SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [x]
Filed by a party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] 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 ss.240.14a-11(c) or ss.240.14a-12
RAMP CORPORATION
----------------
(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)(1) 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:
[RAMP CORPORATION LOGO]
February __, 2005
Dear Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders
(the "Special Meeting") of Ramp Corporation, a Delaware corporation (the
"Company") to be held on ___________, March __, 2005 at 10:00 a.m. local time at
the principal offices of Ramp Corporation, 33 Maiden Lane, 5th Floor, New York,
New York 10038.
I am pleased to report that, after several months of effort, your
management and directors have successfully completed a private placement of
convertible debentures and warrants of the Company. The Company has received
gross proceeds of $2.0 million, before transaction fees and expenses, upon the
first closing of the private placement occurring in January 2005 and will
receive the remaining $2.0 million upon receipt of stockholder approval to issue
the shares of our common stock upon conversion of convertible debentures and
warrants to be sold upon the second closing. The second closing is also subject
to other conditions precedent, including prior registration of the shares of
common stock with the Securities and Exchange Commission. In addition, and
equally vital to the Company's future operations, the Company has successfully
obtained binding commitments for an equity line financing of our common stock
with a maximum commitment amount of up to $25 million, before transaction fees
and expenses. Any drawdown upon the equity line by the Company upon such
financing is contingent upon our receipt of stockholder approval to issue shares
of our common stock and is also subject to other conditions precedent, including
prior registration of the shares of common stock with the Securities and
Exchange Commission.
At the Special Meeting, you will be asked to consider and vote upon the
following proposals: (i) to ratify the sale and issuance of shares of our common
stock in connection with our March 2004 private placement of common stock and
July 2004 private placement of convertible notes and warrants, (ii) to approve
the sale and issuance of shares of our common stock in connection with our
December 2004 private placement of convertible notes, (iii) to approve the sale
and issuance of our common stock and warrants in connection with our January
2005 private placement of 8% convertible redeemable notes, common stock purchase
warrants and additional investment rights, (iv) to approve the sale and issuance
of our common stock in connection with our equity line financing of up to $25
million, (v) to approve an amendment to our 2005 Stock Incentive Plan to
replenish the number of shares of our common stock issuable thereunder, and (vi)
to ratify the appointment of BDO Seidman LLP as our independent registered
public accountants for the fiscal year ending December 31, 2004.
The formal Notice of Special Meeting of Stockholders and Proxy Statement
accompanying this letter more fully describes the business to be acted upon.
After careful consideration, the Company's Board of Directors has unanimously
approved each of the proposals and recommends that you vote FOR each proposal.
Please submit your Proxy over the Internet, by telephone, or sign, date and
return your Proxy card as promptly as possible in the enclosed envelope for your
convenience whether or not you plan to attend the meeting. If you attend the
meeting, you may still vote in person if you so desire.
Sincerely,
Andrew Brown
Chairman of the Board
President and Chief Executive
Officer
YOUR VOTE IS CRITICAL, NO MATTER HOW MANY OR HOW FEW SHARES YOU OWN.
SO THAT YOUR COMMON STOCK WILL BE REPRESENTED AT THE SPECIAL MEETING IN
THE EVENT YOU ARE NOT PERSONALLY PRESENT, PLEASE SUBMIT YOUR PROXY OVER THE
INTERNET, BY TELEPHONE, OR DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED PROXY IN
THE ENVELOPE PROVIDED. EXECUTION OF THE PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE
IN PERSON IF YOU ARE PRESENT AT THE MEETING.
RAMP CORPORATION
33 Maiden Lane, 5th Floor
New York, New York 10038
---------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held _________, March __, 2005
---------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"Special Meeting") of RAMP CORPORATION, a Delaware corporation (the "Company"),
will be held at the offices of the Company located at 33 Maiden Lane, 5th Floor,
New York, New York 10038, on ________, March __, 2005, at 10:00 A.M., to
consider and act upon the following:
1. to ratify the sale and issuance of shares of common stock in connection
with the March, 2004 private placement of common stock and July, 2004
private placement of convertible notes and warrants;
2. to approve the sale and issuance of shares of common stock in
connection with the December, 2004 private placement of convertible
promissory notes in the aggregate principal amount of $452,000;
3. to approve the sale and issuance of shares of common stock in
connection with the January, 2004 private placement of 8% convertible
redeemable debentures, common stock purchase warrants and additional
investment rights in the aggregate principal amount of up to
$4,000,000;
4. to approve the sale and issuance of shares of common stock in
connection with the January, 2004 equity line financing of common stock
of up to $25,000,000;
5. to approve an amendment to the Company's 2005 Stock Incentive Plan to
replenish the number of shares of Common Stock issuable thereunder; and
6. to ratify the appointment of BDO Seidman, LLP as independent registered
public accountants of the Company for the fiscal year ending December
31, 2004.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. Our board of directors recommends that you
vote "FOR" each of the proposals described in this Proxy Statement.
A Proxy Statement and form of Proxy are enclosed herewith. Only holders
of record of Common Stock at the close of business on February 11, 2005 are
entitled to receive notice of, and to attend, the Special Meeting and any
adjournments thereof. At least 10 days prior to the Special Meeting, a complete
list of the stockholders entitled to vote will be available for inspection by
any stockholder, for any purpose germane to the Special Meeting, during ordinary
business hours, at the offices of the Company. If you do not expect to be
present at the Special Meeting, you are requested to fill in, date and sign the
enclosed Proxy, which is solicited by the Board of Directors of the Company, and
to mail it promptly in the enclosed envelope. If you received a proxy card with
a web site address and voting codes, you may choose to vote on the Internet at
the web site indicated or telephonically. If you vote by telephone or the
Internet, you do not need to return the proxy card. In the event you attend the
Special Meeting in person, you may, if you desire, revoke your Proxy and vote
your shares in person.
By Order of the Board of Directors
Dated: February __, 2005 Ron Munkittrick
Secretary
--------------------------------------------------------------------------------
IMPORTANT
The return of your signed Proxy as promptly as possible will greatly facilitate
arrangements for the Special Meeting. No postage is required if the Proxy is
returned in the envelope enclosed for your convenience and mailed in the United
States. If you received a proxy card with a web site address and voting codes,
we urge you to vote on the Internet at the web site indicated or telephonically
to ensure that your vote is recorded without mail delays. If you vote by
telephone or the Internet you do not need to return the proxy card.
--------------------------------------------------------------------------------
RAMP CORPORATION
33 Maiden Lane, 5th Floor
New York, New York 10038
----------------------------------------
Proxy Statement
Special Meeting of Stockholders
March __, 2005
----------------------------------------
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Ramp Corporation, a Delaware corporation
(the "Company"), to be voted at the Special Meeting of Stockholders of the
Company (the "Special Meeting") which will be held at the offices of the Company
located at 33 Maiden Lane, 5th Floor, New York, New York 10038, on March __,
2005, at 10:00 A.M., local time, and any adjournment or adjournments thereof,
for the purposes set forth in the accompanying Notice of Special Meeting of
Stockholders and in this Proxy Statement.
The principal executive offices of the Company are located at 33 Maiden
Lane, 5th Floor, New York, New York 10038. The approximate date on which this
Proxy Statement and accompanying Proxy will first be sent or given to
stockholders is February __, 2005.
A Proxy, in the enclosed form, which is properly executed, duly returned to
the Company and not revoked will be voted in accordance with the instructions
contained therein and, in the absence of specific instructions, will be voted in
favor of the proposals and in accordance with the judgment of the person or
persons voting the Proxy on any other matter that may be brought before the
Special Meeting. Each such Proxy granted may be revoked at any time thereafter
by writing to the Secretary of the Company prior to the Special Meeting, by
execution and delivery of a subsequent proxy or by attendance and voting in
person at the Special Meeting, except as to any matter or matters upon which,
prior to such revocation, a vote shall have been cast pursuant to the authority
conferred by such Proxy. The cost of soliciting proxies will be borne by the
Company. Following the mailing of the proxy materials, solicitation of proxies
may be made by officers and employees of the Company, or anyone acting on their
behalf, by mail, telephone, telegram or personal interview. The Company may, but
is not obligated, to use the services of Georgeson Shareholder Communications
Inc. to aid in the solicitation of proxies. The Company estimates that the fee
for such services should not exceed approximately $25,000. Banks, brokers,
nominees, and other custodians and fiduciaries will be reimbursed for their
reasonable out-of-pocket expenses in forwarding soliciting material to their
principals.
VOTING SECURITIES
Stockholders of record as of the close of business on February 11, 2005
(the "Record Date") will be entitled to notice of, and to vote at, the Special
Meeting or any adjournments thereof. On the Record Date, there were ______
outstanding shares of the Company's common stock, $0.001 par value per share
("Common Stock"). Each holder of Common Stock is entitled to one vote for each
share held by such holder. The presence, in person or by proxy, of the holders
of a majority of the outstanding shares of Common Stock is necessary to
constitute a quorum at the Special Meeting. Proxies submitted which contain
abstentions and broker non-votes will be deemed present at the Special Meeting
for determining the presence of a quorum.
Shares abstaining with respect to any matter will be considered votes
represented, entitled to vote and cast with respect to that matter. Shares
subject to broker non-votes with respect to any matter will be
-1-
considered not voted with respect to that matter. Since an affirmative vote of a
majority of the shares of Common Stock present, in person or by proxy, at the
Special Meeting is required to approve Proposals 1, 2, 3, 4, 5 and 6,
abstentions will have the same effect as a vote "against" Proposals 1, 2, 3, 4,
5 and 6, and broker non-votes will have no effect.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of the Record Date, certain
information regarding the ownership of voting securities of the Company by each
stockholder known to the management of the Company to be (i) the beneficial
owner of more than 5% of the Company's Common Stock, (ii) the directors of the
Company, (iii) the current executive officers of the Company, and (iv) all
directors and executive officers as a group.
Name and Address of Beneficial Shares Beneficially Percentage
Owner (1) Owned (2) of Class
--------------------------------------------------------------------------------
Andrew Brown (3) 724,523 6.0%
Blue Valley Ltd. (4) 1,114,824 8.9%
Cherry Blossom Ltd (5) 1,241,850 9.8%
Forum Managers Ltd. (6) 901,761 7.3%
Lakeview Properties Ltd. (7) 901,761 7.3%
Norfolk Ltd. (8) 1,110,886 8.9%
Jeffrey A. Stahl, MD (9) 71,132 *
Louis E. Hyman (10) 483,625 4.1%
Steven C. Berger (11) 67,798 *
Steven A. Shorr (12) 67,382 *
Tony Soich (13) 67,382 *
Ron Munkittrick (14) 428,883 3.6%
Directors and executive officers,
as a group (7 persons) 1,910,723 14.4%
-------------------
* Represents beneficial ownership of less than one percent.
(1) Unless otherwise indicated, the address for each of the beneficial owners
is c/o Ramp Corporation, 33 Maiden Lane, New York, New York 10038.
(2) "Beneficial ownership" is defined in the regulations promulgated by the SEC
as having or sharing, directly or indirectly (1) voting power, which
includes the power to vote or to direct the voting, or (2) investment
power, which includes the power to dispose or to direct the disposition of
shares of the Common Stock of the Company. The definition of beneficial
ownership includes shares underlying options or warrants to purchase common
stock, or other securities convertible into common stock, that currently
are exercisable or convertible or that will become exercisable or
convertible within 60 days. Unless otherwise indicated, the Company
believes that the beneficial owner has sole voting and investment power
based upon the information furnished by such owners.
-2-
(3) Includes (a) 24,167 shares issuable upon exercise of warrants, and (b)
696,190 shares issuable upon exercise of stock options exercisable within
60 days from the date of the table. Does not include warrants issuable to
Mr. Brown under his employment agreement whereby Mr. Brown will be entitled
to purchase up to one-nineteenth of the outstanding shares of our common
stock, at an exercise price to be determined by the Company.
(4) Includes 211,372 shares issuable upon exercise of warrants. The address of
the holder is Burbage House 83-85 Curtain Road, London EC2A 3BS.
(5) Includes 235,456 shares issuable upon exercise of warrants. The address of
the holder is 20 McCallum Street 10-03 Asia Chambers, Singapore 069046.
(6) Includes 170,900 shares issuable upon exercise of warrants. The address of
the holder is 7 Globe House, 15 Fitzroy Mews, London, United Kingdom.
(7) Includes 170,900 shares issuable upon exercise of warrants. The address of
the holder is 21 Leigh Street, London WC1H 9QX.
(8) Includes 211,372 shares issuable upon exercise of warrants. The address of
the holder is 20 McCallum Street 12-03 Asia Chambers, Singapore 069046.
(9) Consists of 71,132 shares issuable upon exercise of stock options
exercisable within 60 days from the date of the table.
(10) Consists of (a) 833 shares held by Mr. Hyman and his wife of which he
shares dispositive power, (b) 833 shares issuable upon exercise of warrants
held by Mr. Hyman and his wife, and (c) 481,959 shares issuable upon
exercise of stock options exercisable within 60 days from the date of the
table.
(11) Consists of 67,798 shares issuable upon exercise of stock options
exercisable within 60 days from the date of the table.
(12) Consists of 67,382 shares issuable upon exercise of stock options
exercisable within 60 days from the date of the table.
(13) Consists of 67,382 shares issuable upon exercise of stock options
exercisable within 60 days from the date of the table.
(14) Consists of 428,883 shares issuable upon exercise of stock options
exercisable within 60 days from the date of the table.
-3-
ACTIONS TO BE TAKEN AT THE SPECIAL MEETING
--------------------------------------------------------------------------------
PROPOSAL 1
TO RATIFY THE SALE AND ISSUANCE OF SHARES
OF COMMON STOCK IN CONNECTION WITH
THE MARCH 2004 PRIVATE PLACEMENT OF COMMON STOCK
AND JULY 2004 PRIVATE PLACEMENT OF
CONVERTIBLE NOTES AND WARRANTS
--------------------------------------------------------------------------------
Terms and Conditions of the March 2004 Private Placement and July 2004 Private
Placement
On March 4, 2004 (the "March 2004 Private Placement"), the Company entered
into a Common Stock and Warrant Purchase Agreement (the "March Agreement") with
Hilltop Services Ltd. ("Hilltop"), an accredited investor. Under the terms of
the March Agreement, the Company sold and issued to Hilltop an aggregate of
10,869,565 pre-split shares of Common Stock for gross proceeds to the Company in
the amount of $5,000,000, representing a purchase price of $0.46 cents per share
(the "Purchase Price"). In addition to the shares of Common Stock, the Company
issued to Hilltop warrants to purchase an aggregate of 2,173,913 pre-split
shares of Common Stock exercisable at $0.80 cents per share for a term of five
years. Under the March Agreement, the Company agreed that, during the period
commencing on the closing date through and including the period ending
forty-five days following the date a registration statement which includes the
shares and warrants issued to Hilltop is declared effective by the Securities
and Exchange Commission, or SEC (the "New Transaction Period"), the Company
would not enter into a subsequent offer or sale of its Common Stock with a third
party at a price below the Purchase Price. If the Company entered into a
transaction at a purchase price per share less than the Purchase Price during
the New Transaction Period, the Company would be required to issue additional
shares of common stock to Hilltop at an adjusted purchase price equal to eighty
percent (80%) of the lowest conversion price applicable under the terms of the
new transaction (the "Adjusted Purchase Price").
At the time of the March 2004 Private Placement the Company had 158,268,163
pre-split shares of Common Stock issued and outstanding. The March 2004 Private
Placement represented approximately 6.8% of the Company's issued and outstanding
shares.
On April 22, 2004 the Company filed a registration statement with the SEC
to register the shares and warrants sold which, following a review and comment
period with the SEC, was declared effective by the SEC on July 9, 2004. Due to
the delay in the effectiveness of the registration statement and the Company's
need to continue to pay its creditors and finance its operations, on July 14,
2004 (the "July 2004 Private Placement"), the Company entered into a Note and
Warrant Purchase Agreement (the "Note Purchase Agreement") with each of
Cottonwood Ltd. ("Cottonwood") and Willow Bend Management Ltd. ("Willow Bend"),
each an accredited investor. Under the terms of the Note Purchase Agreement, the
Company issued to each of Cottonwood and Willow Bend a convertible promissory
note in the principal amount of $2,100,000, at an interest rate of six (6%)
percent due January 14, 2005. Each promissory note was convertible into shares
of Common Stock at an initial conversion price of $0.30 cents per share and was
secured by a first priority lien against all of the assets and property of the
Company if the average closing sale price of Common Stock for any ten trading
days prior to forty-five days following the closing was less than $0.15 cents
per share. In addition to the convertible promissory note, the Company issued to
each of Cottonwood and Willow Bend warrants exercisable into 4,683,823 pre-split
shares of Common Stock at an exercise price of $0.11 cents per share (the "$0.11
Cent Warrants"), warrants exercisable into 4,683,823 pre-split shares of Common
Stock at an exercise price of $0.15 cents per share, (the "$0.15
-4-
Cent Warrants"), warrants exercisable into 4,683,823 pre-split shares of Common
Stock at an exercise price of $0.35 cents per share (the "$0.35 Cent Warrants"),
and warrants exercisable into 4,683,823 pre-split shares of Common Stock at an
exercise price of $0.40 cents per share (the "$0.40 Cent Warrants" and
collectively the "July Warrants"). The July Warrants were exercisable for a term
of one year.
As a result of the closing of the transactions contemplated under the Note
Purchase Agreement, the Adjusted Purchase Price under the March Agreement was
reduced to $.088 cents per share, representing 80% of $0.11 cents. Under the
terms of a letter agreement, dated July 14, 2004, by and between the Company and
Hilltop, in consideration for Hilltop's consent to the July 2004 Private
Placement and the termination of any and all anti-dilution rights of Hilltop
under the March Agreement, the Company issued to Hilltop (i) 24,130,435
pre-split shares of Common Stock, (ii) a convertible promissory note in the
aggregate principal amount of $1,920,000 convertible into shares of Common Stock
at an initial conversion price of $0.30 cents per share, and (iii) warrants
exercisable into 4,282,354 pre-split shares of Common Stock at an exercise price
of $0.11 cents per share, warrants exercisable into 4,282,354 pre-split shares
of Common Stock at an exercise price of $0.15 cents per share, warrants
exercisable into 4,282,354 pre-split shares of Common Stock at an exercise price
of $0.35 cents per share and warrants exercisable into 4,282,354 pre-split
shares of Common Stock at an exercise price of $0.40 cents per share
(collectively, the "Hilltop Warrants"). The Hilltop Warrants were exercisable
for a term of one year.
Redwood Capital Partners, Inc. ("Redwood") performed financial advisory
services for the Company in connection with the July 2004 Private Placement. In
connection with such services, in addition to payment of a cash fee of $320,000,
the Company agreed to issue to Redwood warrants exercisable into 350,000
pre-split shares of common stock exercisable at $0.11 cents per share, warrants
exercisable into 350,000 pre-split shares of common stock exercisable at $0.15
cents per share, warrants exercisable into 350,000 pre-split shares of common
stock exercisable at $0.35 cents per share and warrants exercisable into 350,000
pre-split shares of common stock exercisable at $0.40 cents per share
(collectively, the "Redwood Warrants"). The Redwood Warrants have a term of one
year.
At the time of the July 2004 Private Placement, the Company had 179,677,864
pre-split shares of Common Stock issued and outstanding. The July 2004 Private
Placement represented approximately 13.4% of the Company's issued and
outstanding shares of Common Stock issued to Hilltop in connection with its
anti-dilution provisions and approximately 15.6% of shares of common stock
underlying July Warrants, Hilltop Warrants and Redwood Warrants at an exercise
price below the market price of the common stock at the time of the transaction.
The Company agreed to register the shares of Common Stock issued to
Hilltop, the shares of Common Stock underlying the convertible promissory notes
and warrants issued to each of Cottonwood, Willowbend and Hilltop, and the
shares of Common Stock underlying the warrants issued to Redwood on a
registration statement filed with the SEC on August 20, 2004. The registration
statement was declared effective by the SEC on September 27, 2004.
In October, 2004, in order to continue operations and pay creditors, the
Company entered into a letter agreement with each of Willow Bend and Cottonwood,
to reduce the exercise price of outstanding July Warrants to purchase an
aggregate of 37,470,584 pre-split shares of Common Stock from the various
exercise prices to $.0325 cents per share. In connection with the exercise of
July Warrants to purchase an aggregate of 25,262,096 pre-split shares of Common
Stock, the noteholders agreed to reduce principal amount of outstanding notes of
$571,018 and to pay cash proceeds to the Company in the amount of $250,000.
-5-
In October, 2004, the Company entered into a letter agreement with Hilltop,
to reduce the exercise price of outstanding Hilltop Warrants to purchase an
aggregate of 17,129,416 pre-split shares of Common Stock to $.0325 cents per
share. In connection with the exercise of warrants to purchase an aggregate of
12,631,048 pre-split shares of Common Stock, the noteholder agreed to reduce
principal amount of outstanding notes of $410,509.
In November, 2004, the Company agreed with the convertible note holders to
reduce the exercise price of outstanding warrants to purchase an aggregate of
16,706,856 pre-split shares of Common Stock to $.015 cents per share. In
connection with the exercise of warrants to purchase all of the shares of Common
Stock, the note holders agreed to reduce principal amount of outstanding notes
of $250,602.84.
In November, 2004, the Company agreed with the convertible note holders to
reduce the conversion price of outstanding convertible notes to purchase an
aggregate of 20,400,000 pre-split shares of Common Stock, from $0.30 cents per
share to $0.015 cents per share. In connection with the conversion of notes to
purchase shares of Common Stock, the note holders agreed to a reduction of
principal amount of outstanding notes of $306,000. The terms and conditions of
each of the agreements constituting the March 2004 Private Placement are set
forth on exhibits 4.34, 4.35 and 4.36 of the Company's Form 10-K for the fiscal
year ended December 31, 2003, as filed with the SEC on April 14, 2004. The terms
and conditions of each of the agreements constituting the July 2004 Private
Placement are set forth on exhibits 4.1 through 4.16, 4.19 and 4.23 of the
Company's Registration Statement on Form S-3, as filed with the SEC on August
23, 2004.
Reasons for the March 2004 Private Placement and July 2004 Private Placement
The principal reasons for each of the March, 2004 and July, 2004 private
placements were to obtain additional capital critical to the Company's ability
to continue its operations and pay creditors.
Reasons for Stockholder Approval
The Company's Common Stock is listed on the American Stock Exchange
("AMEX"). In order to approve the listing of additional shares of Common Stock,
AMEX Company Guide Section 713 requires stockholder approval in connection with
a transaction other than a public offering involving the sale, issuance or
potential issuance by the issuer of common stock (or securities convertible into
common stock) equal to 20% or more of presently outstanding stock for less than
the greater of book or market value of the stock.
Although the March 2004 Private Placement did not involve the issuance or
potential issuance by the Company of shares of Common Stock that would represent
20% or more of the then outstanding Common Stock at below the greater of the
book or market value of the Common Stock, upon review of the July 2004 Private
Placement, it was determined by AMEX that the two transactions must be
aggregated under the AMEX rules, thereby exceeding the 20% threshold on an
aggregate basis. As a result, and as part of its determination to accept the
Company's compliance plan to continue its AMEX listing, AMEX requires
stockholder ratification of the completed private placements and subsequent
agreements with the investors.
If the stockholders do not approve this Proposal 1, the Company's shares of
Common Stock would be subject to potential delisting proceedings by AMEX. In
such event, the liquidity of the Common Stock could be severely restricted which
could have a material adverse effect on the market value of our Common Stock and
the ability of stockholders to sell Common Stock.
-6-
Effect of the Private Placements on Existing Stockholders
Advantages. Prior to voting, each stockholder should consider the fact that
the private placements provided additional financing which was vital to the
Company's efforts to continue operations and pay creditors. Each stockholder
should consider the fact that, at the time of the transactions, the Company's
capital resources were severely limited. Moreover, approval of this Proposal 1
will enable the Company to continue its listing on AMEX.
Disadvantages. The private placements had a significant dilutive effect on
our stockholders. Our stockholders' aggregate percentage ownership declined
significantly as a result of the private placements. The number of shares of
Common Stock issued pursuant to the private placements significantly increased
the number of shares of Common Stock outstanding. This means that our
stockholders owned a smaller percentage interest in the Company as a result of
the closing of the private placements.
Vote Required
Ratification of the transactions described in this Proposal 1 requires the
affirmative vote of a majority of the outstanding shares of Common Stock present
in person or represented by proxy at the Special Meeting and entitled to vote at
the Special Meeting. Abstentions will have the same effect as votes against the
proposal and broker non-votes will have no effect. The Board of Directors
recommends a vote "FOR" approval of the Proposal.
The Board of Directors Recommends You Vote "FOR"
Ratification of each of the March 2004 Private Placement and July 2004 Private
Placement
-7-
--------------------------------------------------------------------------------
PROPOSAL 2
TO APPROVE THE SALE AND ISSUANCE OF SHARES OF
COMMON STOCK IN CONNECTION WITH
THE DECEMBER 2004 PRIVATE PLACEMENT OF
CONVERTIBLE NOTES IN THE AGGREGATE
PRINCIPAL AMOUNT OF $452,000
--------------------------------------------------------------------------------
Terms and Conditions of the December 2004 Private Placement
On December 2, 2004, pursuant to a Note Purchase Agreement (the "Note
Agreement"), the Company issued convertible promissory notes (the "Notes") in
the aggregate principal amount of $400,000, bearing interest at the rate of six
percent (6.0%) per annum, due March 1, 2005, to each of Platinum Partners Value
Arbitrage Fund L.P., Briarwood Investments and Design Investments Ltd., three
institutional accredited investors (the "December 2004 Private Placement"). In
connection with the December 2004 Private Placement, the Company issued a
convertible promissory note in the principal amount of $52,000 to Harborview
Capital Management LLC as an advisory fee on the same terms and conditions as
the institutional investors. As part of the terms and conditions of the Note
Agreement, the Company issued to the investors an aggregate of 480,000 shares of
Common Stock and the financial advisor received 48,000 shares of Common Stock.
By letter agreement dated January 11, 2005 (the "Letter Agreement"), each of the
investors and the financial advisor agreed not to vote their shares of Common
Stock on this Proposal 2 at the Special Meeting or sell their shares of Common
Stock unless and until stockholder approval of this Proposal 2 has been obtained
at the Special Meeting.
The Notes provide that one hundred and twenty percent (120%) of the
outstanding principal amount is automatically convertible into those securities
of the Company issued in any subsequent transaction by the Company with gross
proceeds to the Company of a minimum of $1,000,000 ("Triggering Event").
Interest on the notes is payable in cash or those securities issued by the
Company in a subsequent transaction. As a result of the January 2005 Private
Placement transaction set forth in Proposal 3 below, $455,614 of outstanding
principal and interest of the Notes shall be automatically converted into 8%
convertible redeemable notes, which notes have an initial conversion price of
$2.40 cents per share, and common stock purchase warrants to purchase an
aggregate of 226,000 shares of Common Stock at an initial exercise price of
$2.40 per share.
Under the Note Agreement, the Company is obligated to register for resale
the securities issuable upon conversion of the notes and the shares of Common
Stock issuable to the investors on its next registration statement filed with
the SEC.
At the time of the December 2004 Private Placement, the Company had
5,310,013 post-split shares of Common Stock issued and outstanding. The December
2004 Private Placement represented approximately 14.2% of the Company's issued
and outstanding shares of Common Stock.
Reasons for the December 2004 Private Placement
The principal reasons for the private placement were to obtain additional
capital critical to the Company's ability to continue its operations and pay
creditors. The private placement was entered into as a bridge financing
negotiated as part of its strategy to obtain significant long term financing for
the Company within the next thirty to sixty day period.
-8-
Reasons for Stockholder Approval
AMEX Company Guide Section 713 requires stockholder approval in connection
with a transaction other than a public offering involving the sale, issuance or
potential issuance by the issuer of common stock (or securities convertible into
common stock) equal to 20% or more of presently outstanding stock for less than
the greater of book or market value of the stock.
By letter dated January 21, 2005 from AMEX to the Company, AMEX has
previously approved the listing of 528,000 shares of Common Stock issued by the
Company to the investors and financial advisor under the Note Agreement. The
total number of shares of Common Stock that may be issued by the Company in
connection with the December 2004 Private Placement is dependent upon, among
other things, whether the convertible notes are converted or the warrants are
exercised, whether the principal or interest on the convertible notes is paid in
cash or shares of Common Stock and the market price of the Common Stock used in
calculating any such payments, and whether or not the redemption or antidilution
adjustment provisions of the convertible notes and/or warrants come into effect.
Pursuant to the Letter Agreement, the investors and the financial advisor agreed
not to vote, or sell their shares of Common Stock unless stockholder approval is
obtained for the Company.
As of the Record Date for this Meeting, none of the convertible notes had
been converted into Common Stock, none of the warrants issued to the investors
had been exercised and no principal or interest amount has been paid in shares
of Common Stock. The Company currently intends to satisfy future principal and
interest due on the convertible notes in shares of Common Stock. Since the
private placement described in this Proposal 2, together with the private
placement described in Proposal 3, involves the potential issuance by the
Company of shares of Common Stock equal to 20% or more of the Company's
outstanding Common Stock at below the greater of the book or market value of the
Common Stock, stockholder approval of the private placement is required. The
Company is asking its stockholders to approve this Proposal 2 so that all shares
of Common Stock issuable upon conversion of the convertible notes and exercise
of warrants will be eligible for listing on the AMEX.
If the stockholders do not approve this Proposal 2, the Company would not
be permitted to issue shares of Common Stock which equal or exceed the 20%
threshold and the Company would be forced to pay the convertible notes in cash,
thereof severely impacting the Company's ability to fund its operations. To
avoid this result, the Company may be required to voluntarily delist from AMEX.
In such event, the liquidity of the Common Stock could be severely restricted
and such restrictions could have a material adverse effect on the market value
of our Common Stock.
Effect of the Private Placement on Existing Stockholders
Advantages. Before voting, each stockholder should consider the fact that
the private placement provided additional financing which was vital to the
Company's efforts to continue operations. Each stockholder should also consider
the fact that the Company's current capital resources are limited.
Disadvantages. The private placement has had and, if the convertible notes
are converted and warrants are exercised, will have a dilutive effect on our
current stockholders. Our current stockholders' aggregate percentage ownership
will decline significantly as a result of the private placement. The number of
shares issued pursuant to the private placement will substantially increase the
number of shares of Common Stock currently outstanding. This means that our
current stockholders will own a smaller interest in the Company as a result of
the private placement.
-9-
All shares of Common Stock issuable pursuant to the private placement will
be entitled to registration rights. Consequently, if these shares are
registered, the shares may be freely transferable without restriction under the
Securities Act of 1933, as amended, absent other securities law restrictions.
Such free transferability could materially and adversely affect the market price
of our Common Stock if a sufficient number of such shares are sold in the
market.
Summary of Material Terms of the December 2004 Private Placement
Additional Securities upon Conversion
The Note Agreement provides that, if the automatic conversion of the Notes
into other securities issued by the Company in a subsequent transaction occurs,
the Company shall, upon such conversion, pay to the investors and financial
advisor an additional aggregate amount of $90,400, payable to the investors and
financial advisor in proportion to the amount of their purchase price through
the issuance by the Company to the investors of additional securities in the
transaction, on the same terms and conditions as set forth in the transaction.
This premium payment shall result in additional dilution to existing
stockholders.
Representations and Warranties
The Note Agreement contains representations and warranties by the Company
relating to, among other things, capitalization, due authorization of the
issuance and sale of the Notes, SEC filings and financial statements, the lack
of material adverse changes and material breaches, defaults or violations in the
Company's charter documents, statutes, court or governmental orders or material
contracts resulting from the Company's signing or completion of the private
placement. The Note Agreement also contains representations and warranties by
the investors relating to, among other things, their status as accredited
investors, investment intent, and due authorization.
Registration Rights
The Company has agreed to register at its expense the shares of Common
Stock issued and issuable upon conversion of the Notes, on the next registration
statement the Company filed with the SEC and to use its best efforts to have the
registration statement declared effective by the SEC within 90 days of such
filing date. The Company has agreed to keep the registration statement effective
until the earlier of (i) the date upon which all shares covered by the
registration statement have been sold, or (ii) the date when all such shares may
be sold without any restriction under Rule 144 of the Securities Act of 1933. In
the event the Company fails to file the registration statement within the period
contemplated by the Note Agreement or the registration statement is not declared
effective within the contemplated 90 days, the Company has agreed to pay the
investors liquidated damages equal to 1% of their initial investment in the
notes for each 30 day period (or portion thereof) for which the Company is late.
The Company has also agreed pay all expenses associated with each registration,
including filing and printing fees, counsel and accounting fees and expenses,
listing fees and other reasonable fees.
-10-
Vote Required
Approval of the issuance of the shares of Common Stock described in this
Proposal 2 requires the affirmative vote of a majority of the outstanding shares
of common stock present in person or represented by proxy at the Special Meeting
and entitled to vote at the Special Meeting. Abstentions will have the same
effect as votes against the proposal and broker non-votes will have no effect.
The Board of Directors recommends a vote "FOR" approval of the Proposal.
The Board of Directors Recommends You Vote "FOR"
Approval of the December 2004 Private Placement Transaction
-11-
--------------------------------------------------------------------------------
PROPOSAL 3
TO APPROVE THE SALE AND ISSUANCE OF SHARES OF COMMON STOCK IN
CONNECTION WITH THE JANUARY 2005 PRIVATE PLACEMENT OF 8% CONVERTIBLE
REDEEMABLE DEBENTURES, COMMON STOCK PURCHASE WARRANTS AND ADDITIONAL
INVESTMENT
RIGHTS IN THE AGGREGATE PRINCIPAL AMOUNT OF UP TO $4,000,000
--------------------------------------------------------------------------------
Terms and Conditions of the January 2005 Private Placement
On January 12, 2005, the Company entered into a securities purchase
agreement ("Securities Purchase Agreement") with DKR Soundshore Oasis Holding
Fund Ltd., Harborview Master Fund, L.P. and Platinum Partners Value Arbitrage
Fund, L.P., each an institutional investor, pursuant to which the Company agreed
to sell, and the investors agreed to purchase, 8% convertible redeemable
debentures ("Convertible Debentures") in the aggregate principal amount of up to
$4,000,000 and five-year warrants ("January Warrants") to purchase up to
1,666,667 shares of common stock at an initial exercise price of $2.40 (the
"January 2005 Private Placement"). The Convertible Debentures are convertible
into Common Stock at an initial conversion price of $2.40. A first closing of
$2,000,000 occurred on January 13, 2005 ("First Closing") and a second closing
of $2,000,000 shall occur upon the completion of closing conditions set forth in
the Securities Purchase Agreement ("Second Closing"). The Company is obligated
to redeem one-fifth of the principal and interest amount on the Convertible
Debentures in cash or, at the option of the Company, shares of Common Stock, on
the first day of each month, commencing on the earlier of (a) May 12, 2005, and
(b) the first date following the 20th day after the effective date of the
registration statement registering for resale the securities issuable upon
conversion of the Convertible Debentures and exercise of January Warrants, and
ending upon the full redemption of the Convertible Debentures. If the Company
elects to make redemption payments in shares of Common Stock, the principal
amount is convertible based upon a conversion price equal to the lesser of the
initial conversion price, or 85% of the average of the three lowest closing bid
prices for the Company's Common Stock during the 20 trading days immediately
prior to the monthly redemption date. The Company is also obligated to pay 8%
interest on the outstanding principal on the Convertible Debentures (i) on the
effective date on which the Convertible Debentures are converted into shares of
Common Stock of the Company, (ii) on each monthly redemption date or (iii) on
the maturity date, at the interest conversion rate.
Assuming the maximum amount of $4,000,000 is purchased, the Company has
agreed to issue to the investors additional investment rights to purchase
additional Convertible Debentures in the aggregate principal amount of up to
$1,320,000 along with five year warrants to purchase an aggregate of 550,000
shares of the Company's Common Stock, on the same terms and conditions as the
original Convertible Debentures and January Warrants.
As a result of the First Closing and as set forth in Proposal 2 described
in this Proxy Statement, previously issued and outstanding notes of the Company
in the aggregate principal amount of $452,000, plus interest in the amount of
$3,614, are automatically convertible into one hundred and twenty percent (120%)
of principal amount of Convertible Debentures, together with January Warrants,
of the Company having the same terms and conditions as set forth above. Upon
each closing, in addition to a cash fee equal to eight percent (8%) of the gross
proceeds, the Company's financial advisor is entitled to receive a warrant to
purchase seven percent (7%) of the shares of Common Stock issued or issuable
upon conversion or exercise of the Convertible Debentures and January Warrants
at an initial conversion and exercise price of $2.40. In addition, the Company
must pay the financial advisor a cash commission
-12-
equal to 3% of the gross proceeds received by the Company upon the exercise of
the January Warrants issued to the investors in the January 2005 Private
Placement.
The Company has agreed to register with the SEC 125% of the shares of
common stock issuable upon conversion of principal and interest under the
Convertible Debentures and upon exercise of the January Warrants. In the event
that the Company fails to file a registration statement with the SEC by February
3, 2005, or in the event such registration statement is filed but is not
declared effective by the SEC by April 30, 2005, then the Company will be
obligated to pay the holders of the registrable securities liquidated damages
equal to 1.5% of their total investment for each 30 day period until the
registration statement is filed or declared effective. The Company has agreed to
keep the registration statement effective until the earlier of (i) the date upon
which all shares covered by the registration statement have been sold, or (ii)
the date when all such shares are eligible to be sold without volume
restrictions under Rule 144(k) of the Securities Act of 1933.
At the time of the January 2005 Private Placement, the Company had
6,522,615 shares of Common Stock issued and outstanding. Assuming the initial
conversion price of the Convertible Debentures and exercise price of the January
Warrants of $2.40, the First Closing of January 2005 Private Placement
represented approximately 25.5% of the Company's issued and outstanding shares
of Common Stock.
Reasons for the Private Placement
The Company submitted a compliance plan with AMEX to retain its listing on
the AMEX. The compliance plan was accepted subject to periodic review by AMEX.
As part of its plan, the Company submitted quarterly projections relating to,
among other things, stockholders equity of the Company. The Company entered into
the January 2005 Private Placement in furtherance of its compliance plan, and to
enhance the Company's liquidity, strengthen our balance sheet and obtain
additional capital critical to the Company's ability to continue its operations.
Pursuant to the terms of the January 2005 Private Placement we are generally
prohibited from raising additional financing through the issuance of securities
during the period from the First Closing through the period ending 65 days from
the effective date of a registration statement, which could significantly harm
our ability to continue operations if the Second Closing does not occur.
Reasons for Stockholder Approval
AMEX Company Guide requires stockholder approval in connection with a
transaction other than a public offering involving the sale, issuance or
potential issuance by the issuer of common stock (or securities convertible into
common stock) equal to 20% or more of presently outstanding stock for less than
the greater of book or market value of the stock.
The number of shares of Common Stock outstanding on January 12, 2005 was
6,522,615. At the First Closing, the Company issued a principal amount of
$2,000,000 of Convertible Debentures initially convertible into 833,333 shares
of Common Stock, plus January Warrants exercisable into 833,333 shares of Common
Stock at an exercise price of $2.40 per share, for an aggregate of 1,666,666
shares of Common Stock. If the Second Closing occurs, the Company will be
required to issue an additional number of shares of Common Stock upon conversion
of notes and exercise of warrants which would exceed the 19.99% threshold. The
total number of shares of Common Stock that may be issued by the Company in
connection with the January 2005 Private Placement is dependent upon, among
other things, whether the Convertible Debentures are converted or the January
Warrants are exercised, whether the principal and interest on the Convertible
Debentures is paid in cash or shares of Common Stock and the market price of the
Common Stock used in calculating any such payments, and whether or not the
-13-
redemption or antidilution adjustment provisions of the Convertible Debentures
and/or January Warrants come into effect. Pursuant to the Securities Purchase
Agreement, the Company agreed to seek stockholder approval of the possible
issuance to the investors of shares of Common Stock in excess of the AMEX 19.99%
share limitation.
As of the Record Date for this Meeting, none of the Convertible Debentures
had been converted into Common Stock, none of the January Warrants issued to the
investors had been exercised and no principal or interest amount has been paid
in shares of Common Stock. The Company currently intends to satisfy future
principal and interest due on the Convertible Debentures in shares of Common
Stock.
Since the private placement described in this Proposal 3 involves the
potential issuance by the Company of shares of Common Stock that would represent
more than 20% of the outstanding Common Stock at below the greater of the book
or market value of the Common Stock, stockholder approval of the private
placement is required. We are asking our shareholders to approve this Proposal 3
so that all shares of Common Stock issuable upon conversion of the Convertible
Debentures and exercise of the January Warrants will be eligible for listing on
the AMEX.
If the stockholders do not approve this Proposal 3, and if we were
required, pursuant to the terms of the Convertible Debenture and January
Warrants, to issue shares of Common Stock which exceed the 20% threshold, we
would be required to redeem the Convertible Debentures in cash. We currently do
not have available cash to redeem the Convertible Debentures. If we are unable
to raise adequate cash, we could be subject to delisting proceedings by AMEX. If
we are delisted by AMEX, the liquidity of the Common Stock could be severely
restricted and such restrictions could have a material adverse effect on the
market value of our Common Stock.
Effect of the Private Placement on Existing Stockholders
Advantages. Prior to voting, each stockholder should consider the fact that
the private placement will provide additional financing, which will be
critically important to our efforts to continue our operations. Each stockholder
should consider the fact that our current capital resources are limited. If we
do not have stockholder approval, we will be unable to effect the Second
Closing. Later financing may not be available, or may be available but not on
the same acceptable terms and conditions.
Disadvantages. The private placement will have a dilutive effect on our
current stockholders. Our current stockholders' aggregate percentage ownership
will decline significantly as a result of the private placement. The number of
shares issued pursuant to the private placement will increase substantially the
number of shares of Common Stock currently outstanding. This means that our
current stockholders will own a smaller interest in the Company as a result of
the private placement.
All shares of Common Stock issuable upon the conversion of the Convertible
Debentures and issuable upon the exercise of the January Warrants will be
entitled to registration rights. Consequently, if these shares are registered,
the shares may be freely transferable without restriction under the Securities
Act of 1933, as amended, absent other securities law restrictions. Such free
transferability could materially and adversely affect the market price of our
Common Stock if a sufficient number of such shares are sold in the market.
Description of the Proposal
The Board is requesting that the stockholders of the Company approve the
issuance of shares of Common Stock upon conversion or redemption of the
Convertible Debentures and upon exercise of the
-14-
January Warrants, as well as such additional shares of Common Stock that may be
issued pursuant to certain anti-dilution provisions of the Convertible
Debentures or in lieu of cash interest payments.
Summary of Material Terms of the January 2005 Private Placement
The Securities Purchase Agreement, Convertible Debenture, Warrant,
Additional Investment Right and Registration Rights Agreement have has been
filed with the SEC as exhibits 10.1 10.2, 10.3, 10.4 and 10.5, respectively, to
the Company's Form 8-K filed on January 14, 2005. The following is a materially
complete summary of the transaction documents.
8% Convertible Debenture
If the Second Closing occurs, the Company will issue to the investors
Convertible Debentures in the aggregate principal amount of up to $4,000,000
bearing interest at the rate of eight percent (8.0%) per annum, due December 1,
2005 payable on each conversion date, the maturity date, and each monthly
redemption date, at the Company's option, in cash or shares of Common Stock at
the interest conversion rate. The interest conversion rate means the lesser of
(a) the conversion price and (b) 90% of the lesser of the average of the 10
closing prices immediately prior to the applicable interest payment date or the
date such shares are issued and delivered, if later than the interest payment
date.
Subject to limitations on ownership by the investors, the Convertible
Debentures are convertible into shares of Common Stock at any time at the option
of the investors at an initial conversion price of $2.40.
Interest on the Convertible Debentures may be payable in cash or shares of
Common Stock or a combination thereof at the discretion of the Company;
provided, however, that payment in shares of Common Stock may only occur if all
of the equity conditions under the Convertible Debentures are met. All past due
accrued and unpaid interest to be paid shall entail a late fee at the rate of
eighteen percent (18%) per annum, which would accrue daily, from the date such
interest is due through and including the date of payment.
Negative Covenants
So long as any principal amount under the Convertible Debentures is
outstanding, the Company shall not:
o enter into, create, incur, assume or suffer to exist any indebtedness
or liens of any kind, on or with respect to any of its property or
assets now owned or hereafter acquired or any interest therein or any
income or profits therefrom that is senior to, or pari passu with (for
purposes of clarification, any security interest of any kind shall be
deemed a lien that is senior to the Convertible Debentures and
therefore prohibited), in any respect, the Company's obligations under
the Convertible Debentures;
o amend its certificate of incorporation, bylaws or other charter
documents so as to adversely affect any rights of the holders of the
Convertible Debentures;
o repay, repurchase or offer to repay, repurchase or otherwise acquire
more than a de minimis number of shares of its Common Stock or other
equity securities other than as to the conversion shares to the extent
permitted or required under the Securities Purchase Agreement or as
otherwise permitted by the Securities Purchase Agreement; or
o enter into any agreement with respect to any of the foregoing.
-15-
Events of Default
Under the Convertible Debenture, the following events constitute events of
default of the Company, accelerating the payment by the Company of a mandatory
prepayment amount: default in the payment of principal or interest or liquidated
damages, material default of a covenant or agreement in the Convertible
Debenture or other material agreement, breach of a representation or warranty,
commencement of bankruptcy or insolvency proceedings, failure of the Common
Stock to be eligible for quotation on a national exchange or quotation system or
the OTC Bulletin Board and the failure of the registration statement to have
been declared effective on or prior to 180 calendar days after the closing date.
Warrants
In addition to the Convertible Debentures and assuming the Second Closing
occurs, the Company will issue to the investors January Warrants to purchase an
aggregate of 1,666,666 shares of Common Stock. The January Warrants will have a
term of five years and will be exercisable at an exercise price equal to $2.40
per share.
During the period that the January Warrants will be outstanding, except for
certain exempt issuances, if the Company shall offer, sell or otherwise issue
any securities at an effective price per share of Common Stock less than the
exercise price, then the exercise price of the January Warrants shall be reduced
on a weighted average basis. This provision shall apply for any warrants issued
in connection with any additional investment right exercised by such investor.
Registration
The Company has agreed to register the Common Stock issuable upon
conversion of the Convertible Debentures and exercise of the January Warrants by
filing a registration statement with the SEC within 20 days of the First Closing
(as defined below) and to have the registration statement declared effective by
the SEC within 90 days of such closing date. The Company has agreed to keep the
registration statement effective until the earlier of (i) the date upon which
all shares covered by the registration statement have been sold, or (ii) the
date when all such shares are eligible to be sold without volume restrictions
under Rule 144(k) of the Securities Act of 1933. In the event the Company fails
to file the registration statement within 20 days of the closing date or the
registration statement is not declared effective within 90 days of such closing
date, the Company has agreed to pay the investors liquidated damages equal to
1.5% of their total investment for each 30 day period (or portion thereof) for
which the Company is late. The Company has also agreed pay all expenses
associated with each registration, including filing and printing fees, counsel
and accounting fees and expenses, costs associated with clearing the securities
for sale under applicable state securities laws, listing fees and other
reasonable fees.
Closing
The First Closing for an aggregate amount of up to $2,000,000 has occurred.
The Second Closing for an aggregate amount of $2,000,000 shall occur within 3
trading days of the date following the date that the initial registration
statement filed by the Company in connection with the Agreement is first
declared effective by the SEC.
-16-
Conditions to Second Closing
The Second Closing of the private placement is conditioned on the
satisfaction of various conditions, among others:
o the accuracy in all material respects of the representations and
warranties;
o compliance with the Company's obligations, covenants and agreements
prior to closing;
o delivery of customary closing documents including debentures and
warrants;
o no event which could have a material adverse effect with respect to
the Company;
o the Company shall have filed a registration statement with the SEC
which has been declared effective on or before the six month
anniversary of the date of the Securities Purchase Agreement and no
event of default shall have occurred under the debenture.
Representations and Warranties
The Securities Purchase Agreement contains representations and warranties
by the Company relating to, among other things, its capitalization, due
authorization, the issuance and sale of the Convertible Debentures and January
Warrants, the Company's SEC filings and financial statements, the lack of
material adverse changes and material breaches, defaults or violations in the
Company's charter documents, statutes, court or governmental orders or material
contracts resulting from the Company's signing or completion of the private
placement, and the Company's tax matters, intellectual property, litigation and
insurance coverage. The Securities Purchase Agreement also contains
representations and warranties by the investors relating to, among other things,
their status as accredited or institutional investors.
Participation in Future Financings
The Securities Purchase Agreement provides that, from the date of the
agreement until the two year anniversary of the First Closing, upon any
financing by the Company or any of its subsidiaries of Common Stock or Common
Stock equivalents other than an exempt issuance of securities by the Company (a
"Subsequent Financing"), each investor shall have the right to participate in up
to 100% of the Subsequent Financing. If such investors do not elect to
participate in a Subsequent Financing for a minimum of 25% of the outstanding
securities, the right to participate in Subsequent Financings shall terminate.
Prohibition on Certain Financings
The Securities Purchase Agreement provides that, from the date of the
Securities Purchase Agreement until 65 days following the effective date of the
registration statement, the Company shall not issue securities except for
certain exempt issuances of securities. Also, from the date of the Securities
Purchase Agreement until no investor holds Convertible Debentures, the Company
shall be prohibited from effecting or entering into any variable rate or
floating rate transactions, including transactions with repricing or reset
provisions. Unless shareholder approval is obtained and deemed effective by
AMEX, the Company shall not issue any securities which would cause any
adjustment of the conversion price to the extent the holders of Convertible
Debentures would not be permitted to convert their Convertible Debentures and
exercise their January Warrants.
-17-
Vote Required
Approval of the transactions described in this Proposal 3 requires the
affirmative vote of a majority of the outstanding shares of Common Stock present
in person or represented by proxy at the Special Meeting and entitled to vote at
the Special Meeting. Abstentions will have the same effect as votes against the
proposal and broker non-votes will have no effect. The Board of Directors
recommends a vote "FOR" approval of the Proposal.
The Board of Directors Recommends You Vote "FOR"
Approval of the January 2005 Private Placement Transaction
-18-
--------------------------------------------------------------------------------
PROPOSAL 4
TO APPROVE THE SALE AND ISSUANCE OF SHARES OF
COMMON STOCK IN CONNECTION WITH THE
JANUARY 2005 EQUITY LINE FINANCING OF
COMMON STOCK OF UP TO $25,000,000
--------------------------------------------------------------------------------
Terms and Conditions of the Equity Line Financing
On January 12, 2005, the Company entered into a securities purchase
agreement (the "Equity Line Agreement") with Yokuzuna Holdings and Harborview
Master Fund, L.P., two institutional investors, whereby such investors have
agreed to provide an equity line of credit to the Company (the "January 2005
Equity Line Financing"). Pursuant to the Equity Line Agreement and subject to
closing conditions described herein, upon written notice by the Company, at its
option, the investors have agreed to purchase from the Company an aggregate
amount of up to $25,000,000 through the issuance of shares of Common Stock
during the twenty-four month period beginning on the date that the registration
statement the Company has agreed to file providing for the resale of the shares
of Common Stock issuable under the Equity Line Agreement is declared effective
by the SEC. During this twenty-four month period, the Company may request a
drawdown under the Equity Line Agreement by providing a put notice to the
investors, and the investors will be obligated to purchase the shares of Common
Stock. The Company is under no obligation to request any drawdowns. On the day
of the drawdown notice, a pricing period of ten trading days will begin. Pricing
will be based upon an 8% discount to the average three lowest closing bid prices
during such ten trading day pricing period. There are certain limitations on the
amount of each drawdown and conditions precedent to a put notice as described in
further detail below. The Company is obligated to register with the SEC for
resale 125% of the shares of Common Stock issuable pursuant to the Equity Line
Agreement pursuant to a registration rights agreement dated as of January 12,
2005 between the Company and the investors.
Reasons for the Equity Line Agreement
The principal reasons for entering into the Equity Line Agreement are to
enhance our liquidity, strengthen our balance sheet and obtain additional
capital critical to the Company's ability to continue its operations.
Use of Proceeds
The Company will use the net proceeds from the sale of Common Stock under
the Equity Line Agreement (excluding amounts paid by the Company for legal fees,
finder's fees and escrow fees in connection with the sale of Common Stock) for
working capital purposes and potential acquisitions.
Reasons for Stockholder Approval
The Company's Common Stock is listed on the American Stock Exchange
("AMEX"). AMEX Company Guide Section 713 requires stockholder approval in
connection with a transaction other than a public offering involving the sale,
issuance or potential issuance by the issuer of common stock (or securities
convertible into common stock) equal to 20% or more of presently outstanding
stock for less than the greater of book or market value of the stock.
-19-
Since the sale of Common Stock under the Agreement described in this
Proposal 4 involves the potential sale by the Company of shares of Common Stock
that would represent more than 20% of the outstanding Common Stock at below the
greater of the book or market value of the Common Stock, stockholder approval of
the sale of Common Stock under the Equity Line Agreement is required. We are
asking our shareholders to approve this Proposal 4 so that all shares of Common
Stock saleable under the Equity Line Agreement will be eligible for listing on
the AMEX.
If the stockholders do not approve this Proposal 4, we may be required to
reduce the amount available under the Equity Line Agreement and the investors
may not agree to such reduction. If such event occurs, we may not have the
needed additional financing to continue to fund operations.
Effect of the Private Placement on Existing Stockholders
Advantages. Prior to voting, each stockholder should consider the fact that
the Equity Line Agreement will provide additional financing, which will be
critically important to our efforts to continue our operations. Each stockholder
should consider the fact that our current capital resources are limited. If we
do not have stockholder approval, we may be required to delay or reduce the
amount available under the Equity Line Agreement. Later financing may not be
available, or may be available but not on the same acceptable terms and
conditions.
Disadvantages. The sale of Common Stock under the Equity Line Agreement
will have a dilutive effect on our current stockholders. Our current
stockholders' aggregate percentage ownership will decline, potentially
significantly, as a result of the sales under the Equity Line Agreement. The
number of shares sold pursuant to the Equity Line Agreement will substantially
increase the number of shares of Common Stock currently outstanding. This means
that our current stockholders will own a smaller interest in the Company as a
result of the sale of Common Stock under the Equity Line Agreement.
All shares of Common Stock sold under the Equity Line Agreement will be
entitled to registration rights. Consequently, if these shares are registered
and sold to the investors by the Company, the shares may be freely transferable
without restriction under the Securities Act of 1933, as amended, absent other
securities law restrictions. Such free transferability could materially and
adversely affect the market price of our Common Stock if a sufficient number of
such shares are sold in the market.
The Company has agreed to register shares of Common Stock to be sold under
the Equity Line Agreement representing 125% of the commitment amount at the
average closing price for the five trading days prior to filing a registration
statement with the SEC within 90 business days of the date of the Equity Line
Agreement, and to have the registration statement declared effective by the SEC
within 180 days of such registration date. The Company has agreed to keep the
registration statement effective until the earlier of (i) the date that is one
year after the completion of the last closing date under the Equity Line
Agreement, (ii) the date when the investor may sell all registrable securities
under Rule 144 of the Securities Act of 1933 without volume limitations, or
(iii) the date when the investor no longer owns any of the registrable
securities. In the event the Company fails to file the registration statement
within 90 days of the date of the Equity Line Agreement or the registration
statement is not declared effective within 150 days of such date, the Company
has agreed to pay the investor liquidated damages equal to 1.0% of the cost of
all Common Stock then held by the investor purchased under the Equity Line
Agreement for each 15 business day period (or portion thereof) for which the
Company is late. The Company has also agreed pay all expenses associated with
each registration, including filing and printing fees, counsel and accounting
fees and expenses, listing fees and other reasonable fees. In addition, a fee
for one counsel for investor for the initial registration statement and for each
additional registration
-20-
statement covering the registrable securities shall be borne by the Company,
which fee shall not exceed $5,000.
Summary of Material Terms of Equity Line Agreement
Commitment Period and Puts
Under the Equity Line Agreement, the investors have agreed that, the
Company may deliver a put notice to the investors for the period commencing 60
days after the effective date of the registration statement through the earlier
of: (i) the date on which the investors shall have purchased shares of Common
Stock for the lesser of: (a) $25,000,000, or (b) unless stockholder approval is
obtained, up to 19.9% of the Company's issued and outstanding common stock of
the Company on the date of the Equity Line Agreement, (ii) the date the
agreement is terminated by either party under the terms of the agreement, or
(iii) twenty-four months following the commencement date. During the commitment
period, if the conditions precedent to each put are met, the Company shall
deliver a put notice to the investors which sets forth the investment amount
which the Company intends to require the investors to purchase. The minimum put
amount is $50,000. The maximum put amount is the lesser of $3,000,000 and two
hundred (200%) percent of the weighted average volume of the Common Stock for
the fifteen trading days prior to each put. This maximum put amount is solely
for the purposes of each put, however it does not effect the maximum commitment
amount available to the Company. The purchase price of the investors for a put
shall be the average of the lowest closing bid prices of the Common Stock for
any three (3) trading days during the ten trading day period following the put
date, less an eight (8%) percent discount to such market price. The Company is
under no obligation or commitment to deliver any put notice and may terminate
the Equity Line Agreement at any time and for any reason.
Conditions Precedent
The right of the Company to deliver each put notice and the obligation of
the investors to acquire put shares at a closing of such put is subject to the
satisfaction of certain closing conditions: effectiveness of a registration
statement with the SEC, accuracy of representations and warranties, no material
adverse effect, no delisting of Common Stock from a principal market (AMEX,
Nasdaq or OTC Bulletin Board), investor cannot exceed 4.99% beneficial ownership
of Common Stock, expiration of a 5 trading day cushion between closing of a put
and a subsequent put notice, and no violation of stockholder approval
requirements of AMEX or other exchange).
Covenants of the Company
In connection with the Equity Line Agreement, the Company made certain
covenants to the investors including the reservation of shares of Common Stock
to cover potential put notices by the Company, the use of commercially
reasonable efforts to maintain the listing of the Common Stock on AMEX and the
listing of the put shares on AMEX, and no issuance of Common Stock to a third
party (other than certain exempt issuances, underwritten offerings and other
exceptions) thirty days prior to or subsequent to a closing date of a put.
-21-
Representations and Warranties
The Equity Line Agreement contains representations and warranties by the
Company relating to, among other things, its capitalization, due authorization,
SEC filings and financial statements, material adverse changes and material
breaches, defaults or violations in the Company's charter documents, statutes,
court or governmental orders or material contracts and litigation. The Equity
Line Agreement also contains representations and warranties by the investors
relating to, among other things, their status as an accredited investor and
purchase for own account, authority, no conflicts, disclosure, financial
capability, and status as an underwriter.
Registration Rights
The Company has agreed to file a registration statement to register shares
of Common Stock to be sold under the Equity Line Agreement, representing 125% of
the commitment amount at the average closing price for the five trading days
prior to such filing within 90 business days of the date of the Equity Line
Agreement and to have the registration statement declared effective by the SEC
within 180 days of such filing date. The Company has agreed to keep the
registration statement effective until the earlier of (i) the date that is one
year after the completion of the last closing date under the Equity Line
Agreement, (ii) the date when the investor may sell all registrable securities
under Rule 144 of the Securities Act of 1933 without volume limitations, or
(iii) the date when the investor no longer owns any of the registrable
securities. In the event the Company fails to file the registration statement
within 90 days of the date of the Equity Line Agreement or the registration
statement is not declared effective within 180 days of such date, the Company
has agreed to pay the investor liquidated damages equal to 1.0% of the cost of
all Common Stock then held by the investor purchased under the Equity Line
Agreement for each 15 business day period (or portion thereof) for which the
Company is late. The Company has also agreed pay all expenses associated with
each registration, including filing and printing fees, counsel and accounting
fees and expenses, listing fees and other reasonable fees. In addition, a fee
for one counsel for investor for the initial registration statement and for each
additional registration statement covering the registrable securities shall be
borne by the Company, which fee shall not exceed $5,000.
Vote Required
Approval of the issuance of Common Stock under the Equity Line Agreement
described in this Proposal 4 requires the affirmative vote of a majority of the
outstanding shares of Common Stock present in person or represented by proxy at
the Special Meeting and entitled to vote at the Special Meeting. Abstentions
will have the same effect as votes against the proposal and broker non-votes
will have no effect. The Board of Directors recommends a vote "FOR" approval of
the Proposal.
The Board of Directors Recommends You Vote "FOR"
Approval of the January 2005 Equity Line Financing
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--------------------------------------------------------------------------------
PROPOSAL 5
APPROVAL OF AN AMENDMENT TO THE 2005 STOCK INCENTIVE PLAN TO
REPLENISH THE SHARES OF COMMON STOCK ISSUABLE THEREUNDER
--------------------------------------------------------------------------------
On September 15, 2004, the Board of Directors adopted, and on November 18,
2004 the stockholder's approved, the Company's 2005 Stock Incentive Plan (the
"2005 Plan"). The 2005 Plan was designed to provide an incentive to employees
(including directors and officers who are employees), and to consultants and
directors who are not employees of the Company and to offer an additional
inducement in obtaining the services of such persons. Moreover, the 2005 Plan
was designed to compensate both current or former employees of the Company to
whom the Company had commitments or obligations.
Replenishment of the Number of Common Shares of Common Stock Reserved for
Issuance under the Plan
The Company is proposing to amend the 2005 Plan to replenish the number of
shares of Common Stock available for issuance (the "Replenishment"). Currently,
the aggregate number of shares available for issuance under the 2005 Plan was
limited to 5,500,000 shares of Common Stock. The proposal, if approved, would
not increase the aggregate number of shares of Common Stock available for
issuance under the Plan from the level last approved by stockholders.
During the period from November 18, 2004 (the date on which the approval of
the current maximum number of shares available for issuance under the Plan was
based) to the Record Date, an aggregate of 5,500,000 shares of Common Stock have
been issued or reserved for issuance to the Company's employees, consultants and
directors through restricted stock awards or reserved for the exercise of
options, thereby reducing the number of shares of Common Stock currently
available for issuance under the Plan by this same number.
Accordingly, as of the Record Date there are no shares of Common Stock
available for the grant of restricted stock awards and options under the Plan.
Shareholders will be asked to approve a resolution to reconstitute the Plan
to the level last approved by shareholders by replenishing the number of shares
of Common Stock available for issuance under the 2005 Plan by an additional
5,500,000 shares of Common Stock. If the Replenishment is approved by
shareholders, an aggregate of 11,000,000 shares of Common Stock will be
outstanding or reserved for issuance, or available for issuance under the 2005
Stock Incentive Plan.
Rationale for the Amendment to Replenish the 2005 Plan
The Company is highly dependent on its employees due to the nature of its
business, particularly as it relates to the source code of its products, the
comprehension of which resides in our current employees, as well as the
experience of other key employees through their efforts in our nascent industry
of healthcare connectivity. Recently, the Company has been unable to adequately
compensate its employees in cash in a timely manner, and has also had many of
its current and former employees voluntarily agree to salary reductions. As a
result of our reductions in force, there was significant uncertainty among
existing employees with respect to the stability of their own employment with
the Company. The 2005 Plan was and is a vital part of imbuing our employees with
an ongoing sentiment of long-term potential and value of their efforts. The
extraordinary circumstances the Company is facing has
-23-
required a high degree of dedication and commitment from its employees, for
which the 2005 Plan was and is the only potential source of meaningful and
appropriate compensation. Quite simply, much of the potential value represented
by the Company's products and opportunities would be greatly diminished or
permanently harmed, if its remaining employees could not be granted appropriate
incentives to remain with the Company. In addition to the Company's employees,
the Company desires to utilize restricted stock awards to compensate third party
consultants who effectively market our products on a performance basis. This
will save costs to the Company as an alternative to payment in cash which may
not be available, or may be available through the issuance of securities of the
Company at a discount to market prices, making such issuances more expensive
than direct issuances to consultants to satisfy contractual obligations of the
Company to such persons. In addition, payment of our consultants in shares of
Common Stock aligns its interests with the Company's and such consultants have a
vested interest in the Company's future success.
The following is a materially complete summary of the 2005 Plan.
Shares Subject to the Stock Incentive Plan and Eligibility
The 2005 Plan currently authorizes the issuance of stock appreciation
rights ("SARs") and the grant of options and restricted stock related to a
maximum of up to five million five hundred thousand (5,500,000) shares of the
Company's issued and outstanding shares of Common Stock, including the issuance
of any SARs, options or restricted stock to employees (including officers and
directors who are employees), and to consultants and directors who are not
employees of the Company, and to current and former employees of the Company to
whom the Company has commitments or obligations. If this Proposal 4 is approved,
the maximum shares of Common Stock shall be increased to eleven million
(11,000,000) shares. Notwithstanding the maximum number of shares of the
Company's Common Stock available under the 2005 Plan, the Company shall not
grant SAR's, options or restricted stock to its employees (including officers
and directors who are employees) and consultants in excess of thirty (30%)
percent of the Company's outstanding shares of common stock, on a fully-diluted,
as converted basis, including conversion of convertible notes or exercise of
warrants outstanding. Upon expiration, cancellation, termination or forfeiture
of stock grants or options, the shares of the Common Stock subject thereto will
again be available for grant under the 2005 Plan.
Type of Award
The following awards ("Awards") may be granted under the 2005 Plan: stock
options which are either incentive stock options ("ISOs"), within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
nonqualified stock options which do not qualify as ISOs ("NQSOs"), SARs and
Common Stock which may or may not be subject to contingencies or restrictions.
ISOs, however, may only be granted to employees. The Company makes no
representations or warranties as to the qualification of any option as an
"incentive stock option" under the Code.
Administration
The 2005 Plan will be administered by a committee of the Board of Directors
consisting of at least three members of the Board (the "Committee"). It is
intended that at least two (2) members of the Committee will be a "non-employee
director" within the meaning of Rule 16b-3 (as the same may be in effect and
interpreted from time to time, "Rule 16b-3") promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). It is also intended that
at least two (2) members of the Committee will be an "outside director" within
the meaning of Section 162(m) of the Code.
-24-
Among other things, the Committee is empowered to determine, within the
express limits contained in the 2005 Plan: the employees, consultants and
directors who shall be granted Awards; the type of Award to be granted; the
times when an Award shall be granted; the number of shares of Common Stock to be
subject to each Award; the term of each option and SAR; the date each option and
SAR shall become exercisable; whether an option or SAR shall be exercisable in
whole or in installments and, if in installments, the number of shares of Common
Stock to be subject to each installment, whether the installments shall be
cumulative, the date each installment shall become exercisable and the term of
each installment; whether to accelerate the date of exercise of any option or
SAR or installment thereof; whether shares of Common Stock may be issued upon
the exercise of an option as partly paid and, if so, the dates when future
installments of the exercise price shall become due and the amounts of such
installments; the exercise price of each option and the base price of each SAR;
the price, if any, to be paid for a share Award; the form of payment of the
exercise price of an option; the form of payment upon exercise of a SAR; whether
to restrict the sale or other disposition of a stock Award or the shares of
Common Stock acquired upon the exercise of an option or SAR and, if so, to
determine whether such contingencies and restrictions have been met and whether
and under what conditions to waive any such contingency or restriction; whether
and under what conditions to subject all or a portion of the grant or exercise
of an option or SAR, the vesting of a stock Award or the shares acquired
pursuant to the exercise of an option or SAR to the fulfillment of certain
contingencies or restrictions, including without limitation, contingencies or
restrictions relating to entering into a covenant not to compete, to financial
objectives and/or to the period of continued employment of the Award holder, and
to determine whether such contingencies or restrictions have been met; whether
an Award holder is disabled; the amount, if any, necessary to satisfy the
obligation to withhold taxes or other amounts; the fair market value of a share
of Common Stock; with the consent of the Award holder, to cancel or modify an
Award, pursuant to the terms of the Plan and the Code; to prescribe, amend and
rescind rules and regulations relating to the Plan; and to approve any provision
which under Rule 16b-3 requires the approval of the Board of Directors, a
committee of non-employee directors or the stockholders to be exempt (unless
otherwise specifically provided herein). The Committee is also authorized to
prescribe, amend and rescind rules and regulations relating to the 2005 Plan and
to make all other determinations necessary or advisable for administering the
2005 Plan and to construe each contract ("Contract") entered into by the Company
with an Award holder under the 2005 Plan.
Terms and Conditions of Options
Options granted under the 2005 Plan will be subject to, among other things,
the following terms and conditions:
(a) The exercise price of each option will be determined by the Committee;
provided, however, that the exercise price of an ISO may not be less
than the fair market value of the Common Stock on the date of grant
(110% of such fair market value if the optionee owns (or is deemed to
own) more than 10% of the voting power of the Company).
(b) Options may be granted for terms determined by the Committee;
provided, however, that the term of an ISO may not exceed 10 years (5
years if the optionee owns (or is deemed to own) more than 10% of the
voting power of the Company).
(c) The maximum number of shares of Common Stock for which options and
SARs may be granted to an employee in any calendar year is 1,000,000.
In addition, the aggregate fair market value of shares with respect to
which ISOs may be granted to an employee which are exercisable for the
first time during any calendar year may not exceed $100,000.
-25-
(d) The exercise price of each option is payable in full upon exercise or,
if the applicable Contract permits, in installments over a maximum six
month period. Payment of the exercise price of an option may be made
in cash, certified check or, if the applicable Contract permits, in
mature shares of Common Stock or any combination thereof.
(e) If eligible, an optionee who uses previously acquired shares of Common
Stock to exercise a prior option granted under the Plan shall
automatically be granted an option to purchase the same number of
shares so used; provided, however, that the exercise price of the new
option shall be the fair market value of the Common Stock on the date
of grant of such new option; and further provided that if the prior
option was an ISO and at the time the new option is granted, the
optionee owns (or is deemed to own) more than 10% of the voting power
of the Company, the exercise price of the new option shall be 110% of
the fair market value of the Common Stock on the date of grant of such
new option and its terms shall not exceed five years.
(f) Options may not be transferred other than by will or by the laws of
descent and distribution, and may be exercised during the optionee's
lifetime only by him or her (or by his or her legal representative).
Terms and Conditions of SARs
SARs may be granted by the Committee, in its sole discretion, to employees
(including officers and directors who are employees), consultants to, and
outside directors of the Company. A SAR entitles the holder to be paid upon
exercise, in cash, check or by shares of Common Stock, as determined by the
Committee, the excess (if any) of the fair market value of the shares of Common
Stock on the date of exercise over the base price of such shares. If the
Contract so provides, such amount may be multiplied by a performance factor
which meets the requirements of the Code. The base price is determined by the
Committee upon grant, but it may not be less than the fair market value of the
Common Stock on the grant date. The term of any SAR is determined by the
Committee, but may not exceed ten years.
Restricted Stock Awards
The Committee may from time to time, in its sole discretion, grant shares
of Common Stock to current and former employees (including officers and
directors who are employees) of, or consultants to, the Company, which may or
may not be subject to such contingencies and restrictions as set forth in the
applicable Contract. Upon issuance of the shares, the Award holder is considered
to be the record owner of the shares and, subject to the contingencies and
restrictions, if any, set forth in the Award, has all the rights of a
shareholder. The shares shall vest in the Award holder when all of the
restrictions and contingencies, if any, lapse. Accordingly, the Committee may
require that such shares be held by the Company, together with a stock power
duly endorsed in blank by the Award holder, until the shares vest in the Award
holder.
Termination of Relationship
Except as may otherwise be provided in the applicable Contract, if an Award
holder's relationship with the Company as an employee or consultant is
terminated for any reason (other than the death or disability of the Award
holder), the option or SAR may be exercised, to the extent exercisable at the
time of termination of such relationship, within three months thereafter, but in
no event after the expiration of the term of the option or SAR. If an Award
holder's relationship is terminated for any reason (including the death or
disability of the Award holder), the Award shall cease any further vesting and
the unvested portion shall be forfeited to the Company without consideration. If
the relationship was terminated either
-26-
for cause or without the consent of the Company, the option or SAR will
terminate immediately. In the case of the death of a holder while an employee or
consultant (or, generally, within three months after termination of such
relationship, or within one year after termination of such relationship by
reason of disability), except as otherwise provided in the Contract, his or her
legal representative or beneficiary may exercise the option or SAR, to the
extent exercisable on the date of death, within one year after such date, but in
no event after the expiration of the term of the option or SAR. Except as may
otherwise be provided in the applicable Contract, an optionee whose relationship
with the Company was terminated by reason of his or her disability may exercise
the option or SAR, to the extent exercisable at the time of such termination,
within one year thereafter, but not after the expiration of the term of the
option. The holder shall have no right to continue as an employee, consultant or
director of the Company or interfere in any way with any right of the Company to
terminate the holder's relationship to the Company at any time for any reason
whatsoever without liability to the Company.
Withholding
The Company may withhold cash and/or shares of Common Stock to be issued
under an Award or upon exercise of an option or SAR, having an aggregate value
equal to the amount which the Company determines is necessary to meet its
obligations to withhold any federal, state and/or local taxes or other amounts
incurred by reasons of the grant, vesting, exercise or disposition of an Award
or the disposition of underlying shares of Common Stock. Alternatively, the
Company may require the Award holder to pay the Company such amount, in cash,
promptly upon demand.
Adjustment in Event of Capital Changes
Appropriate adjustments will be made in the number and kind of shares
available under the 2005 Plan, in the number and kind of shares subject to each
outstanding option or SAR and the exercise or base prices of such options or
SARs, any contingency based on the number or kind of shares and the maximum
number of options and SARs that may be granted to an employee in any calendar
year, in the event of any change in the Common Stock by reason of any stock
dividend, spinoff, split-up, combination, reclassification, recapitalization,
merger in which the Company is the surviving corporation, exchange of shares or
the like. In the event of (a) the liquidation or dissolution of the Company, or
(b) a merger in which the Company is not the surviving corporation or a
consolidation, (c) any transaction (or series of related transactions) in which
(i) more than 50% of the outstanding Common Stock is transferred or exchanged
for other consideration or (ii) shares of Common Stock in excess of the number
of shares of Common Stock outstanding immediately preceding the transaction are
issued (other than to stockholder of the Company with respect to their shares of
stock in the Company), any outstanding options or SARs and unvested restricted
stock awards shall terminate upon the earliest of any such event, unless other
provision is made therefor in the transaction or the applicable contract.
Duration and Amendment of the 2005 Plan
No ISO may be granted under the 2005 Plan after the ten year anniversary of
the date of adoption of the 2005 Plan. The Board of Directors may at any time
terminate or amend the 2005 Plan; provided, however, that, without the approval
of the Company's stockholders, no amendment may be made which would (a) except
as a result of the anti-dilution adjustments described above, increase the
maximum number of shares available for the grant of Awards or increase the
maximum number of options or SARs that may be granted to an employee in any
year, (b) change the eligibility requirements for persons who may receive Awards
or (c) make any change for which applicable law, regulation, ruling or
interpretation by the applicable governmental agency or regulatory authority
requires stockholder approval. No termination or amendment may adversely affect
the rights of an Award holder with respect to an outstanding Award without the
holder's consent.
-27-
Federal Income Tax Treatment
The following is a general summary of the federal income tax consequences
under current tax law of options, SARs and restricted stock. It does not purport
to cover all of the special rules, including special rules relating to the
exercise of an option with previously-acquired shares, or the state or local
income or other tax consequences inherent in the grant, vesting or disposition
of an Award or the ownership or disposition of the underlying shares of Common
Stock.
An optionee will not recognize taxable income for federal income tax
purposes upon the grant of an option or SAR.
Upon the exercise of a NQSO, the optionee will recognize ordinary income in
an amount equal to the excess, if any, of the fair market value of the shares
acquired on the date of exercise over the exercise price thereof, and the
Company will generally be entitled to a deduction for such amount at that time.
If the optionee later sells shares acquired pursuant to the exercise of a NQSO,
he or she will recognize long-term or short-term capital gain or loss, depending
on the period for which the shares were held. Long-term capital gain is
generally subject to more favorable tax treatment than ordinary income or
short-term capital gain.
Upon the exercise of an ISO, the optionee will not recognize taxable
income. If the optionee disposes of the shares acquired pursuant to the exercise
of an ISO more than two years after the date of grant and more than one year
after the transfer of the shares to him or her, the optionee will recognize
long-term capital gain or loss and the Company will not be entitled to a
deduction. However, if the optionee disposes of such shares within the required
holding period, all or a portion of the gain will be treated as ordinary income
and the Company will generally be entitled to deduct such amount.
In addition to the federal income tax consequences described above, an
optionee may be subject to the alternative minimum tax, which is payable to the
extent it exceeds the optionee's regular tax. For this purpose, upon the
exercise of an ISO, the excess of the fair market value of the shares over the
exercise price therefor is an adjustment which increases alternative minimum
taxable income. In addition, the optionee's basis in such shares is increased by
such excess for purposes of computing the gain or loss on the disposition of the
shares for alternative minimum tax purposes. If an optionee is required to pay
an alternative minimum tax, the amount of such tax which is attributable to
deferral preferences (including the ISO adjustment) is allowed as a credit
against the optionee's regular tax liability in subsequent years. To the extent
the credit is not used, it is carried forward.
Upon the exercise of a SAR, the Award holder will recognize ordinary income
in an amount equal to the amount payable by the Company upon such exercise, and
the Company will generally be entitled to a deduction therefor.
An employee, consultant or director who receives a grant of stock which is
subject to a substantial risk of forfeiture will generally recognize ordinary
income equal to the fair market value of the stock at the time the restriction
lapses. Alternatively, the Award holder may elect to be taxed on the value of
unrestricted stock at the time of grant. The Company is generally entitled to a
deduction equal to the amount required to be included in income by the Award
holder.
-28-
Equity Compensation Plan Information
The following table provides information about our Common Stock that may be
issued upon the exercise of options, warrants and rights under our stock option
plans.
(c)
(a) Number of securities
Number of securities to (b) remaining available for future
be issued upon exercise Weighted average exercise issuance under equity compensation
of outstanding options, price of outstanding options, plans (excluding securities
Plan Category warrants and rights warrants and rights reflected in Column (a))
------------- --------------------------- ----------------------------- --------------------------------
Equity compensation
plans approved by security 4,496,887 $3.04 0
holders
Equity compensation
plans not approved by security N/A N/A N/A
holders
In addition to the issuance of Common Stock under our stock option plans
set forth in the above table, we have entered into restricted stock agreements
to issue restricted shares of common stock and stock option agreements to issue
an aggregate of 2,526,425 shares of common stock underlying stock options to
certain of our current executive officers, employees and consultants which are
subject to the vesting provisions contained in each agreement and stockholder
approval. We anticipate that these obligations shall be paid through the
issuance of restricted shares of Common Stock or options to be issued under the
2005 Plan. We will enter restricted stock or option agreements with such persons
on terms and conditions to be agreed upon. The number of such restricted shares
to be issued will be based upon the market price of the Common Stock on the date
of grant and other factors.
Required Vote
Approval of the amendment to replenish the 2005 Plan requires the
affirmative vote of the holders of a majority of the shares of Common Stock
present, in person or by proxy, at the Meeting and entitled to vote on this
proposal. If the Replenishment is not approved by stockholders, the 2005 Plan
will still be in effect at current levels.
The Board of Directors Recommends You Vote "FOR"
Approval of the Amendment to the 2005 Stock Incentive Plan
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PROPOSAL 6
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
--------------------------------------------------------------------------------
BDO Seidman, LLP served as the Company's independent registered public
accountants for the fiscal years ended December 31, 2003 and December 31, 2004.
Prior to the engagement of BDO Seidman, LLP as our independent registered public
accountants, the Company's independent registered public accountants for the
fiscal year ended December 31, 2002 was Ehrhardt Keefe Steiner & Hottman, PC.
During the two years ended December 31, 2002 and through the date of their
dismissal by the Company, the Company had no "reportable events", as such term
is defined in Item 304(a)(1)(v) of Regulation S-K.
It is proposed that the stockholders ratify the appointment by the Board of
Directors of BDO Seidman, LLP as independent registered public accountants for
the Company for the 2004 fiscal year.
Approval by the stockholders of the appointment of independent registered
public accountants is not required but the Board deems it desirable to submit
this matter to the stockholders. If a majority of the Common Stock present and
entitled to vote at the Special Meeting should not approve the selection of BDO
Seidman, LLP, the selection of independent registered public accountants will be
reconsidered by the Board of Directors.
Audit Fees
BDO Seidman, LLP billed us $380,000 for services rendered for the audit of
our annual consolidated financial statements for fiscal 2003 included in our
Form 10-K and the reviews of the financial statements included in our Forms 10-Q
for fiscal 2003. No fees were paid to BDO Seidman, LLP in fiscal 2002.
Audit-Related Fees
For fiscal 2003, BDO Seidman, LLP billed us $150,000 for services rendered
for assurance, consultations and related services that are reasonably related to
the performance of the audit or review of the financial statements of the
Company, including audits and reviews of the financial statements of Frontline.
No fees were paid to BDO Seidman, LLP in fiscal 2002.
Tax Fees
For fiscal 2003, BDO Seidman, LLP billed us $50,000 for services rendered
in connection with tax consultation and compliance for the Company. No fees were
paid to BDO Seidman, LLP in fiscal 2002.
All Other Fees
There were no other fees paid to BDO Seidman, LLP during the fiscal year
ended December 31, 2003.
In connection with the revised standards for independence of the Company's
independent registered public accountants promulgated by the SEC, the Audit
Committee has considered whether the provision of such services is compatible
with maintaining the independence of BDO Seidman, LLP and
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has determined that such services are compatible with the continued independence
of BDO Seidman, LLP.
It is our practice that all services provided to us by our independent
registered public accountants be pre-approved by our Audit Committee. No part of
our independent auditor services related to Audit Related Fees, Tax Fees or All
Other Fees listed above was approved by the audit committee pursuant to the
exemption from pre-approval provided by paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X.
Required Vote
Ratification of the appointment of BDO Seidman, LLP as the Company's
independent registered public accountants requires the affirmative vote of a
majority of the shares present in person or by proxy at the Special Meeting.
The Board of Directors Recommends
That You Vote "FOR" the Ratification of the Appointment
of BDO Seidman, LLP as
Independent Registered Public Accountants of the Company
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OTHER BUSINESS
The Board of Directors has no other business to be brought before the
Special Meeting. No other business may properly come before the Special Meeting.
STOCKHOLDER PROPOSALS
The Company intends to hold its 2005 Annual Meeting of Stockholders on or
about June 30, 2005. Any stockholder proposal intended to be included in the
Company's proxy statement and form of proxy for presentation at the 2005 Annual
Meeting of Stockholders (the "2005 Meeting") pursuant to Rule 14a-8 ("Rule
14a-8"), as promulgated under the Securities Exchange Act of 1934, must be
received by the Company not later than February 1, 2005. As to any proposals
submitted for presentation at the 2005 Meeting outside the processes of Rule
14a-8, the proxies named in the form of proxy for the 2005 Meeting will be
entitled to exercise discretionary authority on that proposal unless the Company
receives notice of the matter on or before May 17, 2005. However, even if such
notice is timely received, such proxies nevertheless may be entitled to exercise
discretionary authority on that matter to the extent permitted by Securities and
Exchange Commission regulations.
Any stockholder proposals, as well as any questions relating thereto,
should be directed to the Secretary of the Company at 33 Maiden Lane, New York,
New York 10038.
By Order of the Board of Directors
Andrew Brown
Chairman of the Board
President and Chief Executive Officer
February __, 2005
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PROXY PROXY
----- -----
RAMP CORPORATION
(Solicited on behalf of the Board of Directors)
The undersigned holder of Common Stock of RAMP CORPORATION, revoking all
proxies heretofore given, hereby constitutes and appoints Andrew Brown, Proxy,
with full power of substitution, for the undersigned and in the name, place and
stead of the undersigned, to vote all of the undersigned's shares of said stock,
according to the number of votes and with all the powers the undersigned would
possess if personally present, at the Special Meeting of Stockholders of RAMP
CORPORATION, to be held at the offices of the Company located at 33 Maiden Lane,
New York, New York on __________, March __, 2005, at 10:00 A.M., and at any
adjournments or postponements thereof.
The undersigned hereby acknowledges receipt of the Notice of Meeting and
Proxy Statement relating to the meeting and hereby revokes any proxy or proxies
heretofore given.
Each properly executed Proxy will be voted in accordance with the
specifications made on the reverse side of this Proxy and in the discretion of
the Proxies on any other matter that may properly come before the meeting. Where
no choice is specified, this Proxy will be voted FOR Proposals 1, 2, 3, 4, 5 and
6.
PLEASE MARK, DATE AND SIGN THIS PROXY ON THE REVERSE SIDE
__________________ _______________ PLEASE MARK YOUR CHOICE LIKE |X|
ACCOUNT NUMBER COMMON THIS IN BLUE OR BLACK INK:
Will attend the meeting |_|
The Board of Directors Recommends a Vote FOR
Proposals 1, 2, 3, 4, 5 and 6
(1) to ratify the sale and issuance of shares of FOR AGAINST ABSTAIN
common stock in connection with the March 2004
private placement of common stock and July |_| |_| |_|
2004 private placement of convertible notes
and warrants.
(2) to approve the sale and issuance of shares of FOR AGAINST ABSTAIN
common stock in connection with the December
2004 private placement of convertible |_| |_| |_|
promissory notes in the aggregate principal
amount of $452,000.
(3) to approve the sale and issuance of shares of FOR AGAINST ABSTAIN
common stock in connection with the January
2005 private placement of 8% convertible |_| |_| |_|
redeemable debentures, common stock purchase
warrants and additional investment rights in
the aggregate principal amount of up to
$4,000,000.
(4) to approve the sale and issuance of shares of FOR AGAINST ABSTAIN
common stock in connection with the January
2005 equity line financing of common stock of |_| |_| |_|
up to $25,000,000.
(5) to approve an amendment to the Company's 2005 FOR AGAINST ABSTAIN
Stock Incentive Plan to replenish the number
of shares of Common Stock issuable thereunder. |_| |_| |_|
(6) to ratify the appointment of BDO Seidman, LLP FOR AGAINST ABSTAIN
as independent registered public accountants
of the Company for the fiscal year ending |_| |_| |_|
December 31, 2004.
Dated _____________________, 2005
-----------------------------------------
-----------------------------------------
Signature(s) (Signatures should conform
to names as registered. For jointly owned
shares, each owner should sign. When
signing as attorney, executor,
administrator, trustee, guardian or
officer of a corporation, please give
full title.)
PLEASE MARK AND SIGN ABOVE AND RETURN PROMPTLY
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