UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 3, 2004
AVALON DIGITAL MARKETING SYSTEMS, INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 000-28406 77-0511097
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(State or Other Jurisdiction of (Commission (I.R.S. Employer
Incorporation) File Number) Identification No.)
5255 N. Edgewood Drive, Suite 250
Provo, Utah 84604
(Address of Principal Executive Offices)
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(801) 225-7073
(Registrant's telephone number, including area code)
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Not applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 425 under the Exchange Act (17 CFR
240.14.a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
Item 1.01 Entry into a Material Definitive Agreement.
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See the information set forth in "Item 1.03 Bankruptcy or Receivership"
below regarding material definitive agreements entered into by the Registrant,
which is incorporated herein by reference.
Item 1.03 Bankruptcy or Receivership.
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On September 5, 2003, Avalon Digital Marketing Systems, Inc., a
Delaware corporation (the "Company"), filed a voluntary petition under Chapter
11 of the United States Bankruptcy Code (the "Bankruptcy Code"). The United
States Bankruptcy Court for the District of Utah, Central Division (the
"Bankruptcy Court"), entered an order (the "Confirmation Order") on November 3,
2004 confirming the Company's First Amended Plan of Reorganization Pursuant to
Chapter 11 of the United States Bankruptcy Code (the "Plan"). The Plan became
effective on November 18, 2004. On January 11, 2005, the Company issued a press
release announcing the Confirmation Order and the effectiveness of the Plan.
Copies of the Plan, the Confirmation Order and the press release are attached
hereto as Exhibit 99.1, Exhibit 99.2 and Exhibit 99.3, respectively, and are
incorporated herein by reference.
Summary of Material Features of Plan
Below is a summary of the material features of the Plan. Capitalized
terms used and not otherwise defined herein shall have the meanings ascribed in
the Plan. The following summary of the Plan is qualified in its entirety by
reference to the full text of the Plan and the Confirmation Order. Capitalized
terms used herein and not otherwise defined herein shall have the meanings
ascribed to such terms in the Plan. Readers are encouraged to read the Plan in
its entirety.
Treatment of Claims and Interests under the Plan
The Plan includes a number of distinct Classes of Claims and Interests
established in accordance with the Plan and Sections 1122 and 1123(a)(1) of the
Bankruptcy Code. Below is a summary of the distributions to be made to holders
of Allowed Claims and Interests under the Plan:
Description of Claims or Interests Treatment
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Administrative Expense Claims. Unimpaired. Except as provided in
Article II Section A of the Plan, and
subject to the bar date provisions
contained therein, each holder of an
Allowed Administrative Expense Claim or
a fee payable under 28 U.S.C. ss. 1930
will receive, in full satisfaction of
its Administrative Expense Claim, cash
equal to the amount of such
Administrative Expense Claim on the
later to occur of the Effective Date
and the date on which such Claim shall
become an Allowed Claim.
Priority Tax Claims. Unimpaired. The holder of an Allowed
Priority Tax Claim shall, unless the
holder of such Claim agrees to a
different treatment, receive, in the
Company's sole discretion, either: (a)
a cash payment, on the later to occur
of the Effective Date and the date such
Claim becomes and Allowed Priority Tax
Claim; or (b) on account of such
Allowed Priority Tax Claim deferred
cash payments over a period not
exceeding six years after the date of
assessment, the total of which payments
shall be equal to the amount of such
Allowed Priority Tax Claim plus
interest at the applicable non-default
statutory interest rate with respect to
such Allowed Priority Tax Claim.
Class 1A - The Mulligan Group Impaired. On the Effective Date or as
Secured Claim. reasonably practicable thereafter, the
Mulligan Group Secured Claim shall be
reduced to the total amount of
$116,690. That amount shall bear
interest from the date the Company
filed its petition under the Bankruptcy
Code at the rate of six percent (6%)
per annum. On the Effective Date or as
reasonably practicable thereafter, the
Company shall distribute to The
Mulligan Group the amount of $95,630,
which shall reduce the Mulligan Group
Secured Claim. The remaining portion of
the Mulligan Group Secured Claim shall
be evidenced by a secured promissory
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note (the "Mulligan Group Note"), in
form and substance reasonably
acceptable to the Mulligan Group, with
provisions which (a) preserve the
Mulligan Group's existing security
interest and lien in property of the
Company, (b) provide for interest at
the rate of six percent (6%) per annum
on the unpaid balance, and (c) provide
for the payment of the remaining
balance of the Mulligan Group Secured
Claim in three (3) equal monthly
installments over the course of thee
(3) consecutive months, with the first
installment due thirty (30) days after
the Effective Date, the second
installment due sixty (60) days after
the Effective Date and the final
installment due ninety (90) days after
the Effective Date. As of the date of
this Current Report, the Company has
paid the first installments under the
Mulligan Group Note. In addition, in
consideration for reducing its claim,
the Bankruptcy Court approved the
issuance to The Mulligan Group of a
warrant to purchase 293,933 shares of
Common Stock of the Company at an
exercise price equal to 110% of the
fair market value of the Company's
Common Stock on the Effective Date.
Class 1B - The Zions Bank Secured Impaired. On the later of the Effective
Claim. Date or entry of a Final Order allowing
the Zions Bank Secured Claim, or as
soon as reasonably practicable
thereafter, the Company shall abandon
the collateral securing the Zions Bank
Secured Claim, namely the Bridgeview
Financial Residual Payment Account, to
Zions Bank in full and final payment
and satisfaction of the Zions Bank
Secured Claim, provided, however, that
if there are remaining proceeds in the
Account after Zions has used the
proceeds of the Account to satisfy its
claim in full, Zions shall remit any
remaining balance to the Company,
depending on when Zions receives full
payment. The Zions Bank Secured Claim
was fully satisfied by the Company
prior to the Effective Date.
Class 1C - Other Secured Claims. Unimpaired. On the later of the
Effective Date or entry of a Final
Order allowing a Secured Claim, or as
reasonably practicable thereafter, each
Holder of an Allowed Secured Claim
shall receive, in the Company's sole
discretion, one of the following
distributions: (a) the payment of such
Holder's Allowed Secured Claim in full
in Cash; (b) the sale or disposition
proceeds of the property securing such
Allowed Secured Claim to the extent of
the value of the Company's interest in
such property; (c) the surrender to the
Holder of any Allowed Secured Claim of
the property securing such Claim; or
(d) such other distributions as shall
be necessary to satisfy the
requirements of the Bankruptcy Code
and/or as such Holder of an Allowed
Secured Claim shall agree in
satisfaction of their Claim.
Class 2 - Other Priority Claims Unimpaired. On the later of the
(other than Priority Tax Claims). Effective Date or entry of a Final
Order allowing an Other Priority Claim,
or as soon as reasonably practicable
thereafter, each Holder of an Allowed
Priority Claim shall receive the full
amount of its Claim in cash.
Class 3 - General Unsecured Impaired. On or after the Effective
Claims. Date or as soon as practicable
thereafter as determined by the Plan
Administrator, the Plan Administrator
shall pay the Holders of General
Unsecured Claims on a pro rata basis:
(a) a specified amount of the proceeds
of the issuance and sale of the Notes
and Warrants, which amount shall not be
less than $200,000; (b) 100% of
Bankruptcy Cause of Action Recoveries,
until such time as the Holders of
General Unsecured Claims receive
payment of 50% of their General
Unsecured Claims, at which time any
additional Bankruptcy Cause of Action
Recoveries shall be divided equally
between Holders of General Unsecured
Claims and the Company; and (c) a
specified number of shares of Common
Stock of the Company. Assuming that
Holders of Equity Interests receive a
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distribution under the Plan, the shares
of Common Stock issued to holders of
General Unsecured Claims will represent
fifteen percent (15%) of the Common
Stock of the Company on a fully-diluted
basis immediately following the
issuance and sale of the Notes and the
Warrants, assuming the full conversion
of the Notes, full exercise of the
Warrants and full exercise of the
options underlying the Management
Option Plan.
Class 4 - Equity Interests. Impaired. As approved by the Bankruptcy
Court, upon the affirmative vote of the
holders of General Unsecured Claims,
voting as a separate class, on the
Effective Date, all Equity Interests in
the Company, including preferred
shares, common shares, and/or other
forms of equity security or other
interests shall be deemed extinguished,
and the certificates and other
documents representing such Equity
Interests shall be deemed extinguished
and canceled and the Common Stock of
the Company shall be issued on the
Effective Date or as soon as
practicable thereafter, such that on
the Effective Date or as soon as
practicable thereafter, holders of
Equity Interests shall hold an
aggregate of 73,483 shares of the
Common Stock of the Company (which will
represent one percent (1%) of the
Common Stock of the Company on a
fully-diluted basis immediately
following the issuance and sale of the
Notes and the Warrants, assuming the
full conversion of the Notes, full
exercise of the Warrants and full
exercise of the options underlying the
Management Option Plan).
Issuance and Sale of Notes and Warrants under the Plan
Pursuant to the terms of the Plan, the Company entered into a Note and
Warrant Purchase and Security Agreement (the "Purchase Agreement"), dated as of
May 28, 2004, by and among the Company and the Purchasers listed on Exhibits D-1
and D-2 thereto (the "Purchase Agreement"). In accordance with the Purchase
Agreement, on December 13, 2004, the Company completed the issuance and sale to
the Purchasers of Notes with an aggregate principal amount of $1,337,713 and
Warrants to purchase an aggregate of 734,828 shares of Common Stock. The payment
and performance by the Company of the Notes are secured by a first-priority lien
and continuing security interest in all of the personal property of the Company,
subject only to the security interests currently in favor of the Mulligan Group
and Zions Bank. The Notes are convertible, at the option of the holders thereof,
into shares of Common Stock at the rate of $0.26 in principal amount per share
of Common Stock. The conversion rate under the Notes is subject to adjustments
if specified events occur. The Warrants may be exercised for shares of Common
Stock at any time prior to December 13, 2011 at an exercise price of $0.0001 per
share of Common Stock. The exercise price of the Warrants is subject to
adjustments if specified events occur. As a result of the issuance and sale of
the Notes and the Warrants, a total of 5,143,795 shares of Common Stock have
been reserved for issuance by the Company upon conversion of the Notes and
734,828 shares of Common Stock have been reserved for issuance by the Company
upon exercise of the Warrants. This summary of the terms of the Notes and
Warrants is qualified in its entirety by reference to the forms of Notes and
Warrants attached as exhibits to the Purchase Agreement, a copy of which is
attached hereto as Exhibit 99.4. The terms and provisions of the Purchase
Agreement and the Notes, Warrants and other transaction documents were approved
and made effective by the Bankruptcy Court pursuant to the Confirmation Order.
Registration Rights Agreement
In connection with the closing of the issuance and sale of the Notes
and Warrants under the Purchase Agreement, the Company also entered into a
Registration Rights Agreement (the "Registration Rights Agreement"). Under the
Registration Rights Agreement, the Company is obligated to prepare and file with
the Securities and Exchange Commission a registration statement registering
under the Securities Act of 1933, as amended (the "Securities Act"), the
registrable securities of the Company held by stockholders of the Company who
are parties to the Registration Rights Agreement. In addition, from time to
time, such holders of registrable securities of the Company may require the
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Company to effect the registration under the Securities Act of such holders'
registrable securities of the Company. Subject to the conditions set forth in
the Registration Rights Agreement, such holders may also participate in
registrations of equity securities proposed and initiated by the Company. This
summary of the terms of the registration rights granted by the Company is
qualified in its entirety by reference to the Registration Rights Agreement
attached hereto as Exhibit 99.5.
Capitalization
Pursuant to the Plan and the Confirmation Order, and prior to the
closing of the issuance and sale of the Notes and Warrants under the Purchase
Agreement, the Company also adopted and filed with the Secretary of State of the
State of Delaware an Amended and Restated Certificate of Incorporation on
December 9, 2004 (the "Amended Certificate"), a copy of which is attached hereto
as Exhibit 99.6, and adopted Amended and Restated Bylaws on December 8, 2004, a
copy of which is attached hereto as Exhibit 99.7. The authorized capital stock
of the Company provided by the Amended Certificate consists of 10,000,000 of
shares of Common Stock. As of the date of this Current Report, the Company has
issued no shares of its authorized Common Stock, but has reserved for issuance
the following shares: (i) 1,102,242 shares for issuance under the Plan to the
holders of General Unsecured Claims, (ii) 73,483 shares for issuance under the
Plan to the Equity Interests, (iii) 5,143,795 shares for issuance upon
conversion of the Notes, (iv) 734,828 shares for issuance upon exercise of the
Warrants and (iv) 293,933 shares for issuance to the Mulligan Group pursuant to
warrants issued under the Plan.
Assets and Liabilities of the Company as of Confirmation Date
Information as to the assets and liabilities of the Company as of
November 30, 2004 is filed as Exhibit 99.8 hereto and incorporated herein by
reference. Such information has been extracted from the Company's operating
report filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on January 11, 2005.
Safe Harbor
Certain statements contained in this report are "forward-looking" in
that they reflect management's expectations and beliefs regarding the future
performance of the Company. Such forward-looking statements are subject to
uncertainties and factors relating to the Company's operations and business
environment, all of which are difficult to predict and many of which are beyond
the control of the Company. The Company believes that the continuing risks
associated with the consummation of the Company's emergence from protection
under Chapter 11 of the U.S. Bankruptcy Code, including the satisfaction of
conditions to that emergence, among others, could cause actual results to differ
materially from those expressed or implied by forward-looking statements made by
or on behalf of the Company.
Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal
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Year.
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See the information set forth in "Item 1.03 Bankruptcy or Receivership"
above regarding amendments to the Company's Certificate of Incorporation and
Bylaws, which is incorporated herein by reference.
Item 9.01. Financial Statements and Exhibits.
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(a) Not applicable.
(b) Not applicable.
(c) Exhibits
99.1 First Amended Plan of Reorganization Pursuant to Chapter 11
of the United States Bankruptcy Code of Avalon Digital
Marketing Systems, Inc.
99.2 Order Confirming Debtor's First Amended Plan of
Reorganization Pursuant to Chapter 11 of the United States
Bankruptcy Code of Avalon Digital Marketing Systems, Inc.
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99.3 Press Release of Avalon Digital Marketing Systems, Inc.
dated January 11, 2005.
99.4 Note and Warrant Purchase and Security Agreement dated as
of May 28, 2004 by and among Avalon Digital Marketing
Systems, Inc. and the Purchasers listed on Exhibits D-1 and
D-2 thereto.
99.5 Registration Rights Agreement dated as of December 9, 2004
by and among Avalon Digital Marketing Systems, Inc. and
Avalon Acquisition Company, LLC, Networks Direct, Inc. and
The Mulligan Group, LLC.
99.6 Amended and Restated Certificate of Incorporation of Avalon
Digital Marketing Systems, Inc.
99.7 Amended and Restated Bylaws of Avalon Digital Marketing
Systems, Inc.
99.8 Balance Sheet Information for the Month Ended November 30,
2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: January 13, 2005 Avalon Digital Marketing Systems, Inc.
By: /s/ TYLER THOMPSON
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Name: Tyler Thompson
Its: Chief Executive Officer
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Exhibit Index
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Exhibit 99.1 First Amended Plan of Reorganization Pursuant
to Chapter 11 of the United States Bankruptcy Code
of Avalon Digital Marketing Systems, Inc.
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Exhibit 99.2 Order Confirming Debtor's First Amended Plan of
Reorganization Pursuant to Chapter 11 of the United
States Bankruptcy Code of Avalon Digital Marketing
Systems, Inc.
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Exhibit 99.3 Press Release of Avalon Digital Marketing Systems,
Inc. dated January 11, 2005.
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Exhibit 99.4 Note and Warrant Purchase and Security
Agreement dated as of May 28, 2004 by and among
Avalon Digital Marketing Systems, Inc. and the
Purchasers listed on Exhibits D-1 and D-2 thereto.
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Exhibit 99.5 Registration Rights Agreement dated as of December
9, 2004 by and among Avalon Digital Marketing
Systems, Inc. and Avalon Acquisition Company, LLC,
Networks Direct, Inc. and The Mulligan Group, LLC.
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Exhibit 99.6 Amended and Restated Certificate of Incorporation of
Avalon Digital Marketing Systems, Inc.
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Exhibit 99.7 Amended and Restated Bylaws of Avalon Digital
Marketing Systems, Inc.
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Exhibit 99.8 Balance Sheet Information for the Month Ended
November 30, 2004.
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