SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
(AMENDMENT NO. 2)
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, For Use of
the Commission Only
(As Permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
RECLAMATION CONSULTING AND APPLICATIONS, 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 the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
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[_] 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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RECLAMATION CONSULTING AND APPLICATIONS, INC.
23832 ROCKFIELD BOULEVARD, SUITE 275
LAKE FOREST, CALIFORNIA 92630
(949) 609-0590
TO THE STOCKHOLDERS OF RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the "Meeting")
of Reclamation Consulting and Applications, Inc., a Colorado corporation (the
"Company" or "RCAA"), will be held at * (California time), on *, 2005 at *, for
the following purposes:
1. To elect two (2) directors of the Company to serve until the 2006 Annual
Meeting of Stockholders or until their successors have been duly elected and
qualified;
2. To amend the Company's articles of incorporation to
(a) increase the number of authorized shares of common stock, par value
$.01 per share (the "Common Stock"), of the Company from 75,000,000
shares to 150,000,000 shares; and
(b) authorize the creation of 5,000,000 shares of blank check preferred
stock;
3. To ratify the selection of Corbin & Company LLP as our independent registered
public accounting firm for the fiscal year ending June 30, 2006;
4. To adopt the Company's 2005 Stock Incentive Plan; and
5. To transact such other business as may properly come before the Meeting and
any adjournment or postponement thereof.
Only stockholders who own shares of our common stock at the close of business on
* are entitled to notice of and to vote at the annual meeting. You may vote your
shares by marking, signing and dating the enclosed proxy card as promptly as
possible and returning it in the enclosed postage-paid envelope.
You may also vote in person at the annual meeting, even if you use the option
set forth above.
We have enclosed with this Notice of Annual Meeting, a proxy statement, a form
of proxy and a copy of our annual report to stockholders. Our annual report is
not a part of this proxy statement.
By Order of the Board of Directors,
/s/ GORDON DAVIES
-----------------------------------
Gordon Davies
Chairman of the Board
Lake Forest, California
November 23, 2005
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RECLAMATION CONSULTING AND APPLICATIONS, INC.
23832 ROCKFIELD BOULEVARD, SUITE 275
LAKE FOREST, CALIFORNIA 92630
(TEL) 949-609-0590
(FAX) 949-609-0592
PROXY STATEMENT FOR 2005 ANNUAL MEETING OF STOCKHOLDERS
The board of directors is soliciting proxies to be used at our *, 2005 annual
meeting of stockholders. Please read and carefully consider the information
presented in this proxy statement and vote by completing, dating, signing and
returning the enclosed proxy in the enclosed postage-paid envelope.
This proxy statement, the form of proxy and our annual report will be mailed to
all stockholders on or about *, 2005. Our annual report is not a part of this
proxy statement.
INFORMATION ABOUT THE ANNUAL MEETING
WHEN IS THE ANNUAL MEETING?
*, 2005, * P.M. California time.
WHERE WILL THE ANNUAL MEETING BE HELD?
The meeting will be held at *.
WHAT ITEMS WILL BE VOTED UPON AT THE ANNUAL MEETING?
You will be voting on the following matters:
1. ELECTION OF DIRECTORS. To elect two directors to serve until the 2006 Annual
Meeting of stockholders or until their successors are duly elected and
qualified;
2. AMENDMENT OF THE ARTICLES OF INCORPORATION TO INCREASE THE AUTHORIZED SHARES
OF COMMON STOCK OF THE COMPANY AND CREATE 5,000,000 SHARES OF BLANK CHECK
PREFERRED STOCK. To consider adopting the amendment to the Certificate of
Incorporation that would increase the authorized number of shares of common
stock from 75,000,000 shares to 150,000,000 shares and create 5,000,000 shares
of blank check preferred stock;
3. RATIFICATION OF AUDITORS. To ratify the selection of Corbin & Company LLP
("C&C") as the independent registered public accounting firm of the Company for
the fiscal year ending June 30, 2006;
4. ADOPTION OF 2005 STOCK INCENTIVE PLAN. To adopt the 2005 Stock Incentive
Plan;
5. OTHER BUSINESS. To transact such other business as may properly come before
the annual meeting or any adjournment of the annual meeting.
WHO CAN VOTE?
Only holders of record of our common stock at the close of business on *, 2005
will be entitled to notice of and to vote at the annual meeting and any
adjournments of the annual meeting. You are entitled to one vote for each share
of common stock held on that date. On *, 2005, there were * shares of our common
stock outstanding and entitled to vote at the Stockholders Meeting.
YOUR BOARD OF DIRECTORS HAS APPROVED EACH OF THE PROPOSALS SET FORTH HEREIN.
ACCORDINGLY, THE BOARD RECOMMENDS A VOTE FOR THE ELECTION OF THE NOMINEE
DIRECTORS, THE AMENDMENT OF THE ARTICLES OF INCORPORATION, THE RATIFICATION OF
THE APPOINTMENT OF C&C AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND
THE ADOPTION OF THE 2005 STOCK INCENTIVE PLAN.
HOW DO I VOTE BY PROXY?
You may vote your shares by mail by marking, signing and dating the enclosed
proxy card as promptly as possible and returning it in the enclosed postage-paid
envelope. A pre-addressed, postage-paid envelope is provided for this purpose.
3
If you return your signed proxy card before the annual meeting, we will vote
your shares as you direct. For each item of business, you may vote "FOR" or
"AGAINST" or you may "ABSTAIN" from voting.
If you return your signed proxy card but do not specify how you want to vote
your shares, we will vote them:
o "FOR" the election of all of our nominees for directors;
o "FOR" the amendment of the Company's Articles of Incorporation to increase
the number of shares of common stock authorized from 75,000,000 shares to
150,000,000 shares;
o "FOR" the ratification of Corbin & Company LLP as our independent
registered public accounting firm; and
o "FOR" the adoption of our 2005 Stock Incentive Plan.
If any matters other than those set forth above are properly brought before the
annual meeting, the individuals named in your proxy card may vote your shares in
accordance with their best judgment.
HOW DO I CHANGE OR REVOKE MY PROXY?
You may revoke your Proxy at any time before it is voted either by filing with
the Secretary of the Company, at our principal executive offices, a written
notice of revocation or a duly executed proxy bearing a later date or by
attending the Annual Meeting and expressing a desire to vote your shares in
person. Our principal executive offices are located at 23832 Rockfield
Boulevard, Suite 275, Lake Forest, California 92630.
WHAT CONSTITUTES A "QUORUM" FOR THE ANNUAL MEETING?
The representation, in person or by proxy, of a majority of the outstanding
shares of our common stock entitled to vote is necessary to constitute a quorum
at the Annual Meeting. All Proxies that are returned will be counted by the
Inspector of Elections in determining the presence of a quorum and on each issue
to be voted on, except as noted below. An abstention from voting or a broker
non-vote will be used for the purpose of establishing a quorum, but will not be
counted in the voting process. All Proxies that are properly completed, signed
and returned to the Company before the Annual Meeting, and that have not been
revoked, will be voted in favor of the proposals described in this Proxy
Statement unless otherwise directed.
HOW MANY VOTES ARE REQUIRED?
o Directors nominees are elected by a plurality of the votes cast in person
or by proxy, provided that a quorum is present at the Meeting.
o The proposal to amend the Articles of Incorporation to increase the number
of authorized shares will require the affirmative vote of at least a
majority of the Company's outstanding shares of Common Stock. Thus, any
abstentions, "broker non-votes" (shares held by brokers or nominees as to
which they have no discretionary authority to vote on a particular matter
and have received no instructions from the beneficial owners or persons
entitled to vote thereon), or other limited proxies will have the effect of
a vote against amending the Company's Articles of Incorporation.
o The ratification of the director's selection of Corbin & Company LLP as the
Company's independent registered public accounting firm will require an
affirmative vote of the majority of the votes cast in person or by proxy,
provided that a quorum is present at the annual meeting.
o The adoption of the 2005 Stock Incentive Plan will require an affirmative
vote of the majority of the votes cast in person or by proxy, provided that
a quorum is present at the annual meeting.
WHO PAYS FOR THE SOLICITATION OF PROXIES?
We will pay the cost of preparing, printing and mailing material in connection
with this solicitation of proxies. We will, upon request, reimburse brokerage
firms, banks and others for their reasonable out-of-pocket expenses in
forwarding proxy material to beneficial owners of stock or otherwise in
connection with this solicitation of proxies.
WHEN ARE STOCKHOLDER PROPOSALS FOR THE 2006 ANNUAL MEETING DUE?
Any stockholder proposals for the 2006 annual meeting must be received by us,
directed to the attention of the Company's secretary, Mr. Michael C. Davies,
Reclamation Consulting and Applications, Inc., 23832 Rockfield Boulevard, Suite
275, Lake Forest, California 92630, no later than December 16, 2005. The use of
certified mail, return receipt requested, is advised. To be eligible for
inclusion, a proposal must comply with our bylaws, Rule 14a-8 and all other
applicable provisions of Regulation 14A under the Securities Exchange Act of
1934.
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PROPOSAL 1: ELECTION OF DIRECTORS
(ITEM 1 ON THE PROXY CARD)
At the Meeting, two (2) directors are to be elected. Pursuant to the Company's
By-laws, all directors are elected to serve for the ensuing year and until their
respective successors are elected and qualified. Unless otherwise directed, the
persons named in the enclosed Proxy intend to cast all votes pursuant to proxies
received for the election of Messrs. Davies and Davies (collectively, the
"Nominees"). If any of the Nominees becomes unavailable for any reason, which
event is not anticipated, the shares represented by the enclosed proxy will be
voted for such other person designated by the Board.
Vote required: Directors must be elected by a plurality of all votes cast at the
meeting. Votes withheld for any director will not be counted.
Voting by the Proxies: The Proxies will vote your shares in accordance with your
instructions. If you have not given specific instructions to the contrary, your
shares will be voted to approve the election of the nominees named in the Proxy
Statement. Although the Company knows of no reason why the nominees would not be
able to serve, if a nominee were not available for election, the Proxies would
vote your Common Stock to approve the election of any substitute nominee
proposed by the Board of Directors. The Board may also choose to reduce the
number of directors to be elected as permitted by our Bylaws.
General Information about the Nominees: The following information regarding the
Nominees, their occupations, employment history and directorships in certain
companies is as reported by the respective Nominees.
GORDON W. DAVIES
From 1991 to 1994, Mr. Davies was an Accounts Executive for Innovative
Environmental Services, Ltd., located in Vancouver, British Columbia, which is a
company in the business of wastewater treatment equipment. From 1993 to 1993 he
held a Sales Manager position at Transenviro,Inc. in Irvine, California. From
1994 to 1996, Mr. Davies was the Sales/Marketing & Proposals Manager for Babcock
King-Wilkinson, LP in Irvine, California, and in 1996 he was the acting CEO for
this company. Babcock King-Wilkinson, LP is in the business of wastewater
treatment system process design/engineering and equipment supply operations on a
worldwide basis. From 1996 to 2000 Mr. Davies has been the President and a
Director of Aquadynamic Technologies, Inc. He is also a Director of
Aquatek,Inc., the wholly-owned subsidiary of Aquadynamic Technologies, Inc.
Aquatek, Inc. is an engineering design house and supplier of computer-automated
process and motor control systems for water and wastewater treatment systems.
From 1996 to 1998 Mr. Davies was the General Manager of Wil-Flow, Inc. From 1997
to the present, Mr. Davies has held the position of President and a Director for
us. Gordon Davies is the brother of Michael Davies.
MICHAEL C. DAVIES
From 1988 to 1991, Mr. Davies was the Owner/Manager of Fuel Oil Polishing
Company located in Vancouver, British Columbia, Canada. Mr. Davies' company was
in the sales, marketing and project management of fuel oils polishing within the
Province of British Columbia. From 1991 to 1993 he was an Accounts Executive
with Innovative Environmental Services, Ltd. in Vancouver, a company in the
business of sales and marketing of wastewater treatment equipment. From 1993 to
1994 he was the Marketing Manager for Transenviro, Inc., located in Irvine,
California. Transenviro is an international supplier of wastewater treatment
equipment and process design engineering. From 1994 to 1996 Mr. Davies was the
Marketing Manager for Babcock King-Wilkinson, LP, Irvine, California, a
wastewater treatment business. From 1996 to 2000 Mr. Davies has held the
positions of Vice President and a Director for Aquadynamic Technologies, Inc.
and Aquatek, Inc., which is a wholly owned subsidiary of Aquadynamic
Technologies. Aquadynamic Technologies, Inc. was acquired by Registrant and
became Registrant's wholly-owned subsidiary in November of 1997. From 1996 to
1998 Mr. Davies held the position of Vice President, Sales/Director for
Wil-Flow, Inc., the sole supplier of its patented RGD (Rapid Gravity Dewatering)
wastewater sludge dewatering system. From 1997 to the present, Mr. Davies has
been the Vice President, Chief Financial Officer and a Director. Mr. Davies is
the brother of Gordon Davies.
Directors are elected annually and hold office until the next annual meeting of
the stockholders of the Company and until their successors are elected and
qualified. Officers are elected annually and serve at the discretion of the
Board of Directors.
ROLE OF THE BOARD
Pursuant to Colorado law, our business, property and affairs are managed under
the direction of our board of directors. The board has responsibility for
establishing broad corporate policies and for the overall performance and
direction of RCAA, but is not involved in day-to-day operations. Members of the
board keep informed of our business by participating in board and committee
meetings, by reviewing analyses and reports sent to them regularly, and through
discussions with our executive officers.
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2004 BOARD MEETINGS
In 2004, the board met four times. No director attended less than 75% of all the
meetings of the board in 2004.
BOARD COMMITTEES
The Board does not have any committees.
ELECTION OF DIRECTORS REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF A
PLURALITY OF THE SHARES OF COMMON STOCK REPRESENTED AT THE ANNUAL MEETING.
SHARES OF COMMON STOCK REPRESENTED BY PROXY CARDS RETURNED TO US WILL BE VOTED
FOR THE NOMINEES LISTED ABOVE UNLESS YOU SPECIFY OTHERWISE. THE BOARD OF
DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE ELECTION OF DIRECTORS.
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PROPOSAL 2: TO CONSIDER AND VOTE UPON A PROPOSAL TO
AMEND THE COMPANY'S ARTICLES OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
COMMON STOCK FROM 75,000,000 TO 150,000,000 AND
TO AUTHORIZE THE CREATION OF 5,000,000 SHARES
OF "BLANK CHECK" PREFERRED STOCK
(ITEM 2 ON THE PROXY CARD)
On July 21, 2005, the Board of Directors authorized an amendment to the
Company's Articles of Incorporation to increase the number of our authorized
shares and to authorize the creation of 5,000,000 shares of "blank check"
preferred stock. Subject to shareholder approval, Article IV would be amended to
read as follows and would be filed with the Colorado Secretary of State:
"FOURTH: The Corporation is authorized to issue two classes of stock.
One class of stock shall be Common Stock, par value $0.01. The second class
of stock shall be Preferred Stock, par value $0.01. The Preferred Stock, or
any series thereof, shall have such designations, preferences and relative,
participating, optional or other special rights and qualifications,
limitations or restrictions thereof as shall be expressed in the resolution
or resolutions providing for the issue of such stock adopted by the board
of directors and may be made dependent upon facts ascertainable outside
such resolution or resolutions of the board of directors, provided that the
matter in which such facts shall operate upon such designations,
preferences, rights and qualifications; limitations or restrictions of such
class or series of stock is clearly and expressly set forth in the
resolution or resolutions providing for the issuance of such stock by the
board of directors.
The total number of shares of stock of each class which the Corporation
shall have authority to issue and the par value of each share of each class
of stock are as follows:
Class Par Value Authorized Shares
----- --------- -----------------
Common $ 0.01 150,000,000
Preferred $ 0.01 5,000,000
--------------
Totals: 155,000,000"
INCREASE THE NUMBER OF OUR AUTHORIZED SHARES OF COMMON STOCK
The terms of the additional shares of common stock will be identical to
those of the currently outstanding shares of common stock. However, because
holders of common stock have no preemptive rights to purchase or subscribe for
any unissued stock of the Company, the issuance of additional shares of common
stock will reduce the current stockholders' percentage ownership interest in the
total outstanding shares of Common Stock. This amendment and the creation of
additional shares of authorized common stock will not alter the current number
of issued shares. The relative rights and limitations of the shares of common
stock will remain unchanged under this amendment.
As of the Record Date, a total of * shares of the Company's currently
authorized 75,000,000 shares of common stock are issued and outstanding. The
increase in the number of authorized but unissued shares of common stock would
enable the Company, without further stockholder approval, to issue shares from
time to time as may be required for proper business purposes, such as raising
additional capital for ongoing operations, business and asset acquisitions,
stock splits and dividends, present and future employee benefit programs and
other corporate purposes.
The proposed increase in the authorized number of shares of common stock
could have a number of effects on the Company's stockholders depending upon the
exact nature and circumstances of any actual issuances of authorized but
unissued shares. The increase could have an anti-takeover effect, in that
additional shares could be issued (within the limits imposed by applicable law)
in one or more transactions that could make a change in control or takeover of
the Company more difficult. For example, additional shares could be issued by
the Company so as to dilute the stock ownership or voting rights of persons
seeking to obtain control of the Company. Similarly, the issuance of additional
shares to certain persons allied with the Company's management could have the
effect of making it more difficult to remove the Company's current management by
diluting the stock ownership or voting rights of persons seeking to cause such
removal. Except as further discussed herein, the Board of Directors is not aware
of any attempt, or contemplated attempt, to acquire control of the Company, and
this proposal is not being presented with the intent that it be utilized as a
type of anti- takeover device.
Stockholders do not have any preemptive or similar rights to subscribe for
or purchase any additional shares of common stock that may be issued in the
future, and therefore, future issuances of common stock may, depending on the
circumstances, have a dilutive effect on the earnings per share, voting power
and other interests of the existing stockholders.
Except for the following, there are currently no plans, arrangements,
commitments or understandings for the issuance of the additional shares of
common stock which are to be authorized.
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SECURED CONVERTIBLE NOTES
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on June 23, 2005 for the sale
of (i) $2,000,000 in secured convertible notes and (ii) warrants to buy
8,000,000 shares of our common stock. The four accredited investors, AJW
Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New
Millennium Partners II, LLC subscribed for 50.1%, 33.8%, 14.4% and 1.7%,
respectively, of the total offering. Each accredited investor purchased, or will
purchase, such percentage of each closing under the Securities Purchase
Agreement.
The investors are obligated to provide us with an aggregate of $2,000,000
as follows:
o $700,000 was disbursed on June 23, 2005;
o $600,000 was disbursed on July 28, 2005; and
o $700,000 will be disbursed within two days of the effectiveness of a
registration statement registering the resale of shares of common
stock underlying the secured convertible notes and warramts.
Accordingly, we have received a total of $1,300,000 pursuant to the
Securities Purchase Agreement. Pursuant to the Securities Purchase Agreement, we
have issued 5,200,000 warrants to purchase shares of common stock and we are
obligated to issue 2,800,000 additional warrants together with $700,000 in
secured convertible notes within two days from the effective date of this
registration statement.
The notes bear interest at 10%, mature three years from the date of
issuance, and are convertible into our common stock, at the investors' option,
at the lower of:
o $0.21; or
o 50% of the average of the three lowest intraday trading prices for the
common stock on a principal market for the 20 trading days before but
not including the conversion date.
As of November 23, 2005, we had $1,300,000 in secured convertible notes
outstanding issued pursant to the Securities Purchase Agreement dated June 23,
2005 that may be converted into an estimated 33,911,570 shares of common stock
at current market prices and outstanding warrants to purchase 5,200,000 shares
of common stock issued pursant to the Securities Purchase Agreement dated June
23, 2005. Additionally, we have an obligation pursuant to the Securities
Purchase Agreement dated June 23, 2005, to sell $700,000 in secured convertible
notes within two days of this regisration statement being declared effective
that may be converted into an estimated 18,260,076 shares of common stock at
current market prices and issue warrants to purchase 2,800,000 shares of common
stock in the near future.
We have a call option under the terms of the secured convertible notes. The
call option provides us with the right to prepay all of the outstanding secured
convertible notes at any time, provided we are not in default and our stock is
trading at or below $.21 per share. Prepayment of the notes is to be made in
cash equal to either (i) 125% of the outstanding principal and accrued interest
for prepayments occurring within 30 days following the issue date of the secured
convertible notes; (ii) 135% of the outstanding principal and accrued interest
for prepayments occurring between 31 and 60 days following the issue date of the
secured convertible notes; and (iii) 150% of the outstanding principal and
accrued interest for prepayments occurring after the 60th day following the
issue date of the secured convertible notes.
Our right to repay the notes is exercisable on not less than ten trading
days prior written notice to the holders of the secured convertible notes. For
notice purposes, a trading day is any day on which our common stock is traded
for any period on the OTC Bulletin Board. Notwithstanding the notice of
prepayment, the holders of the secured convertible notes have the right at all
times to convert all or any portion of the secured convertible notes prior to
payment of the prepayment amount.
8
We also has a partial call option under the terms of the secured
convertible notes in any month in which the current price of our common stock is
below $0.25. Under the terms of the partial call option, we have the right to
pay the outstanding principal amount of the secured convertible notes plus
one-month's interest for that month, which will stay any conversions of the
secured convertible notes by the holders for that month. The principal amount of
the secured convertible notes to be repaid is determined by dividing the then
outstanding principal amount of the notes by the maturity of the notes in
months, or 36, multiplied by 104%.
The full principal amount of the secured convertible notes are due upon
default under the terms of secured convertible notes. The warrants are
exercisable until five years from the date of issuance, exercisable at a
purchase price of $0.28 per share. In addition, we have granted the investors a
security interest in substantially all of our assets and intellectual property
and registration rights.
The gross proceeds from the offering are expected to be used as follows:
USE AMOUNT ($)
--- ----------
Transaction and professional fees 300,000
Debt reduction 450,000
Secured loans 60,000
Unsecured loans 60,000
Accounts payable 212,000
Taxes payable 65,000
Accrued interest 53,000
Reserve for potential acquisitions 1,000,000
Working Capital 250,000
---------
TOTAL: 2,000,000
=========
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As of November 23, 2005, we received $1,300,000 out of the $2,000,000 in
total funding, and we have proportionally applied each funding to our proposed
use of the funds.
The following are the risks associated with entering into the Securities
Purchase Agreement:
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR SECURED CONVERTIBLE NOTES AND
WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY
DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of November 21, 2005, we had 29,620,813 shares of common stock issued
and outstanding, secured convertible notes outstanding issued pursant to the
Securities Purchase Agreement dated June 23, 2005 that may be converted into an
estimated 33,911,570 shares of common stock at current market prices and
outstanding warrants to purchase 5,200,000 shares of common stock issued pursant
to the Securities Purchase Agreement dated June 23, 2005. Additionally, we have
an obligation pursuant to the securities purchase agreement dated June 23, 2005,
to sell $700,000 in secured convertible notes within two days of a resale
regisration statement registering the shares of common stock underlying the
secured convertible notes and warrants issued pursuant to the Securities
Purchase Agreement dated June 23, 2005 being declared effective that may be
converted into an estimated 18,260,076 shares of common stock at current market
prices and issue warrants to purchase 2,800,000 shares of common stock in the
near future. In addition, the number of shares of common stock issuable upon
conversion of the outstanding secured convertible notes issued pursant to the
Securities Purchase Agreement dated June 23, 2005 may increase if the market
price of our stock declines. All of the shares registered pursuant to a resale
registration statement, including all of the shares issuable upon conversion of
the secured convertible notes and upon exercise of our warrants issued pursant
to the Securities Purchase Agreement dated June 23, 2005, may be resold without
restriction pursuant to the resale registration statement once the resale
registration statement is declared effective. The sale of these shares may
adversely affect the market price of our common stock.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SECURED CONVERTIBLE
NOTES COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES, WHICH
WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
Our obligation to issue shares upon conversion of our secured convertible
notes is essentially limitless. The following is an example of the amount of
shares of our common stock that are issuable, upon conversion of our secured
convertible notes (excluding accrued interest), based on market prices 25%, 50%
and 75% below the market price, as of November 21, 2005 of $0.10.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 50% Issuable Stock
------ ----- ------- -------- -----
25% $.075 $ .0375 53,333,334 64.29%
50% $.05 $ .025 80,000,000 72.98%
75% $.025 $ .0125 160,000,000 84.38%
As illustrated, the number of shares of common stock issuable upon
conversion of our secured convertible notes will increase if the market price of
our stock declines, which will cause dilution to our existing stockholders.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SECURED CONVERTIBLE
NOTES MAY ENCOURAGE INVESTORS TO MAKE SHORT SALES IN OUR COMMON STOCK, WHICH
COULD HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
The secured convertible notes are convertible into shares of our common
stock at a 50% discount to the trading price of the common stock prior to the
conversion. The significant downward pressure on the price of the common stock
as the selling stockholder converts and sells material amounts of common stock
could encourage short sales by investors, however, the purchasers of the secured
convertible notes have contractually agreed that while any portion of the
secured convertible notes are outstanding, they will not enter into or effect
any short sales in our common stock. Short sales by other investors could place
further downward pressure on the price of the common stock. The selling
stockholder could sell common stock into the market in anticipation of covering
the short sale by converting their securities, which could cause the further
downward pressure on the stock price. In addition, not only the sale of shares
issued upon conversion or exercise of secured convertible notes and warrants,
but also the mere perception that these sales could occur, may adversely affect
the market price of the common stock.
10
THE ISSUANCE OF SHARES UPON CONVERSION OF THE SECURED CONVERTIBLE NOTES AND
EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO
OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the secured convertible notes and
exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd., and New Millennium Partners II, LLC
may not convert their secured convertible notes and/or exercise their warrants
if such conversion or exercise would cause them to own more than 4.99% of our
outstanding common stock, this restriction does not prevent AJW Partners, LLC,
AJW Qualified Partners, LLC, AJW Offshore, Ltd., and New Millennium Partners II,
LLC from converting and/or exercising some of their holdings and then converting
the rest of their holdings. In this way, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd., and New Millennium Partners II, LLC could
sell more than this limit while never holding more than this limit. There is no
upper limit on the number of shares that may be issued which will have the
effect of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in our June 2005 private
placement.
IN THE EVENT THAT OUR STOCK PRICE DECLINES, THE SHARES OF COMMON STOCK ALLOCATED
FOR CONVERSION OF THE SECURED CONVERTIBLE NOTES AND REGISTERED PURSUANT TO A
RESALE REGISTRATION STATEMENT MAY NOT BE ADEQUATE AND WE MAY BE REQUIRED TO FILE
A SUBSEQUENT RESALE REGISTRATION STATEMENT COVERING ADDITIONAL SHARES. IF THE
SHARES WE HAVE ALLOCATED AND REGISTERED ON A RESALE REGISTRATION STATEMENT ARE
NOT ADEQUATE AND WE ARE REQUIRED TO FILE AN ADDITIONAL RESALE REGISTRATION
STATEMENT, WE MAY INCUR SUBSTANTIAL COSTS IN CONNECTION THEREWITH.
Based on our current market price and the potential decrease in our market
price as a result of the issuance of shares upon conversion of the secured
convertible notes, we have made a good faith estimate as to the amount of shares
of common stock that we are required to register and allocate for conversion of
the secured convertible notes. Accordingly, we have allocated and registered
32,000,000 shares of common stock for resale upon the conversion of the secured
convertible notes. In the event that our stock price decreases, the shares of
common stock we have allocated for resale upon conversion of the secured
convertible notes may not be adequate. If the shares we have allocated to the
registration statement are not adequate and we are required to file an
additional registration statement, we may incur substantial costs in connection
with the preparation and filing of such registration statement.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE
NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR
RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE SECURED CONVERTIBLE NOTES, IF
REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE
OF SUBSTANTIAL ASSETS.
In June 2005, we entered into a Securities Purchase Agreement for the sale
of an aggregate of $2,000,000 principal amount of secured convertible notes. The
secured convertible notes are due and payable, with 10% interest, three years
from the date of issuance, unless sooner converted into shares of our common
stock. Although we currently have $1,300,000 secured convertible notes
outstanding, the investors are obligated to purchase additional secured
convertible notes in the aggregate of $700,000. In addition, any event of
default such as our failure to repay the principal or interest when due, our
failure to issue shares of common stock upon conversion by the holder, our
failure to timely file a registration statement or have such registration
statement declared effective, breach of any covenant, representation or warranty
in the Securities Purchase Agreement or related convertible note, the assignment
or appointment of a receiver to control a substantial part of our property or
business, the filing of a money judgment, writ or similar process against our
company in excess of $50,000, the commencement of a bankruptcy, insolvency,
reorganization or liquidation proceeding against our company and the delisting
of our common stock could require the early repayment of the secured convertible
notes, including a default interest rate of 15% on the outstanding principal
balance of the notes if the default is not cured with the specified grace
period. We anticipate that the full amount of the secured convertible notes will
be converted into shares of our common stock, in accordance with the terms of
the secured convertible notes. If we were required to repay the secured
convertible notes, we would be required to use our limited working capital and
raise additional funds. If we were unable to repay the notes when required, the
note holders could commence legal action against us and foreclose on all of our
assets to recover the amounts due. Any such action would require us to curtail
or cease operations.
11
IF AN EVENT OF DEFAULT OCCURS UNDER THE SECURITIES PURCHASE AGREEMENT, SECURED
CONVERTIBLE NOTES, WARRANTS, SECURITY AGREEMENT OR INTELLECTUAL PROPERTY
SECURITY AGREEMENT, THE INVESTORS COULD TAKE POSSESSION OF ALL OUR GOODS,
INVENTORY, CONTRACTUAL RIGHTS AND GENERAL INTANGIBLES, RECEIVABLES, DOCUMENTS,
INSTRUMENTS, CHATTEL PAPER, AND INTELLECTUAL PROPERTY.
In connection with the Securities Purchase Agreements we entered into in
June 2005, we executed a Security Agreement and an Intellectual Property
Security Agreement in favor of the investors granting them a first priority
security interest in all of our goods, inventory, contractual rights and general
intangibles, receivables, documents, instruments, chattel paper, and
intellectual property. The Security Agreements and Intellectual Property
Security Agreements state that if an even of default occurs under the Securities
Purchase Agreement, Secured Convertible Notes, Warrants, Security Agreements or
Intellectual Property Security Agreements, the Investors have the right to take
possession of the collateral, to operate our business using the collateral, and
have the right to assign, sell, lease or otherwise dispose of and deliver all or
any part of the collateral, at public or private sale or otherwise to satisfy
our obligations under these agreements.
WE ARE OBLIGATED TO PAY LIQUIDATED DAMAGES AS A RESULT OF OUR FAILURE TO HAVE
THIS REGISTRATION STATEMENT DECLARED EFFECTIVE PRIOR TO OCTOBER 21, 2005, AND
THE PAYMENT OF LIQUIDATED DAMAGES WILL EITHER RESULT IN DEPLETING OUR WORKING
CAPITAL OR ISSUANCE OF SHARES OF COMMON STOCK WHICH WOULD CAUSE DILUTION TO OUR
EXISTING SHAREHOLDERS.
Pursuant to the terms of our registration rights agreement entered into in
connection with our securities purchase agreement dated June 23, 2005, if we did
not have a registration statement registering the shares underlying the secured
convertible notes and warrants declared effective on or before October 21, 2005,
we are obligated to pay liquidated damages in the amount of 2.0% per month of
the face amount of the issued and outstanding secured convertible notes
outstanding, which equals $26,000, until the registration statement is declared
effective. At our option, these liquidated damages can be paid in cash or
restricted shares of our common stock. If we decide to pay the liquidated
damages in cash, we would be required to use our limited working capital and
potentially raise additional funds. If we decide to pay the liquidated damages
in shares of common stock, the number of shares issued would depend on our stock
price at the time that payment is due. Assuming that we are decided to to pay
liquidated damages for one month on November 21, 2005, the $26,000 (2.0% of the
$1,300,000 of secured convertible notes outstanding on November 21, 2005) on
November 21, 2005, would result in the issuance of approximately 678,232 shares
of common stock. The issuance of shares upon payment of liquidated damages will
have the effect of further diluting the proportionate equity interest and voting
power of holders of our common stock, including investors in this offering. As
of the date hereof, the investors have not demanded payment of the liquidated
damages and we have not determined if we will make such liquidated damages
payments in cash, stock or a combination of both.
CREATION OF BLANK CHECK PREFERRED STOCK
The proposed amendment to the Company's Articles of Incorporation will
create 5,000,000 authorized shares of "blank check" preferred stock. The
proposed Amendment to the Company's Articles of Incorporation, attached as
Exhibit "A" to this information statement contains provisions related to the
"blank check" preferred stock. The following summary does not purport to be
complete and is qualified in its entirety by reference to the proposed
Certificate of Amendment to the Articles of Incorporation as set forth in
Exhibit "A."
12
The term "blank check" refers to preferred stock, the creation and issuance
of which is authorized in advance by the stockholders and the terms, rights and
features of which are determined by the board of directors of the Company upon
issuance. The authorization of such blank check preferred stock would permit the
board of directors to authorize and issue preferred stock from time to time in
one or more series.
Subject to the provisions of the Company's Certificate of Amendment to the
Articles of Incorporation and the limitations prescribed by law, the board of
directors would be expressly authorized, at its discretion, to adopt resolutions
to issue shares, to fix the number of shares and to change the number of shares
constituting any series and to provide for or change the voting powers,
designations, preferences and relative, participating, optional or other special
rights, qualifications, limitations or restrictions thereof, including dividend
rights (including whether the dividends are cumulative), dividend rates, terms
of redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any series of the
preferred stock, in each case without any further action or vote by the
stockholders. The board of directors would be required to make any determination
to issue shares of preferred stock based on its judgment as to the best
interests of the Company and its stockholders. The amendment to the Articles of
Incorporation would give the board of directors flexibility, without further
stockholder action, to issue preferred stock on such terms and conditions as the
board of directors deems to be in the best interests of the Company and its
stockholders.
The amendment would provide the Company with increased financial
flexibility in meeting future capital requirements by providing another type of
security in addition to its Common Stock, as it will allow preferred stock to be
available for issuance from time to time and with such features as determined by
the board of directors for any proper corporate purpose. It is anticipated that
such purposes may include exchanging preferred stock for Common Stock and,
without limitation, may include the issuance for cash as a means of obtaining
capital for use by the Company, or issuance as part or all of the consideration
required to be paid by the Company for acquisitions of other businesses or
assets.
Any issuance of preferred stock with voting rights could, under certain
circumstances, have the effect of delaying or preventing a change in control of
the Company by increasing the number of outstanding shares entitled to vote and
by increasing the number of votes required to approve a change in control of the
Company. Shares of voting or convertible preferred stock could be issued, or
rights to purchase such shares could be issued, to render more difficult or
discourage an attempt to obtain control of the Company by means of a tender
offer, proxy contest, merger or otherwise. The ability of the board of directors
to issue such additional shares of preferred stock, with the rights and
preferences it deems advisable, could discourage an attempt by a party to
acquire control of the Company by tender offer or other means. Such issuances
could therefore deprive stockholders of benefits that could result from such an
attempt, such as the realization of a premium over the market price that such an
attempt could cause. Moreover, the issuance of such additional shares of
preferred stock to persons friendly to the board of directors could make it more
difficult to remove incumbent managers and directors from office even if such
change were to be favorable to stockholders generally.
While the amendment may have anti-takeover ramifications, the board of
directors believes that the financial flexibility offered by the amendment
outweighs any disadvantages. To the extent that the amendment may have
anti-takeover effects, the amendment may encourage persons seeking to acquire
the Company to negotiate directly with the board of directors enabling the board
of directors to consider the proposed transaction in a manner that best serves
the stockholders' interests.
The Company has no present plans, arrangements, commitments or
understandings for the issuance of shares of Preferred Stock.
RECOMMENDATION OF THE BOARD:
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF
THE PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF THE COMPANY'S COMMON STOCK FROM 75,000,000 TO 150,000,000
AND TO AUTHORIZE THE CREATION OF 5,000,000 SHARES OF "BLANK CHECK" PREFERRED
STOCK.
13
PROPOSAL 3: RATIFICATION OF APPOINTMENT OF OUR INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
(ITEM 3 ON THE PROXY CARD)
The Board of Directors has appointed the firm of Corbin & Company LLP as
the independent registered public accounting firm of the Company for the year
ending June 30, 2006, subject to ratification of the appointment by the
Company's stockholders. A representative of Corbin & Company LLP is expected to
attend the annual meeting to respond to appropriate questions and will have an
opportunity to make a statement if he or she so desires.
The Company does not have an audit committee.
REVIEW OF THE COMPANY'S AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED
JUNE 30, 2005
The Board of Directors met and held discussions with management and the
independent auditors. Management represented to the Board of Directors that the
Company's consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States, and the Board of
Directors reviewed and discussed the consolidated financial statements with
management and the independent auditors. The Board of Directors also discussed
with the independent auditors the matters required to be discussed by Statement
on Auditing Standards No. 61 (Codification of Statements on Auditing Standards,
AU 380), as amended.
In addition, the Board of Directors discussed with the independent auditors
the auditors' independence from the Company and its management, and the
independent auditors provided to the Board of Directors the written disclosures
and letter required by the Independence Standards Board Standard No. 1
(Independence Discussions With Audit Committees).
The Board of Directors discussed with the Company's internal and
independent auditors the overall scope and plans for their respective audits.
The Board of Directors met with the internal and independent auditors, with and
without management present, to discuss the results of their examinations, the
evaluation of the Company's internal controls, and the overall quality of the
Company's financial reporting.
Based on the reviews and discussions referred to above, the Board of
Directors approved the audited financial statements be included in the Company's
Annual Report on Form 10-KSB for the year ended June 30, 2005, for filing with
the Securities and Exchange Commission.
AUDIT FEES
The aggregate fees billed by our auditors, for professional services
rendered for the audit of the Company's annual financial statements for the
years ended June 30, 2005 and 2004, and for the reviews of the financial
statements included in the Company's Quarterly Reports on Form 10-QSB during the
fiscal years were $42,881 and $78,350, respectively.
AUDIT-RELATED FEES
Our independent registered public accounting firm did not bill the Company
for any other audit-related work during fiscal 2004 or 2003.
TAX FEES
Our independent registered public accounting firm did not bill the Company
for tax related work during fiscal 2004 or 2003.
ALL OTHER FEES
Our independent registered public accounting firm billed the Company for $0
and $4.075 for other services during fiscal years 2005 and 2004, respectively.
RECOMMENDATION OF THE BOARD:
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE RATIFICATION
OF THE APPOINTMENT OF CORBIN & COMPANY LLP AS THE INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM OF THE COMPANY FOR THE FISCAL YEAR ENDING JUNE 30, 2006.
14
PROPOSAL NO. 4
APPROVAL OF THE 2005 STOCK INCENTIVE PLAN
(ITEM 4 ON THE PROXY CARD)
At the Annual Meeting, the Company's stockholders are being asked to approve the
2005 Stock Incentive Plan (the "2005 Incentive Plan") and to authorize
10,000,000 shares of Common Stock for issuance thereunder. The following is a
summary of principal features of the 2005 Incentive Plan. The summary, however,
does not purport to be a complete description of all the provisions of the 2005
Incentive Plan. Any stockholder of the Company who wishes to obtain a copy of
the actual plan document may do so upon written request to the Company's
Secretary at the Company's principal offices at 23832 Rockfield Boulevard, Suite
275, Lake Forest, California 92630.
GENERAL
The 2005 Incentive Plan was adopted by the Board of Directors. The Board of
Directors has initially reserved 10,000,000 shares of Common Stock for issuance
under the 2005 Incentive Plan. Under the Plan, options may be granted which are
intended to qualify as Incentive Stock Options ("ISOs") under Section 422 of the
Internal Revenue Code of 1986 (the "Code") or which are not ("Non-ISOs")
intended to qualify as Incentive Stock Options thereunder.
The 2005 Incentive Plan and the right of participants to make purchases
thereunder are intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The
2005 Incentive Plan is not a qualified deferred compensation plan under Section
401(a) of the Internal Revenue Code and is not subject to the provisions of the
Employee Retirement Income Security Act of 1974 ("ERISA").
PURPOSE
The primary purpose of the 2005 Incentive Plan is to attract and retain the best
available personnel for the Company in order to promote the success of the
Company's business and to facilitate the ownership of the Company's stock by
employees. In the event that the 2005 Incentive Plan is not adopted the Company
may have considerable difficulty in attracting and retaining qualified
personnel, officers, directors and consultants.
ADMINISTRATION
The 2005 Incentive Plan, when approved, will be administered by the Company's
Board of Directors, as the Board of Directors may be composed from time to time.
All questions of interpretation of the 2005 Incentive Plan are determined by the
Board, and its decisions are final and binding upon all participants. Any
determination by a majority of the members of the Board of Directors at any
meeting, or by written consent in lieu of a meeting, shall be deemed to have
been made by the whole Board of Directors.
Notwithstanding the foregoing, the Board of Directors may at any time, or from
time to time, appoint a committee (the "Committee") of at least two members of
the Board of Directors, and delegate to the Committee the authority of the Board
of Directors to administer the Plan. Upon such appointment and delegation, the
Committee shall have all the powers, privileges and duties of the Board of
Directors, and shall be substituted for the Board of Directors, in the
administration of the Plan, subject to certain limitations.
Members of the Board of Directors who are eligible employees are permitted to
participate in the 2005 Incentive Plan, provided that any such eligible member
may not vote on any matter affecting the administration of the 2005 Incentive
Plan or the grant of any option pursuant to it, or serve on a committee
appointed to administer the 2005 Incentive Plan. In the event that any member of
the Board of Directors is at any time not a "disinterested person", as defined
in Rule 16b-3(c)(3)(i) promulgated pursuant to the Securities Exchange Act of
1934, the Plan shall not be administered by the Board of Directors, and may only
by administered by a Committee, all the members of which are disinterested
persons, as so defined.
ELIGIBILITY
Under the 2005 Incentive Plan, options may be granted to key employees,
officers, directors or consultants of the Company, as provided in the 2005
Incentive Plan.
TERMS OF OPTIONS
The term of each Option granted under the Plan shall be contained in a stock
option agreement between the Optionee and the Company and such terms shall be
determined by the Board of Directors consistent with the provisions of the Plan,
including the following:
(a) PURCHASE PRICE. The purchase price of the Common Shares subject to each ISO
shall not be less than the fair market value (as set forth in the 2005 Incentive
Plan), or in the case of the grant of an ISO to a Principal Stockholder, not
less that 110% of fair market value of such Common Shares at the time such
Option is granted. The purchase price of the Common Shares subject to each
15
Non-ISO shall be determined at the time such Option is granted, but in no case
less than 85% of the fair market value of such Common Shares at the time such
Option is granted.
(b) VESTING. The dates on which each Option (or portion thereof) shall be
exercisable and the conditions precedent to such exercise, if any, shall be
fixed by the Board of Directors, in its discretion, at the time such Option is
granted.
(c) EXPIRATION. The expiration of each Option shall be fixed by the Board of
Directors, in its discretion, at the time such Option is granted; however,
unless otherwise determined by the Board of Directors at the time such Option is
granted, an Option shall be exercisable for ten (10) years after the date on
which it was granted (the "Grant Date"). Each Option shall be subject to earlier
termination as expressly provided in the 2005 Incentive Plan or as determined by
the Board of Directors, in its discretion, at the time such Option is granted.
(d) TRANSFERABILITY. No Option shall be transferable, except by will or the laws
of descent and distribution, and any Option may be exercised during the lifetime
of the Optionee only by him. No Option granted under the Plan shall be subject
to execution, attachment or other process.
(e) OPTION ADJUSTMENTS. The aggregate number and class of shares as to which
Options may be granted under the Plan, the number and class shares covered by
each outstanding Option and the exercise price per share thereof (but not the
total price), and all such Options, shall each be proportionately adjusted for
any increase decrease in the number of issued Common Shares resulting from
split-up spin-off or consolidation of shares or any like Capital adjustment or
the payment of any stock dividend.
Except as otherwise provided in the 2005 Incentive Plan, any Option granted
hereunder shall terminate in the event of a merger, consolidation, acquisition
of property or stock, separation, reorganization or liquidation of the Company.
However, the Optionee shall have the right immediately prior to any such
transaction to exercise his Option in whole or in part notwithstanding any
otherwise applicable vesting requirements.
(f) TERMINATION, MODIFICATION AND AMENDMENT. The 2005 Incentive Plan (but not
Options previously granted under the Plan) shall terminate ten (10) years from
the earlier of the date of its adoption by the Board of Directors or the date on
which the Plan is approved by the affirmative vote of the holders of a majority
of the outstanding shares of capital stock of the Company entitled to vote
thereon, and no Option shall be granted after termination of the Plan. Subject
to certain restrictions, the Plan may at any time be terminated and from time to
time be modified or amended by the affirmative vote of the holders of a majority
of the outstanding shares of the capital stock of the Company present, or
represented, and entitled to vote at a meeting duly held in accordance with the
applicable laws of the State of Colorado.
FEDERAL INCOME TAX ASPECTS OF THE 2005 INCENTIVE PLAN
THE FOLLOWING IS A BRIEF SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION UPON
THE PARTICIPANTS AND THE COMPANY WITH RESPECT TO THE PURCHASE OF SHARES UNDER
THE 2005 INCENTIVE PLAN. THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE AND DOES
NOT ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES TO TAXPAYERS WITH SPECIAL TAX
STATUS. IN ADDITION, THIS SUMMARY DOES NOT DISCUSS THE PROVISIONS OF THE INCOME
TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE PARTICIPANT
MAY RESIDE, AND DOES NOT DISCUSS ESTATE, GIFT OR OTHER TAX CONSEQUENCES OTHER
THAN INCOME TAX CONSEQUENCES. THE COMPANY ADVISES EACH PARTICIPANT TO CONSULT
HIS OR HER OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF PARTICIPATION IN
THE 2005 Incentive Plan AND FOR REFERENCE TO APPLICABLE PROVISIONS OF THE CODE.
The 2005 Incentive Plan and the right of participants to make purchases
thereunder are intended to qualify under the provisions of Sections 421, 422 and
423 of the Code. Under these provisions, no income will be recognized by a
participant prior to disposition of shares acquired under the 2005 Incentive
Plan.
If the shares are sold or otherwise disposed of (including by way of gift) more
than two years after the first day of the offering period during which shares
were purchased (the "Offering Date"), a participant will recognize as ordinary
income at the time of such disposition the lesser of (a) the excess of the fair
market value of the shares at the time of such disposition over the purchase
price of the shares or (b) 15% of the fair market value of the shares on the
first day of the offering period. Any further gain or loss upon such disposition
will be treated as long-term capital gain or loss. If the shares are sold for a
sale price less than the purchase price, there is no ordinary income and the
participant has a capital loss for the difference.
16
If the shares are sold or otherwise disposed of (including by way of gift)
before the expiration of the two-year holding period described above, the excess
of the fair market value of the shares on the purchase date over the purchase
price will be treated as ordinary income to the participant. This excess will
constitute ordinary income in the year of sale or other disposition even if no
gain is realized on the sale or a gift of the shares is made. The balance of any
gain or loss will be treated as capital gain or loss and will be treated as
long-term capital gain or loss if the shares have been held more than one year.
In the case of a participant who is subject to Section 16(b) of the Exchange
Act, the purchase date for purposes of calculating such participant's
compensation income and beginning of the capital gain holding period may be
deferred for up to six months under certain circumstances. Such individuals
should consult with their personal tax advisors prior to buying or selling
shares under the 2005 Incentive Plan.
The ordinary income reported under the rules described above, added to the
actual purchase price of the shares, determines the tax basis of the shares for
the purpose of determining capital gain or loss on a sale or exchange of the
shares.
The Company is entitled to a deduction for amounts taxed as ordinary income to a
participant only to the extent that ordinary income must be reported upon
disposition of shares by the participant before the expiration of the two-year
holding period described above.
RESTRICTIONS ON RESALE
Certain officers and directors of the Company may be deemed to be "affiliates"
of the Company as that term is defined under the Securities Act. The Common
Stock acquired under the 2005 Incentive Plan by an affiliate may be reoffered or
resold only pursuant to an effective registration statement or pursuant to Rule
144 under the Securities Act or another exemption from the registration
requirements of the Securities Act.
REQUIRED VOTE
The approval of the 2005 Incentive Plan and the reservation of 10,000,000 shares
for issuance requires the affirmative vote of the holders of a majority of the
shares of the Company's Common Stock present at the Annual Meeting in person or
by proxy and entitled to vote and constituting at least a majority of the
required quorum.
The proxy holders intend to vote the shares represented by proxies to approve,
the 2005 Stock Incentive Plan.
17
RECOMMENDATION OF THE BOARD:
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE 2005 STOCK INCENTIVE PLAN.
BENEFICIAL OWNERSHIP OF RCAA COMMON STOCK OF PRINCIPAL
STOCKHOLDERS, DIRECTORS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of November 21, 2005
o by each person who is known by us to beneficially own more than
5% of our common stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
NAME AND ADDRESS NUMBER OF PERCENTAGE OF
OF OWNER TITLE OF CLASS SHARES OWNED (1) CLASS
OWNED (2)
- --------------------------------------------------------------------------------
Gordon Davies Common Stock 3,017,400 (3) 9.39%
23832 Rockfield Blvd.
Suite 275
Lake Forest, California 92630
Michael Davies Common Stock 2,764,500 (3) 8.61%
23832 Rockfield Blvd.
Suite 275
Lake Forest, California 92630
All Officers and Directors Common Stock 5,781,900 (4) 16.70%
As a Group (2 persons)
Kurt Baum Common Stock 3,969,320 13.40%
680 S. Avon Avenue
Azusa, California 91702
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of November 21, 2005 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
(2) Based upon 29,620,813 shares issued and outstanding on November 21, 2005.
(3) Includes 2,500,000 shares issuable upon currently exercisable stock options.
(4) Includes 5,000,000 shares issuable upon currently exercisable stock options.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more then 10 percent of
the Company's Common Stock, to file with the SEC the initial reports of
ownership and reports of changes in ownership of common stock. Officers,
directors and greater than 10 percent stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
18
Specific due dates for such reports have been established by the Commission and
the Company is required to disclose in this Proxy Statement any failure to file
reports by such dates during fiscal 2005. Based solely on its review of the
copies of such reports received by it, or written representations from certain
reporting persons that no Forms 5 were required for such persons, the Company
believes that during the fiscal year ended June 30, 2005, there was no failure
to comply with Section 16(a) filing requirements applicable to its officers,
directors and ten percent stockholders.
POLICY WITH RESPECT TO SECTION 162(M)
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"),
provides that, unless an appropriate exemption applies, a tax deduction for the
Company for compensation of certain executive officers named in the Summary
Compensation Table will not be allowed to the extent such compensation in any
taxable year exceeds $1 million. As no executive officer of the Company received
compensation during 2004 approaching $1 million, and the Company does not
believe that any executive officer's compensation is likely to exceed $1 million
in 2005, the Company has not developed an executive compensation policy with
respect to qualifying compensation paid to its executive officers for
deductibility under Section 162(m) of the Code.
EXECUTIVE COMPENSATION
The following tables set forth certain information regarding our CEO and
each of our most highly-compensated executive officers whose total annual salary
and bonus for the fiscal years ending June 30, 2005, 2004 and 2003 exceeded
$100,000:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Other
Annual
Restricted Options LTIP
Name & Principal Salary Bonus Compen- Stock SARs Payouts All Other
Position Year ($) ($) sation ($) Awards($) (#) ($) Compensation
- ------------------------ ------- ------------ ------------ ------------- ------------ ----------- ------------ -------------
Gordon Davies 2005 135,200 0 0 - 1,000,000 - -
President 2004 135,200 0 0 - - - -
2003 135,200 0 0 - - - -
- ------------------------ ------- ------------ ------------ ------------- ------------- ----------- ------------ -------------
Michael Davies 2005 135,200 0 0 - 1,000,000 - -
Chief Financial Officer 2004 135,200 0 0 - - - -
2003 135,200 0 0 - - - -
EMPLOYMENT AGREEMENTS
On June 30, 2004, we entered into five-year employment contracts with
Gordon Davies to serve as Chief Executive Officer and President and Michael
Davies to serve as Chief Financial Officer. The employment agreements are
identical. The base salary under the agreement is $135,200 per annum, plus
benefits. If we realize a minimum net profit for our 12 months ended June 30,
2005 of $250,000 or more, base compensation increases by 20% effective as of the
beginning of the second twelve months of the employment agreement. If we realize
a net profit of at least $250,000 over the 12 months ended June 30, 2006, 2007,
2008 and 2009, the base compensation increases by an additional 20% over the
preceding year's compensation.
19
In addition, the employment agreements provide for bonuses on a sliding
scale based on our realizing net profits each fiscal year. A bonus equal to 10%
of the base salary will be paid in any fiscal year in which net profits equal or
exceed $250,000. This percentage increases on a sliding scale as net profits in
any fiscal year over the three year contract term increase above $500,000, with
a bonus equal to 100% of base salary to be paid if in any fiscal year we realize
a net income of $2,500,000 or more.
In addition, the employment contracts grant each employee 1,500,000 options
to acquire our common stock. These options are all pre-existing options granted
under previous contracts with each employee. All the stock option have vested
under the following terms for each employee, 500,000 shares vested on January
15, 2002, 500,000 shares vested on January 15, 2003, and 500,000 shares vested
on January 15, 2004. The option exercise price is $.40 per share.
These employment contracts have non-compete provisions and various other
provisions, including a death disability benefit of 3 months' pay plus 3 months'
benefits.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information concerning individual grants of
stock options during fiscal 2005 to our President, Mr. Gordon W. Davies and our
Vice President and Chief Financial Officer, Mr. Michael C. Davies. The exercise
prices in each case equal the last reported sales price per share of our common
stock as reported by the Over-the-Counter Bulletin Board on the date of grant.
The percentage of total options granted to our employees in the last fiscal year
is based on options to purchase an aggregate of 2,640,000 shares of common stock
granted to all of our employees in fiscal 2005:
NUMBER OF SHARES OF PERCENT OF TOTAL
COMMON STOCK OPTIONS GRANTED EXERCISE
UNDERLYING OPTIONS TO EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) LAST FISCAL YEAR ($/SH) DATE
- ----------------------- ------------------- ----------------- -------- -----------
Gordon W. Davies 1,000,000 38% $0.25 06/30/2008
$0.25 06/30/2008
Michael C. Davies 1,000,000 38% $0.25 06/30/2008
20
FISCAL YEAR END OPTION VALUES
No options were exercised by any of our officers during the 2005 fiscal
year.
The following table sets forth the number of shares of our common stock
subject to exercisable and unexercisable stock options that the Named Executive
Officers held at June 30, 2005:
NUMBER OF SECURITIES UNDERLYING VALUE OFUNEXERCISED IN-THE-MONEY
NAME UNEXERCISED OPTIONS AT FISCAL YEAR END OPTIONS AT FISCAL YEAR END
- -------------------- ------------------------------------- ---------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Gordon W. Davies 2,500,000 0 $ --
Michael C. Davies 2,500,000 0 $ --
REMUNERATION OF DIRECTORS
None.
STOCK OPTION PLANS
The following table discloses, in tabular format, information regarding our
equity securities authorized for issuance pursuant to any compensation plans as
of the end of our fiscal year ended June 30, 2005.
Number of Securities to Weighted-average exercise Number of Securities
be issued upon exercise price of outstanding remaining available for
of outstanding options, options, warrants and future issuance under
Plan Category warrants and rights rights equity compensation
plans (excluding
securities reflected in
column (a))
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by 0 0 0
security holders
Equity compensation plans not approved 22,441,750 $0.31 0
by security holders
- ----------------------------------------------------------------------------------------------------------------------------
Total 22,441,750 $0.31 0
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended June 30, 2005, we settled debts to related
parties for an aggregate amount of $146,500 in exchange for the issuance of
732,500 shares of our common stock. The debts settled were $30,000 to
Billfighter Investements Limited, $48,500 to David McGuire and $68,000 to Kurt
Baum.
During the quarter ended September 30, 2005, we settled debts to related
parties for an aggregate amount of $208,525 with cash as follows:
Anthony Wilson $97,400
Jerry Graber $20,000
Del Stephens $31,000
Kurt Baum $20,000
Paul Fuller $ 6,667
Richard Jurkovac $15,000
Theodore Cohn $12,000
Fred Davies $ 5,000
Blair Porter $ 1,458
At September 30, 2005, we have debt owing to related parties aggregating
$421,399 as follows:
o We have an unsecured convertible note payable to one shareholder, Jerry
Graber, bearing interest at 10% per annum, convertible into shares of our common
stock at $0.25 per share and due upon demand. At September 30, 2005, the
aggregate principal and interest due and owing under this note was $6,000.
o We have an unsecured convertible note payable to one shareholder, Paul
Fuller, bearing interest at 15% per annum, convertible into shares of our common
stock at $0.75 per share and due on June 30, 2006. Pursuant to the terms of the
Note, we are required to make monthly payments in the aggregate amount of
$1,833. At September 30, 2005, the aggregate principal and interest due and
owing under this note was $13,333.
o We have an unsecured note payable to one shareholder, Blair Porter,
bearing interest at 15% per annum and due upon demand. At September 30, 2005,
the aggregate principal and interest due and owing under this note was $14,598.
o We have unsecured notes payable to some of our shareholders, bearing
interest at 10% per annum and due upon demand. At September 30, 2005, the
aggregate principal and interest due and owing under these notes was $333,763.
The shareholders and amounts due under these notes are as follows:
Anthony Wilson $ 91,500
Canvasback Company Ltd. $ 151
Dale Christianson $ 5,000
Fred Davies $ 5,112
Kurt Baum $115,000
Paul Hazel $ 50,000
Randy Ricker $ 27,000
Theodore Cohn $ 6,000
Lana Bailey/Cooperative $ 34,000
o We have an unsecured note payable to one shareholder, Del Stephens,
bearing interest per annum at the credit card rate and due upon demand. At
September 30, 2005, the aggregate principal and interest due and owing under
this note was $10,555.
o We have an unsecured note payable to one shareholder, Billfighters
Investments Limited, bearing interest per annum at 5% and due upon demand. At
September 30, 2005, the aggregate principal and interest due and owing under
this note was $43,150.
Total interest expense recorded on related-party notes payable for fiscal
2005 was $55,619.
Total interest expense for the three months ending September 30, 2005 was
$13,013.
In addition, we issued 1,000,000 options to Fred Davies, the father of our
named executive officers, for services rendered, resulting in consulting expense
of $192,249.
ANNUAL AND QUARTERLY REPORTS
Our Annual Report on Form 10-KSB for the fiscal year ended June 30, 2005
and our Quarterly Report on Form 10-QSB for the quarter ended September 30,
2005, as filed with the SEC, excluding exhibits, are being mailed to
shareholders with this Proxy Statement. We will furnish any exhibit to our
Annual Report on Form 10-KSB or Quarterly Report on Form 10-QSB free of charge
to any shareholder upon written request to Michael C. Davies, Secretary,
Reclamation Consulting and Applications, Inc., 23832 Rockfield Boulevard, Suite
275, Lake Forest, California 92630. The Annual Report and Quarterly Report are
incorporated in this Proxy Statement. You are encouraged to review the Annual
Report and Quarterly Report together with subsequent information filed by the
Company with the SEC and other publicly available information.
22
OTHER BUSINESS
The Board of Directors is not aware of any matter other than the matters
described above to be presented for action at the Meeting. However, if any other
proper items of business should come before the Meeting, it is the intention of
the individuals named on your proxy card as the proxy holders to vote in
accordance with their best judgment on such matters.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ GORDON DAVIES
----------------------
Gordon Davies
Chairman of the Board
Dated: November 23, 2005
Lake Forest, California
23
EXHIBIT A
CERTIFICATE OF AMENDMENT TO THE
ARTICLES OF INCORPORATION
OF
RECLAMATION CONSULTING AND APPLICATIONS, INC.
The undersigned, President of Reclamation Consulting and Applications, Inc.
(the "Corporation"), does hereby certify as follows:
FIRST: The name of the corporation is:
RECLAMATION CONSULTING AND APPLICATIONS, INC.
SECOND: The articles of incorporation of the Corporation is hereby amended
by replacing Article Fourth, in its entirety, with the following:
"FOURTH: The Corporation is authorized to issue two classes of stock.
One class of stock shall be Common Stock, par value $0.01. The second class
of stock shall be Preferred Stock, par value $0.01. The Preferred Stock, or
any series thereof, shall have such designations, preferences and relative,
participating, optional or other special rights and qualifications,
limitations or restrictions thereof as shall be expressed in the resolution
or resolutions providing for the issue of such stock adopted by the board
of directors and may be made dependent upon facts ascertainable outside
such resolution or resolutions of the board of directors, provided that the
matter in which such facts shall operate upon such designations,
preferences, rights and qualifications; limitations or restrictions of such
class or series of stock is clearly and expressly set forth in the
resolution or resolutions providing for the issuance of such stock by the
board of directors.
The total number of shares of stock of each class which the Corporation
shall have authority to issue and the par value of each share of each class
of stock are as follows:
Class Par Value Authorized Shares
----- --------- -----------------
Common $0.01 150,000,000
Preferred $0.01 5,000,000
---------------
Totals: 155,000,000"
THIRD: The amendment of the certificate of incorporation herein certified
has been duly adopted at a meeting of the Corporation's Board of Directors and
stockholders holding a majority of the outstanding shares of common stock of the
Corporation in accordance with the provisions of the Colorado Business
Corporation Act.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
hereunto affixed and this Certificate of Amendment of the Corporation's Articles
of Incorporation, as amended, to be signed by Gordon Davies, its President, this
___ day of ________, 2005.
RECLAMATION CONSULTING AND APPLICATIONS, INC.
-----------------
Gordon Davies
President
PROXY
RECLAMATION CONSULTING AND APPLICATIONS, INC.
ANNUAL MEETING OF STOCKHOLDERS - TO BE HELD
*, 2005
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, revoking all prior proxies, hereby appoints GORDON W. DAVIES
and MICHAEL C. DAVIES and each of them, with full power of substitution in each,
as proxies for the undersigned, to represent the undersigned and to vote all the
shares of Common Stock of the Company which the undersigned would be entitled to
vote, as fully as the undersigned could vote and act if personally present, at
the Annual Meeting of Stockholders (the "Meeting") to be held on *, 2005, at *,
local time, at *, or at any adjournments or postponements thereof.
Should the undersigned be present and elect to vote at the Meeting or at any
adjournments or postponements thereof, and after notification to the Secretary
of the Company at the Meeting of the stockholder's decision to terminate this
proxy, then the power of such attorneys or proxies shall be deemed terminated
and of no further force and effect. This proxy may also be revoked by filing a
written notice of revocation with the Secretary of the Company or by duly
executing a proxy bearing a later date.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL NOMINEES FOR DIRECTOR AND
EACH OF THE LISTED PROPOSALS.
Proposal (1) The election as directors of all nominees listed below to serve
until the 2006 Annual Meeting of Stockholders or until their successors have
been duly elected and qualified (except as marked to the contrary).
Nominees:
01) Gordon Davies 02) Michael Davies
FOR ALL [___] WITHHOLD ALL [___] FOR ALL EXCEPT [___]
To withhold authority to vote, mark "For All Except" and write the nominee's
number on the line below.
Proposal (2) Amending the Articles of Incorporation to increase the Company's
authorized shares of common stock from 75,000,000 shares to 150,000,000 shares
and authorize the creation of 5,000,000 shares of "blank check" preferred stock.
FOR|_| AGAINST|_| ABSTAIN|_|
Proposal (3) Ratification of the appointment of CORBIN & COMPANY LLP as the
independent registered public accounting firm of the Company for the fiscal year
ending June 30, 2006.
FOR|_| AGAINST|_| ABSTAIN|_|
Proposal (4) Adopting the 2005 Stock Incentive Plan.
FOR|_| AGAINST|_| ABSTAIN|_|
The shares represented by this proxy will be voted as directed by the
stockholder, but if no instructions are specified, this proxy will be voted for
the election of the Board nominees and for proposals (2), (3) and (4). If any
other business is presented at the Meeting, this proxy will be voted by those
named in this proxy in their best judgment. At the present time, the Board of
Directors knows of no other business to be presented at the Meeting.
The undersigned acknowledges receipt from the Company, prior to the execution of
this proxy, of the Notice of Annual Meeting and accompanying Proxy Statement
relating to the Meeting and an Annual Report to Stockholders for fiscal year
ended June 30, 2005.
NOTE: PLEASE MARK, DATE AND SIGN AS YOUR NAME(S) APPEAR(S) HEREON AND RETURN IN
THE ENCLOSED ENVELOPE. IF ACTING AS AN EXECUTORS, ADMINISTRATORS, TRUSTEES,
GUARDIANS, ETC., YOU SHOULD SO INDICATE WHEN SIGNING. IF THE SIGNER IS
CORPORATION, PLEASE SIGN THE FULL CORPORATE NAME, BY DULY AUTHORIZED OFFICER. IF
SHARES ARE HELD JOINTLY, EACH SHAREHOLDER SHOULD SIGN.
Signature (Please sign within the box) [ ______________ ] DATE: _______, 2005
Signature (Joint owners) [_______________ ] DATE: _______, 2005