As filed with the Securities and Exchange Commission on September 17, 1998.
File No. 0-24030
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange
Act of 1934 (Amendment No. ___)
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[x] Preliminary proxy statement
[ ] Confidential, For Use of the Commission Only (as permitted by
Rule 14a- 6(e)(2))
[ ] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
THE PANDA PROJECT, INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of filing fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
(1) Title of each class of securities to which transaction applies:
- -------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- -------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
- -------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- -------------------------------------------------------------------------
(5) Total fee paid:
- -------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing party:
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(4) Date filed:
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<PAGE>
THE PANDA PROJECT, INC.
901 Yamato Road
Boca Raton, Florida 33431
Notice of Special Meeting of Shareholders to be Held
on Thursday, October 29, 1998
A Special Meeting of Shareholders of The Panda Project, Inc. (the
"Company") will be held on October 29, 1998 at the Marriott Crocker Center
Hotel & Resort, 5150 Town Center Circle, Boca Raton, Florida at 10:00 a.m.,
local time, for the purpose of considering and voting upon the following
matters:
1. Issuance under Rule 4460(i)(1)(B) and (D) of the Nasdaq Stock
Market ("Nasdaq") of shares of the Company's Common Stock, $.01 par value
("Common Stock"), upon conversion of the Company's Series A-3 Convertible
Preferred Stock ("Series A Preferred") and upon exercise of certain Common
Stock purchase warrants issued in connection with the Series A Preferred
(the "Series A Placement Warrants").
2. Issuance under Nasdaq Rule 4460(i)(1)(B) and (D) of shares of
Common Stock in the event of certain decreases in the market price of the
Company's Common Stock as of the six-month and/or one-year anniversaries of
a private placement of the Common Stock conducted in August 1998 (the
"Private Placement") and upon exercise of certain Common Stock purchase
warrants issued in connection with the Private Placement (the "Private
Placement Warrants").
3. Such other business, if any, as may properly come before the
Special Meeting or any adjournment thereof.
Shareholders of record at the close of business on September 7, 1998
will be entitled to notice of and to vote at the Special Meeting or any
adjournment thereof. The stock transfer books of the Company will remain
open following the record date.
All shareholders are cordially invited to attend the Special Meeting.
By Order of the Board of Directors,
Stanford W. Crane, Jr.
President and Chief Executive Officer
Boca Raton, Florida
September 28, 1998
<PAGE>
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE
IN ORDER TO ENSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE NEED BE
AFFIXED IF THE PROXY IS MAILED IN THE UNITED STATES.
<PAGE>
Page 1
THE PANDA PROJECT, INC.
901 Yamato Road
Boca Raton, Florida 33431
(561) 994-2300
__________________________
PROXY STATEMENT
__________________________
SPECIAL MEETING OF SHAREHOLDERS
October 29, 1998
This Proxy Statement has been prepared and is furnished by the Board
of Directors of The Panda Project, Inc. (the "Company") pursuant to certain
agreements discussed below in connection with the solicitation of proxies
for the Special Meeting of Shareholders of the Company to be held on
October 29, 1998 (the "Special Meeting"), and at any adjournment thereof,
for the purposes set forth in the accompanying Notice of Meeting.
It is anticipated that this Proxy Statement and the accompanying form
of proxy will be mailed to shareholders on or about September 28, 1998.
Only holders of record of the Company's common stock, $.01 par value
(the "Common Stock"), on the books of the Company at the close of business
on September 7, 1998, are entitled to vote at the Special Meeting. On that
date, there were 14,934,856 issued and outstanding shares of Common Stock
entitled to vote on each matter to be presented at the Special Meeting.
Shares represented by a properly executed proxy received in time to
permit its use at the Special Meeting or any adjournment thereof will be
voted in accordance with the instructions indicated therein. If no
instructions are indicated with respect to a proposal, the shares
represented by the proxy will not be voted with respect to such proposal.
A shareholder who has given a proxy may revoke it at any time before it is
voted at the Special Meeting by giving written notice of revocation to the
Secretary, by submitting a proxy bearing a later date, or by attending the
Special Meeting and voting in person.
The expense of soliciting proxies will be borne by the Company.
Proxies will be solicited principally by mail, but directors, officers and
regular employees of the Company may solicit proxies personally, by
telephone or by facsimile transmission. The Company will reimburse
custodians, nominees or other persons for their out-of-pocket expenses in
sending proxy material to beneficial owners.<PAGE>
Page 2
In determining the presence of a quorum at the Special Meeting,
abstentions are counted and broker non-votes are not. The Company's By-
Laws provide that the affirmative vote of a majority of the shares
represented, in person or by proxy, and entitled to vote on a matter shall
be the act of the shareholders, except as otherwise provided by law. The
current Florida Business Corporation Act (the "Act") provides that
directors are elected by a plurality of the votes cast and all other
matters are approved if the votes cast in favor of the action exceed the
votes cast against the action (unless the matter is one for which the Act
or the Company's Articles of Incorporation require a greater vote).
Therefore, under the Act, as to all matters to be voted on by shareholders
at the Special Meeting, abstentions and broker non-votes have no legal
effect on whether a matter is approved.
You are requested, regardless of the number of shares you hold, to
sign the proxy and return it promptly in the enclosed envelope.
<PAGE>
Page 3
PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT
The table below is based on information obtained from the persons
named below with respect to the shares of Common Stock beneficially owned,
as of August 31, 1998 (except as noted below), by (i) each person known by
the Company to be the owner of more than 5% of the outstanding shares of
Common Stock, (ii) the directors of the Company, (iii) the Chief Executive
Officer and the four most highly compensated other executive officers of
the Company whose total salary and bonuses exceeded $100,000 for the fiscal
year ended December 31, 1997 and (iv) all executive officers and directors
of the Company as a group.
Amount and
Nature of Percentage
Beneficial of Outstanding
Name and Address of Beneficial Owner Ownership(1) Shares Owned(2)
Stanford W. Crane, Jr. (3) 2,228,860 15.0%
William E. Ahearn (4) 43,000 *
Kevin J. Calhoun (5) 13,500 *
C. Daryl Hollis (6) 57,500 *
Melissa F. Crane (7) 35,000 *
James T.A. Wooder (8) 4,442,533 29.8%
Claud L. Gingrich (9) 5,000 *
Rao R. Tummala (10) 3,000 *
Robert Toda (11) 516 *
Helix (PEI) Inc.
70 York Street
Suite 1700
Toronto, Ontario M5J1S9 (12) 4,418,101 24.5%
All executive officers and directors as
a group (8 persons) (13) 45.4%
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* Less than 1%.
<PAGE>
Page 4
(1) The number of shares of Common Stock beneficially owned by each person
is determined under the rules of the Securities and Exchange Commission,
and the information is not necessarily indicative of beneficial ownership
for any other purpose. Under such rules, beneficial ownership includes any
shares as to which the individual has sole or shared voting power or
investment power and also any shares of Common Stock which the individual
has the right to acquire within 60 days after August 31, 1998 through the
exercise of any stock option or other right. The inclusion herein of any
shares of Common Stock deemed beneficially owned does not constitute an
admission of beneficial ownership of those shares. Unless otherwise
indicated, the persons named in the table have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially
owned by them.
(2) The number of shares deemed outstanding includes 14,888,856 shares
outstanding as of August 31, 1998 plus any shares subject to options held
by the person in question that are currently exercisable within 60 days
after August 31, 1998.
(3) Includes 8,000 shares held by Mr. Crane jointly with his wife, of
which 1,000 shares are issuable upon exercise of a warrant.
(4) Includes 41,000 shares issuable upon exercise of outstanding stock
options exercisable with 60 days after August 31, 1998.
(5) Includes 13,500 shares issuable upon exercise of outstanding stock
options exercisable with 60 days after August 31, 1998.
(6) Includes 46,500 shares issuable upon exercise of outstanding warrants
and stock options exercisable within 60 days after August 31, 1998.
Excludes 2,000 shares held by Mr. Hollis's wife, as to which he disclaims
beneficial ownership. Mr. Hollis resigned his positions with the Company
in August 1998.
(7) Includes 8,000 shares held by Ms. Crane jointly with her husband, of
which 1,000 shares are issuable upon exercise of a warrant. Also includes
27,000 shares issuable upon exercise of outstanding stock options
exercisable with 60 days after August 31, 1998. Excludes 2,227,860 shares
held by Ms. Crane's husband, as to which she disclaims beneficial
ownership.
(8) Includes 4,418,101 shares deemed to be beneficially owned by Helix
(PEI) Inc. Mr. Wooder is a Vice President of Helix Investments (Canada)
Inc., the sole shareholder of Helix (PEI) Inc., Also includes 4,500 shares
issuable upon exercise of outstanding stock options exercisable within 60
days after August 31, 1998.
<PAGE>
Page 5
(9) Includes 3,000 shares issuable upon exercise of outstanding stock
options exercisable within 60 days after August 31, 1998.
(10) Includes 3,000 shares issuable upon exercise of outstanding stock
options exercisable within 60 days after August 31, 1998. Excludes 330
shares held by family members of Mr. Tummala, as to which he disclaims
beneficial ownership.
(11) Excludes 1,300 shares held by family members of Mr. Toda, as to which
the disclaims beneficial ownership. Mr. Toda resigned his position with
the Company in November 1997. Data based on information obtained from Mr.
Toda in February 1998.
(12) Includes 3,150,000 shares issuable upon exercise of outstanding
warrants.
(13) See footnotes (3) through (12) above.
PROPOSAL 1 - ISSUANCE OF COMMON STOCK IN EXCESS OF
"EXCHANGE CAP" UPON CONVERSION OF SERIES A PREFERRED
AND EXERCISE OF SERIES A PLACEMENT WARRANTS
Series A Preferred
The Board of Directors of the Company has designated 1,000 shares of
the Preferred Stock as Series A-3 Convertible Preferred Stock ("Series A
Preferred") with the rights, preferences, privileges and terms set forth in
the Company's Seventh Articles of Amendment of Amended and Restated
Articles of Incorporation ("Articles of Amendment"). On February 11, 1998,
the Company issued 600 shares of Series A Preferred for an aggregate
purchase price of $6,000,000. In connection with this issuance, the
Company also issued warrants to purchase an aggregate of 150,000 shares of
Common Stock of the Company having a term of five years, expiring February
11, 2003 and an exercise price of $6.10 per share (the "Series A Placement
Warrants").
In the event certain conditions are met, the Company has the right to
cause the issuance of 400 additional shares of Series A Preferred (the
"Second Tranche"). In such event, the Company would be required to issue
Series A Placement Warrants to purchase an additional 100,000 shares of
Common Stock at an exercise price equal to 115% of the average closing bid
price of the Company's Common Stock for the 5 days immediately preceding
the issuance date. As of August 31, 1998, 116 shares of Series A Preferred
had been converted into an aggregate of 574,676 shares of Common Stock and
484 shares of Series A Preferred remained outstanding. As of August 31,
1998 there were no shares of Preferred Stock outstanding other than shares
of Series A Preferred. The Company has registered the shares of Common
Stock issuable upon conversion of the Series A Preferred and exercise
<PAGE>
Page 6
of the Series A Placement Warrants for resale under the Securities Act of
1933 by means of a registration statement declared effective in July 1998
(the "Registration Statement").
Holders of Series A Preferred are entitled to receive a dividend of 5%
per annum of the purchase price of such shares, payable quarterly, at the
option of the Company either in cash or as an accrual to the purchase price
utilized in computing the number of shares of Series A Preferred issuable
on conversion. So long as any Series A Preferred is outstanding, no
dividends may be paid nor shall any distribution be made, on Common Stock
or other shares junior in rank to the Series A Preferred ("Junior Shares")
unless all dividends for all past quarterly dividend periods have been paid
or declared and a sum of cash or amount of shares sufficient for the
payment thereof set apart.
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of Series A Preferred are
entitled to receive in cash from the assets of the Company, before any
amount shall be paid to holders of Junior Shares, an amount per share of
Series A Preferred equal to the sum of (i) the purchase price for such
share and (ii) any accrued but unpaid dividends thereon. If the amounts
available for distribution are insufficient to pay the full amount due to
holders of Series A Preferred, and shares of other classes or series of
preferred stock of the Company that are of equal rank to the Series A
Preferred then each holder of Series A Preferred and such other shares
shall receive a percentage of the amounts available for distribution
ratably in proportion to the respective amounts of such assets to which
they otherwise would be entitled.
Holders of Series A Preferred have no voting rights except as required
by law or as specified in the Articles of Amendment. Pursuant to the
Articles of Amendment, the affirmative vote of the holders of at least two-
thirds of the outstanding shares of Series A Preferred is required for (i)
any amendment to the Company's Articles of Incorporation which would alter
the rights and preferences of the Series A Preferred or otherwise impair
the rights of the holders of Series A Preferred relative to the holders of
the Common Stock or the holders of any other class of capital stock, or
(ii) any issuance of more than the 1,000 shares of Series A Preferred. In
addition, without the prior written approval of the holders of 66 2/3% of
the Series A Preferred shares, the Company shall not (1) consolidate or
merge with another corporation or other entity or person, whereby the
shareholders of the Company own in the aggregate less than 50% of the
ultimate parent or surviving entity, (2) transfer all or substantially all
of the Company's assets to another corporation or other entity or person,
or (3) fix a record date for the declaration of a distribution or dividend,
whether payable in cash, securities or assets (other than shares of Common
Stock).
<PAGE>
Page 7
Shares of Series A Preferred are convertible into shares of Common
Stock pursuant to a formula whereby the purchase price of the shares to be
converted plus accrued dividends are divided by a conversion price defined
as the lower of (i) $3.50, subject to adjustment in the event of stock
splits or similar transactions (the "Fixed Conversion Price"), or (ii) a
percentage of the average closing bid price of the Common Stock for the
five days immediately preceding conversion equal to 92%, if conversion
occurs during the period beginning 120 days and ending 180 days after
issuance of the Series A Preferred, or 90%, if conversion occurs after 180
days from issuance of the Series A Preferred. All outstanding shares of
Series A Preferred will automatically convert into Common Stock, at the
then applicable conversion price, on the fifth anniversary of issuance. In
addition, the Company has the right to require that all unconverted shares
of Series A Preferred be converted to Common Stock at any time if the
closing bid price of the Common Stock is equal to $12.00 per share for a
period of twenty consecutive trading days.
The terms of the Series A Preferred provide that upon the occurrence
of certain "Triggering Events", including suspension of sales under the
Registration Statement, failure of the Company's Common Stock to be
listed, or the suspension of trading in the Company's Common Stock, on the
Nasdaq National Market or the Nasdaq SmallCap Market, or failure of the
Company to convert shares of Series A Preferred as required (including due
to the "Exchange Cap" described in the next paragraph), the Company shall
pay the holders $100,000 on the first day of each month until the
Triggering Events have been remedied. In addition, if the Company is
unable to issue shares of Common Stock upon conversion of Series A
Preferred for any reason, including, without limitation, because the
Company (i) does not have a sufficient number of shares of Common Stock
authorized and available, (ii) is otherwise prohibited by applicable law,
rules or regulations, including without limitation the Exchange Cap, or
(iii) fails to have a sufficient number of shares of Common Stock
registered for resale under the Registration Statement, the rate of
dividend on the Series A Preferred , shall be permanently increased by 2%
(i.e., from 5% to 7%) commencing on the first day of the 30-day period (or
part thereof) following the receipt of a conversion notice; an additional
2% commencing on the first day of each of the second and third such 30-day
periods (or part thereof); and an additional 1% on the first day of each
consecutive 30-day period (or part thereof) thereafter until such
securities have been duly converted or redeemed; provided that in no event
shall the rate of dividend exceed the lower of 20% and the highest rate
permitted by applicable law. Any such dividends to the extent not fully
paid shall accrue dividends at the current dividend rate on Series A
Preferred.
<PAGE>
Page 8
Exchange Cap
Rule 4460 of Nasdaq, which is applicable to the Company because
the Company's shares of Common Stock are presently included for
quotation on the Nasdaq National Market, sets forth the corporate
governance standards for such securities. Section (i) of Rule 4460
provides:
(1) Each NNM [Nasdaq National Market] issuer shall require
shareholder approval of a plan or arrangement under subparagraph (A) below
or, prior to the issuance of designated securities under
subparagraph (B), (C) or (D) below:
. . . (D) in connection with a transaction other than a public
offering involving:
(i) the sale or issuance by the issuer of common stock
(or securities convertible into or exercisable for common stock) at a
price less than the greater of book or market value which together with
sales by officers, directors or substantial shareholders of the company
equals 20% or more of common stock or 20% or more of the voting power
outstanding before the issuance; or
(ii) the sale or issuance by the company of common stock
(or securities convertible into or exercisable for common stock) equal
to 20% or more of the common stock or 20% or more of the voting power
outstanding before the issuance for less than the greater of book or
market value of the stock.
Because Common Stock issuable upon conversion of Series A Preferred may be
issued at less than "book or market value", Rule 4460(i) is applicable to
such issuances to the extent they exceed 20% of the Company's outstanding
stock prior to issuance of the Series A Preferred.
<PAGE>
Page 9
Nasdaq Rule 4460(i)(1) provides that the 20% limit set forth in
subparagraph (D) (the "Exchange Cap") does not apply if a company's
shareholders approve the issuance of the securities subject to the rule.
In addition, Rule 4460(i)(1) does not apply to issuers which do not have
their Common Stock listed on The Nasdaq National Market.
The Articles of Amendment provide that the Company shall not be
obligated to issue upon conversion of Series A Preferred, in the aggregate,
more than a number of shares of Common Stock which, when added to the
number of shares issuable upon exercise of the Series A Placement Warrants,
shall equal 19.99% of the number of shares of Common Stock outstanding on
the date that Series A Preferred was initially issued. However, to the
extent the market price of the Common Stock is less than approximately
$2.73, the Exchange Cap may operate to prevent the holders of Series A
Preferred from being able to convert all of their shares of Series A
Preferred to Common Stock and/or receive Common Stock upon exercise of the
Series A Placement Warrants. The price of the Company's common stock has
ranged from $.28 to $2.68 during the period from July 30, 1998 through
September 16, 1998. For this reason, the Articles of Amendment provide
that the Company shall use its best efforts to obtain shareholder approval
prior to October 31, 1998 of issuances of shares of Common Stock upon
conversion of Series A Preferred and exercise of Series A Placement
Warrants in excess of the Exchange Cap.
As noted above, in the event the Company is precluded by the Exchange
Cap from issuing the full number of shares of Common Stock to which the
holders of Series A Preferred are entitled to receive upon conversion of
the Series A Preferred, the Company will be required to pay a penalty of
$100,000 per month to the holders of Series A Preferred. In addition, the
dividend rate on Series A Preferred will increase (up to specified
maximums) so long as the Company is precluded from issuing all of such
shares. In addition, although there can be no assurance that the Company
will be able to satisfy the conditions necessary to cause the issuance of
the Second Tranche of Series A Preferred, failure of the Company's
shareholders to approve this proposal would make it more difficult for the
Company to complete the Second Tranche.
Issuance of Common Stock in excess of the Exchange Cap upon conversion
of Series A Preferred or exercise of Series A Placement Warrants could
result in substantial dilution to holders of the Company's Common Stock.
If the Exchange Cap remains in place, the Company may issue no more than
2,443,104 shares of Common Stock upon conversion of Series A Preferred and
exercise of Series A Placement Warrants. If the proposal is approved,
<PAGE>
Page 10
based on the average closing bid price of the Common Stock for the five
days ending August 31, 1998 ($.84375 per share), the outstanding Series A
Preferred (484 shares) would be convertible into approximately 6,496,000
shares of Common Stock (in addition to the 574,676 shares previously
converted as of such date) and all of the Series A Placement Warrants would
be fully exercisable to purchase 150,000 shares of Common Stock. The
number of shares issuable upon conversion of Series A Preferred could prove
to be significantly greater in the event of a decrease in the trading price
of the Common Stock. In addition, an increase in the amount of Common
Stock in the public market as a result of such conversion could reduce the
market price of the Common Stock.
Change in Control
Rule 4460(i)(1)(B) of Nasdaq requires shareholder approval of an
issuance of securities "when the issuance will result in a change of
control of the issuer". It is not clear whether the issuance of shares of
Common Stock upon conversion of the Series A Preferred and exercise of the
Series A Placement Warrants, will result in a change of control of the
Company. As of August 25, 1998, based on information supplied by the
holders of Series A Preferred, the Company believes such holders held in
the aggregate approximately 18% of the Common Stock of the Company
(assuming conversion of all shares of Series A Preferred held by such
holders based on the trading price of the Common Stock as of such date and
exercise of all Series A Placement Warrants). As indicated above, the
actual number of shares issuable upon conversion of Series A Preferred and
exercise of the Series A Placement Warrants cannot be determined until the
conversion and exercise take place. Certain holders of Series A Preferred
shares participated in the Company's August 1998 private placement (see
Proposal 2 below). For purposes of the forgoing calculation, shares issued
or issuable pursuant to such private placement are not included.
Acquisition by the holders of Series A Preferred of substantial numbers of
shares of Common Stock as a result of such conversion and/or exercise could
result in such holders becoming able to exert substantial influence over
the policies and affairs of the Company, possibly including the ability
effectively to control the activities of the Company. A SHAREHOLDER'S VOTE
IN FAVOR OF PROPOSAL 1 WILL BE DEEMED TO BE A VOTE FOR SUCH A CHANGE IN
CONTROL, IF ANY, FOR PURPOSES OF RULE 4460(i)(1)(B) OF NASDAQ.
PROPOSAL 2 -- ISSUANCE OF FILL-UP SHARES
AND SHARES OF COMMON STOCK UPON
EXERCISE OF PRIVATE PLACEMENT WARRANTS
IN EXCESS OF EXCHANGE CAP
<PAGE>
Page 11
Private Placement
In August 1998, the Company completed the sale of 2,254,601 shares of
its Common Stock in a private placement to accredited investors with gross
proceeds of $3,675,000 (the "Private Placement"). Expenses of the Private
Placement were approximately $230,000. In addition to the shares of Common
Stock purchased by each investor in the Private Placement, such investor
received a warrant (the "Private Placement Warrants") to purchase an equal
number of shares of Common Stock (the "Private Placement Warrant Shares"),
subject to adjustment for stock splits and similar events, at an exercise
price of $2.55 per share. The Private Placement Warrants have a term of
five years expiring August 13, 2003. Issuance of the Private Placement
Warrant Shares requires the approval of the Company's shareholders.
Under the terms of the Securities Purchase Agreement relating to the
Private Placement, if on either the six-month or the one-year anniversary
of the date of closing of the Private Placement (each, an "Anniversary
Date"), the average closing bid price of the Common Stock for the twenty-
trading day period ending on the trading day immediately prior to the
applicable Anniversary Date (the "Anniversary Price") is less than the
Closing Price ($2.0375), or the prior Anniversary Price in the event the
six-month Anniversary Price is less than the Closing Price, respectively,
the Company is required to issue a number of shares of Common Stock within
ten days after the Anniversary Date equal to the product of (i) (x) the
difference between the Closing Price (or if the measurement date is the
one-year Anniversary Date, the six-month Anniversary Price if the six-month
Anniversary Price is less than the Closing Price) and the applicable
Anniversary Price, multiplied by .85, multiplied by (y) the number of
shares of Common Stock purchased by the investors in the Private Placement
and not sold or assigned to non-affiliated third parties, divided by (ii)
(x) the applicable Anniversary Price multiplied by (y) .85. The shares
issuable pursuant to this formula are referred to as the "Fill-Up Shares".
Issuance of the Fill-Up Shares pursuant to these provisions requires the
approval of the Company's shareholders.
In the event (i) the Common Stock is delisted or suspended from
trading on Nasdaq, (ii) the Fill-Up Shares or the Private Placement Warrant
Shares are not issuable or are not listed with Nasdaq, or (iii) the Company
fails to issue Fill-Up Shares as required, then the Company shall pay to
the initial investors $100,000 for each full 30-day period that the
condition continues.
Because the Fill-Up Shares will be issuable without the payment of
additional consideration, Rule 4460(i) of Nasdaq (discussed above) requires
shareholder approval to the extent the Fill-Up Shares plus any other shares
issued in the Private Placement exceed 2,506,955 shares (20% of the
outstanding shares of Common Stock of the Company immediately preceding the
<PAGE>
Page 12
Private Placement). As noted above, Rule 4460(i)(1) does not apply to
issuers which do not have their Common Stock listed on the Nasdaq National
Market. In the event the Company's Common Stock ceases to be listed on the
Nasdaq National Market, shareholder approval under such rule would not be
required for issuances of Fill-Up Shares or Private Placement Warrant
Shares in excess of the Exchange Cap.
In connection with the execution and delivery of the Securities
Purchase Agreement relating to the Private Placement, the Company agreed to
seek shareholder approval prior to October 31, 1998 of issuance of the
Fill-Up Shares and Private Placement Warrant Shares. In the event such
proposal is not approved, the Company will be required to pay investors in
the Private Placement $100,000 per month as a penalty.
The number of Fill-Up Shares to be issued could be substantial in the
event of significant decreases in the market price of the Common Stock; for
example, if the twenty-day average closing bid price of the Common Stock as
of the sixth month and/or one-year anniversaries of the closing of the
Private Placement has decreased by fifty percent from the purchase price
paid by Investors in the Private Placement ($1.63 per share), such
Investors would be entitled to receive 2,254,601 Fill-Up Shares. Such an
increase in the amount of the Common Stock in the public market would
result in substantial dilution to holders of the Common Stock and could
reduce the market price of the Common Stock.
Change in Control
As discussed above, Rule 4460(i)(1)(B) of Nasdaq requires shareholder
approval of an issuance of securities "when the issuance will result in a
change of control of the issuer". It is not clear whether the issuance of
Fill-Up Shares and Private Placement Warrant Shares will result in a change
in control of the Company. As of August 25, 1998, based on information
supplied by participants in the Private Placement, the Company believes
such participants held in the aggregate approximately 32% of the Common
Stock of the Company (assuming the issuance of 1,330,764 Fill-Up shares
based on the trading price of the Common Stock as of such date and exercise
of all Private Placement Warrant Shares). As indicated above, the actual
number of Fill-Up Shares and Private Placement Warrant Shares to be issued
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cannot be determined at this time. Certain participants in the Private
Placement also participated in the purchase of Series A Preferred shares
(see Proposal 1 above). For purposes of the foregoing calculation, shares
issued or issuable pursuant to conversion of Series A Preferred shares or
upon exercise of the Series A Placement Warrants are not included.
Acquisition by participants in the Private Placement of substantial numbers
of Fill-up Shares and/or Private Placement Warrant Shares could result in
such participants becoming able to exert substantial influence over the
policies and affairs of the Company, possibly including the ability
effectively to control the activities of the Company. A SHAREHOLDER'S VOTE
IN FAVOR OF PROPOSAL 2 WILL BE DEEMED TO BE A VOTE FOR SUCH A CHANGE IN
CONTROL, IF ANY, FOR PURPOSES OF RULE 4460(i)(1)(B) OF NASDAQ.
SHAREHOLDER PROPOSALS
Shareholder proposals which are to be considered for inclusion in the
proxy materials of the Company for its 1999 Annual Meeting of Shareholders
must be received by the Company by December 16, 1998.
ADDITIONAL INFORMATION
The Board of Directors is not aware of any matters to be presented at
the meeting other than the matters described herein and does not intend to
bring any other matters before the meeting. However, if any other matters
should come before the meeting, or any adjournment thereof, the persons
named in the enclosed proxy will have discretionary authority to vote all
proxies in accordance with their best judgment.
Kindly date, sign and return the enclosed proxy card.
By Order of the Board of Directors
STANFORD W. CRANE, JR.
President and Chief Executive Officer
September 28, 1998
