SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
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:
[ ] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to /Section/240.14a-11(c) or
/Section/240.14a-12
ASD GROUP, INC.
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
N/A
------------------------------------------------------------------------
(Name of Persons(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on the 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:
<PAGE>
ASD GROUP, INC.
1 INDUSTRY STREET
POUGHKEEPSIE, NEW YORK 12603
March 2, 1999
Dear Stockholder:
You are cordially invited to attend the annual meeting of the
stockholders of ASD Group, Inc., a Delaware corporation (the "Company"), to be
held at 152 West 57th Street, 7th Floor, New York, New York 10019, on March 15,
1999, at 10:00 a.m., Eastern Time.
At the meeting, you will be asked to consider and ratify the terms of a
financial restructuring (the "Restructuring") pursuant to which the Company
restructured certain of its indebtedness and obtained a capital infusion
pursuant to (i) the Securities Purchase Agreement ("Purchase Agreement") dated
June 26, 1998 by and among the Company, the parties listed on Schedule 1 to the
Purchase Agreement, and Gary D. Horne, (ii) Subscription Agreements entered into
with three investors in November 1998 (the "November 1998 Subscription
Agreements"), and (iii) Subscription Agreements which are expected to be entered
into on or before March 31, 1999 (the "March 1999 Subscription Agreements"). You
will also be asked to consider and vote upon an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of the
Company's common stock, par value $.01 per share (the "Common Stock"), from an
aggregate of 10,000,000 shares to an aggregate of 50,000,000 shares (the
"Capital Amendment"), the election of five directors for the coming year and the
appointment of Deloitte & Touche LLP as the Company's auditors. The attached
Proxy Statement describes the proposed Restructuring in detail and provides
additional pertinent information about the Purchase Agreement, the Subscription
Agreements and the other Restructuring documents. YOU ARE URGED TO CAREFULLY
READ THE FULL TEXT OF THE PROXY STATEMENT AND ITS EXHIBITS.
Pursuant to the Purchase Agreement, the investors agreed to purchase
shares of the Company's Common Stock, Series A Stock, Series B Stock and
Warrants (as defined below). On July 1, 1998, the investors purchased 392,017
shares of Common Stock (the "Shares"), 215,909 shares of Series A Convertible
Preferred Stock ("Series A Stock"), 330,799 shares of Series B Convertible
Preferred Stock ("Series B Stock") and five-year warrants to purchase an
additional 4,000,000 shares of Common Stock at an exercise price of $.75 per
share (the "Warrants") for $1,500,000. Thereafter, the Company consummated the
sale of an additional 137,000 shares of Series A Stock for $548,000 (together
with the securities sold July 1, 1998, the "Initial Financing"). Additionally,
pursuant to the November 1998 Subscription Agreements, the Company sold 825
shares of Series D Convertible Preferred Stock ("Series D Stock") to three
investors for $825,000. Moreover, prior to the meeting, pursuant to the March
1999 Subscription Agreements the Company expects to sell up to 1,500 shares of
Series E Convertible Preferred Stock ("Series E Stock") to raise up to an
additional $1,500,000. Upon approval of the Restructuring and the Capital
Amendment, the Series A Stock, Series B Stock, Series D Stock and Series E Stock
(assuming all the shares of Series E stock offered are sold) become convertible
into approximately 10,634,096 shares of Common Stock (based on a current market
price of $.75 per share of Common Stock). Moreover, pursuant to the warrants,
the investors will have the right to purchase an additional 4,000,000 shares of
Common Stock for a period of five years commencing the date the Restructuring
and Capital Amendment are approved by the Company's stockholders.
As part of the Restructuring, the Company reached agreement with PNC
Bank, National Association ("PNC Bank"), Bankers Trust Company ("Bankers Trust")
and a group of private noteholders (the "Noteholder Group"), its three primary
lenders, to restructure the Company's outstanding indebtedness. As part of the
agreement with the Noteholder Group, $880,000 in debt
<PAGE>
was converted into shares of Series C Convertible Preferred Stock (the "Series C
Stock"). Upon approval of the Restructuring and Capital Amendment, the Series C
Stock will automatically convert into approximately 734,610 shares of Common
Stock, subject to adjustment.
In addition to the foregoing, holders of outstanding warrants to
purchase an aggregate of 118,126 shares of Common Stock exercisable at $2.69 per
share agreed to exchange these warrants for new warrants to purchase 381,818
shares at $1.50 per share. The Restructuring would have triggered anti-dilution
provisions of the outstanding warrants resulting in such warrants representing
the right to purchase at least 478,198 shares at an exercise price of less than
$.75 per share.
As previously disclosed, commencing the third quarter of the fiscal
year ended June 26, 1998 ("Fiscal 1998"), the Company's sales have been
adversely affected by a reduction in orders by several customers, principally
those in the Asian market. As a result, the Company was experiencing cash flow
problems and did not have sufficient capital to meet its current operating
obligations. As a result of the Company's financial situation, the Company has
experienced difficulties maintaining existing and obtaining new credit
relationships with its vendors and difficulties with existing and prospective
customers. Prior to the Restructuring, the Company was in default of certain
covenants governing its debt agreements.
The Company expects operating losses to continue at least through June
25, 1999. For the quarter ended December 25, 1998, the Company reported net
losses of approximately $3,000,000. These losses result from, among other
things, an inventory write-off of $1,500,000 taken in the quarter ended December
25, 1998. In addition, during December 1998, the Company made a decision to sell
the Grand Avenue facility which is currently idle as part of its financial plan
to reduce debt and increase equity. However, the Company does not have any
written contract for a sale of the property at this time. The amount of the
impairment in the carrying value of the Grand Avenue facility was charged to
operations in the quarter ended December 25, 1998.
The Company may require additional capital notwithstanding the money
raised as part of the Restructuring. Management believes the Company will be in
a better position to raise additional capital after the consummation of the
Restructuring, although there can be no assurance that this will be the case. If
the Proposals 1 and 2 (the Restructuring and Capital Amendment) are not
approved, the Company will be forced to repurchase the shares of Convertible
Preferred Stock. Should this occur, the Company will probably not have the
resources to repurchase these shares. Moreover, even if the Company did have the
capital to repurchase such shares, the Company would probably once again be in
default of covenants under its debt agreements, would be unable to meet its
current operating obligations and might be required to seek bankruptcy
protection.
In addition, the Company received notice from The Nasdaq Stock Market
on February 23, 1999 that the Nasdaq Listings Qualifications Panel determined to
delist the Company's Common Stock from The Nasdaq Stock Market effective
February 23, 1999. The Company failed to meet two requirements for continued
listing on The Nasdaq SmallCap Market. The Company has requested a review of
this decision by the Nasdaq Listing and Hearing Review Council. In the interim,
the Common Stock is being quoted on the OTC Bulletin Board and management
continues its efforts to reduce liabilities and increase stockholders' equity.
Management hopes to be able to demonstrate compliance with The Nasdaq SmallCap
Market maintenance requirements and have a plan for sustained compliance by the
time this decision is reviewed by the Hearing Review Council. However, no
assurance can be given that the Company will be able to achieve compliance or
that the Nasdaq Hearing Review Council will agree to re-list the Company's
Common Stock on The Nasdaq Stock Market.
Finally, the Board believes that the Company will benefit from the new
management to be provided by the newly-appointed directors. Notwithstanding the
dilutive effect of the Restructuring and the investors' ability to exercise a
controlling influence on the Company, the Restructuring will still permit
current stockholders to participate in any future growth and profitability of
the Company and in its efforts to realize long-term value for stockholders.
THE BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE RESTRUCTURING AND
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE RESTRUCTURING AND EACH OF THE OTHER
PROPOSALS TO BE CONSIDERED AND VOTED UPON AT THE SPECIAL MEETING.
2
<PAGE>
In proposing the Restructuring to the Company's stockholders, the Board
considered, among other factors, the fairness opinion requested by the Company
of H.J. Meyers & Co., Inc. ("H.J. Meyers"), the underwriter of the Company's
initial public offering, which rendered its opinion that the Initial Financing
was a reasonable alternative when considered with other likely alternatives
available to the Company. In consideration for preparing the fairness opinion,
the Company paid H.J. Meyers a $25,000 fee and agreed to amend the terms of the
94,500 underwriters' warrants currently held by H.J. Meyers to lower the
exercise price from $8.3375 per share to $1.50 per share. In addition, the
Company agreed to issue to H.J. Meyers 10,000 shares of the Company's Common
Stock. A copy of the opinion of H.J. Meyers is annexed to the Proxy Statement as
Exhibit C. The Board also considered that despite significant efforts to access
additional capital, no alternative source of financing was available to the
Company other than as described.
The enclosed Proxy Statement contains a great deal of detailed
information regarding the Restructuring, the Purchase Agreement and the
Subscription Agreements, the parties involved and the process leading to the
Purchase Agreement and the Subscription Agreements. We urge you to carefully
consider all of the material in the Proxy Statement and the exhibits thereto and
to execute and return the enclosed form of proxy as soon as possible, whether or
not you expect to attend the meeting. A failure to vote, either by not returning
the enclosed proxy card or by checking the "Abstain" box on the proxy card, will
have the same effect as a vote against approval of the Restructuring.
Very truly yours,
/s/ JAY H. SOLOMONT
--------------------------
Jay H. Solomont
Chairman of the Board
3
<PAGE>
ASD GROUP, INC.
1 INDUSTRY STREET
POUGHKEEPSIE, NEW YORK 12603
----------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
ON MARCH 15, 1999
----------------------------
To the Stockholders of ASD Group, Inc.:
NOTICE IS HEREBY GIVEN that an Annual Meeting of Stockholders of ASD
Group, Inc., a Delaware corporation (the "Company"), will be held at the
Company's offices located at 152 West 57th Steeet, 7th Floor, New York, New York
10019, on Monday, March 15, 1999, at 10:00 a.m., Eastern Time, for the following
purposes:
(1) To consider and vote upon approval of the terms of a financial
restructuring (the "Restructuring") pursuant to which the
Company restructured certain of its indebtedness and obtained
a capital infusion pursuant to (i) the Securities Purchase
Agreement ("Purchase Agreement") dated June 26, 1998 by and
among the Company, the parties listed on Schedule 1 to the
Purchase Agreement and Gary D. Horne; (ii) Subscription
Agreements entered into with three investors in November 1998
(the "November 1998 Subscription Agreements"); and (iii)
Subscription Agreements which are expected to be entered into
on or before March 31, 1999 (the "March 1999 Subscription
Agreements"), all as described in the accompanying Proxy;
(2) To consider and vote upon a proposal to approve an amendment
to the Company's Certificate of Incorporation to increase the
number of authorized shares of the Company's common stock, par
value $.01 per share (the "Common Stock"), from 10,000,000
shares to 50,000,000 shares (the "Capital Amendment");
(3) To elect five directors to the Company's Board of Directors
for the ensuing year;
(4) To consider and vote upon an amendment to the Company's 1996
Stock Option Plan to increase the number of shares of the
Company's Common Stock reserved for issuance thereunder from
60,000 shares to 350,000 shares;
(5) To consider and vote upon a proposal to ratify the appointment
of Deloitte & Touche LLP as the Company's auditors for the
fiscal year ending June 25, 1999; and
(6) To transact such other business as may properly come before
the Annual Meeting and any adjournment or postponement
thereof.
<PAGE>
Pursuant to the Bylaws of the Company, the Board of Directors has fixed
the close of business on February 19, 1999 as the record date for the
determination of the stockholders entitled to notice of and to vote at the
Annual Meeting.
By Order of the Board of Directors
Kevin Homon
SECRETARY
Poughkeepsie, New York
March 2, 1999
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. EACH
STOCKHOLDER, WHETHER OR NOT HE OR SHE PLANS TO ATTEND THE ANNUAL MEETING, IS
REQUESTED TO SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
POSTAGE-PAID ENVELOPE WITHOUT DELAY. ANY PROXY GIVEN BY A STOCKHOLDER MAY BE
REVOKED AT ANY TIME BEFORE IT IS EXERCISED. ANY STOCKHOLDER PRESENT AT THE
ANNUAL MEETING MAY REVOKE HIS OR HER PROXY AND VOTE PERSONALLY ON EACH MATTER
BROUGHT BEFORE THE ANNUAL MEETING. HOWEVER, IF YOU ARE A STOCKHOLDER WHOSE
SHARES ARE NOT REGISTERED IN YOUR OWN NAME, YOU WILL NEED ADDITIONAL
DOCUMENTATION FROM YOUR RECORD HOLDER TO VOTE PERSONALLY AT THE ANNUAL MEETING.
<PAGE>
ASD GROUP, INC.
----------------------------
PROXY STATEMENT
FOR THE MARCH 15, 1999 ANNUAL MEETING OF STOCKHOLDERS
----------------------------
INTRODUCTION
This Proxy Statement is being furnished by ASD Group, Inc., a Delaware
corporation (the "Company"), to the holders of the Company's outstanding common
stock, par value $.01 per share (the "Common Stock"), in connection with the
solicitation of proxies by the Company's Board of Directors for use at an Annual
Meeting of Stockholders of the Company to be held at 10:00 a.m., Eastern Time,
on Monday, March 15, 1999, at 152 West 57th Street, 7th Floor, New York, New
York 10019 (the "Meeting"), and at any adjournment or postponement thereof.
The approximate date this Proxy Statement and the enclosed form of
proxy are first being sent to stockholders is March 2, 1999. The Company's
principal executive offices are located at 1 Industry Street, Poughkeepsie, New
York 12603, and its telephone number is (914) 452-3000.
INFORMATION CONCERNING PROXY
The enclosed Proxy is solicited on behalf of the Company's Board of
Directors (the "Board"). The giving of a proxy does not preclude the right to
vote in person should any stockholder giving the proxy so desire. Stockholders
have an unconditional right to revoke their proxy at any time prior to the
exercise thereof, either in person at the Meeting or by filing with the
Company's Secretary at the Company's headquarters a written revocation or duly
executed Proxy bearing a later date; however, no such revocation will be
effective until written notice of the revocation is received by the Company at
or prior to the Meeting.
The cost of preparing, assembling and mailing this Proxy Statement, the
Notice of Annual Meeting and the enclosed Proxy is to be borne by the Company.
In addition to the use of mail, employees of the Company may solicit proxies
personally and by telephone. The Company's employees will receive no
compensation for soliciting proxies other than their regular salaries. The
Company may request banks, brokers and other custodians, nominees and
fiduciaries to forward copies of the proxy material to their principals and to
request authority for the execution of proxies. The Company may reimburse such
persons for their expense in so doing.
IT IS IMPORTANT THAT YOUR PROXY CARD BE RETURNED PROMPTLY. THEREFORE,
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
RETURN THE PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
<PAGE>
PURPOSES OF THE MEETING
At the Meeting, the Company's stockholders will consider and vote upon
the following matters:
(1) To consider and vote upon approval of the terms of a financial
restructuring (the "Restructuring") pursuant to which the
Company restructured certain of indebtedness and obtained a
capital infusion pursuant to (i) the Securities Purchase
Agreement (the "Purchase Agreement") dated June 26, 1998 by
and among the Company, the parties listed on Schedule 1 to the
Purchase Agreement and Gary D. Horne; (ii) Subscription
Agreements entered into with three investors in November 1998
(the "November 1998 Subscription Agreements"); and (iii)
Subscription Agreements which are expected to be entered into
on or before March 31, 1999 (the "March 1999 Subscription
Agreements"), as described in this Proxy Statement;
(2) To consider and vote upon a proposal to approve an amendment
to the Company's Certificate of Incorporation to increase the
number of authorized shares of the Company's Common Stock,
from 10,000,000 shares to 50,000,000 shares (the "Capital
Amendment");
(3) To elect five directors to the Company's Board of Directors
for the ensuing year;
(4) To consider and vote upon an amendment to the Company's 1996
Stock Option Plan to increase the number of shares of the
Company's Common Stock reserved for issuance thereunder from
60,000 shares to 350,000 shares;
(5) To consider and vote upon a proposal to ratify the appointment
of Deloitte & Touche LLP as the Company's auditors for the
fiscal year ending June 25, 1999; and
(6) To transact such other business as may properly come before
the Meeting and any adjournment or postponement thereof.
Upon approval of Proposals 1 and 2, the shares of Series A Convertible
Preferred Stock (the "Series A Stock"), Series B Convertible Preferred Stock
(the "Series B Stock"), Series C Convertible Preferred Stock (the "Series C
Stock"), and Series D Convertible Preferred Stock ("Series D Stock") issued and
the shares of Series E Convertible Preferrerd Stock ("Series E Stock") to be
issued pursuant to the March 1999 Subscription Agreements become convertible
into an aggregate of approximately 11,368,706 shares of Common Stock (based on a
current market price of $.75 per share of Common Stock). Assuming conversion of
the preferred stock, the stockholders who currently own 100% of the Company's
issued and outstanding Common Stock will own 15.47% of the issued and
outstanding Common Stock.
If stockholder approval is not obtained for Proposals 1 and 2 by June
26, 1999, the holders of the Series A Stock and Series B Stock will have the
option to require the Company to repurchase the shares of Series A Stock and
Series B Stock purchased by them at a price equivalent to the purchase price
plus 12% per annum (prorated over the period such shares are outstanding). If
stockholder approval is not obtained for Proposals 1 and 2 by June 26, 1999, the
holders of the Series C Stock will have the option to require the Company to
repurchase the shares of Series C Preferred Stock at a purchase price equivalent
to their stated value of $10 per share. The holders of the Series D Stock and
Series E Stock will have the option to require the Company to repurchase the
shares purchased by them at a price equivalent to the stated value of $1,000 per
share (subject to adjustment), if stockholder approval of Proposals 1 and 2 is
not obtained by the date that is one year from the date the shares were
purchased. The shares were purchased between November 1998 and March 1999.
Unless contrary instructions are indicated on the enclosed Proxy, all
shares of Common Stock represented by valid proxies received pursuant to this
solicitation (and which have not been revoked in accordance with the procedures
set forth herein) will be voted FOR Proposals 1, 2, 3, 4 and 5. If a stockholder
specifies a different choice by means of the enclosed Proxy, his shares will be
voted in accordance with the specification so made. The Board does not know of
any other matters that may be brought before the Meeting. If any other matter
should come before the Meeting, the persons named in the enclosed Proxy will
have discretionary authority to vote all proxies not marked to the contrary with
respect to such matters in accordance with their best judgment.
2
<PAGE>
OUTSTANDING VOTING SECURITIES AND VOTING RIGHTS
The Board has set the close of business on February 19, 1999, as the
record date (the "Record Date") for determining stockholders of the Company
entitled to notice of and to vote at the meeting. As of the Record Date, there
were 2,079,934 shares of Common Stock issued and outstanding, all of which are
entitled to be voted at the Meeting. The Common Stock is the only class of
securities of the Company entitled to vote, each share of Common Stock being
entitled to one noncumulative vote.
A majority of the shares of Common Stock outstanding and entitled to
vote as of the Record Date, or 1,039,968 shares, must be present at the Meeting
in person or by proxy in order to constitute a quorum for the transaction of
business. The affirmative vote of a majority of the shares of Common Stock
present and entitled to vote at the Meeting is required to pass upon the
proposal to approve the Restructuring. The affirmative vote of a majority of the
Company's issued and outstanding shares of Common Stock is required to pass upon
the proposal to approve the Capital Amendment. Pursuant to Delaware law,
abstentions and broker non-votes are counted as present for purposes of
determining the presence of a quorum. However, abstentions are treated as
present and entitled to vote, and thus have the effect of a vote against a
matter. A broker non-vote on a matter is considered not entitled to vote on that
matter, and thus is not considered when counting votes cast on the matter.
In connection with the Restructuring, certain executive officers and
principal stockholders of the Company, who hold an aggregate of 538,872 shares
of Common Stock, have agreed to vote their respective shares of Common Stock for
each of the proposals presented at the Meeting and for the named nominees for
election as directors. In addition, Peter Zachariou, an investor pursuant to the
Purchase Agreement, purchased 392,017 shares of Common Stock as part of the
Restructuring and has indicated that he will vote his shares of Common Stock in
favor of each of the proposals presented at the Meeting (other than Proposal 1,
on which he will not vote in accordance with the interpretation by the National
Association of Securities Dealers, Inc. of the rules of The Nasdaq Stock Market,
Inc. ("Nasdaq")). Such persons hold an aggregate of 930,889 shares of Common
Stock as of the Record Date, or approximately 44.8% of the Company's issued and
outstanding Common Stock.
A list of stockholders entitled to vote at the Meeting will be
available at the Company's offices, 1 Industry Street, Poughkeepsie, New York
12603, for a period of ten days prior to the Meeting and at the Meeting itself
for examination by any stockholder.
3
<PAGE>
BENEFICIAL SECURITY OWNERSHIP
The following table sets forth, as of the Record Date, information with
respect to the beneficial ownership of the Company's Common Stock by (i) each
person who is known by the Company to beneficially own 5% or more of the
Company's outstanding Common Stock, (ii) the Company's Chief Executive Officer
and each of the other "Named Executive Officers" (as defined in "Executive
Compensation-Summary Compensation Table"), (iii) each director of the Company,
and (iv) all directors and executive officers of the Company as a group. The
Company is not aware of any beneficial owner of more than 5% of the outstanding
Common Stock other than as set forth in the following table. With respect to the
total number of shares issued and outstanding, the information provided assumes
that all of the Company's shares of Series A Stock, Series B Stock and Series C
Stock, which are automatically convertible upon receipt of stockholder approval
of Proposals 1 and 2, are converted.
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NUMBER OF SHARES OF CLASS
OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED (2) OUTSTANDING
- ----------------------- ---------------------- -----------
<S> <C> <C>
Peter C. Zachariou(3) 3,200,002 26.7%
Jay H. Solomont (4) 2,500,000 20.8
Robert W. Lichtman 0 0
Thomas H. Lenagh 0 0
Jan M. Winston 0 0
Mark Karasick 0 0
All directors and executive officers as a 5,700,002 43.8
group (6 persons) (5)
5% OR GREATER HOLDERS
Regina Miler(6) 881,818 8.0
Lubin 17/5 B
Hodera, Israel 38401
Lemsford Limited (7)(8) 700,000 6.0
16 Rue de le Felisserie
Casa Postale #3501
1211 Geneva 3, Switzerland
Corommandel Limited (7)(9) 700,000 6.0
16 Rue de le Felisserie
Casa Postale #3501
1211 Geneva 3, Switzerland
</TABLE>
- ------------------------
(1) The business address of all directors and executive officers of the
Company is c/o the Company, 1 Industry Street, Poughkeepsie, New York
12603.
(2) The Company believes that all persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
beneficially owned by them. For purposes of calculating beneficial
ownership and voting power, shares of Common Stock underlying options,
warrants and other rights to acquire Common Stock exercisable within 60
days are included.
(3) Includes (i) shares of Common Stock issuable upon exercise of warrants
owned by Mr. Zachariou and (ii) shares of Common Stock issuable upon
conversion of shares of Series B Stock owned by Mr. Zachariou.
(4) Includes (i) shares of Common Stock issuable upon exercise of warrants
owned by Cameron Worldwide Ltd. ("Cameron") and (ii) shares of Common
Stock issuable upon conversion of shares of Series B Stock owned by
Cameron.
(5) Includes shares of Common Stock issuable upon exercise of warrants and
conversion of Series B Stock described in Notes (3) and (4).
4
<PAGE>
(6) Includes shares of Common Stock issuable upon conversion of shares of
Series A Stock and Series B Stock owned by Ms. Miler.
(7) Represents shares of Common Stock issuable upon exercise of warrants.
(8) The beneficial owner of Lemsford Limited is Patricia Walsh. NWT
Directors Limited is the director and officer. Lemsford Limited is not
affiliated with Corommandel Limited.
(9) The beneficial owner of Corommandel Limited is David Lean. Ian
Williamson and Morris Evans are the directors and officers. Corommandel
Limited is not affiliated with Lemsford Limited.
5
<PAGE>
PROPOSAL 1
APPROVAL OF THE RESTRUCTURING
GENERAL
Effective June 26, 1998, the Company consummated the Restructuring
whereby the Company restructured certain of its indebtedness and obtained an
immediate capital infusion of $1,500,000 providing the Company with much needed
working capital. Pursuant to the Purchase Agreement, the investors agreed to
purchase $1,900,000 of the Company's Common Stock, Series A Stock, Series B
Stock and Warrants. Effective June 26, 1998, the Company sold 392,017 shares of
Common Stock (the "Shares"), 215,909 shares of Series A Stock, 330,799 shares of
Series B Stock and five-year warrants to purchase 4,000,000 shares of Common
Stock at an exercise price of $.75 per share (the "Warrants") to the Purchasers
for $1,500,000. Thereafter, the Company consummated the sale of an additional
137,000 shares of the Series A Stock for $548,000. Additionally, the Company
sold 825 shares of Series D Stock to additional investors for $825,000. Finally,
the Company expects to consummate the sale of up to 1,500 shares of Series E
Stock on or before March 31, 1999.
As part of the Restructuring, the Company reached agreements with PNC
Business Credit Bank ("PNC Bank"), Bankers Trust Company ("Bankers Trust") and a
group of private noteholders (the "Noteholder Group"), its three primary
lenders, to restructure its outstanding indebtedness. As part of the agreement
with the Noteholder Group, $990,000 in debt was converted into 73,461 shares of
Series C Stock. In addition, two of the Company's existing management directors,
Gregory Horne and Stanley F. Zuk, resigned and three new directors, Peter C.
Zachariou, Mark Karasick and Jay H. Solomont, were appointed to the Board
bringing the total number of directors to six. Mr. Gary Horne subsequently
resigned as an executive officer and director of the Company.
Upon approval of Proposals 1 and 2, each share of Series A Stock,
Series B Stock and Series C Stock will automatically convert into Common Stock
at the rate of ten shares of Common Stock for each share of Convertible
Preferred Stock. Upon approval of Proposals 1 and 2, each share of Series D
Stock and Series E Stock become convertible into Common Stock at the rate of one
share for every $1.00 in stated value divided by seventy percent (70%) of the
average market price of the Common Stock for the five trading days immediately
prior to the conversion date.
TERMS OF THE RESTRUCTURING
THE CAPITAL INFUSION
INVESTMENT. Pursuant to the Purchase Agreement, effective June 26,
1998, the Company sold to investors the Shares, the Series A Stock, the Series B
Stock and the Warrants for $1,500,000 and, as part of the same transaction, the
Company subsequently consummated the sale of an additional 122,500 shares of the
Series A Stock for $548,000. Pursuant to the Subscription Agreements, the
Company sold to three additional investors the Series D Stock for $825,000. In
addition, the Company expects to consummate the sale of up to 1,500 shares of
Series E Stock for up to $1,500,000 in the aggregate on or before March 31,
1999. Upon approval of the Restructuring and the Capital Amendment, the Series A
Stock and Series B Stock will automatically convert into Common Stock at the
rate of ten shares of Common Stock for each share of Series A Stock and Series B
Stock (subject to adjustment under certain circumstances). Upon approval of the
Restructuring and Capital Amendment, the Series D Stock and Series E Stock
become convertible into Common Stock at the rate of one share for every $1.00 in
stated value divided by seventy percent (70%) of the average market price of the
Common Stock for the five trading days immediately prior to the conversion date
(subject to adjustment under certain circumstances). The Company will account
for any difference between fair market value of the underlying Common Stock, as
determined by an independent appraisal, and the issuance price as additional
paid in capital. Upon and assuming conversion of the Series A Stock, Series B
Stock, Series D Stock and Series E Stock (assuming all shares of Series E Stock
offered are sold), the investors will own approximately 10,634,096 shares of
Common Stock (based on a current market price of $.75 per share of Common Stock)
and Warrants to purchase an additional 4,000,000 shares of Common Stock. If
stockholder approval of Proposals 1 and 2 is not obtained by June 26, 1999, the
holders of Series A Stock and Series B Stock will have the option to require the
Company to repurchase the shares purchased by them at a price equivalent to the
purchase price plus 12% per annum (prorated over the period such shares are
outstanding). The holders of Series D Stock and Series E Stock will have the
option to require the Company to purchase the shares purchased by them at a
price equivalent to the stated value of $1,000 per share (subject to
adjustment), if stockholder approval of Proposals 1 and 2 is not obtained by the
date that is one year from the date the shares were purchased. The shares were
purchased between November 1998 and March 1999.
Holders of the Series A Stock, Series B Stock, Series D Stock and
Series E Stock are entitled to receive dividends, when, as and if declared by
the Company's Board of Directors, at a rate of 6%, 4%, 3% and 3% per annum,
respectively. Holders of the Series A Stock, Series B Stock, Series D Stock and
Series E Stock have no voting rights. The Series A Stock and Series B Stock each
has a liquidation preference of $10.00 per share. The Series D Stock and Series
E Stock each has a liquidation preference of $1,000 per share.
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Copies of the Purchase Agreement and form of Subscription Agreement are
annexed to this Proxy Statement as Exhibit A and Exhibit B, respectively, and
the summaries of the terms thereof are qualified in their entirety by reference
to the specific provisions of the Purchase Agreement and the Subscription
Agreement.
REGISTRATION RIGHTS. Pursuant to the Subscription Agreements, the
Company agreed to file with the Securities and Exchange Commission (the
"Commission") a registration statement registering the re-sale of the Shares and
the shares of Common Stock into which the Convertible Preferred Stock are
convertible, and the shares of Common Stock issuable upon the exercise of the
Warrants (collectively, the "Registrable Securities"), and to use its best
efforts to cause such registration statement to become effective as soon as
practicable. The Registration Statement was filed on February 1, 1999. The
Company also agreed to grant the holders of the Registrable Securities
piggy-back registration rights with respect to the Registrable Securities.
With respect to the Registrable Securities held by the purchasers of
Series D Stock, since the Registration Statement was not filed by January 2,
1999, the conversion rate will be adjusted to increase the number of shares
issuable upon conversion of the Series D Stock by 5% if the Registration
Statement is not declared effective within 45 days of the date such Registration
Statement is filed i.e. by March 17, 1999, the conversion rate shall be adjusted
to increase the number of shares issuable upon conversion of the Series D Stock
by an additional 5%.
CORPORATE GOVERNANCE MATTERS. On June 26, 1998, Stanley F. Zuk and
Gregory Horne resigned from their positions as members of the Board. The
remaining members of the Board appointed to the Board three individuals
designated by the purchasers of the Series A Stock and Series B Stock, Mark
Karasick, Jay Solomont and Peter Zachariou, and agreed to use their best efforts
to cause the election to the Board of such appointees, to serve until the next
annual meeting of the Company's stockholders in accordance with the Bylaws of
the Company. The Board also adopted a corporate resolution fixing the size of
the Board at six members and agreed not to increase the size until after the
annual meeting of stockholders. Peter Zachariou was also elected President of
the Company.
EMPLOYMENT AGREEMENTS. In connection with the Restructuring, the
Company entered into Amendments to the employment agreements of Gary D. Horne,
the Company's Chairman of the Board and Chief Executive Officer, and Stanley F.
Zuk, the Company's President (jointly, the "Executives"). Pursuant to these
Amendments, the Executives agreed to amend the terms of their existing
Employment Agreements from three-year agreements expiring December 1, 1999 to
one-year agreements expiring June 26, 1999. The Executives also agreed to a
reduction in their compensation (one-half of their original salary) until the
earlier of (a) the conversion of the Convertible Preferred Stock or (b) the
Company achieving three consecutive profitable months of operations.
Prior to the Restructuring, Gary D. Horne had advanced to the Company
an aggregate of $82,000 for working capital purposes. Simultaneously with
entering into the Purchase Agreement and Amendments to Employment Agreements,
the Company entered into a promissory note with Mr. Horne in the amount of
$82,000. Principal and interest payments of $10,000 shall be payable monthly
commencing July 15, 1998, and until the month after the Company has three
consecutive quarters of profitability (i.e. has income before income taxes as
opposed to a loss before income taxes). Thereafter, the balance of the principal
sum and interest due under the note shall be payable in equal monthly
installments over a three-year period.
The Company also amended and restated the promissory note payable to
Gary D. Horne in the amount of $658,557 with respect to advances previously made
by Gary D. Horne. Pursuant to the Amended and Restated Promissory Note, interest
is payable monthly commencing January 1, 1998. Principal shall be payable
monthly commencing January 1, 2001 with the entire principal sum being due
January 1, 2003.
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In addition, in connection with the Restructuring, the Company entered
into a one-year Employment Agreement with Gregory Horne, a Department Manager.
The Employment Agreement provides for a base salary of $75,000 per year and
contains confidentiality, non-competition and non-disclosure provisions.
The Purchase Agreement and the Subscription Agreements contain
customary representations and warranties with respect to, among other things,
good standing, due authorization, enforceability, noncontravention, absence of
material litigation, business, capitalization, accuracy of financial statements
and securities filings, real and personal property, accounts receivable,
accounts payable, inventory, intellectual property and material contracts. The
Company also covenanted, among other matters, to (i) maintain and carry on its
business in the ordinary course consistent with past practices, (ii) appoint the
investors' nominees to the Board, (iii) prepare and file a proxy statement with
respect to a meeting of stockholders to approve the Restructuring, (iii) submit
to Peter C. Zachariou, for a period of six months, a schedule for the payment of
accounts payable and (iv) furnish to the investors all reports filed with the
Commission.
INDEMNIFICATION. The Company and Gary D. Horne agreed to jointly and
severally indemnify the Purchasers and their affiliates against losses arising
out of the breach of any of the warranties and representations in the Purchase
Agreement (subject to certain baskets and caps) occurring within one year of the
date of the Purchase Agreement. Mr. Horne agreed to secure his indemnification
agreement through an offset against the promissory notes payable to Mr. Horne
and by escrowing 85,718 shares of his Common Stock.
PNC BANK RESTRUCTURING
Prior to the Restructuring, ASD's sales had been adversely affected by
a reduction in orders by several customers, principally those in the Asian
market. As a result, the Company was no longer in compliance with the covenants
governing its existing credit facility with certain lenders (the "Lenders") and
PNC Bank, as agent for the lenders ("PNC"). Accordingly, as part of the
Restructuring, the Company entered into an agreement with the Lenders with
respect to advances under the revolving credit facility and the defaults (the
"PNC Agreement").
The Lenders agreed to waive any and all rights they may have by virtue
of any defaults arising under the credit facility, including the right to the
payment of a default rate of interest. In addition, the Lenders agreed to
continue to provide financing to the Company notwithstanding these prior
defaults.
The Lenders agreed that, upon review of projections submitted by the
Company, to increase the maximum credit limit from $4,500,000 to $8,750,000. The
Lenders also agreed to negotiate, in good faith, a restructuring of the
Company's credit facility by September 26, 1998. If no new agreement is reached
by September 26, 1998, the Lenders nevertheless agreed that the credit facility
will remain in place at least through June 23, 2000. No formal written agreement
was reached with PNC with respect to a restructuring of the credit facility.
In consideration for the foregoing, PNC Bank received a warrant to
purchase 100,000 shares of Common Stock at an exercise price of $1.75 per share.
The warrants contain anti-dilution provisions providing for adjustments to the
number of shares issuable upon exercise of the warrants and the exercise price
under certain conditions. The warrants also grant to PNC Bank registration
rights.
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A copy of the PNC Agreement is annexed to this Proxy Statement as
Exhibit C and the summary of the terms thereof is qualified in its entirety by
reference to the specific provisions of the PNC Agreement.
BANKERS TRUST RESTRUCTURING
Prior to the Restructuring, the Company was indebted to Bankers Trust
Company ("Bankers Trust") in the amount of $2,751,133 in principal and unpaid
interest and in default under the existing loan agreement. As part of the
Restructuring, the Company and Bankers Trust entered into the Option and
Forbearance Agreement dated June 26, 1998 (the "Option Agreement") whereby the
Company paid Bankers Trust $250,000 in exchange for Bankers Trust agreeing to
defer the balance of the outstanding principal amount owed Bankers Trust until
March 17, 1999. Bankers Trust will either (i) be paid $1,500,000 on or before
March 17, 1999 in satisfaction of all amounts due, or (ii) in exchange for a
payment of $100,000, grant the Company another extension to September 26, 1999,
at which time the Company will be required to pay Bankers Trust $1,550,000 in
satisfaction for all amounts due. Pursuant to the Option Agreement, the Company
is not required to make payments of principal and interest to Bankers Trust
during this period, although the amounts owing will continue to accrue interest.
If, however, Bankers Trust is not paid in full by such time, the total
outstanding indebtedness will automatically revert back to the current amount
owed, plus any accrued but unpaid interest. Pursuant to the Option Agreement,
upon payment of the option price described above, the five-year warrant to
purchase 100,000 shares of the Company's Common Stock at an exercise price of
$4.50 per share previously issued to Bankers Trust will be cancelled.
In accordance with Statement of Financial Standards No. 4 "Reporting
Gains and Losses From Extinguishment of Debt," any gain from the extinguishment
of the debt owed to Bankers Trust, as measured by the difference between the
reacquisition price and the net carrying amount of the extinguished debt, will
be classified as an extraordinary item, net of related income tax affect.
A copy of the Option Agreement is annexed to this Proxy Statement as
Exhibit D and the summary of the terms thereof is qualified in its entirety by
reference to the specific provisions of the Option Agreement.
AGREEMENT WITH NOTEHOLDER GROUP
The Noteholder Group was owed $1,210,000 in principal and unpaid
interest pursuant to promissory notes due in June 1998. The Company did not have
the capital resources to make that payment. Accordingly, the Company and the
Noteholder Group entered into an agreement (the "Noteholder Agreement") pursuant
to which, in satisfaction for such indebtedness, the Noteholder Group agreed to
accept $110,000 in cash upon consummation of the Restructuring and $110,000 by
June 24, 1999 with the balance of such debt, $990,000, converted into 73,461
shares of Series C Stock. Upon receipt of the stockholder approval of the
Proposals 1 and 2, the Series C Stock will automatically convert into shares of
Common Stock at the rate of ten shares of Common Stock for each share of Series
C Stock or an aggregate of 734,610 shares of Common Stock (subject to adjustment
under certain circumstances). If stockholder approval of Proposals 1 and 2 is
not obtained by June 26, 1999, the Noteholder Group will have the option, for a
period of 90 days thereafter, to require the Company to repurchase the shares of
Series C Stock held by them at a price equivalent to their stated value of
$10.00 per share.
Holders of the Series C Stock will be entitled to receive dividends,
when, as and if declared by the Company's Board of Directors, at a rate of 4%
per annum, respectively. Holders of the Series C Preferred Stock have no voting
rights. The Series C Stock has a liquidation preference of $10.00 per share. In
addition to the foregoing, the Noteholder Group exchanged their existing
warrants to purchase
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534,783 shares of Common Stock at an exercise price of $2.73 per share for
warrants to purchase 418,711 shares of Common Stock which are exercisable for a
period of three years at an exercise price of $1.50 per share, subject to
adjustment under certain circumstances.
A copy of the Noteholder Agreement is annexed to this Proxy Statement
as Exhibit E and the summary of the terms thereof is qualified in its entirety
by reference to the specific provisions of the Noteholder Agreement.
OTHER AGREEMENTS
In addition to the foregoing, holders of outstanding warrants to
purchase an aggregate of 118,126 shares of Common Stock at an exercise price of
$2.69 per share (the "BlueStone Group") have exchanged these warrants for new
warrants for the purchase of 381,818 shares at an exercise price of $1.50 per
share, subject to adjustment under certain circumstances, exercisable until May
13, 2002. The Restructuring would have triggered anti-dilution provisions of
these outstanding warrants resulting in such warrants representing the right to
purchase at least 478,198 shares at an exercise price of approximately $.75 per
share.
Catalyst Financial Corp., an investment banking firm ("Catalyst"),
advised the Purchasers with respect to the transaction. The Purchasers were
party to a financial advisory agreement with Catalyst in connection with the
financing for the Company, the obligations of which were assumed by the Company.
As a result, the Company paid Catalyst a fee of approximately $118,000 (of which
$100,000 has been paid and $18,000 is owing) and issued to Catalyst's designees
warrants to purchase 141,360 shares of Common Stock at an exercise price of
$.358 per share for a period of three years. In addition, the Company has
entered into a two-year advisory agreement with Catalyst pursuant to which
Catalyst is to be paid $5,000 per month. An affiliate of Catalyst also has a
right of first refusal with respect to future financings by the Company and a
right to receive a finders' fee under certain circumstances. This agreement was
subsequently assigned to Capitalink L.C.
BACKGROUND OF THE RESTRUCTURING
The Company provides comprehensive contract manufacturing and
engineering services to original equipment manufacturers ("OEMs"). The Company
initially provided design and engineering services to IBM's main frame computer
development and manufacturing operations in New York's Hudson Valley
("IBM-Hudson Valley"). Over a 25-year period, the Company's relationship with
IBM-Hudson Valley evolved to the point where by the mid-1980's the Company
assembled, wired and tested a significant portion of the IBM-Hudson Valley main
frame computers that were produced. IBM-Hudson Valley became the Company's
principal customer, providing for over 90% of its revenues. Commencing in 1990,
IBM-Hudson Valley's main frame sales began to decline due to the recession and
the shift in technology to personal computer-based systems. In December 1992,
IBM-Hudson Valley eliminated the use of substantially all main frame assembly
vendors, including the Company. As a result, the Company had significant
reductions in revenues and incurred substantial losses. Accordingly, during 1993
and 1994 the Company undertook a restructuring of its operations wherein it
implemented a significant downsizing, re-engineered its operations and commenced
intensive efforts to market its contract manufacturing services to other OEMs.
While operating performance improved, the Company continued to be significantly
leveraged through a credit facility and term loans with Poughkeepsie Savings
Bank, which indebtedness was subsequently acquired by Bankers Trust.
In order to raise additional capital, in December 1995 and February
1996, the Company sold an aggregate of $2,000,000 in principal amount of notes
(the "Notes") to the Noteholder Group in a private placement. The proceeds of
this private offering were used to purchase inventory and repay
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indebtedness. Interest on the Notes accrued at the rate of 10% per annum and was
payable quarterly. The Notes were secured by a first lien on the Company's
inventory and were due and payable upon consummation of the Company's initial
public offering ("IPO"). In connection with the IPO, the Noteholders agreed that
$900,000 of the principal amount of the Notes was to be paid upon consummation
of the IPO and $1,100,000 was to be paid in June 1998. The Noteholder Group also
received warrants to purchase 500,000 shares of the Company's Common Stock at an
exercise price of $2.73 per share (the "Noteholder Warrants"). In addition, the
investment banking firm that assisted the Company with the placement of the
Notes received warrants to purchase 34,783 shares of the Company's Common Stock
at an exercise price of $5.75 per share (subject to adjustment under certain
circumstances).
Although the Company filed a registration statement for the IPO in July
1996, the IPO process took significantly longer than expected. Therefore, in
order to obtain interim financing, in August 1996, the Company sold an aggregate
of $1,100,000 in aggregate principal amount of bridge notes (the "Bridge Notes")
to the BlueStone Group in a private placement. The proceeds of this private
offering were used to purchase inventory and repay indebtedness. The Bridge
Notes were due at the earliest of January 31, 1997, the closing date of the IPO
or upon the sale of the Company. The Bridge Notes were ultimately repaid upon
consummation of the IPO. The BlueStone Group also received warrants to purchase
an aggregate of 112,500 shares of Common Stock. In addition, the investment
banking firm which assisted in the placement of the Bridge Notes received
warrants to purchase 11,250 shares of Common Stock. The warrants issued to the
BlueStone Group and the placement agent were exercisable at a price of $2.96 per
share (subject to adjustment under certain circumstances).
In May 1997, the Company consummated its IPO pursuant to which it
received net proceeds of $3,889,000. From the net proceeds, the Company repaid
the Bridge Notes in full and paid $900,000 in principal on the Notes leaving a
principal balance due under the Notes of $1,100,000. The Company used the
balance of the net proceeds to increase staffing, purchase materials and new
equipment, as well as for sales and marketing, product development and working
capital.
The IPO process was a difficult and long process requiring significant
amounts of time from management. The IPO took significantly longer than
anticipated and generated less proceeds than expected. After the IPO, management
turned its full time and attention back to positioning the Company for further
growth.
On December 19, 1997, the Company completed a refinancing of most of
its indebtedness to Bankers Trust and secured a new credit facility with an
increased borrowing limit with the Lenders. The Company's new revolving line of
credit permitted borrowings of up to $8,750,000 (which amount was subsequently
reduced to $4,500,000) at prime plus 1/2% and was to expire on December 19, 2002
(the "Line of Credit"). The Line of Credit is secured by a first lien on the
Company's assets. The amount available for borrowing under the Line of Credit is
determined pursuant to a formula based upon the Company's eligible accounts
receivable, inventory, machinery and equipment. Approximately $3,800,000 of the
Line of Credit was used to repay the existing revolving credit facility and
machinery and equipment loan with Bankers Trust.
Contemporaneously therewith, the Company entered into a three year term
loan with Bankers Trust for $2,801,000 at an interest rate of 10%. The term loan
is secured by a second lien on the Company's assets. The three year term loan
replaces the existing mortgage payable notes to Bankers Trust.
During the third quarter of the fiscal year ended June 26, 1998
("Fiscal 1998"), the Company's sales began to be adversely affected by a
reduction in orders by several customers, principally customers operating in the
Asian markets. As a result, the Company was no longer in
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compliance with the covenants governing certain of its debt agreements and
announced it was seeking additional financing.
In March 1998, H.J. Meyers & Co., Inc., the underwriter of the
Company's public offering ("H.J. Meyers"), was contacted and asked to attempt to
locate a merger or acquisition candidate for the Company or investors who would
be interested in providing capital to the Company. In March 1998, Friedland
Associates contacted management of the Company and offered to effect a private
placement of $1,000,000 for the Company. Management of the Company subsequently
determined that the terms of proposed financing were not in the best interest of
the Company and its stockholders.
In April 1998, Philip Kamins, President of PMC Global, Inc. ("PMC"),
along with a representative of H.J. Meyers, visited the Company for purposes of
conducting preliminary due diligence and evaluating a potential strategic
alliance. On May 5, 1998, the Company received a letter from PMC expressing an
interest in continuing discussions with the Company. Based on these preliminary
discussions, Gary Horne traveled to California to meet again with
representatives of PMC. PMC continued with its due diligence through May 15,
1998. On May 18, 1998, management received word that PMC did not have the
resources to pursue a strategic alliance with the Company.
On May 4, 1998, a representative of Charter Technologies Group
("Charter") visited the Company. Charter appeared not to have the ability to
move quickly with a proposed transaction and not interested in a transaction of
the size the Company's situation warranted.
Commencing in late March 1998 and through the middle of May 1998, the
Company also had discussions with Carl Marks & Co. and Carl Marks Consulting
Group, an affiliated entity (collectively, "Carl Marks"). This group indicated
it could prepare a report indicating how the Company could improve efficiency
and profitability. However, when the Company was unable to make the final
payment required under an agreement with Carl Marks, Carl Marks terminated its
relationship with the Company.
On April 30, 1998, a representative of Catalyst and Peter C. Zachariou,
a potential investor, visited the Company and met with management of the Company
for purposes of evaluating a potential transaction. Late in May 1998, management
received a proposal from Catalyst, on behalf of a group of private investors led
by Mr. Zachariou and Cameron (the "Cameron Group"), about a potential
investment, subject to the Company reaching certain agreements with PNC, Bankers
Trust, the Noteholder Group and the BlueStone Group. Gary Horne signed the
proposal, subject to Board approval, thereby enabling Catalyst and the Cameron
Group to contact the Company's creditors and negotiate agreements.
During April and May, while the Company explored opportunities with
potential investors, the Company's financial position continued to deteriorate.
The loan agreements with both PNC and Bankers Trust contain certain restrictive
financial covenants. The Company was not in compliance with the covenants of
both the PNC and Bankers Trust loan agreements.
During this time, the Company entered into an agreement with PNC
providing the Company with an additional $200,000 over-advance which was due on
May 22, 1998. Without additional financing it was unlikely that on May 22, 1998
the Company would be able to repay the additional over-advance and meet all its
current operating obligations. Moreover, the Company did not have the resources
to repay the $1,100,000 in Notes held by the Noteholder Group, which were due in
June 1998.
Notwithstanding the discussions with the Cameron Group, on May 21,
1998, management selected bankruptcy counsel. On May 28, 1998, management met
with bankruptcy counsel to discuss the Company's alternatives in the event
bankruptcy protection became the Company's only option. Gary Horne personally
advanced to bankruptcy counsel the required retainer fee on behalf of the
Company. During late May and early June, the Company began to provide its
bankruptcy counsel with the information necessary to file for bankruptcy
protection should that become necessary.
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In early June, management reached a tentative oral agreement with the
Cameron Group, which provided for an infusion of capital of $1,900,000 and
agreements with several of the Company's creditors. However, the agreement with
the Cameron Group was contingent upon the Company negotiating satisfactory
agreements with PNC, Bankers Trust, the Noteholder Group and the BlueStone
Group. On June 7, 1998, a meeting of the Board was conducted to evaluate the
Company's alternatives and the proposal by the Cameron Group. Based on these
discussions, the Board authorized Gary Horne to pursue negotiations with the
Cameron Group. The Board also authorized Gary Horne to pursue obtaining from
H.J. Meyers a fairness opinion with respect to the transaction.
On June 11, 1998, the Board held another meeting of the Board to
discuss the status of the negotiations. At this meeting, the Board also included
a representative of H.J. Meyers who indicated that, based on a preliminary
review, the proposed transaction with the Cameron Group was fair to the Company
and its stockholders from a financial point of view. The Board considered the
fact that no auction process was conducted with respect to a potential sale of
the Company and that H.J. Meyers was not completely unrelated to the Company.
However, the Board noted that it had received indications of value from other
sources who had discussed possible investments in the Company over the last
several months and that H.J. Meyers was most familiar with the Company and its
situation. Based on such indications, the Board felt that the Restructuring
proposed by the Cameron Group would provide the Company's stockholders with the
opportunity to continue to participate in an entity which would benefit from an
infusion of capital and restructuring of its debt and that the Restructuring was
in the best interest of the Company and its stockholders. On June 22, 1998, the
Board approved the Restructuring.
Over the next several weeks, the Purchase Agreement, PNC Agreement,
Option Agreement, Noteholder Agreement and other agreements in connection with
the Restructuring were negotiated by and among the Company, the Cameron Group
and the other parties thereto. On June 24, 1998, the Board of Directors held a
meeting at which the Restructuring and the various agreements were authorized.
The various agreements in connection with the Restructuring were
executed on June 26, 1998 and the transactions contemplated thereunder were
consummated on July 1, 1998 (other than an additional $548,000 in financing
which was received by October 31, 1998, an additional $825,000 which was
received by November 30, 1998 and up to an additional $1,500,000 which is
expected to be received by March 31, 1999).
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
Commencing the third quarter of Fiscal 1998, the Company's sales were
adversely affected by a reduction in orders by several customers, principally
those in the Asian market. As a result, the Company began experiencing cash flow
problems and did not have sufficient capital to meet its current operating
obligations. As a result of the Company's financial situation, the Company
experienced difficulties maintaining existing and obtaining new credit
relationships with its vendors and difficulties with existing and prospective
customers. Without the Restructuring and the capital infusion it provided, it is
likely that the Company would have sought bankruptcy protection. The
Restructuring represents, in the Board's view, a critical element in providing
the Company with a sufficient level of working capital.
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In addition to the foregoing, on June 3, 1998, the Company received
notice from Nasdaq that the Company's Common Stock failed to maintain a closing
bid price greater than or equal to $1.00 and failed to maintain the required
minimum market value of the public float of $1,000,000. Both of these items
were requirements for listing on The Nasdaq SmallCap Market. Management believed
the Company would be in a better position to meet these requirements after the
Restructuring and conversion of the Convertible Preferred Stock, provided
Proposals 1 and 2 are approved by the Company's stockholders. Without the
Restructuring, management believed it was more likely that the Common Stock
would be delisted which would have a material adverse effect on the liquidity
of the market for the Common Stock.
A primary consideration of the Board was that the financial condition
of the Company required a significant capital infusion to fund working capital
and finance inventory, thereby increasing sales and restoring profitability. The
Board considered the Company's deteriorating financial position and the need to
seek bankruptcy protection if the Company did not receive a capital infusion.
The Board considered the fact that despite significant efforts to raise capital
through a strategic alliance or acquisition, no alternative source of financing
was available to provide the Company with the capital it needed other than the
Restructuring.
The Company may require additional capital notwithstanding the money
raised as part of the Restructuring. Management believes the Company will be in
a better position to raise additional capital after the consummation of the
Restructuring, although there can be no assurance that this will be the case. If
the Proposals 1 and 2 (the Restructuring and Capital Amendment) are not
approved, the Company will be forced to repurchase the shares of Convertible
Preferred Stock. Should this occur, the Company will probably not have the
resources to repurchase these shares. Moreover, even if the Company did have the
capital to repurchase such shares, the Company would probably once again be in
default of covenants under the PNC Agreement and the Option Agreement, would be
unable to meet its current operating obligations and might be required to seek
bankruptcy protection.
In addition, the Board believes that the Company will benefit from the
new management to be provided by the newly-appointed directors. Notwithstanding
the dilutive effect of the Restructuring and the investors' ability to exercise
a controlling influence on the Company, the Restructuring will still permit
current stockholders to participate in any future growth and profitability of
the Company and in its efforts to realize long-term value for stockholders.
In arriving at its decision to approve the Restructuring, the Board
considered each of the factors outlined above. On balance, each of the foregoing
factors supported the determination of the Board to approve and to recommend
that the Company's stockholders approve the Restructuring. However, the
Company's Board of Directors found it impractical to, and therefore did not,
quantify or otherwise assign specific or relative weights to the above factors
in its consideration of the Restructuring, but, instead, considered the above
factors in their totality.
The capital infusion received from the issuance of the Series A Stock,
Series B Stock, Series D Stock, Warrants and the additional available working
capital as a result of the restructuring of certain of the Company's
indebtedness enabled the Company to meet its immediate working capital needs.
The Company may require additional capital to finance operations through its
fiscal year ending June 25, 1999 ("Fiscal 1999"). Management may seek additional
capital and believes the Company will be in a better position to obtain
additional capital after the consummation of the Restructuring. There can be no
assurance, however, that such assumption will prove to be correct or that
additional financing will be available to the Company on favorable terms or
otherwise. Neither the investors nor their affiliates are obligated to provide
the Company with any additional financing.
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COMPLETION OF THE RESTRUCTURING IS CONTINGENT UPON APPROVAL BY
STOCKHOLDER OF PROPOSALS 1 AND 2. ACCORDINGLY, THE BOARD OF DIRECTORS RECOMMENDS
THAT STOCKHOLDERS VOTE FOR THE PROPOSALS TO APPROVE (1) THE RESTRUCTURING AND
(2) THE CAPITAL AMENDMENT.
OPINION OF FINANCIAL ADVISOR
On June 11, 1998, the Board received an oral opinion, which was
followed by a written opinion dated June 12, 1998, from H.J. Meyers that, as of
such dates, the consideration paid to the Company in connection with the Initial
Financing is fair to the Company and its stockholders from a financial point of
view.
THE FULL TEXT OF THE OPINION OF H.J. MEYERS DATED JUNE 11, 1998 IS
ATTACHED AS EXHIBIT E TO THIS PROXY STATEMENT. THE COMPANY'S STOCKHOLDERS ARE
URGED TO READ THIS OPINION IN ITS ENTIRETY. THE H.J. MEYERS OPINION IS DIRECTED
ONLY TO THE FAIRNESS OF THE CONSIDERATION TO BE PAID BY THE PURCHASERS FROM A
FINANCIAL POINT OF VIEW AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY OF THE
COMPANY'S STOCKHOLDERS AS TO HOW SAID STOCKHOLDER SHOULD VOTE AT THE MEETING.
THE SUMMARY OF THE OPINION OF H.J. MEYERS SET FORTH IN THIS PROXY STATEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In rendering its opinion, H.J. Meyers (i) reviewed the summary
agreement and term sheet dated June 11, 1998 between the Company and the
Purchasers; (ii) reviewed certain other non-public financial information
including financial forecasts for the Company furnished by the Company's
management; (iii) participated in discussions with members of management of the
Company concerning the financial condition, businesses, financial forecasts and
prospects of the Company both with and without the infusion of new capital; (iv)
performed analyses as it deemed appropriate in arriving at its opinion. H.J.
Meyers also considered certain financial and stock market data regarding the
Company. H.J. Meyers participated in discussions with the Company's management
regarding the strategic aspects of the restructuring and considered such other
information, financial studies, analyses and investigations and financial,
economic, and market data as it deemed relevant.
In connection with its review, H.J. Meyers assumed and relied without
independent investigation or verification upon the accuracy, the completeness
and authenticity of all of the financial and other information provided to it by
the Company and relied upon the publicly available information reviewed by it.
H.J. Meyers did not independently verify any of the foregoing information. H.J.
Meyers did not make or obtain any independent evaluation or appraisal of any
such assets, properties or facilities or any of the liabilities of the Company.
With respect to financial forecasts provided to H.J. Meyers by management of the
Company, H.J. Meyers assumed that they were recently prepared on a basis
reflecting the best available estimates and judgments of management of the
Company at the time of preparation as to the future performance of the Company.
H.J. Meyers relied upon management of the Company as to the reasonableness and
achievability of the financial and operating forecasts and projections (and the
assumptions and basis therefore). H.J. Meyers expresses no view as such
financial forecasts or the assumptions on which they are based.
In connection with rendering its opinion, H.J. Meyers considered a
variety of valuation methods. The material evaluations methods used were (i)
market capitalization or "multiple of book" and (ii) discounted cash flow
analysis. These analyses taken together provide the basis for H.J. Meyers
opinion.
MARKET CAPITALIZATION OR "MULTIPLE OF BOOK" ANALYSIS. H.J. Meyers noted
that the Company had a market capitalization of approximately $640,000. H.J.
Meyers felt this extremely depressed value reflected the market's anticipation
that the Company was on the verge of ceasing operations. H.J. Meyers noted that,
without an infusion of capital, the Company would undoubtedly liquidate; in
which case, the stockholders would have little value remaining. H.J. Meyers
calculated that the value of the Company's stockholders securities would be
approximately $700,000 assuming the Reorganization was approved.
DISCOUNTED CASH FLOW ANALYSIS. H.J. Meyers also attempted to analyze
the Company based on a discounted cash flow analysis of the projected financial
performance of the Company. However, since it was clear that if the Company did
not effect the Reorganization, it would liquidate, this analysis was difficult
to do. For purposes of conducting this analysis for the Company, H.J. Meyers
made several assumptions (including using a present value based on an average of
cost of capital between 10% and 15%, the terminal value of the Company equaling
six times operating income and June 1998 as the base year). Using this analysis,
H.J. Meyers calculated a present value, post-Reorganization, for the Company of
$14,000,000 of which the current stockholders will own 23%. Even if this value
is discounted by 40% to remove any benefit from the tax net operating loss, H.J.
Meyers determined that the transaction is still in the best interest of the
existing stockholders.
15
<PAGE>
In preparing its opinion to the Company's Board of Directors, H.J.
Meyers performed a variety of financial and comparative analyses, including
those described above. This summary of such analyses does not purport to be a
complete description of the analyses underlying H.J. Meyers opinion. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances. Therefore, such opinion is not readily susceptible to a summary
description. In arriving at its opinion, H.J. Meyers did not attribute any
particular weight to any analysis or factor considered by it but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. H.J. Meyers believes that its analysis must be considered as a whole and
that selecting portions of its analyses and other factors considered by it,
without considering all analyses and factors, could create a misleading view of
the process underlying its opinion. H.J. Meyers made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of the Company and H.J.
Meyers. Any estimates contained in H.J. Meyers' analysis are not necessarily
indicative of actual values, which may be significantly more or less favorable
as set forth therein. Estimates of the financial values of companies do not
purport to be appraisals or necessarily reflect the prices at which companies
actually may be sold. Because such estimates are inherently subject to
uncertainty, H.J. Meyers nor any other person is responsible for their accuracy.
The Company's Board of Directors selected H.J. Meyers as its financial
advisor because H.J. Meyers is a regionally recognized investment banking firm
with experience in transactions similar to the Restructuring. In addition, H.J.
Meyers was the underwriter of the IPO in 1997 and acted as a financial
consultant to the Company from May, 1997 through May, 1998. As part of its
investment banking business, H.J. Meyers was continually engaged in the
evaluation of its business and their securities.
H.J. Meyers received, upon consummation of the Restructuring, total
fees of approximately $25,000 for acting as financial advisor to the Company and
preparing its fairness opinion. In addition, the Company amended the terms of
the 94,500 underwriters warrants currently held by H.J. Meyers to lower the
exercise price thereof from $8.3375 per share to $1.50 per share. Finally, the
Company agreed to provide H.J. Meyers with 10,000 shares of the Company's Common
Stock.
Management of the Company has learned that some time after July 1998
H.J. Meyers ceased operations. Management does not have any additional
information.
VALUATION OF DERIVATIVE SECURITIES ISSUED
The Company recognizes that the conversion rates for the Series A
Stock, Series B Stock, Series D Stock and Series E Stock will result in the
investors acquiring shares of Common Stock at less than the price at which the
Common Stock is currently trading. Moreover, in connection with the
Restructuring, the Company has issued warrants to purchase shares of the
Company's Common Stock at an exercise price that is less than the price at which
the Company's securities are currently trading. However, based on the Company's
financial situation at the time these investments in the Company were made and
the significant risk involved in the purchase of these securities, management
believes that these securities were issued (or, with respect to the Series E
Stock, will be issued) at fair value. Subsequent to the Restructuring,
management obtained an independent appraisal of the securities that were issued.
The appraisal indicates that the securities were issued at fair value. The
Company's accounting treatment of this transaction reflects that valuation.
FEDERAL INCOME TAX CONSEQUENCES
The Reorganization will not result in any Federal income tax
consequences to either the Company or its stockholders.
DISSENTERS RIGHTS
Under Delaware law, holders of the Company's Common Stock are not
entitled to dissenters' rights in connection with the Restructuring.
SPECIAL CONSIDERATIONS
The following factors, in addition to the information discussed
elsewhere in this Proxy Statement, should be considered by stockholders in
deciding whether to approve the Restructuring and the Purchase Agreement:
16
<PAGE>
RECENT LOSSES AND NEED FOR ADDITIONAL FINANCING
The Company had net losses of $6,692,670 for Fiscal 1998 and net losses
of $3,527,000 for the six months ended December 25, 1998. The Company continues
to require additional capital to finance operations and expects this to continue
through the year ended June 25, 1999 ("Fiscal 1999"). Management intends to seek
additional capital and believes the Company will be in a better position to
obtain additional capital after the consummation of the Restructuring. The
investors have committed to fund the Company's working capital requirements
through Fiscal 1999. In addition, management is attempting to re-negotiate a
further reduction in the Company's obligations to Bankers Trust Company and an
increase in the Company's revolving credit facility with PNC Bank.
If Proposals 1 and 2 are not approved by the Company's stockholders by
June 26, 1999, with respect to the Series A Stock and Series B Stock and by
November 30, 1999, with respect to the Series D Stock, the investors shall have
the option, for a period of 90 days thereafter, to require the Company to
repurchase the shares of Series A Stock, Series B Stock and Series D Stock
purchased by them. The Series A Stock and Series B Stock must be purchased at a
price equivalent to the purchase price plus 12% per annum (prorated over the
period that the shares are outstanding). The Series D Stock and Series E Stock
must be purchased at a price equivalent to the stated value of $1,000 per share
(subject to adjustment). Moreover, the holders of Series C Stock would have a
similar option to require the Company to purchase their shares at a price
equivalent to their stated value of $10 per share if Proposals 1 and 2 are not
approved by June 26, 1999. Should this occur, the Company will probably be
forced to seek additional financing in order to be able to repurchase the shares
of Convertible Preferred Stock. There can be no assurance that the Company will
be able to obtain additional financing, if required, on favorable terms or
otherwise. Failure to obtain additional financing when, and if, required would
have a material adverse effect on the Company.
CONTROL BY PRINCIPAL STOCKHOLDERS
Assuming the approval of the Restructuring and the Capital Amendment
and conversion of the Convertible Preferred Stock, Peter Zachariou and Cameron
beneficially own approximately 26.7% and 20.8% of the Company's Common Stock,
respectively. Although there is no agreement between Mr. Zachariou and Cameron
as to the voting of their shares, they will be able to exercise a significant
influence over and voting together, control, decisions that may effect the
Company's stockholders. In addition, Mr. Zachariou and Cameron, voting together
will be able to effect certain transactions, including mergers, acquisition
consolidations and sales of substantially all of the assets of the Company,
without the consent of any of the Company's other stockholders subject to
applicable laws.
POTENTIAL LIMITATION ON USE OF THE COMPANY'S TAX LAWS CARRIED FORWARD
As of June 26, 1998, the Company had a net operating loss carried
forward of approximately $1,731,000 for federal income tax purposes. The
Reorganization will result in a "change of control" for federal income tax
purposes and limit the Company's ability to realize NOL's. The effect of such
limitation could be material, depending on the value of the Company's
outstanding stock immediately preceding the ownership change, the applicable
federally prescribed rate used to determine the amount of the limitation and the
Company's projected future taxable income.
EFFECT OF OUTSTANDING CONVERTIBLE SECURITIES AND WARRANTS
Assuming approval of the Restructuring and the Capital Amendment by the
Company's stockholders, the Convertible Preferred Stock will become convertible
into approximately 11,368,706 shares of the Company's common stock (based on the
current market price for the Common Stock). The Company will then have warrants
outstanding to purchase 5,254,571 shares of Common Stock, at exercise prices
ranging from $.358 to $4.50, including the Warrants to purchase 4,000,000 shares
of Common Stock at an exercise price of $.75 per share. The holders of the
warrants are given the opportunity to profit from a rise in the market price of
the Company's stock with a result in dilution in the interest of the other
stockholders. Further,
17
<PAGE>
the terms by which the Company may obtain additional financing while the
warrants are outstanding may be adversely affected by the existence of the
warrants. The holders of the warrants may exercise at a time when the Company
might be able to obtain additional capital through a new offering of Securities
on terms more favorable then those provided in the warrants.
REGISTRATION RIGHTS
Pursuant to the Purchase Agreement and the Subscription Agreements, the
Company has agreed to register the resale of the Registrable Securities. The
Company filed a Registration Statement registering the re-sale of the
Registrable Securities on February 1, 1999. Management expects the Registration
Statement to be declared effective shortly after the meeting. If the investors
were to sell a substantial portion of their Registrable Securities, such sales
could adversely affect the market price of the Common Stock.
NASDAQ DELISTING.
The Company's shares of Common Stock were listed on The Nasdaq SmallCap
Market. However, on February 23, 1999, the Company received notice from The
Nasdaq Stock Market that the Nasdaq Listings Qualifications Panel determined to
delist the Company's Common Stock from The Nasdaq Stock Market effective
February 23, 1999. The Company failed to meet two requirements for continued
listing on The Nasdaq SmallCap Market. The Company has requested a review of
this decision by the Nasdaq Listing and Hearing Review Council. In the interim,
the Common Stock is being quoted on the OTC Bulletin Board and management
continues its efforts to reduce liabilities and increase stockholders' equity.
Management hopes to be able to demonstrate compliance with The Nasdaq SmallCap
Market maintenance requirements and have a plan for sustained compliance by the
time this decision is reviewed by the Hearing Review Council. However, no
assurance can be given that the Company will be able to achieve compliance or
that the Nasdaq Hearing Review Council will agree to re-list the Company's
Common Stock on The Nasdaq Stock Market.
PACIFIC EXCHANGE DELISTING
The Company's shares of Common Stock are listed on the Pacific
Exchange. However, on December 2, 1998, the Company received a letter from the
Pacific Exchange indicating that the Equity Listing Committee had voted
unanimously in favor of delisting the Common Stock. The Common Stock was
suspended from trading on December 2, 1998. On December 7, 1998, the Company
responded with a request for a hearing and an answer to the letter from the
Pacific Exchange. On December 10, 1998, the Company received a letter from the
Pacific Exchange indicating that a panel was going to be gathered to consider
the Company's situation. A panel has been chosen; however, a hearing date has
not been set. Until such date, while the Common Stock has not been delisted, the
Common Stock will remain suspended from trading. The Company's position may not
be deemed to warrant continued listing by the Pacific Exchange in which case the
Pacific Exchange may delist the Company's Common Stock from the Pacific
Exchange. No assurance can be given that the Company's shares of Common Stock
will continue to be listed on the Pacific Exchange. Delisting of the Common
Stock from the Pacific Exchange would likely have a material adverse effect on
the liquidity of the market for the Common Stock and the Company.
VOTE REQUIRED
The approval of the Restructuring is not required under Delaware law,
however, the Restructuring requires stockholder approval under the rules of the
Nasdaq. Thus, the affirmative vote of the holders of the majority of shares of
Common Stock present and entitled to vote at the Meeting is required to approve
the Restructuring. In accordance with Nasdaq rules, the Shares purchased by Mr.
Zachariou will not vote on this matter.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO APPROVE
THE RESTRUCTURING.
18
<PAGE>
PROPOSAL 2
AMENDMENT OF THE CERTIFICATE TO INCREASE
THE AUTHORIZED SHARES OF COMMON STOCK FROM
10,000,000 SHARES TO 50,000,000 SHARES
The Board of Directors of the Company has approved and recommends that
the stockholders of the Company approve an amendment to the Company's
Certificate of Incorporation for the purpose of increasing the number of its
authorized shares of Common Stock from 10,000,000 shares to 50,000,000 shares.
The Capital Amendment will be accomplished by amending the Company's Certificate
of Incorporation.
Upon approval of Proposal 1 and this Proposal, the Company will issue
7,571,686 shares of Common Stock as a result of the automatic conversion of the
Series A Stock, Series B Stock and Series C Stock. At the same, holders of
Series D Stock and Series E Stock may convert their shares into approximately
3,797,020 shares of Common Stock (based on the current market price of the
Common Stock). The additional authorized but unissued shares of Common Stock not
issued to the investors could be used for any proper corporate purpose,
including acquisitions, raising of additional equity capital, stock dividends or
upon the exercise of stock options. The Company's stockholders do not have
preemptive rights to subscribe for or purchase any of the additional shares of
Common Stock to be authorized. The future issuance of additional shares of
Common Stock on other than a pro rata basis may dilute the ownership of the
current stockholders, as well as their proportionate voting rights.
If the proposed amendment to the Company's Certificate of Incorporation
is adopted, no further approval of the stockholders would be required for the
issuance of shares of Common Stock as authorized by the amendment and, absent
any legal or Nasdaq requirements, it is not contemplated that further approval
of the stockholders would be sought for issuance of any shares authorized by the
Capital Amendment. Except as set forth herein in connection with the
Restructuring, the Company presently has no other plans to issue any shares of
Common Stock which would be authorized hereby.
The approval of the proposed amendment could make it more difficult to
acquire control of the Company and thereby discourage attempts to do so, even
though the Company's stockholders may deem such an acquisition desirable.
Issuance of the additional shares of Common Stock could dilute the ownership
interest and voting power of the Company's stockholders who may seek control of
the Company. The shares of Common Stock could be issued in a private placement
to one or more organizations sympathetic to the Company and opposed to any
take-over bid, or under other circumstances that could make it more difficult
and thereby discourage attempts to acquire control of the Company. To the extent
that it impedes any such attempts, the amendment may serve to perpetuate the
Company's management.
Although the Company has from time to time considered the issuance of
additional Common Stock in connection with a strategic alliance or acquisition,
except as described herein, the Company has no present plans, agreements or
arrangements for the issuance of the additional shares of Common Stock in excess
of the number of such shares presently authorized in connection with any
particular transaction. The Company does not anticipate soliciting the vote of
its stockholders to authorize the issuance of the additional shares of the
Common Stock unless otherwise required under Delaware law, the Company's
Certificate of Incorporation or its ByLaws or Nasdaq rules.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO APPROVE
THE CAPITAL AMENDMENT.
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<PAGE>
PROPOSAL 3
ELECTION OF DIRECTORS
Five directors are to be elected at the Meeting to serve until the next
Annual Meeting of the Company's stockholders and until their respective
successors shall have been elected and shall have qualified or until their
earlier resignation, removal from office or death.
NOMINEES
The following table sets forth the names, ages and positions held with
respect to the Company's directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION YEAR FIRST ELECTED DIRECTOR
- ---- --- -------- ---------------------------
<S> <C> <C> <C>
Jay H. Solomont (2) 42 Chairman of the Board 1998
and Director
Peter Zachariou (1) 37 President and Director 1998
Robert W. Lichtman 69 Chief Operating Officer
Mark Karasick 49 Director 1998
Thomas J. Lenagh (1)(2) 73 Director 1997
Jan M. Winston (1)(2) 62 Director 1997
Kevin E. Homon 43 Secretary and Controller
<FN>
(1) - Member of Compensation Committee
(2) - Member of the Audit Committee
</FN>
</TABLE>
JAY H. SOLOMONT became a director of the Company in June 1998 upon
consummation of the Restructuring. Mr. Solomont has been a private investor for
at least the past five years. Prior to that, Mr. Solomont held various executive
and general management positions with A/D/S Group, one of the premier nursing
home companies in the northeast region of the United States, until this company
was sold to the multi-care group for approximately US $100,000,000. Mr.
Solomont, along with his brothers, continues to own a group of assisted living
facilities. Mr. Solomont's private investments include, but are not limited to,
part ownership of a decorative art factory in the United States, ownership of
several real estate properties in the United States and, along with his
partners, ownership of the exclusive rights to develop IMAX Theaters in Israel.
PETER C. ZACHARIOU became President and a director of the Company in
June 1998 upon consummation of the Restructuring. Mr. Zachariou has also held
various positions with JR Consulting, Inc., a company with a class of securities
traded on the OTC Bulletin Board /registered trademark/; most recently Mr.
Zachariou serves as the Chairman of the Board, President and Treasurer. For at
least the preceding five years, Mr. Zachariou has been a private investor.
ROBERT W. LICHTMAN has been acting as the Company's Chief Operating
Officer since July 1998 pursuant to an agreement with Getzler & Co., Inc., a
management consulting firm ("Getzler"). Mr. Lichtman is also a Senior Vice
President of Getzler, and has been for over five years.
MARK KARASICK became a director of the Company in June 1998 upon
consummation of the Restructuring. Mr. Karasick has been a private investor and
syndicator, primarily in the real estate area, for at least the past five years.
Mr. Karasick was initially involved ten years ago as a developer in Orange and
Dutchess counties in New York. When the market declined, Mr. Karasick
represented a number of individuals and entities on working out their troubled
loans with their lenders and in managing their properties on an interim basis.
During the past four years, Mr. Karasick has entered the real estate market as a
principal and syndicator acquiring properties or mortgages, primarily office
buildings in midtown Manhattan.
THOMAS H. LENAGH has been a director of the Company since September
1997. Mr. Lenagh was the Chairman and Chief Executive Officer of Greiner
Engineering from 1984 to 1986. He also served as the Chairman of the Executive
Committee of SCI Systems, Inc., from 1985 to 1994. Mr. Lenagh, an independent
financial advisor since 1984, has also served in financial management positions
of the Aspen Institute and the Ford Foundation as well as on the Board of
Directors of several corporations.
JAN M. WINSTON has been a director of the Company since September 1997.
Mr. Winston was employed by the IBM Corporation from 1963 to 1997. He has held
executive and general management positions in computer development, marketing
and finance. He has extensive experience in developing
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<PAGE>
and marketing minicomputers, personal computers and software and frequently
represented IBM in external negotiations. Mr. Winston was one of six senior
managers who launched IBM's personal computer activity in the early 1980's. Most
recently, he lead IBM activities in the development and sales of speech
recognition systems.
KEVIN E. HOMON has been the Company's Controller since July 1997 and
Secretary since July 1998. Prior to joining the Company, Mr. Homon was
Controller of York Hunter, Inc., a large construction management firm, from 1986
to 1997.
Peter C. Zachariou became an officer and director of the Company as
part of the Restructuring. Mark Karasick and Jay Solomont were also appointed to
the Board of Directors upon consummation the Restructuring. Robert Lichtman
became Chief Operating Officer shortly after the Restructuring. Stanley Zuk and
Gregory Horne resigned as executives officers and directors of the Company upon
consummation of the Restructuring; however, they continue to be employees of the
Company. After the Restructuring, Mr. Gary Horne continued to serve as Chairman
of the Board and a Chief Executive Officer of the Company; however, Mr. Horne
subsequently resigned on November 5, 1998.
In connection with the IPO, the Company granted H.J. Meyers the right,
for a period of three years from May 13, 1997, to designate an observer to the
Company's Board of Directors, which individual may be a director, officer,
employee or affiliate of H.J. Meyers.
The Company's compensation to non-employee directors consists of a fee
of $1,000 per meeting of the Board of Directors and to provide non-employee
directors with annual grants of stock options under the Company's 1996 Stock
Option Plan (the "1996 Plan") to purchase 7,500 shares of Common Stock that will
be vested at the end of each full year of service.
The following table sets forth the persons nominated as directors:
<TABLE>
<CAPTION>
NAME AGE POSITION YEAR FIRST ELECTED
- ---- --- -------- ------------------
<S> <C> <C> <C>
Jay H. Solomont (2) 42 Chairman of the Board 1998
and Director
Peter C. Zachariou (1) 37 President and Director 1998
Mark Karasick 49 Director 1998
Thomas J. Lenagh (1)(2) 73 Director 1997
Jan M. Winston (1)(2) 62 Director 1997
<FN>
(1) - Member of Compensation Committee
(2) - Member of the Audit Committee
</FN>
</TABLE>
Our directors hold office until the next annual meeting of stockholders
and until their successors have been duly elected and qualified or their earlier
resignation, removal from office or death. Our officers are elected annually by
the Board of Directors and serve at the direction of the Board.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers, directors and holders of more than
10% of the Company's Common Stock, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (the "Commission"). Such
persons are required to furnish the Company with copies of all Section 16(a)
forms they file.
Based solely on its review of the copies of such forms received by it
or oral or written representations from certain reporting persons that no Forms
5 were required for those persons, the Company believes that, with respect to
Fiscal 1998, its executive officers, directors and greater than 10% beneficial
owners complied with all such filing requirements, with three exceptions. Mark
Karasick became a director of the Company in June 1998. Kevin Homon became an
officer of the Company in July 1998. Robert Lichtman became an officer of the
Company in June 1998. The Form 3's for each of these individuals were not filed
timely.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During Fiscal 1998, the Board of Directors held 11 formal meetings
and took actions by written consent on four occasions. During Fiscal 1998, no
director attended fewer than 75% of the number of meetings of the Board of
Directors held during the period such director served on the Board.
The only standing committees of the Board of Directors are the Audit
Committee and the Compensation Committee. The Board does not have a nominating
or similar committee. Both Committees were formed during the fiscal year ended
June 27, 1997 ("Fiscal 1997") following consummation of the IPO.
The Audit Committee is presently comprised of Jay H. Solomont, Thomas
J. Lenagh and Jan M. Winston. The duties and responsibilities of the Audit
Committee include (a) recommending to the Board of Directors the appointment of
the Company's independent certified public accountants and any termination of
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<PAGE>
engagement, (b) reviewing the plan and scope of independent audits, (c)
reviewing the Company's significant accounting and reporting policies and
operating controls, (d) having general responsibility for all related auditing
matters, and reporting its recommendations and findings to the full Board of
Directors. During Fiscal 1998, the Audit Committee held two formal meetings
and did not take any actions by written consent.
The Compensation Committee is presently comprised of Peter C.
Zachariou, Thomas J. Lenagh and Jan M. Winston. The Compensation Committee
reviews and approves the compensation of the Company's executive officers and
administers the 1996 Stock Option Plan (the "1996 Plan"). During Fiscal 1998,
the Compensation Committee held no formal meetings and did not take any actions
by written consent.
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE NOMINEES FOR ELECTION
AS DIRECTORS.
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides information with respect to the
compensation paid or accrued by the Company and all its subsidiaries to the
Company's Chief Executive Officer, Chief Operating Officer and the Chief
Financial Officer (collectively, the "Named Executive Officers") in all their
capacities for the Fiscal 1998 and Fiscal 1997. No other executive officer of
the Company received salary and bonus compensation in Fiscal 1998 and Fiscal
1997 in excess of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------- --------------------
SHARES
NAME AND OTHER ANNUAL UNDERLYING
PRINCIPLE POSITION YEAR SALARY BONUS COMPENSATION (1) OPTIONS (#)
------------------ ---- ------ ----- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Peter C. Zachariou(2) 1998 $0 $0 $0 0
President 1997 $0 $0 $0 0
Gary D. Horne(3) 1998 $132,534 $0 $0 0
Chairman and Chief Executive 1997 $139,150 $0 $0 0
Officer
Stanley F. Zuk(4) 1998 $119,380 $0 $0 0
President and Chief Operating 1997 $138,400 $0 $0 0
Officer
</TABLE>
- -------------------------
(1) The table does not include amounts for personal benefits extended to
Mr. Horne and Mr. Zuk by the Company, such as health or life insurance.
The Company believes that the incremental cost of such benefits to Mr.
Horne or Mr. Zuk during Fiscal 1998 and Fiscal 1997 did not exceed the
lesser of $50,000 or 10% of his total annual salary and bonuses.
(2) Mr. Zachariou became President of the Company effective June 26, 1998.
On July 24, 1998, the Board agreed to compensate Mr. Zachariou in the
amount of $7,000 per month. However, to date, compensation to Mr.
Zachariou has not been paid and is accruing. No compensation was paid
or accrued in Fiscal 1998 or Fiscal 1997.
(3) Mr. Horne resigned as Chairman of the Board and Chief Executive Officer
on November 5, 1998. Mr. Horne continues to be employed by the Company
as Vice President of Engineering.
(4) Mr. Zuk resigned from his position as President and Chief Operating
Officer effective June 26, 1998. Mr. Zuk continues to be employed
by the Company as Vice President of Manufacturing.
EXECUTIVE EMPLOYMENT AGREEMENTS
Effective December 1, 1996, the Company entered into three-year
employment agreements with each of Gary D. Horne, the Company's Chairman and
Chief Executive Officer, and Stanley F. Zuk, the Company's President and Chief
Operating Officer. The terms of the employment agreements will automatically be
extended for successive one year terms unless the Company or the executive
officer gives written notices to the other at least 90 days prior to the
then-scheduled expiration date. The employment agreements provide for annual
salaries initially set at $160,000 and $140,000 (subject to annual
cost-of-living adjustments) for Messrs. Horne and Zuk, respectively. However, in
connection with the Restructuring, the employment agreements for Messrs. Horne
and Zuk were amended to reduce their salaries by 50% until the earlier of (a)
the conversion of the Series A Stock, Series B Stock and Series C Stock have
been converted or (b) the Company has three consecutive profitable months.
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Each employment agreement provides that the executive officer who is a
party thereto (the "Executive Officer") will continue to receive his salary for
a period of 12 months after termination of employment, if his employment is
terminated by the Company for any reason other than Cause (as defined in the
employment agreement), including death or disability (with such severance
payable in a lump sum in the case of death). The term Cause is defined in the
employment agreement to mean (a) an Executive Officer's act or omission which
constitutes a willful and material breach of the employment agreement which is
not cured within 30 days after the Executive Officer's receipt of notice of such
breach, (b) an Executive officer's embezzlement or misappropriation of the
Company's assets for property or (c) an Executive Officer's conviction for a
criminal act that is a felony. Each employment agreement also prohibits the
Executive Officer from directly or indirectly competing with the Company for one
year after termination for any reason except Cause.
On July 24, 1998, the Board voted (with Mr. Zachariou abstaining) on
and approved a compensation package for Mr. Zachariou, which includes a
compensation payment of $7,000 per month.
The Company has obtained key man insurance in the amount of $1,000,000
on the lives of each of Messrs. Horne and Zuk.
Effective June 29, 1998, the Company entered into an agreement with
Getzler & Co., Inc. ("Getzler") with respect to the services of Robert W
Lichtman as Chief Operating Officer of the Company. Pursuant to the one-year
agreement, Getzler will be paid $200,000 per annum payable monthly in advance on
the first day of every month. In addition, as additional compensation for the
services to be provided, the Company issued 150,000 shares of the Company's
Common Stock to Getzler and/or its designees. Notwithstanding the foregoing,
Getzler has a right to require Peter Zachariou, individually, to purchase the
shares owned by Getzler at $1.25 per share, and Peter Zachariou has a call with
respect to the shares at $1.50 per share. In addition to the foregoing, Getzler
purchased 100,000 shares of the Company's Common Stock at a purchase price of
$.352 per share. Getzler will also be reimbursed for all reasonable expenses.
Effective November 5, 1998, Mr. Horne resigned from his positions as
Chairman of the Board and Chief Executive Officer of the Company. Mr. Horne
continues to be an employee of the Company.
OPTIONS GRANTS IN LAST FISCAL YEAR
Under the 1996 Plan, 60,000 shares of Common Stock are reserved for
issuance upon exercise of the options. The 1996 Plan is designed to serve as an
incentive for retaining qualified and competent directors, employees,
consultants and independent contractors of the Company. There were no grants of
stock options made during Fiscal 1998 to the Company's named Executive Officers.
STOCK OPTIONS HELD AT END OF FISCAL 1997
No stock options are held by the Company's Named Executive Officers as
of June 26, 1998.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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ADVANCES FROM STOCKHOLDER
In order to assist the Company with meeting its working capital needs,
Gary D. Horne has periodically advanced funds to the Company. Such advances,
including interest at the rate of 8% per annum, aggregated approximately
$659,000 at June 27, 1997 and $82,000 at June 26, 1998. Such advances are
unsecured. The $659,000 in advances are payable as follows: interest only
commencing January 1, 1998; principal plus interest payable monthly commencing
January 1, 2001 with the entire balance due January 1, 2003. The $82,000 in
advances outstanding at June 26, 1998 are repayable as follows: principal and
interest payments of $10,000 are payable monthly commencing July 15, 1998 and
until the month after the Company has three consecutive quarters of
profitability (i.e. has income before income taxes as opposed to a loss before
income taxes); thereafter, the balance of the principle sum and interest due
under the note shall be payable in equal monthly installments over a three year
period. The Company is currently in default with respect to these obligations.
TRANSACTIONS WITH NETCOMP, INC.
The Company purchases computers, computer supplies and services from
Netcomp, which operates the ComputerLand franchise in Poughkeepsie, New York.
Netcomp is owned by Gary D. Horne and Stanley F. Zuk. Purchases from Netcomp
aggregated approximately $134,000 and $135,000 during Fiscal 1998 and Fiscal
1997, respectively.
APPROVAL OF AFFILIATED TRANSACTIONS
All transactions between the Company and its directors, executive
officers and principal stockholders will be on terms no less favorable than
could be obtained from unaffiliated third parties and have been and will be
approved by a majority of the independent outside directors of the Company.
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PROPOSAL 4
AMENDMENT OF 1996 STOCK OPTION PLAN
The Board of Directors of the Company has amended, subject to
stockholder approval, the 1996 Plan to increase the number of shares of Common
Stock authorized for issuance under the 1996 Plan by 290,000 shares from 60,000
shares to 350,000 shares of Common Stock.
1996 PLAN DESCRIPTION
The statements in this Proxy Statement concerning the terms and
provisions of the 1996 Plan are summaries only and do not purport to be
complete. All such statements are qualified in their entirety by reference to
the full text of the 1996 Plan, which is attached as Exhibit F to this Proxy
Statement
The purpose of the 1996 Plan is to advance the interests of the Company
by providing an additional incentive to attract and retain qualified and
competent persons as employees, upon whose efforts and judgment the success of
the Company is largely dependent, through the encouragement of stock ownership
in the Company by such persons.
The 1996 Plan was effective as of June 25, 1996, and unless sooner
terminated by the Board of Directors of the Company in accordance with the terms
thereof, shall terminate on June 25, 2006. Certain employees, who are selected
by the stock option committee, or if there is no stock option committee by the
Board of Directors, may participate in the 1996 Plan; however, no incentive
stock option, as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code" or "Internal Revenue Code") shall be granted to a consultant
who is not also an employee of the Company.
The 1996 Plan provides for the issuance of incentive stock options
("Incentive Stock Options") and nonqualified stock options ("Nonqualified Stock
Options"). An Incentive Stock Option is an option to purchase Common Stock that
meets the definition of "incentive stock option" set forth in Section 422 of the
Code. A Nonqualified Stock Option is an option to purchase Common Stock that
meets certain requirements in the Plans but does not meet the definition of an
"incentive stock option" set forth in Section 422 of the Code. Nonqualified
Stock Options and Incentive Stock Options are sometimes referred to herein as
"Options."
The number of shares of Common Stock that may be issued pursuant to
Options granted under the 1996 Plan is presently 60,000, and if this proposal is
approved by the Stockholders, will be increased to 350,000. If any Option
granted pursuant to the 1996 Plan terminates, expires, or is canceled or
surrendered, in whole or in part, shares subject to the unexercised portion may
again be issued pursuant to the exercise of Options granted under the 1996 plan.
The shares acquired upon exercise of Options granted under the 1996 Plan will be
authorized and unissued shares of Common Stock. The Company's Stockholders will
not have any preemptive rights to purchase or subscribe for the shares reserved
for issuance under the 1996 Plan.
The 1996 Plan is administered by a committee of two or more directors
(the "Committee") or, if a Committee is not designated by the Board of
Directors, by the Board of Directors as a whole. The Board has authorized the
Compensation Committee to administer the 1996 Plan. The Committee has the right
to determine, among other things, the persons to whom Options are granted, the
number of shares of Common Stock subject to Options, the exercise price of
Options and the term thereof.
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All employees of the Company, including officers and directors and
consultants to the Company, are eligible to receive grants of Options under the
1996 Plan; however, no Incentive Stock Option may be granted to a consultant who
is not also an employee of the Company or any of its subsidiaries. Upon
receiving grants of Options, each holder of the Options (the "Optionee") shall
enter into an option agreement with the Company which contains the terms and
conditions deemed necessary by the Committee.
TERMS AND CONDITIONS OF OPTIONS
OPTION PRICE
For any Option granted under the 1996 Plan, the option price per share of
Common Stock may be any price not less than par value per share as determined by
the Committee; however, the option price per share of any Incentive Stock Option
may not be less than the Fair Market Value (defined below) of the Common Stock
on the date such Incentive Stock Option is granted. On October 30, 1998, the
closing price of the Company's Common Stock as reported by the Nasdaq SmallCap
Market was $0.688 per share.
Under the 1996 Plan, the "Fair Market Value" is the closing price of
shares on the business day immediately preceding the date of grant; however, if
the shares are not publicly traded, then the Fair Market Value will be as the
Committee shall in its sole and absolute discretion determine in a fair and
uniform manner. The closing price of the share on any business day under the
1996 Plan is (i) if the shares are listed or admitted for trading on any United
States national securities exchange, or if actual transactions are otherwise
reported on a consolidated transaction reporting system, the last reported sale
price of shares on such exchange or reporting system, as reported in any
newspaper of general circulation, (ii) if the shares are quoted on the National
Association of Securities Dealers Automated Quotations System, or any similar
system of automated dissemination of quotations of securities prices in common
use, the mean between the closing high bid and low asked quotations for such day
of shares on such system, or (iii) if neither clause (i) nor (ii) is applicable,
the mean between the high bid and low asked quotations for the shares as
reported by the National Quotation Bureau, Incorporated if at least two
securities dealers have inserted both bid and asked quotations for the shares on
at least five of the ten preceding days.
EXERCISE OF OPTIONS
Each Option is exercisable in such amounts, at such intervals and upon
such terms as the Committee may determine; however, Incentive Stock Options must
vest in three annual installments commencing one year from the date of grant. In
no event may an Option be exercisable after ten years from the date of grant.
Unless otherwise provided in an Option, each outstanding Option may, in the sole
discretion of the Committee, become immediately fully exercisable (i) if there
occurs any transaction (which shall include a series of transactions occurring
within 60 days or occurring pursuant to a plan), that has the result that
Stockholders of the Company immediately before such transaction cease to own at
least 51 percent of the voting stock of the Company or of any entity that
results from the participation of the Company in a reorganization,
consolidation, merger, liquidation or any other form of corporate transaction;
(ii) if the Stockholders of the Company shall approve a plan of merger,
consolidation, reorganization, liquidation or dissolution in which the Company
does not survive (unless such plan is subsequently abandoned); or (iii) if the
Stockholders of the Company shall approve a plan for the sale, lease, exchange
or other disposition of all or substantially all the property and assets of the
Company (unless such plan is subsequently abandoned). The Committee may in its
sole discretion accelerate the date on which any Option may be exercised and may
accelerate the vesting of any shares subject to any Option or previously
acquired by the exercise of any Option. Options granted to the officers and
directors under the 1996 Plan may not be exercised
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unless otherwise expressly provided in any Option, until six months following
the date of grant and if and only if the Optionee is in the employ of the
Company on such date.
Unless further limited by the Committee in any Option, shares of Common
Stock purchased upon the exercise of Options must be paid for in cash, by
certified or official bank check, by money order, with already owned shares of
Common Stock, or a combination of the above. The Committee, in its sole
discretion, may accept a personal check in full or partial payment. If paid in
whole or in part with shares of already owned Common Stock, the value of the
shares surrendered is deemed to be their Fair Market Value on the date the
Option is exercised. Proceeds from the sale of Common Stock pursuant to the
exercise of Options will be added to the general funds of the Company to be used
for general corporate purposes. Under the 1996 Plan, the Company may also lend
money to an Optionee to exercise all or a portion of an Option granted under the
1996 Plan. If the exercise price is paid in whole or in part with Optionee's
promissory note, such note shall (i) provide for full recourse to the maker,
(ii) be collateralized by the pledge of shares purchased by Optionee upon
exercise of such Option, (iii) bears interest at a rate of interest no less than
the rate of interest payable by the Company to its principal lender, and (iv)
contain such other terms as the Committee in its sole discretion shall require.
NONTRANSFERABILITY
Options granted under the 1996 Plan are not transferable by an Optionee
other than by will or the laws of descent and distribution, and Options are
exercisable during an Optionee's lifetime only by the Optionee.
TERMINATION OF OPTIONS
The expiration date of an Option is determined by the Committee at the
time of the grant and is set forth in the applicable stock option agreement. In
no event may an Option be exercisable after ten years from the date it is
granted.
The 1996 P1an provides that if an Optionee's employment is terminated for
any reason other than for cause, an improper termination, mental or physical
disability or death, then the unexercised portion of the Optionee's Options
shall terminate three months after the such termination. If an Optionee's
employment is terminated for cause or if there is an improper termination of
Optionee's employment, the unexercised portion of the Optionee's Options shall
terminate immediately upon such termination. If an Optionee's employment is
terminated by reason of the Optionee's mental or physical disability, the
unexercised portion of the Optionee's Options shall terminate 12 months after
such termination. If an Optionee's employment is terminated by reason of the
Optionee's death, the unexercised portion of the Optionee's Options shall
terminate 12 months after the Optionee's death.
The Committee in its sole discretion may by giving written notice cancel,
effective upon the date of the consummation of certain corporate transactions
that would result in an Option becoming fully exercisable, cancel any Option
that remains unexercised on such date. Such notice shall be given a reasonable
period of time prior to the proposed date of such cancellation and may be given
either before or after Stockholder approval of such corporate transaction.
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OUTSTANDING OPTIONS
As of the Record Date, Options to purchase a total of 50,000 shares of
Common Stock had been granted pursuant to the 1996 Plan, none of which have been
exercised and 50,000 of which are outstanding (of which none Options are
exercisable). Outstanding Options, which are held by approximately 3 persons,
are exercisable at $.50 per share.
FEDERAL INCOME TAX EFFECTS
The 1996 Plan is not qualified under the provisions of Section 401(a) of
the Code, nor is it subject to any of the provisions of the Employee Retirement
Income Security Act of 1974, as amended.
INCENTIVE STOCK OPTIONS
Incentive Stock Options are "incentive stock options" as defined in
Section 422 of the Internal Revenue Code. Under the Code, an Optionee generally
is not subject to ordinary income tax upon the grant or exercise of an Incentive
Stock Option. However, an employee who exercises an Incentive Stock Option by
delivering shares of Common Stock previously acquired pursuant to the exercise
of an Incentive Stock Option is treated as making a Disqualifying Disposition
(defined below) of such shares if the employee delivers such shares before the
expiration of the holding period applicable to such shares. The applicable
holding period is the longer of two years from the date of grant or one year
from the date of exercise. The effect of this provision is to prevent
"pyramiding" the exercise of an Incentive Stock Option (i.e., the exercise of
the Incentive Stock Option for one share and the use of that share to make
successive exercise of the Incentive Stock Option until it is completely
exercised) without the imposition of current income tax.
The amount by which the fair market value of the shares acquired at the
time of exercise of an Incentive Stock Option exceeds the purchase price of the
shares under such Option will be treated as an item of adjustment included in
the Optionee's alternative minimum taxable income for purposes of the
alternative minimum tax. If, however, there is a Disqualifying Disposition in
the year in which the Option is exercised, the maximum amount of the item of
adjustment for such year is the gain on the disposition of the shares. If there
is Disqualifying Disposition in a year other than the year of exercise, the
dispositions will not result in an item of adjustment for such other year.
If, subsequent to the exercise of an Incentive Stock Option (whether paid
for in cash or in shares), the Optionee holds the shares received upon exercise
for a period that exceeds (a) two years from the date such Incentive Stock
Option was granted or, if later, (b) one year from the date of exercise (the
"Required Holding Period"), the difference (if any) between the amount realized
from the sale of such shares and their tax basis to the holder will be taxed as
long-term capital gain or loss. If the holder is subject to the alternative
minimum tax in the year of disposition, such holder's tax basis in his or her
shares will be increased for purposes of determining his alternative minimum tax
for such year, by the amount of the item of adjustment recognized with respect
to such shares in the year the Option was exercised.
In general, if, after exercising an Incentive Stock Option, an employee
disposes of the shares so acquired before the end of the Required Holding Period
(a "Disqualifying Disposition"), such Optionee would be deemed in receipt of
ordinary income in the year of the Disqualifying Disposition, in an amount equal
to the excess of the fair market value of the shares at the date the Incentive
Stock Option was exercised over the exercise price. If the Disqualifying
Disposition is a sale or exchange which would permit a loss to be recognized
under the Code (were a loss in fact to be sustained), and the sales proceeds are
less than the fair market value of the shares on the date of
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exercise, the Optionee's ordinary income would be limited to the gain (if any)
from the sale. If the amount realized upon disposition exceeds the fair market
value of the shares on the date of exercise, the excess would be treated as
short-term or long-term capital gain, depending on whether the holding period
for such shares exceeded one year.
An income tax deduction is not allowed to the Company with respect to the
grant or exercise of an Incentive Stock Option or the disposition, after the
Required Holding Period, of shares acquired upon exercise. In the event of a
Disqualifying Disposition, a Federal income tax deduction will be allowed to the
Company in an amount equal to the ordinary income to be recognized by the
Optionee, provided that such amount constitutes an ordinary and necessary
business expense to the Company and is reasonable, and the Company satisfies its
withholding obligation with respect to such income.
NONQUALIFIED STOCK OPTIONS
An Optionee granted a Nonqualified Stock Option under the 1996 Plan will
generally recognize, at the date of exercise of such Nonqualified Stock Option,
ordinary income equal to the difference between the exercise price and the fair
market value of the shares of Common Stock subject to the Nonqualified Stock
Option. This taxable ordinary income will be subject to Federal income tax
withholding. A Federal income tax deduction will be allowed to the Company in an
amount equal to the ordinary income to be recognized by the Optionee, provided
that such amount constitutes an ordinary and necessary business expense to the
Company and is reasonable, and the Company satisfies its withholding obligation
with respect to such income.
If an Optionee exercises a Nonqualified Stock Option by delivering other
shares, the Optionee will not recognize gain or loss with respect to the
exchange of such shares, even if their then fair market value is different from
the Optionee's tax basis. The Optionee, however, will be taxed as described
above with respect to the exercise of the Nonqualified Stock Option as if he had
paid the exercise price in cash, and the Company likewise generally will be
entitled to an equivalent tax deduction. Provided a separate identifiable stock
certificate is issued therefor, the Optionee's tax basis in that number of
shares received on such exercise which is equal to the number of shares
surrendered on such exercise will be equal to his tax basis in the shares
surrendered and his holding period for such number of shares received will
include his holding period for the shares surrendered. The Optionee's tax basis
and holding period for the additional shares received on exercise of a
Nonqualified Stock Option paid for, in whole or in part, with shares will be the
same as if the Optionee had exercised the Nonqualified Stock Option solely for
cash.
The discussion set forth above does not purport to be a complete analysis
of the potential tax consequences relevant to the Optionees or to the Company,
or to describe tax consequences based on particular circumstances. It is based
on Federal income tax law and interpretational authorities as of the date of
this Proxy Statement, which are subject to change at any time.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THIS PROPOSAL.
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PROPOSAL 5
RATIFICATION OF SELECTION OF
AUDITORS
The firm of Deloitte & Touche LLP, auditors, served as the Company's
independent certified public accountants for Fiscal 1998. The Board of Directors
has selected Deloitte & Touche LLP as the Company's auditors for the fiscal year
ending June 25, 1999. One or more representatives of Deloitte & Touche LLP are
expected to be present at the Meeting, will have the opportunity to make a
statement if they desire to do so and are expected to be available to respond to
appropriate questions from Stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THIS PROPOSAL
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OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors knows of
no additional matters that will be presented for consideration at the Meeting.
Execution of a proxy, however, confers on the designated proxy holders
discretionary authority to vote the shares covered thereby in accordance with
their best judgment on such other business, if any, that may properly come
before the Meeting or any adjournment or postponement thereof.
STOCKHOLDER PROPOSALS
Any proposals of stockholders to be presented at the 1999 Annual
Meeting of Stockholders must be received by the Company no later than
October 31, 1999, for inclusion in the Company's proxy statement relating to
such meeting, subject to the rules and regulations of the Commission.
By Order Of The Board Of Directors,
Kevin Homon
SECRETARY
Poughkeepsie, New York
March 2, 1999
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ASD GROUP, INC.
ANNUAL MEETING OF STOCKHOLDERS - MARCH 15, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
ASD GROUP, INC.
The undersigned hereby appoints Peter C. Zachariou as proxy, with full
power to appoint a substitute, to represent and to vote, with all the powers the
undersigned would have if personally present, all the shares of common stock,
$.01 par value per share, of ASD Group, Inc. (the "Company") held of record by
the undersigned on February 19, 1999 at the Annual Meeting of Stockholders to be
held on March 15, 1999 or any adjournment or adjournments thereof.
PROPOSAL 1. Approval of the terms of a financial restructuring pursuant
to which the Company restructured certain of its indebtedness
and obtained a capital infusion pursuant to (i) the Securities
Purchase Agreement dated June 26, 1998 by and among the
Company, the parties listed on Schedule 1 to the Purchase
Agreement, and Gary D. Horne; (ii) Subscription Agreements
entered into with three investors in November 1998;"), and
(iii) Subscription Agreements expected to be entered into on
or before March 31, 1999.
FOR [_] AGAINST [_] ABSTAIN [_]
PROPOSAL 2. Approval of proposal to amend the Company's Certificate of
Incorporation to increase the authorized shares of Common
Stock from 10,000,000 shares to 50,000,000 shares.
FOR [_] AGAINST [_] ABSTAIN [_]
PROPOSAL 3. Election of five directors to the Company's Board of Directors
for the ensuing year.
[_] FOR ALL THE NOMINEES LISTED BELOW [_] WITHHOLD AUTHORITY (except as
marked to the contrary below) TO VOTE
FOR ALL NOMINEES LISTED BELOW.
Jay H. Solomont, Peter C. Zachariou, Mark Karasick, Thomas J. Lenagh and Jan M.
Winston
(INSTRUCTIONS: To withhold authority for any individual nominees, write that
nominee's name in the space below.)
- --------------------------------------------------------------------------------
<PAGE>
PROPOSAL 4. Approval of the proposal to amend the Company's 1996 Stock
Option Plan to increase the number of shares of the Company's
Common Stock reserved for issuance thereunder from 60,000
shares to 350,000 shares.
PROPOSAL 5. To ratify the selection of Deloitte & Touche LLP as the
Company's auditors for the fiscal year ending June 25, 1999.
FOR [_] AGAINST [_] ABSTAIN [_]
In their discretion, the Proxies are authorized to vote upon other
business as may come before the meeting.
This Proxy, when properly executed, will be voted in the manner
directed herein by the undersigned stockholder. If no direction is made, the
Proxy will be voted FOR Proposals 1, 2, 4 and 5 and for all nominees to the
Board of Directors.
Dated: ___________________, 1999
________________________________________
(Signature)
________________________________________
(Signature)
PLEASE SIGN HERE
Please date this Proxy and sign your
name exactly as it appears hereon.
Where there is more than one owner, each
should sign. When signing as an agent,
attorney, administrator, executor,
guardian, or trustee, please add your
title as such. If executed by a
corporation, the proxy should be signed
by a duly authorized officer who should
indicate his office.
PLEASE DATE, SIGN, AND MAIL THIS PROXY CARD IN THE ENCLOSED ENVELOPE.
NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
2
