<PAGE>
================================================================================
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[x] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
7th Level, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
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Notes:
<PAGE>
7TH LEVEL, INC.
1110 EAST COLLINS BOULEVARD
SUITE 122
RICHARDSON, TEXAS 75081
---------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
JULY 9, 1998
---------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of 7th
Level, Inc. (the "Corporation") will be held at _______ o'clock a.m., local
time, on July 9, 1998, at ___ _________________________________, for the
following purposes:
1. To elect five directors of the Corporation to hold office until the
next Annual Meeting of Stockholders and until the election and qualification of
their respective successors;
2. To consider and vote upon a proposal to approve an amendment to the
Restated Certificate of Incorporation of the Corporation (the "Certificate of
Incorporation") to increase the number of authorized shares of common stock, par
value $.01 per share, of the Corporation (the "Common Stock"), from 20,000,000
to 100,000,000;
3. To consider and vote upon a proposal to approve an amendment to the
Certificate of Incorporation to amend the terms of the Corporation's "blank
check" preferred stock to provide that the Board of Directors of the Corporation
may designate shares of preferred stock with voting rights other than one vote
per share; and
4. To transact such other business as may properly come before the
meeting.
Only holders of record of the Common Stock and Series A Preferred Stock at
the close of business on June 9, 1998 are entitled to notice of, and to vote at,
the meeting and any adjournment thereof. Such stockholders may vote in person or
by proxy.
STOCKHOLDERS WHO FIND IT CONVENIENT ARE CORDIALLY INVITED TO ATTEND THE
MEETING IN PERSON. IF YOU ARE NOT ABLE TO DO SO AND WISH THAT YOUR STOCK BE
VOTED, YOU ARE REQUESTED TO FILL IN, SIGN, DATE AND RETURN THE ACCOMPANYING
PROXY IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES.
By Order of the Board of Directors,
DONALD SCHUPAK
Chairman of the Board
Dated: June __, 1998
<PAGE>
PRELIMINARY
7TH LEVEL, INC.
1110 EAST COLLINS BOULEVARD
SUITE 122
RICHARDSON, TEXAS 75081
---------------
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of 7th Level, Inc. (the "Corporation") of proxies to be
used at the Annual Meeting of Stockholders of the Corporation to be held at
_____ o'clock a.m., local time, on July 9, 1998, at
_____________________________________, and at any adjournments thereof. The
purposes of the meeting are:
1. To elect five directors of the Corporation to hold office until the
next Annual Meeting of Stockholders and until the election and qualification of
their respective successors;
2. To consider and vote upon a proposal to approve an amendment to the
Restated Certificate of Incorporation of the Corporation (the "Certificate of
Incorporation") to increase the number of authorized shares of common stock, par
value $.01 per share, of the Corporation (the "Common Stock"), from 20,000,000
to 100,000,000;
3. To consider and vote upon a proposal to approve an amendment to the
Certificate of Incorporation to amend the terms of the Corporation's "blank
check" preferred stock to provide that the Board of Directors of the Corporation
may designate shares of preferred stock with voting rights other than one vote
per share; and
4. To transact such other business as may properly come before the
meeting.
If proxy cards in the accompanying form are properly executed and returned,
the shares of Common Stock or Series A Preferred Stock, par value $.01 per share
("Series A Preferred Stock," and together with the Common Stock, the "Voting
Stock"), represented thereby will be voted as instructed on the proxy. If no
instructions are given, such shares will be voted (i) for the election as
directors of the nominees of the Board of Directors named below, (ii) for the
proposal to amend the Certificate of Incorporation to increase the number of
authorized shares of Common Stock, (iii) for the proposal to amend the
Certificate of Incorporation to amend the terms of the Corporation's "blank
check" preferred stock, and (iv) in the discretion of the Proxies named in the
proxy card on any other proposals to properly come before the meeting or any
adjournment thereof. Any proxy may be revoked by a stockholder prior to its
exercise upon written notice to the Chief Executive Officer of
<PAGE>
the Corporation, or by the vote of a stockholder cast in person at the meeting.
The approximate date of mailing of this Proxy Statement is June __, 1998.
VOTING
Holders of record of the Voting Stock on June 9, 1998, will be entitled to
vote at the Annual Meeting or any adjournment thereof. As of that date, the
Corporation had outstanding _______ shares of Common Stock and 5,500 shares of
Series A Preferred Stock, which are its only outstanding classes of voting
stock. Each holder of record of Common Stock and Series A Preferred Stock on
such date will be entitled to one vote for each share held on all matters to be
voted upon at the meeting, including the election of directors. The holders of
Series A Preferred Stock and Common Stock will vote together as a single class
on all matters that will be presented for consideration at the meeting. In
addition, the holders of Series A Preferred Stock will vote as a separate class
on all matters to be voted upon at the meeting. A majority in interest of the
outstanding Voting Stock considered together as a single class, and the Series A
Preferred Stock voting as a separate class, represented at the meeting in person
or by proxy, constitute a quorum for the transaction of business. Abstentions
and broker non-votes are counted for purposes of determining the presence or
absence of a quorum for the transaction of business.
The favorable vote of a plurality of the Voting Stock voting together as a
single class and the Series A Preferred Stock voting separately as a class cast
at the meeting is necessary to elect each director of the Corporation. The
favorable vote of a majority of the outstanding Voting Stock voting together as
a single class, and the Series A Preferred Stock voting separately as a class,
is necessary to approve the amendment to the Certificate of Incorporation to
increase the number of authorized shares of Common Stock. The favorable vote of
a majority of the outstanding Voting Stock voting together as a single class,
and the Series A Preferred Stock voting separately as a class, is necessary to
approve the amendment to the Certificate of Incorporation to amend the terms of
the Corporation's "blank check" preferred stock. Abstentions and broker non-
votes will have the same legal effect as a vote against the proposed amendment
to the Certificate of Incorporation to increase the number of authorized shares
of Common Stock and the proposed amendment to the Certificate of Incorporation
to amend the terms of the Corporation's "blank check" preferred stock. However,
abstentions and broker non-votes will have no effect on the outcome of the
election of directors. The Board of Directors recommends a vote FOR each of the
nominees named below, FOR the proposal to approve the amendment to the
Certificate of Incorporation to increase the number of authorized shares of
Common Stock and FOR the proposal to approve the amendment to the Certificate of
Incorporation to amend the terms of the Corporation's "blank check" preferred
stock.
INFORMATION AS TO NOMINEES AND OTHER DIRECTORS
Five directors are to be elected at the Annual Meeting. The Board of
Directors has recommended the persons named in the table below as nominees for
election as directors. All such persons are presently directors of the
Corporation. Unless otherwise specified in the accompanying proxy, the shares
voted pursuant to it will be voted for the persons named below as nominees for
2
<PAGE>
election as directors. If, for any reason, at the time of the election any of
the nominees should be unable or unwilling to accept election, it is intended
that such proxy will be voted for the election, in such nominee's place, of a
substitute nominee recommended by the Board of Directors. However, the Board of
Directors has no reason to believe that any nominee will be unable or unwilling
to serve as a director.
The following information is supplied with respect to the nominees for
election as directors of the Corporation:
NOMINEES FOR DIRECTOR
DIRECTOR OF THE
NAME OF DIRECTOR AGE CORPORATION SINCE
---------------- --- -----------------
Donald Schupak 55 1997 to present
Robert Alan Ezrin 49 1995 to present
Merv Adelson 68 1994 to present
James A. Cannavino 54 1997 to present
W. Scott Page 46 1993 to present
Donald Schupak currently serves as Chairman of the Board and Director.
He has been a member of the Board since January 1997 and has been Chairman since
March 1997. Mr. Schupak is the Chief Executive Officer of the Schupak Group, an
organization that provides strategic planning, management consulting and
corporate services to corporations worldwide. Mr. Schupak has been with Schupak
Group since 1990. On March 27, 1997, he became the Chairman of the Board for
Danskin, Inc. He served as Chairman and Chief Executive Officer at Horn &
Hardart Company from 1988 to 1990. Mr. Schupak is also a member of the Advisory
Board of the Maxwell School of Citizenship and Public Affairs at Syracuse
University.
Robert Alan Ezrin currently serves as Vice Chairman of the Board and
Director. Mr. Ezrin is a founder of the Corporation and has served as Director
since its inception in April 1993 and has served as Vice Chairman of the Board
since April 1998. Mr. Ezrin served as President from November 1995 until April
1998 and Chief Executive Officer from March 1997 until April 1998. Mr. Ezrin
served as Vice President and Co-Chairman of the Board of the Corporation since
its inception in April 1993 until November 1995. Mr. Ezrin served as Executive
Vice President of Production from April 1994 to November 1995. From 1984
through 1994, Mr. Ezrin was a Producer with Lozem Productions, Inc. Mr. Ezrin
has more than 25 years of experience in the international entertainment
business, producing music, video and television projects for numerous
internationally known stars such as Pink Floyd, Rod Stewart, KISS, Peter Gabriel
and Roger Daltry. Mr. Ezrin is Chairman of the Board of Directors of
Metropolitan Los Angeles Communities in Schools.
Merv Adelson has served as a Director of the Corporation since
February 1994. Since 1989, Mr. Adelson has been the trustee of the sole
shareholder of East West Capital Associates, Inc.
3
<PAGE>
("Capital"), a merchant banking and venture capital company, and currently
serves as its Chairman of the Board and Chief Executive Officer. Mr. Adelson co-
founded the predecessor of Lorimar Telepictures in 1969, which was sold to
Warner Bros. in 1989. Mr. Adelson is also a director of Time Warner, Inc.
James A. Cannavino has served as a Director of the Corporation since
January 1997. Since April 1, 1998, Mr. Cannavino is Chairman and Chief Executive
Officer of CyberSafe Corporation, a company that makes corporate network
security products, and Chairman of Softworks, a systems software tools company.
Mr. Cannavino was a private investor from July 1997 to March 1998. Mr. Cannavino
served as President, Chief Executive Officer and Director of Perot Systems
Corporation ("Perot Systems") from September 1996 to July 1997 and he served as
President, Chief Operating Officer and Director of Perot Systems from September
1995 to September 1996. Mr. Cannavino has more than 30 years of experience in
the computer and information technology industries. Prior to joining Perot
Systems in September 1995, he was a private investor from April 1995 to
September 1995. Previously, Mr. Cannavino was at IBM Corporation, where he was
Senior Vice President of Strategy and Development from 1993 to April 1995, and
prior to this, he served as Senior Vice President and General Manager of the
Personal Systems Group at IBM Corporation from 1991 to 1993.
W. Scott Page is a founder of the Corporation and has been a Vice
President and Director of the Corporation since its inception in April 1993 and
has served as Executive Vice President of Production since November 1995. Mr.
Page served as Executive Vice President of Creative from March 1994 until
November 1995. Prior to joining the Corporation, from November 1988 through
April 1993, Mr. Page was President of The Walt Tucker Group, a post-production
studio that he founded which specialized in long and short form music videos and
graphics merchandising. Mr. Page also was a tenor saxophonist and guitarist for
the musical rock groups Pink Floyd, Supertramp and others.
MEETINGS OF THE BOARD
During the fiscal year ended December 31, 1997, the Board of Directors met,
or acted by unanimous written consent, on fourteen (14) occasions. Each of the
directors attended 75% or more of the aggregate number of meetings of the Board
of Directors and committees on which he served during the 1997 fiscal year.
The Board of Directors has an audit committee ("Audit Committee")
consisting of Merv Adelson (Chairman) and James A. Cannavino. The Audit
Committee is responsible for approving the scope of the annual audit and for
making recommendations to the Board concerning the selection of the
Corporation's independent public accountants. The Audit Committee also reports
to the Board concerning the Corporation's internal accounting controls, factors
that may affect the integrity of the Corporation's financial reports, compliance
by the Corporation's management and employees with the Corporation's policies,
and other matters. The Audit Committee held one meeting during the
Corporation's last fiscal year.
4
<PAGE>
The Board of Directors also has a compensation committee ("Compensation
Committee") consisting of James A. Cannavino (Chairman) and Merv Adelson. The
Compensation Committee is responsible for determining the compensation for the
Corporation's senior management and establishing compensation policies for the
Corporation's employees generally. The Compensation Committee also administers
the Corporation's Amended and Restated Incentive Stock Option Plan (the
"Incentive Stock Option Plan") and the Corporation's Employee Stock Purchase
Plan. The Compensation Committee held no meetings during the Corporation's last
fiscal year.
The Board of Directors also has an executive committee ("Executive
Committee") consisting of Donald Schupak (chairman), Merv Adelson and James A.
Cannavino. Members of the Executive Committee are non-employee directors of the
Corporation. The Executive Committee has all the authority of the Board in the
management of the business and affairs of the Corporation, except those powers
that by law or by the Corporation's Certificate of Incorporation or by-laws
cannot be delegated by the Board. The Executive Committee held one meeting
during the Corporation's last fiscal year.
The Board of Directors has no standing nominating committee.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of May 8, 1998
(except as otherwise noted) with respect to the beneficial ownership of the
Voting Stock by (i) each person known by the Corporation to be the beneficial
owner of more than 5% of the outstanding shares of Voting Stock, (ii) each
director of the Corporation, (iii) each named officer of the Corporation listed
in the Summary Compensation Table, and (iv) all officers and directors of the
Corporation as a group. Unless otherwise noted, the Corporation believes that
all persons named in the table have sole voting and investment power with
respect to all shares of Voting Stock beneficially owned by them.
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF APPROXIMATE SHARES OF APPROXIMATE
NAME OF PERSON SHARES OF PERCENTAGE OF SERIES A PERCENTAGE OF
OR IDENTITY OF GROUP COMMON STOCK CLASS PREFERRED STOCK CLASS
- ----------------------------------- ------------ ------------- --------------- -------------
<S> <C> <C> <C> <C>
Robert Alan Ezrin (1).............. 2,021,631 14.1%
1110 East Collins Blvd.,
Suite 122
Richardson, TX 75081
Entec Associates (2)............... 1,374,158 9.6% 830 15.1%
P. O. Box 491459
Los Angeles, California 90049
Alpine Associates, a New Jersey....
Limited Partnership (3).......... 900,000 6.1%
100 Union Avenue
Cresskill, New Jersey 07626
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF APPROXIMATE SHARES OF APPROXIMATE
NAME OF PERSON SHARES OF PERCENTAGE OF SERIES A PERCENTAGE OF
OR IDENTITY OF GROUP COMMON STOCK CLASS PREFERRED STOCK CLASS
- ----------------------------------- ------------ ------------- --------------- -------------
<S> <C> <C> <C> <C>
Merv Adelson (4)................... 770,426 5.3%
10900 Wilshire Boulevard
Suite 750
Los Angeles, California 90024
Donald Schupak (5)................. 715,092 5.1%
730 5th Avenue
Suite 1901
New York, New York 10019
Bond Fund Series for the account
of Oppenheimer Convertible
Securities Fund.................. 625,000 4.3% 2,500 45.5%
Two World Trade Center
New York, New York 10048
DLJ Capital Corp................... 100,000 * 400 7.3%
277 Park Avenue
New York, New York 10172
Ozzie Silna........................ 73,750 * 295 5.4%
23301 Palm Canyon Lane
Malibu, California 90265
W. Scott Page (6).................. 560,151 4.0%
James A. Cannavino (7)............. 75,000 *
David W. Craig (8)................. 70,000 *
George D. Grayson (9).............. 34,171 *
David R. Henkel.................... -0- *
All current directors and
executive officers as a group.... 4,260,800 29.8%
</TABLE>
_____________
(1) Includes all shares of Common Stock beneficially owned by Entec Associates
("Entec") with respect to which Mr. Ezrin has sole voting power pursuant to
a stockholders' voting agreement and irrevocable proxy. Shares shown as
beneficially owned include 34,163 shares which may be purchased by the
Corporation pursuant to the Option Share Repurchase Agreement at $0.003 per
share upon the exercise of certain options granted or to be granted under
the Incentive Stock Option Plan. Shares shown as beneficially owned do not
include 125 shares of Series C Preferred Stock or 125,000 shares of Common
Stock issuable upon the exercise of unvested stock options with an exercise
price of $2.00 per share for Common Stock.
(2) Michael R. Milken is a general partner of Entec, and the Corporation
believes that Mr. Milken has sole investment power with respect to, and may
be deemed a beneficial owner of, the shares held by Entec. All shares of
Common Stock beneficially owned by Entec are subject to a stockholders'
voting agreement and irrevocable proxy pursuant to which Robert Alan Ezrin
has sole voting power with respect to the shares of Common Stock
beneficially owned by Entec. Shares shown as beneficially owned include
166,391 shares issuable upon the
6
<PAGE>
exercise of warrants at an exercise price of $7.50 per share and 95,757
shares issuable upon conversion of 7% Subordinated Convertible Notes and
207,500 shares issuable upon the exercise of warrants at an exercise price
of $0.01 per share.
(3) Shares shown as beneficially owned include 450,000 shares issuable upon
exercise of warrants at an exercise price of $0.01 per share and 450,000
shares issuable upon conversion of Notes (as defined) in the aggregate
principal amount of $3,000,000 to (i) 3,000 shares of Series A Preferred
Stock and (ii) warrants exercisable for 450,000 shares of Common Stock and
subsequent exercise of such warrants at an exercise price of $0.01 per
share.
(4) Includes all shares beneficially owned by Capital which is owned by The
Mervyn Adelson Trust U/T/A dated September 29, 1992, of which Mr. Adelson
is the trustee. Shares beneficially owned by Capital include 225,000 shares
issuable upon exercise of warrants at an exercise price of $0.01 per share
and 225,000 shares issuable upon conversion of Notes in the aggregate
principal amount of $1,500,000 to (i) 1,500 shares of Series A Preferred
Stock and (ii) warrants exercisable for 225,000 shares of Common Stock and
subsequent exercise of such warrants at an exercise price of $0.01 per
share. Shares shown as beneficially owned by Mr. Adelson also include
53,242 shares issuable upon the exercise of warrants which are exercisable
at $7.50 per share and 30,641 shares issuable on conversion of 7%
Subordinated Convertible Notes. Shares shown as beneficially owned do not
include 55 shares of Series C Preferred Stock or 55,000 shares of Common
Stock issuable upon the exercise of unvested stock options with an exercise
price of $2.00 per share for Common Stock.
(5) Shares shown as beneficially owned include shares granted for $0.01 par
value per share on the surrender of stock options of a like amount. Shares
shown as beneficially owned by Mr. Schupak do not include 600 shares of
Series C Preferred Stock or 600,000 shares of Common Stock issuable upon
the exercise of unvested stock options with an exercise price of $2.00 per
share for Common Stock.
(6) Shares shown as beneficially owned include 34,166 shares which may be
purchased by the Corporation pursuant to an Option Share Repurchase
Agreement at $0.003 per share upon the exercise of certain options granted
or to be granted under the Incentive Stock Option Plan. Shares shown as
beneficially owned do not include 130 shares of Series C Preferred Stock or
130,000 shares of Common Stock issuable upon the exercise of unvested stock
options with an exercise price of $2.00 per share for Common Stock.
(7) Shares shown as beneficially owned include 75,000 shares issuable on the
exercise of vested stock options with an exercise price of $2.00 per share.
Shares shown as beneficially owned do not include 140 shares of Series C
Preferred Stock or 140,000 shares of Common Stock issuable upon the
exercise of unvested stock options with an exercise price of $2.00 per
share for Common Stock.
7
<PAGE>
(8) Shares shown as beneficially owned include 70,000 shares issuable upon the
exercise of vested stock options with an exercise price of $2.00 per share.
(9) Shares shown as beneficially owned include 34,171 shares which may be
purchased by the Corporation pursuant to an Option Share Repurchase
Agreement at $0.003 per share upon the exercise of certain options granted
or to be granted under the Incentive Stock Option Plan.
* Represents beneficial ownership of less than 1% of the Common Stock.
EXECUTIVE OFFICERS OF THE CORPORATION
The following table sets forth the names, ages and all positions and
offices with the Corporation held by the Corporation's present executive
officers. Unless otherwise indicated below, each person has held the office
indicated for more than five years:
NAME AGE POSITION
---- --- --------
Donald Schupak.............. 55 Director and Chairman of the Board of
Directors
Robert Alan Ezrin........... 49 Director and Vice Chairman of the Board of
Directors
Richard S. Merrick.......... 42 Chief Executive Officer
Curt Marvis................. 42 President
Timothy J. Cahill........... 31 Chief Operating Officer and Executive Vice
President
W. Scott Page............... 46 Executive Vice President of Media
Production
and Director
Richard S. Merrick has been Chief Executive Officer since April 1998. Mr.
Merrick served as Senior Vice President of Technology and Chief Strategist of
the Corporation since January 1998 until April 1998. From March 1997 until
January 1998, Mr. Merrick served as Vice President of Strategic Technology.
From November 1995 to March 1997, Mr. Merrick served as Vice President of
Technology. From April 1993 to November 1995, Mr. Merrick served as Vice
President of Research and Development. From June 1989 to February 1993, Mr.
Merrick was Director of Systems Development at Micrografx, Inc., a leading
developer of desktop graphics software. From May 1984 to June 1989, Mr. Merrick
was Manager of Research and Development at CompuTrac, a software company.
Curt Marvis has been President since April 1998. From November 1997 until
April 1998, Mr. Marvis served as Senior Vice President of Business Development.
From June 1997 to November 1997, Mr. Marvis was a consultant to the Corporation.
From March 1995 to April 1997, Mr. Marvis was the Executive Vice President of
Powerhouse Entertainment, a privately-held multimedia production company. From
April 1994 to March 1995, Mr. Marvis was a consultant to IBM
8
<PAGE>
Multimedia Publishing Studio. From December 1985 to October 1994, Mr. Mavis was
Chief Executive Officer and co-founder of The Company, a ground breaking music
video production company.
Timothy J. Cahill has been Chief Operating Officer and Executive Vice
President since April 1998. Prior to joining the Corporation, Mr. Cahill was
Vice President and General Manger of Pulse Entertainment, Inc. from March 1997
to April 1998. Mr. Cahill was the founder and principal of Cahill & Co., Inc.,
a new media law firm serving the interactive entertainment community from June
1995 to March 1997. From September 1993 to June 1995, Mr. Cahill was a real
estate transaction attorney in the Los Angeles office of Pillsbury Madison and
Sutro.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid during 1997, 1996 and
1995 to the two individuals who served as the Corporation's Chief Executive
Officer during 1997, each person serving as an executive officer on December 31,
1997 who earned more than $100,000 in salary and bonus in fiscal 1997 and two
individuals who were among the highest paid employees for the year ended
December 31, 1997 but were not executive officers on December 31, 1997
(collectively, the "Named Executives").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION:
COMPENSATION SECURITIES
NAME AND PRINCIPAL FISCAL ------------ UNDERLYING
POSITION YEAR SALARY BONUS OPTIONS (1) OTHER (2)
------------------ ------ ------ ----- ------------- ---------
<S> <C> <C> <C> <C> <C>
George D. Grayson (3)............... 1997 $117,312 $ - - $ 3,102
Former Chief Executive 1996 251,083 - 100,000 12,432
Officer and Chairman of the 1995 43,576 100,000 20,000 (4) 1,000
Board
Robert Alan Ezrin (3)............... 1997 275,000 - - 17,331
Former President and current 1996 263,083 - 50,000 17,378
Director 1995 250,500 50,000 10,000 (4) 15,405
W. Scott Page....................... 1997 193,750 - - 17,334
Executive Vice President 1996 187,667 - - 17,227
of Production and Director 1995 152,583 - - 15,260
David W. Craig (3).................. 1997 180,900 - - 5,496
Former Chief Financial Officer 1996 135,388 - 70,000 3,180
1995 - - - -
David R. Henkel (3)................. 1997 257,642 - - 15,797
Former Chief Operating 1996 251,083 - 25,000 32,796(5)
Officer and Director 1995 237,500 50,000 10,000 (4) 55,623(5)
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Daniel Kuenster (3)................. 1997 189,592 5,000 - 6,500
Former Vice President of 1996 182,533 10,000 30,000 52,500(5)
Animation 1995 156,260 20,000 - 37,125(5)
</TABLE>
__________
(1) Represents the number of options (each to acquire one share of Common
Stock) granted pursuant to the Incentive Stock Option Plan.
(2) Includes auto allowance, Corporation match contributions to the
Corporation's 401(k) Plan and dollar value of life insurance premiums paid
by the Corporation.
(3) Messrs. Grayson and Henkel resigned March 10, 1997. Mr. Ezrin, Vice
Chairman of the Board, resigned as President on April [20], 1998 and Mr.
Craig resigned on February 28, 1998. Mr. Kuenster resigned on December 31,
1997.
(4) This table does not reflect options granted in 1995 to purchase 100,000,
50,000 and 25,000 shares at exercise prices of $16.75, $16.00 and $16.00
per share that were held by George D. Grayson, Robert Alan Ezrin and David
R. Henkel, respectively, because such options were canceled and new grants
were made in 1996 as shown.
(5) Includes the dollar value difference between the price paid and the fair
market value of Common Stock upon exercise of options granted under the
Incentive Stock Option Plan.
OPTIONS GRANTED IN LAST FISCAL YEAR
There were no stock options granted to Named Executives during 1997.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table provides information about exercised stock options held
by the Named Executives. During 1997, only one of the Named Executives
exercised stock options granted by the Corporation.
10
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES SECURITIES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ON VALUE AT DECEMBER 31, 1997 AT DECEMBER 31, 1997(1)
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- -------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
George D. Grayson (2) - - - - - -
Robert Alan Ezrin (2) - - 17,500 42,500 - (3) - (3)
W. Scott Page - - - - - -
David W. Craig (2) - - 17,500 52,500 - (3) - (3)
David R. Henkel (2) 45,000 $183,075 (4) 11,250 - - (3) -
Daniel Kuenster (2) - - 52,000 - - (3) -
</TABLE>
_____________
(1) Value based on the December 31, 1997 closing price of the Common Stock on
the Nasdaq National Market System of $1.69 per share.
(2) Messrs. Grayson and Henkel resigned March 10, 1997. Mr. Ezrin, Vice
Chairman of the Board, resigned as President on April [20], 1998 and Mr.
Craig resigned on February 28, 1998. Mr. Kuenster resigned on December 31,
1997.
(3) Underlying options that are not in-the-money are not valued in this table.
(4) Value based on the January 28, 1997 and March 11, 1997 (dates of exercise)
closing prices of the Common Stock on the NASDAQ National Market System of
$4.00 and $4.63 per share.
COMPENSATION OF DIRECTORS
None of Messrs. Schupak (Chairman of the Board), Ezrin (Vice Chairman of the
Board) or Page (Executive Vice President of Media Production) receives any
compensation for his services as director. The Corporation's outside directors
earn $10,000 per annum, plus $2,000 per annum for each committee membership, and
they are reimbursed for their out-of-pocket expenses incurred in attending board
meetings.
As discussed in the "Compensation Committee Report on Executive
Compensation," on April 20, 1998, due to employee turnover, employee morale and
the challenges and opportunities facing the Corporation, the Board determined to
reprice options of a significant number of its employees, consultants and
directors as well as grant additional options. As part of such repricing,
options for 75,000 shares of Common Stock held by James A. Cannavino were
repriced to an exercise price equal to $2.00 per share. On the date of the
repricing of such options, the closing price of the Common Stock on The Nasdaq
National Market was $1.8125.
In April 1998, the Board adopted a broad based plan that, due to the limited
number of authorized shares of Common Stock available, was for options
exercisable for approximately 2,967
11
<PAGE>
shares of Series C Preferred Stock, par value $.01 per share ("Series C
Preferred Stock"). If the proposed amendment to the Restated Certificate of
Incorporation of the Corporation to increase the number of authorized shares of
Common Stock is adopted (see "Proposal to amend Certificate of Incorporation to
increase the number of authorized shares of Common Stock from 20,000,000 to
100,000,000"), the options exercisable under such plan will be exercisable for
approximately 2,967,000 shares of Common Stock. All of the options granted on
such date are exercisable at an exercise price equal to $2.00 per share. On the
date of the grant of such options, the closing price of the Common Stock on The
Nasdaq National Market was $1.8125. Messrs. Schupak, Ezrin and Page received
options exercisable for 600, 125 and 130 shares of Series C Preferred Stock,
respectively, or 600,000, 125,000 and 130,000 shares of Common Stock,
respectively. Mr. Adelson received options exercisable for 55 shares of Series C
Preferred Stock (or 55,000 shares of Common Stock) in exchange for the surrender
of options exercisable for 25,000 shares of Common Stock. Mr. Cannavino received
options exercisable for 140 shares of Series C Preferred Stock (or 140,000
shares of Common Stock) in exchange for the surrender of options exercisable for
20,000 shares of Common Stock.
As part of the broad based plan, each director of the Corporation (i.e.,
Messrs. Schupak, Ezrin, Adelson, Cannavino and Page) received options
exercisable into 30 shares of Series C Preferred Stock (or 30,000 shares of
Common Stock) which are included in the option grants described above. In
addition, Messrs. Schupak and Ezrin surrendered their options exercisable into
655,000 and 60,000 shares, respectively, in exchange for the issuance of 655,000
and 110,000 shares of Common Stock. Mr. Schupak also waived his right to be
considered for a cash bonus for 1997. In April 1998, the Corporation terminated
the Non-Employee Directors' Stock Option Plan.
In March 1997, the Corporation and the Schupak Group entered into an
agreement whereby the Corporation pays $12,000 per month to the Schupak Group
for the consulting services of Donald Schupak and other employees of the Schupak
Group. Additionally, Mr. Schupak is entitled to the reimbursement of reasonable
travel and other expenses incidental to the performance of his consulting
duties. Mr. Schupak also serves as Chairman of the Board and a director of the
Corporation, but receives no additional compensation for his services as a
director. Mr. Schupak is entitled to have the Board consider a bonus at the end
of each fiscal year.
EMPLOYMENT AGREEMENTS
The Corporation had employment agreements with George D. Grayson (the
"Grayson Agreement") and David R. Henkel (the "Henkel Agreement").
The Grayson Agreement provided that Mr. Grayson was entitled to cash
compensation of at least $25,000 per annum plus a bonus pursuant to any bonus
plan of the Corporation. The Grayson Agreement was terminable by the
Corporation upon Mr. Grayson's death or incapacity or with the vote of five of
six disinterested directors. Upon any termination of Mr. Grayson upon a vote of
the Board of Directors, Mr. Grayson would be entitled to receive accrued salary,
bonus and other benefits and the Corporation would repurchase from Mr. Grayson
any shares of common stock
12
<PAGE>
which Mr. Grayson desired to sell within twelve months of his termination (such
twelve month period to be extended if Mr. Grayson was delayed or prohibited by
state or federal securities laws from selling such stock). The Grayson Agreement
was terminable by Mr. Grayson upon ninety days notice. The Grayson agreement had
an original term of five years commencing April 28, 1993 and automatically
renewed for successive five year periods unless earlier terminated in accordance
therewith.
On March 10, 1997, Mr. Grayson resigned from his positions as officer,
director and employee of the Corporation. In connection with such resignation,
the Corporation agreed to continue paying Mr. Grayson's salary at the then
current annual level of $250,000 for a ninety day period. Additionally, the
Corporation agreed to an early debt repayment to Mr. Grayson for debt issued
February 11, 1994 as a 7% Subordinated Convertible Note. The Corporation agreed
to pay $125,000 to Mr. Grayson as full repayment of $135,142 principal and
accrued interest of approximately $1,000.
The Henkel Agreement provided that Mr. Henkel was entitled to receive cash
compensation of $250,000 per year. Mr. Henkel was also entitled to participate
in any cash bonus plan for key executive officers of the Corporation adopted
beginning in 1995. The Henkel Agreement provided that if the Corporation
terminated his employment for any reason other than gross negligence, he would
be paid a severance equal to six months of his current salary (excluding
bonuses).
On March 10, 1997, Mr. Henkel resigned from his positions as an officer and
director of the Corporation. Mr. Henkel and the Corporation agreed that Mr.
Henkel would provide additional consulting services to the Corporation through
November, 1997 for which Mr. Henkel was paid at the rate of $20,833 per month.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Corporation's approach to executive compensation is designed to attract,
motivate and retain the executive resources that the Corporation needs in order
to maximize its return to stockholders. The Corporation attempts to provide its
executives with a total compensation package that, at expected levels of
performance, is competitive with those provided to executives who hold
comparable positions or having similar qualifications in other similar
organizations.
Fiscal 1997 represented a transition year for the Corporation. In March
1997, the Corporation underwent a change in management, and subsequently, in
August 1997, new management announced its strategy to quickly transform the
Corporation from being a self-funded content developer and publisher to position
the Corporation as a developer of Internet software which supports the creation
of rich-media content for use in advertising, e-commerce, training, customer
support and other Internet related applications. In November 1997, the
Corporation announced a proposed merger with Pulse Entertainment, Inc., which it
subsequently terminated upon conclusion that it would be more profitable for
each company to develop and market its own technology separately. These
13
<PAGE>
events, as well as the Corporation's financial condition, were crucial factors
for determining the Corporation's executive compensation.
After careful consideration of market conditions, employee turnover,
employee morale and the challenges and opportunities facing the Corporation, and
in light of the Board's inability to grant stock options exercisable for shares
of Common Stock as a result of the minimal number of authorized shares of Common
Stock available for issuance, the Board determined that it was necessary to
reprice existing options which were substantially out of the money and to adopt
a broad based plan for options exercisable for shares of Series A Preferred
Stock (or shares of Common Stock upon approval of the proposed amendment to the
Restated Certificate of Incorporation of the Corporation to increase the number
of authorized shares of Common Stock). These options enabled the Corporation to
attract and retain highly qualified employees.
Cash compensation for executive officers named in the Summary Compensation
Table includes base salary, annual bonus and other compensation such as car
allowance and employer contribution to the Corporation's 401(k) Plan.
Base salaries are reviewed on an annual basis with a variety of factors
considered including the individual's contribution to the success of the
Corporation, and salary trends for individuals in similar positions. Annual
bonuses are determined based on annual accomplishments including the
individual's contribution to the development and success of the Corporation.
Compensation of the Chief Executive Officer
Mr. George D. Grayson was the Corporation's Chief Executive Officer until he
resigned from such position on March 10, 1997. Based on the Corporation's
performance in 1996, the Compensation Committee approved a base salary for Mr.
Grayson of $250,000 for 1997. Mr. Robert Ezrin, a founder and large stockholder
of the Corporation, was appointed Chief Executive Officer on March 10, 1997.
Mr. Ezrin's base salary for fiscal 1997 was $275,000. In determining the base
salary, the Compensation Committee considered Mr. Ezrin's performance in
assisting the Corporation through the transition of its new business strategy
and through its difficult financial position.
COMPENSATION COMMITTEE
James A. Cannavino (Chairman)
Merv Adelson
The foregoing report of the Compensation Committee shall not be deemed
incorporated by reference by any general statement incorporating by reference
the Proxy Statement into any filing under the Act, or the Securities Exchange
Act of 1934, as amended, except to the extent that the Corporation specifically
incorporated this information by reference and shall not otherwise be deemed
filed under such Acts.
14
<PAGE>
PERFORMANCE GRAPH
The Performance Graph shown below was prepared by the Corporation for use in
this Proxy Statement. Note that historic stock price performance is not
necessarily indicative of future stock performance. As required by applicable
rules of the Securities and Exchange Commission, the graph was prepared based
upon the following assumptions:
1. $100 was invested in the Common Stock, the S&P High Technology Composite
Index and the S&P 500 Composite Index on October 19, 1994 (the date of
the Corporation's initial inclusion in the NASDAQ National Market
System).
2. Dividends are reinvested on the ex-dividend dates.
[PERFORMANCE GRAPH APPEARS HERE]
15
<PAGE>
<TABLE>
<CAPTION>
October 19, December 30, December 29, December 31, December 31,
1994 1994 1995 1996 1997
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7th Level, Inc. /1/ $100 $ 52.50 $140.00 $ 37.50 $ 16.88
S&P High Technology $100 $103.46 $150.03 $207.33 $260.22
Composite Index
S&P 500 Composite $100 $100.42 $145.17 $172.33 $221.88
Index
</TABLE>
As of May 8, 1998, the closing price of the Common Stock on The Nasdaq
National Market System was $6.375 per share.
CERTAIN TRANSACTIONS
On May 6, 1998, the Corporation completed a private placement of Senior
Secured Promissory Notes ("Notes") in the aggregate principal amount of
$4,500,000 and warrants exercisable for 675,000 shares of Common Stock, at an
exercise price of $.01 per share. In connection with such private placement,
Capital purchased Notes in the aggregate principal amount of $1,500,000 and
warrants exercisable for 225,000 shares of Common Stock, at an exercise price of
$.01 per share. Merv Adelson, a director of the Corporation, is the trustee of
the sole shareholder of Capital and currently serves as its Chairman of the
Board and Chief Executive Officer.
In May 1998, the Board of Directors approved the grant of a warrant to
purchase 200 shares of Series C Preferred Stock or, upon the filing of a
Certificate of Amendment to the Certificate of Incorporation increasing the
Corporation's authorized Common Stock, 200,000 shares of Common Stock, to
Capital in connection with a consulting agreement. The exercise price of such
warrant is as follows: 50 shares of Series C Preferred Stock at $2.00 per one
one-thousandth of a share, 50 shares at $3.00 per one one-thousandth of a share,
50 shares at $4.00 per one one-thousandth of a share and 50 shares at $5.00 per
one one-thousandth of a share, or 50,000 shares of Common Stock at $2.00 per
share, 50,000 shares at $3.00 per share, 50,000 shares at $4.00 per share and
50,000 shares at $5.00 per share.
PROPOSAL TO AMEND CERTIFICATE OF INCORPORATION TO
INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
FROM 20,000,000 TO 100,000,000
On May 1, 1998, the Board of Directors of the Corporation unanimously voted
to recommend to the stockholders that the Certificate of Incorporation be
amended to increase the number of
- ---------------
/1/ Based upon stock price of $10.00 per share, the initial public offering
price per share of the Common Stock.
16
<PAGE>
authorized shares of Common Stock from 20,000,000 to 100,000,000 shares and to
increase the total number of authorized shares of capital stock from 20,100,000
to 100,100,000.
The authorized Common Stock of the Corporation currently consists of
20,000,000 shares of Common Stock of which 14,682,572 shares were outstanding at
May 8, 1998, and approximately 4,482,560 shares were reserved for issuance under
outstanding warrants, options and convertible securities. In addition, there
are 100,000 shares of preferred stock, par value $.01 per share, authorized
under the Certificate of Incorporation, of which 5,500 shares of Series A
Preferred Stock were outstanding at May 8, 1998, and approximately 4,500 shares
of Series A Preferred Stock and 3,967 shares of Series C Preferred Stock were
reserved for issuance.
On May 6, 1998, the Corporation consummated a private placement consisting
of the sale of (i) Notes in the aggregate principal amount of $4,500,000 and
warrants exercisable for 675,000 shares of Common Stock, at an exercise price of
$.01 per share, and (ii) shares of Series A Preferred Stock in the aggregate
amount of $5,500,000 and warrants exercisable for 1,375,000 shares of Common
Stock, at an exercise price of $.01 per share. Assuming receipt of requisite
stockholder approval for the proposal to amend the Certificate of Incorporation
to amend the terms of the Corporation's "blank check" preferred stock, the
shares of Series A Preferred Stock will be automatically converted into shares
of Series B Convertible Preferred Stock, par value $.01 per share ("Convertible
Preferred Stock"). In addition, the holders of the Notes have the right to
convert the Notes into (i) shares of Convertible Preferred Stock having a
liquidation preference equal to the principal amount outstanding of the Notes
and (ii) warrants to purchase 1,125,000 shares of Common Stock. The Certificate
of Designations for the Convertible Preferred Stock (the "Certificate of
Designations") is annexed as Exhibit A hereto. The Certificate of Designations
provides that on the original issue date of the Convertible Preferred Stock, the
holders of the Convertible Preferred Stock will have the right to nominate two
members of the Board.
If either proposed amendment to the Certificate of Incorporation (i.e.,
increasing the number of authorized shares of Common Stock or amending the terms
of the Corporation's "blank check" preferred stock) is not approved, the
Convertible Preferred Stock could not be issued and the Series A Preferred stock
would remain duly authorized and outstanding. As a result, the holders of the
Series A Preferred Stock would be entitled to (i) a special participation right,
whereby such holders would be paid an amount equal to .0044% per share of all
dividends and distributions payable with respect to the Common Stock, (ii) an
additional voting right to vote as a separate class on all matters submitted to
a vote of stockholders of the Corporation and (iii) a right to nominate one-
third of the Board commencing May 6, 1999 and a majority of the Board commencing
May 6, 2000. In addition, if the proposed amendment is not approved, interest
on the Notes, which accrues at a rate of 10% per annum, will accrue from May 6,
1998 instead of September 1, 1998. Failure to approve the proposed amendment
will also require the Corporation to issue to the holders of the Notes
additional warrants commencing on October 1, 1998 and on the first day of each
month thereafter until May 6, 2005, as well as additional warrants on November
6, 1998. Approval of the proposed amendment would result in the elimination of
the foregoing rights in favor of the holders of the Series A Preferred Stock.
17
<PAGE>
The holders of the Notes have agreed to vote all shares of Common Stock
beneficially owned by them or by any of their affiliates in favor of the
proposed amendment. The holders of the Series A Preferred Stock have also
agreed to vote all shares of Common Stock beneficially owned by them or by any
of their affiliates, and all shares of Series A Preferred Stock, in favor of the
proposed amendment. In addition, each director and executive officer of the
Corporation has agreed to vote all of the shares of Common Stock beneficially
owned (excluding options) by him for the approval of the proposed amendment.
The proposed amendment would have the effect of options exercisable for
Series C Preferred Stock becoming exercisable for shares of Common Stock. As
discussed under "Compensation Committee Report on Executive Compensation," the
issuance of additional options was necessary to retain and attract necessary
employees. Employees may believe that if the proposed amendment is not adopted,
options for shares of Series C Preferred Stock are not a sufficient inducement
to continue working for the Corporation.
Furthermore, the Board believes that the complexity of modern business
financing and acquisition transactions requires greater flexibility in the
Corporation's capital structure than now exists. The authorization of
additional shares of Common Stock is desirable in order to have a substantial
number of authorized shares available for issuance from time to time without
further stockholder approval in connection with possible future distributions to
stockholders (including stock splits), financings, joint ventures, strategic
alliances, acquisitions, public or private offerings, employee benefit plans and
other corporate opportunities that may present themselves in the future. Having
additional authorized shares available for issuance in the future would give the
Corporation greater flexibility and allow shares of Common Stock to be issued
without the expense and delay of stockholder action at a special meeting of
stockholders unless such action is required by applicable law or the rules of
any stock exchange on which the Common Stock may be listed. Such a delay
might deprive the Corporation of the flexibility the Board views as important in
facilitating the effective use of the Corporation's shares. Except as described
above, the Corporation has no plans, understandings, agreements or arrangements
concerning the issuance of additional shares of Common Stock not previously
authorized for issuance by the Board.
Another effect of the proposed amendment would be that the Board would have
the authority, subject to the limitations set forth above, to issue additional
shares of Common Stock that would dilute the voting power of outstanding shares,
and thereby possibly impede a proposed tender offer or other attempt by a third
party to gain control of the Corporation without Board approval. A portion of
such additional shares could, for example, be privately placed with purchasers
who might side with the Board in opposing a hostile takeover bid and thus
preserve the control of the then existing management. The mere existence of the
additional authorized shares of Common Stock could have the effect of
discouraging unsolicited takeover attempts. The issuance of new shares of
Common Stock also could be used to dilute the stock ownership of a person or
entity seeking to obtain control. Accordingly, a future transaction which some,
or even a majority, of the holders of Common Stock might deem to be in their
best interest, or in which such holders might have the opportunity to receive a
premium for their shares over the then market price, might be impeded. As
18
<PAGE>
of the date hereof, the Corporation is not aware of any proposed tender offer or
other attempt to take control of the Corporation. Holders of the Common Stock
have no preemptive rights with respect to any shares which may be issued in the
future. Under Delaware law, stockholders are not entitled to dissenter's rights
with respect to the proposed amendment to the Certificate of Incorporation.
The Board cannot predict what effect, if any, the increase in the number of
authorized shares of Common Stock will have on the market price of the Common
Stock. An increase in the number of authorized shares of Common Stock may have
a depressive effect on the market price of the Common Stock. The issuance of
additional shares of Common Stock without further approval of the stockholders
would also require the Board to make any determination to issue shares of Common
Stock based on its judgment as to the best interests of the Corporation and the
stockholders.
The additional Common Stock to be authorized by adoption of the proposed
amendment would have rights identical to the currently outstanding Common Stock
of the Corporation. Adoption of the proposed amendment and issuance of the
Common Stock would not affect the rights of the holders of currently outstanding
Common Stock of the Corporation, except for effects incidental to increasing the
number of shares of the Common Stock outstanding such as dilution of the
earnings per share and percentage share of voting rights of current holders of
Common Stock. If the proposed amendment is adopted, it will become effective
upon filing of a Certificate of Amendment of the Corporation's Certificate of
Incorporation with the Secretary of State of the State of Delaware.
If the amendment is approved, the first paragraph of Article Fourth of the
Certificate of Incorporation will be amended to read as follows:
The total number of shares of all classes of capital stock which the
corporation is authorized to issue is 100,100,000 shares, of which
100,000,000 shares shall be common stock, par value $.01 per share, and
100,000 shares shall be preferred stock, par value $.01 per share.
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock entitled to vote at the meeting is required to authorize the
proposed increase in the authorized number of shares of Common Stock. The Board
of Directors has unanimously approved the increase in the number of authorized
shares of Common Stock and recommends that stockholders vote "FOR" the proposed
increase in authorized shares of Common Stock.
PROPOSAL TO AMEND CERTIFICATE OF INCORPORATION TO AMEND THE TERMS OF THE
CORPORATION'S "BLANK CHECK" PREFERRED STOCK
On May 1, 1998, the Board of Directors of the Corporation unanimously voted
to recommend to the stockholders that the Certificate of Incorporation be
amended to amend the terms of the Corporation's "blank check" preferred stock to
provide that the Board of Directors of the Corporation may designate shares of
preferred stock with voting rights other than one vote per share.
19
<PAGE>
Under the Certificate of Incorporation, the Board of Directors of the
Corporation is authorized to issue up to 100,000 shares of "blank check"
preferred stock, par value $.01 per share. The Board of Directors of the
Corporation has the flexibility, at any time and without stockholder approval,
to determine the designation, powers, preferences, rights and limitations of
such shares of preferred stock. Under Delaware law, each share of a
corporation's capital stock has one vote, unless Corporation's certificate of
incorporation proves otherwise. The amendment of the Certificate of
Incorporation of the Corporation would authorize the Board of Directors to
designate shares of preferred stock with voting rights other than one vote per
share.
Approval by the Corporation's stockholders of the amendment to the terms of
the Corporation's "blank check" preferred stock would allow the Corporation to
issue the Convertible Preferred Stock. If the Convertible Preferred Stock is
issued, each share would be entitled to one vote for each share of Common Stock
issuable upon conversion of the Convertible Preferred Stock. In addition, the
proposed amendment would provide the Corporation with the flexibility to address
potential future financing and acquisition needs by creating a series of
preferred stock customized to meet the needs of a particular transaction.
Pursuant to this amendment, the Board of Directors may, without stockholder
approval, authorize the issuance of preferred stock with voting rights other
than one vote per share which could adversely affect the voting power of the
holders of Common Stock.
The authorization of the Board to designate shares of preferred stock with
voting rights other than one vote per share may, in conjunction with Section 203
of the Delaware General Corporation Law (prohibiting certain "business
combinations" between a Delaware Corporation whose stock is publicly-traded and
an "interested stockholder"), render more difficult or discourage a merger,
tender offer or proxy contest, the assumption of control by a holder of a large
block of the Corporation's securities and the removal of incumbent management,
even if such actions would be beneficial to the interests of existing
stockholders of the Corporation. While the proposed amendment is not designed to
prevent a change in control, the Corporation could use the preferred stock to
create voting impediments or to frustrate persons seeking to effect a merger or
otherwise gain control of the Corporation.
The authorization of the Board to designate shares of preferred stock with
voting rights other than one vote per share has no present effect on the
ownership or voting power of the Corporation's existing stockholders except as
described above or on the book value or earnings per share of the Common Stock.
The Board cannot predict what effect, if any, the authorization of the Board to
designate shares of preferred stock with voting rights other than one vote per
share will have on the market price of the Common Stock. The authorization of
the Board to designate shares of preferred stock with voting rights other than
one vote per share may have a depressive effect on the market price of the
Common Stock
If the amendment is approved, the third paragraph of Article Fourth of the
Certificate of Incorporation will be amended to read as follows:
20
<PAGE>
The board of directors is authorized, subject to limitations
prescribed by law and the provisions of this Article Fourth, to
provide by resolution or resolutions for the issuance of the shares of
preferred stock in one or more 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 included in any such series,
and to fix the voting powers, designation, preferences and rights of
the shares of any such series and the qualifications, limitations or
restrictions thereof.
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock entitled to vote at the meeting is required to authorize the
proposed amendment to the terms of the Corporation's "blank check" preferred
stock. The Board of Directors has unanimously approved the amendment to the
terms of the Corporation's "blank check" preferred stock and recommends that
stockholders vote "FOR" the proposed amendment to the terms of the Corporation's
"blank check" preferred stock.
COMPLIANCE WITH THE EXCHANGE ACT
The Corporation's executive officers and directors are required under the
Securities Exchange Act of 1934, as amended, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Copies of
those reports must also be furnished to the Corporation. Based solely on the
Corporation's review of the copies of such reports it has received, the
Corporation believes that all its executive officers and directors and greater
than ten percent beneficial owners complied with all filing requirements
applicable to them.
OTHER BUSINESS
The Board of Directors of the Corporation knows of no other matters to be
presented at the Annual Meeting. However, if any other matters properly come
before the meeting, or any adjournment thereof, it is intended that proxies in
the accompanying form will be voted in accordance with the judgment of the
persons named therein.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the next annual
meeting of the Corporation's stockholders must be received by the Corporation
for inclusion in the Corporation's 1999 Proxy Statement and form of proxy on or
prior to October 12, 1998.
ANNUAL REPORTS AND FINANCIAL STATEMENTS
The Annual Report to Stockholders of the Corporation for the year ended
December 31, 1997 (the "Annual Report") is being furnished simultaneously
herewith. Such Annual Report is not to be considered a part of this Proxy
Statement.
21
<PAGE>
Upon the written request of any stockholder, management will provide, free
of charge, a copy of the Corporation's annual report on Form 10-K for the fiscal
year ended December 31, 1997, including the financial statements and schedules
thereto. Requests should be directed to Richard S. Merrick, Chief Executive
Officer, 7th Level, Inc., 1110 East Collins Boulevard, Suite 122, Richardson,
Texas 75081.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The Corporation's financial statements for the years ended December 31,
1997, 1996 and 1995 have been examined by the firm of KPMG Peat Marwick, LLP
independent certified public accountants. Representatives of KPMG Peat Marwick,
LLP are expected to be present at the Annual Meeting of Stockholders to make a
statement if they so desire and they are expected to be available to respond to
appropriate questions.
The Corporation's Board of Directors intends to review the appointment of
independent certified public accountants at a meeting subsequent to the Annual
Meeting of Stockholders.
COST OF SOLICITATION
The cost of soliciting proxies in the accompanying form has been or will be
borne by the Corporation. The Corporation has engaged the firm of ___________
as proxy solicitors. The fee to such firm for solicitation services is
estimated to be $________ plus reimbursement of out-of-pocket expenses. In
addition, directors, officers and employees of the Corporation may solicit
proxies personally or by telephone or other means of communications. Although
there is no formal agreement to do so, arrangements may be made with brokerage
houses and other custodians, nominees and fiduciaries to send proxies and proxy
material to their principals, and the Corporation may reimburse them for any
attendant expenses.
It is important that your shares be represented at the meeting. If you are
unable to be present in person, you are respectfully requested to sign the
enclosed proxy and return it in the enclosed stamped and addressed envelope as
promptly as possible.
By Order of the Board of Directors,
DONALD SCHUPAK
Chairman of the Board
Dated: June __, 1998
22
<PAGE>
EXHIBIT A
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES B CONVERTIBLE
PREFERRED STOCK OF 7TH LEVEL, INC.
7TH LEVEL, INC., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY
CERTIFY THAT:
Pursuant to authority conferred upon the Board of Directors (the
"Board") by the Certificate of Incorporation of the Corporation (the
"Certificate of Incorporation") and pursuant to the provisions of (S)151 of the
Delaware General Corporation Law, the Board, at a meeting held on May 1, 1998,
adopted the following resolution providing for the voting powers, designations,
preferences and rights, and the qualifications, limitations and restrictions of
the Series B Convertible Preferred Stock.
WHEREAS, the Certificate of Incorporation provides for two classes of
shares known as common stock, $.01 par value per share (the "Common Stock"), and
preferred stock, $.01 par value per share (the "Preferred Stock"); and
WHEREAS, the Board is authorized by the Certificate of Incorporation
to provide for the issuance of the shares of Preferred Stock in one or more
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 any such series and to fix the voting powers, designations, preferences and
rights of the shares of any such series and the qualifications, limitations and
restrictions thereof.
NOW, THEREFORE, BE IT RESOLVED, that the Board deems it advisable to,
and hereby does, designate a Series B Convertible Preferred Stock and fixes and
determines the voting powers, designations, preferences and rights, and the
qualifications, limitations and restrictions relating to the Series B
Convertible Preferred Stock as follows:
1. Designation. The shares of such series of Preferred Stock shall be
designated "Series B Convertible Preferred Stock" (referred to herein as the
"Series B Stock").
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2. Authorized Number. The number of shares constituting the Series B
Stock shall be 15,000.
3. Ranking. The Series B Stock shall rank, as to dividends, rights upon
liquidation, dissolution or winding up, senior and prior to the Common Stock and
to all other classes or series of stock issued by the Corporation, including,
without limitation, the Series C Preferred Stock contemplated to be issued by
the Corporation, except as otherwise approved by the affirmative vote or consent
of the holders of shares of Series B Stock pursuant to Section 10(c) hereof.
(All equity securities of the Corporation to which the Series B Stock ranks
prior, whether with respect to dividends or upon liquidation, dissolution,
winding up or otherwise, including the Common Stock, are collectively referred
to herein as "Junior Securities," all equity securities of the Corporation with
which the Series B Stock ranks on a parity, whether with respect to dividends or
upon liquidation, dissolution, winding up or otherwise, are collectively
referred to herein as "Parity Securities," and all equity securities of the
Corporation to which the Series B Stock ranks junior, whether with respect to
dividends or upon liquidation, dissolution, winding up or otherwise, are
collectively referred to herein as "Senior Securities").
4. Dividends.
(a) Dividend Accrual and Payment. Dividends shall accrue on the
shares of Series B Stock on the date of the issuance of the shares of Series B
Stock (the "Original Issue Date") (or if shares of Series B Stock are issued
after the Original Issue Date, the "Subsequent Issue Date") at the rate of 8%
per share per annum (expressed as a percentage of the $1,000 per share
liquidation preference (the "Dividend Rate")); provided, however, that in the
event the Corporation fails to redeem the Series B Stock on or before the
Anniversary Redemption Date (as defined) pursuant to Section 8(a) hereof, the
dividend rate on the Series B Stock shall increase 2% per annum on each
anniversary of the Anniversary Redemption Date, until such date as the
Corporation redeems the Series B Stock. The holders of shares of Series B Stock
shall be entitled to receive such dividends when and as declared by the Board,
in cash or shares of Common Stock (or fractions thereof) computed by dividing
the amount of the dividend by the Market Price (as defined) applicable to such
dividend, out of assets legally available for such purpose, quarterly in arrears
on the 30th day of January, April, July or October of each year (each of such
dates being a "Dividend Payment Date"), commencing October 30, 1998. Such
dividends shall be paid to the holders of record at the close of business on the
date specified by the Board at the time such dividend is declared, provided,
however, that such date shall not be more than 60 nor less than 10 days prior to
the applicable Dividend Payment Date. Dividends on the Series B Stock shall be
cumulative and shall accrue on each share whether or not earned, from and after
the Dividend Payment Date coincident with or next preceding the issuance of such
share; provided, however, that dividends payable on the first Dividend Payment
Date shall so accrue from and after the date immediately succeeding the Original
Issue Date. If the Original Issue Date or the Subsequent Issue Date, as the
case may be, is on a date which does not coincide with a Dividend Payment Date,
then the dividend accrual period applicable to such shares shall be the period
from the Original Issue Date or the Subsequent Issue Date, as the case may be,
through whichever of January, April, July or October next occurs after the
Original
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Issue Date or the Subsequent Issue Date, as the case may be. If the date fixed
for payment of a final liquidating distribution on any shares of Series B Stock,
or the date on which any shares of Series B Stock are redeemed or converted into
Common Stock does not coincide with a Dividend Payment Date, then subject to the
provisions hereof relating to such payment, redemption or conversion, the final
dividend accrual period applicable to such shares shall be the period from
whichever of January, April, July or October most recently precedes the date of
such payment, conversion or redemption through the effective date of such
payment, conversion or redemption. The rate at which dividends are paid shall be
adjusted for any combinations or divisions or similar recapitalizations
affecting the shares of Series B Stock. So long as any shares of Series B Stock
are outstanding, (i) the amount of all dividends paid with respect to the shares
of Series B Stock pursuant to this Section 4(a) shall be paid pro rata to the
holders entitled thereto and (ii) holders of the shares of Series B Stock shall
be entitled to receive the dividends provided for in this Section 4(a) in
preference to and in priority over any dividends upon any Junior Securities.
(b) Dividend Limitation on Junior Securities. So long as any shares
of Series B Stock are outstanding, the Corporation shall not declare, pay or set
apart for payment, any dividend on any Junior Securities or make any payment on
account of, or set apart for payment, money for a sinking or other similar fund
for, the purchase, redemption or other retirement of, any Junior Securities or
any warrants, rights, calls or options exercisable or exchangeable for or
convertible into any Junior Securities, or make any distribution in respect
thereof, either directly or indirectly, and whether in cash, obligations or
shares of the Corporation or other property (other than in each case
distributions or dividends in Junior Securities to the holder of Junior
Securities). Notwithstanding the foregoing, the Corporation may expend up to
$1,000,000 to purchase shares of Junior Securities or options to purchase Junior
Securities from officers, directors, employees and consultants of the
Corporation upon their departure from the Corporation.
(c) Dividends on Fractional Shares. Each fractional share of Series B
Stock outstanding shall be entitled to a ratably proportionate amount of all
dividends accruing with respect to each outstanding share of Series B Stock
pursuant to Section 4(a) hereof, and all such dividends with respect to such
outstanding fractional shares shall be fully cumulative and shall accrue
(whether or not declared), and shall be payable in the same manner and at such
times as provided for in Section 4(a) hereof with respect to dividends on each
outstanding share of Series B Stock.
5. Liquidation.
(a) Liquidation Procedure. Upon any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the holders of
the shares of Series B Stock shall be entitled, before any distribution or
payment is made upon any Junior Securities, to be paid an amount equal to (i)
$1,000 per share of Series B Stock, representing the liquidation preference per
share of the Series B Stock (as adjusted for any combinations, divisions or
similar recapitalizations affecting the shares of Series B Stock) (the "Series B
Issue Price"), plus (ii) all accrued and unpaid dividends on the Series B Stock
to such date (together with the Series B Issue Price, the "Liquidation
Payments"). If upon any liquidation, dissolution or winding up of the
Corporation, whether
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voluntary or involuntary, the assets to be distributed among the holders of
Series B Stock shall be insufficient to permit payment in full to the holders of
Series B Stock of the Liquidation Payments, then the entire assets of the
Corporation shall be distributed ratably among such holders in proportion to the
full respective distributive amounts to which they are entitled.
(b) Remaining Assets. Upon any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, after the holders of
Series B Stock shall have been paid in full the Liquidation Payments, the
remaining assets of the Corporation may be distributed ratably per share in
order of preference to the holders of Junior Securities in accordance with their
terms.
(c) Notice of Liquidation. Written notice of a liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
stating a payment date, the amount of the Liquidation Payments and the place
where said Liquidation Payments shall be payable, shall be given by mail,
postage prepaid, not less than 30 days prior to the payment date stated therein,
to each holder of record of Series B Stock at his post office address as shown
by the records of the Corporation.
(d) Fractional Shares. The Liquidation Payments with respect to each
outstanding fractional share of Series B Stock shall be equal to a ratably
proportionate amount of the Liquidation Payments with respect to each
outstanding share of Series B Stock.
6. Conversion.
The holders of the Series B Stock shall have the following conversion
rights:
(a) Conversion. Subject to the limitations set forth below, the
Series B Stock shall be convertible at any time, unless previously redeemed
(subject to there being sufficient available authorized shares of Common Stock
into which to convert), at the option of the holder of record thereof, into the
number of fully paid and nonassessable shares of Common Stock equal to the
quotient of (x) the aggregate liquidation preference of the shares of Series B
Stock being converted divided by (y) the Conversion Price (as defined below)
then in effect upon surrender to the Corporation or its transfer agent of the
certificate or certificates representing the Series B Stock to be converted, as
provided below, or if the holder notifies the Corporation or its transfer agent
that such certificate or certificates have been lost, stolen or destroyed, upon
the execution and delivery of an agreement satisfactory to the Corporation to
indemnify the Corporation from any losses incurred by him in connection
therewith.
(b) Conversion Price; Converted Shares. The initial conversion price
of the Series B Stock (the "Conversion Price") shall be equal to $2.00, subject
to adjustment as provided in Section 7. If any fractional interest in a share of
Common Stock would be deliverable upon conversion of Series B Stock, the
Corporation shall pay in lieu of such fractional share an amount in cash equal
to the Conversion Price of such fractional share (computed to the nearest one
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<PAGE>
hundredth of a share) in effect at the close of business on the date of
conversion. Any shares of Series B Stock which have been converted shall be
cancelled and all dividends on converted shares shall cease to accrue and the
certificates representing shares of Series B Stock so converted shall represent
the right to receive (i) such number of shares of Common Stock into which such
shares of Series B Stock are convertible, plus (ii) cash payable for any
fractional share, plus (iii) all accrued but unpaid dividends relating to such
shares, together with interest thereon, through the date of conversion. Amounts
payable with respect to the foregoing clause (iii) shall be paid in cash or
additional shares of Common Stock valued at the Market Price thereof on the date
of such payment. Upon the conversion of shares of Series B Stock as provided in
this Section 6, the Corporation shall promptly pay all then accrued but unpaid
dividends to the holder of the Series B Stock being converted. The Board shall
at all times, so long as any shares of Series B Stock remain outstanding,
reserve a sufficient number of authorized but unissued shares of Common Stock to
be issued in satisfaction of the conversion rights and privileges aforesaid. On
the date following 270 days after the Original Issue Date, the Conversion Price
shall be adjusted to the average of the daily closing prices for the thirty (30)
consecutive business days ending on the business day before the day in question
(as adjusted for any share dividend, split-up, combination or reclassification
that took effect during such thirty (30 ) business day period), valued at the
Market Price but the Conversion Price shall not, as a result of this adjustment
be less than $1.00 per share, and not greater than $2.00 per share.
As used herein, "Market Price" means, with respect to the shares of
Common Stock, (a) if the shares are listed or admitted for trading on any
national securities exchange or included in The Nasdaq National Market or
Nasdaq SmallCap Market, the last reported sales price as reported on such
exchange or market; (b) if the shares are not listed or admitted for
trading on any national securities exchange or included in The Nasdaq
National Market or Nasdaq SmallCap Market, the average of the last reported
closing bid and asked quotation for the shares as reported on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") or
a similar service if NASDAQ is not reporting such information; (c) if the
shares are not listed or admitted for trading on any national securities
exchange or included in The Nasdaq National Market or Nasdaq SmallCap
Market or quoted by NASDAQ or a similar service, the average of the last
reported bid and asked quotation for the shares as quoted by a market maker
in the shares (or if there is more than one market maker, the bid and asked
quotation shall be obtained from two market makers and the average of the
lowest bid and highest asked quotation). In the absence of any available
public quotations for the Common Stock, the Board shall determine in good
faith the fair value of the Common Stock, which determination shall be set
forth in a certificate by the Secretary of the Corporation.
(c) Mechanics of Conversion. In the case of a conversion, before any
holder of Series B Stock shall be entitled to convert the same into shares of
Common Stock, he shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or its transfer agent for the Series
B Stock, and shall give written notice to the Corporation of the election to
convert the same and shall state therein the name or names in which the
certificate or certificates for
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<PAGE>
shares of Common Stock are to be issued. The Corporation shall, as soon as
practicable thereafter and in any case within ten (10) business days of the
Corporation's receipt of the notice of conversion, issue and deliver at such
office to such holder of Series B Stock, or to the nominee or nominees of such
holder, a certificate or certificates for the number of shares of Common Stock
to which such holder shall be entitled as aforesaid. A certificate or
certificates shall be issued for the remaining shares of Series B Stock in any
case in which fewer than all of the shares of Series B Stock represented by a
certificate are converted.
(d) Issue Taxes. The Corporation shall pay all issue taxes, if any,
incurred in respect of the issue of shares of Common Stock on conversion. If a
holder of shares surrendered for conversion specifies that the shares of Common
Stock to be issued on conversion are to be issued in a name or names other than
the name or names in which such surrendered shares stand, then the Corporation
shall not be required to pay any transfer or other taxes incurred by reason of
the issuance of such shares of Common Stock to the name of another, and if the
appropriate transfer taxes shall not have been paid to the Corporation or the
transfer agent for the Series B Stock at the time of surrender of the shares
involved, the shares of Common Stock issued upon conversion thereof may be
registered in the name or names in which the surrendered shares were registered,
despite the instructions to the contrary.
(e) Valid Issuance. All shares of Common Stock which may be issued in
connection with the conversion provisions set forth herein shall, upon issuance
by the Corporation, be validly issued, fully paid and nonassessable, free from
preemptive rights and free from all taxes, liens or charges with respect thereto
created or imposed by the Corporation.
7. Adjustment of Conversion Price. The number and kind of securities
issuable upon the conversion of the Series B Stock and the Conversion Price
shall be subject to adjustment from time to time in accordance with the
following provisions:
(a) Certain Definitions. For purposes of this Certificate:
(i) The term "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued, or deemed to be issued by the
Corporation pursuant to paragraph (e) of this Section 7, after the
Original Issue Date except:
(A) issuances of Common Stock, Convertible Securities and/or
Options granted or approved to be granted by the Board or a
committee thereof prior to the first date of issuance of the
Series A Stock;
(B) issuances of Common Stock, Convertible Securities and/or
Options to officers, employees, consultants or directors;
provided that such issuances pursuant to this clause (B) in the
aggregate do not exceed more than 10% of the shares of Common
Stock outstanding, as determined on a fully-diluted basis (the
"Management Securities"); and
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(C) issuances of Common Stock or Series B Stock resulting
from the provisions of the Securities Purchase Agreement dated as
of May 6, 1998 by and among the Corporation, Alpine Associates, a
New Jersey Limited Partnership and East West Capital Associates,
Inc. and the Securities Purchase Agreement dated as of May 6,
1998 by and among the Corporation and the Purchasers parties
thereto relating to the sale of the Series A Preferred Stock
(collectively, the "Purchase Agreements"), and in each case the
documents executed, filed or delivered in connection therewith.
(ii) The term "Common Stock" shall mean (A) the Common Stock and
(B) the stock of the Corporation of any class, or series within a
class, whether now or hereafter authorized, which has the right to
participate in the distribution of either earnings or assets of the
Corporation without limit as to the amount or percentage.
(iii) The term "Convertible Securities" shall mean any evidence
of indebtedness, shares or other securities (other than the Series B
Stock) convertible into or exercisable or exchangeable for Common
Stock.
(iv) The term "Options" shall mean any and all rights, options
or warrants (other than the Management Securities) to subscribe for,
purchase or otherwise in any manner acquire Common Stock or
Convertible Securities.
(b) Subdivision or Combination of Shares. In case outstanding shares
of Common Stock shall be subdivided, the Conversion Price shall be
proportionately reduced as of the effective date of such subdivision, or as of
the date a record is taken of the holders of Common Stock for the purpose of so
subdividing, whichever is earlier. In case outstanding shares of Common Stock
shall be combined, the Conversion Price shall be proportionately increased as of
the effective date of such combination, or as of the date a record is taken of
the holders of Common Stock for the purpose of so combining, whichever is
earlier.
(c) Stock Dividends. In case shares of Common Stock are issued as a
dividend or other distribution on the Common Stock (or such dividend is
declared), the Conversion Price shall be adjusted, as of the date a record is
taken of the holders of Common Stock for the purpose of receiving such dividend
or other distribution (or if no such record is taken, as at the earliest of the
date of such declaration, payment or other distribution), to the Conversion
Price determined by multiplying the Conversion Price in effect immediately prior
to such declaration, payment or other distribution by a fraction (i) the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to the declaration or payment of such dividend or other
distribution, and (ii) the denominator of which shall be the total number of
shares of Common Stock outstanding immediately after the declaration or payment
of such dividend or other distribution. In the event that the Corporation shall
declare or pay any dividend on the Common Stock payable in any right to acquire
Common Stock for no consideration, then the Corporation shall be deemed to have
made a
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dividend payable in Common Stock in an amount of shares equal to the maximum
number of shares issuable upon exercise of such rights to acquire Common Stock.
(d) Issuance of Additional Shares of Common Stock. If the Corporation
shall issue any Additional Shares of Common Stock (including Additional Shares
of Common Stock deemed to be issued pursuant to paragraph (e) below) after the
Original Issue Date (other than as provided in the foregoing subsections (b) and
(c)), for no consideration or for a consideration per share less than the Market
Price in effect on the date of and immediately prior to such issue, then in such
event, the Conversion Price shall be reduced, concurrently with such issue, to a
price equal to the quotient obtained by dividing:
(A) an amount equal to (x) the total number of shares of Common
Stock outstanding immediately prior to such issuance or sale
multiplied by the Market Price in effect immediately prior to such
issuance or sale, plus (y) the aggregate consideration received or
deemed to be received by the Corporation upon such issuance or sale,
by
(B) the total number of shares of Common Stock outstanding
immediately after such issuance or sale.
(e) Deemed Issue of Additional Shares of Common Stock. Except as set
forth in subsection (a) above, if the Corporation at any time or from time to
time after the Original Issue Date shall issue any Convertible Securities or
Options or shall fix a record date for the determination of holders of any class
of securities then entitled to receive any such Options or Convertible
Securities, then the maximum number of shares (as set forth in the instrument
relating thereto without regard to any provisions contained therein designed to
protect against dilution) of Common Stock issuable upon the exercise of such
Options, or, in the case of Convertible Securities and Options therefor, the
conversion or exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock issued as of the time of such issue of Options
or Convertible Securities or, in case such a record date shall have been fixed,
as of the close of business on such record date, provided that in any such case
in which Additional Shares of Common Stock are deemed to be issued:
(i) no further adjustments in the Conversion Price shall be
made upon the subsequent issue of Convertible Securities or shares of
Common Stock upon the exercise of such Options or the issue of Common
Stock upon the conversion or exchange of such Convertible Securities;
(ii) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Corporation, or increase
or decrease in the number of shares of Common Stock issuable, upon the
exercise, conversion or exchange thereof, the Conversion Price
computed upon the original issuance of such Options or Convertible
Securities (or upon the occurrence of a record date with respect
thereto),
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and any subsequent adjustments based thereon, upon any such increase
or decrease becoming effective, shall be recomputed to reflect such
increase or decrease insofar as it affects such Options or the rights
of conversion or exchange under such Convertible Securities (provided,
however, that no such adjustment of the Conversion Price shall affect
Common Stock previously issued upon conversion of the Series B Stock);
(iii) upon the expiration of any such Options or any rights of
conversion or exchange under such Convertible Securities which shall
not have been exercised, the Conversion Price computed upon the
original issue of such Options or Convertible Securities (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon such expiration, be recomputed
as if:
(A) in the case of Options or Convertible Securities, the
only Additional Shares of Common Stock issued were the shares of
Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible
Securities and the consideration received therefor was the
consideration actually received by the Corporation (x) for the
issue of all such Options, whether or not exercised, plus the
consideration actually received by the Corporation upon exercise
of the Options or (y) for the issue of all such Convertible
Securities which were actually converted or exchanged plus the
additional consideration, if any, actually received by the
Corporation upon the conversion or exchange of the Convertible
Securities; and
(B) in the case of Options for Convertible Securities, only
the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such
Options, and the consideration received by the Corporation for
the Additional Shares of Common Stock deemed to have been then
issued was the consideration actually received by the Corporation
for the issue of all such Options, whether or not exercised, plus
the consideration deemed to have been received by the Corporation
upon the issue of the Convertible Securities with respect to
which such Options were actually exercised.
(iv) No readjustment pursuant to clause (ii) or (iii) above
shall have the effect of increasing the Conversion Price to an amount
which exceeds the lower of (x) the Conversion Price on the original
adjustment date or (y) the Conversion Price that would have resulted
from any issuance of Additional Shares of Common Stock between the
original adjustment date and such readjustment date.
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(v) In the case of any Options which expire by their terms not
more than 30 days after the date of issue thereof, no adjustment of
the Conversion Price shall be made until the expiration or exercise of
all such Options, whereupon such adjustment shall be made in the same
manner provided in clause (iii) above.
(f) Determination of Consideration. For purposes of this Section 7,
the consideration received by the Corporation for the issue of any Additional
Shares of Common Stock shall be computed as follows:
(i) Cash and Property. Such consideration shall:
(A) insofar as it consists of cash, be the aggregate amount
of cash received by the Corporation; and
(B) insofar as it consists of property other than cash, be
computed at the fair value thereof at the time of the issue, as
determined in good faith by the vote of a majority of the Board
or if the Board cannot reach such agreement, by a qualified
independent public accounting firm, other than the accounting
firm then engaged as the Corporation's independent auditors.
(ii) Options and Convertible Securities. The consideration per
share received by the Corporation for Additional Shares of Common Stock
deemed to have been issued pursuant to paragraph (e) above, relating to
Options and Convertible Securities shall be determined by dividing:
(A) the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments
relating thereto, without regard to any provision contained
therein designed to protect against dilution) payable to the
Corporation upon the exercise of such Options or the conversion
or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options
for Convertible Securities and the conversion or exchange of such
Convertible Securities, by
(B) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to any
provision contained therein designed to protect against dilution)
issuable upon the exercise of such Options or conversion or
exchange of such Convertible Securities.
(g) Other Provisions Applicable to Adjustment Under this Section. The
following provisions shall be applicable to the adjustments in Conversion Price
as provided in this Section 7:
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(i) Treasury Shares. The number of shares of Common Stock at
any time outstanding shall not include any shares thereof then directly or
indirectly owned or held by or for the account of the Corporation.
(ii) Other Action Affecting Common Stock. If the Corporation
shall take any action affecting the outstanding number of shares of Common
Stock other than an action described in any of the foregoing subsections
7(b) through 7(e) hereof, inclusive, which would have an inequitable effect
on the holders of Series B Stock, then the Conversion Price shall be
adjusted in such manner and at such time as the Board on the advice of the
Corporation's independent public accountants may in good faith determine to
be equitable in the circumstances.
(iii) Minimum Adjustment. No adjustment of the Conversion Price
shall be made if the amount of any such adjustment would be an amount less
than one percent (1%) of the Conversion Price then in effect, but any such
amount shall be carried forward and an adjustment in respect thereof shall
be made at the time of and together with any subsequent adjustment which,
together with such amount and any other amount or amounts so carried
forward, shall aggregate an increase or decrease of one percent (1%) or
more.
(iv) Certain Adjustments. The Conversion Price shall not be
adjusted upward except in the event of a combination of the outstanding
shares of Common Stock into a smaller number of shares of Common Stock or
in the event of a readjustment of the Conversion Price pursuant to Section
7(e)(ii) or (iii).
(h) Notices of Adjustments. Whenever the Conversion Price is adjusted
as herein provided, an officer of the Corporation shall compute the adjusted
Conversion Price in accordance with the foregoing provisions and shall prepare a
written certificate setting forth such adjusted Conversion Price and showing in
detail the facts upon which such adjustment is based, and such written
instrument shall promptly be delivered to the recordholders of the Series B
Stock.
8. Redemption.
(a) Optional Redemption. On or after April 30, 2005 (the "Anniversary
Redemption Date"), the Corporation may elect to redeem all, in whole or in part,
outstanding shares of Series B Stock at the Redemption Price (as defined below).
The election shall be made by delivering written notice to the holders of record
of shares of Series B Stock at their respective address as shown on the records
of the Corporation, specifying the place and date of such redemption, at least
thirty (30) but not more than sixty (60) days prior to the Anniversary
Redemption Date. If such redemption is for less than all shares then
outstanding, the shares to be redeemed shall be selected by lot or pro rata.
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(b) Redemption on Change in Control. Upon a Change of Control (as
defined below), the Corporation shall submit a written offer (the "Offer") to
each holder of Series B Stock to purchase any and all of the Series B Stock
owned by such holder at a price per share equal to 200% of the Series B Issue
Price plus an amount equal to all accrued and unpaid dividends on the shares of
Series B Stock to be so redeemed to the date of redemption (the "Change of
Control Redemption Date"). If the holder of Series B Stock desires to sell a
number of his shares of Series B Stock, then such holder shall communicate in
writing his election to sell such shares (an "Acceptance") to the Corporation
within 30 days of the date the Offer was made. The Corporation shall purchase
all shares of Series B Stock as to which an Acceptance was received by the
Corporation within 30 days after the date of the Offer. If a holder of Series B
Stock does not send an Acceptance to the Corporation, then such holder shall be
deemed to have consented to the redemption by the Corporation of any Junior
Securities also being redeemed in connection with the Change of Control. Any
Offer made by the Corporation shall comply with the Securities Act of 1933, as
amended (the "Securities Act"), and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations promulgated
thereunder.
As used herein, a "Change of Control" means when any "person" (as
defined in Sections 13(d) and 14(d) of the Exchange Act) or "group" (as defined
in Section 13(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13(d)(3) of the Exchange Act), directly or indirectly, of
securities of the Corporation representing fifty percent (50%) or more of the
combined voting power of the Corporation's then outstanding securities.
In lieu of making the Offer, the Corporation may, in its discretion,
issue to each holder of Series B Stock warrants exercisable for 250,000 shares
of Common Stock for each 1,000 shares of Series B Stock, at an exercise price of
$.01 per share.
(c) Redemption on Qualified Offering and Qualified Market. Solely at
the election of the Corporation and only (i) (A) after the Corporation shall
have completed a Qualified Offering (as defined below) or (B) after the
Corporation's Common Stock shall be deemed to constitute a Qualified Market (as
defined below), and (ii) if the Corporation shall have sufficient available
funds to pay the Redemption Price in full, upon thirty (30) days written notice
by the Corporation, each share of Series B Stock shall be redeemed at the
Redemption Price, payable in cash on the Qualified Redemption Date (as defined
below). A "Qualified Offering" means the Corporation shall have consummated an
underwritten public offering of its Common Stock pursuant to an effective
registration under the Securities Act in which the Corporation receives gross
proceeds of at least $20,000,000 and the price per share of Common Stock for
such offering shall be equal to at least 200% of the then effective Conversion
Price. A "Qualified Market" means the average of the Market Prices for the
Common Stock for 20 consecutive trading days equal to an amount which is at
least 200% of the then effective Conversion Price and the aggregate market value
of the Common Stock held by non-Affiliates (as defined below) of the Corporation
is at least $35,000,000. Upon the achievement of a Qualified Offering or a
Qualified Market and the giving of the mandatory redemption notice by the
Corporation, the outstanding shares of Series B to be converted shall be
redeemed automatically thirty (30) days after such notice without any further
action by the holders
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<PAGE>
of such shares and whether or not the certificates representing such shares are
surrendered to the Corporation or its transfer agent (such date being herein
referred to as the "Qualified Redemption Date").
(d) Option to Convert in Lieu of Redemption. Notwithstanding anything
to the contrary contained herein, each holder of shares of Series B Stock that
does not want the Corporation to redeem the shares of Series B Stock called by
the Corporation for redemption shall have the right to convert all or any
portion of his shares of Series B Stock into Common Stock at the Conversion
Price prior to the Redemption Date (as defined below).
(e) Redemption Procedure. On or prior to the Anniversary Redemption
Date, the Change of Control Redemption Date or the Qualified Redemption Date
(collectively, the "Redemption Date"), as the case may be, the Corporation shall
deposit the Series B Issue Price plus an amount equal to all accrued and unpaid
dividends on all outstanding shares of Series B Stock to be so redeemed to the
Redemption Date (the "Redemption Price") with a bank or trust corporation having
aggregate capital and surplus in excess of $100,000,000 as a trust fund for the
benefit of the holders of the shares of Series B Stock, with irrevocable
instructions and authority to the bank or trust corporation to pay the
Redemption Price for such shares to their respective holders on or after the
Redemption Date upon receipt of the certificate or certificates of the shares of
Series B Stock to be redeemed. From and after the Redemption Date, unless there
shall have been a default in payment of the Redemption Price, all rights of the
holders of shares of Series B Stock as holders of Series B Stock (except the
right to receive the Redemption Price upon surrender of their certificate or
certificates) shall cease as to those shares of Series B Stock redeemed, and
such shares shall not thereafter be transferred on the books of the Corporation
or be deemed to be outstanding for any purpose whatsoever. If on the Redemption
Date the funds of the Corporation legally available for redemption of shares of
Series B Stock are insufficient to redeem the total number of shares of Series B
Stock to be redeemed on such date, then the Corporation shall use those funds
which are legally available therefor to redeem the maximum possible number of
shares of Series B Stock ratably among the holders of such shares to be redeemed
based upon their holdings of Series B Stock. Payments shall first be applied
against accrued and unpaid dividends and thereafter against the remainder of the
Redemption Price. The shares of Series B Stock not redeemed shall remain
outstanding and entitled to all the rights and preferences provided herein. At
any time thereafter when additional funds of the Corporation are legally
available for the redemption of shares of Series B Stock such funds shall
immediately be used to redeem the balance of the shares of Series B Stock to be
redeemed. No dividends or other distributions shall be declared or paid on, nor
shall the Corporation redeem, purchase or acquire any shares of, the Common
Stock or any other class or series of stock of the Corporation unless the
Redemption Price of all shares elected to be redeemed shall have been paid in
full. Until the Redemption Price for a share of Series B Stock elected to be
redeemed shall have been paid in full, such share of Series B Stock shall remain
outstanding for all purposes and entitle the holder thereof to all the rights
and privileges provided herein, including, without limitation, that dividends
and interest thereon shall continue to accrue and, if unpaid prior to the date
such shares are redeemed, shall be included as part of the Redemption Price as
provided in this Section 8(e).
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<PAGE>
"Affiliate" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization or
any other entity or organization including a government or political subdivision
or any agency or instrumentality thereof ("Person") (i) which directly or
indirectly through one or more intermediaries controls, or is controlled by, or
is under common control, with such Person, or (ii) which beneficially owns or
holds ten percent (10%) or more of the voting power of the Corporation. The
term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through ownership of voting power by contract or otherwise.
9. Notices of Record Dates and Effective Dates. In case: (a) the
Corporation shall declare a dividend (or any other distribution) on the Common
Stock payable otherwise than in shares of Common Stock; or (b) the Corporation
shall authorize the granting to the holders of Common Stock of rights to
subscribe for or purchase any shares of capital stock of any class or any other
rights; or (c) of any reorganization, share exchange or reclassification of the
capital stock of the Corporation (other than a subdivision or combination of
outstanding shares of Common Stock), or of any consolidation or merger to which
the Corporation is a party or of the sale, lease or exchange of all or
substantially all of the property of the Corporation; or (d) of the voluntary or
involuntary dissolution, liquidation or winding up of the Corporation; then the
Corporation shall cause to be mailed to the recordholders of the Series B Stock
at least 20 days prior to the applicable record date or effective date
hereinafter specified, a notice stating (i) the date on which a record is to be
taken for the purpose of such dividend, distribution or rights, or, if a record
is not to be taken, the date as of which the holders of record of Common Stock
to be entitled to such dividend, distribution or rights are to be determined or
(ii) the date on which such reclassification, reorganization, share exchange,
consolidation, merger, sale, lease, exchange, dissolution, liquidation or
winding up is expected to become effective or be consummated, and the date as of
which it is expected that holders of record of Common Stock shall be entitled to
exchange their shares of Common Stock for securities or other property
deliverable upon such reclassification, reorganization share exchange,
consolidation, liquidation, merger, sale, lease, exchange, dissolution,
liquidation or winding up.
10. Voting Rights.
(a) General. Holders of Series B Stock shall be entitled to notice of
all meetings of the Corporation's stockholders. Except as provided herein, in
addition to the rights otherwise provided for herein or by law, holders of the
Series B Stock shall be entitled to vote, together with the holders of the
Common Stock and any other class or series of stock then entitled to vote, as
one class on all matters submitted to a vote of stockholders of the Corporation,
in the same manner and with the same effect as the holders of the Common Stock.
In any such vote, and in any vote or action of the holders of the Series B Stock
voting together as a separate class, each share of issued and outstanding Series
B Stock shall entitle the holder thereof to one vote per share for each share of
Common Stock (including fractional shares) which would be obtained upon
conversion of all of the outstanding shares of the Series B Stock held by such
holder, rounded up to the nearest one-tenth of a share.
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<PAGE>
(b) Appointment of Board of Directors. On the Original Issue Date,
the holders of the Series B Stock shall have the right to nominate two (2)
members of the Board. Subject to applicable law, the Series B Stock shall vote
as a class to elect such nominees. The Corporation acting through its Board,
subject to its fiduciary duty and in accordance with its Charter Documents (as
defined in the Securities Purchase Agreement, dated as of May 6, 1998 (the
"Securities Purchase Agreement"), by and among the Corporation and the
purchasers thereto) and applicable Law (as defined in the Securities Purchase
Agreement), shall (i) (A) increase the size of its Board by two (2), (B) use its
best efforts to elect the nominees of the Series B Stock to the Board to the
newly created directorships to hold office until their respective successors are
elected at a special or annual meeting of the stockholders, and (C) in
connection with any such subsequent election of directors, nominate, recommend
and do all other acts and things to cause (including, without limitation, voting
all shares for which the Corporation's management or Board holds proxies
(including undesignated proxies) unless otherwise provided by the stockholders
submitting such proxies) the persons referenced in the preceding clause (B) to
be elected to the Board. In the event the directors elected pursuant to this
Section 10(b) shall cease to serve as directors for any reason, the Corporation
shall cause (subject to its fiduciary duty and the provisions of its Charter
Documents and applicable Law) the vacancies resulting thereby to be filled as
promptly as practicable by persons selected by the holders of Series B Stock.
Notwithstanding any provision hereof, in the event that less than 25% of the
Series B Stock issued and sold pursuant to the Securities Purchase Agreement is
outstanding, then the Corporation's obligations set forth in this Section 10(b)
shall cease and be of no further effect.
(c) Protective Provisions. In addition to any other vote or consent
of stockholders provided by law or by the Certificate of Incorporation, the
Corporation shall not, without the approval by vote or written consent of the
holders of not less than 66 2/3% of the then outstanding shares of Series B
Stock, voting as a separate class:
(i) amend, alter or repeal any of the provisions of the
Certificate of Incorporation or the Certificate of Designation
creating this Series B Stock which would alter or change the powers,
preferences or special rights of the shares of Series B Stock so as to
affect them adversely, including, but not limited to, increasing or
decreasing the par value of the Series B Stock;
(ii) authorize, increase the number of or issue any Parity
Securities or Senior Securities , including, but not limited to,
shares of Series B Stock or any other preferred stock (whether or not
junior as to dividends and liquidation preference) having earlier
mandatory redemption dates than the Series B Stock, or reclassify any
Junior Securities into Parity Securities or Senior Securities, or
reclassify any Parity Securities into Senior Securities (the
expressions "Junior Securities," "Parity Securities" and "Senior
Securities" in this clause (ii) to include securities convertible into
or exchangeable for options, warrants or other rights to acquire,
Junior Securities, Parity Securities or Senior Securities, as the case
may be);
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<PAGE>
(iii) effect a voluntary liquidation, dissolution or winding up
of the Corporation; or
(iv) establish a new line of business requiring a material
investment.
unless, in any case, at or prior to the time of taking any action
referred to in clauses (i) - (iv) above, all shares of Series B Stock
shall have been called for redemption (if such redemption would then
be permitted in accordance with the provisions hereof) and a sum
sufficient to pay the then applicable redemption price thereof and all
accrued and unpaid dividends thereon shall have been set aside for
payment.
11. Preemptive Rights.
(a) The Corporation shall not issue or sell any shares of Common Stock
or securities convertible into or exchangeable for shares of Common Stock (the
securities issued in such transactions being referred to as the "Newly Issued
Securities"), other than any such issuance or sale (i) which is made pursuant to
a public offering pursuant to a registration statement declared effective by
the Securities and Exchange Commission, (ii) pursuant to a stock option plan or
similar plan or agreement approved by the Board, (iii) in exchange, at fair
market value, for assets or equipment to be used by the Corporation in the
ordinary course of business or (iv) pursuant to any of the Purchase Agreements
or the documents executed, filed or delivered in connection therewith, unless
prior to the issuance or sale of such Newly Issued Securities each holder of
Series B Stock shall have been given the opportunity (such opportunity being
herein referred to as the "Preemptive Right") to purchase (on the same terms as
such Newly Issued Securities are proposed to be sold) the same proportion of
such Newly Issued Securities being issued or offered for sale by the Corporation
as (x) the number of shares of Common Stock (calculated solely on account of
outstanding Series B Stock on an as converted basis) held by such holder on the
day preceding the date of the Preemptive Notice (as defined) bears to (y) the
total number of shares of Common Stock (calculated on a fully diluted basis)
outstanding on that day.
(b) At least thirty (30) days prior to the issuance by the Corporation
of any Newly Issued Securities, the Corporation shall give written notice
thereof (the "Preemptive Notice") to each holder of Series B Stock. The
Preemptive Notice shall specify (i) the name and address of the bona fide
investor to whom the Corporation proposes to issue or sell Newly Issued
Securities, (ii) the total amount of capital to be raised by the Corporation
pursuant to the issuance or sale of Newly Issued Securities, (iii) the number of
such Newly Issued Securities proposed to be issued or sold, (iv) the price and
other terms of their proposed issuance or sale, (v) the number of such Newly
Issued Securities which such holder is entitled to purchase (determined as
provided in subsection (a) above), and (vi) the period during which such holder
may elect to purchase such Newly Issued Securities, which period shall extend
for at least thirty (30) days following the receipt by such holder of the
Preemptive Notice (the "Preemptive Acceptance Period"). Each holder of Series B
Stock who desires to purchase Newly Issued Securities shall notify the
Corporation within the Preemptive Acceptance Period of the number of Newly
Issued Securities he wishes to purchase, as well as the
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<PAGE>
number, if any, of additional Newly Issued Securities he would be willing to
purchase in the event that all of the Newly Issued Securities subject to the
Preemptive Right are not subscribed for by the other holders of Series B Stock.
(c) In the event a holder of Series B Stock declines to subscribe for
all or any part of his pro rata portion of any Newly Issued Securities which are
subject to the Preemptive Right (the "Declining Preemptive Purchaser") during
the Preemptive Acceptance Period, then the other holders of Series B Stock shall
have the right to subscribe for all (or any declined part) of the Declining
Preemptive Purchaser's pro rata portion of such Newly Issued Securities (to be
divided among the other holders of Series B Stock desiring to exercise such
right on a ratable basis).
(d) After the conclusion of the Preemptive Acceptance Period, any
Newly Issued Securities which none of the holders elect to purchase in
accordance with the provisions of this Section 11, may be sold by the
Corporation, within a period of four (4) months after the expiration of the
Preemptive Acceptance Period, to any other person or persons at not less than
the price and upon other terms and conditions not less favorable to the
Corporation than those set forth in the Preemptive Notice.
(e) The provisions contained in this Section 11 shall expire upon the
later of (i) three years from the Original Issue Date or (ii) (A) a Qualified
Offering or (B) a Qualified Market.
12. Right of First Offer.
(a) If a holder of Series B Stock (for purposes of this Section, the
"Selling Stockholder") desires to sell all or any part of his shares of Series B
Stock, pursuant to a bona fide, arm's length offer from a creditworthy third
party other than an Affiliate of the Selling Stockholder (the "Proposed
Transferee"), the Selling Stockholder shall submit a written offer (the "Offer")
to sell all, but not less than all, of such shares of Series B Stock (the
"Offered Shares"), to the Corporation, on terms and conditions, including price,
not less favorable to the Corporation than those on which the Selling
Stockholder proposes to sell the Offered Shares to the Proposed Transferee. The
Offer shall disclose the identity of the Proposed Transferee, the number of
Offered Shares proposed to be sold, the total number of shares of Series B Stock
owned by the Selling Stockholder, the terms and conditions, including price, of
the proposed sale, the address of the Selling Stockholder and any other material
facts relating to the proposed sale. In the event of a transfer to an
Affiliate, the Affiliate shall be bound by the terms of this Certificate of
Designations.
(b) If the Corporation desires to purchase the Offered Shares, then it
shall communicate in writing its election to purchase the Offered Shares (an
"Acceptance") to the Selling Stockholder within ten (10) business days of the
date the Offer was made.
(c) If the Corporation declines the Offer to purchase all of the
Offered Shares, then the Offered Shares may be sold by the Selling Stockholder
at any time within ninety (90) days after the date the Offer was made. Any such
sale shall be to the Proposed Transferee, at not less than
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<PAGE>
the price and upon other terms and conditions, if any, not more favorable to the
Proposed Transferee than those specified in the Offer. Any Offered Shares not
sold within such 90-day period shall continue to be subject to the requirements
of a prior offer pursuant to this Section 12.
(d) The provisions contained in this Section 12 shall expire upon the
later of (i) three years from the Original Issue Date or (ii) (A) a Qualified
Offering or (B) a Qualified Market.
13. Co-Sale Right.
(a) In the event any of the members of management of the Corporation
listed on Schedule 1 attached hereto (the "Management") intend to sell at least
100,000 shares of Common Stock and such sale exceeds 10% of any shares of Common
Stock beneficially owned by him to any Person (other than an Affiliate of such
seller) (the "Proposed Acquiror") within any twelve month period, each holder of
Series B Stock shall have the right with respect to the shares of Common Stock
(issuable upon conversion) beneficially owned by him (the "Co-Sale Right") to
require the Proposed Acquiror to purchase from him up to that number of shares
of Common Stock which is equal to the product of (x) the number of shares of
Common Stock proposed to be sold by the Management and (y) a fraction (A) the
numerator of which is the number of shares of Common Stock on an as converted
basis held by such holder and (B) the denominator of which is the sum of all
shares of Common Stock determined on a fully diluted basis. In the event such
holder does not elect to sell his proportionate number of shares of Common Stock
pursuant to the Co-Sale Right or elects to sell less than the full amount of
shares of Common Stock he would be permitted to sell in accordance with the
preceding sentence, then such Management stockholder shall be permitted to sell
to the Proposed Acquiror an amount of shares of Common Stock which is equal to
the total amount of shares of Common Stock initially offered for sale less the
number of shares of Common Stock to be sold by the holders of Series B Stock;
provided, however, that this clause (a) shall not apply to shares issued upon
exercise of Options after the date hereof.
(b) The Management stockholder shall notify the holders in writing of
each such proposed sale. Such notice shall set forth (i) the number of shares
of Common Stock proposed to be sold by such Management stockholder, (ii) the
maximum number of shares of Common Stock that each holder may include in the
sale, (iii) the name and address of the Proposed Acquiror, (iv) the proposed
amount of consideration and the terms and conditions of payment offered by the
Proposed Acquiror and, in the case of consideration in whole or in part other
than cash, the fair market value thereof as determined promptly in good faith by
the Board, which determination shall be evidenced by a Board resolution filed
with the Corporation, (v) that the Proposed Acquiror has been informed of the
Co-Sale Right provided for in this Section 13 and has agreed to purchase shares
of Common Stock in accordance with the terms hereof, and (vi) the date and
location of and mechanics for closing the transaction.
(c) The Co-Sale Right may be exercised by each holder of Series B
Stock by delivery of a written notice (the "Co-Sale Notice") to the Proposed
Acquiror within ten (10) days following his receipt of the notice specified in
clause (a) of this Section 13. The Co-Sale Notice
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<PAGE>
shall state the number of shares of Common Stock that such holder proposes to
include in the sale to the Proposed Acquiror. If no Co-Sale Notice is received
during the 10-day period referred to above, the Management stockholder shall
have the right, for a 20-day period after the expiration of the 10-day period
referred to above, to sell to the Proposed Acquiror the shares of Common Stock
proposed to be transferred on terms and conditions no more favorable to such
holder than those stated in the notice specified in clause (a) of this Section
13. Any shares of Common Stock which continue to be held by such Management
stockholder after such 20-day period shall again be subject to the provisions of
this Section 13.
(d) The provisions contained in this Section 13 shall expire at such
time as a registration statement for the Common Stock issuable upon conversion
of the Series B Stock has been declared effective by the Securities and Exchange
Commission or upon the later of (i) three years from the Closing Date or (ii)
(A) a Qualified Offering or (B) a Qualified Market.
14. Limitations on Transactions with Affiliates. The Corporation shall
not, and shall not permit, cause or suffer, any of its Subsidiaries (as defined
in the Securities Purchase Agreement) to, participate in an Affiliate
Transaction, except in good faith and on terms that are no less favorable to the
Corporation or such Subsidiary, as the case may be, than those that could have
been obtained in a comparable transaction on an arm's length basis from a person
not an Affiliate of the Corporation or such Subsidiary. "Affiliate Transaction"
means the conduct of business or any transactions or series of transactions by
the Corporation or any of its Subsidiaries with or for the benefit of any of
their respective Affiliates.
15. Limitation on Indebtedness. Neither the Corporation nor any of its
Subsidiaries shall incur, create, become or be liable, directly or indirectly,
in any manner with respect to or permit to exist any Indebtedness in excess
$5,000,000 at any one time outstanding until such date as (i) all of the Common
Stock underlying the Series B Stock has been registered with the Securities and
Exchange Commission and (ii) the Common Stock has traded at an average of at
least $4.00 for 30 consecutive trading days. "Indebtedness" means the principal
amount of indebtedness incurred for borrowed money and any guaranty of
Indebtedness of others entered into by the Corporation, other than customary
transactions in the ordinary course of business.
16. Information Rights. The Corporation shall deliver to the holders of
the Series B Stock the same information which is delivered to the holders of the
Common Stock. Upon written request, the Corporation shall deliver to the
holders of the Series B Stock the Corporation's (i) audited annual financial
statements, (ii) unaudited quarterly financial statements and (iii) annual
business plan. At any time, upon the request by the holders of at least an
aggregate of $1 million of liquidation preference of the Series B Stock the
Corporation shall provide such holders and their representatives access to the
books, records, Properties (as defined in the Securities Purchase Agreement) and
officers of the Corporation so long as such access does not violate any federal
or applicable state Law (as defined in the Securities Purchase Agreement);
provided, however, that the holders of the Series B Stock agree to maintain the
confidentiality of all non-public information received from the Corporation.
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<PAGE>
17. No Reissuance of Series B Stock. No share or shares of Series B Stock
acquired by the Corporation by reason of redemption, purchase, conversion or
otherwise shall be reissued, and all such shares of Series B Stock shall be
canceled, retired and eliminated from the shares of Series B Stock which the
Corporation shall be authorized to issue. Any such shares of Series B Stock
acquired by the Corporation shall have the status of authorized and unissued
shares of Preferred Stock issuable in undesignated Series and may be
redesignated and reissued in any series other than as Series B Stock.
18. Exclusion of Other Rights. Except as may otherwise be required by
law, shares of Series B Stock shall not have any voting powers, designations,
preferences and rights, other than those specifically set forth herein (as may
be amended from time to time) and in the Certificate of Incorporation.
19. Registered Holders. A holder of Series B Stock registered on the
Corporation's stock transfer books as the owner of shares of Series B Stock
shall be treated as the owner of such shares for all purposes. All notices and
all payments required to be mailed to a holder of shares of Series B Stock shall
be mailed to such holder's registered address on the Corporation's stock
transfer books, and all dividend and redemption payments to a holder of shares
of Series B Stock made hereunder shall be deemed to be paid in compliance hereof
on the date such payments are deposited into the mail addressed to such holder
at his registered address on the Corporation's stock transfer books.
20. Headings of Subdivisions. The headings of the various subdivisions
hereof are for convenience of reference only and shall not affect the
interpretation of any of the provisions hereof.
21. Severability of Provisions. If any right, preference or limitation of
the Series B Stock set forth herein (as may be amended) from time to time is
invalid, unlawful or incapable of being enforced by reason of any rule of law or
public policy, such right, preference or limitation (including, without
limitation, the dividend rate) shall be enforced to the maximum extent permitted
by law and all other rights, preferences and limitations set forth herein (as so
amended) which can be given effect without the invalid, unlawful or
unenforceable right, preference or limitation shall, nevertheless, remain in
full force and effect, and no right, preference or limitation herein set forth
shall be deemed dependent upon any other such right, preference or limitation
unless so expressed herein.
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<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Certificate this
6th day of May, 1998.
7TH LEVEL, INC.
By:
-------------------------------
Donald Schupak
Chairman of the Board
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SCHEDULE 1
----------
MANAGEMENT
----------
Timothy Cahill
Robert Ezrin
Curt Marvis
Richard Merrick
W. Scott Page
Donald Schupak
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PROXY 7TH LEVEL, INC. SERIES A
PREFERRED STOCK
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE CORPORATION FOR ANNUAL MEETING OF STOCKHOLDERS
JULY 9, 1998
The undersigned hereby constitutes and appoints DONALD SCHUPAK and
[RICHARD S. MERRICK], and each of them, with full power of substitution,
attorneys and proxies to represent and to vote all of the shares of Series A
Preferred Stock, par value $.01 per share, of 7TH LEVEL, INC. that the
undersigned would be entitled to vote, with all powers the undersigned would
possess if personally present, at the Annual Meeting of the Stockholders of 7TH
LEVEL, INC., to be held at __________________________________________________,
on July 9, 1998 at __ o'clock A.M., local time, and at any adjournment thereof,
on all matters coming before said meeting:
1. ELECTION OF DIRECTORS. Nominees: Donald Schupak, Robert Alan Ezrin,
Merv Adelson, James A. Cannavino and W. Scott Page (Mark only one of
the following boxes.)
[_] VOTE FOR ALL NOMINEES LISTED ABOVE, EXCEPT VOTE WITHHELD AS TO
THE FOLLOWING NOMINEES (IF ANY): __________________
[_] VOTE WITHHELD FROM ALL NOMINEES.
2. PROPOSAL TO APPROVE THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK.
[_] FOR [_] AGAINST [_] ABSTAIN
3. PROPOSAL TO APPROVE THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION
TO AMEND THE TERMS OF THE "BLANK CHECK" PREFERRED STOCK.
[_] FOR [_] AGAINST [_] ABSTAIN
4. IN THEIR DISCRETION, UPON ANY OTHER BUSINESS THAT MAY PROPERLY COME
BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.
(Continue and sign on other side)
<PAGE>
(Continued from other side)
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR THE ELECTION AS DIRECTORS OF THE NOMINEES OF THE BOARD OF
DIRECTORS, FOR THE PROPOSAL TO APPROVE THE AMENDMENT TO THE CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK AND
FOR THE PROPOSAL TO APPROVE THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO
AMEND THE TERMS OF THE "BLANK CHECK" PREFERRED STOCK.
The undersigned acknowledges receipt of the accompanying Proxy Statement
dated June 11, 1998.
Dated: ____________________, 1998
_______________________________
_______________________________
Signature of Stockholder(s)
(When signing as attorney, trustee,
executor, administrator, guardian,
corporate officer, etc., please give
full title. If more than one trustee,
all should sign. Joint owners must
each sign.)
Please date and sign exactly as name
appears above.
I plan [_] I do not plan [_]
to attend the Annual Meeting.
2
<PAGE>
PROXY 7TH LEVEL, INC. COMMON STOCK
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE CORPORATION FOR ANNUAL MEETING OF STOCKHOLDERS
JULY 9, 1998
The undersigned hereby constitutes and appoints DONALD SCHUPAK and
[RICHARD S. MERRICK], and each of them, with full power of substitution,
attorneys and proxies to represent and to vote all of the shares of Common
Stock, par value $.01 per share, of 7TH LEVEL, INC. that the undersigned would
be entitled to vote, with all powers the undersigned would possess if personally
present, at the Annual Meeting of the Stockholders of 7TH LEVEL, INC., to be
held at __________________________________________________, on July 9, 1998 at
__ o'clock A.M., local time, and at any adjournment thereof, on all matters
coming before said meeting:
1. ELECTION OF DIRECTORS. Nominees: Donald Schupak, Robert Alan Ezrin,
Merv Adelson, James A. Cannavino and W. Scott Page (Mark only one of
the following boxes.)
[ ] VOTE FOR ALL NOMINEES LISTED ABOVE, EXCEPT VOTE WITHHELD AS TO
THE FOLLOWING NOMINEES (IF ANY): __________________
[ ] VOTE WITHHELD FROM ALL NOMINEES.
2. PROPOSAL TO APPROVE THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. PROPOSAL TO APPROVE THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION
TO AMEND THE TERMS OF THE "BLANK CHECK" PREFERRED STOCK.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. IN THEIR DISCRETION, UPON ANY OTHER BUSINESS THAT MAY PROPERLY COME
BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.
(Continue and sign on other side)
<PAGE>
(Continued from other side)
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR THE ELECTION AS DIRECTORS OF THE NOMINEES OF THE BOARD OF
DIRECTORS, FOR THE PROPOSAL TO APPROVE THE AMENDMENT TO THE CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK AND
FOR THE PROPOSAL TO APPROVE THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO
AMEND THE TERMS OF THE "BLANK CHECK" PREFERRED STOCK.
The undersigned acknowledges receipt of the accompanying Proxy Statement
dated June 11, 1998.
Dated: ____________________, 1998
_________________________________
_________________________________
Signature of Stockholder(s)
(When signing as attorney, trustee,
executor, administrator, guardian,
corporate officer, etc., please give
full title. If more than one trustee,
all should sign. Joint owners must
each sign.)
Please date and sign exactly as name
appears above.
I plan [ ] I do not plan [ ]
to attend the Annual Meeting.
2
