UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 14C
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MediaBay, Inc.
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(Name of Registrant as Specified in Its Charter)
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PRELIMINARY COPY
MEDIABAY, INC.
2 RIDGEDALE AVENUE, SUITE 300
CEDAR KNOLLS , NEW JERSEY 07927
INFORMATION STATEMENT AND NOTICE OF ACTION TAKEN WITHOUT A
MEETING OF SHAREHOLDERS
**WE ARE NOT ASKING FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY**
INTRODUCTION
This Information Statement and Notice of Action Taken Without a Meeting
of Shareholders is being furnished by MediaBay, Inc. (the "COMPANY") to its
shareholders of record as of March 21, 2005 (the "RECORD Date"), to inform them
of the March 19, 2005 approval by written consent of shareholders owning a
majority, as of such date, of the Company's outstanding common stock, no par
value (the "COMMON STOCK"), Series A preferred stock, no par value (the "SERIES
A PREFERRED") and Series C preferred stock, no par value (the "SERIES C
Preferred"), the only classes of the Company's voting securities as of such
date, of the following actions to be taken by the Company (the "SHAREHOLDER
CONSENT"):
(a) the issuance pursuant to the terms of the Financing (defined below) and
the transactions contemplated thereby of a number of shares of Common
Stock upon the exercise or conversion of the Offering Securities, the
Satellite Warrant and the Merriman Warrants (each, defined below) and
the securities underlying such (collectively, the "FINANCING
SECURITIES") in accordance with their respective terms (without regard
to the contractual limitations on conversions and exercises in excess
of the Cap Amount, defined below, which have been agreed to by the
holders thereof pending the effectiveness of the Shareholder Consent
(the "PRE-EFFECTIVE LIMITATIONS")), which could exceed 19.99% of the
number of shares of Common Stock outstanding immediately prior to the
Financing (the "CAP AMOUNT"), an action for which prior shareholder
approval is required by NASD Marketplace Rules applicable to companies
whose securities are quoted on NASDAQ;
(b) the issuance of a number of shares of Common Stock upon the exercise or
conversion of the Financing Securities in accordance with their terms
(without regard to the Pre-Effective Limitations), which could, if all
of the Financing Securities were so exercised or converted and if the
unaffiliated investors in the Financing were to act in concert, result
in a change of control ("CHANGE OF CONTROL"), an action for which prior
shareholder approval is also required by applicable NASD Marketplace
Rules; and
(c) the filing of an amendment to the Company's Articles of Incorporation
increasing the number of authorized shares of Common Stock from
150,000,000 to 300,000,000 (the "AMENDMENT"), an action for which prior
shareholder approval is required under Florida law.
This Information Statement is dated _______, 2005 and is first being
sent or given to the Company's Record Date shareholders on or about ________,
2005.
VOTING RIGHTS AND OUTSTANDING SHARES
The possible issuance of shares of Common Stock in excess of the Cap
Amount, the issuance of possible Change of Control securities and the filing of
the Amendment were approved by the Shareholder Consent on March 19, 2005 by
shareholders of the Company owning a majority of the outstanding Common Stock,
Series A Preferred and Series C Preferred. The Amendment will be filed with the
Florida Secretary of State on or about _____, 2005.
As of the date of the Shareholder Consent, the only voting securities
of the Company were its Common Stock, Series A Preferred and Series C Preferred.
Holders of the Series A Preferred and Series C Preferred were entitled to vote
together with the holders of Common Stock on all actions to be voted on by the
Company's shareholders. The holders of the Company's 200 shares of Series B
Preferred Stock, no par value ("SERIES B PREFERRED"), do not have any voting
rights, except as required by law, and, accordingly, were not entitled to vote
on the matters referred to above.
As of the date of the Shareholder Consent, there were issued and
outstanding a total of 37,206,151 shares of Common Stock, 14,316 shares of
Series A Preferred, 200 shares of Series B Preferred and 43,527 shares of Series
C Preferred. With respect to each of the actions approved by the Shareholder
Consent, each share of Common Stock entitled its holder to one vote, each share
of Series A Preferred entitled its holder to approximately 57.14 votes and each
share of Series C Preferred entitled its holder to approximately 128.21 VOTES.
Accordingly, as of the date of the Shareholder Consent, the holders of the
Common Stock were entitled to an aggregate of 37,206,151 votes, the holders of
the Series A Preferred were entitled to an aggregate of 818,057 votes and the
holders of the Series C Preferred were entitled to an aggregate of 5,580,384
votes with respect to each of such matters. The Shareholder Consent was signed
by holders of 23,558,612 (or 54%) of the 43,604,592 votes that were entitled to
be cast on the matters referred to above.
As a result of requirements under applicable federal securities and
state law, the Shareholder Consent will not be effective, and therefore no
conversion or exercise of the Financing Securities above the Cap Amount can be
effected and the Amendment cannot become effective until at least 20 calendar
days after this information statement is sent or given to the Company's
shareholders of record as of the Record Date. Until such time, the investors in
the Financing have agreed not to convert or exercise their securities above
their pro rata portion of the Cap Amount and Merriman (defined below) has agreed
not to exercise the Merriman Warrants.
The following table sets forth, as of the date of the Shareholder
Consent, the beneficial ownership of shares of Common Stock of the Company by
(i) each person known by the Company to be the beneficial owner of more than
five percent (5%) of the Common Stock, (ii) each person named in the Summary
Compensation Table set forth in Item 10 of Part II of the Company's Annual
Report on Form 10-K for its fiscal year ended December 31, 2004 (a "NAMED
OFFICER"), (iii) each Director of the Company, and (iv) the Directors and
executive officers of the Company as a group. Except as otherwise indicated, to
the knowledge of the Company, each shareholder listed possesses sole voting and
investment power with respect to the shares indicated as being beneficially
owned by such shareholder.
PRINCIPAL SHAREHOLDERS TABLE
NUMBER OF SHARES OF COMMON PERCENTAGE OF
NAME AND ADDRESS (1) STOCK BENEFICIALLY OWNED CLASS
-------------------- --------------------------- -------------
Jeffrey Dittus 950,000 (2) 2.5%
Joseph Rosetti 527,500 (3) 1.4%
John Levy 437,215 (4) 1.2%
Robert Toro 216,145 (5) *
Richard Berman 147,500 (6) *
Paul Ehrlich 117,500 (6) *
Paul Neuwirth 75,000 (8) *
Stephen Yarvis 75,000 (8) *
Norton Herrick 36,446,203 (9) 62.4%
Forest Hill Capital, LLC 2,368,048 (10) 5.1%
Directors and executive officers
as a group (8 persons) 2,545,860 6.5%
----------
* Less than 1%
(1) Based on 37,206,151 shares of Common Stock outstanding. Unless otherwise
indicated the address of each beneficial owner is c/o MediaBay, Inc., 2
Ridgedale Avenue, Cedar Knolls, New Jersey 07927. For purposes of this
table, a person is deemed to be the beneficial owner of the securities if
that person has the right to acquire such securities upon the exercise of
options, warrants or other convertible securities within 60 days of the
date of the Shareholder Consent. In determining the percentage ownership of
the persons listed, we assumed in each case that the person listed
exercised and converted all of such person's options, warrants and
convertible securities that were exercisable within 60 days of the date of
the Shareholder Consent, but that none of the options, warrants and
convertible securities held by any other person were exercised or
converted.
(2) Represents shares issuable upon exercise of options. Does not include an
additional 1,300,000 shares issuable upon exercise of options.
(3) Represents 25,000 shares and 502,500 shares issuable upon exercise of
options.
(4) Represents 1,000 shares, 25,974 shares issuable upon conversion of Series B
Preferred and 410,241 shares issuable upon exercise of options. Does not
include an additional 600,000 shares issuable upon exercise of options.
(5) Represents shares issuable upon exercise of options. Does not include an
additional 120,000 shares issuable upon exercise of options.
(6) Represents shares issuable upon exercise of options. Does not include an
additional 52,500 shares issuable upon exercise of options.
(7) Represents shares issuable upon exercise of options. Does not include an
additional 37,500 shares issuable upon exercise of options.
(8) Represents shares issuable upon exercise of options.
(9) Includes 9,348,267 shares, 1,500,000 shares issuable upon exercise of
options, 4,071,043 shares issuable upon conversion of Series A Preferred
and Series C Preferred and 3,029,230 shares issuable upon exercise of
warrants, held by Mr. Herrick. Also includes 5,892,856 shares, 4,065,769
shares issuable upon conversion of Series C Preferred and 8,599,038 shares
issuable upon exercise of warrants, held by Huntingdon Corporation
("Huntingdon"). Mr. Herrick is the sole stockholder of Huntingdon and has
voting and dispositive power over the securities held by Huntingdon. (10)
Represents shares purchased by Forest Hill Capital, LLC ("FOREST HILL") for
the account of (i) Forest Hill Select Fund, L.P., of which Forest Hill is
the general partner, (ii) Lone Oak Partners, L.P., of which Forest Hill is
the general partner, (iii) Forest Hill Select Offshore Fund, Ltd., to which
Forest Hill acts as investment advisor, and (iv) a managed account to which
Forest Hill acts as investment advisor.
SUMMARY OF FINANCING TRANSACTION
THE FINANCING
On March 21, 2005, the Company issued to six accredited institutional
investors (the "PRINCIPAL Investors") through a total of nine funds (the
"INVESTORS") for an aggregate purchase price of $35.9 million, the following
securities in a private financing (the "FINANCING"):
(a) an aggregate of 35,900 shares (the "OFFERING SHARES") of its Series
D Convertible Preferred Stock (the "SERIES D PREFERRED");
(b) five-year common stock purchase warrants exercisable for an
aggregate of 32,636,364 shares of Common Stock (the "OFFERING WARRANTS"); and
(c) preferred warrants (the "OVER-ALLOTMENT WARRANTS" and, together
with the Offering Shares and the Offering Warrants, the "OFFERING SECURITIES")
exercisable for a limited time for the purchase, for additional proceeds to the
Company of $8.975 million, of (1) up to an aggregate of 8,975 additional shares
of Series D Preferred (the "ADDITIONAL SHARES" and, together with the Offering
Shares, the "PREFERRED SHARES") and (2) additional warrants, identical to the
Offering Warrants, for the exercise of up to an aggregate of 8,159,091 shares of
Common Stock (the "ADDITIONAL WARRANTS" and, together with the Offering
Warrants, the "WARRANTS").
REASONS FOR THE FINANCING
The Company is in the process of transitioning its business from
selling hard goods primarily via mail order to digital distribution via wireless
and Internet downloads. Its new distribution strategy is two pronged: (i) to
wholesale its audio content to leading music services and broadband companies on
a white label basis, both domestically and internationally; and (ii) to operate
its own downloadable content stores and subscription services.
Prior to the Financing, the Company negotiated with several sources for
the funding necessary to enable it to implement its new distribution strategy
and improve its balance sheet by eliminating the approximately $17.5 million of
aggregate indebtedness outstanding with respect to its credit facility,
convertible notes and accrued and unpaid interest and dividends. In December
2004, the Company engaged Merriman, Curhan, Ford & Co. ("MERRIMAN") as its
financial advisor to assist it with identifying sources of financing and
structuring the necessary financing terms. In February 2005, the Company began
negotiating with Satellite Asset Management ("SATELLITE"), which acted as lead
investor for the Financing (and ultimately, through two of its funds, purchased
$15 million of the Offering Securities), and subsequently agreed upon the terms
of the Financing with Satellite and opened the offering up to other
institutional investors introduced to the Company by Merriman.
As a result of the Financing, and as more fully described below under
"Use of Proceeds," the Company was able to repay its $9.4 million senior credit
facility and its $2.3 million of accrued and unpaid interest and dividends. In
addition, pursuant to the terms of the Financing and as described below under
"Interest of Certain Persons In Matters to Be Acted Upon," prior to the
Financing, $5.8 million principal amount of the Company's convertible notes were
converted into shares of Common Stock and the holders of all of the Company's
outstanding Series A Preferred and Series C Preferred, with dividend rates of 9%
and 12%, respectively (as compared to the 6% dividend rate associated with the
Series D Preferred issued in connection with the Financing), converted 10,684
shares of the Series A Preferred into shares of Common Stock and agreed to the
Company's redemption on or before June 1, 2005 of the balance of the Series A
Preferred and Series C Preferred shares at their face value and to the cessation
of dividend accruals thereon as of the date of the Financing. Moreover, after
the Company's repayment of its credit facility and the accrued interest and
dividends on its debt and preferred stock, escrow of the redemption price for
the Series A Preferred and the Series C Preferred and payment of expenses
relating to the Financing, the Company has approximately $16 million of
remaining cash, which it believes is sufficient to implement its new
distribution strategy over at least the following 12 months.
The Board of Directors of the Company, by authorizing the Financing,
believes that because of the cash received in the Financing (as well as the
additional cash, which could be substantial, that the Company will receive if
the Preferred Warrants and/or Warrants are exercised) and the improvement in its
balance sheet as a result of the increase in equity and elimination of
substantially all of its debt, the Financing was in the best interest of the
Company and its shareholders, despite the significant ownership dilution that
its shareholders could suffer if all or a substantial portion of the Offering
Securities are converted into, or exercised to purchase, Common Stock.
DESCRIPTION OF SECURITIES ISSUED IN THE FINANCING
SERIES D PREFERRED
GENERAL. The Preferred Shares have a face value of $1,000 per share
("STATED VALUE") and are non-voting. Cumulative dividends will accrue on the
Preferred Shares on an annualized basis in an amount equal to 6% of their Stated
Value until they are converted or redeemed and will be payable quarterly in
arrears, beginning April 1, 2005, in cash or, at the Company's option, subject
to its satisfaction of certain conditions, in shares of Common Stock valued at
93% of the average of the daily volume weighted average per-share price of the
Common Stock for the five trading days prior to the applicable payment date.
Subject to certain exceptions for accounts receivable and equipment and capital
lease financings, the Company may not incur additional indebtedness for borrowed
money or issue additional securities that are senior to or pari passu to the
Preferred Shares without the prior written consent of holders of at least 2/3rds
of the Preferred Shares then outstanding.
OPTIONAL CONVERSION. The Preferred Shares are convertible at any time
(subject to the Blockers, described below) at the option of the holder into
shares ("CONVERSION SHARES") of Common Stock at the rate of $0.55 per Conversion
Share, subject to certain adjustments, including in the event the Company fails
to timely file any report required to be filed under the Exchange Act and full
ratchet anti-dilution protection for issuances of Common Stock for consideration
below the conversion price.
MANDATORY OR FORCED CONVERSION. The Preferred Shares are also
mandatorily convertible at the option of the Company (subject to the Blockers,
described below) commencing 30 days following the later date to occur of the
effective date of the Financing Registration Statement (defined below) and the
effective date of the Shareholder Consent (such later date, the "EFFECTIVE
DATE"), provided that certain conditions (the "FORCED CONVERSION CONDITIONS")
are met, including the following:
(a) the Financing Registration Statement continues to be effective and
covering the required securities,
(b) the Common Stock is listed on Nasdaq National Market, Nasdaq
SmallCap Market or the New York Stock Exchange and in compliance with the
applicable listing standards and requirements,
(c) no fundamental change shall have occurred and be continuing, such
as the failure of a representation or warranty of the Company set forth in the
Financing documents to be true and correct in all material respects, the
Company's failure to comply in all material respects with its obligations under
the Financing documents, a change of control requiring a vote of the Company's
Board of Directors, or a liquidation event, such as a voluntary bankruptcy
proceeding or a bankruptcy proceeding instituted by a third party that has not
been dismissed within 90 days, and
(d) the average, over any period of 22 consecutive trading days ending
after the Effective Date, of the products obtained by multiplying the daily
trading volume of the Common Stock for each trading day during such period times
the volume weighted average price of the Common Stock on each such date exceeds
$500,000 (in the case of a forced conversion that is subject to the 4.9%
Blocker, described below) or $750,000 (in the case of any other forced
conversion) (the "LIQUIDITY CONDITION"). A lesser portion of the Preferred
Shares can still be converted if all of the Forced Conversion Conditions other
then the Liquidity Condition are met, based on a formula tied to the percentage
of the Liquidity Condition actually achieved.
In the event of a forced conversion by the Company, there could be
significant sales into the market if the ownership of Common Stock is less
attractive to the holders at the time of such conversion than the ownership of
the Preferred Shares, which could affect the market price of the Common Stock.
REDEMPTION RIGHTS. Under certain circumstances, the holders will also
have the right to require the Company to redeem their Preferred Shares at their
Stated Value, including, for instance, upon certain changes of control, a
bankruptcy event or the Company's failure to comply in all material respects
with its covenants with respect to the Financing, or at 120% of their Stated
Value in the event the Company ever effects a "going private" transaction.
WARRANTS
Each Warrant is exercisable (subject to the Blockers, described below)
to purchase one share of Common Stock (collectively, the "WARRANT SHARES"), at
an exercise price of $0.56 per share for a period of five years commencing
September 21, 2005, subject to certain adjustments, including in the event the
Company fails to timely file any report required to be filed under the Exchange
Act and full ratchet anti-dilution protection for issuances of Common Stock for
consideration below the exercise price. In addition, once exercisable, the
Warrants permit cashless exercises during any period when the Warrant Shares are
not covered by an effective resale registration statement.
The Over-Allotment Warrants are exercisable until 90 days following the
Effective Date for the purchase of Additional Shares and Additional Warrants, at
an exercise price equal to the Stated Value of the Additional Shares purchased,
with the purchase of each Additional Share including an Additional Warrant
exercisable for a number of Warrant Shares equal to 50% of the Conversion Shares
underlying such Additional Share.
BLOCKERS
LIMITATIONS ON INVESTORS' OPTIONAL CONVERSION OF PREFERRED SHARES AND
EXERCISE OF WARRANTS. An Investor can only convert its Preferred Shares or
exercise its Warrants if its beneficial ownership of Common Stock (together with
its affiliates' beneficial ownership of Common Stock) following such conversion
or exercise would not exceed 4.9% (the "4.9% BLOCKER"), provided that it may
waive the 4.9% Blocker with 61 days prior notice to the Company. Following such
waiver, it would still, however, only be able to convert its Preferred Shares or
exercise its Warrants if its beneficial ownership of Common Stock (together with
its affiliates' beneficial ownership of Common Stock) following such conversion
or exercise would not exceed 9.5% (the "9.5% BLOCKER" and, together with the
4.9% Blocker, the "BLOCKERS").
LIMITATIONS ON COMPANY'S FORCED CONVERSION OF PREFERRED SHARES. In
addition, once the Preferred Shares become convertible at the option of the
Company, as described above under "- Series D Preferred," then, until the 91st
day following the Effective Date, the Company can only force conversion of the
Preferred Shares by each holder on one occasion up to the 4.9% Blocker.
Thereafter, the Company can force conversion by each holder, on one or more
occasions, up to the 9.5% Blocker, provided the Forced Conversion Conditions are
still met.
REGISTRATION RIGHTS GRANTED TO THE INVESTORS
In connection with the Financing, the Company entered into a
registration rights agreement with the Investors whereby the Company has agreed
to register, at its expense, for resale by all such Investors other than, in
certain respects, Goldman, Sachs & Co. ("GOLDMAN"), the Conversion Shares, the
Dividend Shares, the Warrant Shares and the shares underlying the Satellite
Warrant (defined below) (collectively, the "REGISTRABLE INVESTOR SHARES")
beneficially held by such Investors. Pursuant to that agreement, the Company has
undertaken to file with the SEC a registration statement for such purposes (the
"FINANCING REGISTRATION STATEMENT") by May 1, 2005 and to use its best efforts
to have the Financing Registration Statement declared effective by June 19,
2005, subject to a 30-day extension under certain circumstances. If the
Financing Registration Statement is not filed or effective by the applicable
dates, the Company will be required to pay cash penalties equal to up to
approximately $493,500 (or approximately $661,875 if all of such Investors'
Over-Allotment Warrants are exercised) for each 30-day period during which
either such default exists.
The Company entered into another registration rights agreement with
Goldman pursuant to which the Company granted Goldman a demand registration
right with respect to its Registrable Investor Shares, exercisable commencing
180 days after the Closing (the "DEMAND RIGHT") and agreed that upon Goldman's
exercise of its Demand Right (a "DEMAND"), the Company would use its best
efforts (i) to file a registration statement with the SEC for the resale of such
shares (the "GOLDMAN REGISTRATION STATEMENT") on or prior to the later of the
45th day after a Demand and the 15th day after the effective date of the
Financing Registration Statement (such later date, the "FILING DEADLINE") and
(ii) to have the Goldman Registration Statement declared effective within 90
days after the Filing Deadline, subject to a 30-day extension under certain
circumstances. In the event the Goldman Registration Statement is not filed or
effective by the applicable dates, the Company will be required to pay Goldman
cash penalties equal to up to approximately $45,000 (or approximately $56,250 if
all of Goldman's Over-Allotment Warrants are exercised) for each 30-day period
during which either such default exists.
FEES
Merriman acted as a financial advisor to the Company with respect to
the Financing for which it received compensation from the Company of $2,625,000
plus a five-year warrant (the "MERRIMAN WARRANT") to purchase 7,159,091 shares
of Common Stock at an exercise price of $0.56 per share commencing upon the
effectiveness of the Shareholder Consent. Merriman also received a structuring
fee from the Company with respect to the Financing in the amount of $175,000. At
such time as any Over-Allotment Warrants are exercised, the Company has also
agreed to pay to Merriman a fee equal to 7.5% of the proceeds from such exercise
and issue to Merriman a warrant, identical to the Merriman Warrant (the
"OVER-ALLOTMENT MERRIMAN WARRANT" and together with the Merriman Warrant, the
"MERRIMAN WARRANTS"), exercisable for a number of shares of Common Stock equal
to 7.5% of the Conversion Shares underlying the Additional Shares issued upon
such exercise and 7.5% of the Warrant Shares underlying the Additional Warrants
issued upon such exercise. The Company has also agreed to include the shares
underlying the Merriman Warrants for resale in the Financing Registration
Statement.
In addition, the Company issued to Satellite Strategic Finance
Associates, LLC, an Investor in the Financing and an affiliate of Satellite, a
warrant (the "SATELLITE WARRANT") to purchase 250,000 shares of Common Stock
(identical to the Warrants), and reimbursed it $55,000 for its legal expenses,
for consulting services rendered by it in connection with the Financing.
USE OF PROCEEDS
The Company received $35 million of gross proceeds in the Financing,
not including the securities exchanged by certain affiliates of Forest Hill for
$900,000 of the purchase price, described below in "Interest of Certain Persons
in Matters to be Acted Upon." The net proceeds to the Company from the sale of
the Offering Securities, after deducting consulting and financial advisory fees,
counsel fees and certain other expenses, were approximately $32 million.
The Company used (and intends to use) the proceeds of the Financing to:
o repay principal and accrued interest and legal fees of
approximately $9,440,000 on senior notes previously issued by the
Company to its lender Zohar CDO 2003-1 under its senior credit
facility;
o redeem from Norton Herrick ("HERRICK"), a principal shareholder
of the Company, and his affiliate, Huntingdon, the balance of the
Series A Preferred shares remaining after the partial conversion
thereof pursuant to the terms of the Financing and all of the
Series C Preferred Shares (collectively the "REDEMPTION SHARES")
for an amount equal to the aggregate stated capital of such
shares, or $1,431,600 and $4,352,697, respectively, on the
earlier of the effective date of the Shareholder Consent and June
1, 2005;
o pay to Herrick and/or Huntingdon on the closing of the Financing
the following sums: (a) approximately $620,000, which represented
all accrued and unpaid dividends due with respect to (i) the
Series A Preferred shares that converted on March 19, 2005,
through their conversion date, and (ii) the Redemption Shares
through the closing of the Financing, following which no further
dividends will accrue thereon; (b) approximately $1,635,000,
which represented the accrued and unpaid interest that was due on
the Herrick Notes (defined below) at the time of their conversion
on March 19, 2005; and (c) approximately $12,000, which
represented the accrued but still unpaid interest due with
respect to certain notes that were previously issued to
Huntingdon and canceled;
o pay to Merriman a fee equal to $2,625,000, or 7.5% of the total
cash proceeds received by the Company in connection with the
Financing, plus a $175,000 structuring fee, for services rendered
by Merriman in connection with the Financing;
o pay the Company's legal fees and other expenses related to the
Financing and the Huntingdon and Herrick transactions; including
$55,000 in reimbursement of expenses incurred by Strategic in
connection with the Financing; and
o make monthly payments of approximately $7,000 through April 2007
and monthly payments of approximately $19,389 thereafter and
through April 2010, under a debt obligation.
The Company will use the remaining funds for general working capital purposes.
REASONS SHAREHOLDER APPROVAL IS REQUIRED
POSSIBLE ISSUANCES IN EXCESS OF CAP AMOUNT
Because the Company's Common Stock is listed on the NASDAQ SmallCap
Market, the Company is subject to NASD Marketplace Rules. NASD Marketplace Rule
4350(i)(1)(D)(ii) requires that a company whose securities are traded on NASDAQ
obtain shareholder approval in connection with a transaction (other than a
public offering) involving the potential issuance of shares of common stock
(including shares of common stock issuable upon the conversion or exercise of
other securities) equal to 20% or more of its aggregate shares of common stock,
or its aggregate voting power, outstanding before the transaction for less than
the greater of book or market value of its common stock as of the date of the
transaction.
Pending the effectiveness of the Shareholder Consent, the Investors are
subject to the Pre-Effective Limitations, which prohibit each Investor from
exercising or converting its Financing Securities to the extent such conversions
and exercises would, in the aggregate, result in the issuance to such Investor
of shares of Common Stock in excess of its pro rata portion of the Cap Amount.
However, upon the effectiveness of this Information Statement and the resultant
removal of the Pre-Effective Limitations (and despite the Blockers, which
prohibit any Investor from converting or exercising its Financing Securities to
the extent such exercises and conversions would result in its or its affiliates
beneficial ownership of more than, depending on the circumstances, 4.9% or 9.5%
of the Common Stock), the Company will be obligated to issue shares of Common
Stock upon the exercise and conversion of the Financing Securities in excess of
the Cap Amount. Therefore, this NASD Marketplace Rule applies to issuances of
Common Stock by the Company in excess of the CAP Amount as a result of the
Financing.
As a result of the removal of the Pre-Effective Limitations, the
Company could be required to issue (over time, as the Investors sell Common
Stock and are thereby able to convert additional shares of Series D Preferred or
exercise additional Warrants, up to the Blocker in effect on any given date) an
aggregate of approximately 131,600,000 shares of Common Stock. If all of such
shares were issued, they would represent approximately 78% of the Company's
Common Stock on an actual basis (assuming no other outstanding options or
warrants are exercised) and approximately 66% of the outstanding Common Stock on
a fully diluted basis, thereby significantly diluting the equity ownership of
the Company's existing securityholders.
ISSUANCES OF POSSIBLE CHANGE OF CONTROL SECURITIES
NASD Marketplace Rule 4350(i)(1)(B) requires a company whose securities
are traded on NASDAQ to obtain shareholder approval when the issuance of the
securities in a transaction could result in a change of control of the Company.
By virtue of the Pre-Effective Limitations, until the effective date of
this Information Statement, the Investors cannot, in the aggregate, beneficially
own more than the Cap Amount, or 19.9% of the outstanding Common Stock, so prior
to such date, they would not be able to cause a change of control of the
Company. In addition, to the Company's knowledge, none of the six Principal
Investors in the Financing are affiliated with each other (and therefore the
Company believes they would not be deemed a group for purposes of Section 13G of
the Exchange Act), and no one Investor, together with its affiliates, can by
virtue of the 9.5% Blocker described above ever convert or exercise its
Financing Securities to the extent such exercise or conversion would result in
its (or its affiliates) beneficial ownership of more than 9.5% of the Common
Stock. As a result, no Principal Investor, together with its affiliates, can
ever effect a change of control by itself even following the effective date of
this Information Statement and the resultant removal of the Pre-Effective
Limitations. Nonetheless, following the effective date of this Information
Statement and the resultant removal of the Pre-Effective Limitations, if all of
the Investors were to exercise or convert their Financing Securities up to the
9.5% Blocker (assuming they make no sales prior thereto) they would beneficially
own approximately 30,000,000 shares, or approximately 46%, of the Company's
currently outstanding Common Stock (after giving effect to the conversions or
exercises) and, if they determined to act in concert and vote their shares in a
like manner, they would likely effectively control any matter voted on by the
Company's shareholders, resulting in a "change of control" as contemplated by
Marketplace Rule 4350(i)(1)(B).
To the extent that a NASDAQ listed company does not obtain shareholder
approval prior to effecting the actions governed by NASD Marketplace Rule 4350
(in our case, issues securities that are convertible or exercisable into shares
of common stock in excess of the Cap Amount) and otherwise proceeds with such
actions, that company may be subject to the delisting of its securities from
NASDAQ.
AMENDMENT TO THE ARTICLES OF INCORPORATION
An amendment to the Company's Articles of Incorporation, such as the
Amendment, which increases the authorized shares of Common Stock is required by
Florida law.
An increase in the authorized shares of Common Stock is needed because,
without the Pre-Effective Limitations, the Company does not have sufficient
shares of Common Stock authorized to issue all of the shares of Common Stock
issuable upon exercise and conversion of the Financing Securities and the other
outstanding securities of the Company that are convertible or exercisable into
Common Stock.
The Company currently has 150,000,000 authorized shares of Common
Stock. Immediately prior to the Financing, the Company had approximately
37,200,000 shares of Common Stock outstanding and approximately 71,500,000
shares outstanding on a fully diluted basis. Immediately following the closing
of the Financing, the Company had approximately 35,400,000 shares of Common
Stock outstanding (after the return of 1,800,000 shares by the Forest Hill
Entities in exchange for $900,000 of the Offering Securities in connection with
the Financing, described below), and it still had sufficient authorized and
unissued shares of Common Stock available to satisfy all of its current
contractual obligations, including those reserved for issuance upon the
conversion and exercise of the Financing Securities up to the Cap Amount
(7,436,280 shares), upon the exercise of its other outstanding options, warrants
and convertible securities (approximately 24,000,000 shares) and for future
grant under its stock option plans (approximately 10,300,000 shares). However,
if all of the Financing Securities and other outstanding securities of the
Company that were convertible or exercisable into Common Stock upon the
consummation of the Financing are converted or exercised, without regard to the
Pre-Effective Limitations or the Blockers, there would be approximately
200,000,000 shares of Common Stock outstanding, or approximately 50,000,000
shares in excess of its currently authorized shares.
In addition to requiring additional authorized shares to satisfy the
Company's contractual obligations to issue shares of its Common Stock, the
Amendment will avoid the possible need to call and hold a special meeting for
that purpose at a later date on an accelerated timetable should the Company
decide in the future to issue additional equity securities. Once authorized, the
Board of Directors is empowered to authorize the issuance of additional
authorized shares of Common Stock at such time or times, to such persons and for
such consideration as the Board deems appropriate, without further shareholder
action. Although such additional shares could be used to dilute the share
ownership of persons seeking to obtain control of the Company, the Amendment was
not adopted for that purpose.
EXCEPT WITH RESPECT TO THE FINANCING, THE COMPANY HAS NO CURRENT PLANS
TO ISSUE THE ADDITIONAL SHARES OF COMMON STOCK THAT ARE THE SUBJECT OF THE
AMENDMENT OTHER THAN WITH RESPECT TO ANY OBLIGATION IT HAS UNDER EXISTING
OPTIONS AND WARRANTS AND OTHER CONVERTIBLE SECURITIES THAT ARE OUTSTANDING OR
AVAILABLE FOR FUTURE GRANT PURSUANT TO THE COMPANY'S STOCK OPTION OR STOCK
INCENTIVE PLANS.
Prior to the Financing, none of the Company's securityholders had any
pre-emptive rights; however, the Investors were granted the right to participate
in subsequent placements of securities by the Company and purchase up to 40% of
the securities offered therein, for as long as any Preferred Shares or Warrants
are outstanding.
REASONS COMPANY USED SHAREHOLDER CONSENT AS OPPOSED TO SOLICITATION OF
SHAREHOLDER APPROVAL VIA PROXY STATEMENT AND SPECIAL MEETING
Because of the number of shares of Common Stock potentially issuable as
a result of the Financing, the approval of the Company's shareholders with
respect to the potential issuance of securities in excess of the Cap Amount, the
issuance of possible Change of Control securities under Nasdaq rules, and the
Amendment is required before the Company can issue securities that are
convertible or exercisable for shares of Common Stock in excess of the Cap
Amount. As a result, originally the Investors were not willing to fund the
Financing until such shareholder approval was actually obtained and effective.
Shareholder approval could have been obtained by the Company in one of
two ways: (1) by the dissemination of a proxy statement and subsequent majority
vote in favor of the actions at a shareholders meeting called for such purpose,
or (2) by a written consent of the holders of a majority of the Company's voting
securities. However, the later method, while it represents the requisite
shareholder approval, is not deemed effective until 20 days after this
Information Statement has been sent to all of the Company's shareholders giving
them notice of and informing them of the actions approved by such consent.
The Company determined that it would have been detrimental to its
ability to complete the Financing to solicit shareholder approval through the
use of a proxy statement because of the significant delay which would have
occurred. Such a delay would have correspondingly delayed its receipt of the
proceeds from the Financing and its repayment of its debt and may have required
it to pay an additional $600,000 to its senior lenders to extend the senior
credit facility pursuant to its then existing terms. In addition, the Company
would have been subject to the risk of market price fluctuations of its Common
Stock during the waiting period, which may have jeopardized its ability to
complete the Financing on its terms or at all.
As a result, through negotiation, the Company and the Investors agreed
that the Financing could close and the funds could be released to the Company
prior to the effectiveness of shareholder approval, provided that (a) the
Company obtained the Shareholder Consent prior to the closing of the Financing
and (b) the Investors agreed in the Financing documents that they could not
exercise or convert their Financing Securities such that they beneficially owned
shares of Common Stock in excess of their respective pro rata portions of the
Cap Amount until the Shareholder Consent was effective.
INTEREST OF CERTAIN PERSONS
IN MATTERS TO BE ACTED UPON
FOREST HILL ENTITIES
As part of the Financing, certain affiliates of Forest Hill, a
principal shareholder of the Company (collectively, the "FOREST HILL ENTITIES"),
exchanged 1.8 million shares of Common Stock and 400,000 common stock warrants
previously purchased by them from the Company in October 2004 for $900,000 of
the Offering Securities. The Company has agreed to include an additional 119,048
shares of Common Stock, as well as 50,000 shares of Common Stock underlying
certain additional warrants, retained by Forest Hill Capital, for resale in the
Financing Registration Statement.
DIRECTORS AND OFFICERS
As a condition to the closing of the Financing, Joseph Rosetti, the
Company's Chairman, and Jeffrey A. Dittus, the Company's Chief Executive
Officer, entered into an agreement with the Company wherein they agreed not to
sell any of their shares of Common Stock prior to the later date to occur of the
effective date of the financing Registration Statement and the effective date of
the Shareholder Consent. In addition, each of Stephen Yarvis, Paul Ehrlich, Paul
Neuwirth and Richard Berman, the Company's independent directors, and the
Company, have entered into letter agreements pursuant to which each such
independent director has agreed to voluntarily resign from the Company's Board
of Directors immediately upon request of the Chairman of the Board. In
consideration of such letter agreements, and as a condition to any such
requested resignation, the Company has agreed to take all actions and to execute
all documents necessary to cause any unvested options held by each such board
member to become immediately vested in the event of and upon such member's
requested resignation.
HERRICK ENTITIES
In connection with the Financing, the Company also entered into an
agreement (the "HERRICK AGREEMENT") with Herrick, a principal shareholder of the
Company, and Huntington, one of his affiliates and also a principal shareholder
of the Company (collectively, the "HERRICK ENTITIES"), pursuant to which,
concurrently with the Financing:
(a) all $5.784 million principal amount of the convertible notes of the
Company owned by the Herrick Entities (the "HERRICK NOTES`") and 10,684
of their shares of Series A Preferred were converted into an aggregate
of approximately 12.2 million shares of Common Stock (the "HERRICK
SHARES"), at their stated conversion rate of $0.56 per share;
(b) the Company agreed to redeem the Redemption Shares (the remaining
14,316 shares of Series A Preferred held by the Herrick Entities and
all 43,527 of their shares of Series C Preferred) for $5.8 million, the
aggregate stated capital of such shares, on the earlier of the
effective date of the Shareholder Consent and June 1, 2005, and both
the Redemption Shares and the redemption price were placed into escrow
pending such date and the Herrick Entities agreed to the cessation of
dividend accruals on the Redemption Shares as of the closing of the
Financing;
(c) the Company paid to the Herrick Entities all accrued and unpaid
interest and dividends on the Herrick Notes and the Herrick Shares
through their March 19, 2005 conversion date, all accrued and unpaid
dividends on the Redemption Shares through the closing of the
Financing, and all accrued and unpaid interest still outstanding with
respect to certain notes previously issued to Huntingdon and canceled;
(d) the Herrick Entities waived certain of their registration rights and
the Company agreed to include the Herrick Shares for resale in the
Financing Registration Statement, so long as they were owned by the
Herrick Entities and not otherwise transferred, including, but not
limited to, in the Herrick Financing (as defined below); and
(e) the Herrick Entities consented to the terms of the Financing and the
agreements entered into in connection with the Financing, as the
Company was required to obtain such consents pursuant to the terms of
the Herrick Notes, the Series A Preferred and the Series C Preferred.
Herrick and Huntingdon also entered into a voting agreement and proxy
with the Company pursuant to which they agreed not to take any action to
contradict or negate the Shareholder Consent and gave the Company a proxy to
vote their shares, at the direction of the Company's Board of Directors, until
the later date to occur of the effective date of the financing Registration
Statement and the effective date of the Shareholder Consent.
In addition, concurrently with the Financing, the Herrick Entities sold
9,090,909 shares of Common Stock and 4,545,455 common stock purchase warrants to
several purchasers in a private sale for $5 million (the "HERRICK SALE"). As
part of the Herrick Agreement, the Company agreed to register such securities
for resale by the purchasers thereof, as well as certain other warrants held by
the Herrick Entities, in a registration statement to be filed with the SEC
within 30 days following the effective date of the Financing Registration
Statement.
WHERE YOU CAN FIND MORE INFORMATION
The Company files annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information the Company
files at the Securities and Exchange Commission's public reference room in
Washington, D.C. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the public reference rooms. The
Company's filings with the Securities and Exchange Commission are also available
to the public from commercial document retrieval services and at the web site
maintained by the Securities and Exchange Commission at "http://www.sec.gov."
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS INFORMATION STATEMENT. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS
INFORMATION STATEMENT. THIS INFORMATION STATEMENT IS DATED ________, 2005. YOU
SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS INFORMATION STATEMENT
IS ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE, AND THE MAILING OF THIS
INFORMATION STATEMENT TO SHAREHOLDERS SHALL NOT CREATE ANY IMPLICATION TO THE
CONTRARY.
Dated: _____, 2005
By Order of the Board of Directors,
Joseph Rosetti
Chairman