which cannot be issued because their
issuance would exceed such holder's allocated portion of the Reserved 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 D 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 these Articles of Amendment.
Notwithstanding the foregoing, if a holder has not received certificates for all
shares of Common Stock prior to the 10th business day after the expiration of
the Delivery Period with respect to a conversion of shares of Series D 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
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Corporation) the holder shall regain the rights of a holder of such shares of
Series D Preferred Stock with respect to such unconverted shares of Series D
Preferred Stock and the Corporation shall, as soon as practicable, return such
unconverted shares of Series D Preferred Stock to the holder or, if such shares
of Series D Preferred Stock have not been surrendered, adjust its records to
reflect that such shares of Series D Preferred Stock have not been converted. In
all cases, the holder shall retain all of its rights and remedies (including,
without limitation, (i) the right to receive Delivery Default Payments pursuant
to Section 6(d) to the extent required thereby for such Delivery Default and any
subsequent Delivery Default and (ii) the right to have the Conversion Price with
respect to subsequent conversions determined in accordance with Section 6(e) for
the Corporation's failure to convert the Series D Preferred Stock .
(7) AUTOMATIC CONVERSION
(a) So long as (i) all of the shares of Common Stock issuable
upon conversion of all outstanding shares of Series D Preferred Stock are then
(x) authorized and reserved for issuance, (y) registered for re-sale under the
Securities Act of 1933, as amended, by the holders of the Series D Preferred
Stock (or may otherwise be resold publicly without registration or restriction
as to volume) and (z) eligible to be traded on Nasdaq, the NYSE, the AMEX or
Nasdaq SmallCap, and (ii) there is not then a continuing Mandatory Redemption
Event, each share of Series D Preferred Stock issued and outstanding on the
third anniversary of the Issue Date (the "AUTOMATIC CONVERSION DATE") (together
with the Premium Amount and any Conversion Default Payments, Delivery Default
Payments and other amounts due and payable by the Corporation pursuant to
Section 2(c) of the Registration Rights Agreement) automatically shall be
converted into shares of Common Stock on such date at the then effective
Conversion Price in accordance with, and subject to, the provisions of Section 6
hereof (the "AUTOMATIC CONVERSION"). The Automatic Conversion Date shall be
delayed by one Trading Day for each Trading Day occurring prior thereto and
prior to the full conversion of the Series D Preferred Stock that (i) any
Registration Statement required to be filed and to be effective pursuant to the
Registration Rights Agreement is not effective or sales of all of the
Registrable Securities (as defined in the Registration Rights Agreement)
otherwise cannot be made thereunder during the Registration Period (whether by
reason of the Corporation's failure to properly supplement or amend the
Prospectus in accordance with the terms of the Registration Rights Agreement or
otherwise), (ii) any Mandatory Redemption Event exists, without regard to
whether any cure periods shall have run, or (iii) the Corporation is in breach
of any of its obligations pursuant to Section 4(e) of the Purchase and Exchange
Agreement. The Automatic Conversion Date shall be the Conversion Date for
purposes of determining the Conversion Price and the time within which
certificates representing the Common Stock must be delivered to the holders.
(b) In the event that the Corporation enters into a
consolidation, merger or
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other business combination with any Person or Persons when the Corporation is
not the Survivor and (i) the Survivor is subject to the SEC Filing Requirements,
(ii) the consideration to be paid to the stockholders of the Corporation in such
transaction consists solely of capital stock of the Survivor ("SURVIVOR CAPITAL
STOCK"), (iii) the Average Price is equal to or greater than the product of (x)
two, multiplied by (y) the Conversion Price in effect on the Measurement Date,
and (iv) the Closing Bid Price of the Common Stock on the Trading Day
immediately preceding the Measurement Date is equal to or greater than the
Average Price, then, so long as the Survivor Capital Stock is then listed on
Nasdaq, the NYSE or the AMEX and the resale thereof by Holder has been
registered under the Securities Act or such stock may be resold by Holder
without registration or restriction (including volume limitations) under the
Securities Act, all shares of Series D Preferred Stock then outstanding
(together with the Premium Amount and any Conversion Default Payments, Delivery
Default Payments and other amounts due and payable by the Corporation pursuant
to Section 2(c) of the Registration Rights Agreement) automatically shall be
converted on the closing date for such transaction into the number of shares of
Survivor Capital Stock that the holders thereof would have received in such
transaction if they had converted such shares in full into Common Stock in
accordance with, and subject to, the provisions of Section 6, at the Conversion
Price then in effect. The Corporation shall not effect any transaction described
in this Section 7(b) unless (x) it first gives, to the extent practical, prior
written notice of the record date of the special meeting of stockholders to
approve, or if there is no such record date, the consummation of, such
transaction, to the extent required by law, which notice shall be given
concurrently with the first public announcement of such transaction and (y) the
Survivor assumes by written instrument the obligations of the Corporation under
this Section 7. Holders of Series D Preferred Stock shall be permitted to
convert such stock in accordance with the terms of Section 6 at any time
following receipt of the notice described in clause (x) of the preceding
sentence.
(8) VOTING RIGHTS. The holders of the Series D Preferred Stock have no
voting power whatsoever, except as otherwise provided by the North Carolina
Business Corporation Act ("NCBCA"), in this Section 8, and in Section 9 below.
Notwithstanding the above, the Corporation shall provide each holder of
Series D Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
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 for the purpose of determining shareholders who
are entitled 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
liquidation, dissolution or winding up of the Corporation, the Corporation shall
mail a notice to each holder, at least 10 days prior to the record date
specified therein (or 30 days prior to the consummation of the transaction or
event, whichever is earlier), of the date on which any such record is to be
taken for the purpose of such dividend, distribution, right or other event, and
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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 NCBCA the vote of the holders of the
Series D Preferred Stock, voting separately as a class, is required to authorize
a given action of the Corporation, the affirmative vote or consent of the
holders of at least a majority of the shares of the Series D Preferred Stock
represented at a duly held meeting at which a quorum is present or by unanimous
consent of holders of the shares of Series D Preferred Stock (except as
otherwise may be required under the NCBCA) shall constitute the approval of such
action by the class. To the extent that under the NCBCA holders of the Series D
Preferred Stock are entitled to vote on a matter with holders of Common Stock,
voting together as one class, each share of Series D 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 using the record date for the taking of such vote
of shareholders as the date as of which the Conversion Price is calculated.
Holders of the Series D Preferred Stock shall be entitled to notice of all
shareholder meetings or written consents (and copies of proxy materials and
other information sent to shareholders) with respect to which they would be
entitled to vote, which notice would be provided pursuant to the Corporation's
bylaws and the NCBCA.
(9) PROTECTIVE PROVISIONS. So long as shares of Series D Preferred
Stock are outstanding, the Corporation shall not, without first obtaining the
approval (by vote or written consent, as provided by the NCBCA) of the holders
of at least a majority of the then outstanding shares of Series D Preferred
Stock:
(a) alter, amend or repeal (whether by merger, consolidation
or otherwise) any of the rights, preferences or privileges of the Series D
Preferred Stock or any capital stock of the Corporation so as to affect
adversely the Series D Preferred Stock;
(b) create any Senior Securities;
(c) create any Pari Passu Securities;
(d) increase the authorized number of shares of Series D
Preferred Stock;
(e) issue any Senior Securities or Pari Passu Securities;
(f) increase the par value of the Common Stock, or
(g) do any act or thing not authorized or contemplated by
these Articles of Amendment which would result in taxation of the holders of
shares of the Series D Preferred Stock under Section 305 of the Internal Revenue
Code of 1986, as amended (or any comparable provision of the Internal Revenue
Code as hereafter from time to time amended).
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In the event holders of at least a majority of the then
outstanding shares of Series D Preferred Stock agree to allow the Corporation to
alter or change the rights, preferences or privileges of the shares of Series D
Preferred Stock, pursuant to subsection (a) above, so as to affect the Series D
Preferred Stock, then the Corporation will deliver notice of such approved
change to the holders of the Series D Preferred Stock that did not agree to such
alteration or change (the "DISSENTING HOLDERS") and Dissenting Holders shall
have the right for a period of 30 days to convert pursuant to the terms of these
Articles of Amendment as they exist prior to such alteration or change or
continue to hold their shares of Series D Preferred Stock.
(10) PRO RATA ALLOCATIONS. The Reserved Amount (including any increases
thereto) shall be allocated by the Corporation pro rata among the holders of
Series D Preferred Stock based on the number of shares of Series D Preferred
Stock issued to each holder. Each increase to the Reserved Amount shall be
allocated pro rata among the holders of Series D Preferred Stock based on the
number of shares of Series D Preferred Stock held by each holder at the time of
the increase in the Reserved Amount. In the event a holder shall sell or
otherwise transfer any of such holder's shares of Series D Preferred Stock, each
transferee shall be allocated a pro rata portion of such transferor's Reserved
Amount. Any portion of the Reserved Amount which remains allocated to any person
or entity which does not hold any Series D Preferred Stock shall be allocated to
the remaining holders of shares of Series D Preferred Stock, pro rata based on
the number of shares of Series D Preferred Stock then held by such holders.
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EXHIBIT B
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series D Preferred Stock)
The undersigned hereby irrevocably elects to convert ______ shares of
Series D Preferred Stock, represented by stock certificate No(s). __________
(the "PREFERRED STOCK CERTIFICATES") into shares of common stock ("COMMON
STOCK") of Interactive Magic, Inc., a North Carolina corporation (the
"CORPORATION") according to the conditions of the Articles of Amendment with
respect to the Series D Preferred Stock, 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 and is
delivering herewith such certificates. 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 Corporation shall electronically transmit the Common Stock issuable
pursuant to this Notice of Conversion to the account of the undersigned or its
nominee with DTC through its Deposit Withdrawal Agent Commission system ("DWAC
Transfer").
Name of DTC Prime Broker:___________________________________
Account Number:_____________________________________________
|_| In lieu of receiving shares of Common Stock issuable pursuant to this
Notice of Conversion by way of a DWAC Transfer, the undersigned hereby
requests that the Corporation issue a certificate or certificates for
the number of shares of Common Stock set forth above (which numbers are
based on the Holder's calculation attached hereto) in the name(s)
specified immediately below or, if additional space is necessary, on an
attachment hereto:
Name:_____________________________________
Address:__________________________________
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 D Preferred Stock shall be made pursuant to registration of the
securities under the Securities Act of 1933, as amended (the "ACT"), or pursuant
to an exemption from registration under the Act.
Date of Conversion:_____________________________
Conversion Price:_______________________________
Number of Shares of
Common Stock to be Issued:______________________
Signature:______________________________________
Name:___________________________________________
Address:________________________________________
*The Corporation is not required to issue shares of Common Stock until the
original Series D Preferred Stock Certificate(s) (or evidence of loss, theft or
destruction thereof) to be converted are received by the Corporation or its
Transfer Agent. The Corporation shall issue and deliver shares of Common Stock
to an overnight courier not later than two (2) business days following receipt
of the original Preferred Stock Certificate(s) to be converted, and shall make
payments pursuant to the Articles of Amendment for the number of business days
such issuance and delivery is late.
<PAGE>
INTERACTIVE MAGIC, INC.
215 Southport Drive, Suite 1000
Morrisville, North Carolina 27560
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
---------------
PROXY
---------------
The undersigned hereby appoints Jacob Agam and Michael Pearce, and each
or either of them as proxy holders with power to appoint his substitute and
hereby authorizes the proxy holders to represent and vote, as designated on this
proxy card, all the shares of Common Stock of Interactive Magic, Inc. held of
record by the undersigned on November 30, 1999, at __:__ .m. local time at the
annual meeting of shareholders to be held on December__, 1999, or at any
adjournment thereof.
1. In the election of five directors:
For management's slate, except those Against management's slate ( )
marked out below ( )
Jacob Agam Marc Goldfarb Michael Pearce
W. Joseph McClelland J.W. Stealey
2. To amend the Company's Articles of Incorporation to change its name to
iEntertainment Network, Inc.:
For ( ) Against ( ) Abstain ( )
3. To reserve an additional 1,000,000 shares of common stock under the
Company's 1998 Stock Plan:
For ( ) Against ( ) Abstain ( )
4. To ratify the Series D preferred stock financing of the Company:
For ( ) Against ( ) Abstain ( )
5. To ratify the appointment of Ernst & Young as independent auditors of
the Company for the fiscal year ending December 31, 1999:
For ( ) Against ( ) Abstain ( )
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER, IF NO DIRECTION IS
<PAGE>
MADE, THIS PROXY WILLBE VOTED "FOR" MANAGEMENT'S SLATE OF DIRECTORS AND
PROPOSALS 2-5, AND IN THE DISCRETION OF THE PROXY HOLDERS ON ANY OTHER MATTERS
CONSIDERED AT THE MEETING.
PLEASE PROMPTLY MARK, SIGN, DATE AND RETURN THIS PROXY USING THE
ENCLOSED ENVELOPE.
Signature Date: December __, 1999
Date: December __, 1999
Signature, if held jointly
NOTE: Please sign exactly as name appears hereon. When shares are held
by joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian please give full title as such. If a
corporation, please sign in full corporate name by the President or other
authorized officer. If a partnership, please sign in partnership name by an
authorized partner.
