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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-K
_____________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1996
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
COMMISSION FILE NUMBER 0-26790
INNOVUS CORPORATION
(exact name of registrant as specified in its charter)
DELAWARE 87-0461856
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2060 E. 2100 SOUTH
SALT LAKE CITY, UTAH 84109
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(801) 463-8200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$0.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X . No .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 18, 1997, 5,744,079 of the Registrant's Common Shares were
outstanding. As of March 18, 1997, the aggregate market value of voting stock
held by non-affiliates of the Registrant was approximately $17,747,204 based on
the closing prices for the Registrant's Common Shares on the Nasdaq Small Cap
market.
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DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS
Innovus Corporation (the "Company") provides a powerful, yet easy to use
software tool, INNOVUS MULTIMEDIA, for creating interactive business multimedia
applications and presentations. The Company's product can seamlessly interact
with the user's existing business applications due to its Microsoft-standards
compliant design. While the nature of projects which can be created with INNOVUS
MULTIMEDIA is limited primarily by the user's imagination, typical examples
include computer based training (CBT) applications; high impact multimedia
presentations; employee orientation and other human resources systems;
electronic catalogs; product information systems; and other sales and marketing
applications, all of which integrate desktop applications with corporate
databases in an enhanced, media rich format. Projects can be created in INNOVUS
MULTIMEDIA by intermediate-level computer users in a "point and click" fashion;
programmers and developers also find the product useful and scalable since the
underlying engine, accessible to those who wish to use it, is compliant with
Microsoft Visual Basic for Applications standards. INNOVUS MULTIMEDIA is the
first multimedia tool to offer the ease of use of presentation software combined
with the media management of authoring programs and the power of application
development tools. INNOVUS MULTIMEDIA allows the desktop PC user to fill the
gap between settling for standard solutions provided by shrinkwrap applications
and creating customized programs using traditional complex development and
authoring tools.
In addition to the software tool, Innovus Corporation has begun to release
a series of application templates that further simplify the use of the tool by
providing an outline to automate several common business activities. The
Company intends to expand the family of application templates. The Company has
also introduced CD volumes of business oriented media objects, such as video,
sounds, animations, backgrounds, interactive buttons and images, to facilitate
development of multimedia projects using INNOVUS MULTIMEDIA or other media
applications.
INDUSTRY OVERVIEW
Increasingly, business information system resources are incorporating
multimedia to enhance efficiency and productivity. The communications power of
multimedia, when combined with other business computing capabilities, such as
databases, networks, and integration of other business applications, allows
users to create innovative solutions to recurring business activities. In an
industry report dated April 1996, the Gartner Group, a leading industry analyst,
estimated that the impact of multimedia on business will be as far-reaching as
the introduction of PCs and LANs in the early 1980s. According to the Gartner
Group, over 70 percent of all multimedia applications will have to be created
and maintained at or below the corporate department level, rather than by the
information services (IS) department.
The acceleration of multimedia in the business environment is evidenced by
several significant emerging industry standards, including Intel's MMX standard
for improved business multimedia PC performance and Microsoft's DirectX enhanced
multimedia software development specification. Several factors influencing this
growing trend include:
INCREASED POWER OF DESKTOP COMPUTERS. As the cost of hardware has
continually dropped and the requirements of business software has
increased, the capabilities of typical corporate desktop PCs has increased.
An ever-increasing percentage of desktop PCs are
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capable of using 32 bit operating systems such as Windows 95 or Windows NT.
These PCs have the large hard drives, color monitors, and RAM memory
required for multimedia.
RAPID EXPANSION OF THE INTRANET AND INTERNET. The rapid expansion of
Intranets and the Internet is driving demand for tools to manipulate and
manage enhanced digital graphic and multimedia content for use in World
Wide Web sites, and electronic transaction and business information
environments.
INCREASED USER KNOWLEDGE AND EXPECTATIONS. As users experience more
software utilizing graphical or multimedia user interfaces, they demand
similar intuitive presentation and point and click functionality from all
business applications.
PROLIFERATION OF MULTIMEDIA CAPABLE BUSINESS NETWORKS. Network technology
has continued to evolve to allow for higher bandwidth and lower cost
network communication. Such enabling technology allows for the deployment
of multimedia applications across corporate networks.
INCREASED EASE OF USE AND RE-USE OF MEDIA CONTENT. Multimedia tools and
applications can readily use and store media in standard industry formats
without complicated conversion. Multimedia developers can therefore
readily obtain media content from a variety of sources, including the
Internet and commercial clip-art packages, as well as create their own
media through the use of scanners, sound cards, digitized cameras and
drawing tools.
INCREASED MULTIMEDIA PRODUCTIVITY AND EFFICIENCY. Demand for more
efficient computer information systems has created a demand for
applications which automate, organize and monitor typical business
functions such as employee training, customer support and sales force
automation. Communication rich multimedia applications increase the
productivity and efficiency of automated systems.
COMPANY STRATEGY
The Company's objective is to rapidly penetrate and capture the business
multimedia applications market for users from the corporate department level to
the small to medium enterprise (SME) market. Key elements of the Company's
product market strategy are:
PRODUCT POSITIONING. The Company is positioning its products as the
business multimedia tool for the individual user in a business environment.
By combining the ease of use of presentation software with full OLE and
Open Database Connectivity (ODBC) access to business applications, the
Company believes INNOVUS MULTIMEDIA presents a unique opportunity for power
users to create applications without the learning curve of traditional
development tools.
RAPID MARKET PENETRATION. Beginning in the fourth quarter of 1996, the
Company has begun to aggressively market its products through substantially
lowered price points, exciting visual advertising, and direct mail
campaigns. The targeted market includes a broad range of customer
profiles, including power users, developers, and current authoring product
users, with an emphasis on the user searching for a way to add the power of
multimedia to his other business without the authoring tool learning curve.
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INDUSTRY RELATIONSHIPS. The Company is currently discussing potential
joint marketing efforts and other strategic relationships with key industry
participants.
FLEXIBLE SOFTWARE DESIGN. Recognizing that software standards are
constantly in a state of flux, INNOVUS MULTIMEDIA was designed to be
inherently flexible and readily modifiable to accommodate new standards for
media and data exchange. Since many features are enabled through external
wizards or OLE automation, revision of the software to accommodate new
standards is simplified, potentially allowing for shorter development
cycles.
COMPLETE SOLUTIONS. The Company is positioning itself to be a leader in
business multimedia applications development by providing a complete family
of products for business users. The Company provides a fully integrated
technology solution that allows customers to standardize on a single
methodology for deploying media-based business applications, on the
desktop, through the server, and over the web. Additionally, the Company
offers custom application development services through a third party
organization to augment the resources of the users and the VAR channel.
BROAD BASED DISTRIBUTION CHANNELS. The Company has established partners
with respect to the following channels of distribution: direct sales,
retail, catalog marketers, value added resellers ("VARs") and corporate
resellers. The Company plans to leverage these existing relationships for
penetration of its target markets. Additionally, the Company believes it
is well positioned to serve as a channel partner in that its products add
value and usability to other software companies' existing applications and
embedded technologies.
DESIGN PRODUCT LINE FOR REPEAT SALES. The Company's current and planned
product line consists of the core software tool, application templates for
specific uses and multimedia content. The Company believes that each sale
of the tool creates a potential customer for application templates and
media content; each purchaser of content is a potential customer for the
tool or templates; and each purchaser of a template is a potential customer
for other templates and media content. By enabling power users to readily
become developers, the Company believes INNOVUS MULTIMEDIA will be creating
a repeat customer base in addition to the typical upgrade market.
EXPLOIT INTERNET OPPORTUNITIES. The Company believes that the emergence of
the world-wide web/internet will significantly increase the market for open
environment multimedia development tools. This emergence is driving demand
for development tools to manipulate and manage enhanced digital graphics
and multimedia content for use in the world wide web sites, and electronic
transaction of business information. The Company's products allow business
managers to develop and deploy fully transactional applications using the
Internet to continuously update and/or exchange data with remote users.
THE INNOVUS SOLUTION
The Company's core software tool allows business managers and users to
automate recurring activities through a multimedia development tool designed
specifically for building easily modifiable business information systems. For
example, the Company's software can create computer applications that automate
the training and orientation functions which otherwise would require significant
manpower and other corporate resources. It is the first multimedia tool to
offer
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the ease of use of presentation software combined with the media management of
authoring programs and the power of application development tools. Managers,
trainers, and developers can now build dynamic, easily modifiable business
applications that interface with commonly used databases without the support
of the IS professional. Unlike multimedia tools that require the user to
convert multimedia text and database files to proprietary formats, the
Company's products give managers OLE integration and ODBC so managers can
access files in their original formats. The Company's software allows
corporate users to distribute applications over a LAN and to interact with
existing data files. Furthermore, once these applications have been developed,
segments or portions can be reused in new applications, substantially adding
to the cost-efficiency benefits of implementing technology in the context of
such business activities.
The INNOVUS products' user-friendly interface allows a manager or staff
member to build full multimedia applications using the same basic computer
skills required to operate presentation software. Dynamic links allow
applications deployed on a network to be changed by simply updating the central
database. Applications can also incorporate active portions of other common
business software, including spreadsheets, e-mail, and word processors.
Additionally, the Company's products offer complete solutions. Using INNOVUS
MULTIMEDIA, users will be able to accelerate their business process automation
by using various INNOVUS application templates. The Company has released, and
will continue to expand, a growing family of application templates which
provide both the logic and content for various common business activities in the
training, human resources, sales force automation, customer support, and product
marketing areas. The Company is also releasing a series of media kits containing
video, audio, images, animations, backgrounds, graphical buttons, and hot spots
- - essential components of multimedia applications.
THE INNOVUS PRODUCT LINE
The following software products are being offered by the Company as of
April, 1997:
INNOVUS MULTIMEDIA v.2.21 Authoring
INNOVUS MULTIMEDIA v.2.21 Presentations
Web_Candy Vol 1 for PC
Web_Candy Vol 1 for Mac
Web_Candy 3D for PC
Web_Candy 3D for Mac
NotesMaster CBT
Company Bulletin Board Application Template
Electronic Catalog Application Template
Employee/Visitor Sign in/out Application Template
Pay & Benefits Application Template
Safety & Security Application Template
Conduct & Responsibility Application Template
Our Company Application Template
Customer Service Application Template
The Company's software products allow managers to design friendly
multimedia user interfaces that automate time-consuming, paper-intensive
activities and turn them into controlled,
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modifiable systems. Using the Company's products, anyone with basic Microsoft
Windows skills can:
- Design the flow, layout, and timing of information.
- Connect the project to existing databases or create new data sources,
combine video, sound, graphics, and text, add quiz and survey questions,
and incorporate other applications.
- Deploy the project across a network or package it for a single
workstation.
- Measure how and by whom the applications are being used.
- Maintain the system and update changing information.
The Company's software is compatible with the latest and most advanced PC
and multimedia technology. The Company's software is Windows 95 and Windows NT
compatible, indicating that it can take advantage of advanced features such as
OLE and ODBC support, and is compatible with Windows 3.1. These features allow
INNOVUS Multimedia to operate as a full "front end" to other OLE compliant
applications, allowing the design of training programs which teach the user how
to use other application software, and which can continue to be available as a
refresher tool as the user attempts to utilize the application in the course of
the business day. INNOVUS Multimedia scripts use a QuickScript-TM- Visual Basic
compatible scripting language.
MARKETING AND SALES
The Company's products are positioned for worldwide distribution through a
combination of direct sales, retail, catalog marketers, VAR channels, corporate
resellers, and strategic relationships. The Company will leverage VARs and
corporate resellers to sell products directly to corporate department managers
and will use direct, catalog marketer, and retail sales to reach individual
desktop developers and power users. The Company's distribution channels are as
follows:
VALUE ADDED RESELLERS (VARS). Long term market development and support
requires the establishment of an international VAR network. The Company
plans to continue building its VAR network by recognizing VARs from
existing application-specific areas, such as Lotus Notes VARs. The Company
has established a VAR network with over 65 VARs having already been through
product training. These are active solutions developers who can use
INNOVUS Multimedia to accelerate the speed and quality of media
applications development for their existing customer base and extend their
services to new customers with this added capability.
STRATEGIC RELATIONSHIPS. The Company is working to secure relationships
that can provide OEM and software bundling opportunities which will help to
rapidly proliferate the user base for its INNOVUS Multimedia product. The
Company is currently negotiating partnerships with service providers, VARs,
hardware companies, and other software vendors for this purpose.
DIRECT SALES ACTIVITIES. The Company is actively promoting Internet based
sales and marketing through its web site (www.innovusmm.com). The web site
has fully implemented electronic commerce including direct download as well
as on-line ordering with conventional delivery.
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CORPORATE RESELLERS. The Company has distribution agreements with well
established corporate sales organizations, including Software Spectrum,
Software House International, Stream, ASAP Software Express, PC Connection,
Programmer's Paradise, Tiger Direct, MicroWarehouse, and Software.Net, an
internet based reseller.
SOFTWARE RETAILERS. The INNOVUS products are stocked by leading national
retailers such as Egghead Software and CompUSA, as well as by important
regional retailers such as Elek Tek and J&R Computer World. The Company's
products are carried in approximately twelve retail organizations in total,
and the Company intends to expand this area throughout 1997.
CUSTOMERS AND END USERS
The Company markets its products to small and medium sized businesses as
well as corporate departments operating on local area networks or the Internet.
Buyers of the products include individual users, department managers, managers
of specific business activities and corporate IS departments. The Company is
positioning INNOVUS Multimedia as a powerful new business productivity tool that
enhances the capabilities of other common business software and improves the
efficiency and skills of a company's employees by automating many common,
redundant business and management processes. The Company's customers may be
subdivided into various vertical markets. The Company serves these vertical
markets in order to address the unique needs experienced in each of the vertical
markets as described below.
The Company's current product line has been designed to allow its sales and
marketing personnel as well as the sales and marketing personnel of its channel
partners to focus on several vertical market opportunities inside the corporate
computing environment. Products designed for other departments in the
corporation will allow the Company to expand to other market segments in the
future. Current application template products provide the Company access to
these vertical market segments: corporate training, human resource departments,
and sales and marketing departments. The following are examples of how some of
the Company's products are being used by current vertical market customers.
LOTUS NOTES UPGRADE TRAINING is an application that teaches end users how
to migrate their Notes applications from the 3.x to the 4.0 version of that
product. It includes complete instructions on the product upgrade
functionality and a section designed to be modified by the Notes support
team to customize the specific application of Notes as used by that company
or corporate department. American Express Stored Value Group is using this
product to facilitate the easy upgrade of thousands of Lotus Notes end
users in their organization. The customer is making the Company's training
program available in their corporate training centers and also distributing
it on their networks as an on line information system for ongoing support
of the Lotus Notes user groups.
SAFETY AND COMPLIANCE is a training application designed to educate and
test employees on various government requirements associated with their job
responsibilities. This template can be modified to include sections on
personal safety, toxic waste management, fire prevention, OSHA regulations,
and Equal Opportunity Employment practices. A multi-national oil company is
working with the Company to modify this template for refinery operations
and will use the testing and database connectivity to capture employee
results, to bolster compliance verification, and identify training areas
which need expansion.
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NEW EMPLOYEE ORIENTATION is an application designed to be modified to fit
each individual corporate culture. It includes sections on company
structure and mission statements, employee benefit options, vacation
schedules, training opportunities and available computing resources.
Intermountain Health Care Corporation is using this product to accelerate
the process of making new employees productive in their jobs. This will
provide them a completely automated, cost saving orientation system
connected to all their employee data bases that can be distributed across
their local and wide area networks.
ELECTRONIC POLICIES AND PROCEDURES is an application that provides an on
line policy document that can be updated continuously to meet changes
inside the company, new legislation, or in the business environment. This
is an essential tool to the reengineering process currently under way in
much of corporate America. Associated Foods Corporation is implementing
this tool to help manage their corporate reengineering and to minimize
legal accountability issues associated with proper employee notification
requirements and verification of employee acceptance.
ELECTRONIC PRODUCT INFORMATION SYSTEM is an application that allows
companies to distribute new product information and data updates across
company networks and over the Internet. This template can be modified to
link visual product presentations together with inventory status, product
ordering systems, and other on line departmental information that can
assist their Placement Agents in closing a customer sale. This application
recently won the "BEST OF SHOW" Award in the "Online Training and
Documentation" Category of Softbank Institutes Interactive 96 Conference
and Expo Trade Show in Atlanta. Egghead Software Corporation intended to
implement a nationwide sales force automation system based on this template
that allows that company to send updated product information from an Oracle
database to its 700 field sales Placement Agents every day along with
customized training on each new item and then return the results to each
employee's performance records.
In addition to this vertical market focus, the Company is actively selling the
core development tool to individual users, business managers, corporate IS
departments and VARs who are creating numerous other applications to meet their
own customer's demands. Part of the Company's marketing strategy is to look for
opportunities to work with these developers to turn their solutions into
meaningful application templates for resale to the general business marketplace.
This will allow the Company to rapidly expand its product offerings without
dedicating its own resources and open up additional vertical market product and
channel opportunities.
COMPETITION
The markets for the Company's products are highly competitive and are
characterized by pressures to reduce prices, incorporate new features and
accelerate the release of new product versions. A number of companies currently
offer products that compete directly or indirectly with one or more aspects of
the Company's products. Competitors could develop a product which competes with
all aspects of the Company's products. Some current and potential competitors
are larger, better established, and have greater financial resources than the
Company. Such competitors may have the ability to more aggressively market and
price their products than the Company. There is no assurance that the Company
will be able to successfully compete in these markets.
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The Company has developed a family of multimedia application products which
combine the simplicity of a presentation program user interface and the media
richness of professional authoring software with all the power and business
functionality of corporate development tools. The Company's core product allows
management to automate recurring activities through a multimedia development
tool designed specifically for building easily modifiable business information
systems. It is the first multimedia tool to offer the ease of use of
presentation software combined with the media management of authoring programs
and the power of application development tools. Managers, trainers, and
developers can now build dynamic, easily modifiable business applications that
interface with all popular databases without the support of the IS professional.
Unlike multimedia tools that require the user to convert multimedia text and
database files to proprietary formats, the Company's products give managers OLE
integration and ODBC so managers can access files in their original formats.
The Company's software allows corporate users to distribute presentations over a
LAN and import existing data files. Because of this, management feels the
Company is unique from a competitive standpoint, particularly in light of the
ability of its technology to be used in an open environment and implemented on a
cost effective basis.
There are currently four categories of software products which attempt to
provide business multimedia application solutions to the corporate market.
VISUAL DEVELOPMENT ENVIRONMENTS such as Visual Basic, Delphi, and
PowerBuilder are capable corporate tools which integrate well in network
solutions. These are highly technical development tools generally requiring
skilled programmers and protracted development schedules to create and
maintain business applications. These products have limited native media
support capability.
MULTIMEDIA AUTHORING TOOLS such as IconAuthor, AuthorWare, and MFactory can
create and manage sophisticated media presentations and program logic. They
demand a high level graphics artist or technical user and have limited
business functionality or scalable network deployment capabilities.
WEB PAGE DESIGN TOOLS such as Microsoft Front Page and Netscape Gold are
strong media and text document managers and work well in extended network
environments, but are limited in their format support and transaction
capabilities and lack back-office connectivity. These tools focus on web
development and fall short in full business applications.
COMPUTER BASED TRAINING TOOLS such as CBT Express, Toolbook and Quest are
useful project development programs for training and testing activities
which provide much of the presentation logic for instructional
applications. While some of these tools offer media support, they are
generally lacking in scalable network capabilities, database support,
extensibility, and business functionality.
Few of these products can be operated effectively by the average manager or
desktop computer user. They offer no accelerated vertical solution templates.
They are generally cost prohibitive for wide distribution by managers to
desktop users, and do not provide a single integrated multimedia application
solution that crosses all levels of the corporate network.
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Management believes that only the INNOVUS product line offers this complete
solution approach to the business multimedia application market. Management
believes the companies that now have program development and presentation
products would incur significant expense and programming time in re-engineering
those products to be suitable for desktop business applications. In particular,
the Company is not aware of existing presentation products that could emulate
the ability of INNOVUS MULTIMEDIA to act as an interactive multimedia data base
front-end without fundamental changes to the architecture of such competitive
products.
SERVICE BUSINESS
Following the initial introduction of INNOVUS MULTIMEDIA, the Company
utilized its experience to produce 'turn-key' multimedia applications for
customers. Certain of these applications were modified to form the basis of
application templates. In January, 1997 the Company determined that this labor
intensive low-margin service business did not fit into the Company's strategy.
Accordingly, the service business was divested and now operates independently.
PROPRIETARY RIGHTS
The Company regards certain features of its products as proprietary and
relies on a combination of copyright, trademark and trade secret laws,
confidentiality procedures and contractual provisions to protect its proprietary
information. The Company holds no patents applicable to its business and has no
patent applications pending. The Company seeks to protect its products and
related documentation and other written materials under trade secret and
copyright laws (as described below) which afford only limited protection. The
Company seeks to protect its product names under trademark and unfair
competition laws. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or obtain and use information that the Company regards as proprietary.
The Company's software is protected by copyright laws, and each end-user is
granted a license to use either a single copy or an open network access to the
software. The Company has received copyright protection on its various
development tools, application templates and run time programs. Copyrighted code
includes three DOS based product versions, five Windows 3.x version products,
three Windows 95 version products and three Windows NT product versions.
Copyrights cover authoring and development products, report generators, media
drivers, peripheral drivers, various program executables, and configuration and
install programs. All of these copyrights relate to the Company's development
programs and vertical applications. The Company may also attempt to obtain
limited patent protection for the architecture of its products, but has not yet
determined if its products contain any patentable inventions. Innovus has filed
for trademark registration for certain of its product and feature names.
EMPLOYEES
Innovus has 22 full time employees as of March 31, 1997. Of the total
employees, 6 are engaged in management and administration, 3 in sales and
marketing, 12 in development, and 1 in customer support. None of the Company's
employees are represented by a labor union. The Company believes its
relationship with its employees to be good.
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COMPANY HISTORY
The Company was incorporated in 1988 as a Delaware corporation. Innovus
Multimedia, Inc., the predecessor to the Company's operating subsidiary, was
founded in 1987, and acted as a value added reseller of multimedia hardware and
software in the form of stand alone kiosks until 1993. Subsequently, new
management joined the Company, and the Company de-emphasized its multimedia
kiosk business, and focussed on business oriented multimedia software
development. As part of this transition, the Company hired new software
developers, marketing personnel, and others, and secured the equity financing
for research and development necessary to complete its first version of its
Windows software.
In September of 1994, as part of Innovus' transition to a business oriented
multimedia software developer, and to enhance its capital raising ability,
Innovus was acquired by the Company in a reverse acquisition.
The Company commercially released its core software product in March of
1996, and since that time has released several templates that complement that
software.
ITEM 2. PROPERTIES.
In 1995, the Company purchased the building it had previously been leasing
in Salt Lake City, Utah. The building is approximately 11,760 square feet which
includes a complete software development lab, hardware integration and testing
facilities, computer graphics stations, digital media compression systems,
audio/video edit bay, project authoring systems, application design equipment,
and general offices. The Company is considering selling the building and moving
to smaller leased offices. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation".
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings which, in its belief,
could have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fourth quarter of the calendar year ending December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is currently listed on the Nasdaq SmallCap
market. From August, 1994 to November, 1995 the Common Stock was traded over
the counter. Prior to August, 1994 there had been only sporadic trading in the
Common Stock and no consistent source for quotes.
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On March 18, 1997, the closing price of the Common Stock on Nasdaq was
$4.00. As of March 18, 1997, there were 195 holders of record of the Common
Stock. The following table reflects the high and low closing bid quotations
reported by the OTC Bulletin Board through November 1995 and high and low last
sales prices reported by Nasdaq for subsequent periods. Such prices represent
inter-dealer quotations, do not include markups, markdowns, or commissions and
may not reflect actual transactions.
HIGH LOW
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YEAR ENDING DECEMBER 31, 1995
January 1 to March 31, 1995 $10.00 $ 5.75
April 1 to June 30, 1995 $10.75 $10.50
July 1 to September 30, 1995 $10.50 $ 7.50
October 1 to December 31, 1995 $10.00 $ 8.25
YEAR ENDING DECEMBER 31, 1996
January 1 to March 31, 1996 $10.75 $ 7.50
April 1 to June 30, 1996 $13.75 $ 9.38
July 1 to September 30, 1996 $11.50 $ 5.13
October 1 to December 31, 1996 $ 6.25 $ 3.25
The Company has not paid any cash dividends since its inception. The
Company's revolving loan agreements currently prohibit it from declaring any
dividends without the written permission of the lender. The Company is
prohibited from paying dividends on its Common Stock while it has an outstanding
series of Preferred Stock. The Company currently intends to retain future
earnings in the operation and expansion of its business and does not expect to
pay any cash dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA.
The following Selected Financial Data should be read in conjunction with
the financial statements and notes thereto bound elsewhere herein.
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YEAR ENDED DECEMBER 31
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STATEMENT OF 1996 1995 1994 1993(1) 1992(1)
OPERATIONS DATA ----------- ----------- ----------- -------- --------
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Revenues $ 597,567 $ 189,380 $ 193,848 $453,928 $291,885
Costs of products
and services sold 302,571 123,701 234,234 325,044 125,131
Amortization 796,673 315,464 - - -
Product development 1,185,525 1,340,415 444,855 37,173 69,054
Selling and
marketing expense 3,988,987 1,417,396 425,403 30,687 32,826
General and
administrative 1,279,542 719,862 537,860 75,079 90,102
Net (loss) $(7,791,146) $(3,735,351) $(1,554,213) $(93,631) $(83,983)
Net (loss) per share $ (1.59) $ (0.98) $ (0.60) $ (0.05) $ (0.05)
AT DECEMBER 31
------------------------------------------------------------------
BALANCE SHEET DATA 1996 1995 1994 1993 1992
----------- ----------- ----------- --------- ---------
Current assets $ 1,161,735 $ 2,466,060 $ 387,370 $ 149,708 $ 87,455
Software development
costs 809,824 886,153 408,384 152,624 0
Current liabilities 1,124,592 473,460 1,521,294 576,252 357,139
Long term liabilities
(net) 728,555 722,785 180,961 163,535 190,161
Stockholders' equity
(deficit) $ 1,490,029 $ 3,553,885 $ (658,474) $(416,597) $(322,966)
</TABLE>
(1) Historical information regarding the Innovus predecessor company only. The
separate operations and assets of the Company for the periods and on the dates
presented are not material.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The following discussion should be read in conjunction with the financial
statements and notes thereto found elsewhere herein. On September 6, 1994, the
Company and Innovus completed an Agreement and Plan of Reorganization whereby
Innovus became a wholly owned subsidiary of the Company. Although the Company
survived as the parent corporation of Innovus, the transaction was accounted for
such that the financial statements for the Company following the transaction
will be the financial statements of Innovus with the additional shares held by
the Company's prior shareholders reflected as a recapitalization of Innovus.
The assets and operating results of the Company separate from Innovus are not
material and separate financial statements of the Company prior to the
transaction are not presented.
RESULTS OF OPERATIONS
The Innovus predecessor company operated its multimedia kiosk business
since 1987, and had developed its multimedia authoring software with a view
towards eventual commercial sale. Commencing in July 1993, Innovus began hiring
additional staff and otherwise incurring additional expense to begin a full
scale revision of its software for the Windows operating environment. Sales of
the software through VARs, began in the fourth quarter of 1995 and general
commercial sales began in March, 1996. In November, 1996, the Company re-
positioned its software towards individual business users, significantly
lowering the price of the core software. Results of operations for the current
year may not be directly comparable to prior periods when the software was being
developed.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Initial sales of INNOVUS MULTIMEDIA to small value added resellers (VARs)
and corporate information services departments began in late March, 1996. In
October, 1996 the Company announced an aggressive repricing and repositioning of
the software to appeal to the individual desktop PC user. Following the re-
pricing, the software is being sold through retail outlets such as Egghead
Software and CompUSA. The software is also being distributed by Tech Data, the
second largest distributor of computer software and hardware in the world, and
corporate resellers such as Software Spectrum, Software House International,
Stream and ASAP Software Express. The Company's products are also offered
through mail order catalog companies such as Micro-Warehouse, PC Connection, and
Programmers Paradise. The Company has also established a site on the World Wide
Web for direct sales of the software. In addition the INNOVUS MULTIMEDIA
software tools, the Company currently offers eight application template packages
for specific applications, a computer based training application for Lotus Notes
users and two business oriented media packages. Additional application
templates and packages are scheduled for release during the year.
During the year ended December 31, 1996, the Company had revenues of
$597,567 compared to $189,380 for the prior year. Approximately 38% of the 1996
revenues was generated by shrinkwrap software sales, approximately 53% was
generated by sales of customized programming or content production services and
the balance was generated by training and related sales. Subsequent to the end
of the year, the Company determined not to continue
14
<PAGE>
offering the customized programming or content production. The sale of
multimedia information kiosks, which had accounted for all revenue in 1995,
did not materially contribute to 1996 revenue.
The costs of products and services sold in the year ended December 31, 1996
were $302,571 or 51% of sales. During 1995, such costs for the presentation and
kiosk business were $123,701 or 65% of sales. The gross margins for 1996 and
1995 may not be directly comparable due to the change in the nature of the
revenue stream. The Company is now in the process of building its revenue model
from software and associated product sales, and has discontinued the kiosk
business.
The Company's aggressive pricing of its software announced in October, 1996
is expected to increase software unit sales and total revenues. During the
fourth quarter of 1996, net sales were $198,718, 43% of which resulted from the
sale of shrinkwrap software. Net sales for the first nine months of 1996 were
$398,849, 35% of which resulted from the sale of shrinkwrap software. Although
the Company expects that substantially all of its 1997 sales will come from
shrinkwrap software, the Company cannot predict whether sales will continue to
grow from fourth quarter 1996 levels.
Selling and marketing expenses increased to $3,988,987 in the year ended
December 31, 1996 compared to $1,417,396 in 1995. These increased expenditures
reflect the first quarter support of the VAR release of the software and the
subsequent marketing of the general release of the software. Although marketing
expenses currently exceed revenue, the Company believes that continued
aggressive marketing efforts are necessary as the Company promotes its
positioning of INNOVUS MULTIMEDIA to the individual desktop PC user.
Following completion of the commercial version of the software, product
development expenditures continued for application templates to be used with the
software tool and preparations for future updates to the software tool. For the
year ended December 31, 1996, product development costs were $1,185,525,
compared to the $1,340,415 of such expenditures for 1995 when the software tool
was under development. During the fourth quarter of 1996, product development
expenses dropped to $108,358. Such expenses may increase in the future in
connection with new versions of the software tool or increased development of
application templates. In the year ended December 31, 1996, $796,673 of
capitalized software development costs were amortized, compared to $315,464 of
such expenses in 1995. Development expenses include payments to independent
contractors working under contract with Innovus and license fees paid to third
parties for technology purchased from other developers. The Company anticipates
continued development costs for future versions of INNOVUS MULTIMEDIA, as well
as the addition and completion of other application templates and applications
providing users with additional products enhancing INNOVUS MULTIMEDIA.
General and administrative expenses were $1,279,542 for the year ended
December 31, 1996 compared to $719,862 in 1995. The Company believes that the
resizing effected in the fourth quarter of 1996 and first quarter of 1997 will
allow general and administrative expenses to moderate or decline. Included in
general and administrative expenses for 1996 is $258,926 representing a modified
Black-Scholes valuation of 50,000 warrants issued to consultants. The exercise
price of the warrants was equal to the market price of the common stock at the
time of issuance.
15
<PAGE>
The Company incurred losses from operations of $7,553,298 during the year
ended December 31, 1996 compared to losses from operations of $3,727,458 for
1995.
The Company is deemed to have incurred $773,350 in interest expense during
1996 in connection with warrants issued as part of bridge financing from
affiliates and others. The warrants are exercisable at the fair market value of
the underlying common stock at the date of issuance, but a value was assigned to
the warrants using a modified Black-Scholes method. Exclusive of the deemed
expense from the warrants, the Company incurred net interest expense for the
year ended December 31, 1996 of $62,065. Net interest expense for 1995 was
$7,893.
The Company sustained a net loss of $7,791,146 for 1996 compared to a loss
of $3,735,351 for 1995. The loss per common share was $1.59 and $0.98 for 1996
and 1995, respectively. The weighted number of shares used in calculating the
loss per common share does not include the potential issuance of common shares
on conversion of outstanding preferred stock, as such conversions are considered
anti-dilutive.
The losses incurred in 1996 cannot be sustained over an extended period.
Following the appointment of Terry Haas as President and CEO during the third
quarter, the Company re-positioned its software in an attempt to increase sales
and began reducing personnel and other non-marketing expenses to levels more
closely aligned with sales levels. In 1997, the Company further reduced
expenses by ceasing sales of low margin services. While sales of shrinkwrap
software continue to increase, management cannot predict with certainty when, or
if, the Company can become profitable.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Sales for the year ended December 31, 1995, were $189,380, compared to
$193,848 for 1994. All sales were generated by the kiosk and services business.
During 1995 and 1994, the Company directed its resources towards development of
the software rather than marketing of the kiosks and production services to new
customers. Marketing in both years was directed towards maintaining
relationships with existing customers; these efforts did not result in
substantial new sales.
The cost of products and services sold in 1995 was $123,701 or 65% of
revenue compared to $234,234 or 121% of sales in 1994. Cost of products and
services sold consists primarily of the computer and other hardware incorporated
into the kiosks, outside production costs for the presentations and internal
production, assembly, and support labor. Management believes that those were a
number of reasons why the costs in 1994 exceeded revenue for that year,
including the continuation of the level of fixed costs from the prior year when
revenues had been higher ($453,928), and the provision of higher performance
hardware than was required by contract to increase customer satisfaction and
provide platforms on which the new software could be tested. These excess costs
were reduced in 1995 as personnel and other resources were re-deployed and beta
test sites became available for the software.
During 1995, the Company began amortizing its capitalized software
development costs. Amortization during 1995 was $315,464. Capitalized
development costs are amortized over a period of not more than three years.
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<PAGE>
As the Company built the infrastructure needed to operate as a software
company, the addition of substantial additional personnel and support resources
has significantly increased total costs and expenses. Product development costs
increased to $1,340,415 in 1995 from $444,855 in 1994. This does not include
capitalized amounts for software development costs of $793,233 in 1995 and
$255,760 in 1994. Selling and marketing expense in 1995 was $1,417,396 compared
to $425,403 in 1994. The primary source of the increase in these expenses was
related to the software as the Company began planning to position the software
for launch. General and administrative expense was $719,862 in 1995 compared to
$537,860 in 1994. This primarily reflects the increase in staffing related to
the restructuring as a software company. During 1995, the Company exercised its
option to purchase the building it had been leasing for its offices. The
purchase reduced the Company's monthly expense for its offices.
During the first part of 1995, the Company incurred interest expense on the
debt it incurred in 1994 to fund operations. Following an equity offering, the
debt and interest expense were reduced and the Company began earning interest
income on its unspent funds. Interest income will decline as funds are expended
on operations. During 1995, net interest expense was $7,893 compared to
$105,709 in 1994.
The Company sustained a net loss of $3,735,351 in 1995 compared to a net
loss of $1,554,213 for 1994.
LIQUIDITY AND CAPITAL RESOURCES
Following the commercial release of the software, the Company has been
dedicating all available funds to INNOVUS MULTIMEDIA marketing and support.
Marketing expenses have exceeded software revenue and the Company's liquid
resources have been depleted as a result. The Company has obtained funds to
support its operations from sales of its equity, including convertible preferred
stock. At December 31, 1996, the Company had total current assets of $1,161,735
and working capital of $37,143. If the reduction in current liabilities for the
unamortized value of the warrants issued in connection with the bridge financing
is ignored, the Company would have had a deficit in working capital (current
liabilities in excess of current assets) of $429,000. During 1996, the Company
incurred a net loss of $7,791,146 and had negative cash flow from operations of
$5,261,703. The Company anticipates that it will incur additional negative
operating cash flow until such time as software sales and service revenues
increase substantially. The future rate of revenue generation cannot be
predicted with accuracy at this stage of the Company's growth.
The Company cannot sustain its current rate of negative cash flows from
operations and software development without additional sources of cash. In the
long term, needed cash must be generated by operations in order for the Company
to sustain itself. During 1996, the Company raised $4,201,468 (after deduction
of offering costs) primarily by issuing preferred stock to institutional and
accredited investors. Subsequent to the end of 1996, the Company raised
approximately an additional $1,860,000 from the issuance of preferred stock.
The preferred stock was issued in various series, the terms of each of which
vary. All series of preferred stock are preferred to the common stock in the
event of liquidation of the Company. Each series of preferred stock is entitled
to accrual of a dividend at the rate of 5% to 15% per annum, which is
17
<PAGE>
generally payable in stock at the time of conversion. Each series of preferred
stock is convertible into common stock, either at a fixed price or a price tied
to the market value of the common stock.
As of May 2, 1996 the Company obtained a line of credit from a commercial
lending bank pursuant to a Loan and Security Agreement. Provided that the terms
of the agreement are met, the Company was allowed to borrow a base amount of up
to $500,000 without regard to the value of specific assets. Borrowing above
this base amount is allowed on a revolving basis only to the extent that the
loan balance is less than 75% of the Company's eligible accounts receivable.
Advances under the line bear interest at 1.5% per annum above the Bank's prime
rate. Advances under the line are due no later than May 2, 1997. The line is
secured by substantially all of the Company's assets, including its inventory,
accounts receivable, and technology. The Company is prohibited from certain
corporate transactions, such as the payment of dividends, while the line is
outstanding without the lender's approval. At December 31, 1996, the Company
had $0 outstanding to the Bank under both the base borrowing amount and the
revolving line.
During 1996, the Company borrowed $1,470,300 from affiliates and other
individuals. The balance owing at December 31, 1996 was $445,000. These
amounts are secured by a second priority interest in substantially all assets of
the Company. The loans bear interest at 9.25% per annum and are due July 30,
1997.
At December 31, 1996, the Company had long term liabilities of $728,555,
consisting primarily of the mortgage on the Company's building and notes payable
to related parties. The Company is considering offering the building for sale
and relocating to leased premises. Although the Company will require additional
funds to sustain operations, the Company did not have any other significant
capital commitments at December 31, 1996.
The Company is dedicating substantially all available funds, including
amounts it is able to borrow, to the software marketing and support. The
Company has limited available resources. The Company may require additional
funding to sustain operations until such time, if ever, as substantial revenues
are received from software sales.
The auditor's report on the Company's December 31, 1996 financial
statements notes that the Company's substantial operating losses raise
substantial doubt about the Company's ability to continue as a going concern.
The Company anticipates that it will be able to obtain sufficient financing from
external sources, combined with results from operations, to sustain operations.
There can be no assurance that additional financing will be available to the
Company or that operating results will improve as management currently
anticipates.
FORWARD LOOKING STATEMENTS.
This report contains both historical statements of fact and forward looking
statements. Statements regarding the Company's expectations as to demand for
its products and future revenue and cash flow and certain other information
presented in this report constitute forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. When used in
this Form 10-K or other filings by the Company with the Securities and Exchange
Commission, in the Company's press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
officer of the Company's executive officers, the words or phrases "would be,"
"will allow," "intends to," "will likely result," "are
18
<PAGE>
expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify forward-looking statements.
Although the Company believes that its expectations with respect thereto are
based on reasonable assumptions within the bounds of its knowledge of its
business and operations, there can be no assurance that actual results will
not differ materially from its expectations. In addition to matters
affecting the economy and the Company's industry generally, factors which
could cause actual results to differ from expectations include the following:
Lack of market acceptance of INNOVUS MULTIMEDIA and other Company products
Lower than expected gross profit margins due to competitive pricing
pressures
Product and technological obsolescence
Competition
Inability to adequately market the software due to financial restraints
relative to competitors
The Company does not undertake, and specifically disclaims any obligation,
to update any forward looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and reports of independent certified public
accountants are filed as part of this report on pages F-1 through F-29.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL STATEMENT DISCLOSURE.
Effective November 7, 1996, the Company dismissed Hansen, Barnett & Maxwell
("Hansen") as its certifying accountant. Hansen's reports on the Company's
financial statements for the years ended December 31, 1995 and 1994 did not
contain an adverse opinion or a disclaimer of opinion and were not qualified as
to uncertainty, audit scope, or accounting principles.
The Company's board of directors unanimously approved dismissal of Hansen.
During the Company's two most recent fiscal years ended December 31, 1996
and 1995, there were no disagreements, as defined in Regulation S-K Item 304,
with Hansen on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements would
have caused Hansen to make a reference to the subject matter of the disagreement
in connection with its reports.
On November 7, 1996, the Registrant engaged Grant Thornton LLP ("Grant") to
perform its audits and provide various accounting services thereafter. The
Registrant did not consult with Grant prior to such date regarding any
reportable matter.
19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is information regarding (i) the current directors of the
Company, who will serve until the next annual meeting of shareholders or until
their successors are elected or appointed and qualified, and (ii) the current
executive officers of the Company, who are elected to serve at the discretion of
the Board of Directors.
The Company's executive officers and directors are as follows:
Name Age Position
David M. Mock 44 Chairman, Chief Financial Officer, Secretary,
Treasurer and Director
Terry R. Haas 47 President, Chief Executive Officer and Director
Gary F. Wall 39 Vice President - Finance, Controller
Michael L. Debloois 56 Director
Kenneth M. Woolley 50 Director
Jay Misra 40 Director*
Brenda Lowe Cornell 38 Director
Richard M. Cott 34 Director
* Mr. Misra has resigned from the Board effective April 11, 1997.
DAVID M. MOCK. Mr. Mock joined the Company in 1993 and assumed the
position of Chief Executive Officer in 1995. In addition to his
responsibilities as Chief Executive Officer, Mr. Mock is responsible for
facilitating the Company's financial and strategic planning and money
management. From 1993 to 1995 Mr. Mock was an executive officer and director
of MicroQue Corporation, a closely held company that designed products for
MacIntosh computers. From 1985 until June 1993, Mr. Mock also served as an
officer and director of Vystar Group, Inc., a publicly held corporation with
investments in different high technology companies. In June 1993, Vystar and
its partially owned subsidiary, Megahertz Corporation, a manufacturer of
PCMCIA modems for portable computers, of which Mr. Mock also served as a
director, reorganized with Megahertz being the surviving entity. He also
serves as a consultant to other Utah based high technology companies. Mr.
Mock has his bachelors degree in accounting and has completed the
requirements for a degree in finance at the University of Utah.
TERRY R. HAAS. Mr. Haas joined the Company on a part-time basis as
Director of Sales in 1995, became Executive Vice President Sales & Marketing
commencing June 1, 1996 and was appointed as President and Chief Executive
Officer in August, 1996. Mr. Haas is responsible for overseeing the
development of the Company's product and marketing strategies as well as
building the team to execute them within the parameters of the Company's
business model. Prior to joining Innovus, Mr. Haas was Vice President
Channel Sales and Marketing at Novell, Inc. from 1994 until May, 1996. From
1986 to 1992 he also held a variety of other sales and marketing positions at
Novell. During 1992 and 1993 he worked for Digital Equipment Corp., Lotus,
Xerox, and other high technology firms as a sales and marketing consultant.
Mr. Haas has a bachelor of
20
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science degree from Western Michigan University and an M.B.A. in finance from
DePaul University.
GARY F. WALL. Mr. Wall joined the Company in August 1995. Mr. Wall is
responsible for all financial, budgeting and reporting activities for the
Company. He has extensive experience with SEC reporting requirements and
other public filings. His previous experience includes over 12 years in
public accounting including Audit Manager at Hansen, Barnett & Maxwell in
Salt Lake City, Utah from 1990 to August 1995. Mr. Wall has a B.S. in
Accounting from Brigham Young University.
MICHAEL L. DEBLOOIS. Mr. DeBloois was director of customer relations
and sales for the Company's services business from 1996 to 1997. Mr.
DeBloois currently is a partner in Multimedia Group, which provides
substantially the same services previously offered by the Company's services
business. From 1987 to 1992, Mr. DeBloois was President of MIKEN
Corporation, a professional education consulting company with corporate
clients throughout the United States. He has been a professor of
Instructional Design and Technology at both Florida State and Utah State
Universities before establishing his own consulting company in 1989, which he
operated until joining the Company. Mr. DeBloois has been published in
dozens of computer industry and education journals. He has a B.A. from Utah
State University, M.A. from the University of Utah and an Ed.D. from the
University of Massachusetts, Amherst.
KENNETH M. WOOLLEY. Mr. Woolley has been a founder and director of
several companies. Mr. Woolley served on the Board of Directors of Megahertz
Holding Corporation, the leading manufacturer of fax/modems for laptop and
notebook computers until February 1995. Prior to the merger of Megahertz and
VyStar Group, Inc. in June 1993, Mr. Woolley had served as President of the
parent company. Since 1979, Mr. Woolley has been a principal in Extra Space
Management, Inc. and Extra Space Storage, privately held companies engaged in
the ownership and management of mini-storage facilities. Since 1989, Mr.
Woolley has been a partner in D.K.S. Associates, and since 1990 a director
and executive officer of Realty Management, Inc., privately held companies
engaged in the ownership and management of apartments, primarily in Las
Vegas, Nevada. Mr. Woolley is a director of Cirque Corporation. Mr. Woolley
also serves as an associate professor of business management at Brigham Young
University. Mr. Woolley holds a B.A. in Physics from Brigham Young
University, an M.B.A. and Ph.D. in Business Administration from the Stanford
University Graduate School of Business.
JAY MISRA. Mr. Misra became a Director of the Company in July, 1996.
From 1996 to the present, Mr. Misra has managed his private investments.
From 1995 to 1996, Mr. Misra was a managing director with Soros Fund
Management. From 1991 to 1995, Mr. Misra was a vice president with Capital
Group, a San Francisco based portfolio manager. From 1989 to 1991, Mr. Misra
was acting director of marketing for 3Com Corporation. He is currently a
director of Nirwana Corporation and Ukiah Software Company. Mr. Misra holds
an M.B.A. from Harvard Business School and M.S. and B.S. degrees in
engineering from the University of Pittsburgh.
BRENDA LOWE CORNELL. Ms. Cornell has been a director of the Company
since its acquisition of Innovus and was Vice-President of Customer Support
until leaving to pursue personal interests in January, 1997. Ms. Cornell has
seven six years of training experience with the multimedia products for the
Company and its predecessors. Ms. Cornell was previously Media Director for
International Connections, a video and laser disc production company,
managing all computer-based media production and program design.
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<PAGE>
RICHARD M. COTT. Mr. Cott became a director of the Company in 1997.
Since October, 1992, Mr. Cott has held a number of finance related positions
with The Free Methodist Foundation, a 501(c)3 foundation. His current
positions with The Free Methodist Foundation include Executive Vice
President, Chief Financial Officer and Treasurer. Mr. Cott has been an
adjunct professor in management and organizational development in the
graduate program of Spring Arbor College since 1994. From May to October
1992 Mr. Cott was a registered representative with The Prudential. From
October 1984 through May 1990 Mr. Cott was with the United States Air Force,
culminating as a Captain and A-10 fighter pilot. Mr. Cott holds a B.A. in
business administration and political science from Hope College and an M.B.A.
from Webster University.
SIGNIFICANT EMPLOYEES
BILL KESSELRING. Mr. Kesselring joined the Company in October 1996. He
is responsible for the Company's product development, customer support, and
information systems. Prior to joining the Company, Mr. Kesselring managed
the consulting firm, Kesselring and Associates, working with such clients as
Next Software, Novell Inc., and Microsoft. He has worked for Novell Inc. and
Dataquest Inc., and was a board member of Component Integration Laboratories.
SHAWN P. CUNNINGHAM. Mr. Cunningham joined the Company in March 1994.
Mr. Cunningham oversees management and marketing for the Innovus product
line. Prior to joining the Company, Mr. Cunningham was Marketing Manager for
the AppWare Division at Novell Inc. He has worked with Silicon Graphics,
Adobe, Inmac, Price Waterhouse, and numerous other technology companies as a
marketing software consultant.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has voted to establish two
committees, the Compensation Committee, and the Audit Committee. Neither
committee met during 1996 and all activities of the respective committees
were undertaken by the Board as a whole.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission and the National Association of Securities Dealers. Officers,
directors and greater than ten-percent shareholders are required by
Securities and Exchange Commission regulations to furnish the Company with
copies of all Section 16(a) forms they file. Based solely on a review of the
copies of such forms furnished to the Company between January 1, 1996 and
December 31, 1996, on year-end reports furnished to the Company after
December 31, 1996 and on representations that no other reports were required,
the Company has determined that during the last fiscal year all applicable
16(a) filing requirements were met except as follows:
David Broadbent, a former officer and director of the Company, did not
file a Form 4 reporting the sale of 23,200 shares in October and November,
1996 by a family trust for which Mr. Broadbent is a trustee. Such sales
should have been reported on Forms 4 filed in November and December, 1996.
The Forms were not timely filed.
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David Mock and a family corporation controlled by him exercised options
to acquire 153,332 shares in May, 1996. These exercises should have been
reported on a Form 5 filed by February 17, 1997. The Form was not timely
filed.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the aggregate cash compensation paid by
the Company for services rendered during the last three years to the
Company's Chief Executive Officer as of December 31, 1996 and to each of the
Company's other executive officers whose annual salary and bonus exceeded
$100,000.
SUMMARY COMPENSATION
Annual Compensation Long Term Compensation
Year Other Annual
Name and Ended Salary Bonus Compensation Options/SARs
Principal Position 12/31 ($) ($)(1) ($) (#)
- ------------------ ----- ------- ------ ------------ ------------
Terry R. Haas(1) 1996 $84,345
President/CEO 1995 $ 0
1994 $ 0
David Mock(2) 1996 $60,862
Chairman/CEO 1995 $70,300
1994 $ 0 354,738
(1) The Company has agreed to compensate Mr. Haas with a base salary of a
$185,000 per year through March 31, 1999 with a one time cash bonus of $50,000
in April, 1997 and such future incentives as may be determined by the Board.
Upon a termination following a change in control, Mr. Haas would be entitled to
one year's base salary as severance pay. The Company may acquire key man life
insurance with respect to Mr. Haas on a so-called reverse split dollar basis
with a death benefit of up to $1,000,000. Under this arrangement, the Company
leases an insurance policy owned by Mr. Haas. The premium paid by the Company
may exceed the premium it would be required to pay for similar coverage directly
to an insurance company, and may exceed the premium actually being paid by Mr.
Haas. The terms of compensation have not been reduced to a written agreement.
(2) Effective January 1, 1995, Mr. Mock entered into an employment
agreement with the Company. Mr. Mock's current base salary is $72,000 per year.
In addition, Mr. Mock is entitled to receive such discretionary bonuses, not to
exceed 100% of base salary, as may be granted by the Board of Directors. The
Company has agreed to acquire key man life insurance with respect to Mr. Mock on
a so-called reverse split dollar basis with a death benefit of $500,000. Under
this arrangement, the Company leases an insurance policy owned by Mr. Mock. The
premium paid by the Company may exceed the premium it would be required to pay
for similar coverage directly to an insurance company, and may exceed the
premium actually being paid by Mr. Mock. As of the date of this report, such
insurance has not been acquired.
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STOCK OPTIONS GRANTED IN LAST FISCAL YEAR
Information concerning 1996 grants to named executive officers is reflected
in the table below. The amounts shown for each of the named executive officers
as potential realizable values are based on arbitrarily assumed annualized rates
of stock price appreciation of five percent and ten percent over the full terms
of the options. These potential realizable values are based solely on
arbitrarily assumed rates of price appreciation required by applicable SEC
regulations. Actual gains, if any, on option exercises and common stockholdings
are dependent on the future performance of the Company and overall stock market
conditions. There can be no assurance that the potential realizable values
shown in this table will be achieved.
<TABLE>
=======================================================================================================
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
FOR OPTION TERM
- -------------------------------------------------------------------------------------------------------
% OF TOTAL
OPTIONS
GRANTED TO
OPTIONS EMPLOYEES IN (5%) (10%)
NAME GRANTED (#) 1996 EXERCISE PRICE EXPIRATION DATE ($) ($)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Terry Haas 200,000 49.3% $7.75 8/12/01 $276,282 $610,510
- -------------------------------------------------------------------------------------------------------
Terry Haas 75,000 18.5% $7.50 3/14/01 $ 93,245 $206,047
- -------------------------------------------------------------------------------------------------------
David M. Mock 56,250 13.6% $5.50 9/30/02 $105,217 $238,702
- -------------------------------------------------------------------------------------------------------
David M. Mock 56,250 13.6% $2.50 9/30/02 $47,826 $108,501
=======================================================================================================
</TABLE>
SECTION 401(k) PLAN
The Company maintains a deferred compensation plan pursuant to Section
401(k) of the Internal Revenue Code of 1986, as amended (the "Plan").
Participation in the Plan is available to all employees 21 years and older.
The Company may, at its option, make contributions to the Plan equal to a
percentage of voluntary contributions made by participants or it may make a
contribution equal to a percentage of the salary of all participants. The
Company has not made contributions to the Plan.
STOCK OPTION PLAN
The Company has adopted the Innovus Corporation Omnibus Stock Option
Plan (the "Option Plan") to assist the Company in securing and retaining key
employees and directors. The Option Plan provides that options to purchase a
maximum of 1,327,500 shares of Common Stock may be granted to (i) directors,
and (ii) officers (whether or not a director) or key employees of the Company
("Eligible Employees"). The Option Plan will terminate on September 6, 2004,
unless sooner terminated by the Board of Directors.
The Option Plan is administered by a committee (the "Option Committee")
currently consisting of the Board of Directors. The total number of options
granted in any year to Eligible Employees, the number and selection of
Eligible Employees to receive options, the number of options granted to each
and the other terms and provisions of such options are wholly within the
discretion of the Option Committee, subject to the limitations set forth in
the Option Plan. The option exercise price for options granted under the Plan
may not be less than 100% of the fair
24
<PAGE>
market value of the underlying common stock on the date the option is granted.
Options granted under the Option Plan expire upon the earlier of an
expiration date fixed by the Option Committee or five years from the date of
grant.
As of March 29, 1997, options to purchase 1,327,500 shares of Common
Stock were granted under the Plan.
REPRICING OF OPTIONS
The repricing of options and warrants reflected on the following table
were effectuated following the election of Terry Haas as CEO of the Company.
In all cases, the stock price at the time of repricing was significantly lower
than the exercise price and the price at the date of grant. The decline in
stock price was based, in part, on business decisions made by the prior
leadership of the Company. In order to provide incentives to the employees,
including Mr. Haas, to refocus the Company, the options and warrants were
repriced to reflect the current market price, in order to better reflect and
indicate the performance of the Company under the leadership of Mr. Haas.
<TABLE>
================================================================================================
LENGTH OF
NUMBER OF ORIGINAL
SECURITIES OPTION TERM
UNDERLYING MARKET PRICE OF EXERCISE PRICE REMAINING
OPTIONS/SARS STOCK AT TIME AT TIME OF NEW AT DATE OF
DATE OF REPRICED OR OF REPRICING REPRICING OR EXERCISE REPRICING OR
NAME REPRICING AMENDED OR AMENDMENT AMENDMENT PRICE AMENDMENT
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Terry Haas 12/27/96 25,000 $3.63 $7.50 $4.25 4 years
- ------------------------------------------------------------------------------------------------
Terry Haas 10/31/96 75,000 $4.50 $7.50 $4.50 4 years
4 1/2 months
(3/14/01)
- ------------------------------------------------------------------------------------------------
Terry Haas 09/26/96 200,000 $5.13 $7.75 $5.00 4 years
10 1/2 months
(8/12/01)
- ------------------------------------------------------------------------------------------------
David M. Mock 1/27/97 56,250 $2.38 $5.50 $2.50 5 years
8 months
(9/30/02)
================================================================================================
</TABLE>
COMPENSATION OF DIRECTORS
The Company's non-employee Directors are not currently compensated for
attendance at Board of Director meetings. Non-employee directors have been
granted, on an ad hoc basis, stock options upon being appointed to the Board.
The Company may adopt a formal director compensation plan in the future. All
of the Directors are reimbursed for their expenses for each Board and
committee meeting attended.
25
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth information regarding Common Stock of the
Company beneficially owned as of March 18, 1997 by: (i) each person known by
the Company to beneficially own 5% or more of the outstanding Common Stock,
(ii) by each director and director nominee, and (iii) by all officers and
directors as a group.
==================================================================
Name of Officers and Directors
and Names and Addresses Amount of Common
of Principal Stockholders Shares* Percentage
- ------------------------------------------------------------------
David M. Mock(1)
2060 East 2100 South
Salt Lake City, Utah 869,100 15.1%
- ------------------------------------------------------------------
Terry Haas(2)
2060 East 2100 South
Salt Lake City, Utah 187,083 3.2%
- ------------------------------------------------------------------
Brenda Lowe Cornell
2060 East 2100 South
Salt Lake City, Utah 294,870 5.1%
- ------------------------------------------------------------------
Gary F. Wall
2060 East 2100 South
Salt Lake City, Utah 12,600 0.2%
- ------------------------------------------------------------------
Kenneth M. Woolley(3)
2060 East 2100 South
Salt Lake City, Utah 123,125 2.1%
- ------------------------------------------------------------------
Michael DeBloois
2060 East 2100 South
Salt Lake City, Utah 5,000 0.1%
- ------------------------------------------------------------------
Jay Misra
1150 North Buffalo Drive
Apt. 2010
Las Vegas, Nevada 12,500 0.2%
- ------------------------------------------------------------------
Richard M. Cott(4)
3471 Henderson Road
Spring Arbor, MI 49283 0 0.0%
- ------------------------------------------------------------------
David Broadbent(5)
2060 East 2100 South
Salt Lake City, Utah 409,217 7.1%
- ------------------------------------------------------------------
Andy Stallman(6)
2800 Nielson Way, #1103
Santa Monica, CA 90405 495,480 8.1%
- ------------------------------------------------------------------
26
<PAGE>
==================================================================
Name of Officers and Directors
and Names and Addresses Amount of Common
of Principal Stockholders Shares* Percentage
- ------------------------------------------------------------------
All Directors and Executive
Officers (8 persons) 1,391,778 22.5%
==================================================================
_____________
* Assumes exercise of all exercisable options held by listed
security holders which can be acquired within 60 days from March
18, 1997.
(1) Includes shares held by a family corporation and a charitable
foundation over which Mr. Mock holds voting control. Mr. Mock
disclaims beneficial ownership of shares held by charitable
foundation. Includes options held by Mr. Mock or his affiliates
which will entitle them to purchase 225,000 shares.
(2) Includes options held by Mr. Haas which will entitle him to
purchase 187,083 shares.
(3) Includes options held by Mr. Woolley which will entitle him to
purchase 12,500 shares.
(4) Does not include 23,000 shares of Series F Preferred Stock
(convertible into at least 575,000 shares of common stock) and
warrants to purchase 115,000 shares of common stock held by
accounts associated with The Free Methodist Foundation. Mr. Cott
disclaims beneficial ownership of such shares.
(5) Includes shares over which Mr. Broadbent exercises voting control
held for the benefit of Mr. Broadbent's minor children and family
trusts.
(6) Includes 400,000 shares of common stock which may be acquired by
Mr. Stallman on exercise of outstanding warrants.
The stockholders listed have sole voting and investment power, except as
otherwise noted.
27
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has agreed to lease key man life insurance policies from Mr.
Broadbent and Mr. Mock on their respective lives on a so-called reverse split
dollar basis. The premium to be paid by the Company may exceed the premium
it would be required to pay for similar coverage directly to an insurance
company, and may exceed the premium actually being paid by Messrs. Broadbent
and Mock.
Mr. Mock and a family corporation controlled by him have from time to
time advanced funds to the Company. Mr. Mock or the corporation have
converted $120,750 of such debt into Common Stock at a price of $2.25 per
share. In 1994, the family corporation also converted $200,000 of debt into
13,333 shares of Preferred Stock at $15.00 per share. The prices for such
conversions were equal to the prices being paid by third parties for
restricted stock at or about the time of the conversions. The balance of the
debt bore interest at 9% per annum. The outstanding debt to Mr. Mock in the
amount of $715,600, was repaid in 1995.
In September, 1996 the Company entered into bridge financing
arrangements with Mr. Mock and unrelated parties whereby the Company borrowed
$625,000 at prime plus 1% per annum. Borrowings under the bridge financing
are secured by substantially all of the assets of the Company, subject to the
senior security interest of the Bank. Warrants to purchase up to 312,500
shares at $5.50 per share were issued to the lenders in connection with the
bridge financing.
Mr. DeBloois is a partner in the Multimedia Group. The Multimedia Group
provides substantially the same services as were previously offered by the
Company's services business. The Multimedia Group has agreed to complete
work which the services business had in process when it was discontinued in
January, 1997 and to provide similar support to the Company's customers in
the future. The Multimedia Group is utilizing a portion of the Company's
facilities and equipment, for which it has agreed to pay a fair rental value.
The exact terms of the rental and the other arrangements between the Company
and the Multimedia Group are being negotiated.
In 1997 accounts associated with The Free Methodist Foundation purchased
23,000 shares of Series F Preferred Stock (convertible into at least 575,000
shares of common stock) and warrants to purchase 115,000 shares of common
stock. Mr. Cott is Chief Financial Officer of The Free Methodist Foundation.
Such shares and warrants were purchased prior to Mr. Cott joining the
Company's Board of Directors.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
TITLE OF DOCUMENTS PAGE NO.
- ------------------ --------
Reports of Independent Accountants F-2, F-3
Consolidated Balance Sheets at December 31, 1996 and 1995 F-4
Consolidated Statements of Operations for the Years
Ended December 31, 1996, 1995 and 1994 F-6
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1996, 1995 and 1994 F-7
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 F-8
Notes to Consolidated Financial Statements F-9
FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the notes thereto.
(b) REPORTS ON FORM 8-K
The Company filed two Current Reports on Form 8-K during the fourth
quarter of its fiscal year ended December 31, 1996. The Form 8-K dated
October 7, 1996 reported the issuance of the Company's Series C and D
Preferred Stock. The Form 8-K dated November 7, 1996 reported the dismissal
of Hamsen, Barnett & Maxwell as the Company's certifying accountant and
the appointment of Grant Thornton LLP. Neither Form 8-K included any
financial statements.
(c) EXHIBITS
The following documents are included as exhibits to this report.
EXHIBITS EXHIBIT DESCRIPTION PAGE OR LOCATION
-------- ------------------- ----------------
3.1 Articles of Amendment *
3.2 By-laws **
3.3 Certificate of Designation - Series C
Preferred Stock
3.4 Certificate of Increase to the Certificate
of Designation - Series C Preferred Stock
3.5 Certificate of Designation - Series D
Preferred Stock
3.6 Certificate of Correction to Certificate
of Designation - Series D Preferred Stock
3.7 Certificate of Designation - Series E
Preferred Stock
3.8 Certificate of Designation - Series F
Preferred Stock
3.9 Certificate of Designation - Series G
Preferred Stock
29
<PAGE>
10.3 Employment Agreement - David Mock *
11.1 Computation of Earnings per Share
21.1 Subsidiaries of the Registrant *
24.1 Consent of Hansen Barnett & Maxwell
24.2 Consent of Grant Thornton LLP
* Incorporated by reference to the Company's Form 10-K for the year
ended December 31, 1994
** Incorporated by reference to the Company's Registration Statement,
File No. 33-33136-D
30
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
INNOVUS CORPORATION
Dated: April 14, 1997 By /s/ TERRY R. HAAS
-------------------------------
Terry R. Haas, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Terry R. Haas Chief Executive Officer April 14, 1997
- ---------------------------- President and Director
Terry R. Haas
/s/ David Mock Chairman and Director April 14, 1997
- ---------------------------- Principal Financial Officer
David Mock
/s/ Gary F. Wall Vice President-Finance April 14, 1997
- ---------------------------- Controller, Principal
Gary F. Wall Accounting Officer
/s/ Brenda Lowe Cornell Director April 14, 1997
- ----------------------------
Brenda Lowe Cornell
/s/ Kenneth M. Woolley Director April 14, 1997
- ----------------------------
Kenneth M. Woolley
/s/ Michael DeBloois Director April 14, 1997
- ----------------------------
Michael DeBloois
Director April __, 1997
- ----------------------------
Jay Misra
Director April __, 1997
- ----------------------------
Richard M. Cott
<PAGE>
Innovus Corporation and Subsidiary
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Grant Thornton LLP, independent certified public
accountants on the December 31, 1996 and 1995 financial statements F-2
Report of Hansen, Barnett & Maxwell, independent certified public
accountants on the December 31, 1994 financial statements F-3
Consolidated financial statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-4
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 F-6
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994 F-7
Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994 F-8
Notes to Consolidated Financial Statements F-9
All Financial Statement Schedules are omitted because they are not applicable or
because the required information is contained in the Consolidated Financial
Statements or the Notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Innovus Corporation
We have audited the accompanying consolidated balance sheets of Innovus
Corporation and Subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Innovus
Corporation and Subsidiary as of December 31, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company has incurred substantial operating losses during the past three
years. In addition, cash flows from operations has been negative for the past
three years which has resulted in low levels of working capital. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are described in Note B.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
GRANT THORNTON LLP
Salt Lake City, Utah
March 7, 1997
F-2
<PAGE>
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
MEMBER OF AICPA DIVISION OF FIRMS Fax (801) 532-7944
MEMBER OF SECPS 345 East Broadway, Suite 200
MEMBER OF SUMMIT INTERNATIONAL ASSOCIATES Salt Lake City, Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors
Innovus Corporation
We have audited the accompanying consolidated statement of operations,
stockholders' equity (deficit) and cash flows of Innovus Corporation and
Subsidiary for the year ended December 31, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated statement of operations, stockholders' equity
(deficit) and cash flows referred to above present fairly, in all material
respects, the operations and cash flows of Innovus Corporation and Subsidiary
for the year ended December 31, 1994 in conformity with generally accepted
accounting principles.
HANSEN BARNETT & MAXWELL
Salt Lake City, Utah
February 21, 1996
F-3
<PAGE>
Innovus Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
1996 1995
---------- ----------
CURRENT ASSETS (Note E)
Cash and cash equivalents $ 886,122 $2,362,556
Accounts receivable, net 116,761 59,766
Inventories 39,003 -
Prepaid expenses 119,849 43,738
---------- ----------
Total current assets 1,161,735 2,466,060
PROPERTY AND EQUIPMENT, net 1,341,175 1,363,101
(Notes C and E)
OTHER ASSETS
Software development costs, net
(Notes D and E) 809,824 886,153
Other 30,442 34,816
---------- ----------
$3,343,176 $4,750,130
---------- ----------
---------- ----------
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Innovus Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
------------ -----------
CURRENT LIABILITIES
Accounts payable $ 716,068 $ 167,846
Accrued compensation 216,805 208,293
Accrued liabilities 126,022 30,715
Current maturities of long-term debt
(Note E) 28,477 48,067
Current maturities of capital lease
obligations (Note E) 37,220 18,539
------------ -----------
Total current liabilities 1,124,592 473,460
LONG-TERM DEBT,
less current maturities (Note E) 671,564 682,096
CAPITAL LEASE OBLIGATIONS,
less current maturities (Note E) 56,991 40,689
------------ -----------
Total liabilities 1,853,147 1,196,245
------------ -----------
COMMITMENTS (Notes E, F, H, J, L and M) - -
STOCKHOLDERS' EQUITY (Notes H, I, J, K, L and M)
Preferred stock - $0.001 par value; 1,000,000
shares authorized; 87,100 shares issued
and outstanding in 1996 87 -
Common stock - $0.001 par value; 15,000,000
shares authorized; 5,052,811 shares and
4,691,037 shares issued and outstanding,
respectively 5,053 4,691
Additional paid-in capital 14,996,682 9,255,355
Deferred compensation (14,486) -
Accumulated deficit (13,497,307) (5,706,161)
------------ -----------
Total stockholders' equity 1,490,029 3,553,885
------------ -----------
$ 3,343,176 $ 4,750,130
------------ -----------
------------ -----------
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Innovus Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1996 1995 1994
----------- ----------- -----------
Net sales $ 597,567 $ 189,380 $ 193,848
----------- ----------- -----------
Costs and operating expenses
Costs of products and
services sold 302,571 123,701 234,234
Amortization of software
development costs 796,673 315,464 -
Product development 1,185,525 1,340,415 444,855
Selling and marketing 3,988,987 1,417,396 425,403
General and administrative
(Note J) 1,279,542 719,862 537,860
----------- ----------- -----------
7,553,298 3,916,838 1,642,352
----------- ----------- -----------
Operating loss (6,955,731) (3,727,458) (1,448,504)
----------- ----------- -----------
Other income (expense)
Interest income 35,195 86,349 -
Interest expense for warrants
issued with debt (Note E) (773,350) - -
Interest expense, other (97,260) (94,242) (105,709)
----------- ----------- -----------
(835,415) (7,893) (105,709)
----------- ----------- -----------
NET LOSS $(7,791,146) $(3,735,351) $(1,554,213)
----------- ----------- -----------
----------- ----------- -----------
Loss per common share $ (1.59) $ (0.98) $ (0.60)
----------- ----------- -----------
----------- ----------- -----------
Weighted number of shares of
common stock used in per share
calculation 4,913,091 3,794,276 2,577,125
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Innovus Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31, 1996, 1995 and 1994
<TABLE>
Preferred Stock Common Stock Additional
---------------- ------------------ Paid-In Accumulated
Shares Amount Shares Amount Capital Other Deficit Total
-------- ------ --------- ------ ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 - $ - 2,470,625 $2,471 $ 111,601 $ - $ (416,597) $ (302,525)
Issuance of common stock for cash - - 164,250 164 301,336 - - 301,500
Net effect of merger with Tri-Nem
subsidiary - - 205,000 205 (7,908) - - (7,703)
Issuance of preferred stock for
a note 11,334 11 - - 169,989 (170,000) - -
Issuance of preferred stock for
cash, net of offering costs
of $64,525 52,666 53 - - 685,672 39,750 - 725,475
Conversion of debt and liabilities - - 79,097 79 178,913 - - 178,992
Net loss for the year - - - - - - (1,554,213) (1,554,213)
-------- ----- --------- ------ ----------- --------- ------------ -----------
Balance at December 31, 1994 64,000 64 2,918,972 2,919 1,439,603 (130,250) (1,970,810) (658,474)
Issuance of preferred stock for
cash, net of offering costs of
$17,923 and finders fees of
$108,147 56,000 56 - - 1,049,874 - - 1,049,930
Issuance of common stock for cash - - 163,833 164 571,586 - - 571,750
Conversion of debt and accrued
interest into common stock - - 78,932 79 191,148 - - 191,227
Conversion of preferred stock
into common stock (120,000) (120) 720,000 720 (600) - - -
Issuance of common stock for
cash in initial public offering,
net of offering costs of
$100,804 and finders fees of
$222,090 - - 692,000 692 5,904,414 - - 5,905,106
Common stock issued upon
exercise of stock options - - 192,300 192 49,255 - - 49,447
Surrendering of shares - - (75,000) (75) 75 - - -
Collection of receivable from
stockholders - - - - - 130,250 - 130,250
Compensation related to grant
of stock options - - - - 50,000 - - 50,000
Net loss for the year - - - - - - (3,735,351) (3,735,351)
-------- ----- --------- ------ ----------- --------- ------------ -----------
Balance at December 31, 1995 - - 4,691,037 4,691 9,255,355 - (5,706,161) 3,553,885
Deferred compensation from
grant of stock options - - - - 23,437 (23,437) - -
Exercise of stock warrants and
options, including conversion of
$18,452 of debt, net of stock
surrendered - - 361,774 362 95,088 - - 95,450
Issuance of preferred stock in
private placement offerings, net
of offering costs of $376,727 87,100 87 - - 3,958,186 - - 3,958,273
Amortization of deferred
compensation - - - - - 8,951 - 8,951
Issuance of warrants for debt
and consulting expenses - - - - 1,664,616 - - 1,664,616
Net loss for the year - - - - - - (7,791,146) (7,791,146)
-------- ----- --------- ------ ----------- --------- ------------ -----------
Balance at December 31, 1996 87,100 $ 87 5,052,811 $5,053 $14,996,682 $ (14,486) $(13,497,307) $ 1,490,029
-------- ----- --------- ------ ----------- --------- ------------ -----------
-------- ----- --------- ------ ----------- --------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
Innovus Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1996 1995 1994
----------- ----------- -----------
Increase (decrease) in cash and
cash equivalents
Cash flows from operating
activities
Net loss $(7,791,146) $(3,735,351) $(1,554,213)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization 972,310 433,487 63,765
Expenses for issued warrants 1,032,276 - -
Changes in assets and
liabilities
Accounts receivable (56,995) (51,944) 33,126
Inventories (39,003) 27,360 45,308
Accounts payable and
accrued expenses 652,041 75,993 131,038
Other (31,186) 10,495 (4,582)
----------- ----------- -----------
Net cash used in
operating activities (5,261,703) (3,239,960) (1,285,558)
----------- ----------- -----------
Cash flows from investing activities
Acquisition of property and
equipment (90,725) (506,654) (165,915)
Proceeds from purchase of Tri-Nem - - 952
Increase in software development
costs (720,344) (793,233) (255,760)
----------- ----------- -----------
Net cash used in
investing activities (811,069) (1,299,887) (420,723)
----------- ----------- -----------
Cash flows from financing activities
Proceeds from borrowings 1,470,300 - 1,039,100
Payments to reduce long-term debt
and capital lease obligations (1,075,430) (1,146,068) (110,678)
Net proceeds from issuance of
preferred and common stock 4,201,468 7,576,233 1,091,500
Collection of receivable
from stockholder - 130,250 -
----------- ----------- -----------
Net cash provided by
financing activities 4,596,338 6,560,415 2,019,922
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents (1,476,434) 2,020,568 313,641
Cash and cash equivalents at
beginning of year 2,362,556 341,988 28,347
----------- ----------- -----------
Cash and cash equivalents at
end of year $ 886,122 $ 2,362,556 $ 341,988
----------- ----------- -----------
----------- ----------- -----------
Supplemental Cash Flow Information - Note K
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. ORGANIZATION AND CONSOLIDATION
Tri-Nem, Inc. (Tri-Nem), a Delaware corporation, was incorporated on
December 21, 1988. Utah Info Connection, a Utah corporation (Utah Info),
was incorporated on May 13, 1987. Utah Info changed its name to Innovus
Multimedia, Inc. (Innovus) in January 1994.
On September 6, 1994, the shareholders of Tri-Nem and Innovus approved an
agreement and plan of reorganization whereby a newly-formed, wholly-owned
subsidiary of Tri-Nem was merged into Innovus and the Innovus shareholders
exchanged each of their shares of Innovus common stock for 2.95 shares of
the common stock of Tri-Nem. Accordingly, Tri-Nem issued 2,514,875 shares
of its common stock in exchange for all of the outstanding shares of Innovus
common stock. There were 205,000 shares of Tri-Nem common stock outstanding
prior to the reorganization, after restatement for a 1-for-10 reverse stock
split.
The reorganization was accounted for as a recapitalization of Innovus and
the issuance by Innovus of 205,000 shares of common stock for the assets and
liabilities of Tri-Nem. Those limited assets and liabilities were recorded
under the purchase method of accounting at their historical cost which
approximated fair value. The accompanying financial statements include the
operations of Innovus for all periods presented with the operations of Tri-
Nem included from the date of the recapitalization. The operations of Tri-
Nem were immaterial prior to the recapitalization; accordingly, pro forma
results of operations assuming the recapitalization had occurred January 1,
1994 are not presented. All intercompany accounts and transactions have been
eliminated in consolidation. In connection with the recapitalization, Tri-
Nem's name was changed to Innovus Corporation.
2. BUSINESS ACTIVITY
Innovus Corporation and its wholly-owned subsidiary, Innovus Multimedia,
Inc. are collectively referred to herein as the Company. The Company is a
provider of software development tools designed for building modifiable
media-intensive business information management systems. These tools
provide links to company databases through open data base connectivity and
object linking and embedding technology. Prior to 1996, a significant
portion of all the Company's sales were for multimedia interactive kiosk
systems (kiosk systems). The systems were primarily sold to United States
government agencies. The Company no longer sells or supports kiosk systems.
F-9
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
3. CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid debt instruments purchased with an
original maturity of three months or less when purchased to be cash
equivalents. The Company has entered into a sweep account arrangement
whereby excess funds are invested in U.S. Government obligations on a daily
basis. Those investments are considered cash equivalents. The Company
maintains cash and cash equivalents at several financial institutions.
Amounts at each institution are insured by the FDIC up to $100,000.
Uninsured balances aggregate approximately $900,000 at December 31, 1996
($2,300,000 in 1995).
4. INVENTORIES
Inventories consist of packaged software products and individual component
units awaiting assembly as packaged software. Inventory is valued at the
lower of cost or market with cost being determined using the first-in,
first-out method.
5. DEPRECIATION AND AMORTIZATION
Property and equipment are reported at cost. Depreciation and amortization
are provided in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives. Leased property under
capital leases are amortized over the shorter of the lives of the respective
leases or over the service lives of the asset. The straight-line method of
depreciation is followed for financial reporting purposes and accelerated
methods are used for income tax purposes.
6. SOFTWARE DEVELOPMENT COSTS
Costs incurred in creating computer software products are charged to
operations as research and development expense prior to the development of a
detailed program design or a working model. After the detailed program
design or working model has been established, costs of producing product
masters are capitalized as software development costs.
F-10
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
6. SOFTWARE DEVELOPMENT COSTS - CONTINUED
Costs of maintenance and customer support are recognized as expense when the
related revenue is recognized or when those costs are incurred, whichever
occurs first. Amortization of capitalized costs relating to each software
product begins when that product is released for sale to customers.
Amortization is computed using the greater of (a) the ratio that current
revenues from the software bear to current and estimated future revenues
from the software or (b) the straight-line method over the remaining
estimated economic life of the software, which is presently estimated to be
from one to two years. Unamortized costs are carried at the lower of cost or
net realizable value. In management's opinion, the net realizable value of
future sales exceeds the carrying value of unamortized software development
costs.
7. INCOME TAXES
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. An
allowance against deferred tax assets is recorded when it is more likely
than not that such tax benefits will not be realized.
8. COMMON STOCK
During March 1995, the Company completed a reverse split of its common stock
on a 1-for-2 basis. The accompanying financial statements have been restated
to reflect this stock split for all periods presented.
9. LOSS PER SHARE
Loss per share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the year. Convertible
debt, convertible preferred stock and outstanding common stock warrants and
options were excluded from the weighted average number of shares of common
stock as they would decrease loss per share.
F-11
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
10. REVENUE RECOGNITION
The Company recognizes revenues on the majority of its product sales and
services at the time of product delivery or the rendering of services.
Occasionally, the Company enters into long-term contracts under which
services are delivered over the term of the contract. Revenue under long-
term contracts is recognized on the percentage-of-completion method.
11. PRODUCT DEVELOPMENT EXPENSE
Product development expense includes all expenses related to future releases
and enhancements of products, including research, development, porting of
software to new operating systems and platforms, documentation and
development of training programs, less allowable capitalized software
development costs. Research and development costs incurred under contracts
with others are recognized as cost of products and services sold as
incurred.
12. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets, liabilities, revenues
and expenses during the reporting period. Estimates also affect the
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from these estimates. An estimate
which is subject to significant accounting sensitivity and which is affected
by expected future gross revenues is the realization of capitalized software
development costs. Management believes the estimates used in determining
the carrying value of capitalized software development costs as of the
respective balance sheet dates are reasonable.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments is not presented because,
in management's opinion, there is no material difference between carrying
amounts and estimated fair values of financial instruments as presented in
the accompanying consolidated balance sheets.
14. RECLASSIFICATIONS - NOT MATERIAL
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform with the 1996 presentation. The reclassifications are
not material.
F-12
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE B - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of
the Company as a going concern. However, the Company has sustained
substantial operating losses during recent years, which has resulted in an
accumulated deficit of $13,497,307 as of December 31, 1996. The Company has
used the proceeds from issuance of stock and from debt financing to fund its
recurring losses. Given the losses and the lack of operating working
capital, it is not presently known whether the Company can continue to
satisfy its obligations in the future.
In view of these matters, realization of a major portion of the assets in
the accompanying balance sheet at December 31, 1996 is dependent upon
continued operation of the Company and the Company's ability to meet its
financial requirements. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or amounts and classifications of liabilities that might be
necessary should the Company be unable to continue.
Management believes that the Company will be able to obtain the necessary
financial resources to meet its financial obligations in the future through
operations and through equity financing.
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment and estimated useful lives consist of the following:
Years 1996 1995
----- ---------- ----------
Building 40 $ 422,231 $ 422,231
Computer and office equipment 5-7 907,499 791,113
Furniture and fixtures 5-7 115,859 92,460
---------- ----------
1,445,589 1,305,804
Less accumulated depreciation
and amortization (478,845) (317,134)
---------- ----------
966,744 988,670
Land 374,431 374,431
---------- ----------
$1,341,175 $1,363,101
---------- ----------
---------- ----------
F-13
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE C - PROPERTY AND EQUIPMENT - CONTINUED
Depreciation expense, including amortization expense related to equipment
recorded under capital leases, was $166,686, $118,023 and $63,765 for the
years ended December 31, 1996, 1995 and 1994, respectively. The gross amount
of equipment recorded under capital leases at December 31, 1996 and 1995
was $119,083 and $62,747 respectively, with related accumulated amortization
of $15,460 and $4,229 at December 31, 1996 and 1995, respectively.
NOTE D - SOFTWARE DEVELOPMENT COSTS
1996 1995
--------- ---------
Balance at beginning of year $ 886,153 $ 408,384
Additions during year 720,344 793,233
Amortization (796,673) (315,464)
--------- ---------
Balance at end of year $ 809,824 $ 886,153
--------- ---------
--------- ---------
Accumulated amortization totaled $1,112,137 and $315,465 at December 31,
1996 and 1995, respectively.
NOTE E - LONG AND SHORT-TERM OBLIGATIONS
1. DEBT
Long-term debt is summarized as follows:
1996 1995
-------- ---------
Note payable under a seller financed
mortgage collateralized by building
and land; payable in monthly payments
of $5,658 which includes interest at
8.5% through June 2000, at which time
interest becomes variable, due June
30, 2005 with a balloon payment of
$558,190 $682,934 $692,543
Notes payable under bridge financing
agreements, net(A) (21,143) -
Promissory note payable to a finance
company(B) 38,250 37,620
-------- ---------
700,041 730,163
Less current maturities, net 28,477 48,067
-------- ---------
$671,564 $682,096
-------- ---------
-------- ---------
F-14
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE E - LONG AND SHORT-TERM OBLIGATIONS - CONTINUED
1. DEBT - CONTINUED
Aggregate gross maturities of debt are as follows:
YEAR ENDING
DECEMBER 31,
------------
1997 (before unamortized fair value of warrants) $ 494,620
1998 11,463
1999 12,476
2000 13,579
2001 14,779
Thereafter 619,267
----------
1,166,184
Unamortized fair value of warrants 466,143
----------
$ 700,041
----------
----------
(A) In September 1996, the Company entered into bridge financing agreements,
which authorized the Company to borrow up to $625,000, from certain
unrelated and related parties and stockholders. The agreements bear interest
at prime plus 1% in addition to the amortization of the warrants' fair value
(Note J), resulting in an effective interest rate of 704% at December 31,
1996. The agreements are subordinate to the security interest of the bank,
as explained below in Note E2, in substantially all of the assets of
Company. The payments are due July 1997. Under the terms of the agreements,
if the Company repays any principal portion of the notes prior to March 31,
1997, the Company is entitled to reborrow such repayment amounts. If the
holders of the notes decline to loan the Company the amounts requested, the
holders of the notes forfeit the right to exercise one half of the
detachable warrants they hold as discussed in Note J. The financing was
accomplished by issuing detachable warrants for the purchase of 312,500
shares of common stock with an exercise price of $5.50 per share. The
estimated fair value of the warrants on the date of grant approximated
$1,239,000. This amount is being amortized as interest expense over the
life of the agreements. The unamortized portion at December 31, 1996
approximates $466,000 and is included as an offset to the related debt in
the 1996 balance sheet. At December 31, 1996, the Company has drawn
$445,000, when not including the $466,000 offset, under these financing
agreements of which $345,000 was from unrelated lenders and $100,000 was
from an officer and director of the Company.
(B) The Company purchases Directors and Officers insurance which is financed
by the insurance company over a period of eight months beginning in each
December.
F-15
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE E - LONG AND SHORT-TERM OBLIGATIONS - CONTINUED
2. LINE OF CREDIT
In May 1996, the Company entered into a line of credit agreement with a bank
with a revolving line of $500,000, with an additional $1,000,000 available
subject to qualifying collateral. Interest is computed at prime plus 1.5%
(9.75% at December 31, 1996), payable monthly, with maturity in May 1997 and
is collateralized by substantially all of the Company's assets, including
its inventory, accounts receivable and technology. The Company issued
warrants for the bank to purchase 4,688 shares of common stock in connection
with the agreement. The agreement contains certain restrictive covenants
including, but not limited to, a requirement that the Company declare no
dividends while the line is outstanding. At December 31, 1996, the Company
had no amounts outstanding on the line.
3. CAPITAL LEASES
The Company has equipment under capital lease obligations. The following is
a schedule by years of future minimum lease payments under capital leases
together with the present value of the net minimum lease payments:
YEAR ENDING
DECEMBER 31,
------------
1997 $ 48,546
1998 43,300
1999 18,990
Thereafter -
--------
Total minimum lease payments 110,836
Less amount representing interest 16,625
--------
Present value of net minimum lease payments 94,211
Less current portion 37,220
--------
$ 56,991
--------
--------
F-16
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE F - 401(K) PROFIT SHARING PLAN
The Company maintains a compensation plan pursuant to Section 401(k) of the
Internal Revenue Code (the Plan). Participation in the Plan is available to
all employees 21 years of age and older. The Company may, at its option,
make contributions to the Plan equal to a percentage of voluntary
contributions made by participants or it may make a contribution equal to a
percentage of the salary of all participants. The Company made no
contributions to the Plan during 1996, 1995 and 1994.
NOTE G - INCOME TAXES
The major components of the net deferred tax asset as of December 31, 1996
and 1995 were as follows:
1996 1995
----------- -----------
Depreciation $ (56,679) $ (36,670)
Software development costs 719,857 512,744
Accrued expenses 56,399 67,912
Deferred compensation 19,501 19,501
Operating loss carry forwards 4,561,166 1,650,692
Valuation allowance (5,300,244) (2,214,179)
----------- -----------
Net deferred tax asset $ - $ -
----------- -----------
----------- -----------
The net change in the valuation allowance was $3,086,065, $1,436,355 and
$600,518 for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company had operating loss carry forwards at December 31, 1996 of
$11,695,298 which expire in the years 2005 through 2011 if unused. Under
federal tax law, certain potential changes in ownership of the Company,
which may not be within the Company's control, may operate to restrict
future utilization of these carry forwards.
The components of the provision for income taxes were immaterial for all
periods presented. The following is a reconciliation of the income tax at
the federal statutory tax rate of 34% with the provision for income taxes
for the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
----------- ----------- ----------
Income tax benefit at statutory rate $(2,648,990) $(1,270,019) $(528,398)
Current operating loss not recognized 2,466,255 830,554 490,114
Change in deferred tax asset
valuation allowance 167,654 421,653 33,313
Nondeductible expenses 15,081 17,812 4,971
----------- ----------- ----------
Provision for income taxes $ - $ - $ -
----------- ----------- ----------
----------- ----------- ----------
F-17
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE H - PREFERRED STOCK
There are 1,000,000 shares of preferred stock, par value $0.001 per share,
authorized of which 120,000 shares have been designated Series A preferred
stock with no shares outstanding. In addition, 55,000 shares have been
designated Series C preferred stock, 20,100 shares have been designated
Series D preferred stock and 12,000 shares have been designated as Series E
preferred stock. The designated Series C, D and E shares are all
outstanding.
The Series C, D and E preferred stock have a stated value of $50 per share.
The holders of the Series C, D and E preferred stock are entitled to
dividends computed at an annual rate of 5% of the stated value, or $2.50
per share per annum. The dividends are cumulative and are payable at the
time of conversion or redemption (unless earlier declared and paid) in cash
or shares of common stock. The preferred stockholders have no voting rights
and a liquidation preference equal to the stated value of the preferred
stock plus accrued but unpaid dividends.
In 1996, the Company issued in private placement offerings 55,000 shares of
Series C convertible preferred stock for $2,750,000 and 12,000 shares of
Series E convertible preferred stock for $600,000. Total offering costs
were $165,442 which resulted in net proceeds of $3,184,558. Including the
conversion of the 20,100 shares of Series D preferred stock, as discussed in
Note I, the Company issued a total of 87,100 shares of preferred stock for
net proceeds of $4,124,470 after offering costs of $210,530.
The Series C preferred stock is convertible into shares of common stock at
the option of the preferred stockholders commencing December 17, 1996. The
Company may call for conversion of the preferred stock into common stock
after September 30, 1997 if a registration statement has been declared
effective. The conversion ratio shall be the issue price of $50 divided by
the lesser of $5.45 per share or 75% of the average per share market value
of the common stock for five trading days immediately preceding the
conversion date.
The Series D preferred shares have a liquidation preference which is senior
to the common stock but junior to the Series C preferred. The holders of the
Series D preferred shares may convert into shares of common stock at the
rate of one common share for each $4 originally invested, or approximately
12.5 common shares per share of Series D preferred stock. The Company is
entitled to require conversion of the Series D preferred stock after one
year from the original issuance date.
F-18
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE H - PREFERRED STOCK - CONTINUED
The Series E preferred stock is convertible into shares of common stock at
the option of the preferred stockholders any time after March 31, 1997. The
Company may call for conversion of the preferred stock into common stock
after March 31, 1998 if a registration statement has been declared
effective. The conversion ratio shall be $3.50 per share. Subsequent to
year end, the Series E preferred stock was converted into Series G preferred
stock as explained in Note M.
NOTE I - COMMON STOCK
During 1996, common stock purchase warrants and options were exercised
resulting in the Company issuing 305,974 shares of common stock for cash
proceeds of $95,450, plus the cancellation of debt owed to an option holder
in the amount of $18,452 relating to the exercise of options of 72,644
shares. Included in these proceeds was the conversion of $18,452 of notes
payable as payment upon the exercise of options for 72,644 shares.
In June 1996, the Company issued 134,000 shares of common stock for $985,000
less offering costs of $45,088 for net proceeds of $939,912. In connection
with the Series C preferred stock private placement offering discussed
above, the holder of these 134,000 shares of common stock converted them
into 20,100 shares of Series D convertible preferred stock.
In October 1996, options for 107,500 shares of common stock were exercised
for $27,305, which was paid by a principal shareholder surrendering 18,200
shares of common stock valued at approximately $1.50 per share. This
shareholder also surrendered 33,500 shares of common stock for which the
Company made no payment.
NOTE J - STOCK OPTIONS AND WARRANTS
In August 1994, the Company adopted the Omnibus Stock Option Plan (the
Plan), which authorized incentive and non-qualified stock options to be
granted to employees of the Company. Reserved for issuance under the Plan
are 1,327,500 shares of common stock. The Company may also grant other non-
qualified options and warrants outside of the plan. Incentive stock options
must be granted with an exercise price at least equal to the market value of
the common stock on the date of grant unless otherwise approved by the
Company's Board of Directors. The options generally become exercisable
over a period of three years. In the event of a dissolution or liquidation
of the Company, any options outstanding under the Plan will terminate.
F-19
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE J - STOCK OPTIONS AND WARRANTS - CONTINUED
1. NON-QUALIFIED OPTIONS AND WARRANTS
1994 GRANTS: During 1994, the Company authorized and granted 591,334
warrants and 505,113 stock options with rights to acquire a total of
1,096,447 shares of common stock to key employees, officers and directors.
Vesting of these warrants and options range from the date they were granted
up to three years. The exercise prices were greater than the market value
of the common stock on each of the dates granted.
Included in the 1,096,447 options and warrants above were warrants
authorizing the holders to purchase 443,834 shares of common stock during
1994 in connection with the issuance of $630,500 of notes payable to related
parties. These warrants were exercisable for a period of three years from
the date of issuance and were exercisable at a price based on 60% of the
price of a future public offering of the common stock. However, warrants
relating to the purchase of 428,119 shares of common stock (issued in
connection with $580,500 of notes payable to related parties) were canceled
when options to purchase 443,238 shares of common stock were granted. At
December 31, 1994, warrants relating to the remaining $50,000 of promissory
notes were outstanding and exercisable. In February 1995, the remaining
warrants for 15,715 shares of common stock were exercised at $1.75 per
share. The exercise price was paid by the conversion of the associated debt
and accrued interest into common stock.
Also included in the 1,096,447 options and warrants above were warrants to
purchase 147,500 shares of common stock in connection with a consulting
agreement. The warrants are exercisable at $0.25 per share, which was
greater than the market value of the common stock on the date granted. Of
these warrants, 73,750 were exercised in July 1995.
1995 GRANTS: During 1995, the Company authorized and granted 400,000
warrants and 25,000 stock options for a total of 425,000 shares of common
stock. The warrants were granted in connection with a consulting agreement
and were exercisable at $7 per share, which was greater than the market
value of the common stock on the date granted. The warrants became
exercisable in February 1995 and expire on February 15, 1998 if not
exercised. In September 1996, the warrants were repriced to the quoted
market value of the underlying stock of $5 per share.
F-20
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE J - STOCK OPTIONS AND WARRANTS - CONTINUED
1. NON-QUALIFIED OPTIONS AND WARRANTS - CONTINUED
The stock options for 25,000 shares were granted in connection with the
signing of a letter of commitment for future employment by a prospective key
employee. In March 1996, additional options were granted for another 75,000
shares in connection with the inception of the employment. All 100,000
options are exercisable at $7.50 per share. The options vest immediately for
those granted in December 1995 with the options granted in March 1996
vesting over three years. Compensation relating to these options was $50,000
for the options granted in December 1995 and was recognized as an expense in
1995. Compensation relating to the options granted in March 1996 was $23,437
which has been deferred and is being recognized over the vesting period.
1996 GRANTS: During 1996, the Company authorized and granted 417,188
warrants and 325,000 stock options (inclusive of the stock options for
75,000 shares discussed above) for the right to acquire a total of 742,188
shares of common stock. Included were warrants for 312,500 shares of common
stock which were issued in connection with the issuance of $625,000 of notes
to related parties and other lenders. The warrants are exercisable at $5.50
per share which was the market value of the common stock on the date the
warrants were issued. The warrants are exercisable through September 2002;
however, warrants for 156,250 shares are exercisable only if the lenders
allow the Company to reborrow through March 31, 1997, any amounts that the
Company prepays under the terms of the notes as explained in Note E.
Warrants for 100,000 shares of common stock were issued to individuals for
consulting services. The estimated fair value of the warrants on the dates
of grant approximated $425,000. Of this amount, approximately $167,000 was
netted against the proceeds received on the issuance of preferred stock
during 1996. The remaining $258,000 was recorded as an general and
administrative expense in the 1996 statement of operations. The warrants
are exercisable at prices ranging from $4.25 to $5.75 per share and are
exercisable through November 2001.
Warrants for 4,688 shares of common stock were issued in connection with the
line of credit discussed in Note E. The warrants are exercisable at $8 per
share and were exercisable on date of grant and expire in May 2001.
Options for 250,000 shares of common stock were granted to the president and
two outside directors. These options were repriced in September 1996 from $8
per share to the quoted market value of $5 on the date repriced.
F-21
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE J - STOCK OPTIONS AND WARRANTS - CONTINUED
1. NON-QUALIFIED OPTIONS AND WARRANTS - CONTINUED
The following is a summary of the activity relating to non-qualified
warrants and options through December 31, 1996:
<TABLE>
WEIGHTED
AVERAGE
STOCK EXERCISE EXERCISE
WARRANTS OPTIONS PRICE PRICE
-------- ------- ------------ --------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1994 - - $ - $ -
Granted 591,334 505,113 0.25 - 3.50 0.31
Exercised - - - -
Canceled or expired 428,119 - 0.25 0.25
------- -------
Outstanding at December 31, 1994 163,215 505,113 0.25 - 3.50 0.40
Granted 400,000 25,000 7.00 - 7.50 7.03
Exercised 89,465 116,156 0.25 - 1.75 0.29
Canceled or expired - - - -
------- -------
Outstanding at December 31, 1995 473,750 413,957 0.25 - 7.50 3.57
Granted 417,188 325,000 2.50 - 8.00 4.11
Exercised - 253,332 0.25 0.25
Canceled or expired - 73,750 0.25 0.25
------- -------
------- -------
Outstanding at December 31, 1996 890,938 411,875 0.25 - 8.00 4.28
------- -------
------- -------
Exercisable at December 31, 1996 528,438 62,500 $0.25 - 8.00 $4.28
------- -------
------- -------
</TABLE>
The following table summarizes information concerning non-qualified
outstanding and exercisable stock options and warrants at December 31, 1996:
NON-QUALIFIED OPTIONS AND WARRANTS OUTSTANDING
WEIGHTED-AVERAGE
REMAINING
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE
--------------- ----------- ---------------- ----------------
$0.25 - $0.68 110,625 1.33 $0.40
$2.25 - $2.50 181,250 5.37 2.47
$4.25 - $5.75 1,006,250 4.13 5.02
$8.00 4,688 4.33 8.00
---------
1,302,813
---------
---------
F-22
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE J - STOCK OPTIONS AND WARRANTS - CONTINUED
1. NON-QUALIFIED OPTIONS AND WARRANTS - CONTINUED
NON-QUALIFIED OPTIONS AND WARRANTS EXERCISABLE
RANGE OF NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES EXERCISABLE EXERCISE PRICE
--------------- ----------- ----------------
$0.25 - $0.68 73,750 $0.25
$2.25 - $2.50 12,500 2.25
$4.25 - $5.75 500,000 4.89
$8.00 4,688 8.00
-------
590,938
-------
-------
2. QUALIFIED OPTIONS
During 1994, the Company granted options under the Plan which authorized the
holders of the options to purchase 771,425 shares of common stock from $0.25
to $0.51 per share which was greater than the market value of the common
stock on the dates granted. The options are exercisable over three years
through August 1997.
During 1995, the Company granted options under the Plan to purchase 653,112
shares of common stock with exercise prices equal to the market value of the
common stock on the dates granted.
During 1996, options for 198,500 shares were granted under the Plan which
are exercisable through December 2001.
F-23
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE J - STOCK OPTIONS AND WARRANTS - CONTINUED
2. QUALIFIED OPTIONS - CONTINUED
The following is a summary of the activity relating to qualified options
under the Plan, through December 31, 1996:
WEIGHTED
AVERAGE
STOCK EXERCISE EXERCISE
OPTIONS PRICE PRICE
------- ------------ --------
Outstanding at January 1, 1994 - $ - $ -
Granted 771,425 0.25 - 0.51 0.36
Exercised - - -
Canceled or expired - - -
---------
Outstanding at December 31,
1994 771,425 0.25 - 0.51 0.36
Granted 653,112 3.00 -10.25 4.56
Exercised 2,385 0.51 0.51
Canceled or expired 52,156 0.51 - 3.00 1.85
---------
Outstanding at December 31,
1995 1,369,996 0.25 -10.25 2.31
Granted 198,500 5.50 -13.00 6.23
Exercised 160,142 0.25 - 3.00 0.37
Canceled or expired 614,063 0.25 -13.00 1.98
---------
Outstanding at December 31,
1996 794,291 0.51 - 4.25 2.67
---------
---------
Exercisable at December 31,
1996 260,973 $0.51 - 4.25 $1.67
---------
---------
The following table summarizes information concerning qualified outstanding
and exercisable stock options at December 31, 1996:
QUALIFIED OPTIONS OUTSTANDING
WEIGHTED-AVERAGE
REMAINING
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE
--------------- ----------- ----------------- ----------------
$0.51 224,641 1.92 $0.51
$3.00 - $4.25 569,650 3.64 3.52
-------
794,291
-------
-------
F-24
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE J - STOCK OPTIONS AND WARRANTS - CONTINUED
2. QUALIFIED OPTIONS - CONTINUED
QUALIFIED OPTIONS EXERCISABLE
---------------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES EXERCISABLE EXERCISE PRICE
--------------- ----------- -----------------
$0.51 149,761 $0.51
$3.00 - $4.25 111,212 3.24
-------
260,973
-------
-------
3. FAIR VALUE OF OPTIONS AND WARRANTS GRANTED AND PRO FORMA LOSS
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (FAS
123). Therefore, the Company accounts for stock based compensation under
Accounting Principles Board Opinion No. 25. Had compensation cost for the
stock based compensation been determined based upon the fair value of the
awards at the grant dates consistent with the methodology prescribed by FAS
123, the Company's net loss and loss per share would have been increased to
the following pro forma amounts:
1996 1995
------------ ------------
Net loss As reported $(7,791,146) $(3,735,351)
Pro forma (8,824,279) (5,227,807)
Loss per share As reported (1.59) (0.98)
Pro forma (1.80) (1.38)
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation cost related to
grants made before 1995. The fair value of these options and warrants were
estimated at the date of grant using the modified Black-Scholes American
option-pricing model with the following weighted-average assumptions for
1996 and 1995: expected volatility of 67.17% and 65.89%, respectively; risk-
free interest rate of 6.10%; and expected life of 4.2 years. The weighted
average fair value of options and warrants granted was $3.88 and $2.49 in
1996 and 1995, respectively.
F-25
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE J - STOCK OPTIONS AND WARRANTS - CONTINUED
3. FAIR VALUE OF OPTIONS AND WARRANTS GRANTED AND PRO FORMA LOSS -
CONTINUED
Option pricing models require the input of highly subjective assumptions
including the expected stock price volatility. Also, the Company's employee
stock options and warrants have characteristics significantly different from
those of traded options and warrants, and changes in the subjective input
assumptions can materially affect the fair value estimate. Management
believes the best input assumptions available were used to value the options
and warrants and the resulting values are reasonable.
NOTE K - SUPPLEMENTAL CASH FLOW INFORMATION
1. NON-CASH STOCK AND PAYABLES ACTIVITIES
In 1996, 72,644 shares of common stock were issued upon exercise of options
for which the option holder canceled debt owed by the Company in the amount
of $18,452.
In 1995 and 1994, respectively, note holders voluntarily converted debt owed
to them in the amount of $148,250 and $168,750 into 69,382 and 75,000 shares
of common stock at an average of $2.14 and $2.25 per share. The conversion
ratio was based on the fair value of common stock on the date of the
conversion.
During 1995, $42,975 of notes payable to an unrelated party were converted
into 9,550 shares of common stock at $4.50 per share.
During 1994, 11,334 shares of preferred stock were issued for a note in the
amount of $170,000 of which $39,750 was settled by receiving services
related to the issuance of preferred stock. Also during 1994, $10,242 of
accrued expenses were converted into 4,097 shares of common stock at $2.50
per share.
In 1995 and 1994, $15,619 and $15,602, respectively of accrued and unpaid
interest was added to the principal amount of notes payable.
During 1994 and in conjunction with the recapitalization described in Note
A, 30,000 shares of common stock were issued to an individual as a finder's
fee. The finder's fee was valued at $59,100 based on the fair value of the
stock on the date issued of $2 per share, less $900 of cash paid by the
finder.
F-26
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE K - SUPPLEMENTAL CASH FLOW INFORMATION - CONTINUED
2. PROPERTY AND EQUIPMENT AND PAYABLES ACTIVITIES
In 1995, the Company purchased the building it had previously leased in the
amount of $796,663. $696,313 was financed by a note payable and the
remaining $100,350 was paid in cash. Also during 1995, the Company leased
office equipment in the amount of $47,408 which was financed by a capital
lease. In addition, during 1995 the Company returned office equipment for
payment of a $6,547 capital lease.
In 1994, the Company acquired office equipment in the amount of $9,800, of
which $8,820 was financed by a capital lease and the remaining $980 was paid
in cash.
During 1996, capital leases for computer and office equipment were executed
for $56,336.
3. WARRANTS ISSUED WITH DEBT AND TO CONSULTANTS
During 1996, the Company issued debt with detachable warrants. The
unamortized portion of the costs of warrants of approximately $466,000 is
shown as a reduction of the related debt.
Also during 1996, warrants were issued to consultants who assisted in
raising capital through the issuance of preferred stock. The estimated fair
value of the warrants were offset against the proceeds received.
4. CASH PAID FOR INTEREST
Cash flows from operating activities included interest paid of $91,038,
$147,039 and $62,044 for the years ended December 31, 1996, 1995 and 1994,
respectively.
NOTE L - EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement expiring in 1999 with a
key employee. The agreement is renewed automatically for an additional one-
year unless either party gives written notice of non-renewal not less than
ninety days prior to the expiration. The agreement provides for a base
payment of $185,000 per year. The agreement also provides that the employee
will receive stock options to purchase up to 100,000 shares of common stock,
as explained in Note J, and can earn bonuses based upon performance.
F-27
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE M - SUBSEQUENT EVENTS
1. ISSUANCE OF PREFERRED STOCK
In February 1997, the Company designated 70,000 shares of preferred stock as
Series F and issued 40,000 of such shares for $2,000,000.
The Series F preferred stock is convertible from time to time by the holders
thereof based upon the original purchase price of $50 per share, plus
accrued dividends thereon, divided by $2 per share of common stock.
Dividends on any Series F preferred stock converted during the first year
following original issuance accrue at 10% per annum. Dividends on any
Series F preferred stock which is converted following the first year
following original issuance accrue at 15% per annum for the first year and
5% per annum thereafter. All dividends on the Series F preferred stock are
payable, in cash or common stock, only at the time of conversion. If the
market price for the common stock is not at least $3 per share on February
15, 1998, the conversion rate for all Series F preferred stock then still
outstanding will be adjusted so that each preferred share (including accrued
dividends) will be convertible into common stock having a market value equal
to 150% of the original purchase price of $50.
Also in February 1997, the Company designated 12,000 shares of preferred
stock as Series G. This series will be issued only in exchange for shares
for the Company's Series E preferred stock.
The Series G preferred stock is convertible from time to time by the holders
thereof based upon the original purchase price of $50 per share, plus
accrued dividends thereon, divided by $2.25 per share of common stock.
Dividends on any Series G preferred stock converted during the first year
following original issuance accrue at 10% per annum. Dividends on any
Series G preferred stock which is converted following the first year
following original issuance accrue at 15% per annum for the first year and
5% per annum thereafter. All dividends on the Series G preferred stock are
payable, in cash or common stock, only at the time of conversion.
F-28
<PAGE>
Innovus Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE M - SUBSEQUENT EVENTS - CONTINUED
2. DOWNSIZING
During January 1997, the Company effected a downsizing of its full-time
staff, to less than 25 employees. In conjunction with this downsizing, the
Company re-directed its focus to being a software developer and away from a
service provider of custom programming. The customer programming work-in-
process and backlog at the time of the downsizing is being completed by the
ex-employees of the Company who have established an unrelated entity for
that purpose.
As a result of this downsizing, 49,527 shares of common stock were issued
upon exercise of stock options for $25,160, by terminated employees.
Additionally, 345,399 stock options held by terminated employees were
forfeited.
3. CONVERSION OF PREFERRED STOCK
Preferred stockholders converted 22,100 shares of Series C and 17,100 shares
of Series D preferred stock into 835,049 shares of common stock in several
transactions.
4. ISSUANCE OF OPTIONS
During January 1997, the Company granted to an officer/director an option to
purchase 200,000 common shares at $2.50 per share. The option vests 50%
immediately, an additional 25% at the end of year one and the final 25% at
the end of year two. The options expire in five years. The exercise price
of $2.50 was the fair market value of the underlying stock on the date
granted.
5. REPRICING OF WARRANTS
The Company repriced certain warrants issued in connection with the bridge
financing in 1996 from $5.50 per share to the market value of the underlying
stock on the date of the repricing of $2.50 per share.
F-29
<PAGE>
CERTIFICATE OF DESIGNATION OF
SERIES C CONVERTIBLE PREFERRED STOCK OF
INNOVUS CORPORATION
The undersigned, Terry Haas and David Mock, hereby certify that:
I. They are the duly elected and acting President and Secretary,
respectively, of Innovus Corporation, a Delaware corporation (the "Company").
II. The Certificate of Incorporation of the Company authorizes
1,000,000 shares of preferred stock, par value $.001 per share, of which the
following have been authorized and are issued and outstanding: 120,000 Series A
Preferred Stock authorized, none outstanding.
III. The following is a true and correct copy of resolutions duly
adopted by the Board of Directors at meetings duly held on August 8, 9 and 12,
1996, which constituted all requisite action on the part of the Company for
adoption of such resolutions.
RESOLUTIONS
WHEREAS, the Board of Directors of the Company (the "Board of
Directors") is authorized to provide for the issuance of the shares of Preferred
Stock in series, and by filing a certificate pursuant to the applicable law of
the State of Delaware, to establish from time to time the number of shares to be
included in each such series, and to fix the designations, powers, preferences
and rights of the shares of each such series and the qualifications, limitations
or restrictions thereof;
WHEREAS, the Board of Directors desires, pursuant to its authority as
aforesaid, to designate a new series of preferred stock, set the number of
shares constituting such series and fix the rights, preferences, privileges and
restrictions of such series.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
designates a new series of preferred stock and the number of shares constituting
such series and fixes the rights, preferences, privileges and restrictions
relating to such series as follows:
Section 1. DESIGNATION, AMOUNT AND PAR VALUE. The series of
Preferred Stock shall be designated as the Series C Convertible Preferred Stock
(the "Preferred Stock"), and the number of shares so designated shall be 45,000.
The par value of each share of Preferred Stock shall be $.001. Each share of
Preferred Stock shall have a stated value of $50.00 per share (the "Stated
Value").
<PAGE>
Section 2. DIVIDENDS.
(a) Holders of Preferred Stock shall be entitled to receive, when and
as declared by the Board of Directors out of funds legally available therefor,
and the Company shall pay, cumulative dividends at the rate per share (as a
percentage of the Stated Value per share) equal to 5% per annum, payable, in
cash or shares of Common Stock, in arrears on the Conversion Date (as
hereinafter defined). Dividends on the Preferred Stock shall accrue daily
commencing the Original Issue Date (as defined in Section 7) and shall be deemed
to accrue on such date whether or not earned or declared and whether or not
there are profits, surplus or other funds of the Company legally available for
the payment of dividends. The party that holds the Preferred Stock on an
applicable record date for any dividend payment will be entitled to receive such
dividend payment and any other accrued and unpaid dividends which accrued prior
to such dividend payment date, without regard to any sale or disposition of such
Preferred Stock subsequent to the applicable record date but prior to the
applicable dividend payment date. Except as otherwise provided herein, if at
any time the Company pays less than the total amount of dividends then accrued
to any class of Preferred Stock, such payment shall be distributed ratably among
the holders of such class based upon the number of shares held by each holder.
(b) So long as any Preferred Stock shall remain outstanding, neither
the Company nor any subsidiary thereof shall redeem, purchase or otherwise
acquire directly or indirectly any Junior Securities (as defined in Section 7),
nor shall the Company directly or indirectly pay or declare any dividend or make
any distribution (other than a dividend or distribution described in Section 5)
upon, nor shall any distribution be made in respect of, any Junior Securities,
nor shall any monies be set aside for or applied to the purchase or redemption
(through a sinking fund or otherwise) of any Junior Securities unless all
dividends on the Preferred Stock for all past dividend periods shall have been
paid.
Section 3. VOTING RIGHTS. Except as otherwise provided herein and as
otherwise provided by law, the Preferred Stock shall have no voting rights.
However, so long as any shares of Preferred Stock are outstanding, the Company
shall not, without the affirmative vote of the holders of a majority of the
shares of the Preferred Stock then outstanding, (i) alter or change adversely
the powers, preferences or rights given to the Preferred Stock or (ii) authorize
or create any class of stock ranking as to dividends or distribution of assets
upon a Liquidation (as defined below) senior to, prior to or PARI PASSU with the
Preferred Stock.
Section 4. LIQUIDATION. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a "Liquidation"),
the holders of shares of Preferred Stock shall be entitled to receive out of the
assets of the Company, whether such assets are capital or surplus, for each
share of Preferred Stock an amount equal to the Stated Value, plus an amount
equal to accrued but unpaid dividends per share, whether declared or not, but
without interest, before any distribution or payment shall be made to the
holders of any Junior Securities, and if the assets of the Company shall be
insufficient to pay in full such amounts, then the entire assets to be
distributed
2
<PAGE>
shall be distributed among the holders of Preferred Stock ratably in accordance
with the respective amounts that would be payable on such shares if all amounts
payable thereon were paid in full. A sale, conveyance or disposition of all or
substantially all of the assets of the Company or the effectuation by the
Company of a transaction or series of related transactions in which more than
50% of the voting power of the Company is disposed of shall be deemed a
Liquidation; PROVIDED that, a consolidation or merger of the Company with or
into any other company or companies shall not be treated as a Liquidation, but
instead shall be subject to the provisions of Section 5. The Company shall mail
written notice of any such liquidation, not less than 60 days prior to the
payment date stated therein, to each record holder of Preferred Stock.
Section 5. CONVERSION.
(a) Each share of Preferred Stock shall be convertible into shares of
Common Stock at the Conversion Ratio (as defined in Section 7) at the option of
the holder in whole or in part at any time after the expiration of the earlier
to occur of (i) 105 days after the Original Issue Date and (ii) the date that
the Securities and Exchange Commission (the "Commission") declares effective
under the Securities Act of 1933, as amended (the "Securities Act") the
registration statement contemplated by the Registration Rights Agreement, dated
the Original Issue Date (the "Registration Rights Agreement"), by and between
the Company and the original holder of Preferred Stock relating to the Preferred
Stock and the shares of Common Stock into which the Preferred Stock is
convertible in accordance with the terms hereof. The holder shall effect
conversions by surrendering the certificate or certificates representing the
shares of Preferred Stock to be converted to the Company, together with the form
of conversion notice attached hereto as EXHIBIT A (the "Holder Conversion
Notice") in the manner set forth in Section 5(j). Each Holder Conversion Notice
shall specify the number of shares of Preferred Stock to be converted and the
date on which such conversion is to be effected, which date may not be prior to
the date the Holder delivers such Notice by facsimile (the "Holder Conversion
Date"). Subject to Section 5(c) and, as to the original Holder (or its sole
designee), subject to Section 4.13 of the Purchase Agreement (as defined in
Section 7), each Holder Conversion Notice, once given, shall be irrevocable. If
the holder is converting less than all shares of Preferred Stock represented by
the certificate or certificates tendered by the holder with the Holder
Conversion Notice, the Company shall promptly deliver to the holder a
certificate for such number of shares as have not been converted.
(b) Provided that ten (10) Trading Days (as defined in Section 7)
shall have elapsed from the date the Commission declared the registration
statement contemplated by the Registration Rights Agreement effective under the
Securities Act, each share of the Preferred Stock shall be convertible into
shares of Common Stock at the Conversion Ratio at the option of the Company in
whole or in part at any time on or after the expiration of one year after the
Original Issue Date; PROVIDED, HOWEVER, that the Company is not permitted to
deliver a Company Conversion Notice (as defined below) within ten (10) days of
issuing any press release or other public statement relating to such conversion.
The Company shall effect such conversion by delivering to the holders of such
shares of Preferred Stock to be converted a written notice in the form attached
3
<PAGE>
hereto as EXHIBIT B (the "Company Conversion Notice"), which Company Conversion
Notice, once given, shall be irrevocable. Each Company Conversion Notice shall
specify the number of shares of Preferred Stock to be converted and the date on
which such conversion is to be effected, which date will be at least one (1)
Trading Day after the date the Company delivers such Notice by facsimile to the
holder (the "Company Conversion Date"). The Company shall give such Company
Conversion Notice in accordance with Section 5(j) below at least one (1) Trading
Day before the Company Conversion Date. Any such conversion shall be effected
on a pro rata basis among the holders of Preferred Stock. Upon the conversion
of shares of Preferred Stock pursuant to a Company Conversion Notice, the
holders of the Preferred Stock shall surrender the certificates representing
such shares at the office of the Company or of any transfer agent for the
Preferred Stock or Common Stock. If the Company is converting less than all
shares of the Preferred Stock, the Company shall, upon conversion of such shares
subject to such Company Conversion Notice and receipt of the certificate or
certificates representing such shares of Preferred Stock deliver to the holder
or holders a certificate for such number of shares of Preferred Stock as have
not been converted. Each of a Holder Conversion Notice and a Company Conversion
Notice is sometimes referred to herein as a "Conversion Notice," and each of a
"Holder Conversion Date" and a "Company Conversion Date" is sometimes referred
to herein as a "Conversion Date."
(c) Not later than three (3) Trading Days after the Conversion Date,
the Company will deliver to the holder (i) a certificate or certificates which
shall be free of restrictive legends and trading restrictions (other than those
then required by law and as set forth in the Purchase Agreement), representing
the number of shares of Common Stock being acquired upon the conversion of
shares of Preferred Stock and (ii) one or more certificates representing the
number of shares of Preferred Stock not converted; PROVIDED, HOWEVER that the
Company shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon conversion of any shares of Preferred Stock until
certificates evidencing such shares of Preferred Stock are either delivered for
conversion to the Company or any transfer agent for the Preferred Stock or
Common Stock, or the holder notifies the Company that such certificates have
been lost, stolen or destroyed and provides a bond (or other adequate security
reasonably acceptable to the Company) satisfactory to the Company to indemnify
the Company from any loss incurred by it in connection therewith. The Company
shall, upon request of the holder, use its best efforts to deliver any
certificate or certificates required to be delivered by the Company under this
Section 5(c) electronically through the Depository Trust Corporation or another
established clearing corporation performing similar functions. In the case of a
conversion pursuant to a Holder Conversion Notice, if such certificate or
certificates are not delivered by the date required under this Section 5(c), the
holder shall be entitled by written notice to the Company at any time on or
before such holder's receipt of such certificate or certificates thereafter, to
rescind such conversion, in which event the Company shall immediately return the
certificates representing the shares of Preferred Stock tendered for conversion.
(d) (i) The conversion price for each share of Preferred Stock (the
"Conversion Price") in effect on any Conversion Date shall be the lesser of (a)
the average Per Share Market Value for the five (5) Trading Days immediately
preceding the
4
<PAGE>
Original Issue Date or (b) 75% of the average Per Share Market Value for the
five (5) Trading Days immediately preceding the Conversion Date; PROVIDED,
HOWEVER, (x) if the registration statement to be filed by the Company in
accordance with the Registration Rights Agreement is not filed with and
declared effective by the Commission on or prior to the Effectiveness Date
(as defined in the Registration Rights Agreement), or (y) if such
registration statement filed is declared effective but thereafter ceases to
be effective at any time during the Effectiveness Period (as defined in the
Registration Rights Agreement) without being succeeded within 30 days by a
subsequent registration statement filed with and declared effective by the
Commission (any such failure being hereinafter referred to as an "Event", and
for purposes of clause (x), the date on which such Event occurs, or for
purposes of clause (y), the date on which such 30-day limit is exceeded,
being hereinafter referred to as an "Event Date"), the Conversion Price shall
be decreased by 1.5% monthly (i.e., 73.5% at the beginning of the first such
month and 72% at the beginning of the second such month). Commencing on the
third month after an Event Date, the 1.5% monthly penalty shall be paid to
the Holder in cash, and any penalty amount not paid when due shall accrue
interest at the rate of 1.5% per month until paid.
(ii) If the Company, at any time while any shares of Preferred
Stock are outstanding, (a) shall pay a stock dividend or otherwise make a
distribution or distributions on shares of its Junior Securities payable in
shares of its capital stock (whether payable in shares of its Common Stock or of
capital stock of any class), (b) subdivide outstanding shares of Common Stock
into a larger number of shares, (c) combine outstanding shares of Common Stock
into a smaller number of shares, or (d) issue by reclassification of shares of
Common Stock any shares of capital stock of the Company, the Conversion Price
designated in Section 5(d)(i) shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding before such
event and of which the denominator shall be the number of shares of Common Stock
outstanding after such event. Any adjustment made pursuant to this Section
5(d)(ii) shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision, combination or re-classification.
(iii) If the Company, at any time while any shares of Preferred
Stock are outstanding, shall issue rights or warrants to all holders of Common
Stock entitling them to subscribe for or purchase shares of Common Stock at a
price per share less than the Per Share Market Value of Common Stock at the
record date mentioned below, the Conversion Price designated in Section 5(d)(i)
shall be multiplied by a fraction, of which the denominator shall be the number
of shares of Common Stock (excluding treasury shares, if any) outstanding on the
date of issuance of such rights or warrants plus the number of additional shares
of Common Stock offered for subscription or purchase, and of which the numerator
shall be the number of shares of Common Stock (excluding treasury shares, if
any) outstanding on the date of issuance of such rights or warrants plus the
number of shares which the aggregate offering price of the total number of
shares so offered would purchase at such Per Share Market Value. Such
adjustment shall be made whenever such rights or warrants are issued, and shall
become effective
5
<PAGE>
immediately after the record date for the determination of stockholders
entitled to receive such rights or warrants. However, upon the expiration of
any right or warrant to purchase Common Stock the issuance of which resulted
in an adjustment in the Conversion Price designated in Section 5(d)(i)
pursuant to this Section 5(d)(iii), if any such right or warrant shall expire
and shall not have been exercised, the Conversion Price designated in Section
5(d)(i) shall immediately upon such expiration be recomputed and effective
immediately upon such expiration be increased to the price which it would
have been (but reflecting any other adjustments in the Conversion Price made
pursuant to the provisions of this Section 5 after the issuance of such
rights or warrants) had the adjustment of the Conversion Price made upon the
issuance of such rights or warrants been made on the basis of offering for
subscription or purchase only that number of shares of Common Stock actually
purchased upon the exercise of such rights or warrants actually exercised.
(iv) If the Company, at any time while shares of Preferred Stock
are outstanding, shall distribute to all holders of Common Stock (and not to
holders of Preferred Stock) evidences of its indebtedness or assets or rights or
warrants to subscribe for or purchase any security (excluding those referred to
in Section 5(d)(iii) above) then in each such case the Conversion Price at which
each share of Preferred Stock shall thereafter be convertible shall be
determined by multiplying the Conversion Price in effect immediately prior to
the record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Per Share
Market Value of Common Stock determined as of the record date mentioned above,
and of which the numerator shall be such Per Share Market Value of the Common
Stock on such record date less the then fair market value at such record date of
the portion of such assets or evidence of indebtedness so distributed applicable
to one outstanding share of Common Stock as determined by the Board of Directors
in good faith; PROVIDED, HOWEVER that in the event of a distribution exceeding
ten percent (10%) of the net assets of the Company, such fair market value shall
be determined by a nationally recognized or major regional investment banking
firm or firm of independent certified public accountants of recognized standing
(which may be the firm that regularly examines the financial statements of the
Company) (an "Appraiser") selected in good faith by the holders of a majority in
interest of the shares of Preferred Stock; and PROVIDED, FURTHER that the
Company, after receipt of the determination by such Appraiser shall have the
right to select an additional Appraiser, in which case the fair market value
shall be equal to the average of the determinations by each such Appraiser. In
either case the adjustments shall be described in a statement provided to all
holders of Preferred Stock of the portion of assets or evidences of indebtedness
so distributed or such subscription rights applicable to one share of Common
Stock. Such adjustment shall be made whenever any such distribution is made and
shall become effective immediately after the record date mentioned above.
(v) All calculations under this Section 5 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be.
(vi) Whenever the Conversion Price is adjusted pursuant to
Section 5(d)(ii),(iii), (iv) or (v), the Company shall promptly mail to each
holder of
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Preferred Stock, a notice setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(vii) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, the sale
or transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property, the holders of the Preferred Stock
then outstanding shall have the right thereafter to convert such shares only
into the shares of stock and other securities and property receivable upon or
deemed to be held by holders of Common Stock following such reclassification,
consolidation, merger, sale, transfer or share exchange, and the holders of
the Preferred Stock shall be entitled upon such event to receive such amount
of securities or property as the shares of the Common Stock of the Company
into which such shares of Preferred Stock could have been converted
immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange would have been entitled. The terms of any such
consolidation, merger, sale, transfer or share exchange shall include such
terms so as to continue to give to the holder of Preferred Stock the right to
receive the securities or property set forth in this Section 5(d)(vii) upon
any conversion following such consolidation, merger, sale, transfer or share
exchange. This provision shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or share
exchanges.
(viii) If:
a. the Company shall declare a dividend (or any other
distribution) on its Common Stock; or
b. the Company shall declare a special nonrecurring cash
dividend on or a redemption of its Common Stock; or
c. the Company shall authorize the granting to all holders
of the Common Stock rights or warrants to subscribe for
or purchase any shares of capital stock of any class or
of any rights; or
d. the approval of any stockholders of the Company shall
be required in connection with any reclassification of
the Common Stock of the Company (other than a
subdivision or combination of the outstanding shares of
Common Stock), any consolidation or merger to which the
Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, or any
compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property; or
7
<PAGE>
e. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding-up of
the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Preferred Stock, and shall cause to be mailed to
the holders of Preferred Stock at their last addresses as they shall appear upon
the stock books of the Company, at least 30 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined, or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, share exchange, dissolution, liquidation or winding-up
is expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding-up; PROVIDED, HOWEVER, that the failure to
mail such notice or any defect therein or in the mailing thereof shall not
affect the validity of the corporate action required to be specified in such
notice.
(e) If at any time conditions shall arise by reason of action taken
by the Company which in the opinion of the Board of Directors are not adequately
covered by the other provisions hereof and which might materially and adversely
affect the rights of the holders of Preferred Stock (different than or
distinguished from the effect generally on rights of holders of any class of the
Company's capital stock) or if at any time any such conditions are expected to
arise by reason of any action contemplated by the Company, the Company shall
mail a written notice briefly describing the action contemplated and the
material adverse effects of such action on the rights of the holders of
Preferred Stock at least 30 calendar days prior to the effective date of such
action, and an Appraiser selected by the holders of majority in interest of the
Preferred Stock shall give its opinion as to the adjustment, if any (not
inconsistent with the standards established in this Section 5), of the
Conversion Price (including, if necessary, any adjustment as to the securities
into which shares of Preferred Stock may thereafter be convertible) and any
distribution which is or would be required to preserve without diluting the
rights of the holders of shares of Preferred Stock; PROVIDED, HOWEVER, that the
Company, after receipt of the determination by such Appraiser, shall have the
right to select an additional Appraiser, in which case the adjustment shall be
equal to the average of the adjustments recommended by each such Appraiser. The
Board of Directors shall make the adjustment recommended forthwith upon the
receipt of such opinion or opinions or the taking of any such action
contemplated, as the case may be; PROVIDED, however, that no such adjustment of
the Conversion Price shall be made which in the opinion of the Appraiser(s)
giving the aforesaid opinion or opinions would result in an increase of the
Conversion Price to more than the Conversion Price then in effect.
(f) The Company covenants that it will at all times reserve and
keep available out of its authorized and unissued Common Stock solely for the
purpose of
8
<PAGE>
issuance upon conversion of Preferred Stock as herein provided, free from
preemptive rights or any other actual contingent purchase rights of persons
other than the holders of Preferred Stock, such number of shares of Common
Stock as shall be issuable (taking into account the adjustments and
restrictions of Section 5(b) and Section 5(d) hereof) upon the conversion of
all outstanding shares of Preferred Stock. The Company covenants that all
shares of Common Stock that shall be so issuable shall, upon issue, be duly
and validly authorized, issued and fully paid and nonassessable.
(g) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock, but
may if otherwise permitted, make a cash payment in respect of any final fraction
of a share based on the Per Share Market Value at such time. If the Company
elects not, or is unable, to make such a cash payment, the holder of a share of
Preferred Stock shall be entitled to receive, in lieu of the final fraction of a
share, one whole share of Common Stock.
(h) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the holder of such shares of Preferred
Stock so converted and the Company shall not be required to issue or deliver
such certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(i) Shares of Preferred Stock converted into Common Stock shall be
canceled and shall have the status of authorized but unissued shares of
preferred stock.
(j) Each Holder Conversion Notice shall be given by facsimile and by
mail, postage prepaid, addressed to the attention of the Chief Financial Officer
of the Company at the facsimile telephone number and address of the principal
place of business of the Company. Each Company Conversion Notice shall be given
by facsimile and by mail, postage prepaid, addressed to each holder of Preferred
Stock at the facsimile telephone number and address of such holder appearing on
the books of the Company or provided to the Company by such holder for the
purpose of such Company Conversion Notice, or if no such facsimile telephone
number or address appears or is so provided, at the principal place of business
of the holder. Any such notice shall be deemed given and effective upon the
earliest to occur of (i)(a) if such Conversion Notice is delivered via facsimile
at the facsimile telephone number specified in this Section 5(j) prior to 4:30
p.m. (Eastern Standard Time) on any date, such date (or, in the case of a
Company Conversion Notice, the next Trading Day) or such later date as is
specified in the Conversion Notice, and (b) if such Conversion Notice is
delivered via facsimile at the facsimile telephone number specified in this
Section 5(j) after 11:59 p.m. (Eastern Standard Time) on any date, the next date
(or, in the case of a Company Conversion Notice, the next Trading Day after such
next day) or such later date as is specified in the
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<PAGE>
Conversion Notice, (ii) five days after deposit in the United States mails or
(iii) upon actual receipt by the party to whom such notice is required to be
given.
Section 6. COMPANY REDEMPTION OPTION.
The Company may, at its option, redeem any outstanding and unconverted
Preferred Stock on the third anniversary of the Original Issue Date (the
"Optional Redemption Date"), provided that the Company notifies the holders
thereof no later than the third Trading Day prior to the Optional Redemption
Date of its intention to do so.
If the Company elects to redeem such outstanding and unconverted
shares of Preferred Stock, the redemption price per share (the "Optional
Redemption Price") shall equal the Conversion Ratio multiplied by the Per Share
Market Value on the Optional Redemption Date and shall be paid by the Company to
the Holders of such unconverted Preferred Stock on the Optional Redemption Date.
If any portion of the Optional Redemption Price shall not be paid by the Company
within 7 calendar days after the Optional Redemption Date, such Optional
Redemption Price shall be increased by an amount accruing from the 7th day to
the 21st day after the Optional Redemption Date at the rate of 5% per annum,
from the 22nd day to the 60th day at 8% per annum and from the 61st day until
paid at the rate of 12% per annum, except that no such interest shall accrue
until the Purchaser shall have delivered to the Company the certificates
representing the shares of Preferred Stock to be so redeemed. If any portion of
the Optional Redemption Price remains unpaid more than 7 calendar days after the
Optional Redemption Date, then the Holder may elect, by written notice to the
Company given within 45 days after the Optional Redemption Date, to either (i)
demand conversion in accordance with the formula and the time frame therefor set
forth in Section 5 for a conversion at the option of the Holder hereof of all
Preferred Stock for which the Optional Redemption Price, plus interest, has not
been paid in full (the "Unpaid Optional Redemption Stock"), in which event the
Per Share Market Value for such shares shall be the lower of the Per Share
Market Value calculated on the Optional Redemption Date and the Per Share Market
Value as of the Holder's written demand for conversion, or (ii) demand that the
Company withdraw its election to force such redemption. If the Holder elects
option (i) above, the Company shall within three Business Days of its receipt of
such election deliver to the Holder the shares of Common Stock issuable upon
conversion of the Unpaid Optional Redemption Stocks subject to such Holder
conversion demand and otherwise perform its obligations hereunder with respect
thereto; or, if the Holder elects option (ii) above, the Company shall promptly,
and in any event not later than three Business Days from receipt of Holder's
notice of such election, return to the Holder all of the Unpaid Optional
Redemption Stock.
Section 7. DEFINITIONS. For the purposes hereof, the following terms
shall have the following meanings:
"Business Day" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the state of
New York are authorized or required by law or other government actions to close.
10
<PAGE>
"Common Stock" means shares now or hereafter authorized of the class
of Common Stock, par value $.001, of the Company and stock of any other class
into which such shares may hereafter have been reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, of which the
numerator is Stated Value plus accrued but unpaid dividends, and of which the
denominator is the Conversion Price at such time.
"Junior Securities" means the Common Stock and all other equity
securities of the Company.
"Original Issue Date" shall mean the date of the first issuance of any
shares of the Preferred Stock regardless of the number transfers of any
particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"Per Share Market Value" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on the Nasdaq SmallCap
Market or other national securities exchange on which the Common Stock has been
listed or if there is no such price on such date, then the closing bid price on
such national securities exchange or market on the date nearest preceding such
date, or (b) if the Common Stock is not listed on the Nasdaq SmallCap Market or
any national securities exchange or market, the closing bid for a share of
Common Stock in the over-the-counter market, as reported by the Nasdaq SmallCap
Market at the close of business on such date, or (c) if the Common Stock is not
quoted on the Nasdaq SmallCap Market, the closing bid price for a share of
Common Stock in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or similar organization or agency succeeding to
its functions of reporting prices), or (d) if the Common Stock is no longer
reported by the National Quotation Bureau Incorporated (or similar organization
or agency succeeding to its functions of reporting prices), then the average of
the "Pink Sheet" quotes for the relevant conversion period as determined by the
Holder, or (e) if the Common Stock is no longer publicly traded the fair market
value of a share of Common Stock as determined by an Appraiser (as defined in
Section 5(d)(iv) above) selected in good faith by the Holders of a majority in
interest of the shares of the Preferred Stock; PROVIDED, HOWEVER, that the
Company, after receipt of the determination by such Appraiser, shall have the
right to select an additional Appraiser, in which case, the fair market value
shall be equal to the average of the determinations by each such Appraiser.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Purchase Agreement" means the Convertible Preferred Stock Purchase
Agreement, dated as of the Original Issue Date, between the Company and the
original Holder of the Preferred Stock.
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<PAGE>
"Trading Day" means (a) a day on which the Common Stock is traded on
the Nasdaq SmallCap Market or principal national securities exchange or market
on which the Common Stock has been listed, or (b) if the Common Stock is not
listed on the Nasdaq SmallCap Market or any stock exchange or market, a day on
which the Common Stock is traded in the over-the-counter market, as reported by
the Nasdaq SmallCap Market, or (c) if the Common Stock is not quoted on the
Nasdaq SmallCap Market, a day on which the Common Stock is quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices).
RESOLVED FURTHER, that the President and Secretary of the Company be,
and they hereby are, authorized and directed to prepare, execute, verify, and
file in Delaware, a Certificate of Designation in accordance with these
resolutions and as required by law.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
12
<PAGE>
IN WITNESS WHEREOF, Innovus Corporation has caused its corporate seal to
be hereunto affixed and this certificate to be signed by Terry Haas, its
President, and attested by David Mock, its Secretary, this 1st day of
October, 1996.
INNOVUS CORPORATION
---------------------------------
Terry Haas
President
Attest:
By:
--------------------------------
David Mock
Secretary
13
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby irrevocably elects to convert the number of shares of
Series C Convertible Preferred Stock indicated below, into shares of Common
Stock, par value U.S.$.001 per share (the "Common Stock"), of Innovus
Corporation (the "Company") according to the conditions hereof, as of the
date written below. If shares are to be issued in the name of a person other
than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the Holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations:
----------------------------------
Date to Effect Conversion
----------------------------------
Number of shares of Preferred
Stock to be Converted
----------------------------------
Applicable Conversion Price
----------------------------------
Signature
----------------------------------
Name:
----------------------------------
Address:
The Company undertakes to promptly upon its receipt of this conversion notice
(and, in any case prior to the time it effects the conversion requested
hereby), notify the converting holder by facsimile of the number of shares of
Common Stock outstanding on such date and the number of shares of Common
Stock which would be issuable to the holder if the conversion requested in
this conversion notice were effected in full, whereupon, the holder may,
within one day of the notice from the Company, revoke the conversion
requested hereby to the extent that it determines that such conversion would
result in it owning in excess of 4.9% of the outstanding shares of Common
Stock on such date, and the Company shall issue to the holder one or more
certificates representing shares of Preferred Stock which have not been
converted as a result of this provision. If the holder waives the
applicability of this limitation by notice to the Company delivered upon its
receipt of the Company's notice regarding the number of outstanding shares of
Common Stock or if the Purchaser fails to respond to the Company's notice
within one day thereafter, the Company shall effect in full the conversion
requested in this notice.
14
<PAGE>
EXHIBIT B
INNOVUS CORPORATION
NOTICE OF CONVERSION AT
THE ELECTION OF THE COMPANY
The undersigned in the name and on behalf of Innovus Corporation (the "Company")
hereby notifies the addressee hereof that the Company hereby elects to exercise
its right to convert [ ] shares of its Series C Convertible
Preferred Stock held by the Holder into shares of Common Stock, par value
U.S.$.001 per share (the "Common Stock") of the Company according to the terms
hereof, as of the date written below. No fee will be charged to the Holder for
any conversion hereunder, except for such transfer taxes, if any which may be
incurred by the Company if shares are to be issued in the name of a person other
than the person to whom this notice is addressed.
Conversion calculations:
----------------------------------
Date to Effect Conversion
----------------------------------
Number of Shares of Preferred
Stock to be Converted
----------------------------------
Applicable Conversion Price
----------------------------------
Number of Shares of Common Stock
outstanding at close of trading
on Conversion Date
----------------------------------
Signature
----------------------------------
Name:
----------------------------------
Address:
15
<PAGE>
CERTIFICATE OF INCREASE TO THE
CERTIFICATE OF DESIGNATION OF
SERIES C CONVERTIBLE PREFERRED STOCK OF
INNOVUS CORPORATION
The undersigned, Terry Haas and David Mock, hereby certify that:
I. They are the duly elected and acting President and Secretary,
respectively, of Innovus Corporation, a Delaware corporation (the "Company").
II. The Certificate of Incorporation of the Company authorizes
1,000,000 shares of preferred stock, par value $.001 per share, of which the
following have been authorized and are issued and outstanding: 100,000 Series
A Preferred Stock authorized, none outstanding; 45,000 Series C Preferred
authorized, 45,000 outstanding.
III. The following is a true and correct copy of resolutions duly
adopted by the Board of Directors at a meeting duly held on October 9, 1996,
which constituted all requisite action on the part of the Company for adoption
of such resolutions.
RESOLUTIONS
WHEREAS, the Board of Directors of the Company (the "Board of
Directors") is authorized to provide for the issuance of the shares of
Preferred Stock in series, and by filing a certificate pursuant to the
applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, and to fix the
designations, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof;
WHEREAS, pursuant to that certain Certificate of Designation of
Series C Convertible Preferred Stock of Innovus Corporation (the "Original
Certificate"), the Board of Directors authorized 45,000 shares of Series C
Convertible Preferred Stock (the "Series C Preferred"), all of which have been
issued;
WHEREAS, Section 151 of the Delaware Corporation Law authorizes the
Board of Directors to increase the number of shares of stock of any series;
WHEREAS, the Original Certificate provides for the authorization of
additional shares of Series C Preferred with the consent of the holders of the
existing Series C Preferred shares; and
WHEREAS, the holders of the Series C Preferred have consented to the
increase in the number of shares of Series C Preferred from 45,000 to 55,000.
<PAGE>
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
designates additional shares of Series C Preferred, and fixes the rights,
preferences, privileges and restrictions relating to such series as follows:
RESOLVED, that the number of shares of Series C Preferred authorized
in "Section 1. DESIGNATION, AMOUNT AND PAR VALUE" of the Original Certificate
is hereby increased from 45,000 to 55,000 by amending said Section 1 to read
as follows:
Section 1. DESIGNATION, AMOUNT AND PAR VALUE. The series of Preferred
Stock shall be designated as the Series C Convertible Preferred Stock
(the "Preferred Stock"), and the number of shares so designated shall
be 55,000. The par value of each share of Preferred Stock shall be
$.001. Each share of Preferred Stock shall have a stated value of
$50.00 per share (the "Stated Value").
RESOLVED FURTHER, that all other rights, preferences, privileges and
restrictions relating to the Series C Preferred shall remain in effect and
unchanged.
RESOLVED FURTHER, that the President and Secretary of the Company be,
and they hereby are, authorized and directed to prepare, execute, verify, and
file in Delaware, an Amendment to the Certificate of Designation in accordance
with these resolutions and as required by law.
IN WITNESS WHEREOF, Innovus Corporation has caused its corporate seal
to be hereunto affixed and this certificate to be signed by Terry Haas, its
President, and attested by David Mock, its Secretary, this __ day of October,
1996.
INNOVUS CORPORATION
----------------------------------
Terry Haas
President
Attest:
By:
------------------------------
David Mock
Secretary
2
<PAGE>
CERTIFICATE OF DESIGNATION OF
SERIES D CONVERTIBLE PREFERRED STOCK OF
INNOVUS CORPORATION
The undersigned, Terry Haas and David Mock, hereby certify that:
I. They are the duly elected and acting President and Secretary,
respectively, of Innovus Corporation, a Delaware corporation (the "Company").
II. The Certificate of Incorporation of the Company authorizes
1,000,000 shares of preferred stock, par value $.001 per share, of which the
following have been authorized and are issued and outstanding: 100,000 Series
A Preferred Stock authorized, none outstanding; 55,000 Series C Preferred
Stock authorized, 45,000 shares outstanding.
III. The following is a true and correct copy of resolutions duly
adopted by the Board of Directors at meetings duly held on October 9, 1996,
which constituted all requisite action on the part of the Company for adoption
of such resolutions.
RESOLUTIONS
WHEREAS, the Board of Directors of the Company (the "Board of
Directors") is authorized to provide for the issuance of the shares of
Preferred Stock in series, and by filing a certificate pursuant to the
applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, and to fix the
designations, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof;
WHEREAS, the Board of Directors desires, pursuant to its authority as
aforesaid, to designate a new series of preferred stock, set the number of
shares constituting such series and fix the rights, preferences, privileges
and restrictions of such series.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
designates a new series of preferred stock and the number of shares
constituting such series and fixes the rights, preferences, privileges and
restrictions relating to such series as follows:
Section 1. DESIGNATION, AMOUNT AND PAR VALUE. The series of
Preferred Stock shall be designated as the Series D Convertible Preferred
Stock (the "Preferred Stock"), and the number of shares so designated shall be
20,100. The par value of each share of Preferred Stock shall be $.001. Each
share of Preferred Stock shall have a stated value of $50.00 per share (the
"Stated Value").
<PAGE>
Section 2. DIVIDENDS.
(a) Holders of Preferred Stock shall be entitled to receive, when
and as declared by the Board of Directors out of funds legally available
therefor, and the Company shall pay, cumulative dividends at the rate per
share (as a percentage of the Stated Value per share) equal to 5% per annum,
payable, in cash or shares of Common Stock, in arrears on the Conversion Date
(as hereinafter defined). Dividends on the Preferred Stock shall accrue daily
commencing October 1, 1997 and shall be deemed to accrue on such date whether
or not earned or declared and whether or not there are profits, surplus or
other funds of the Company legally available for the payment of dividends.
The party that holds the Preferred Stock on an applicable record date for any
dividend payment will be entitled to receive such dividend payment and any
other accrued and unpaid dividends which accrued prior to such dividend
payment date, without regard to any sale or disposition of such Preferred
Stock subsequent to the applicable record date but prior to the applicable
dividend payment date. Except as otherwise provided herein, if at any time the
Company pays less than the total amount of dividends then accrued to any class
of Preferred Stock, such payment shall be distributed ratably among the
holders of such class based upon the number of shares held by each holder.
(b) So long as any Preferred Stock shall remain outstanding, neither
the Company nor any subsidiary thereof shall redeem, purchase or otherwise
acquire directly or indirectly any Junior Securities (as defined in Section
7), nor shall the Company directly or indirectly pay or declare any dividend
or make any distribution (other than a dividend or distribution described in
Section 5) upon, nor shall any distribution be made in respect of, any Junior
Securities, nor shall any monies be set aside for or applied to the purchase
or redemption (through a sinking fund or otherwise) of any Junior Securities
unless all dividends on the Preferred Stock for all past dividend periods
shall have been paid.
Section 3. VOTING RIGHTS. Except as otherwise provided herein and
as otherwise provided by law, the Preferred Stock shall have no voting rights.
However, so long as any shares of Preferred Stock are outstanding, the
Company shall not, without the affirmative vote of the holders of a majority
of the shares of the Preferred Stock then outstanding, (i) alter or change
adversely the powers, preferences or rights given to the Preferred Stock or
(ii) authorize or create any class of stock ranking as to dividends or
distribution of assets upon a Liquidation (as defined below) senior to, prior
to or PARI PASSU with the Preferred Stock.
Section 4. LIQUIDATION. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a "Liquidation"),
the holders of shares of Preferred Stock shall be entitled to receive out of
the assets of the Company, whether such assets are capital or surplus, for
each share of Preferred Stock an amount equal to the Stated Value, plus an
amount equal to accrued but unpaid dividends per share, whether declared or
not, but without interest, before any distribution or payment shall be made to
the holders of any Junior Securities, and if the assets of the Company shall
be insufficient to pay in full such amounts, then the entire assets to be
distributed
2
<PAGE>
shall be distributed among the holders of Preferred Stock ratably in
accordance with the respective amounts that would be payable on such shares if
all amounts payable thereon were paid in full. A sale, conveyance or
disposition of all or substantially all of the assets of the Company or the
effectuation by the Company of a transaction or series of related transactions
in which more than 50% of the voting power of the Company is disposed of shall
be deemed a Liquidation; PROVIDED that, a consolidation or merger of the
Company with or into any other company or companies shall not be treated as a
Liquidation, but instead shall be subject to the provisions of Section 5. The
Company shall mail written notice of any such liquidation, not less than 60
days prior to the payment date stated therein, to each record holder of
Preferred Stock.
Section 5. CONVERSION.
(a) Each share of Preferred Stock shall be convertible into shares
of Common Stock at the Conversion Ratio (as defined in Section 7) at the
option of the holder in whole or in part at any time after the expiration of
the earlier to occur of (i) 74 days after the Original Issue Date (as defined
in Section 7) and (ii) the date that the Securities and Exchange Commission
(the "Commission") declares effective under the Securities Act of 1933, as
amended (the "Securities Act") the registration statement contemplated by the
Registration Rights Agreement, dated September 30, 1996, by and between the
Company and the original holders of the Company's Series C Preferred Stock as
amended by the Amended and Restated Registration Rights Agreement dated
October 31, 1996 between the Company and the original holder of the Company's
Series D Preferred Stock (as so amended, the "Registration Rights Agreement"),
relating among other things to the Preferred Stock and the shares of Common
Stock into which the Preferred Stock is convertible in accordance with the
terms hereof. The holder shall effect conversions by surrendering the
certificate or certificates representing the shares of Preferred Stock to be
converted to the Company, together with the form of conversion notice attached
hereto as EXHIBIT A (the "Holder Conversion Notice") in the manner set forth
in Section 5(j). Each Holder Conversion Notice shall specify the number of
shares of Preferred Stock to be converted and the date on which such
conversion is to be effected, which date may not be prior to the date the
Holder delivers such Notice by facsimile (the "Holder Conversion Date").
Subject to Section 5(c) and, as to the original Holder (or its sole designee),
subject to Section 4.13 of the Purchase Agreement (as defined in Section 7),
each Holder Conversion Notice, once given, shall be irrevocable. If the
holder is converting less than all shares of Preferred Stock represented by
the certificate or certificates tendered by the holder with the Holder
Conversion Notice, the Company shall promptly deliver to the holder a
certificate for such number of shares as have not been converted.
(b) Provided that ten (10) Trading Days (as defined in Section 7)
shall have elapsed from the date the Commission declared the registration
statement contemplated by the Registration Rights Agreement effective under
the Securities Act, each share of the Preferred Stock shall be convertible
into shares of Common Stock at the Conversion Ratio at the option of the
Company in whole or in part at any time on or after the expiration of one year
after the Original Issue Date; PROVIDED, HOWEVER, that the Company is not
permitted to deliver a Company Conversion Notice (as defined below)
3
<PAGE>
within ten (10) days of issuing any press release or other public statement
relating to such conversion. The Company shall effect such conversion by
delivering to the holders of such shares of Preferred Stock to be converted a
written notice in the form attached hereto as EXHIBIT B (the "Company
Conversion Notice"), which Company Conversion Notice, once given, shall be
irrevocable. Each Company Conversion Notice shall specify the number of shares
of Preferred Stock to be converted and the date on which such conversion is to
be effected, which date will be at least one (1) Trading Day after the date
the Company delivers such Notice by facsimile to the holder (the "Company
Conversion Date"). The Company shall give such Company Conversion Notice in
accordance with Section 5(j) below at least one (1) Trading Day before the
Company Conversion Date. Any such conversion shall be effected on a pro rata
basis among the holders of Preferred Stock. Upon the conversion of shares of
Preferred Stock pursuant to a Company Conversion Notice, the holders of the
Preferred Stock shall surrender the certificates representing such shares at
the office of the Company or of any transfer agent for the Preferred Stock or
Common Stock. If the Company is converting less than all shares of the
Preferred Stock, the Company shall, upon conversion of such shares subject to
such Company Conversion Notice and receipt of the certificate or certificates
representing such shares of Preferred Stock deliver to the holder or holders a
certificate for such number of shares of Preferred Stock as have not been
converted. Each of a Holder Conversion Notice and a Company Conversion Notice
is sometimes referred to herein as a "Conversion Notice," and each of a
"Holder Conversion Date" and a "Company Conversion Date" is sometimes referred
to herein as a "Conversion Date."
(c) Not later than three (3) Trading Days after the Conversion Date,
the Company will deliver to the holder (i) a certificate or certificates which
shall be free of restrictive legends and trading restrictions (other than
those then required by law and as set forth in the Purchase Agreement),
representing the number of shares of Common Stock being acquired upon the
conversion of shares of Preferred Stock and (ii) one or more certificates
representing the number of shares of Preferred Stock not converted; PROVIDED,
HOWEVER that the Company shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon conversion of any shares
of Preferred Stock until certificates evidencing such shares of Preferred
Stock are either delivered for conversion to the Company or any transfer agent
for the Preferred Stock or Common Stock, or the holder notifies the Company
that such certificates have been lost, stolen or destroyed and provides a bond
(or other adequate security reasonably acceptable to the Company) satisfactory
to the Company to indemnify the Company from any loss incurred by it in
connection therewith. The Company shall, upon request of the holder, use its
best efforts to deliver any certificate or certificates required to be
delivered by the Company under this Section 5(c) electronically through the
Depository Trust Corporation or another established clearing corporation
performing similar functions. In the case of a conversion pursuant to a
Holder Conversion Notice, if such certificate or certificates are not
delivered by the date required under this Section 5(c), the holder shall be
entitled by written notice to the Company at any time on or before such
holder's receipt of such certificate or certificates thereafter, to rescind
such conversion, in which event the Company shall immediately return the
certificates representing the shares of Preferred Stock tendered for
conversion.
4
<PAGE>
(d) (i) The conversion price for each share of Preferred Stock (the
"Conversion Price") in effect on any Conversion Date shall be $5.00 per share.
(ii) If the Company, at any time while any shares of Preferred
Stock are outstanding, (a) shall pay a stock dividend or otherwise make a
distribution or distributions on shares of its Junior Securities payable in
shares of its capital stock (whether payable in shares of its Common Stock or
of capital stock of any class), (b) subdivide outstanding shares of Common
Stock into a larger number of shares, (c) combine outstanding shares of Common
Stock into a smaller number of shares, or (d) issue by reclassification of
shares of Common Stock any shares of capital stock of the Company, the
Conversion Price designated in Section 5(d)(i) shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common Stock
outstanding before such event and of which the denominator shall be the number
of shares of Common Stock outstanding after such event. Any adjustment made
pursuant to this Section 5(d)(ii) shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or re-classification.
(iii) If the Company, at any time while any shares of Preferred
Stock are outstanding, shall issue rights or warrants to all holders of Common
Stock entitling them to subscribe for or purchase shares of Common Stock at a
price per share less than the Per Share Market Value of Common Stock at the
record date mentioned below, the Conversion Price designated in Section
5(d)(i) shall be multiplied by a fraction, of which the denominator shall be
the number of shares of Common Stock (excluding treasury shares, if any)
outstanding on the date of issuance of such rights or warrants plus the number
of additional shares of Common Stock offered for subscription or purchase, and
of which the numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding on the date of issuance of
such rights or warrants plus the number of shares which the aggregate offering
price of the total number of shares so offered would purchase at such Per
Share Market Value. Such adjustment shall be made whenever such rights or
warrants are issued, and shall become effective immediately after the record
date for the determination of stockholders entitled to receive such rights or
warrants. However, upon the expiration of any right or warrant to purchase
Common Stock the issuance of which resulted in an adjustment in the Conversion
Price designated in Section 5(d)(i) pursuant to this Section 5(d)(iii), if any
such right or warrant shall expire and shall not have been exercised, the
Conversion Price designated in Section 5(d)(i) shall immediately upon such
expiration be recomputed and effective immediately upon such expiration be
increased to the price which it would have been (but reflecting any other
adjustments in the Conversion Price made pursuant to the provisions of this
Section 5 after the issuance of such rights or warrants) had the adjustment of
the Conversion Price made upon the issuance of such rights or warrants been
made on the basis of offering for subscription or purchase only that number of
shares of Common Stock actually purchased upon the exercise of such rights or
warrants actually exercised.
5
<PAGE>
(iv) If the Company, at any time while shares of Preferred Stock
are outstanding, shall distribute to all holders of Common Stock (and not to
holders of Preferred Stock) evidences of its indebtedness or assets or rights
or warrants to subscribe for or purchase any security (excluding those
referred to in Section 5(d)(iii) above) then in each such case the Conversion
Price at which each share of Preferred Stock shall thereafter be convertible
shall be determined by multiplying the Conversion Price in effect immediately
prior to the record date fixed for determination of stockholders entitled to
receive such distribution by a fraction of which the denominator shall be the
Per Share Market Value of Common Stock determined as of the record date
mentioned above, and of which the numerator shall be such Per Share Market
Value of the Common Stock on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness
so distributed applicable to one outstanding share of Common Stock as
determined by the Board of Directors in good faith; PROVIDED, HOWEVER that in
the event of a distribution exceeding ten percent (10%) of the net assets of
the Company, such fair market value shall be determined by a nationally
recognized or major regional investment banking firm or firm of independent
certified public accountants of recognized standing (which may be the firm
that regularly examines the financial statements of the Company) (an
"Appraiser") selected in good faith by the holders of a majority in interest
of the shares of Preferred Stock; and PROVIDED, FURTHER that the Company,
after receipt of the determination by such Appraiser shall have the right to
select an additional Appraiser, in which case the fair market value shall be
equal to the average of the determinations by each such Appraiser. In either
case the adjustments shall be described in a statement provided to all holders
of Preferred Stock of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of Common
Stock. Such adjustment shall be made whenever any such distribution is made
and shall become effective immediately after the record date mentioned above.
(v) All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(vi) Whenever the Conversion Price is adjusted pursuant to
Section 5(d)(ii), (iii), (iv) or (v), the Company shall promptly mail to each
holder of Preferred Stock, a notice setting forth the Conversion Price after
such adjustment and setting forth a brief statement of the facts requiring
such adjustment.
(vii) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, the sale
or transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, the holders of the Preferred Stock then
outstanding shall have the right thereafter to convert such shares only into
the shares of stock and other securities and property receivable upon or
deemed to be held by holders of Common Stock following such reclassification,
consolidation, merger, sale, transfer or share exchange, and the holders of
the Preferred Stock shall be entitled upon such event to receive such amount
of securities or property as the shares of the Common Stock of the Company
into which such shares of Preferred Stock could have been converted
immediately prior to such
6
<PAGE>
reclassification, consolidation, merger, sale, transfer or share exchange
would have been entitled. The terms of any such consolidation, merger, sale,
transfer or share exchange shall include such terms so as to continue to give
to the holder of Preferred Stock the right to receive the securities or
property set forth in this Section 5(d)(vii) upon any conversion following
such consolidation, merger, sale, transfer or share exchange. This provision
shall similarly apply to successive reclassifications, consolidations,
mergers, sales, transfers or share exchanges.
(viii) If:
a. the Company shall declare a dividend (or any other
distribution) on its Common Stock; or
b. the Company shall declare a special nonrecurring cash
dividend on or a redemption of its Common Stock; or
c. the Company shall authorize the granting to all holders
of the Common Stock rights or warrants to subscribe
for or purchase any shares of capital stock of any class
or of any rights; or
d. the approval of any stockholders of the Company shall
be required in connection with any reclassification of
the Common Stock of the Company (other than a
subdivision or combination of the outstanding shares
of Common Stock), any consolidation or merger to
which the Company is a party, any sale or transfer of
all or substantially all of the assets of the Company, or
any compulsory share exchange whereby the Common
Stock is converted into other securities, cash or
property; or
e. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding-up of
the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained
for the purpose of conversion of Preferred Stock, and shall cause to be mailed
to the holders of Preferred Stock at their last addresses as they shall appear
upon the stock books of the Company, at least 30 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating
(x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not
to be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are
to be determined, or (y) the date on which such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution,
liquidation or winding-up is expected to become
7
<PAGE>
effective, and the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution,
liquidation or winding-up; PROVIDED, HOWEVER, that the failure to mail such
notice or any defect therein or in the mailing thereof shall not affect the
validity of the corporate action required to be specified in such notice.
(e) If at any time conditions shall arise by reason of action taken
by the Company which in the opinion of the Board of Directors are not
adequately covered by the other provisions hereof and which might materially
and adversely affect the rights of the holders of Preferred Stock (different
than or distinguished from the effect generally on rights of holders of any
class of the Company's capital stock) or if at any time any such conditions
are expected to arise by reason of any action contemplated by the Company, the
Company shall mail a written notice briefly describing the action contemplated
and the material adverse effects of such action on the rights of the holders
of Preferred Stock at least 30 calendar days prior to the effective date of
such action, and an Appraiser selected by the holders of majority in interest
of the Preferred Stock shall give its opinion as to the adjustment, if any
(not inconsistent with the standards established in this Section 5), of the
Conversion Price (including, if necessary, any adjustment as to the securities
into which shares of Preferred Stock may thereafter be convertible) and any
distribution which is or would be required to preserve without diluting the
rights of the holders of shares of Preferred Stock; PROVIDED, HOWEVER, that
the Company, after receipt of the determination by such Appraiser, shall have
the right to select an additional Appraiser, in which case the adjustment
shall be equal to the average of the adjustments recommended by each such
Appraiser. The Board of Directors shall make the adjustment recommended
forthwith upon the receipt of such opinion or opinions or the taking of any
such action contemplated, as the case may be; PROVIDED, HOWEVER, that no such
adjustment of the Conversion Price shall be made which in the opinion of the
Appraiser(s) giving the aforesaid opinion or opinions would result in an
increase of the Conversion Price to more than the Conversion Price then in
effect.
(f) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the
purpose of issuance upon conversion of Preferred Stock as herein provided,
free from preemptive rights or any other actual contingent purchase rights of
persons other than the holders of Preferred Stock, such number of shares of
Common Stock as shall be issuable (taking into account the adjustments and
restrictions of Section 5(b) and Section 5(d) hereof) upon the conversion of
all outstanding shares of Preferred Stock. The Company covenants that all
shares of Common Stock that shall be so issuable shall, upon issue, be duly
and validly authorized, issued and fully paid and nonassessable.
(g) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock, but
may if otherwise permitted, make a cash payment in respect of any final
fraction of a share based on the Per Share Market Value at such time. If the
Company elects not, or is unable, to make such a cash payment, the holder of a
share of Preferred Stock shall be
8
<PAGE>
entitled to receive, in lieu of the final fraction of a share, one whole share
of Common Stock.
(h) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect of
any transfer involved in the issuance and delivery of any such certificate
upon conversion in a name other than that of the holder of such shares of
Preferred Stock so converted and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or
shall have established to the satisfaction of the Company that such tax has
been paid.
(i) Shares of Preferred Stock converted into Common Stock shall be
canceled and shall have the status of authorized but unissued shares of
preferred stock.
(j) Each Holder Conversion Notice shall be given by facsimile and by
mail, postage prepaid, addressed to the attention of the Chief Financial
Officer of the Company at the facsimile telephone number and address of the
principal place of business of the Company. Each Company Conversion Notice
shall be given by facsimile and by mail, postage prepaid, addressed to each
holder of Preferred Stock at the facsimile telephone number and address of
such holder appearing on the books of the Company or provided to the Company
by such holder for the purpose of such Company Conversion Notice, or if no
such facsimile telephone number or address appears or is so provided, at the
principal place of business of the holder. Any such notice shall be deemed
given and effective upon the earliest to occur of (i)(a) if such Conversion
Notice is delivered via facsimile at the facsimile telephone number specified
in this Section 5(j) prior to 4:30 p.m. (Eastern Standard Time) on any date,
such date (or, in the case of a Company Conversion Notice, the next Trading
Day) or such later date as is specified in the Conversion Notice, and (b) if
such Conversion Notice is delivered via facsimile at the facsimile telephone
number specified in this Section 5(j) after 11:59 p.m. (Eastern Standard Time)
on any date, the next date (or, in the case of a Company Conversion Notice,
the next Trading Day after such next day) or such later date as is specified
in the Conversion Notice, (ii) five days after deposit in the United States
mails or (iii) upon actual receipt by the party to whom such notice is
required to be given.
Section 6. COMPANY REDEMPTION OPTION.
The Company may, at its option, at any time on or after November 1,
1997 redeem any outstanding and unconverted Preferred Stock; provided that the
Company notifies the holders thereof no later than thirty calendar days prior
to the effective date of such redemption (the "Optional Redemption Date") of
its intention to do so.
If the Company elects to redeem such outstanding and unconverted
shares of Preferred Stock, the redemption price per share (the "Optional
Redemption Price")
9
<PAGE>
shall equal the Conversion Ratio multiplied by the Conversion Price on the
Optional Redemption Date and shall be paid by the Company to the Holders of
such unconverted Preferred Stock on the Optional Redemption Date. If any
portion of the Optional Redemption Price shall not be paid by the Company
within 7 calendar days after the Optional Redemption Date, such Optional
Redemption Price shall be increased by an amount accruing from the 7th day to
the 21st day after the Optional Redemption Date at the rate of 5% per annum,
from the 22nd day to the 60th day at 8% per annum and from the 61st day until
paid at the rate of 12% per annum, except that no such interest shall accrue
until the Purchaser shall have delivered to the Company the certificates
representing the shares of Preferred Stock to be so redeemed. If any portion
of the Optional Redemption Price remains unpaid more than 7 calendar days
after the Optional Redemption Date, then the Holder may elect, by written
notice to the Company given within 45 days after the Optional Redemption Date,
to either (i) demand conversion in accordance with the formula and the time
frame therefor set forth in Section 5 for a conversion at the option of the
Holder hereof of all Preferred Stock for which the Optional Redemption Price,
plus interest, has not been paid in full (the "Unpaid Optional Redemption
Stock"), or (ii) demand that the Company withdraw its election to force such
redemption. If the Holder elects option (i) above, the Company shall within
three Business Days of its receipt of such election deliver to the Holder the
shares of Common Stock issuable upon conversion of the Unpaid Optional
Redemption Stocks subject to such Holder conversion demand and otherwise
perform its obligations hereunder with respect thereto; or, if the Holder
elects option (ii) above, the Company shall promptly, and in any event not
later than three Business Days from receipt of Holder's notice of such
election, return to the Holder all of the Unpaid Optional Redemption Stock.
Section 7. DEFINITIONS. For the purposes hereof, the following
terms shall have the following meanings:
"Business Day" means any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
state of New York are authorized or required by law or other government
actions to close.
"Common Stock" means shares now or hereafter authorized of the class
of Common Stock, par value $.001, of the Company and stock of any other class
into which such shares may hereafter have been reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, of which the
numerator is Stated Value plus accrued but unpaid dividends, and of which the
denominator is the Conversion Price at such time.
"Junior Securities" means the Common Stock and all other equity
securities of the Company with the exception of the Series C Preferred Stock.
"Original Issue Date" shall mean October 31, 1996.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the Nasdaq
SmallCap Market
10
<PAGE>
or other national securities exchange on which the Common Stock has been
listed or if there is no such price on such date, then the closing bid price
on such national securities exchange or market on the date nearest preceding
such date, or (b) if the Common Stock is not listed on the Nasdaq SmallCap
Market or any national securities exchange or market, the closing bid for a
share of Common Stock in the over-the-counter market, as reported by the
Nasdaq SmallCap Market at the close of business on such date, or (c) if the
Common Stock is not quoted on the Nasdaq SmallCap Market, the closing bid
price for a share of Common Stock in the over-the-counter market as reported
by the National Quotation Bureau Incorporated (or similar organization or
agency succeeding to its functions of reporting prices), or (d) if the Common
Stock is no longer reported by the National Quotation Bureau Incorporated (or
similar organization or agency succeeding to its functions of reporting
prices), then the average of the "Pink Sheet" quotes for the relevant
conversion period as determined by the Holder, or (e) if the Common Stock is
no longer publicly traded the fair market value of a share of Common Stock as
determined by an Appraiser (as defined in Section 5(d)(iv) above) selected in
good faith by the Holders of a majority in interest of the shares of the
Preferred Stock; PROVIDED, HOWEVER, that the Company, after receipt of the
determination by such Appraiser, shall have the right to select an additional
Appraiser, in which case, the fair market value shall be equal to the average
of the determinations by each such Appraiser.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Purchase Agreement" means the Convertible Preferred Stock Purchase
Agreement, dated as of the Original Issue Date, between the Company and the
original Holder of the Series C Preferred Stock.
"Trading Day" means (a) a day on which the Common Stock is traded on
the Nasdaq SmallCap Market or principal national securities exchange or market
on which the Common Stock has been listed, or (b) if the Common Stock is not
listed on the Nasdaq SmallCap Market or any stock exchange or market, a day on
which the Common Stock is traded in the over-the-counter market, as reported
by the Nasdaq SmallCap Market, or (c) if the Common Stock is not quoted on the
Nasdaq SmallCap Market, a day on which the Common Stock is quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions
of reporting prices).
RESOLVED FURTHER, that the President and Secretary of the Company
be, and they hereby are, authorized and directed to prepare, execute, verify,
and file in Delaware, a Certificate of Designation in accordance with these
resolutions and as required by law.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
11
<PAGE>
IN WITNESS WHEREOF, Innovus Corporation has caused its corporate
seal to be hereunto affixed and this certificate to be signed by Terry Haas,
its President, and attested by David Mock, its Secretary, this __ day of
October, 1996.
INNOVUS CORPORATION
------------------------------------
Terry Haas
President
Attest:
By:
--------------------------------
David Mock
Secretary
12
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby irrevocably elects to convert the number of shares of
Series D Convertible Preferred Stock indicated below, into shares of Common
Stock, par value U.S.$.001 per share (the "Common Stock"), of Innovus
Corporation (the "Company") according to the conditions hereof, as of the date
written below. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the Holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations:
----------------------------------
Date to Effect Conversion
----------------------------------
Number of shares of Preferred Stock
to be Converted
$5.00
----------------------------------
Applicable Conversion Price
----------------------------------
Signature
----------------------------------
Name:
----------------------------------
Address:
The Company undertakes to promptly upon its receipt of this conversion notice
(and, in any case prior to the time it effects the conversion requested
hereby), notify the converting holder by facsimile of the number of shares of
Common Stock outstanding on such date and the number of shares of Common Stock
which would be issuable to the holder if the conversion requested in this
conversion notice were effected in full, whereupon, the holder may, within one
day of the notice from the Company, revoke the conversion requested hereby to
the extent that it determines that such conversion would result in it owning
in excess of 4.9% of the outstanding shares of Common Stock on such date, and
the Company shall issue to the holder one or more certificates representing
shares of Preferred Stock which have not been converted as a result of this
provision. If the holder waives the applicability of this limitation by
notice to the Company delivered upon its receipt of the Company's notice
regarding the number of outstanding shares of Common Stock or if the Purchaser
fails to respond to the Company's notice within one day thereafter, the
Company shall effect in full the conversion requested in this notice.
13
<PAGE>
EXHIBIT B
INNOVUS CORPORATION
NOTICE OF CONVERSION AT
THE ELECTION OF THE COMPANY
The undersigned in the name and on behalf of Innovus Corporation (the
"Company") hereby notifies the addressee hereof that the Company hereby elects
to exercise its right to convert [ ] shares of its Series D
Convertible Preferred Stock held by the Holder into shares of Common Stock,
par value U.S.$.001 per share (the "Common Stock") of the Company according to
the terms hereof, as of the date written below. No fee will be charged to the
Holder for any conversion hereunder, except for such transfer taxes, if any
which may be incurred by the Company if shares are to be issued in the name of
a person other than the person to whom this notice is addressed.
Conversion calculations:
----------------------------------
Date to Effect Conversion
----------------------------------
Number of Shares of Preferred Stock
to be Converted
----------------------------------
Applicable Conversion Price
----------------------------------
Number of Shares of Common Stock
outstanding at close of trading
on Conversion Date
----------------------------------
Signature
----------------------------------
Name:
----------------------------------
Address:
14
<PAGE>
CERTIFICATE OF CORRECTION
TO THE
CERTIFICATE OF DESIGNATION OF
SERIES D CONVERTIBLE PREFERRED STOCK OF
INNOVUS CORPORATION
The undersigned, Terry Haas and David Mock, hereby certify that:
I. They are the duly elected and acting President and Secretary,
respectively, of Innovus Corporation, a Delaware corporation (the "Company").
II. On November 1, 1996, the Company filed a document styled
"Certificate of Designation of Series D Convertible Preferred Stock of
Innovus Corporation" (the "Original Filing"). The Original Filing was an
inaccurate record of the corporate action therein referred to, inasmuch as
the conversion price was incorrectly stated as $5.00 per share rather than
$4.00 per share as detailed below.
III. The following provisions of the Original Filing are hereby
corrected pursuant to Section 103(f) to reflect the true and correct copy of
resolutions duly adopted by the Board of Directors at meetings duly held on
October 9, 1996, which constituted all requisite action on the part of the
Company for adoption of such resolutions.
FIRST: Section 5. (d)(i) of the Resolutions is hereby corrected to read
as follows:
Section 5. CONVERSION.
(d) (i) The conversion price for each share of Preferred Stock
(the "Conversion Price") in effect on any Conversion Date shall be $4.00 per
share.
SECOND: Exhibits A and B to the Original Filing are hereby corrected to
be in the form attached hereto.
<PAGE>
IN WITNESS WHEREOF, Innovus Corporation has caused its corporate seal to
be hereunto affixed and this certificate to be signed by Terry Haas, its
President, and attested by David Mock, its Secretary, this __ day of
November, 1996.
INNOVUS CORPORATION
---------------------------------
Terry Haas
President
Attest:
By:
--------------------------------
David Mock
Secretary
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby irrevocably elects to convert the number of shares of
Series D Convertible Preferred Stock indicated below, into shares of Common
Stock, par value U.S.$.001 per share (the "Common Stock"), of Innovus
Corporation (the "Company") according to the conditions hereof, as of the
date written below. If shares are to be issued in the name of a person other
than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the Holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations: ---------------------------------
Date to Effect Conversion
---------------------------------
Number of shares of Preferred
Stock to be Converted
$4.00
---------------------------------
Applicable Conversion Price
---------------------------------
Signature
---------------------------------
Name:
---------------------------------
Address:
The Company undertakes to promptly upon its receipt of this conversion notice
(and, in any case prior to the time it effects the conversion requested
hereby), notify the converting holder by facsimile of the number of shares of
Common Stock outstanding on such date and the number of shares of Common
Stock which would be issuable to the holder if the conversion requested in
this conversion notice were effected in full, whereupon, the holder may,
within one day of the notice from the Company, revoke the conversion
requested hereby to the extent that it determines that such conversion would
result in it owning in excess of 4.9% of the outstanding shares of Common
Stock on such date, and the Company shall issue to the holder one or more
certificates representing shares of Preferred Stock which have not been
converted as a result of this provision. If the holder waives the
applicability of this limitation by notice to the Company delivered upon its
receipt of the Company's notice regarding the number of outstanding shares of
Common Stock or if the Purchaser fails to respond to the Company's notice
within one day thereafter, the Company shall effect in full the conversion
requested in this notice.
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EXHIBIT B
INNOVUS CORPORATION
NOTICE OF CONVERSION AT
THE ELECTION OF THE COMPANY
The undersigned in the name and on behalf of Innovus Corporation (the "Company")
hereby notifies the addressee hereof that the Company hereby elects to exercise
its right to convert [ ] shares of its Series D Convertible
Preferred Stock held by the Holder into shares of Common Stock, par value
U.S.$.001 per share (the "Common Stock") of the Company according to the terms
hereof, as of the date written below. No fee will be charged to the Holder for
any conversion hereunder, except for such transfer taxes, if any which may be
incurred by the Company if shares are to be issued in the name of a person other
than the person to whom this notice is addressed.
Conversion calculations: ---------------------------------
Date to Effect Conversion
---------------------------------
Number of Shares of Preferred
Stock to be Converted
$4.00
---------------------------------
Applicable Conversion Price
---------------------------------
Number of Shares of Common Stock
outstanding at close of trading
on Conversion Date
---------------------------------
Signature
---------------------------------
Name:
---------------------------------
Address:
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CERTIFICATE OF DESIGNATION OF
SERIES E CONVERTIBLE PREFERRED STOCK OF
INNOVUS CORPORATION
The undersigned, Terry Haas and David Mock, hereby certify that:
I. They are the duly elected and acting President and Secretary,
respectively, of Innovus Corporation, a Delaware corporation (the "Company").
II. The Certificate of Incorporation of the Company authorizes
1,000,000 shares of preferred stock, par value $.001 per share, of which the
following have been authorized and are issued and outstanding: 100,000 Series
A Preferred Stock authorized, none outstanding; 55,000 Series C Preferred
Stock authorized, 55,000 shares outstanding; and 20,100 Series D Preferred
Stock authorized, 20,100 outstanding.
III. The following is a true and correct copy of resolutions duly
adopted by the Board of Directors on December 27, 1996, which constituted all
requisite action on the part of the Company for adoption of such resolutions.
RESOLUTIONS
WHEREAS, the Board of Directors of the Company (the "Board of
Directors") is authorized to provide for the issuance of the shares of
Preferred Stock in series, and by filing a certificate pursuant to the
applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, and to fix the
designations, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions thereof;
WHEREAS, the Board of Directors desires, pursuant to its authority as
aforesaid, to designate a new series of preferred stock, set the number of
shares constituting such series and fix the rights, preferences, privileges
and restrictions of such series.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
designates a new series of preferred stock and the number of shares
constituting such series and fixes the rights, preferences, privileges and
restrictions relating to such series as follows:
Section 1. DESIGNATION, AMOUNT AND PAR VALUE. The series of Preferred
Stock shall be designated as the Series E Convertible Preferred Stock (the
"Preferred Stock"), and the number of shares so designated shall be 12,000.
The par value of each share of Preferred Stock shall be $.001. Each share of
Preferred Stock shall have a stated value of $50.00 per share (the "Stated
Value").
<PAGE>
Section 2. DIVIDENDS.
(a) Holders of Preferred Stock shall be entitled to receive, when and
as declared by the Board of Directors out of funds legally available
therefor, and the Company shall pay, cumulative dividends at the rate per
share (as a percentage of the Stated Value per share) equal to 5% per annum,
payable, in cash or shares of Common Stock, in arrears on the Conversion Date
(as hereinafter defined). Notwithstanding the above, with respect to any
shares of the Preferred Stock which have not been converted or redeemed on
the date one year from the date of their original Issue Date, the rate of
dividend shall accrue at 15% per annum, AB INTITIO from the Original Issue
Date. Dividends on the Preferred Stock shall accrue daily commencing the
date of original issuance and shall be deemed to accrue on such date whether
or not earned or declared and whether or not there are profits, surplus or
other funds of the Company legally available for the payment of dividends.
The party that holds the Preferred Stock on an applicable record date for any
dividend payment will be entitled to receive such dividend payment and any
other accrued and unpaid dividends which accrued prior to such dividend
payment date, without regard to any sale or disposition of such Preferred
Stock subsequent to the applicable record date but prior to the applicable
dividend payment date. Except as otherwise provided herein, if at any time
the Company pays less than the total amount of dividends then accrued to any
class of Preferred Stock, such payment shall be distributed ratably among the
holders of such class based upon the number of shares held by each holder.
(b) So long as any Preferred Stock shall remain outstanding, neither
the Company nor any subsidiary thereof shall redeem, purchase or otherwise
acquire directly or indirectly any Junior Securities (as defined in Section
7), nor shall the Company directly or indirectly pay or declare any dividend
or make any distribution (other than a dividend or distribution described in
Section 5) upon, nor shall any distribution be made in respect of, any Junior
Securities, nor shall any monies be set aside for or applied to the purchase
or redemption (through a sinking fund or otherwise) of any Junior Securities
unless all dividends on the Preferred Stock for all past dividend periods
shall have been paid.
Section 3. VOTING RIGHTS. Except as otherwise provided herein and as
otherwise provided by law, the Preferred Stock shall have no voting rights.
However, so long as any shares of Preferred Stock are outstanding, the
Company shall not, without the affirmative vote of the holders of a majority
of the shares of the Preferred Stock then outstanding, (i) alter or change
adversely the powers, preferences or rights given to the Preferred Stock or
(ii) authorize or create any class of stock ranking as to dividends or
distribution of assets upon a Liquidation (as defined below) senior to, prior
to or PARI PASSU with the Preferred Stock.
Section 4. LIQUIDATION. Upon any liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary (a "Liquidation"), the holders
of shares of Preferred Stock shall be entitled to receive out of the assets of
the Company, whether such assets are capital or surplus, for each share of
Preferred Stock an amount equal to the Stated Value, plus an amount equal to
accrued but unpaid dividends per
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share, whether declared or not, but without interest, before any distribution
or payment shall be made to the holders of any Junior Securities, and if the
assets of the Company shall be insufficient to pay in full such amounts, then
the entire assets to be distributed shall be distributed among the holders of
Preferred Stock ratably in accordance with the respective amounts that would
be payable on such shares if all amounts payable thereon were paid in full.
A sale, conveyance or disposition of all or substantially all of the assets
of the Company or the effectuation by the Company of a transaction or series
of related transactions in which more than 50% of the voting power of the
Company is disposed of shall be deemed a Liquidation; PROVIDED that, a
consolidation or merger of the Company with or into any other company or
companies shall not be treated as a Liquidation, but instead shall be subject
to the provisions of Section 5. The Company shall mail written notice of any
such liquidation, not less than 60 days prior to the payment date stated
therein, to each record holder of Preferred Stock.
Section 5. CONVERSION.
(a) Each share of Preferred Stock shall be convertible into shares of
Common Stock at the Conversion Ratio (as defined in Section 7) at the option
of the holder in whole or in part at any time after March 31, 1997. The
holder shall effect conversions by surrendering the certificate or certificates
representing the shares of Preferred Stock to be converted to the Company,
together with the form of conversion notice attached hereto as EXHIBIT A (the
"Holder Conversion Notice") in the manner set forth in Section 5(j). Each
Holder Conversion Notice shall specify the number of shares of Preferred
Stock to be converted and the date on which such conversion is to be
effected, which date may not be prior to the date the Holder delivers such
Notice by facsimile (the "Holder Conversion Date"). Subject to Section 5(c),
each Holder Conversion Notice, once given, shall be irrevocable. If the
holder is converting less than all shares of Preferred Stock represented by
the certificate or certificates tendered by the holder with the Holder
Conversion Notice, the Company shall promptly deliver to the holder a
certificate for such number of shares as have not been converted.
(b) Each share of the Preferred Stock shall be convertible into shares
of Common Stock at the Conversion Ratio at the option of the Company in whole
or in part at any time on or after March 31, 1998; PROVIDED, HOWEVER, that
the Company is not permitted to deliver a Company Conversion Notice (as
defined below) within ten (10) days of issuing any press release or other
public statement relating to such conversion. The Company shall effect such
conversion by delivering to the holders of such shares of Preferred Stock to
be converted a written notice in the form attached hereto as EXHIBIT B (the
"Company Conversion Notice"), which Company Conversion Notice, once given,
shall be irrevocable. Each Company Conversion Notice shall specify the number
of shares of Preferred Stock to be converted and the date on which such
conversion is to be effected, which date will be at least one (1) Trading Day
after the date the Company delivers such Notice by facsimile to the holder
(the "Company Conversion Date"). The Company shall give such Company
Conversion Notice in accordance with Section 5(j) below at least one (1)
Trading Day before the Company Conversion Date. Any such conversion shall be
effected on a pro rata basis among the holders of Preferred Stock. Upon the
conversion of shares of Preferred Stock pursuant to a Company Conversion
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<PAGE>
Notice, the holders of the Preferred Stock shall surrender the certificates
representing such shares at the office of the Company or of any transfer
agent for the Preferred Stock or Common Stock. If the Company is converting
less than all shares of the Preferred Stock, the Company shall, upon
conversion of such shares subject to such Company Conversion Notice and
receipt of the certificate or certificates representing such shares of
Preferred Stock deliver to the holder or holders a certificate for such
number of shares of Preferred Stock as have not been converted. Each of a
Holder Conversion Notice and a Company Conversion Notice is sometimes
referred to herein as a "Conversion Notice," and each of a "Holder Conversion
Date" and a "Company Conversion Date" is sometimes referred to herein as a
"Conversion Date."
(c) Not later than three (3) Trading Days after the Conversion Date,
the Company will deliver to the holder (i) a certificate or certificates
representing the number of shares of Common Stock being acquired upon the
conversion of shares of Preferred Stock and (ii) one or more certificates
representing the number of shares of Preferred Stock not converted; PROVIDED,
HOWEVER that the Company shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon conversion of any shares
of Preferred Stock until certificates evidencing such shares of Preferred
Stock are either delivered for conversion to the Company or any transfer
agent for the Preferred Stock or Common Stock, or the holder notifies the
Company that such certificates have been lost, stolen or destroyed and
provides a bond (or other adequate security reasonably acceptable to the
Company) satisfactory to the Company to indemnify the Company from any loss
incurred by it in connection therewith. The Company shall, upon request of
the holder, use its best efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section 5(c)
electronically through the Depository Trust Corporation or another
established clearing corporation performing similar functions. In the case
of a conversion pursuant to a Holder Conversion Notice, if such certificate
or certificates are not delivered by the date required under this Section
5(c), the holder shall be entitled by written notice to the Company at any
time on or before such holder's receipt of such certificate or certificates
thereafter, to rescind such conversion, in which event the Company shall
immediately return the certificates representing the shares of Preferred
Stock tendered for conversion.
(d) (i) The conversion price for each share of Preferred Stock (the
"Conversion Price") in effect on any Conversion Date shall be $3.50 per share.
(ii) If the Company, at any time while any shares of Preferred Stock
are outstanding, (a) shall pay a stock dividend or otherwise make a distribution
or distributions on shares of its Junior Securities payable in shares of its
capital stock (whether payable in shares of its Common Stock or of capital stock
of any class), (b) subdivide outstanding shares of Common Stock into a larger
number of shares, (c) combine outstanding shares of Common Stock into a smaller
number of shares, or (d) issue by reclassification of shares of Common Stock any
shares of capital stock of the Company, the Conversion Price designated in
Section 5(d)(i) shall be multiplied by a fraction of which the numerator shall
be the number of shares of Common Stock outstanding before such event and of
which the denominator shall be the number of shares of Common Stock outstanding
after such event. Any adjustment made pursuant
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<PAGE>
to this Section 5(d)(ii) shall become effective immediately after the record
date for the determination of stockholders entitled to receive such dividend
or distribution and shall become effective immediately after the effective
date in the case of a subdivision, combination or re-classification.
(iii) If the Company, at any time while any shares of Preferred
Stock are outstanding, shall issue rights or warrants to all holders of
Common Stock entitling them to subscribe for or purchase shares of Common
Stock at a price per share less than the Per Share Market Value of Common
Stock at the record date mentioned below, the Conversion Price designated in
Section 5(d)(i) shall be multiplied by a fraction, of which the denominator
shall be the number of shares of Common Stock (excluding treasury shares, if
any) outstanding on the date of issuance of such rights or warrants plus the
number of additional shares of Common Stock offered for subscription or
purchase, and of which the numerator shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding on the date of issuance
of such rights or warrants plus the number of shares which the aggregate
offering price of the total number of shares so offered would purchase at
such Per Share Market Value. Such adjustment shall be made whenever such
rights or warrants are issued, and shall become effective immediately after
the record date for the determination of stockholders entitled to receive
such rights or warrants. However, upon the expiration of any right or
warrant to purchase Common Stock the issuance of which resulted in an
adjustment in the Conversion Price designated in Section 5(d)(i) pursuant to
this Section 5(d)(iii), if any such right or warrant shall expire and shall
not have been exercised, the Conversion Price designated in Section 5(d)(i)
shall immediately upon such expiration be recomputed and effective
immediately upon such expiration be increased to the price which it would
have been (but reflecting any other adjustments in the Conversion Price made
pursuant to the provisions of this Section 5 after the issuance of such
rights or warrants) had the adjustment of the Conversion Price made upon the
issuance of such rights or warrants been made on the basis of offering for
subscription or purchase only that number of shares of Common Stock actually
purchased upon the exercise of such rights or warrants actually exercised.
(iv) If the Company, at any time while shares of Preferred Stock
are outstanding, shall distribute to all holders of Common Stock (and not to
holders of Preferred Stock) evidences of its indebtedness or assets or rights
or warrants to subscribe for or purchase any security (excluding those
referred to in Section 5(d)(iii) above) then in each such case the Conversion
Price at which each share of Preferred Stock shall thereafter be convertible
shall be determined by multiplying the Conversion Price in effect immediately
prior to the record date fixed for determination of stockholders entitled to
receive such distribution by a fraction of which the denominator shall be the
Per Share Market Value of Common Stock determined as of the record date
mentioned above, and of which the numerator shall be such Per Share Market
Value of the Common Stock on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness
so distributed applicable to one outstanding share of Common Stock as
determined by the Board of Directors in good faith; PROVIDED, HOWEVER that in
the event of a distribution exceeding ten percent (10%) of the net assets of
the Company, such fair market value shall be determined by a
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<PAGE>
nationally recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which may be
the firm that regularly examines the financial statements of the Company) (an
"Appraiser") selected in good faith by the holders of a majority in interest
of the shares of Preferred Stock; and PROVIDED, FURTHER that the Company,
after receipt of the determination by such Appraiser shall have the right to
select an additional Appraiser, in which case the fair market value shall be
equal to the average of the determinations by each such Appraiser. In either
case the adjustments shall be described in a statement provided to all
holders of Preferred Stock of the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one
share of Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date mentioned above.
(v) All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(vi) Whenever the Conversion Price is adjusted pursuant to Section
5(d)(ii), (iii), (iv) or (v), the Company shall promptly mail to each holder
of Preferred Stock, a notice setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(vii) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, the sale
or transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property, the holders of the Preferred Stock
then outstanding shall have the right thereafter to convert such shares only
into the shares of stock and other securities and property receivable upon or
deemed to be held by holders of Common Stock following such reclassification,
consolidation, merger, sale, transfer or share exchange, and the holders of
the Preferred Stock shall be entitled upon such event to receive such amount
of securities or property as the shares of the Common Stock of the Company
into which such shares of Preferred Stock could have been converted
immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange would have been entitled. The terms of any such
consolidation, merger, sale, transfer or share exchange shall include such
terms so as to continue to give to the holder of Preferred Stock the right to
receive the securities or property set forth in this Section 5(d)(vii) upon
any conversion following such consolidation, merger, sale, transfer or share
exchange. This provision shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or share
exchanges.
(viii) If:
a. the Company shall declare a dividend (or any other
distribution) on its Common Stock; or
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<PAGE>
b. the Company shall declare a special nonrecurring cash
dividend on or a redemption of its Common Stock; or
c. the Company shall authorize the granting to all holders
of the Common Stock rights or warrants to subscribe
for or purchase any shares of capital stock of any class
or of any rights; or
d. the approval of any stockholders of the Company shall
be required in connection with any reclassification of
the Common Stock of the Company (other than a
subdivision or combination of the outstanding shares
of Common Stock), any consolidation or merger to
which the Company is a party, any sale or transfer of
all or substantially all of the assets of the Company,
or any compulsory share exchange whereby the Common
Stock is converted into other securities, cash or
property; or
e. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding-up of
the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained
for the purpose of conversion of Preferred Stock, and shall cause to be
mailed to the holders of Preferred Stock at their last addresses as they
shall appear upon the stock books of the Company, at least 30 calendar days
prior to the applicable record or effective date hereinafter specified, a
notice stating (x) the date on which a record is to be taken for the purpose
of such dividend, distribution, redemption, rights or warrants, or if a
record is not to be taken, the date as of which the holders of Common Stock
of record to be entitled to such dividend, distributions, redemption, rights
or warrants are to be determined, or (y) the date on which such
reclassification, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding-up is expected to become effective, and
the date as of which it is expected that holders of Common Stock of record
shall be entitled to exchange their shares of Common Stock for securities or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer, share exchange, dissolution, liquidation or winding-up;
PROVIDED, HOWEVER, that the failure to mail such notice or any defect therein
or in the mailing thereof shall not affect the validity of the corporate
action required to be specified in such notice.
(e) If at any time conditions shall arise by reason of action taken by the
Company which in the opinion of the Board of Directors are not adequately
covered by the other provisions hereof and which might materially and adversely
affect the rights of the holders of Preferred Stock (different than or
distinguished from the effect generally on rights of holders of any class of the
Company's capital stock) or if at any time any such conditions are expected to
arise by reason of any action contemplated by the
7
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Company, the Company shall mail a written notice briefly describing the
action contemplated and the material adverse effects of such action on the
rights of the holders of Preferred Stock at least 30 calendar days prior to
the effective date of such action, and an Appraiser selected by the holders
of majority in interest of the Preferred Stock shall give its opinion as to
the adjustment, if any (not inconsistent with the standards established in this
Section 5), of the Conversion Price (including, if necessary, any adjustment
as to the securities into which shares of Preferred Stock may thereafter be
convertible) and any distribution which is or would be required to preserve
without diluting the rights of the holders of shares of Preferred Stock;
PROVIDED, HOWEVER, that the Company, after receipt of the determination by
such Appraiser, shall have the right to select an additional Appraiser, in
which case the adjustment shall be equal to the average of the adjustments
recommended by each such Appraiser. The Board of Directors shall make the
adjustment recommended forthwith upon the receipt of such opinion or opinions
or the taking of any such action contemplated, as the case may be; PROVIDED,
however, that no such adjustment of the Conversion Price shall be made which
in the opinion of the Appraiser(s) giving the aforesaid opinion or opinions
would result in an increase of the Conversion Price to more than the
Conversion Price then in effect.
(f) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the
purpose of issuance upon conversion of Preferred Stock as herein provided,
free from preemptive rights or any other actual contingent purchase rights of
persons other than the holders of Preferred Stock, such number of shares of
Common Stock as shall be issuable (taking into account the adjustments and
restrictions of Section 5(b) and Section 5(d) hereof) upon the conversion of
all outstanding shares of Preferred Stock. The Company covenants that all
shares of Common Stock that shall be so issuable shall, upon issue, be duly
and validly authorized, issued and fully paid and nonassessable.
(g) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock,
but may if otherwise permitted, make a cash payment in respect of any final
fraction of a share based on the Per Share Market Value at such time. If the
Company elects not, or is unable, to make such a cash payment, the holder of
a share of Preferred Stock shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.
(h) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect
of any transfer involved in the issuance and delivery of any such certificate
upon conversion in a name other than that of the holder of such shares of
Preferred Stock so converted and the Company shall not be required to issue
or deliver such certificates unless or until the person or persons requesting
the issuance thereof shall have paid to the Company the amount of such tax or
shall have established to the satisfaction of the Company that such tax has
been paid.
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(i) Shares of Preferred Stock converted into Common Stock shall be canceled
and shall have the status of authorized but unissued shares of preferred stock.
(j) Each Holder Conversion Notice shall be given by facsimile and by mail,
postage prepaid, addressed to the attention of the Chief Financial Officer of
the Company at the facsimile telephone number and address of the principal
place of business of the Company. Each Company Conversion Notice shall be
given by facsimile and by mail, postage prepaid, addressed to each holder of
Preferred Stock at the facsimile telephone number and address of such holder
appearing on the books of the Company or provided to the Company by such
holder for the purpose of such Company Conversion Notice, or if no such
facsimile telephone number or address appears or is so provided, at the
principal place of business of the holder. Any such notice shall be deemed
given and effective upon the earliest to occur of (i)(a) if such Conversion
Notice is delivered via facsimile at the facsimile telephone number specified
in this Section 5(j) prior to 4:30 p.m. (Eastern Standard Time) on any date,
such date (or, in the case of a Company Conversion Notice, the next Trading
Day) or such later date as is specified in the Conversion Notice, and (b) if
such Conversion Notice is delivered via facsimile at the facsimile telephone
number specified in this Section 5(j) after 11:59 p.m. (Eastern Standard
Time) on any date, the next date (or, in the case of a Company Conversion
Notice, the next Trading Day after such next day) or such later date as is
specified in the Conversion Notice, (ii) five days after deposit in the
United States mails or (iii) upon actual receipt by the party to whom such
notice is required to be given.
Section 6. COMPANY REDEMPTION OPTION.
The Company may, at its option, at any time on or the date one year
following the Original Issue Date, redeem any outstanding and unconverted
Preferred Stock; provided that the Company notifies the holders thereof no
later than thirty calendar days prior to the effective date of such
redemption (the "Optional Redemption Date") of its intention to do so.
If the Company elects to redeem such outstanding and unconverted shares
of Preferred Stock, the redemption price per share (the "Optional Redemption
Price") shall equal the Conversion Ratio multiplied by the Conversion Price
on the Optional Redemption Date and shall be paid by the Company to the
Holders of such unconverted Preferred Stock on the Optional Redemption Date.
If any portion of the Optional Redemption Price shall not be paid by the
Company within 7 calendar days after the Optional Redemption Date, such
Optional Redemption Price shall be increased by an amount accruing from the
7th day to the 21st day after the Optional Redemption Date at the rate of 5%
per annum, from the 22nd day to the 60th day at 8% per annum and from the
61st day until paid at the rate of 12% per annum, except that no such
interest shall accrue until the Purchaser shall have delivered to the Company
the certificates representing the shares of Preferred Stock to be so
redeemed. If any portion of the Optional Redemption Price remains unpaid
more than 7 calendar days after the Optional Redemption Date, then the Holder
may elect, by written notice to the Company given within 45 days after the
Optional Redemption Date, to either (i) demand conversion in accordance with
the formula and the time frame therefor set forth in Section 5 for a
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<PAGE>
conversion at the option of the Holder hereof of all Preferred Stock for
which the Optional Redemption Price, plus interest, has not been paid in full
(the "Unpaid Optional Redemption Stock"), or (ii) demand that the Company
withdraw its election to force such redemption. If the Holder elects option
(i) above, the Company shall within three Business Days of its receipt of
such election deliver to the Holder the shares of Common Stock issuable upon
conversion of the Unpaid Optional Redemption Stocks subject to such Holder
conversion demand and otherwise perform its obligations hereunder with
respect thereto; or, if the Holder elects option (ii) above, the Company
shall promptly, and in any event not later than three Business Days from
receipt of Holder's notice of such election, return to the Holder all of the
Unpaid Optional Redemption Stock.
Section 7. DEFINITIONS. For the purposes hereof, the following terms
shall have the following meanings:
"Business Day" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the state
of New York are authorized or required by law or other government actions to
close.
"Common Stock" means shares now or hereafter authorized of the class of
Common Stock, par value $.001, of the Company and stock of any other class
into which such shares may hereafter have been reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, of which the
numerator is Stated Value plus accrued but unpaid dividends, and of which the
denominator is the Conversion Price at such time.
"Junior Securities" means the Common Stock and all other equity
securities of the Company with the exception of the Series C Preferred Stock
and the Series D Preferred Stock.
"Original Issue Date" shall mean the date that the Preferred stock was
originally issued by the Company, without regard to subsequent transfers.
Such Original Issue Date is anticipated to be December 31, 1996.
"Per Share Market Value" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on the Nasdaq SmallCap
Market or other national securities exchange on which the Common Stock has
been listed or if there is no such price on such date, then the closing bid
price on such national securities exchange or market on the date nearest
preceding such date, or (b) if the Common Stock is not listed on the Nasdaq
SmallCap Market or any national securities exchange or market, the closing
bid for a share of Common Stock in the over-the-counter market, as reported
by the Nasdaq SmallCap Market at the close of business on such date, or (c)
if the Common Stock is not quoted on the Nasdaq SmallCap Market, the closing
bid price for a share of Common Stock in the over-the-counter market as reported
by the National Quotation Bureau Incorporated (or similar organization or agency
succeeding to its functions of reporting prices), or (d) if the Common Stock is
no longer reported by the National Quotation Bureau Incorporated (or similar
organization or agency succeeding
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to its functions of reporting prices), then the average of the "Pink Sheet"
quotes for the relevant conversion period as determined by the Holder, or (e)
if the Common Stock is no longer publicly traded the fair market value of a
share of Common Stock as determined by an Appraiser (as defined in Section
5(d)(iv) above) selected in good faith by the Holders of a majority in
interest of the shares of the Preferred Stock; PROVIDED, HOWEVER, that the
Company, after receipt of the determination by such Appraiser, shall have the
right to select an additional Appraiser, in which case, the fair market value
shall be equal to the average of the determinations by each such Appraiser.
"Person" means a corporation, an association, a partnership, organization,
a business, an individual, a government or political subdivision thereof or a
governmental agency.
"Trading Day" means (a) a day on which the Common Stock is traded on the
Nasdaq SmallCap Market or principal national securities exchange or market on
which the Common Stock has been listed, or (b) if the Common Stock is not
listed on the Nasdaq SmallCap Market or any stock exchange or market, a day
on which the Common Stock is traded in the over-the-counter market, as
reported by the Nasdaq SmallCap Market, or (c) if the Common Stock is not
quoted on the Nasdaq SmallCap Market, a day on which the Common Stock is
quoted in the over-the-counter market as reported by the National Quotation
Bureau Incorporated (or any similar organization or agency succeeding its
functions of reporting prices).
RESOLVED FURTHER, that the President and Secretary of the Company be,
and they hereby are, authorized and directed to prepare, execute, verify, and
file in Delaware, a Certificate of Designation in accordance with these
resolutions and as required by law.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, Innovus Corporation has caused its corporate seal to be
hereunto affixed and this certificate to be signed by Terry Haas, its President,
and attested by David Mock, its Secretary, this __ day of December, 1996.
INNOVUS CORPORATION
---------------------------------
Terry Haas
President
Attest:
By:
--------------------------------
David Mock
Secretary
12
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby irrevocably elects to convert the number of shares of
Series E Convertible Preferred Stock indicated below, into shares of Common
Stock, par value $.001 per share (the "Common Stock"), of Innovus Corporation
(the "Company") according to the conditions hereof, as of the date written
below. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the Holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations: ---------------------------------
Date to Effect Conversion
---------------------------------
Number of shares of Preferred
Stock to be Converted
$3.50
---------------------------------
Applicable Conversion Price
---------------------------------
Signature
---------------------------------
Name:
---------------------------------
Address:
13
<PAGE>
EXHIBIT B
INNOVUS CORPORATION
NOTICE OF CONVERSION AT
THE ELECTION OF THE COMPANY
The undersigned in the name and on behalf of Innovus Corporation (the
"Company") hereby notifies the addressee hereof that the Company hereby
elects to exercise its right to convert [ ] shares of its Series
E Convertible Preferred Stock held by the Holder into shares of Common Stock,
par value $.001 per share (the "Common Stock") of the Company according to
the terms hereof, as of the date written below. No fee will be charged to
the Holder for any conversion hereunder, except for such transfer taxes, if
any which may be incurred by the Company if shares are to be issued in the
name of a person other than the person to whom this notice is addressed.
Conversion calculations: ---------------------------------
Date to Effect Conversion
---------------------------------
Number of Shares of Preferred
Stock to be Converted
$3.50
---------------------------------
Applicable Conversion Price
---------------------------------
Signature
---------------------------------
Name:
---------------------------------
Address:
14
<PAGE>
CERTIFICATE OF DESIGNATION OF
SERIES F CONVERTIBLE PREFERRED STOCK OF
INNOVUS CORPORATION
The undersigned, Terry Haas and David Mock, hereby certify that:
I. They are the duly elected and acting President and Secretary,
respectively, of Innovus Corporation, a Delaware corporation (the "Company").
II. The Certificate of Incorporation of the Company authorizes 1,000,000
shares of preferred stock, par value $.001 per share, of which the following
have been authorized and are issued and outstanding: 100,000 Series A
Preferred Stock authorized, none outstanding; 55,000 Series C Preferred Stock
authorized, 35,825 shares outstanding; 20,100 Series D Preferred Stock
authorized, 5,500 outstanding and 12,000 Series E Preferred Stock authorized,
12,000 outstanding.
III. The following is a true and correct copy of resolutions duly adopted
by the Board of Directors on February 3, 1997, which constituted all
requisite action on the part of the Company for adoption of such resolutions.
RESOLUTIONS
WHEREAS, the Board of Directors of the Company (the "Board of
Directors") is authorized to provide for the issuance of the shares of
Preferred Stock in series, and by filing a certificate pursuant to the
applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, and to fix the
designations, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions thereof;
WHEREAS, the Board of Directors desires, pursuant to its authority as
aforesaid, to designate a new series of preferred stock, set the number of
shares constituting such series and fix the rights, preferences, privileges
and restrictions of such series.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
designates a new series of preferred stock and the number of shares
constituting such series and fixes the rights, preferences, privileges and
restrictions relating to such series as follows:
Section 1. DESIGNATION, AMOUNT AND PAR VALUE. The series of Preferred
Stock shall be designated as the Series F Convertible Preferred Stock (the
"Preferred Stock"), and the number of shares so designated shall be 40,000.
The par value of each share of Preferred Stock shall be $.001. Each share of
Preferred Stock shall have a stated value of $50.00 per share (the "Stated
Value").
<PAGE>
Section 2. DIVIDENDS.
(a) Holders of Preferred Stock shall be entitled to receive, when and
as declared by the Board of Directors out of funds legally available
therefor, and the Company shall pay, cumulative dividends at the dividend
rate per share (as a percentage of the Stated Value per share) described in
the following sentence, payable at the option of the Company, in cash or
shares of Common Stock, in arrears on the Conversion Date (as hereinafter
defined). The dividend rate shall be (i) with respect to Preferred Stock
converted prior to March 1, 1998, 10% per annum, (ii) with respect to the
period ending March 1, 1998 for Preferred Stock not converted prior to March
1, 1998, 15% per annum retroactive to the date or original issuance, and
(iii) with respect to periods commencing on or after March 1, 1998, 5% per
annum. Dividends on the Preferred Stock shall accrue daily commencing the
date of original issuance and shall be deemed to accrue on such date whether
or not earned or declared and whether or not there are profits, surplus or
other funds of the Company legally available for the payment of dividends.
The party that holds the Preferred Stock on an applicable record date for any
dividend payment will be entitled to receive such dividend payment and any
other accrued and unpaid dividends which accrued prior to such dividend
payment date, without regard to any sale or disposition of such Preferred
Stock subsequent to the applicable record date but prior to the applicable
dividend payment date. Except as otherwise provided herein, if at any time
the Company pays less than the total amount of dividends then accrued to any
class of Preferred Stock, such payment shall be distributed ratably among the
holders of such class based upon the number of shares held by each holder.
(b) So long as any Preferred Stock shall remain outstanding, neither
the Company nor any subsidiary thereof shall redeem, purchase or otherwise
acquire directly or indirectly any Junior Securities (as defined in Section
7), nor shall the Company directly or indirectly pay or declare any dividend
or make any distribution (other than a dividend or distribution described in
Section 5) upon, nor shall any distribution be made in respect of, any Junior
Securities, nor shall any monies be set aside for or applied to the purchase
or redemption (through a sinking fund or otherwise) of any Junior Securities
unless all dividends on the Preferred Stock for all past dividend periods
shall have been paid.
Section 3. VOTING RIGHTS. Except as otherwise provided herein and as
otherwise provided by law, the Preferred Stock shall vote as a single class
with the Common Stock with each share of Preferred Stock having the same
number of votes as one share of Common Stock (I.E. the same number of votes
as if the Preferred Stock had converted to Common Stock as of the original
issue date without regard to subsequent adjustments). However, so long as any
shares of Preferred Stock are outstanding, the Company shall not, without the
affirmative vote of the holders of a majority of the shares of the Preferred
Stock then outstanding, (i) alter or change adversely the powers, preferences
or rights given to the Preferred Stock or (ii) authorize or create any class
of stock ranking as to dividends or distribution of assets upon a Liquidation
(as defined below) senior to, prior to or PARI PASSU with the Preferred Stock
other than the Equivalent Series (as defined below).
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<PAGE>
Section 4. LIQUIDATION. Upon any liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary (a "Liquidation"), the holders
of shares of Preferred Stock shall be entitled to receive out of the assets of
the Company, whether such assets are capital or surplus, for each share of
Preferred Stock an amount equal to the Stated Value, plus an amount equal to
accrued but unpaid dividends per share, whether declared or not, but without
interest, before any distribution or payment shall be made to the holders of
any Junior Securities, and if the assets of the Company shall be insufficient
to pay in full such amounts, then the entire assets to be distributed shall be
distributed among the holders of Preferred Stock and other Equivalent Series of
preferred stock which are PARI PASSU with the Preferred Stock ratably in
accordance with the respective amounts that would be payable on such shares if
all amounts payable thereon were paid in full. A sale, conveyance or
disposition of all or substantially all of the assets of the Company or the
effectuation by the Company of a transaction or series of related transactions
in which more than 50% of the voting power of the Company is disposed of shall
be deemed a Liquidation; PROVIDED that, a consolidation or merger of the Company
with or into any other company or companies shall not be treated as a
Liquidation, but instead shall be subject to the provisions of Section 5.
The Company shall mail written notice of any such liquidation, not less than
60 days prior to the payment date stated therein, to each record holder of
Preferred Stock.
Section 5. CONVERSION.
(a) Each share of Preferred Stock shall be convertible into shares of
Common Stock at the Conversion Ratio (as defined in Section 7) at the option of
the holder in whole or in part at any time after March 31, 1997. The holder
shall effect conversions by surrendering the certificate or certificates
representing the shares of Preferred Stock to be converted to the Company,
together with the form of conversion notice attached hereto as EXHIBIT A (the
"Holder Conversion Notice") in the manner set forth in Section 5(j). Each
Holder Conversion Notice shall specify the number of shares of Preferred Stock
to be converted and the date on which such conversion is to be effected, which
date may not be less than seven Trading Days following the date the Holder
delivers such Notice by facsimile (the "Holder Conversion Date"). Subject to
Section 5(c), each Holder Conversion Notice, once given, shall be irrevocable.
If the holder is converting less than all shares of Preferred Stock represented
by the certificate or certificates tendered by the holder with the Holder
Conversion Notice, the Company shall promptly deliver to the holder a
certificate for such number of shares as have not been converted.
(b) Each share of the Preferred Stock shall be convertible into shares
of Common Stock at the Conversion Ratio at the option of the Company in whole
or in part at any time on or after March 31, 1998; PROVIDED, HOWEVER, that
the Company is not permitted to deliver a Company Conversion Notice (as
defined below) within ten (10) days of issuing any press release or other
public statement relating to such conversion. The Company shall effect such
conversion by delivering to the holders of such shares of Preferred Stock to
be converted a written notice in the form attached hereto as EXHIBIT B (the
"Company Conversion Notice"), which Company Conversion Notice, once given,
shall be irrevocable. Each Company Conversion Notice shall specify the number
of
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<PAGE>
shares of Preferred Stock to be converted and the date on which such
conversion is to be effected, which date will be at least seven (7) Trading
Days after the date the Company delivers such Notice by facsimile to the
holder (the "Company Conversion Date"). The Company shall give such Company
Conversion Notice in accordance with Section 5(j) below at least one (1)
Trading Day before the Company Conversion Date. Any such conversion shall be
effected on a pro rata basis among the holders of Preferred Stock. Upon the
conversion of shares of Preferred Stock pursuant to a Company Conversion
Notice, the holders of the Preferred Stock shall surrender the certificates
representing such shares at the office of the Company or of any transfer
agent for the Preferred Stock or Common Stock. If the Company is converting
less than all shares of the Preferred Stock, the Company shall, upon
conversion of such shares subject to such Company Conversion Notice and
receipt of the certificate or certificates representing such shares of
Preferred Stock deliver to the holder or holders a certificate for such
number of shares of Preferred Stock as have not been converted. Each of a
Holder Conversion Notice and a Company Conversion Notice is sometimes
referred to herein as a "Conversion Notice," and each of a "Holder Conversion
Date" and a "Company Conversion Date" is sometimes referred to herein as a
"Conversion Date."
(c) Not later than three (3) Trading Days after the Conversion Date,
the Company will deliver to the holder (i) a certificate or certificates
representing the number of shares of Common Stock being acquired upon the
conversion of shares of Preferred Stock and (ii) one or more certificates
representing the number of shares of Preferred Stock not converted; PROVIDED,
HOWEVER that the Company shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon conversion of any shares
of Preferred Stock until certificates evidencing such shares of Preferred
Stock are either delivered for conversion to the Company or any transfer
agent for the Preferred Stock or Common Stock, or the holder notifies the
Company that such certificates have been lost, stolen or destroyed and
provides a bond (or other adequate security reasonably acceptable to the
Company) satisfactory to the Company to indemnify the Company from any loss
incurred by it in connection therewith. The Company shall, upon request of
the holder, use its best efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section 5(c)
electronically through the Depository Trust Corporation or another
established clearing corporation performing similar functions. In the case
of a conversion pursuant to a Holder Conversion Notice, if such certificate
or certificates are not delivered by the date required under this Section
5(c), the holder shall be entitled by written notice to the Company at any
time on or before such holder's receipt of such certificate or certificates
thereafter, to rescind such conversion, in which event the Company shall
immediately return the certificates representing the shares of Preferred
Stock tendered for conversion.
(d) (i) The conversion price for each share of Preferred Stock (the
"Conversion Price") in effect on any Conversion Date shall be $2.00 per share.
(ii) There shall be a one-time adjustment to the Conversion Price
(the "Price Protection Adjustment") for holders of the Preferred Stock who
have not then converted any Preferred Stock in the event that the average of
the Per Share Market Value for the fifteen Trading Days prior to February 15,
1998 (the "FMV") is
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<PAGE>
less than $3.00 per share. If the Price Protection Adjustment is necessary,
the Conversion Price after the Price Protection Adjustment shall be equal to
a fraction, (a) the numerator of which shall be the product of (x) the Stated
Value plus accrued dividends per share, multiplied by (y) the greater of FMV
or $1.00, and (b) the denominator of which is 150% of the Stated Value. The
intent of such adjustment is that if the Per Share Fair Market Value is at
least $1.00, Preferred Stock outstanding as of the Price Protection
Adjustment will be convertible into Common Stock having a value (including
accrued dividends) of 150% of the original purchase price. The Price
Protection Adjustment, if any, shall be effective as of the Trading Day
following February 15, 1998 and the Company shall promptly notify any holders
of Preferred Stock who are eligible for such adjustment. No adjustment shall
be made with respect to changes in the Per Share Fair Market Value for any
period subsequent to February 15, 1998.
(ii) If the Company, at any time while any shares of Preferred
Stock are outstanding, (a) shall pay a stock dividend or otherwise make a
distribution or distributions on shares of its Junior Securities payable in
shares of its capital stock (whether payable in shares of its Common Stock or
of capital stock of any class), (b) subdivide outstanding shares of Common
Stock into a larger number of shares, (c) combine outstanding shares of
Common Stock into a smaller number of shares, or (d) issue by reclassification
of shares of Common Stock any shares of capital stock of the Company, the
Conversion Price designated in Section 5(d)(i) shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock outstanding
before such event and of which the denominator shall be the number of shares of
Common Stock outstanding after such event. Any adjustment made pursuant to this
Section 5(d)(ii) shall become effective immediately after the record date for
the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or re-classification.
(iii) If the Company, at any time while any shares of Preferred Stock
are outstanding, shall issue rights or warrants to all holders of Common Stock
entitling them to subscribe for or purchase shares of Common Stock at a price
per share less than the Per Share Market Value of Common Stock at the record
date mentioned below, the Conversion Price designated in Section 5(d)(i)
shall be multiplied by a fraction, of which the denominator shall be the
number of shares of Common Stock (excluding treasury shares, if any)
outstanding on the date of issuance of such rights or warrants plus the
number of additional shares of Common Stock offered for subscription or
purchase, and of which the numerator shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding on the date of issuance
of such rights or warrants plus the number of shares which the aggregate
offering price of the total number of shares so offered would purchase at
such Per Share Market Value. Such adjustment shall be made whenever such
rights or warrants are issued, and shall become effective immediately after
the record date for the determination of stockholders entitled to receive
such rights or warrants. However, upon the expiration of any right or
warrant to purchase Common Stock the issuance of which resulted in an
adjustment in the Conversion Price designated in Section 5(d)(i) pursuant to
this Section 5(d)(iii), if any
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<PAGE>
such right or warrant shall expire and shall not have been exercised, the
Conversion Price designated in Section 5(d)(i) shall immediately upon such
expiration be recomputed and effective immediately upon such expiration be
increased to the price which it would have been (but reflecting any other
adjustments in the Conversion Price made pursuant to the provisions of this
Section 5 after the issuance of such rights or warrants) had the adjustment
of the Conversion Price made upon the issuance of such rights or warrants
been made on the basis of offering for subscription or purchase only that
number of shares of Common Stock actually purchased upon the exercise of such
rights or warrants actually exercised.
(iv) If the Company, at any time while shares of Preferred Stock
are outstanding, shall distribute to all holders of Common Stock (and not to
holders of Preferred Stock) evidences of its indebtedness or assets or rights
or warrants to subscribe for or purchase any security (excluding those
referred to in Section 5(d)(iii) above) then in each such case the Conversion
Price at which each share of Preferred Stock shall thereafter be convertible
shall be determined by multiplying the Conversion Price in effect immediately
prior to the record date fixed for determination of stockholders entitled to
receive such distribution by a fraction of which the denominator shall be the
Per Share Market Value of Common Stock determined as of the record date
mentioned above, and of which the numerator shall be such Per Share Market
Value of the Common Stock on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness
so distributed applicable to one outstanding share of Common Stock as determined
by the Board of Directors in good faith; PROVIDED, HOWEVER that in the event of
a distribution exceeding ten percent (10%) of the net assets of the Company,
such fair market value shall be determined by a nationally recognized or major
regional investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) (an "Appraiser") selected in
good faith by the holders of a majority in interest of the shares of Preferred
Stock; and PROVIDED, FURTHER that the Company, after receipt of the
determination by such Appraiser shall have the right to select an additional
Appraiser, in which case the fair market value shall be equal to the average of
the determinations by each such Appraiser. In either case the adjustments shall
be described in a statement provided to all holders of Preferred Stock of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
(v) All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(vi) Whenever the Conversion Price is adjusted pursuant to Section
5(d)(ii), (iii), (iv) or (v), the Company shall promptly mail to each holder
of Preferred Stock, a notice setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.
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<PAGE>
(vii) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, the sale
or transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property, the holders of the Preferred Stock
then outstanding shall have the right thereafter to convert such shares only
into the shares of stock and other securities and property receivable upon or
deemed to be held by holders of Common Stock following such reclassification,
consolidation, merger, sale, transfer or share exchange, and the holders of
the Preferred Stock shall be entitled upon such event to receive such amount
of securities or property as the shares of the Common Stock of the Company
into which such shares of Preferred Stock could have been converted
immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange would have been entitled. The terms of any such
consolidation, merger, sale, transfer or share exchange shall include such
terms so as to continue to give to the holder of Preferred Stock the right to
receive the securities or property set forth in this Section 5(d)(vii) upon
any conversion following such consolidation, merger, sale, transfer or share
exchange. This provision shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or share
exchanges.
(viii) If:
a. the Company shall declare a dividend (or any other
distribution) on its Common Stock; or
b. the Company shall declare a special nonrecurring cash
dividend on or a redemption of its Common Stock; or
c. the Company shall authorize the granting to all holders
of the Common Stock rights or warrants to subscribe
for or purchase any shares of capital stock of any class
or of any rights; or
d. the approval of any stockholders of the Company shall
be required in connection with any reclassification of
the Common Stock of the Company (other than a
subdivision or combination of the outstanding shares
of Common Stock), any consolidation or merger to
which the Company is a party, any sale or transfer of
all or substantially all of the assets of the Company,
or any compulsory share exchange whereby the Common
Stock is converted into other securities, cash or
property; or
e. the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding-up of the affairs of
the Company;
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<PAGE>
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Preferred Stock, and shall cause to be mailed to
the holders of Preferred Stock at their last addresses as they shall appear upon
the stock books of the Company, at least 30 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined, or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, share exchange, dissolution, liquidation or winding-up
is expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding-up; PROVIDED, HOWEVER, that the failure to
mail such notice or any defect therein or in the mailing thereof shall not
affect the validity of the corporate action required to be specified in such
notice.
(e) If at any time conditions shall arise by reason of action taken by
the Company which in the opinion of the Board of Directors are not adequately
covered by the other provisions hereof and which might materially and
adversely affect the rights of the holders of Preferred Stock (different than
or distinguished from the effect generally on rights of holders of any class
of the Company's capital stock) or if at any time any such conditions are
expected to arise by reason of any action contemplated by the Company, the
Company shall mail a written notice briefly describing the action
contemplated and the material adverse effects of such action on the rights of
the holders of Preferred Stock at least 30 calendar days prior to the
effective date of such action, and an Appraiser selected by the holders of
majority in interest of the Preferred Stock shall give its opinion as to the
adjustment, if any (not inconsistent with the standards established in this
Section 5), of the Conversion Price (including, if necessary, any adjustment
as to the securities into which shares of Preferred Stock may thereafter be
convertible) and any distribution which is or would be required to preserve
without diluting the rights of the holders of shares of Preferred Stock;
PROVIDED, HOWEVER, that the Company, after receipt of the determination by
such Appraiser, shall have the right to select an additional Appraiser, in
which case the adjustment shall be equal to the average of the adjustments
recommended by each such Appraiser. The Board of Directors shall make the
adjustment recommended forthwith upon the receipt of such opinion or opinions
or the taking of any such action contemplated, as the case may be; PROVIDED,
however, that no such adjustment of the Conversion Price shall be made which
in the opinion of the Appraiser(s) giving the aforesaid opinion or opinions
would result in an increase of the Conversion Price to more than the
Conversion Price then in effect.
(f) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the
purpose of issuance upon conversion of Preferred Stock as herein provided,
free from preemptive rights or any other actual contingent purchase rights of
persons other than the holders of Preferred Stock, such number of shares of
Common Stock as shall be issuable (taking into account the adjustments and
restrictions of Section 5(b) and Section 5(d) hereof)
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<PAGE>
upon the conversion of all outstanding shares of Preferred Stock. The Company
covenants that all shares of Common Stock that shall be so issuable shall, upon
issue, be duly and validly authorized, issued and fully paid and nonassessable.
(g) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock,
but may if otherwise permitted, make a cash payment in respect of any final
fraction of a share based on the Per Share Market Value at such time. If the
Company elects not, or is unable, to make such a cash payment, the holder of
a share of Preferred Stock shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.
(h) The issuance of certificates for shares of Common Stock on conversion
of Preferred Stock shall be made without charge to the holders thereof for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided that the Company shall not be required
to pay any tax that may be payable in respect of any transfer involved in the
issuance and delivery of any such certificate upon conversion in a name other
than that of the holder of such shares of Preferred Stock so converted and the
Company shall not be required to issue or deliver such certificates unless or
until the person or persons requesting the issuance thereof shall have paid to
the Company the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid.
(i) Shares of Preferred Stock converted into Common Stock shall be canceled
and shall have the status of authorized but unissued shares of preferred stock.
(j) Each Holder Conversion Notice shall be given by facsimile and by mail,
postage prepaid, addressed to the attention of the Chief Financial Officer of
the Company at the facsimile telephone number and address of the principal place
of business of the Company. Each Company Conversion Notice shall be given by
facsimile and by mail, postage prepaid, addressed to each holder of Preferred
Stock at the facsimile telephone number and address of such holder appearing on
the books of the Company or provided to the Company by such holder for the
purpose of such Company Conversion Notice, or if no such facsimile telephone
number or address appears or is so provided, at the principal place of business
of the holder. Any such notice shall be deemed given and effective upon the
earliest to occur of (i)(a) if such Conversion Notice is delivered via facsimile
at the facsimile telephone number specified in this Section 5(j) prior to 4:30
p.m. (Eastern Standard Time) on any date, such date (or, in the case of a
Company Conversion Notice, the next Trading Day) or such later date as is
specified in the Conversion Notice, and (b) if such Conversion Notice is
delivered via facsimile at the facsimile telephone number specified in this
Section 5(j) after 11:59 p.m. (Eastern Standard Time) on any date, the next date
(or, in the case of a Company Conversion Notice, the next Trading Day after such
next day) or such later date as is specified in the Conversion Notice, (ii) five
days after deposit in the United States mails or (iii) upon actual receipt by
the party to whom such notice is required to be given.
Section 6. COMPANY REDEMPTION OPTION.
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The Company may, at its option, at any time on or after March 31, 1998
redeem any outstanding and unconverted Preferred Stock; provided that the
Company notifies the holders thereof no later than thirty calendar days prior
to the effective date of such redemption (the "Optional Redemption Date") of
its intention to do so.
If the Company elects to redeem such outstanding and unconverted shares
of Preferred Stock, the redemption price per share (the "Optional Redemption
Price") shall equal the Conversion Ratio multiplied by the Conversion Price
on the Optional Redemption Date and shall be paid by the Company to the
Holders of such unconverted Preferred Stock on the Optional Redemption Date.
If any portion of the Optional Redemption Price shall not be paid by the
Company within 7 calendar days after the Optional Redemption Date, such
Optional Redemption Price shall be increased by an amount accruing from the
7th day to the 21st day after the Optional Redemption Date at the rate of 5%
per annum, from the 22nd day to the 60th day at 8% per annum and from the
61st day until paid at the rate of 12% per annum, except that no such
interest shall accrue until the Purchaser shall have delivered to the Company
the certificates representing the shares of Preferred Stock to be so
redeemed. If any portion of the Optional Redemption Price remains unpaid
more than 7 calendar days after the Optional Redemption Date, then the Holder
may elect, by written notice to the Company given within 45 days after the
Optional Redemption Date, to either (i) demand conversion in accordance with
the formula and the time frame therefor set forth in Section 5 for a
conversion at the option of the Holder hereof of all Preferred Stock for
which the Optional Redemption Price, plus interest, has not been paid in full
(the "Unpaid Optional Redemption Stock"), or (ii) demand that the Company
withdraw its election to force such redemption. If the Holder elects option
(i) above, the Company shall within three Business Days of its receipt of
such election deliver to the Holder the shares of Common Stock issuable upon
conversion of the Unpaid Optional Redemption Stocks subject to such Holder
conversion demand and otherwise perform its obligations hereunder with
respect thereto; or, if the Holder elects option (ii) above, the Company
shall promptly, and in any event not later than three Business Days from
receipt of Holder's notice of such election, return to the Holder all of the
Unpaid Optional Redemption Stock.
Section 7. DEFINITIONS. For the purposes hereof, the following terms
shall have the following meanings:
"Business Day" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the state
of New York are authorized or required by law or other government actions to
close.
"Common Stock" means shares now or hereafter authorized of the class of
Common Stock, par value $.001, of the Company and stock of any other class
into which such shares may hereafter have been reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, of which the
numerator is Stated Value plus accrued but unpaid dividends, and of which the
denominator is the Conversion Price at such time.
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"Junior Securities" means the Common Stock and all other equity securities
of the Company with the exception of the Series C Preferred Stock, the Series D
Preferred Stock and the Series E Preferred Stock. The Series F Preferred Stock
shall have the same priority as to dividends and distributions on liquidation as
(i) the Series G Preferred Stock, and (ii) such additional Series of Preferred
Stock as the Company may hereafter designate as being PARI PASSU with the
Preferred Stock (collectively the "Equivalent Series"); provided that the
aggregated Stated Value of all outstanding Preferred Stock and preferred stock
of all other Equivalent Series shall not exceed $7,000,000.
"Original Issue Date" shall mean the date that the Preferred stock was
originally issued by the Company, without regard to subsequent transfers.
Such Original Issue Date is anticipated to be February 15, 1997.
"Per Share Market Value" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on the Nasdaq SmallCap
Market or other national securities exchange on which the Common Stock has
been listed or if there is no such price on such date, then the closing bid
price on such national securities exchange or market on the date nearest
preceding such date, or (b) if the Common Stock is not listed on the Nasdaq
SmallCap Market or any national securities exchange or market, the closing
bid for a share of Common Stock in the over-the-counter market, as reported
by the Nasdaq SmallCap Market at the close of business on such date, or (c)
if the Common Stock is not quoted on the Nasdaq SmallCap Market, the closing
bid price for a share of Common Stock in the over-the-counter market as
reported by the National Quotation Bureau Incorporated (or similar
organization or agency succeeding to its functions of reporting prices), or
(d) if the Common Stock is no longer reported by the National Quotation
Bureau Incorporated (or similar organization or agency succeeding to its
functions of reporting prices), then the average of the "Pink Sheet" quotes
for the relevant conversion period as determined by the Holder, or (e) if the
Common Stock is no longer publicly traded the fair market value of a share of
Common Stock as determined by an Appraiser (as defined in Section 5(d)(iv)
above) selected in good faith by the Holders of a majority in interest of the
shares of the Preferred Stock; PROVIDED, HOWEVER, that the Company, after
receipt of the determination by such Appraiser, shall have the right to
select an additional Appraiser, in which case, the fair market value shall be
equal to the average of the determinations by each such Appraiser.
"Person" means a corporation, an association, a partnership, organization,
a business, an individual, a government or political subdivision thereof or a
governmental agency.
"Trading Day" means (a) a day on which the Common Stock is traded on the
Nasdaq SmallCap Market or principal national securities exchange or market on
which the Common Stock has been listed, or (b) if the Common Stock is not
listed on the Nasdaq SmallCap Market or any stock exchange or market, a day
on which the Common Stock is traded in the over-the-counter market, as
reported by the Nasdaq SmallCap Market, or (c) if the Common Stock is not
quoted on the Nasdaq SmallCap Market, a day on which the Common Stock is
quoted in the over-the-counter market as
11
<PAGE>
reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions of reporting prices).
RESOLVED FURTHER, that the President and Secretary of the Company be,
and they hereby are, authorized and directed to prepare, execute, verify, and
file in Delaware, a Certificate of Designation in accordance with these
resolutions and as required by law.
IN WITNESS WHEREOF, Innovus Corporation has caused its corporate seal to be
hereunto affixed and this certificate to be signed by Terry Haas, its President,
and attested by David Mock, its Secretary, this __ day of February, 1997.
INNOVUS CORPORATION
---------------------------------
Terry Haas
President
Attest:
By:
--------------------------------
David Mock
Secretary
12
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby irrevocably elects to convert the number of shares of
Series F Convertible Preferred Stock indicated below, into shares of Common
Stock, par value $.001 per share (the "Common Stock"), of Innovus Corporation
(the "Company") according to the conditions hereof, as of the date written
below. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the Holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations: ---------------------------------
Date to Effect Conversion
---------------------------------
Number of shares of Preferred
Stock to be Converted
$2.00
---------------------------------
Applicable Conversion Price
---------------------------------
Signature
---------------------------------
Name:
---------------------------------
Address:
13
<PAGE>
EXHIBIT B
INNOVUS CORPORATION
NOTICE OF CONVERSION AT
THE ELECTION OF THE COMPANY
The undersigned in the name and on behalf of Innovus Corporation (the "Company")
hereby notifies the addressee hereof that the Company hereby elects to exercise
its right to convert [ ] shares of its Series F Convertible
Preferred Stock held by the Holder into shares of Common Stock, par value $.001
per share (the "Common Stock") of the Company according to the terms hereof, as
of the date written below. No fee will be charged to the Holder for any
conversion hereunder, except for such transfer taxes, if any which may be
incurred by the Company if shares are to be issued in the name of a person other
than the person to whom this notice is addressed.
Conversion calculations: ---------------------------------
Date to Effect Conversion
---------------------------------
Number of Shares of Preferred
Stock to be Converted
$2.00
---------------------------------
Applicable Conversion Price
---------------------------------
Signature
---------------------------------
Name:
---------------------------------
Address:
14
<PAGE>
CERTIFICATE OF DESIGNATION OF
SERIES G CONVERTIBLE PREFERRED STOCK OF
INNOVUS CORPORATION
The undersigned, Terry Haas and David Mock, hereby certify that:
I. They are the duly elected and acting President and Secretary,
respectively, of Innovus Corporation, a Delaware corporation (the "Company").
II. The Certificate of Incorporation of the Company authorizes
1,000,000 shares of preferred stock, par value $.001 per share, of which the
following have been authorized and are issued and outstanding: 100,000 Series
A Preferred Stock authorized, none outstanding; 55,000 Series C Preferred
Stock authorized, 35,825 shares outstanding; 20,100 Series D Preferred Stock
authorized, 5,500 outstanding, 12,000 Series E Preferred Stock authorized,
12,000 outstanding, and 40,000 Series F Preferred Stock authorized, 40,000
outstanding.
III. The following is a true and correct copy of resolutions duly
adopted by the Board of Directors on February 3, 1997, which constituted all
requisite action on the part of the Company for adoption of such resolutions.
RESOLUTIONS
WHEREAS, the Board of Directors of the Company (the "Board of
Directors") is authorized to provide for the issuance of the shares of
Preferred Stock in series, and by filing a certificate pursuant to the
applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, and to fix the
designations, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof;
WHEREAS, the Board of Directors desires, pursuant to its authority as
aforesaid, to designate a new series of preferred stock, set the number of
shares constituting such series and fix the rights, preferences, privileges
and restrictions of such series.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
designates a new series of preferred stock and the number of shares
constituting such series and fixes the rights, preferences, privileges and
restrictions relating to such series as follows:
Section 1. DESIGNATION, AMOUNT AND PAR VALUE. The series of
Preferred Stock shall be designated as the Series G Convertible Preferred
Stock (the "Preferred Stock"), and the number of shares so designated shall be
12,000. The par value of each share of Preferred Stock shall be $.001. Each
share of Preferred Stock shall have a
<PAGE>
stated value of $50.00 per share (the "Stated Value"). The Preferred Stock
shall be issued only in exchange for shares of the Company's Series E
Preferred Stock (the "Old Stock").
Section 2. DIVIDENDS.
(a) Holders of Preferred Stock shall be entitled to receive, when
and as declared by the Board of Directors out of funds legally available
therefor, and the Company shall pay, cumulative dividends at the dividend rate
per share (as a percentage of the Stated Value per share) described in the
following sentence, payable at the option of the Company, in cash or shares of
Common Stock, in arrears on the Conversion Date (as hereinafter defined). The
dividend rate shall be (i) with respect to Preferred Stock converted prior to
the first anniversary of the Original Issue Date, 10% per annum, (ii) with
respect to the period ending on the first anniversary of the Original Issue
Date for Preferred Stock not converted prior to such anniversary, 15% per
annum retroactive to the Original Issue Date, and (iii) with respect to
periods commencing on or after the first anniversary of the Original Issue
Date, 5% per annum. Dividends on the Preferred Stock shall accrue daily
commencing the Original Issue Date and shall be deemed to accrue on such date
whether or not earned or declared and whether or not there are profits,
surplus or other funds of the Company legally available for the payment of
dividends. The party that holds the Preferred Stock on an applicable record
date for any dividend payment will be entitled to receive such dividend
payment and any other accrued and unpaid dividends which accrued prior to such
dividend payment date, without regard to any sale or disposition of such
Preferred Stock subsequent to the applicable record date but prior to the
applicable dividend payment date. Except as otherwise provided herein, if at
any time the Company pays less than the total amount of dividends then accrued
to any class of Preferred Stock, such payment shall be distributed ratably
among the holders of such class based upon the number of shares held by each
holder.
(b) So long as any Preferred Stock shall remain outstanding, neither
the Company nor any subsidiary thereof shall redeem, purchase or otherwise
acquire directly or indirectly any Junior Securities (as defined in Section
7), nor shall the Company directly or indirectly pay or declare any dividend
or make any distribution (other than a dividend or distribution described in
Section 5) upon, nor shall any distribution be made in respect of, any Junior
Securities, nor shall any monies be set aside for or applied to the purchase
or redemption (through a sinking fund or otherwise) of any Junior Securities
unless all dividends on the Preferred Stock for all past dividend periods
shall have been paid.
Section 3. VOTING RIGHTS. Except as otherwise provided herein and
as otherwise provided by law, the Preferred Stock shall have no voting rights.
However, so long as any shares of Preferred Stock are outstanding, the
Company shall not, without the affirmative vote of the holders of a majority
of the shares of the Preferred Stock then outstanding, (i) alter or change
adversely the powers, preferences or rights given to the Preferred Stock or
(ii) authorize or create any class of stock ranking as to dividends or
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<PAGE>
distribution of assets upon a Liquidation (as defined below) senior to, prior
to or PARI PASSU with the Preferred Stock other than the Equivalent Series (as
defined below).
Section 4. LIQUIDATION. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a "Liquidation"),
the holders of shares of Preferred Stock shall be entitled to receive out of
the assets of the Company, whether such assets are capital or surplus, for
each share of Preferred Stock an amount equal to the Stated Value, plus an
amount equal to accrued but unpaid dividends per share, whether declared or
not, but without interest, before any distribution or payment shall be made to
the holders of any Junior Securities, and if the assets of the Company shall
be insufficient to pay in full such amounts, then the entire assets to be
distributed shall be distributed among the holders of Preferred Stock and
other Equivalent Series of preferred stock which are PARI PASSU with the
Preferred Stock ratably in accordance with the respective amounts that would
be payable on such shares if all amounts payable thereon were paid in full. A
sale, conveyance or disposition of all or substantially all of the assets of
the Company or the effectuation by the Company of a transaction or series of
related transactions in which more than 50% of the voting power of the Company
is disposed of shall be deemed a Liquidation; PROVIDED that, a consolidation
or merger of the Company with or into any other company or companies shall not
be treated as a Liquidation, but instead shall be subject to the provisions of
Section 5. The Company shall mail written notice of any such liquidation, not
less than 60 days prior to the payment date stated therein, to each record
holder of Preferred Stock.
Section 5. CONVERSION.
(a) Each share of Preferred Stock shall be convertible into shares
of Common Stock at the Conversion Ratio (as defined in Section 7) at the
option of the holder in whole or in part at any time after March 31, 1997.
The holder shall effect conversions by surrendering the certificate or
certificates representing the shares of Preferred Stock to be converted to the
Company, together with the form of conversion notice attached hereto as
EXHIBIT A (the "Holder Conversion Notice") in the manner set forth in Section
5(j). Each Holder Conversion Notice shall specify the number of shares of
Preferred Stock to be converted and the date on which such conversion is to be
effected, which date may not be less than seven Trading Days following the
date the Holder delivers such Notice by facsimile (the "Holder Conversion
Date"). Subject to Section 5(c), each Holder Conversion Notice, once given,
shall be irrevocable. If the holder is converting less than all shares of
Preferred Stock represented by the certificate or certificates tendered by the
holder with the Holder Conversion Notice, the Company shall promptly deliver
to the holder a certificate for such number of shares as have not been
converted.
(b) Each share of the Preferred Stock shall be convertible into
shares of Common Stock at the Conversion Ratio at the option of the Company in
whole or in part at any time on or after March 31, 1998; PROVIDED, HOWEVER,
that the Company is not permitted to deliver a Company Conversion Notice (as
defined below) within ten (10) days of issuing any press release or other
public statement relating to such conversion. The Company shall effect such
conversion by delivering to the holders of such shares of
3
<PAGE>
Preferred Stock to be converted a written notice in the form attached hereto
as EXHIBIT B (the "Company Conversion Notice"), which Company Conversion
Notice, once given, shall be irrevocable. Each Company Conversion Notice shall
specify the number of shares of Preferred Stock to be converted and the date
on which such conversion is to be effected, which date will be at least one
(1) Trading Day after the date the Company delivers such Notice by facsimile
to the holder (the "Company Conversion Date"). The Company shall give such
Company Conversion Notice in accordance with Section 5(j) below at least one
(1) Trading Day before the Company Conversion Date. Any such conversion shall
be effected on a pro rata basis among the holders of Preferred Stock. Upon
the conversion of shares of Preferred Stock pursuant to a Company Conversion
Notice, the holders of the Preferred Stock shall surrender the certificates
representing such shares at the office of the Company or of any transfer agent
for the Preferred Stock or Common Stock. If the Company is converting less
than all shares of the Preferred Stock, the Company shall, upon conversion of
such shares subject to such Company Conversion Notice and receipt of the
certificate or certificates representing such shares of Preferred Stock
deliver to the holder or holders a certificate for such number of shares of
Preferred Stock as have not been converted. Each of a Holder Conversion
Notice and a Company Conversion Notice is sometimes referred to herein as a
"Conversion Notice," and each of a "Holder Conversion Date" and a "Company
Conversion Date" is sometimes referred to herein as a "Conversion Date."
(c) Not later than three (3) Trading Days after the Conversion Date,
the Company will deliver to the holder (i) a certificate or certificates
representing the number of shares of Common Stock being acquired upon the
conversion of shares of Preferred Stock and (ii) one or more certificates
representing the number of shares of Preferred Stock not converted; PROVIDED,
HOWEVER that the Company shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon conversion of any shares
of Preferred Stock until certificates evidencing such shares of Preferred
Stock are either delivered for conversion to the Company or any transfer agent
for the Preferred Stock or Common Stock, or the holder notifies the Company
that such certificates have been lost, stolen or destroyed and provides a bond
(or other adequate security reasonably acceptable to the Company) satisfactory
to the Company to indemnify the Company from any loss incurred by it in
connection therewith. The Company shall, upon request of the holder, use its
best efforts to deliver any certificate or certificates required to be
delivered by the Company under this Section 5(c) electronically through the
Depository Trust Corporation or another established clearing corporation
performing similar functions. In the case of a conversion pursuant to a
Holder Conversion Notice, if such certificate or certificates are not
delivered by the date required under this Section 5(c), the holder shall be
entitled by written notice to the Company at any time on or before such
holder's receipt of such certificate or certificates thereafter, to rescind
such conversion, in which event the Company shall immediately return the
certificates representing the shares of Preferred Stock tendered for
conversion.
(d) (i) The conversion price for each share of Preferred Stock (the
"Conversion Price") in effect on any Conversion Date shall be $2.25 per share.
4
<PAGE>
(ii) If the Company, at any time while any shares of Preferred
Stock are outstanding, (a) shall pay a stock dividend or otherwise make a
distribution or distributions on shares of its Junior Securities payable in
shares of its capital stock (whether payable in shares of its Common Stock or
of capital stock of any class), (b) subdivide outstanding shares of Common
Stock into a larger number of shares, (c) combine outstanding shares of Common
Stock into a smaller number of shares, or (d) issue by reclassification of
shares of Common Stock any shares of capital stock of the Company, the
Conversion Price designated in Section 5(d)(i) shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common Stock
outstanding before such event and of which the denominator shall be the number
of shares of Common Stock outstanding after such event. Any adjustment made
pursuant to this Section 5(d)(ii) shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or re-classification.
(iii) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall issue rights or warrants to all holders
of Common Stock entitling them to subscribe for or purchase shares of Common
Stock at a price per share less than the Per Share Market Value of Common
Stock at the record date mentioned below, the Conversion Price designated in
Section 5(d)(i) shall be multiplied by a fraction, of which the denominator
shall be the number of shares of Common Stock (excluding treasury shares, if
any) outstanding on the date of issuance of such rights or warrants plus the
number of additional shares of Common Stock offered for subscription or
purchase, and of which the numerator shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding on the date of issuance
of such rights or warrants plus the number of shares which the aggregate
offering price of the total number of shares so offered would purchase at such
Per Share Market Value. Such adjustment shall be made whenever such rights or
warrants are issued, and shall become effective immediately after the record
date for the determination of stockholders entitled to receive such rights or
warrants. However, upon the expiration of any right or warrant to purchase
Common Stock the issuance of which resulted in an adjustment in the Conversion
Price designated in Section 5(d)(i) pursuant to this Section 5(d)(iii), if any
such right or warrant shall expire and shall not have been exercised, the
Conversion Price designated in Section 5(d)(i) shall immediately upon such
expiration be recomputed and effective immediately upon such expiration be
increased to the price which it would have been (but reflecting any other
adjustments in the Conversion Price made pursuant to the provisions of this
Section 5 after the issuance of such rights or warrants) had the adjustment of
the Conversion Price made upon the issuance of such rights or warrants been
made on the basis of offering for subscription or purchase only that number of
shares of Common Stock actually purchased upon the exercise of such rights or
warrants actually exercised.
(iv) If the Company, at any time while shares of Preferred Stock
are outstanding, shall distribute to all holders of Common Stock (and not to
holders of Preferred Stock) evidences of its indebtedness or assets or rights
or warrants to subscribe for or purchase any security (excluding those
referred to in Section 5(d)(iii) above) then
5
<PAGE>
in each such case the Conversion Price at which each share of Preferred Stock
shall thereafter be convertible shall be determined by multiplying the
Conversion Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the Per Share Market Value of
Common Stock determined as of the record date mentioned above, and of which
the numerator shall be such Per Share Market Value of the Common Stock on such
record date less the then fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed applicable to one
outstanding share of Common Stock as determined by the Board of Directors in
good faith; PROVIDED, HOWEVER that in the event of a distribution exceeding
ten percent (10%) of the net assets of the Company, such fair market value
shall be determined by a nationally recognized or major regional investment
banking firm or firm of independent certified public accountants of recognized
standing (which may be the firm that regularly examines the financial
statements of the Company) (an "Appraiser") selected in good faith by the
holders of a majority in interest of the shares of Preferred Stock; and
PROVIDED, FURTHER that the Company, after receipt of the determination by such
Appraiser shall have the right to select an additional Appraiser, in which
case the fair market value shall be equal to the average of the determinations
by each such Appraiser. In either case the adjustments shall be described in
a statement provided to all holders of Preferred Stock of the portion of
assets or evidences of indebtedness so distributed or such subscription rights
applicable to one share of Common Stock. Such adjustment shall be made
whenever any such distribution is made and shall become effective immediately
after the record date mentioned above.
(v) All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(vi) Whenever the Conversion Price is adjusted pursuant to
Section 5(d)(ii), (iii), (iv) or (v), the Company shall promptly mail to each
holder of Preferred Stock, a notice setting forth the Conversion Price after
such adjustment and setting forth a brief statement of the facts requiring
such adjustment.
(vii) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, the sale
or transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, the holders of the Preferred Stock then
outstanding shall have the right thereafter to convert such shares only into
the shares of stock and other securities and property receivable upon or
deemed to be held by holders of Common Stock following such reclassification,
consolidation, merger, sale, transfer or share exchange, and the holders of
the Preferred Stock shall be entitled upon such event to receive such amount
of securities or property as the shares of the Common Stock of the Company
into which such shares of Preferred Stock could have been converted
immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange would have been entitled. The terms of any such
consolidation, merger, sale, transfer or share exchange shall include such
terms so as to continue to give to the holder of Preferred Stock the right to
receive the securities or property set forth in this Section 5(d)(vii) upon
any
6
<PAGE>
conversion following such consolidation, merger, sale, transfer or share
exchange. This provision shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or share
exchanges.
(viii) If:
a. the Company shall declare a dividend (or any other
distribution) on its Common Stock; or
b. the Company shall declare a special nonrecurring cash
dividend on or a redemption of its Common Stock; or
c. the Company shall authorize the granting to all holders
of the Common Stock rights or warrants to subscribe
for or purchase any shares of capital stock of any class
or of any rights; or
d. the approval of any stockholders of the Company shall
be required in connection with any reclassification of
the Common Stock of the Company (other than a
subdivision or combination of the outstanding shares
of Common Stock), any consolidation or merger to
which the Company is a party, any sale or transfer of
all or substantially all of the assets of the Company, or
any compulsory share exchange whereby the Common
Stock is converted into other securities, cash or
property; or
e. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding-up of
the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained
for the purpose of conversion of Preferred Stock, and shall cause to be mailed
to the holders of Preferred Stock at their last addresses as they shall appear
upon the stock books of the Company, at least 30 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating
(x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not
to be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are
to be determined, or (y) the date on which such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution,
liquidation or winding-up is expected to become effective, and the date as of
which it is expected that holders of Common Stock of record shall be entitled
to exchange their shares of Common Stock for securities or other property
deliverable upon such reclassification, consolidation, merger, sale, transfer,
share exchange, dissolution, liquidation or winding-up; PROVIDED, HOWEVER,
that the
7
<PAGE>
failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice.
(e) If at any time conditions shall arise by reason of action taken
by the Company which in the opinion of the Board of Directors are not
adequately covered by the other provisions hereof and which might materially
and adversely affect the rights of the holders of Preferred Stock (different
than or distinguished from the effect generally on rights of holders of any
class of the Company's capital stock) or if at any time any such conditions
are expected to arise by reason of any action contemplated by the Company, the
Company shall mail a written notice briefly describing the action contemplated
and the material adverse effects of such action on the rights of the holders
of Preferred Stock at least 30 calendar days prior to the effective date of
such action, and an Appraiser selected by the holders of majority in interest
of the Preferred Stock shall give its opinion as to the adjustment, if any
(not inconsistent with the standards established in this Section 5), of the
Conversion Price (including, if necessary, any adjustment as to the securities
into which shares of Preferred Stock may thereafter be convertible) and any
distribution which is or would be required to preserve without diluting the
rights of the holders of shares of Preferred Stock; PROVIDED, HOWEVER, that
the Company, after receipt of the determination by such Appraiser, shall have
the right to select an additional Appraiser, in which case the adjustment
shall be equal to the average of the adjustments recommended by each such
Appraiser. The Board of Directors shall make the adjustment recommended
forthwith upon the receipt of such opinion or opinions or the taking of any
such action contemplated, as the case may be; PROVIDED, however, that no such
adjustment of the Conversion Price shall be made which in the opinion of the
Appraiser(s) giving the aforesaid opinion or opinions would result in an
increase of the Conversion Price to more than the Conversion Price then in
effect.
(f) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the
purpose of issuance upon conversion of Preferred Stock as herein provided,
free from preemptive rights or any other actual contingent purchase rights of
persons other than the holders of Preferred Stock, such number of shares of
Common Stock as shall be issuable (taking into account the adjustments and
restrictions of Section 5(b) and Section 5(d) hereof) upon the conversion of
all outstanding shares of Preferred Stock. The Company covenants that all
shares of Common Stock that shall be so issuable shall, upon issue, be duly
and validly authorized, issued and fully paid and nonassessable.
(g) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock, but
may if otherwise permitted, make a cash payment in respect of any final
fraction of a share based on the Per Share Market Value at such time. If the
Company elects not, or is unable, to make such a cash payment, the holder of a
share of Preferred Stock shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.
(h) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the holders
thereof for any
8
<PAGE>
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided that the Company shall not be
required to pay any tax that may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate upon conversion
in a name other than that of the holder of such shares of Preferred Stock so
converted and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(i) Shares of Preferred Stock converted into Common Stock shall be
canceled and shall have the status of authorized but unissued shares of
preferred stock.
(j) Each Holder Conversion Notice shall be given by facsimile and by
mail, postage prepaid, addressed to the attention of the Chief Financial
Officer of the Company at the facsimile telephone number and address of the
principal place of business of the Company. Each Company Conversion Notice
shall be given by facsimile and by mail, postage prepaid, addressed to each
holder of Preferred Stock at the facsimile telephone number and address of
such holder appearing on the books of the Company or provided to the Company
by such holder for the purpose of such Company Conversion Notice, or if no
such facsimile telephone number or address appears or is so provided, at the
principal place of business of the holder. Any such notice shall be deemed
given and effective upon the earliest to occur of (i)(a) if such Conversion
Notice is delivered via facsimile at the facsimile telephone number specified
in this Section 5(j) prior to 4:30 p.m. (Eastern Standard Time) on any date,
such date (or, in the case of a Company Conversion Notice, the next Trading
Day) or such later date as is specified in the Conversion Notice, and (b) if
such Conversion Notice is delivered via facsimile at the facsimile telephone
number specified in this Section 5(j) after 11:59 p.m. (Eastern Standard Time)
on any date, the next date (or, in the case of a Company Conversion Notice,
the next Trading Day after such next day) or such later date as is specified
in the Conversion Notice, (ii) five days after deposit in the United States
mails or (iii) upon actual receipt by the party to whom such notice is
required to be given.
Section 6. COMPANY REDEMPTION OPTION.
The Company may, at its option, at any time on or the date one year
following the Original Issue Date, redeem any outstanding and unconverted
Preferred Stock; provided that the Company notifies the holders thereof no
later than thirty calendar days prior to the effective date of such redemption
(the "Optional Redemption Date") of its intention to do so.
If the Company elects to redeem such outstanding and unconverted
shares of Preferred Stock, the redemption price per share (the "Optional
Redemption Price") shall equal the Conversion Ratio multiplied by the
Conversion Price on the Optional Redemption Date and shall be paid by the
Company to the Holders of such unconverted Preferred Stock on the Optional
Redemption Date. If any portion of the Optional Redemption Price shall not be
paid by the Company within 7 calendar days after the Optional Redemption Date,
such Optional Redemption Price shall be increased by an
9
<PAGE>
amount accruing from the 7th day to the 21st day after the Optional Redemption
Date at the rate of 5% per annum, from the 22nd day to the 60th day at 8% per
annum and from the 61st day until paid at the rate of 12% per annum, except
that no such interest shall accrue until the Purchaser shall have delivered to
the Company the certificates representing the shares of Preferred Stock to be
so redeemed. If any portion of the Optional Redemption Price remains unpaid
more than 7 calendar days after the Optional Redemption Date, then the Holder
may elect, by written notice to the Company given within 45 days after the
Optional Redemption Date, to either (i) demand conversion in accordance with
the formula and the time frame therefor set forth in Section 5 for a
conversion at the option of the Holder hereof of all Preferred Stock for which
the Optional Redemption Price, plus interest, has not been paid in full (the
"Unpaid Optional Redemption Stock"), or (ii) demand that the Company withdraw
its election to force such redemption. If the Holder elects option (i) above,
the Company shall within three Business Days of its receipt of such election
deliver to the Holder the shares of Common Stock issuable upon conversion of
the Unpaid Optional Redemption Stocks subject to such Holder conversion demand
and otherwise perform its obligations hereunder with respect thereto; or, if
the Holder elects option (ii) above, the Company shall promptly, and in any
event not later than three Business Days from receipt of Holder's notice of
such election, return to the Holder all of the Unpaid Optional Redemption
Stock.
Section 7. DEFINITIONS. For the purposes hereof, the following
terms shall have the following meanings:
"Business Day" means any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
state of New York are authorized or required by law or other government
actions to close.
"Common Stock" means shares now or hereafter authorized of the class
of Common Stock, par value $.001, of the Company and stock of any other class
into which such shares may hereafter have been reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, of which the
numerator is Stated Value plus accrued but unpaid dividends, and of which the
denominator is the Conversion Price at such time.
"Junior Securities" means the Common Stock and all other equity
securities of the Company with the exception of the Series C Preferred Stock
and the Series D Preferred Stock. The Series G Preferred Stock shall have the
same priority as to dividends and distributions on liquidation as (i) the
Series F Preferred Stock, and (ii) such additional Series of Preferred Stock
as the Company may hereafter designate as being PARI PASSU with the Preferred
Stock (collectively the "Equivalent Series"); provided that the aggregated
Stated Value of all outstanding Preferred Stock and preferred stock of all
other Equivalent Series shall not exceed $7,000,000.
"Original Issue Date" shall mean the date that the Old Stock was
originally issued by the Company, without regard to subsequent transfers or
the exchange of the Old Stock for the Preferred Stock. Such Original Issue
Date is December 31, 1996.
10
<PAGE>
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the Nasdaq
SmallCap Market or other national securities exchange on which the Common
Stock has been listed or if there is no such price on such date, then the
closing bid price on such national securities exchange or market on the date
nearest preceding such date, or (b) if the Common Stock is not listed on the
Nasdaq SmallCap Market or any national securities exchange or market, the
closing bid for a share of Common Stock in the over-the-counter market, as
reported by the Nasdaq SmallCap Market at the close of business on such date,
or (c) if the Common Stock is not quoted on the Nasdaq SmallCap Market, the
closing bid price for a share of Common Stock in the over-the-counter market
as reported by the National Quotation Bureau Incorporated (or similar
organization or agency succeeding to its functions of reporting prices), or
(d) if the Common Stock is no longer reported by the National Quotation Bureau
Incorporated (or similar organization or agency succeeding to its functions of
reporting prices), then the average of the "Pink Sheet" quotes for the
relevant conversion period as determined by the Holder, or (e) if the Common
Stock is no longer publicly traded the fair market value of a share of Common
Stock as determined by an Appraiser (as defined in Section 5(d)(iv) above)
selected in good faith by the Holders of a majority in interest of the shares
of the Preferred Stock; PROVIDED, HOWEVER, that the Company, after receipt of
the determination by such Appraiser, shall have the right to select an
additional Appraiser, in which case, the fair market value shall be equal to
the average of the determinations by each such Appraiser.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Trading Day" means (a) a day on which the Common Stock is traded on
the Nasdaq SmallCap Market or principal national securities exchange or market
on which the Common Stock has been listed, or (b) if the Common Stock is not
listed on the Nasdaq SmallCap Market or any stock exchange or market, a day on
which the Common Stock is traded in the over-the-counter market, as reported
by the Nasdaq SmallCap Market, or (c) if the Common Stock is not quoted on the
Nasdaq SmallCap Market, a day on which the Common Stock is quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions
of reporting prices).
RESOLVED FURTHER, that the President and Secretary of the Company
be, and they hereby are, authorized and directed to prepare, execute, verify,
and file in Delaware, a Certificate of Designation in accordance with these
resolutions and as required by law.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
11
<PAGE>
IN WITNESS WHEREOF, Innovus Corporation has caused its corporate
seal to be hereunto affixed and this certificate to be signed by Terry Haas,
its President, and attested by David Mock, its Secretary, this __ day of
February, 1997.
INNOVUS CORPORATION
----------------------------------
Terry Haas
President
Attest:
By:
------------------------------
David Mock
Secretary
12
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby irrevocably elects to convert the number of shares of
Series E Convertible Preferred Stock indicated below, into shares of Common
Stock, par value $.001 per share (the "Common Stock"), of Innovus Corporation
(the "Company") according to the conditions hereof, as of the date written
below. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the Holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations:
----------------------------------
Date to Effect Conversion
----------------------------------
Number of shares of Preferred Stock
to be Converted
$2.25
----------------------------------
Applicable Conversion Price
----------------------------------
Signature
----------------------------------
Name:
----------------------------------
Address:
13
<PAGE>
EXHIBIT B
INNOVUS CORPORATION
NOTICE OF CONVERSION AT
THE ELECTION OF THE COMPANY
The undersigned in the name and on behalf of Innovus Corporation (the
"Company") hereby notifies the addressee hereof that the Company hereby elects
to exercise its right to convert [ ] shares of its Series E
Convertible Preferred Stock held by the Holder into shares of Common Stock,
par value $.001 per share (the "Common Stock") of the Company according to the
terms hereof, as of the date written below. No fee will be charged to the
Holder for any conversion hereunder, except for such transfer taxes, if any
which may be incurred by the Company if shares are to be issued in the name of
a person other than the person to whom this notice is addressed.
Conversion calculations:
----------------------------------
Date to Effect Conversion
----------------------------------
Number of Shares of Preferred Stock
to be Converted
$2.25
----------------------------------
Applicable Conversion Price
----------------------------------
Signature
----------------------------------
Name:
----------------------------------
Address:
14
<PAGE>
Exhibit 11.1
Innovus Corporation and Subsidiary
LOSS PER SHARE CALCULATION
Year ended December 31,
1996 1995 1994
----------- ----------- -----------
Net loss $(7,791,146) $(3,735,351) $(1,554,213)
----------- ----------- -----------
----------- ----------- -----------
Shares outstanding:
Common shares outstanding
during the entire year 4,691,037 2,918,972 2,470,625
Weighted average common
shares issued during the
year 222,054 875,304 106,500
----------- ----------- -----------
Weighted average common
shares outstanding during
the year $ 4,913,091 $ 3,794,276 $ 2,577,125
----------- ----------- -----------
----------- ----------- -----------
Net loss per common share $ (1.59) $ (0.98) $ (0.60)
----------- ----------- -----------
<PAGE>
[LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Innovus Corporation
We have issued our report dated February 21, 1996 on the consolidated
statement of operations, stockholders' equity (deficit) and cash flows of
Innovus Corporation and Subsidiary as of December 31, 1994, which are
included in the Form 10-K of Innovus Corporation dated December 31, 1996. We
consent to the incorporation by reference of our report in the Registration
Statement of Innovus Corporation on Form S-3. We also consent to the
statements with respect to us as appearing under the heading of "Experts" in
the Registration Statement.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
April 11, 1997
<PAGE>
CONSENT
We have issued our report dated March 7, 1997, accompanying the financial
statements of Innovus Corporation and Subsidiary incorporated by reference or
included in the Annual Report of Innovus Corporation and Subsidiary on Form
10-K for the year ended December 31, 1996. We hereby consent to the
incorporation by reference of said report in the Registration Statement of
Innovus Corporation and Subsidiary on Form S-3 (File No. 333-16295 effective
December 17, 1996).
GRANT THORNTON LLP
Salt Lake City, Utah
April 11, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 886122
<SECURITIES> 0
<RECEIVABLES> 116761
<ALLOWANCES> 0
<INVENTORY> 39003
<CURRENT-ASSETS> 1161735
<PP&E> 1606497
<DEPRECIATION> 796673
<TOTAL-ASSETS> 3343176
<CURRENT-LIABILITIES> 1124592
<BONDS> 728555
4395000
0
<COMMON> 10606822
<OTHER-SE> (14486)
<TOTAL-LIABILITY-AND-EQUITY> 3343176
<SALES> 597567
<TOTAL-REVENUES> 597567
<CGS> 302571
<TOTAL-COSTS> 302571
<OTHER-EXPENSES> 7250727
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 835415
<INCOME-PRETAX> (7791146)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7791146)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7791146)
<EPS-PRIMARY> (1.59)
<EPS-DILUTED> 0
</TABLE>
