<PAGE> 1
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to section 240.14a-11(c) or section 240.14a-12
INDENET, INC.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
INDENET, INC.
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ ] 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:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
-----------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
Set forth the amount on which the filing fee is calculated and state how
it was determined.
[x] 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:
$125.00
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2) Form, Schedule or Registration Statement No.:
Schedule 14A (Preliminary Proxy)
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3) Filing Party:
IndeNet, Inc.
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4) Date Filed:
October 24, 1996
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1.
<PAGE> 2
INDENET, INC.
1640 NORTH GOWER STREET
LOS ANGELES, CALIFORNIA 90028
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Notice is hereby given that a Special Meeting of Stockholders of
IndeNet, Inc. (the "Company") will be held at its principal executive offices,
located at 1640 North Gower Street, Los Angeles, California 90028 on Monday,
December 30, 1996, at 1:00 p.m., for the following purpose:
To approve the Company's proposed issuance of (i) shares of the
Company's new Series C Preferred Stock in exchange for most of the
currently outstanding shares of the Company's Series A Preferred Stock,
and (ii) warrants to purchase shares of the Company's Common Stock in
connection with the foregoing exchange of Series A Preferred Stock.
Only holders of the Company's $.001 par value common stock of record at
the close of business on November 5, 1996, will be entitled to notice of and to
vote at the meeting and at any adjournment or adjournments thereof.
BY ORDER OF THE BOARD OF DIRECTORS
Robert W. Lautz, Jr.,
Chief Executive Officer
Los Angeles, California
December 6, 1996
<PAGE> 3
INDENET, INC.
1640 NORTH GOWER STREET
LOS ANGELES, CALIFORNIA 90028
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
December 30, 1996
INTRODUCTION
This Proxy Statement is first sent or given to stockholders on or about
December 6, 1996, in connection with the solicitation of proxies by and on
behalf of IndeNet, Inc. (the "Company"). The proxies solicited hereby are to be
voted at a Special Meeting of Stockholders of the Company to be held at the
Company's principal executive offices, located at 1640 North Gower Street, Los
Angeles, California 90028, on Monday, December 30, 1996, at 1:00 p.m. (the
"Special Meeting"). The purpose of the Special Meeting is, as stated in the
Notice of Special Meeting, to consider and vote upon the proposed issuance of
shares of the Company's new Series C Preferred Stock (the "Series C Preferred")
to the holders of, and in exchange for, most of the currently outstanding shares
of the Company's Series A Preferred Stock (the "Series A Preferred") and, in
connection with such exchange, the issuance of certain warrants to purchase
shares of the Company's $.001 par value common stock (the "Common Stock"). The
foregoing exchange and issuance of warrants is herein collectively referred to
as the "Exchange." No business other than a vote on the Exchange will be
conducted at the Special Meeting.
The securities entitled to vote at the Special Meeting consist of all
of the issued and outstanding shares of Common Stock. The close of business on
November 5, 1996 has been fixed by the Board of Directors of the Company as the
record date for the Special Meeting. Only stockholders of record as of the
record date may vote at the Special Meeting. As of the record date, there were
17,093,683 shares of Common Stock issued and outstanding.
Each stockholder will be entitled to one vote for each share of Common
Stock held as of the record date. The presence at the Special Meeting of the
holders of an amount of shares of Common Stock and proxies representing the
right to vote a majority of the number of shares of the Common Stock outstanding
as of the record date will constitute a quorum for transacting business. The
affirmative vote of the holders of a majority of the outstanding Common Stock
will be required to approve the action taken at the meeting. Accordingly,
abstentions and indications by brokers that they do not have authority to vote
certain shares will have the effect of negative votes.
It is contemplated that the solicitation of proxies will be made
primarily by mail. Should it, however, appear desirable to do so in order to
ensure adequate representation of shares at the Special Meeting, officers,
agents and employees of the Company may communicate with stockholders, banks,
brokerage houses and others by telephone, facsimile, or in person to request
that proxies be furnished. All expenses incurred in connection with this
solicitation will be borne
1.
<PAGE> 4
by the Company. In following up the original solicitation of proxies by mail,
the Company may make arrangements with brokerage houses and other custodians,
nominees and fiduciaries to send proxies and proxy materials to the beneficial
owners of the shares eligible to vote at the Special Meeting and will reimburse
them for their expenses in so doing. The Company has no present plans to hire
special employees or paid solicitors to assist in obtaining proxies, but
reserves the option of doing so if it should appear that a quorum otherwise
might not be obtained.
A form of proxy is enclosed for your use. The shares represented by
each properly executed unrevoked proxy will be voted as directed by the
stockholder executing the proxy. If no direction is made, the shares represented
by each properly executed unrevoked proxy will be voted "FOR" the Exchange.
Any proxy given may be revoked at any time prior to the exercise
thereof by filing with Secretary of the Company an instrument revoking such
proxy or by the filing of a duly executed proxy bearing a later date. Any
stockholder present at the meeting who has given a proxy may withdraw it and
vote his or her shares in person if such stockholder so desires.
SECURITY OWNERSHIP OF MANAGEMENT AND OTHER
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock, as of December 2, 1996, of (i) each
person known by the Company to beneficially own 5% or more of the outstanding
Common Stock, (ii) each current director and nominee for director of the
Company, (iii) the Company's Chief Executive Officer and each executive officer
of the Company whose compensation during the fiscal year ended March 31, 1996
exceeded $100,000, and (iv) all current directors and executive officers as a
group. Such information is based upon information furnished by each such person
and is correct to the best knowledge of the Company. Under the rules of the
Securities and Exchange Commission, a person is deemed to beneficially own
certain if shares if the person holds rights to acquire such shares within 60
days through the exercise of stock options or otherwise. Unless otherwise
stated, the indicated persons have sole voting and investment power with respect
to the shares listed. The indicated percentages are based upon the number of
shares of Common Stock outstanding as of December 2, 1996, plus, where
applicable, the number of shares that the indicated person or group had a right
to acquire within 60 days of such date.
<TABLE>
<CAPTION>
Common
Stock Amount of
Underlying Total
Name and Address of Common Stock Exercisable Beneficial Percent of
Beneficial Owner Current Owned Options Ownership Class
-------------------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Robert W. Lautz, Jr. 713,505 100,000 813,505 __%
1640 North Gower Street
Los Angeles, CA 90028
Thomas H. Baur 1,587,030 100,000 1,687,030 __%
110 West Hubbard Street
Chicago, IL 60610
Robert E. Derham 56,780 235,000 291,780 __%
110 West Hubbard Street
Chicago, IL 60610
</TABLE>
2.
<PAGE> 5
<TABLE>
<S> <C> <C> <C> <C>
Cary S. Fitchey 94,640 25,000 119,640 __%
1640 North Gower Street
Los Angeles, CA 90028
William A. Kunkel 41,633 25,000 66,633 __%
554 Valley Road
New Canaan, CT 06940
Andre A. Blay 188,195 45,833 234,028 __%
40300 Fairway III Drive
Northville, MI 48167
William D. Killion 1,530,000 -0- 1,530,000 __%
1640 North Gower Street
Los Angeles, CA 90028
Graeme R. Jenner 71,101 200,000 271,101 __%
1640 North Gower Street
Los Angeles, CA 90028
Richard L. Schleufer 53,427 125,000 178,427 __%
5475 Tech Center Dr.
Suite 300
Colorado Springs, CL 80919
Lewis K. Eisaguirre (1) 71,724 80,000 151,724 __%
1640 North Gower Street
Los Angeles, CA 90028
All Directors and Officers as a 4,408,035 935,833 5,343,868 __%
Group (10 Persons)
</TABLE>
- -----------------
(1) Mr. Eisaguirre resigned as an officer and a Director of the Company
effective March 15, 1996.
PROPOSAL TO AUTHORIZE ISSUANCE
OF SERIES C PREFERRED STOCK
AND WARRANTS
BACKGROUND
On April 26, 1996, the Company sold 1,200 shares of its Series A
Preferred to 16 off-shore investors in an offering that was exempt from
registration pursuant to Regulation S promulgated under the U.S. Securities Act
of 1933, as amended. The purchase price of each share of Series A Preferred was
$10,000.
Pursuant to the Certificate of Designation of Series A Preferred Stock,
400 shares of Series A Preferred were convertible into Common Stock at any time
after June 25, 1996, an additional 400 shares of Series A Preferred were
convertible at any time after July 25, 1996, and the remaining 400 shares of
Series A Preferred were convertible into Common Stock at any time after August
24, 1996. Accordingly, pursuant to the Certificate of Designation of Series A
Preferred, all shares of Series A Preferred are currently convertible at the
option of the purchasers thereof into shares of Common Stock at a conversion
price equal, in general, to the lesser of (x) $7.00 or (y) 85% of the average
closing bid price of the
3.
<PAGE> 6
Common Stock for the five trading days immediately preceding the date on which
the shares are submitted for conversion. The conversions may be effected by
delivery of a written conversion notice to the Company and its transfer agent.
All shares of Common Stock issuable upon conversion of the Series A Preferred
have been registered with the Securities and Exchange Commission for resale by
the issuees of such shares.
In connection with the purchase of the Series A Preferred, each
investor entered into a Regulation S Securities Subscription Agreement. Because
the Series A Preferred is convertible into Common Stock at a discount to the
market price of the Common Stock at the time the election to convert is made
(rather than at a conversion price that is fixed at the time of the issuance of
the Series A Preferred), each Series A Preferred investor agreed in its
subscription agreement that it would not enter into any put option, short
position or other similar instrument or position for the intended purpose of
lowering the price at which the Series A Preferred is convertible into Common
Stock. (A short position is created when an investor borrows stock in order to
sell it, figuring the price of the stock will decline. An investor is in a short
position until he acquires the stock, by purchase or conversion of convertible
stock, to repay the lender.) The foregoing limitation on short positions is
contained in section 2 of each of the subscription agreements. The Company's
agreement with its transfer agent further provided that the transfer agent would
not convert the Series A Preferred into shares of Common Stock if there is a
change in section 2 of the subscription agreements.
On August 6, 1996 the Company announced that it would no longer convert
the Series A Preferred into shares of Common Stock. The Company took this action
as a result of, what it believed to be, highly unusual and suspicious trading
activity in its Common Stock, including the significant increase in short
positions in the Common Stock and a significant increase in sell orders. The
closing sales price of the Common Stock on April 26, 1996 was $6.88 per share;
the closing sales price on the day before the Company made the foregoing
announcement was $2.31 per share. As a result of the decrease in the trading
price of the Common Stock, the holders of the Series A Preferred would have been
entitled to receive 4,308,017 shares of Common Stock on August 6, 1996, or
2,444,878 more than could have been issued based on the April 26, 1996 price.
Prior to the Company's actions on August 6, 1996, a total of 179 shares (or
$1,790,000 of the initial $12,000,000 aggregate purchase price of the Series A
Preferred) had been converted into 664,303 shares of Common Stock. The Company
took the foregoing action because it believed that certain purchasers of the
Series A Preferred had violated the terms of the subscription agreements.
Following the Company's action to prevent further conversions of the
Series A Preferred, the Company held negotiations with purchasers of the Series
A Preferred to convert the Series A Preferred into a security that was not
immediately convertible into Common Stock and that had a more predictable
conversion price. On September 30, 1996, the Company reached an agreement with
the holders (the "Holders") of 771 of the Series A Preferred (or 76% of the
remaining outstanding shares of the Series A Preferred) to effect an exchange of
at least 80% of the shares of Series A Preferred held by the Holders into shares
of a new series of the Company's preferred stock. The new series was designated
as "Series C Preferred Stock" (the "Series C Preferred").
The Company has, to date, been unable to settle the dispute regarding
the conversion of the Series A Preferred with the owners of 250 shares of the
Series A Preferred
4.
<PAGE> 7
(the "Dissenting Investors"). One of the Dissenting Investors, the owner of 60
shares of Series A Preferred, has filed a lawsuit against the Company to enforce
the conversion rights contained in the Series A Certificate of Designation. The
Company expects that other lawsuits will be initiated by either the Company or
the remaining Dissenting Investors unless the parties agree to an exchange
similar to that agreed to by the Holders or unless the parties are otherwise
able to resolve their dispute in the near future. Although the Company intends
to vigorously enforce its rights in the foregoing lawsuit and to continue its
settlement discussions with all of the Dissenting Investors, no assurance can be
given that the Company will be successful in the lawsuit or that it will be able
to successfully resolve the conversion dispute with the Dissenting Investors.
SERIES C PREFERRED
Pursuant to the authority vested in the Board of Directors under the
Company's Certificate of Incorporation, the Board has established the Series C
Preferred and has filed with the Secretary of State of Delaware the Certificate
of Designation of Series C Preferred Stock of IndeNet, Inc. (the "Series C
Certificate of Designation"). A copy of the Series C Certificate of Designation
is attached hereto as Appendix A. No shares of Series C Preferred have yet been
issued, and no shares will be issued unless the stockholders approve the
Exchange at the Special Meeting. The following is a summary of the principal
terms of the Series C Preferred and a summary comparison between Series A
Preferred and the Series C Preferred of such principal terms:
1. Designation and Amount. The Company has designated 1,200 shares of
its preferred stock as Series C Preferred. The Series C Preferred has a par
value of $.0001 per share, an original issue price of $10,000 per share, and,
commencing on January 1, 1997, an accretion rate of 8% per annum.
The Company has also designated 1,200 shares as Series A Preferred,
which shares also have a $.0001 par value and an original issue price of $10,000
per share. The accretion rate of the Series A Preferred is 6% per annum.
2. Rank. The Series C Preferred will rank on a parity with the Series A
Preferred and senior to the Common Stock, in each case as to distributions of
assets upon liquidation, dissolution or winding up of the Company.
3. Dividends. The Series C Preferred will bear no dividends. The Series
A Preferred also bears no dividends.
4. Liquidation Preference. In the event of liquidation, dissolution or
winding up of the Company. The Series C Preferred will be entitled to receive,
in preference to the Common Stock and any other stock junior to the Series C
Preferred, an amount equal to the sum of the original issue price ($10,000 per
share) plus the accretion. At each holder's option, the sale of all or
substantially all of the assets of the Company to a private entity, the common
stock of which is not publicly traded, may be deemed to be a liquidation of the
Company.
The liquidation preference of the Series A Preferred is substantially
similar to that of the Series C Preferred.
5.
<PAGE> 8
5. Conversion. The Series C Preferred is not convertible into Common
Stock until April 1, 1997. Commencing on April 1, 1997, during each two-week
period thereafter, each Holder will be entitled to convert up to 5% of the
aggregate number of shares of Series C Preferred issued to such Holder in the
Exchange (the conversion of fractional shares is permitted if necessary to
convert the maximum amount allowed). Shares not converted during any two- week
period may be converted later, provided that no more than 10% of the Holder's
shares may be converted during any two-week period. In the event that the
closing bid price of the Common Stock, as published by The Nasdaq Stock Market,
exceeds $7.00 per share for any five consecutive trading days, the rate at which
the shares of Series C Preferred may be converted will thereafter double to 10%
per two-week period, and the aggregate maximum conversion rate per two week
period will double to 20%. The number of shares of Common Stock issuable upon
the conversion of a share of Series C Preferred Stock (the "Conversion Rate") is
equal to (x) the sum of the original issue price of the shares ($10,000) and the
accretion (at 8% per annum beginning January 1, 1997) through the conversion
date, (y) divided by $5.00. The $5.00 price is subject to adjustment for stock
splits, stock dividends, reorganizations and other similar events.
But for the Company's actions to prevent conversions, all of the shares
of Series A Preferred would be currently convertible into shares of Common Stock
at a conversion price equal, in general, to the lesser of (x) $7.00 or (y) 85%
of the average closing bid price of the Common Stock for the five trading days
immediately preceding the date on which the shares are submitted for conversion.
Accordingly, unlike the Series C Preferred, the Series A Preferred is not
limited in the number of shares that can be converted at any time, nor is the
conversion price fixed. However, after a total of 2,394,605 shares of Common
Stock are issued upon the conversion of the Series A Preferred, the Company has
the right to redeem for cash all shares thereafter tendered for conversion. The
Series C Preferred has no such limitation.
6. Redemption by the Company. Until March 31, 1997, the Company may, at
its option, redeem up to 50% of the Series C Preferred held by each Holder.
Should the Company desire to redeem more than 50% of a Holder's shares, such
additional redemption shall require the Holder's consent.
The redemption price for each share of Series C Preferred will be the
original issue price ($10,000) plus the accretion (at 8%) through the date of
redemption. The redemption price is payable in cash. As additional consideration
for such a redemption, in addition to the cash redemption price, the Company is
obligated to issue to each Holder warrants to purchase a number of shares of
Common Stock equal to the redemption price divided by $5.00. The warrants will
have a five-year term and an exercise price of $7.00 per share.
Prior to April 27, 1997, the Company's right to redeem any shares of
Series A Preferred is limited to redeeming shares of Series A Preferred that are
tendered for conversion. Such redemption right must be exercised by the Company
within one business day after it receives notice of conversion, otherwise the
redemption right with respect to the tendered shares expires. Commencing on
April 27, 1997, the Company has the rights to redeem some or all of the
outstanding shares of Series A Preferred at a redemption price that varies based
on the time such shares are redeemed. In general, the redemption price is 130%
of the Stated Value during the first six-month redemption period, 125% of the
Stated Value during the next six-month period, 120% of the Stated Value during
the following six-month period, and 115% of the Stated Value thereafter. The
"Stated Value" of the Series A Preferred is the original issue price ($10,000
per share) plus the accretion (at 6%) through the date of redemption.
6.
<PAGE> 9
7. Redemption/Conversion at Request of Holder. Beginning on October 1,
1997 and continuing during each of the four calendar months through January 31,
1998, each Holder shall have the non-cumulative right to require the Company to
redeem up to 25% of such Holder's initial allocation of Series C Preferred. If a
Holder does not during any of the four months cause the Company to redeem that
month's entire 25% allocation, the redemption rights with respect to such shares
shall thereafter expire. The redemption price for such redemptions (the
"Required Redemption Price") shall be 105% of the sum of the original issue
price plus accretion through the redemption date.
The Required Redemption Price is payable in cash. However, the Required
Redemption Price may be paid in shares of Common Stock if the Company elects to
pay the price in stock or if the Company is financially unable or legally
prohibited from paying the price in cash. If the Required Redemption Price is
paid in Common Stock, the number of shares issuable shall be equal to the
Required Redemption Price divided by the five-day average bid price of the
Common Stock immediately preceding the redemption date.
The holders of the Series A Preferred do not have any rights to require
the Company to redeem any of their shares.
8. Automatic Conversion. On September 30, 1999, each share of Series C
Preferred then outstanding shall be automatically converted into Common Stock at
the Conversion Rate.
The Series A Preferred shall automatically convert into Common Stock on
April 26, 1999 at a conversion price per share equal to lesser of (x) $7.00 or
(y) 85% of the average closing bid price of the Common Stock for the five
trading days immediately prior to April 26, 1999.
9. Voting Rights. Neither the Series C Preferred nor the Series A
Preferred have any voting rights, except to the extent required by the General
Corporation Law of the State of Delaware.
10. Protective Provisions. Without the consent of the holders of 66.67%
of the then outstanding shares of Series C Preferred, the Company may not alter
the rights of the Series C Preferred, create a new class or series of stock
having preference over or on parity with the Series C Preferred, or take any
action that would result in taxation of the holders of the Series C Preferred.
The Series A Preferred has substantially the same protective provisions
as the Series C Preferred.
THE EXCHANGE
Pursuant to Exchange Agreements entered into by the Company and each of
the Holders, the Company has agreed to issue 1.1 shares of Series C Preferred
for each share of Series A Preferred tendered for exchange by the Holders. Each
Holder is required to exchange at least 80% of the number of shares of Series A
Preferred owned by such Holder for shares of Series C Preferred. Of the
remaining 20% of the Series A Preferred, one half may, at the option on each
Holder, be converted into shares of Common Stock at any time up to December 31,
1996,
7.
<PAGE> 10
and the other half may be converted at any time between January 1, 1997 and
March 31, 1997. The conversion price for all such conversions has been fixed at
$3.32.
In addition to receiving shares of Series C Preferred for the shares of
Series A Preferred in the Exchange, the Company has agreed to issue to each of
the Holders a warrant (the "Warrants") to purchase shares of Common Stock at an
exercise price of $5.00 per share. The number of shares that can be purchased
under the Warrants will be equal to approximately one share of Common Stock for
each 10 shares that the Series C Preferred is initially convertible into.
Accordingly, in connection with the Exchange, the Company will issue to the
Holders Warrants to purchase a total of 135,400 shares of Common Stock. The
Warrants are exercisable commencing on April 1, 1997 until September 30, 2001.
The Company has also agreed with each of the Holders to register with
the Securities and Exchange Commission the resale by the Holders of all of the
shares of Common Stock issuable form time to time upon (i) the conversion of the
Series C Preferred and (ii) the exercise of the warrants to be issued in the
Exchange or upon any redemption of the Series C Preferred. Accordingly, the
shares of Common Stock received by the Holders will be freely tradeable.
All documents, stock certificates and warrants required to effect the
Exchange have been deposited into an escrow account by the Company and the
Holders. If the stockholders approve the Exchange at the Special Meeting, the
new shares of Series C Preferred will be issued and the other closing documents
will be released. If the Exchange is not approved by the stockholders, all
documents held in escrow will be returned, and the Exchange will not be
effected. Upon the exchange of the shares of Series A Preferred for the Series C
Preferred, all exchanged shares of Series A Preferred will be cancelled.
In order to facilitate the conversion of the Series C Preferred and the
issuance of the shares of Common Stock upon such conversions, the Company, each
of the Holders and First Union National Bank of Georgia (the "Custodian") have
entered into a Stock Custodian and Disbursement Agreement (the "Custodian
Agreement"). Pursuant to the Custodian Agreement, the Custodian will act as the
Series C Preferred conversion and redemption agent. In order to enable the
Custodian to issue shares of Common Stock upon the conversion or redemption of
the Series C Preferred, the Company has deposited with the Custodian
certificates representing approximately 120% of the number of shares of Common
Stock that would be issuable if the shares of Series C Preferred were to be
exchanged by the Holders at a conversion price of $3.00. The Company and its
transfer agent are required, from time to time at the request of the Custodian,
to replenish the number of Common Stock certificates held by the Custodian. The
Custodian Agreement irrevocably instructs the Custodian to effect all
conversions and redemptions in accordance with the terms of the Certificate of
Designation. The Company has agreed to pay all of the Custodians fees and
expenses, and has agreed to indemnify the Custodian for liabilities that may be
imposed on the Custodian in connection with the performance of its duties under
the Custodian Agreement.
The following table lists the outstanding equity securities of the
Company (a) as of September 30, 1996, (b) on a pro forma basis as if the
Exchange had occurred on September 30, 1996 and all shares of Series A Preferred
that are entitled to be converted in connection with the Exchange had been
converted on such date ("Pro Forma With Exchange"), and (c) on a pro forma basis
as if (i) the Exchange had occurred on September 30, 1996, (ii) all Warrants
issued to the Holders had been exercised on September 30, 1996, and (iii) all
8.
<PAGE> 11
shares of Series C Preferred had been converted into shares of Common Stock on
September 30, 1996 at the designated $5.00 conversion price ("Pro Forma With
Conversion").
9.
<PAGE> 12
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------------------
PRO FORMA PRO FORMA
WITH WITH
EQUITY SECURITIES ACTUAL EXCHANGE CONVERSION(1)
----------------- ------ --------- -------------
<S> <C> <C> <C>
Series A Preferred Stock,
$.0001 par value, 1,200 share authorized............. 1,021 250 250(2)
Series B Preferred Stock,
$.0001 par value, 250,000 shares authorized.......... 216,667 216,667 216,667
Series C Preferred Stock,
$.0001 par value, 1,200 shares authorized............ -0- 742 -0-
Warrants to Purchase Common Stock(3).................. 659,242 807,642 659,242
Common Stock,
$0.001 par value, 100,000,000 authorized............. 16,990,865 17,273,998 18,906,398
</TABLE>
- --------
1 Beginning on October 1, 1997, each Holder will have the right to cause
the Company to redeem the shares of Series C Preferred for cash or, at
the Company's option, in shares of Common Stock. If the Company elects
to pay the redemption price in Common Stock, or if the Company is
financially unable to pay the redemption price in cash, the number of
shares that the Company will have to issue in payment of the redemption
price will be based on the then current market price of the Common
Stock. Since the Company is unable to predict how many shares, if any,
it may issue after October 1, 1997 in connection with any such
redemptions, no information has been included in this table regarding
such potential issuances. However, since the number of shares that the
Company would issue is based on the market price, the number of such
shares could be significant if the market price of the Common Stock is
low at the time of any such redemption.
2 As discussed in "Background" above, Dissenting Investors holding 250
shares of Series C Preferred have not agreed to the Exchange. The
Company currently is unable to estimate the number of shares of Common
Stock, if any, that the Company may ultimately issue to the Dissenting
Investors. The actual number of shares that may in the future be issued
will be determined upon the completion of the pending litigation or
upon any other resolution of the dispute. Accordingly, no information
is included in the table regarding any issuance of Common Stock with
respect to the foregoing 250 shares of Series C Preferred.
3 Does not include vested stock options outstanding as of September 30,
1996 to purchase a total of 1,372,633 shares of Common Stock, which
options were granted to officers, directors and employees of the
Company under the Company's stock option plan.
10.
<PAGE> 13
NASDAQ STOCKHOLDER APPROVAL REQUIREMENTS
The Common Stock is currently traded on the Nasdaq National Market. The
rules of The Nasdaq Stock Market require that the Company obtain stockholder
approval in connection with any private placement of securities if such
securities are convertible into or exercisable for Common Stock at less than
market value and if the total number of shares of Common Stock issuable upon the
conversion equals or exceeds 20% of the number of shares of Common Stock
outstanding before the issuance. Base on the market price in effect on the day
the Series A Preferred was issued, the 1,200 shares of Series A Preferred would
have been convertible into 2,189,781 shares of Common Stock, or 18% of the
Common Stock outstanding before the issuance. In order to prevent the issuance
of more than 2,394,605 shares of Common Stock (or 19.9% of the then outstanding
shares of Common Stock) upon the conversion of the Series A Preferred, the
Company has the power and authority to redeem all shares of Series A Preferred
tendered for redemption after 2,394,605 shares of Common Stock have been issued.
Because of the foregoing limitation on the issuance of more than 2,394,605
shares of Common Stock upon the conversion of the Series A Preferred, the
issuance of the Series A Preferred did not violate the foregoing Nasdaq rule.
However, because of the structure of the proposed Exchange, under certain
circumstances, the conversion of both the Series A Preferred and Series C
Preferred and the exercise of the Warrants may result in the issuance of more
than 20% of the Common Stock outstanding as of April 26, 1996.
The actual number of shares of Common Stock that the Company will
ultimately issue upon the conversion of the Series A Preferred and Series C
Preferred and upon the exercise of the Warrants cannot be presently determined.
In particular, the number of shares of Common Stock that the Company may elect
to issue, or may be required to issue, in payment of the Required Redemption
Price is based on the market price of the shares of Common Stock at that time
and, therefore, cannot be currently estimated. Because the number of shares that
the Company may issue in payment of the Required Redemption Price is based on
the market price, the number of shares issuable will vary inversely with the
market price of the Common Stock. In addition, since the Warrants have an
exercise price ($5.00 per share) that is less than the fair market price of the
Common Stock on April 26, 1996 ($6.88 per share), the number of shares of Common
Stock issued upon the exercise of the Warrants may be added to the total number
of shares of Common Stock issued upon the conversion of the Series A Preferred
and Series C Preferred. Accordingly, the number of shares of Common Stock that
could be issued in connection with the conversion of the Series A Preferred or
as a result of the Exchange could, under certain circumstances, equal to exceed
20% of the number of shares of Common Stock outstanding prior to April 26, 1996.
Therefore, in order to assure continued compliance with the above-referenced
Nasdaq rules, the Company is requesting that the holders of the Common Stock
authorize the Company to enter into the Exchange and to issue and deliver the
Series C Preferred and the Warrants. No further authorization or vote of the
holders of the Common Stock will be sought or required with respect to the
subsequent issuance of Common Stock upon the conversion of the Series C
Preferred or the exercise of the Warrants. The issuance of such shares of Common
Stock may be dilutive to the interests of the holders of the currently
outstanding shares of Common Stock.
In the event that the stockholders do not approve the Exchange, the
Exchange will not be consummated and all outstanding shares of the Series A
Preferred owned by the Holders will remain outstanding. Since the Company has
refused to permit the conversion of the Series A Preferred, the failure by the
stockholders to approve the Exchange would require the Company
11.
<PAGE> 14
to engage in further negotiations with the Holders in an effort to restructure
the terms of the outstanding shares of Series A Preferred. Failure to
successfully renegotiate the terms of the Series A Preferred could result in
protracted litigation between the Company and the Holders of the Series A
Preferred.
The Board of Directors of the Company recommends a vote FOR approval of
the proposal.
INCORPORATION BY REFERENCE OF FINANCIAL AND OTHER INFORMATION
The following information is hereby incorporated into this Proxy
Statement by reference: (a) the financial statements listed on Index to
Consolidated Financial Statements, page F-1, of the Company's Annual Report on
Form 10-KSB for the year ended March 31, 1996 (the "Form 10-KSB"); (b) the
information contained under the caption "Item 6. Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Form 10-KSB;
and (c) the Company's Quarterly Reports on Form 10-QSB for the fiscal quarters
ended June 30, 1996 and September 30, 1996 (collectively, the "Forms 10-QSB").
Copies of the Form 10-KSB and each of the Forms 10-QSB are attached hereto as
Appendix B, Appendix C and Appendix D, respectively.
A representative of BDO Seidman, LLP, the Company's independent
auditors for the year ended March 31, 1996, is expected to attend the Company's
Special Meeting. The representative of BDO Seidman, LLP will have the
opportunity to make a statement, if he or she desires to do so, and will be
available to respond to appropriate questions.
BY ORDER OF THE BOARD OF DIRECTORS
Robert W. Lautz, Jr., Chief Executive Officer
Los Angeles, California
December 6, 1996
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APPENDIX A
CERTIFICATE OF DESIGNATION OF
SERIES C PREFERRED STOCK
OF
INDENET, INC.
It is hereby certified that:
1. The name of the Company (hereinafter called the "Company") is
IndeNet, Inc., a Delaware corporation.
2. The certificate of incorporation of the Company authorizes the
issuance of Ten Million (10,000,000) shares of preferred stock, $.0001 par value
per share, and expressly vests in the Board of Directors of the Company the
authority provided therein to issue any or all of said shares in one (1) or more
series and by resolution or resolutions to establish the designation and number
and to fix the relative rights and preferences of each series to be issued.
3. The Board of Directors of the Company, pursuant to the authority
expressly vested in it as aforesaid, has previously created a Series A Preferred
Stock, $.0001 par value, with 1,200 authorized shares and 1,021 shares
outstanding and a Series B Preferred Stock, $.0001 par value, with 250,000
authorized shares and 216,667 shares outstanding, and has adopted the
resolutions set forth below creating a Series C issue of Preferred Stock.
4. As required by Section 8 of the Certificate of Designation of Series
A Preferred Stock, the holders of at least 66-2/3% of the then outstanding
shares of Series A Preferred Stock, and at least 66-2/3% of the holders of the
outstanding Series A Preferred Stock, have approved the creation of the new
class or series of stock specified in Section 1 below, which approval was
obtained pursuant to Section 228 of the Delaware General Corporation Law. Notice
of the foregoing corporate action was provided to all stockholders of the
Corporation who have not consented in writing to the corporate action.
RESOLVED, that One Thousand Two Hundred (1,200) of the Ten Million
(10,000,000) authorized shares of Preferred Stock of the Company shall be
designated Series C Preferred Stock, $.0001 par value per share, and shall
possess the rights and preferences set forth below:
Section 1. Designation and Amount. The shares of such series shall have
a par value of $.0001 per share and shall be designated as Series C Preferred
Stock (the "Series C Preferred Stock") and the number of shares constituting the
Series C Preferred Stock shall be One Thousand Two Hundred (1,200). The Series C
Preferred Stock shall be issued in exchange for outstanding Series A Preferred
Stock and shall be deemed to have an original issue price per share equal to the
original issue price for the Series A Preferred Stock of Ten Thousand Dollars
($10,000) per share (the "Original Series C Issue Price"), with a eight percent
(8%) per annum accretion rate as set forth herein commencing January 1, 1997.
Section 2. Rank. The Series C Preferred Stock shall rank: (i) junior to
the Series B Preferred Stock (the "Senior Securities"); (ii) prior to all of the
Company's Common Stock,
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$.001 par value per share ("Common Stock"); (iii) prior to any class or series
of capital stock of the Company hereafter created not specifically ranking by
its terms senior to or on parity with any Series C Preferred Stock of whatever
subdivision (collectively, with the Common Stock, "Junior Securities"); and (iv)
on parity with the Series A Preferred Stock and any class or series of capital
stock of the Company hereafter created specifically ranking by its terms on
parity with the Series C Preferred Stock ("Parity Securities") in each case as
to distributions of assets upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary (all such distributions being referred
to collectively as "Distributions").
Section 3. Dividends. The Series C Preferred Stock will bear no
dividends, and the holders of the Series C Preferred Stock ("Holders") shall not
be entitled to receive dividends on the Series C Preferred Stock.
Section 4. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up
of the Company, either voluntary or involuntary, the Holders of shares of Series
C Preferred Stock shall be entitled to receive, immediately after any
distributions to Senior Securities required by the Company's Certificate of
Incorporation or any certificate of designation, and prior in preference to any
distribution to Junior Securities but in parity with any distribution to Parity
Securities, an amount per share equal to the sum of (i) $10,000 (the "Original
Series C Issue Price") for each outstanding share of Series C Preferred Stock
and (ii) as to each share of Series C Preferred Stock, an amount equal to eight
percent (8%) of the Original Series C Issue Price per annum for the period that
has passed since the date of issuance ("Issue Date") of such Series C Preferred
Stock from the Company, (such amount being referred to herein as the "Premium").
If upon the occurrence of such event, and after payment in full of the
preferential amounts with respect to the Senior Securities, the assets and funds
available to be distributed among the Holders of the Series C Preferred Stock
and Parity Securities shall be insufficient to permit the payment to such
Holders of the full preferential amounts due to the Holders of the Series C
Preferred Stock and the Parity Securities, respectively, then the entire assets
and funds of the Company legally available for distribution shall be distributed
among the Holders of the Series C Preferred Stock and the Parity Securities, pro
rata, based on the respective liquidation amounts to which each such series of
stock is entitled by the Company's Certificate of Incorporation and any
certificate(s) of designation relating thereto.
(b) Upon the completion of the distribution required by
subsection 4(a), if assets remain in this Company, they shall be distributed to
holders of Junior Securities in accordance with the Company's Certificate of
Incorporation including any duly adopted certificate(s) of designation.
(c) At each Holder's option, a sale, conveyance or disposition
of all or substantially all of the assets of the Company to a private entity,
the common stock of which is not publicly traded, shall be deemed to be a
liquidation, dissolution or winding up within the meaning of this Section 4;
provided, however, that the liquidation preference in such case shall be equal
to one hundred five percent (105%) of the sum of the Original Series C Issue
Price plus the accrued Premium; and provided further that an event described in
the prior clause that the Holder does not elect to treat as a liquidation and a
consolidation, merger, acquisition, or other business combination of the Company
with or into any other company or companies shall not be treated as a
liquidation, dissolution or winding up within the meaning of this Section 4, but
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instead shall be treated pursuant to Section 5(e) hereof (a Holder who elects to
have the transaction treated as a liquidation is herein referred to as a
"Liquidating Holder").
(d) Prior to the closing of a transaction described in Section
4(c) which would constitute a liquidation event, the Company shall either (i)
make all cash distributions it is required to make to the Liquidating Holders
pursuant to the first sentence of Section 4(a), (ii) set aside sufficient funds
from which the cash distributions required to be made to the Liquidating Holder
can be made, or (iii) establish an escrow or other similar arrangement with a
third party pursuant to which the proceeds payable to the Company from a sale of
all or substantially all of the assets of the Company will be used to make the
liquidating payments to the Liquidating Holders immediately after the
consummation of such sale. In the event that the Company has not fully complied
with either of the foregoing alternatives, the Company shall either: (x) cause
such closing to be postponed until such cash distributions have been made, or
(y) cancel such transaction, in which event the rights of the Holders or other
arrangements shall be the same as existing immediately prior to such proposed
transaction.
Section 5. Conversion. The record Holders of this Series C Preferred
Stock shall have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each record Holder of Series C Preferred
Stock shall be entitled (at the times and in the amounts set forth below) and
subject to the Company's right of redemption set forth in Section 6(a), to
convert whole or (if necessary to convert the maximum amount allowable)
fractional shares of Series C Preferred Stock, for resale either pursuant to an
effective shelf registration statement for the Common Stock issuable upon
conversion of the Series C Preferred Stock under the Securities Act of 1933, as
amended (the "Registration Statement") or, if the Registration Statement is not
effective, then pursuant to Regulation S or any other applicable exemptions, as
follows:
Lock Up Period: The Series C Preferred Stock shall not be
convertible into Common Stock until April 1, 1997 (the time
from the Issue Date of the Series C Preferred Stock through
March 31, 1997 is referred to as the "Lock-up Period").
Conversion Quota: Beginning on April 1, 1997, each Holder
shall accrue the right to convert into Common Stock up to 5%
of the aggregate number of shares of Series C Preferred Stock
issued to such Holder, and for each two week period that
expires thereafter, Holder shall accrue (the "Accrual Rate")
the right to convert an additional 5% shares of Series C
Preferred Stock issued to such Holder into Common Stock (the
number of shares that may be converted at any time, in the
aggregate, is herein referred to as the "Conversion Quota"),
all at the Conversion Rate (as defined below). In the event
that Holder elects not to convert its full Conversion Quota
during any two week period, the unconverted amount shall be
carried forward and added to the Conversion Quota. Each Holder
may, from time to time, convert any portion of the Conversion
Quota; provided, however, that in no event shall Holder
convert more than 10% of the shares of Series C Preferred
Stock issued to Holder during any two week period.
Conversion Acceleration: If the Closing Bid Price of the
Common Stock is $7.00 or greater for five consecutive trading
days anytime after the end of the Lock-up Period, (i) each
Holder's Accrual Rate for each two week period shall
thereafter
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double (to 10%) and (ii) thereafter, the maximum amount of the
Conversion Quota that the Holder will be able to convert
during any two-week period will be limited to 20% of the
shares of Series C Preferred Stock issued to the Holder.
For purposes hereof, the term "Closing Bid Price" shall mean the
closing bid price on the Nasdaq National Market System published by The Nasdaq
Stock Market, or if no longer traded on the Nasdaq National Market, the closing
bid price on the Nasdaq Small Cap Market, the over-the-counter market or the
principal national securities exchange on which the Common Stock is so traded
and if such closing bid prices are not available, the mean of the high and low
prices on the principal national securities exchange, the over-the-counter
market or the Nasdaq Stock Market on which the Common Stock is so traded.
The April 1, 1997 date and each subsequent 2-week period referenced above are
hereinafter referred to singularly as a "Conversion Gate" and collectively as
"Conversion Gates". At the applicable Conversion Gate and at any time
thereafter, the percentage of Series C Preferred Stock issued to such Holder
which is available for conversion as set forth above is convertible into that
number of fully-paid and non-assessable shares of Common Stock of the Company
calculated in accordance with the following formula (the "Conversion Rate"):
Number of shares of Common Stock to be issued upon conversion
("Conversion") of one (1) share of Series C Preferred Stock =
(.08)(N/365)(10,000) + 10,000
-----------------------------
Fixed Conversion Price
where,
- N = the number of days between (i) January 1, 1997 and (ii) the
applicable Date of Conversion (as defined in Section 5(b)(iv) below)
for the shares of Series C Preferred Stock for which conversion is
being elected, and
- Fixed Conversion Price = $5.00.
(b) Mechanics of Conversion. In order to convert Series C
Preferred Stock into full shares of Common Stock, the Holder shall (i) fax, on
or prior to 11:59 p.m., New York City time (the "Conversion Notice Deadline") on
the date of conversion, a copy of a fully executed notice of conversion ("Notice
of Conversion") to the Company and to First Union National Bank of Georgia, the
custodian of the Common Stock (the "Custodian") (with a copy to the Company's
designated transfer agent (the "Transfer Agent") for the Series C Preferred
Stock) stating that the Holder elects to convert, which notice shall specify the
date of conversion, the number of shares of Series C Preferred Stock to be
converted, the Conversion Rate and a calculation of the number of shares of
Common Stock issuable upon such conversion (together with a copy of the front
page of each certificate to be converted) and (ii) surrender to a common
courier, for either overnight or two (2) day delivery to the office of the
Custodian, the original certificates representing the Series C Preferred Stock
being converted (the "Preferred Stock Certificates"), duly endorsed for
transfer; provided, however, that the Company 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 Custodian as
provided above, or the Holder notifies the Company or the Custodian that such
certificates have been lost, stolen
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or destroyed (subject to the requirements of subparagraph (i) below). In the
case of a reasonable dispute as to the calculation of the Conversion Rate, the
Custodian shall promptly issue to the Holder the number of Shares that are not
disputed and shall submit the disputed calculations to the Company's outside
accountant via facsimile within three (3) business days of receipt of Holder's
Notice of Conversion. The Company shall cause the accountant to perform the
calculations and notify the Custodian, the Company and Holder of the results no
later than two (2) business days from the time it receives the disputed
calculations. Accountant's calculation shall be deemed conclusive absent
manifest error.
(i) Lost or Stolen Certificates. Upon receipt by the
Company of evidence of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing shares of Series C Preferred Stock,
and (in the case of loss, theft or destruction) of indemnity or security
reasonably satisfactory to the Company, and upon surrender and cancellation of
the Preferred Stock Certificate(s), if mutilated, the Company shall execute and
deliver new Preferred Stock Certificate(s) of like tenor and date. However,
Company shall not be obligated to re-issue such lost or stolen Preferred Stock
Certificates if Holder contemporaneously requests Company to convert such Series
C Preferred Stock into Common Stock.
(ii) Delivery of Common Stock Upon Conversion. The
Company no later than 6:00 p.m. (New York City time) on the third (3rd) business
day (the "Deadline") after receipt by the Custodian of all necessary
documentation duly executed and in proper form required for conversion,
including the original Preferred Stock Certificates to be converted (or after
provision for security or indemnification in the case of lost or destroyed
certificates, if required), shall issue and surrender or shall cause the
Custodian to issue and surrender to a common courier for either overnight or (if
delivery is outside the United States) two (2) day delivery to the Holder at the
address of the Holder as shown on the stock records of the Company a certificate
for the number of shares of Common Stock to which the Holder shall be entitled
as aforesaid.
(iii) No Fractional Shares. If any conversion of the
Series C Preferred Stock would create a fractional share of Common Stock or a
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, in the aggregate, shall be the next higher number of shares.
(iv) Date of Conversion. The date on which conversion
occurs (the "Date of Conversion") shall be deemed to be the date such Notice of
Conversion is faxed to the Company and the Custodian, provided that the advance
copy of the Notice of Conversion is faxed to the Company on or prior to 11:59
p.m., New York City time, on the Date of Conversion. The original Preferred
Stock Certificates representing the shares of Series C Preferred Stock to be
converted shall be surrendered by depositing such certificates with a common
courier for either overnight or two (2) day delivery, as soon as practicable
following the Date of Conversion. The person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record Holder or Holders of such shares of Common Stock on the
Date of Conversion.
(c) Reservation Number of Stock Issuable Upon Conversion. The
Company shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the Series C Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
then outstanding Series C Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Series C Preferred Stock, the
Company will take such corporate action as may be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose.
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(d) Automatic Conversion. Each share of Series C Preferred
Stock outstanding on September 30, 1999 (the "Automatic Conversion Date")
automatically shall be converted into Common Stock on such date at the
Conversion Rate then in effect (calculated in accordance with the formula in
Section 5(a) above), and the Automatic Conversion Date shall be deemed the Date
of Conversion with respect to such conversion.
(e) Adjustment to Conversion Rate.
(i) Adjustment to Fixed Conversion Price Due to Stock
Split, Stock Dividend, Etc. If, prior to the conversion of all of the Series C
Preferred Stock, the number of outstanding shares of Common Stock is increased
by a stock split, stock dividend, or other similar event, the Fixed Conversion
Price shall be proportionately reduced, or if the number of outstanding shares
of Common Stock is decreased by a combination or reclassification of shares, or
other similar event, the Fixed Conversion Price shall be proportionately
increased.
(ii) Adjustment Due to Merger, Consolidation, Etc.
If, prior to the conversion of all Series C Preferred Stock, there shall be any
merger, consolidation, exchange of shares, recapitalization, reorganization, or
other similar event, as a result of which shares of Common Stock of the Company
shall be changed into the same or a different number of shares of the same or
another class or classes of stock or securities of the Company or another entity
or there is a sale of all or substantially all the Company's assets that is not
deemed to be a liquidation pursuant to Section 4(c), then the Holders of Series
C Preferred Stock shall thereafter have the right to receive upon conversion of
Series C 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 and/or other assets
which the Holder would have been entitled to receive in such transaction had the
Series C Preferred Stock been converted immediately prior to such transaction,
and in any such case appropriate provisions shall be made with respect to the
rights and interests of the Holders of the Series C Preferred Stock to the end
that the provisions hereof (including, without limitation, provisions for the
adjustment of the Conversion Price and of the number of shares issuable upon
conversion of the Series C Preferred Stock) shall thereafter be applicable, as
nearly as may be practicable in relation to any securities thereafter
deliverable upon the exercise hereof. The Company shall not effect any
transaction described in this subsection 5(e)(ii) unless (a) it first gives
thirty (30) calendar days, prior notice of such merger, consolidation, exchange
of shares, recapitalization, reorganization, or other similar event (during
which time the Holder shall be entitled to convert its shares of Series C
Preferred Stock into Common Stock to the extent permitted hereby) and (b) the
resulting successor or acquiring entity (if not the Company) assumes by written
instrument the obligation of the Company under this Certificate of Designation,
including the obligation of this subsection 5(e)(ii).
(iii) No Fractional Shares. If any adjustment under
this Section 5(e) would create a fractional share of Common Stock or a 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
shall be the next higher number of shares.
Section 6. Redemption by Company.
(a) Company's Right to Redeem at its Election Prior to April
1, 1997. At any time, commencing on the date of issuance of any Series C
Preferred Stock and ending on March 31, 1997, the Company shall have the right,
in its sole discretion, to redeem ("Redemption at Company's Election"), from
time to time, up to fifty percent (50%) of the Series C Preferred Stock of each
Holder. If the
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Company elects to redeem any shares of the Series C Preferred stock, it must
redeem the same specified percentage of shares of each Holder. Notwithstanding
the foregoing, the Company may offer to redeem more than 50% of each Holder's
shares of Series C Preferred Stock, and each Holder may, at its sole option,
elect to permit more than 50% of its shares to be redeemed. Any such redemption
in excess of 50% shall be offered on a pro rata basis among the outstanding
Series C Preferred.
(i) Redemption Price At Company's Election. The
"Redemption Price At Company's Election" shall be one hundred percent (100%) of
Stated Value, as that term is defined below, of the Series C Preferred Stock
redeemed pursuant to this Section 6(a). For each share of Series C Preferred
Stock redeemed at Company's election, Holder shall receive a warrant or warrants
(the "Redemption Warrant" or "Redemption Warrants") to purchase a number of
shares of Common Stock equal to the Stated Value of the shares of Series C
Preferred Stock so redeemed divided by $5.00. The Redemption Warrants shall be
exerciseable beginning April 1, 1997 at an exercise price of $7.00 per share and
shall have a five (5) year term.
For purposes hereof, "Stated Value" shall mean the Original Series C
Issue Price (as defined in Section 4(a)) of the shares of Series C Preferred
Stock being redeemed pursuant to this Section 6(b), together with the accrued
but unpaid Premium for such shares (as defined in Section 4(a)).
(ii) Mechanics of Redemption at Company's Election.
The Company shall effect each such Redemption at Company's Election by giving at
least five (5) days prior written notice ("Notice of Redemption At Company's
Election") to (A) the Holders of the Series C Preferred Stock selected for
redemption, at the address and facsimile number of such Holder appearing in the
Company's Series C Preferred stock register and (B) the Transfer Agent, which
Notice of Redemption At Company's Election shall be deemed to have been
delivered two (2) business days after the Company's mailing (by overnight or two
(2) day courier, with a copy by facsimile) of such Notice of Redemption At
Company's Election. Such Notice of Redemption At Company's Election shall
indicate (i) the number of shares of Series C Preferred Stock that have been
selected for redemption, (ii) the date which such redemption is to become
effective (the "Date of Redemption At Company's Election") (iii) the applicable
Redemption Price At Company's Election, as defined in subsection (b)(i) above,
(iv) detailed instructions as to the redemption procedure, including but not
limited to instructions regarding the time and place for delivery of the Series
C Preferred being redeemed, and (v) certifying that the Company then complies
with Section 6(c) below.
(b) Holder's Right to Require Company to Redeem Beginning
October 1, 1997. Beginning October 1, 1997 and continuing during each of the
four calendar months ending January 31, 1998, each Holder shall have the right
to require Company to redeem (a "Requested Redemption") up to twenty five
percent (25%) per calendar month, of the Series C Preferred issued to such
Holder, at a redemption price of 105% of Stated Value. The foregoing rights are
non-cumulative and therefore any 25% portion not redeemed during any calendar
month shall not be available for Requested Redemptions pursuant to this Section
6(b) in subsequent calendar months. Company may either pay the redemption price
in cash or may alternatively convert (an "Alternate Conversion") such amount
into Common Stock. If the Company does not meet the requirements of Section 6(c)
below, the Company must effect an Alternate Conversion. In the event that the
Company elects to (or is required to) convert such amount into Common Stock, the
number of shares of Common Stock to be issued is calculated as follows (the
"Alternate Conversion Rate"):
105% X Stated Value
--------------------------------
5 Day Average Closing Bid Price,
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where, the "5 Day Average Closing Bid Price" equals the average Closing Bid
Price for the five (5) trading days immediately preceding the date (the "Date of
Alternate Conversion") of such Requested Redemption.
(i) Mechanics of Required Redemption or Alternate
Conversion. The Holder shall effect a Requested Redemption by giving notice
("Notice of Requested Redemption") to the Company and the Custodian on the date
that such redemption is desired (the "Requested Redemption Date"). The Holder
shall surrender to a common courier, by no later than 5:00 p.m. New York City
time on the third business day following the Requested Redemption Date, for
either overnight or two (2) day delivery to the office of the Custodian, the
original Preferred Stock Certificates being tendered for Requested Redemption.
The Company shall give notice ("Requested Redemption Confirmation") to the
Custodian and to the Holder, by facsimile, within one (1) business day of
receipt of a Notice of Requested Redemption, verifying that the Company intends
to redeem in cash, and meets the requirements of Section 6(c) below. If the
Custodian does not receive a Requested Redemption Confirmation by the next
business day, the Custodian shall effect an Alternate Conversion, and issue the
appropriate number of shares of Common Stock to the Holder within three (3)
business days after the later of (i) the date of the Requested Redemption, or
(ii) the date the original Preferred Stock Certificates being converted are
received.
(c) Company Must Have Immediately Available Funds or Credit
Facilities. The Company shall not be entitled to send any Redemption Notice or
begin the redemption procedure under Sections 6(a) or undertake any redemption
for cash pursuant to Section 6(b) unless, it has paid all dividends required to
be paid under the Series B Preferred Stock, and it has:
(i) the full amount of the redemption price in cash,
available in a demand or other immediately available account in a bank or
similar financial institution; or
(ii) immediately available credit facilities, in the
full amount of the redemption price with a bank or similar financial
institution; or
(iii) an agreement with a standby underwriter willing
to purchase from the Company a sufficient number of shares of stock to provide
proceeds necessary to redeem any stock that is not converted prior to
redemption; or
(iv) a combination of the items set forth in (i),
(ii) and (iii) above, aggregating the full amount of the redemption price;
provided that the above restrictions shall not apply to an Alternate Conversion.
(d) Payment of Redemption Price. Each Holder submitting
Preferred Stock being redeemed under Section 6(a) shall send their Series C
Preferred Stock Certificates so redeemed to the Company or its Transfer Agent no
later than the Date of Redemption at Company's election, and the Company shall
pay the applicable redemption price to that Holder within five (5) business days
of the Date of Redemption at Company's Election. The redemption shall be deemed
to have been made on the Date of Redemption, and, if the Company pays the
applicable redemption price to the Holder within the allotted time, all rights
of the Holders shall cease as of the Date of Redemption with respect to such
redeemed shares of Series C Preferred Stock except for the right thereafter to
receive the redemption price in accordance herewith. Where a Holder has
requested redemption under Section 6(b) and the Company has elected to pay the
redemption in cash, the Company shall pay the
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applicable redemption price to such Holder within five (5) business days of the
Requested Redemption Date. The Company shall not be obligated to deliver the
redemption price unless the Preferred Stock Certificates so redeemed are
delivered to the Company or its Transfer Agent, or, in the event one or more
certificates have been lost, stolen, mutilated or destroyed, the Holder has
complied with Section 5(b)(i).
(e) Blackout Period. Notwithstanding the foregoing, the
Company may not either send out a redemption notice or effect a redemption
pursuant to Section 6(a) above during a Blackout Period (defined as a period
during which the Company's officers or directors would not be entitled to buy or
sell stock because of their holding of material non-public information), unless
the Company shall first disclose the non-public information that resulted in the
Blackout Period, provided, however, that no redemption shall be effected until
at least ten (10) days after the Company shall have given the Holder written
notice that the Blackout Period has been lifted.
Section 7. Voting Rights. The Holders of the Series C Preferred Stock
shall have no voting power whatsoever, except as otherwise provided by the
General Corporation Law of the State of Delaware ("Delaware Law"), and no Holder
of Series C Preferred Stock shall vote or otherwise participate in any
proceeding in which actions shall be taken by the Company or the shareholders
thereof or be entitled to notification as to any meeting of the shareholders.
Notwithstanding the above, Company shall provide Holder with
notification of any meeting of the shareholders regarding any major corporate
events affecting the Company. In the event of any taking by the Company 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 any share of any class or any other
securities or property (including by way of merger, consolidation or
reorganization), 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 Company, or any proposed liquidation, dissolution or winding up of the
Company, the Company shall mail a notice to Holder, at least ten (10) days prior
to the record date specified therein, of the date on which any such record is to
be taken for the purpose of such dividend, distribution, right or other event,
and a brief statement regarding the amount and character of such dividend,
distribution, right or other event to the extent known at such time.
To the extent that under Delaware Law the vote of the Holders of the
Series C Preferred Stock, voting separately as a class, is required to authorize
a given action of the Company, the affirmative vote or consent of the Holders of
at least a majority of the shares of the Series C Preferred Stock represented at
a duly held meeting at which a quorum is present or by written consent of a
majority of the shares of Series C Preferred Stock (except as otherwise may be
required under Delaware Law) shall constitute the approval of such action by the
class. To the extent that under Delaware Law the Holders of the Series C
Preferred Stock are entitled to vote on a matter with holders of Common Stock,
voting together as one (1) class, each share of Series C 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 stockholders as the date as of which the Conversion Price is calculated.
Holders of the Series C Preferred Stock also shall be entitled to notice of all
shareholder meetings or written consents with respect to which they would be
entitled to vote, which notice would be provided pursuant to the Company's
by-laws and applicable statutes.
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Section 8. Protective Provision. So long as shares of Series C
Preferred Stock are outstanding, the Company shall not without first obtaining
the approval (by vote or written consent, as provided by Delaware Law) of the
Holders of at least sixty-six and two-thirds percent (66 2/3%) of the then
outstanding shares of Series C Preferred Stock, and at least sixty-six and
two-thirds percent (66 2/3%) of the then outstanding Holders:
(a) alter or change the rights, preferences or
privileges of the Series C Preferred Stock or any Senior Securities so as to
affect adversely the Series C Preferred Stock;
(b) create any new class or series of stock having a
preference over or on parity with the Series C Preferred Stock or increase the
size of the authorized number of Series C Preferred; or
(c) do any act or thing not authorized or
contemplated by this Certificate of Designation which would result in taxation
of the holders of shares of the Series C 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).
In the event Holders of at least sixty-six and two thirds percent
(66 2/3%) of the then outstanding shares of Series C Preferred Stock agree to
allow the Company to alter or change the rights, preferences or privileges of
the shares of Series C Preferred Stock, pursuant to subsection (a) above, so as
to affect the Series C Preferred Stock, then the Company will deliver notice of
such approved change to the Holders of the Series C 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 thirty (30) days to convert
pursuant to the terms of this Certificate of Designation as they exist prior to
such alteration or change; notwithstanding the otherwise applicable Conversion
Quota, or continue to hold their shares of Series C Preferred Stock.
Section 9. Status of Redeemed or Converted Stock. In the event any
shares of Series C Preferred Stock shall be redeemed or converted pursuant to
Section 5 or Section 6 hereof, the shares so converted or redeemed shall be
canceled, shall return to the status of authorized but unissued Preferred Stock
of no designated series, and shall not be issuable by the Company as Series C
Preferred Stock.
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Section 10. Preference Rights. Nothing contained herein shall be
construed to prevent the Board of Directors of the Company from issuing one (1)
or more series of Preferred Stock with dividend and/or liquidation preferences
junior to the dividend and liquidation preferences of the Series C Preferred
Stock.
Signed on ____________________, 1996
___________________________________________
________________________________, President
Attest:
____________________________
_________________, Secretary
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