As filed with the Securities and Exchange Commission on August 19, 2005
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material under ss.240.14a-12
OVATION PRODUCTS CORPORATION
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(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
offset fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the
date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party
(4) Date Filed:
[Ovation Letterhead]
August __, 2005
To Our Stockholders:
You are cordially invited to attend a special meeting of stockholders of
Ovation Products Corporation. The meeting will be held at Ovation's corporate
offices located at 395 East Dunstable Road, Nashua, New Hampshire, on _______,
September __, 2005 at 2:00 p.m., Eastern time.
At the special meeting, you will be asked to consider and approve an
important recapitalization transaction intended to simplify Ovation's capital
structure. You also will be asked to approve (1) a three-for-one stock split of
the outstanding common stock and (2) certain amendments to Ovation's certificate
of incorporation to effect the stock split, reduce the par value of the common
stock and the preferred stock and simplify Ovation's capital structure.
Holders of our preferred stock voting by series will be asked to consider
and approve the conversion of their preferred stock into common stock. The
recapitalization involves the conversion of the shares of each of our series of
preferred stock (Series A, Series B, Series B-1 and Series C) into shares of
common stock (the "Common Stock Conversion").
If a majority of each series of preferred stock voting separately agrees
to convert to common stock, the respective conversion ratios will be as follows:
o Series A Preferred Stock into common stock at a ratio of five shares
of preferred stock to seven shares of common stock;
o Series B Preferred Stock into common stock at a ratio of five shares
of preferred stock to six shares of common stock;
o Series B-1 Preferred Stock into common stock at a ratio of five
shares of preferred stock to six shares of common stock; and
o Series C Preferred Stock into common stock at a ratio of five shares
of preferred stock to eight shares of common stock.
In addition, upon approval of the Common Stock Conversion by the holders
of the Series C Preferred Stock, we will offer all holders of the Series C
Warrants and holders of the William M. Sherman Enterprises Warrants the
opportunity to convert their warrants into common stock on a one-for-one basis.
These warrant holders will not have a right to vote the shares underlying their
warrants unless the warrant holders have exercised their warrants (prior to the
record date for this meeting) for shares of Series C Preferred Stock in the case
of the Series C Warrant holders or for common stock in the case of the William
M. Sherman Enterprises Warrants.
The issuance of these additional shares of common stock will result in
substantial dilution to our existing holders of common stock.
As explained in greater detail below, we are undertaking this
recapitalization in order to enhance our ability to access the capital markets
to raise additional funds, to pursue strategic alternatives, to enhance overall
stockholder value, and to provide the holders of our preferred stock with
increased liquidity for their shares.
Ovation is seeking the approval by the holders of common stock and by the
holders of each series of Ovation's four series of preferred stock voting by
series for the amendment of Ovation's certificate of incorporation in order to
implement the Common Stock Conversion.
If the amendment to the certificate of incorporation authorizing the
conversion of shares of Series A, Series B, Series B-1 and Series C Preferred
Stock into common stock is approved, the Common Stock Conversion (including the
issuance of additional shares of common stock) is expected to be completed and
become effective as soon as practicable following the special meeting.
If the recapitalization is completed in its entirety, the four existing
series of preferred stock would be eliminated. At June 30, 2005, there were a
total of 1,127,118 shares of preferred stock of all four series outstanding. At
that date, those shares had an aggregate liquidation preference of $939,121 and
a potential right to convert into 1,209,854 shares of common stock before the
proposed recapitalization.
Ovation is proposing the recapitalization because it believes, among other
reasons, that:
o the elimination of the four series of preferred stock will simplify
Ovation's capital structure and should create improved opportunities
for Ovation to access the capital markets, pursue strategic
alternatives and enhance stockholder value; and
o because Ovation is not using cash to effect the Common Stock
Conversion, the recapitalization will permit Ovation to accomplish
its objectives while retaining cash for its operations.
The board of directors reviewed and considered the terms of the
recapitalization and unanimously recommended the approval of those terms,
including the issuance of additional shares of common stock as a result of the
Common Stock Conversion. The board of directors has determined that the
recapitalization is both substantively and procedurally fair to Ovation's
unaffiliated preferred stockholders of each series and is advisable and in the
best interests of Ovation and its stockholders, and recommends that Ovation's
stockholders vote to authorize the issuance of additional shares of common stock
in connection with the Common Stock Conversion and that each series of preferred
stock vote to authorize the Common Stock Conversion.
The board of directors did not retain the services of a financial advisor
to render an opinion as to the fairness of the recapitalization transaction.
The board of directors unanimously recommends that each holder of
preferred stock vote to convert its preferred stock into Common Stock and that
you concurrently vote FOR the proposal to approve the issuance of additional
shares of Common Stock.
Ovation is seeking the affirmative vote of the holders of its common stock
and holders of its preferred stock to approve amendments to Ovation's
certificate of incorporation to:
o effect a three-for-one stock split of the common stock;
o reduce the par value of the common stock from $1.00 to $0.01 per
share of common stock and reduce the par value of the preferred
stock from $1.00 to $0.01 par value per share of preferred stock in
order to reduce franchise taxes to the State of Delaware; and
o eliminate the designation of the four series of preferred stock (if
approved by the required vote), increase the authorized number of
shares of common stock and preferred stock and provide for
undesignated preferred stock.
The board of directors unanimously recommends that each holder of common
stock and each holder of preferred stock vote FOR the proposal to approve
amendments to Ovation's certificate of incorporation.
Information about the special meeting and the business to be considered
and voted upon at the special meeting is included in the accompanying notice of
special meeting and proxy statement. These materials include a summary of the
recapitalization, including the Common Stock Conversion, and additional
information about the parties involved and their interests in the
recapitalization, including the Common Stock Conversion. These materials also
include a summary of the amendments to Ovation's certificate of incorporation.
We encourage you to read and consider carefully the information contained in the
proxy statement. In addition, you may find supplementary information about our
Company from documents we have filed with the Securities and Exchange Commission
("SEC").
Your vote is important regardless of the number of shares you own. We urge
you to complete, sign, date and return the enclosed proxy card as soon as
possible, even if you currently plan to attend the meeting. Returning a proxy
card will not prevent you from attending the special meeting and voting in
person, but will ensure that your vote is counted if you are unable to attend
the meeting.
Thank you for your interest and participation.
Sincerely,
/s/ WILLIAM ZEBUHR
---------------------------
William Zebuhr
Chairman of the Board
/s/ ROBERT MACDONALD
---------------------------
Robert MacDonald
Chief Executive Officer
Neither the SEC nor any state securities commission has approved or
disapproved of the Common Stock Conversion or the other proposals being
submitted to a vote, passed upon the merits or fairness of the Common Stock
Conversion or the other proposals, or passed upon the adequacy or accuracy of
the disclosure in this proxy statement. Any representation to the contrary is a
criminal offense.
OVATION PRODUCTS CORPORATION
395 East Dunstable Road
Nashua, New Hampshire 03062
(603) 891-3224
--------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
--------------------------
To Our Stockholders:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Ovation
Products Corporation will be held at Ovation's corporate offices located at 395
East Dunstable Road, Nashua, New Hampshire, on _______, September __, 2005 at
2:00 p.m., Eastern time, for the following purposes:
1. To approve by vote of each series of preferred stock voting
separately, the conversion of our Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock and Series C Preferred
Stock into common stock (the "Common Stock Conversion").
2. To approve a three-for-one stock split of the common stock.
3. To approve amendments to Ovation's certificate of incorporation in
order to (a) effect the stock split; (b) reduce the par value of the
common stock and the preferred stock; and (c) eliminate the
designation of the four series of preferred stock, increase the
authorized shares of common stock and preferred stock and provide
for undesignated preferred stock.
4. To approve adjournments of the special meeting in order to allow
Ovation to continue to solicit proxies from holders of common stock
or preferred stock who have not cast a vote by proxy with respect to
the approval of the proposal, or whose proxies have not been voted
in favor of the proposal.
5. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof. The board of
directors is not aware of any other business to come before the
special meeting.
These proposals are more fully described in the proxy statement that
accompanies this notice. Please read the proxy statement carefully when
determining how to vote on these proposals.
Ovation is seeking the approval by the holders of each series of Ovation's
four series of preferred stock for the Common Stock Conversion. The approval of
the conversion of the preferred stock requires the affirmative vote of the
holders of a majority of the outstanding shares of each of the four series of
preferred stock. This proxy statement is being mailed to holders of common
stock, holders of Series A Preferred Stock, Series B Preferred Stock, Series B-1
Preferred Stock and Series C Preferred Stock and holders of the Series C
Warrants and the William M. Sherman Enterprises Warrants in connection with the
special meeting to which this notice relates. These warrant holders will not
have a right to vote the shares underlying their warrants unless the warrant
holders have exercised their warrants (prior to the record date) for shares of
Series C preferred stock in the case of the Series C Warrant holders or for
common stock in the case of the William M. Sherman Enterprises Warrants.
If the proposal to authorize the conversion of the preferred stock is
approved at the special meeting and the amendment to Ovation's certificate of
incorporation providing for the Common Stock Conversion is approved, the Common
Stock Conversion is expected to be completed and become effective as soon as
practicable following the special meeting.
The Common Stock Conversion is part of an important recapitalization
transaction that is intended to simplify Ovation's capital structure in order to
enhance our ability to access the capital markets to raise additional funds, to
pursue strategic alternatives and to enhance overall stockholder value.
The board of directors has fixed the close of business on September __,
2005 as the record date for the determination of stockholders entitled to notice
of and to vote at the special meeting and at any adjournment or postponement
thereof.
After careful consideration as to the fairness of the recapitalization,
from a financial point of view, to Ovation's unaffiliated common stockholders
and unaffiliated preferred stockholders, including the exchange ratios offered
in the Common Stock Conversion, Ovation's board of directors determined that the
Common Stock Conversion is substantively and procedurally fair to Ovation's
unaffiliated common stockholders and unaffiliated preferred stockholders of each
series and is advisable and in the best interests of Ovation and its
stockholders, and directed that the proposal to authorize the issuance of
additional shares of common stock in conjunction with the Common Stock
Conversion be submitted to Ovation's stockholders for their approval. Ovation's
board of directors recommends that you vote "FOR" Proposal 1.
Ovation's board of directors also recommends that you vote "FOR" the other
proposals, Proposal 2, Proposal 3 and Proposal 4.
A proxy card accompanies this notice of special meeting and the proxy
statement. Whether or not you expect to attend the special meeting, please
complete, sign and date the enclosed proxy card and return it promptly. If you
plan to attend the special meeting and wish to vote your shares personally, you
may do so at any time before the proxy is voted.
All stockholders are cordially invited to attend the meeting.
By Order of the Board of Directors
/s/ WILLIAM ZEBUHR
---------------------
William Zebuhr
Chairman of the Board
Nashua, New Hampshire
August __, 2005
TABLE OF CONTENTS
Page
SUMMARY OF THE PROPOSALS.........................................................................................1
WHO CAN HELP ANSWER YOUR QUESTIONS?..............................................................................6
INFORMATION ABOUT THE MEETING....................................................................................7
Voting at the Meeting...................................................................................7
Revocation of Proxies...................................................................................7
Solicitation of Proxies.................................................................................7
Record Date, Quorum and Required Vote...................................................................7
PROPOSAL 1: CONVERSION OF PREFERRED STOCK.......................................................................9
Conversion of Preferred Stock...........................................................................9
Basis of the Common Stock Conversion....................................................................9
No Appraisal Rights....................................................................................10
Dividends on the Common Stock and Preferred Stock......................................................10
Preemptive Rights and Anti-Dilution Provisions.........................................................10
Vote Required by Holders of the Common Stock...........................................................10
Vote Required by Holders of each series of preferred stock.............................................10
Fees and Expenses......................................................................................10
Conditions to the Common Stock Conversion..............................................................11
Board Recommendation...................................................................................11
Possible Adjournment of the Meeting....................................................................11
PROPOSAL 2: AUTHORIZATION TO SPLIT THE OUTSTANDING COMMON STOCK ON A
THREE-FOR-ONE-BASIS....................................................................................12
Implementation and Effects of the Stock Split..........................................................12
No Effect on Percentage of Ownership...................................................................12
Appraisal Rights.......................................................................................12
Effect of Split on Options and Other Rights to Acquire Common Stock....................................12
Exchange of Stock Certificates.........................................................................13
Stockholders Should Not Send Their Stock Certificates Until They Receive a Transmittal Form............13
Certain Federal Income Tax Consequences................................................................13
Required Vote; Recommendation of the Board of Directors................................................14
PROPOSAL 3: AUTHORIZATION TO AMEND AND RESTATE THE CERTIFICATE OF INCORPORATION................................15
Required Vote; Recommendation of the Board of Directors................................................15
DESCRIPTION OF OUR CAPITAL STOCK................................................................................16
Capital Stock Following Conversion.....................................................................16
Common Stock...........................................................................................16
Current Preferred Stock................................................................................17
i
Additional Rights of Holders of Current Preferred Stock................................................18
Stock Options and Warrants.............................................................................19
FORWARD-LOOKING STATEMENTS......................................................................................20
SUMMARY FINANCIAL INFORMATION...................................................................................20
BACKGROUND OF THE RECAPITALIZATION..............................................................................21
General ..............................................................................................21
Reasons for the Recapitalization.......................................................................21
Recommendation of the Board of Directors; Fairness of the Recapitalization.............................22
Interests of Ovation's Directors and Affiliated Parties in the Recapitalization........................23
EFFECT OF THE COMMON STOCK CONVERSION ON THE COMMON STOCK.......................................................23
EFFECT OF THE COMMON STOCK CONVERSION ON THE PREFERRED STOCK....................................................24
CAPITALIZATION..................................................................................................25
MANAGEMENT......................................................................................................26
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................................28
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................................31
INDEPENDENT ACCOUNTANTS.........................................................................................35
STOCKHOLDER PROPOSALS...........................................................................................35
INCORPORATION BY REFERENCE......................................................................................35
OTHER BUSINESS..................................................................................................35
APPENDIX A: AMENDED AND RESTATED CERTIFICATE OF INCORPORATION.................................................A-1
ii
SUMMARY OF THE PROPOSALS
This summary term sheet highlights selected material information from this
proxy statement, but may not contain all of the information that is important to
you. To better understand the Common Stock Conversion, the issuance of
additional shares of common stock pursuant to the Common Stock Conversion and
the other proposals, and for a more complete description of the terms, you
should carefully read this entire proxy statement and the other documents
referred to in this proxy statement.
When used in this proxy statement, the terms "Company," "Ovation," "we,"
"our," "ours" and "us" refer to Ovation Products Corporation, unless otherwise
specified or the context requires otherwise. The term "unaffiliated," when used
in the phrase "unaffiliated holders of Common Stock" or "unaffiliated holders of
Preferred Stock" means stockholders who are not directors or officers of
Ovation, and who are not persons or entities affiliated with any director or
officer of Ovation.
What Is Ovation Products Corporation Seeking to Accomplish?
Ovation is seeking to simplify its capital structure. We seek to
accomplish the proposed recapitalization through two steps:
1. An offer to preferred stockholders to exchange their shares of
Series A Preferred Stock, Series B Preferred Stock, Series B-1
Preferred Stock and Series C Preferred Stock for common stock
through the conversion of all such shares of Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock and
Series C Preferred Stock into shares of common stock (the "Common
Stock Conversion"); and
2. Upon approval of the Common Stock Conversion by the Series C
Preferred stockholders, an offer to all holders of Series C Warrants
and William M. Sherman Enterprises Warrants to exchange their
warrants for common stock on a one-for-one basis.
The issuance of additional shares of common stock pursuant to the Common
Stock Conversion is described in detail in this proxy statement.
Proposals 2 and 3 seek your approval for a three-for-one stock split of
the common stock and for amendments to Ovation's certificate of incorporation in
order to effect the stock split, reduce the par value of the common stock and
the preferred stock, eliminate the designation of the four series of preferred
stock, increase the authorized shares of common stock and preferred stock and
provide for undesignated preferred stock.
What Are the Benefits of the Recapitalization to the Common Stockholders?
o The elimination of the four series of preferred stock outstanding
will simplify Ovation's capital structure and should create improved
opportunities for Ovation to access the capital markets, and to
engage in strategic transactions.
o Because we are not using cash to effect the Common Stock Conversion,
the recapitalization will permit us to accomplish our objectives
while retaining cash for strategic initiative purposes.
See "Background of the Recapitalization--Reasons for the
Recapitalization."
What Transactions Are Involved in the Common Stock Conversion?
Upon majority vote approval from each series of preferred stock, the
Common Stock Conversion will convert each series of preferred stock, in
accordance with the respective conversion ratios for each Series, into shares of
common stock. If the amendments to our certificate of incorporation are approved
by the holders of a majority of the outstanding shares of common stock and
preferred stock voting together and the other conditions to the recapitalization
are satisfied or waived, the outstanding shares of each respective series of
preferred stock will automatically be converted into shares of our common stock.
The Common Stock Conversion also involves the possibility of additional
shares of common stock being issued with respect to the conversion of Series C
Warrants and William M. Sherman Enterprises Warrants into shares of common stock
on a one-for-one basis.
At the time of conversion of the Series A Preferred Stock into shares
of common stock, Ovation will calculate and issue the number of additional
shares of common stock to which the holders of the Series A Preferred Stock are
entitled as a result of the application of the anti-dilution protection in
connection with issuances of capital stock by Ovation at a purchase price below
the $11.25 per share price paid by the holders of the Series A Preferred Stock.
Is Ovation Products Corporation Willing To Complete Only Part of the
Recapitalization?
Yes. The issuance of additional shares of common stock in conjunction
with the conversion of the preferred stock as involved in the Common Stock
Conversion depends upon the majority voting approval of each series of preferred
stock. Regardless of whether the conversion of the preferred stock is approved
by the preferred stockholders of a particular series of preferred stock, the
preferred stockholders of the remaining series of preferred stock may vote for
the conversion of their respective series of preferred stock into common stock.
Therefore, the complete recapitalization depends upon the conversion of each
series of preferred stock while Ovation may determine to complete only part of
the recapitalization as decided by vote of a majority of each series of
preferred stock. It is possible that certain series may vote in favor of
conversion, while other series will not vote in favor of conversion; we will
convert into common stock those series of preferred stock where a favorable vote
has been obtained, even if all series have not elected to convert.
Will My Ownership of Ovation Products Corporation be Diluted by the Issuance of
Additional Shares of Common Stock in the Recapitalization?
Yes. Since the respective conversion ratios for each series of
preferred stock involve the issuance of more shares of common stock, the
recapitalization will result in dilution. The dilution for a particular
shareholder will vary depending on that shareholder's relative ownership of
different classes of stock, and some shareholders (for example a holder of just
Series C Preferred) will see an increase in their percentage ownership.
What Process Did the Board Use in Deciding to Pursue the Recapitalization?
The decision to pursue the recapitalization was the result of
deliberations by the board of directors. The board of directors held numerous
meetings and considered a variety of alternatives, and unanimously approved the
proposed recapitalization. See "Background of the Recapitalization--Reasons for
the Recapitalization" and "-- Recommendation of the Board of Directors; Fairness
of the Recapitalization."
Has the Board of Directors Recommended That I Vote "FOR" the conversion of the
Preferred Stock into Common Stock?
Yes. The board of directors has unanimously approved the Common Stock
Conversion, including the issuance of additional shares of common stock, and
recommends to the stockholders the approval of the proposal to authorize the
issuance of additional shares of common stock pursuant to the Common Stock
Conversion and the conversion of the preferred stock into common stock. See
"Background of the Recapitalization--Reasons for the Recapitalization."
Does the Board Believe that the Recapitalization is Fair to Existing
Stockholders?
Yes. Although the board of directors did not obtain an appraisal or
fairness opinion from a separate financial advisor, the board believes that the
Common Stock Conversion is both substantively and procedurally fair to the
existing holders of common stock and preferred stock, including the unaffiliated
stockholders of each class or series. The reasons for the board's determination
include:
2
o the holders of common stock may benefit from the recapitalization
notwithstanding the issuance of additional shares of common stock in
the Common Stock Conversion because the recapitalization may
increase our liquidation value per common share; and
o the fact that the Common Stock Conversion will not take place unless
the issuance of additional shares of common stock is approved by the
holders of a majority of the stockholders (both common stock and
preferred stock) present at a meeting of the stockholders of
Ovation, and the fact that because the members of the board of
directors and the executive officers of Ovation hold approximately
41% of the outstanding shares of the common stock at June 30, 2005,
this approval requirement will require substantial support by the
unaffiliated holders of common stock.
See "Background of the Recapitalization--Reasons for the
Recapitalization."
Did the Board of Directors Consider Alternatives to the Common Stock Conversion?
Yes. The board of directors considered several alternatives to the Common
Stock Conversion:
o Liquidation. Wolf & Company, P.C., our independent registered public
accounting firm, has included a going concern qualification in its
audit report on our financial statements for the year ended December
31, 2004. Since inception, we have dedicated our efforts to research
and development activities. We have not generated any revenues from
our operations. To date, we have not commercialized any products and
have produced only prototype versions for testing purposes. At June
30, 2005, we had a working capital deficit of approximately $1.1
million and a stockholders' deficit of $760,239. We have had to
scale back our operations because we have been unable to raise
additional capital on a timely basis. If we are unable to raise
sufficient additional capital to continue our efforts we may be
required to reduce further the scope of our operations or cease our
operations entirely. Currently, our capital structure is quite
complex. The holders of our preferred stock have certain preemptive
and other rights, which make the process of raising additional
capital more challenging for Ovation. We have considered the
possibility of liquidating; however, it is unlikely that we would be
able to realize the full value of our assets, comprised principally
of intellectual property rights and technology know-how, in a
liquidation scenario. Moreover, the substantial majority of our
assets are secured. Given that we are unlikely to conduct a
successful liquidation and our stockholders are unlikely to receive
any distributions in respect of a liquidation, the board of
directors believes that the recapitalization offers existing
stockholders the possibility to benefit from our future success.
o Strategic alternatives. We also have considered the pursuit of
strategic alternatives that would allow us to expand our business.
We have engaged a number of third party financial intermediaries to
assist us with financing and other strategic alternatives. However,
we have been advised that the overall complexity of our capital
structure is an impediment to the successful pursuit of additional
capital raising and to the pursuit of strategic alternatives.
Advanced discussions with venture capital firms also indicated that
it would be necessary to simplify our capital structure.
o No recapitalization. We also have considered the effect of electing
not to restructure our preferred stock. We believe that this
alternative does not solve our long-term need to simplify our
capital structure.
See "Background of the Recapitalization--Reasons for the
Recapitalization."
Will the Recapitalization Result in a Change of Control of Ovation Products
Corporation?
No.
3
Does the Recapitalization Involve any Conflicts of Interest?
Yes. In considering the recommendations of the board of directors, you
should be aware that three of Ovation's eight directors are beneficial owners of
preferred stock and may have interests that conflict with your interests as a
holder of common stock.
Because these directors own preferred stock, their interests in
establishing terms that provide for the receipt of additional shares of common
stock are different from the interests of the holders of common stock, and it is
possible that their recommendations with respect to the Common Stock Conversion
may have been influenced by economic interests not shared by the holders of
common stock.
See "Background of the Recapitalization--Reasons for the
Recapitalization."
Did the Board Retain a Financial Advisor?
No. The board of directors determined that it was unnecessary to hire
an outside financial advisor to evaluate the Common Stock Conversion. As
described above, the board of directors determined that the Common Stock
Conversion was substantively fair to the holders of each series of preferred
stock, to the holders of Ovation's common stock, to the unaffiliated holders of
each series of preferred stock and to Ovation as a whole.
The board of directors also concluded that the Common Stock Conversion
(including the issuance of additional shares of common stock) is procedurally
fair to the unaffiliated holders of common stock and of each series of preferred
stock. The board of directors took into account the fact that because of the
majority voting requirement, the terms of the Common Stock Conversion would be
required to be approved by a majority of holders of each series of preferred
stock, as well as the fact that the issuance of additional shares of common
stock in conjunction with the Common Stock Conversion would be subject to
approval by the holders of a majority of our common stock and preferred stock
present and voting at the special meeting of stockholders.
See "Background of the Recapitalization--Reasons for the
Recapitalization."
When is the Recapitalization Expected to Be Completed?
Subject to the necessary stockholder approvals and satisfaction or
waiver of our closing conditions, we expect the recapitalization (including the
issuance of additional shares of common stock pursuant to the Common Stock
Conversion) to be completed on the day of the meeting of the stockholders, or
shortly after that date.
What are the Benefits of the Stock Split?
The stock split will increase the number of shares of Ovation's common
stock. The board of directors believes that having a larger number of shares of
common stock will be helpful to establish a liquid market once Ovation's common
stock is approved for listing on a securities exchange. However, there
necessarily can be no assurance of this. The proposed stock split will not
change the stockholders' equity, nor would the split affect the relative rights
of any stockholder or result on its own (without considering the impact of the
Common Stock Conversion) in a dilution or diminution of any stockholder's
proportionate interest in Ovation.
The board of directors has unanimously approved the proposed
three-for-one stock split of the common stock, and recommends to the
stockholders the approval of the proposal to authorize the three-for-one stock
split.
What are the Benefits of the Proposed Amendments to the Certificate of
Incorporation?
The proposed amendments to the certificate of incorporation will (a)
effect the stock split, (b) reduce the par value of the common stock and the par
value of the preferred stock, and (c) eliminate the designation of the four
series of preferred stock, increase the authorized shares of common stock and
preferred stock and provide for undesignated preferred stock.
4
Ovation would like to reduce the par value of the common stock from $1.00
per share to $0.01 per share and to reduce the par value of the preferred stock
from $1.00 per share to $0.01 per share in order to reduce the amount of
franchise tax payable to the State of Delaware. The change in the par value of
the common stock and the preferred stock will not in any way affect the rights
of the holders of the common stock or the preferred stock.
If the holders of a majority of each series of preferred stock approve the
conversion of that series of preferred stock into common stock, the proposed
amendments to the certificate of incorporate would eliminate the designation of
the four existing series of preferred stock. This would simplify Ovation's
capital structure. The proposed amendments also would increase the number of
authorized shares of common stock and preferred stock in order to accommodate
all of the proposed changes, as well as to provide flexibility for future
capital raising or strategic transaction. The amendments would provide for blank
check, or undesignated, preferred stock.
The board of directors has unanimously approved the proposed amendments to
the certificate of incorporation and recommends to the stockholders the approval
of the proposal to amend and restate Ovation's certificate of incorporation.
What are the Conditions to Completing the Recapitalization?
The completion of the recapitalization is subject to the following
conditions:
o approval of the amendments to our certificate of incorporation by
the holders of a majority of the outstanding shares of our capital
stock (common stock and preferred stock); and
o approval of the conversion of each series of preferred stock by the
holders of a majority of each series of preferred stock present at
the special meeting.
The recapitalization is also subject to certain general conditions,
including the absence of court or other governmental actions prohibiting the
Common Stock Conversion, general market conditions and the condition of our
business. See "Proposal 1: Conversion of Preferred Stock--Conditions to the
Common Stock Conversion." We are not aware of any factors that would cause the
failure of any of the closing conditions.
See "Proposal 1: Conversion of Preferred Stock--Vote Required" and
"--Conditions to the Common Stock Conversion."
When and Where is the Meeting?
The meeting of stockholders will take place on September __, 2005, at 2:00
p.m., Eastern Time, at Ovation's corporate offices located at 395 East Dunstable
Road, Nashua, New Hampshire. See "Information About the Meeting."
What Will be Voted on at the Meeting?
At the special meeting:
o the preferred stockholders will vote separately by series to approve
the conversion of each series of preferred stock.
o the holders of common stock and the holders of preferred stock will
vote to approve a three-for-one stock split of the common stock.
o the holders of common stock and the holders of preferred stock will
vote to approve amendments to Ovation's certificate of incorporation
to effect the stock split, reduce the par value of the common stock
and the par value of the preferred stock, eliminate the designation
of the four series of preferred stock, increase the authorized
number of shares of common stock and preferred stock and provide for
undesignated preferred stock.
5
o if necessary, the stockholders may be asked to consider adjourning
the meeting in order for Ovation to continue to solicit proxies from
stockholders who have not yet voted or who have not voted in favor
of the proposal to authorize the issuance of additional shares of
common stock and the conversion of the preferred stock.
o the stockholders will transact other business that may come before
the meeting.
See "Information About the Meeting--Voting at the Meeting."
Who is Entitled to Vote?
Only stockholders of record at the close of business on September __, 2005
which is the "Record Date," are entitled to notice of, and to vote at, the
special meeting.
What Stockholder Vote is Required to Approve the Proposals?
Proposal 1 to approve the conversion of the preferred stock must be
approved by a majority of the holders of each series of our preferred stock
voting separately by series. We do not have advance assurances of approval from
the holders of the common stock or from the holders of any series of preferred
stock. We have discussed the recapitalization, including the Common Stock
Conversion, with the holders of a majority of each series of preferred stock
and, as a result of these discussions, we believe that a majority of each series
of preferred stock will vote in favor of the conversion. However, our
preliminary discussions cannot be considered conclusive or final and, therefore,
stockholders may change their mind and vote accordingly based on the entirety of
the information contained within this document.
Proposals 2, 3 and 4 must be approved by the holders of a majority of the
shares of common stock and preferred stock voting together.
See "Information About the Meeting--Record Date, Quorum and Required
Vote."
What Do I Need To Do Now?
First, read this proxy statement carefully. Then, you should complete,
sign and mail your proxy card in the enclosed return envelope as soon as
possible. See "Information About the Meeting--Voting at the Meeting."
May I Change My Vote After I Have Mailed In My Signed Proxy Card Or Otherwise
Voted?
Yes. To change your vote you can:
o send in a later-dated, signed proxy card or a written revocation
before the meeting, or
o attend the meeting and give oral notice of your intention to vote in
person.
You should be aware that simply attending the meeting will not in and of
itself constitute a revocation of your proxy. See "Information About the
Meeting--Revocation of Proxies."
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you have any questions concerning the proposals or if you would like
additional copies of the proxy statement, please call us at (603) 891-3224. The
summary information provided above in "question and answer" format is for your
convenience only and is merely a brief description of material information
contained in this proxy statement. You should carefully read this proxy
statement in its entirety, including the proposed Amended and Restated
Certificate of Incorporation of Ovation in Appendix A.
6
PROXY STATEMENT
INFORMATION ABOUT THE MEETING
This proxy statement is being furnished to all holders of common stock
and preferred stock of Ovation Products Corporation in connection with the
solicitation by its board of directors of proxies to be used at the special
meeting of stockholders to be held on September __, 2005 at 2:00 p.m., Eastern
time, at Ovation's corporate offices, located at 395 East Dunstable Road,
Nashua, New Hampshire, and at any adjournments thereof. This proxy statement is
first being mailed to stockholders on or about August __, 2005.
Voting at the Meeting
Regardless of the number of shares of common stock or preferred stock
owned, it is important that stockholders be represented by proxy or present in
person at the special meeting. A proxy card is enclosed. Stockholders are
requested to vote by completing the proxy card and returning it signed and dated
in the enclosed postage-paid envelope. Stockholders are urged to indicate their
vote in the spaces provided on the proxy card. Proxies solicited by the board of
directors of Ovation will be voted in accordance with directions given in the
proxy card. Ovation is seeking the approval of a majority of the holders of each
series of preferred stock for the conversion of the preferred stock into shares
of common stock. Where no instructions are indicated, proxies will be voted FOR
the proposal and FOR adjournment, if applicable. Ovation is seeking the approval
of a majority of the holders of common stock and preferred stock for a
three-for-one stock split of the common stock and for amendments to Ovation's
certificate of incorporation to effect the stock split, reduce the par value of
the common stock and preferred stock, eliminate the designation of the four
series of preferred stock, increase the authorized shares of common stock and
preferred stock and provide for undesignated preferred stock.
The board of directors knows of no additional matters that will be
presented for consideration at the special meeting. Execution of a proxy,
however, confers on the designated proxy holders discretionary authority to vote
the shares in accordance with their best judgment on such other business, if
any, which may properly come before the special meeting or any adjournments
thereof.
Revocation of Proxies
A proxy may be revoked at any time prior to its exercise by filing
written notice of revocation with the Secretary of Ovation, by delivering to
Ovation a duly executed proxy bearing a later date, or by attending the special
meeting, filing a notice of revocation with the Secretary and voting in person.
However, if you are a stockholder whose shares are not registered in your name,
you will need additional documentation from the record holder of your shares to
vote personally at the meeting.
Solicitation of Proxies
The cost of solicitation of proxies in the form enclosed will be borne
by Ovation. Proxies also may be solicited personally or by telephone, or by
directors, officers, and regular employees of Ovation, without additional cost
to us. We have not engaged a proxy solicitor. We also will request persons,
firms and corporations holding shares in their names, or in the name of their
nominees, which are beneficially owned by others, to send proxy material to and
obtain proxies from such beneficial owners, and will reimburse such holders for
their reasonable expenses in doing so.
Record Date, Quorum and Required Vote
The securities that may be voted at the special meeting consist of
shares of common stock, with each share entitling its owner to one vote on all
matters to be voted on at the meeting, and shares of preferred stock, with each
share entitling its owner to one vote on all matters to be voted on at the
meeting; however, each series of preferred stock also will vote separately by
series for the conversion into common stock of that series.
7
The close of business on September __, 2005 has been established by the
board of directors as the record date for the determination of stockholders
entitled to notice of, and to vote at, the special meeting and any adjournments
thereof. As of the record date, there were 794,301 shares of common stock
outstanding.
The presence, in person or by proxy, of at least a majority of the
total number of shares of common stock entitled to vote is necessary to
constitute a quorum at the special meeting. The affirmative vote of the holders
of a majority of the shares of common stock and preferred stock voted on each
action at the meeting will be required to take any action at the special
meeting, including the approval of any adjournment. We will treat shares of
common stock represented by proxies that reflect abstentions as shares that are
present and entitled to vote for the purpose of determining the presence of a
quorum at the special meeting and for the purpose of determining the outcome of
any question submitted to the stockholders for a vote.
For a discussion of the circumstances under which we might seek to
adjourn the special meeting in order to solicit additional proxies in favor of
the proposal to authorize the conversion of the preferred stock, see "Proposal
1: Conversion of Preferred Stock--Possible Adjournment of the Meeting."
8
PROPOSAL 1:
CONVERSION OF PREFERRED STOCK
Conversion of Preferred Stock
Ovation seeks to restructure its capital structure by converting the
shares of each of our series of preferred stock into shares of common stock and
amending its certificate of incorporation. The amendment provides for the
conversion into common stock of all of the outstanding shares of Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock and Series
C Preferred Stock into shares of common stock (the "Common Stock Conversion").
Assuming that all of the outstanding shares of Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock and Series C
Preferred Stock are exchanged for common stock on the date of this proxy
statement, the preferred stockholders will receive, in exchange for their
currently outstanding 1,127,118 shares of preferred stock, an aggregate of
approximately 1,713,348 shares of common stock.
As of June 30, 2005, the directors of Ovation beneficially owned
approximately 100% of the outstanding shares of Series A Preferred Stock (all of
the shares of Series A Preferred Stock are owned by S.J. Electro Systems, Inc.),
15% of the outstanding shares of Series B Preferred Stock, 0% of the outstanding
Series B-1 Preferred Stock and 2% of the outstanding shares of Series C
Preferred Stock. The number of shares of common stock that will be issued to the
directors and their affiliates in the Common Stock Conversion will depend on the
number of shares of preferred stock exchanged for conversion.
Basis of the Common Stock Conversion
The conversion ratio for the Common Stock Conversion is: (a) 1.4 shares
of common stock for each outstanding share of Series A Preferred Stock, (b) 1.2
shares of common stock for each outstanding share of Series B Preferred Stock,
(c) 1.2 shares of common stock for each outstanding share of Series B-1
Preferred Stock, and (d) 1.6 shares of common stock for each outstanding share
of Series C Preferred Stock.
Based on these conversion ratios, a holder of 100 shares of the Series
A Preferred Stock, the Series B Preferred Stock, the Series B-1 Preferred Stock
or the Series C Preferred Stock would receive the following upon the conversion
of his preferred shares:
Number of Shares of
Common Stock into which Number of Shares of
Preferred Stock is Common Stock to be
Original Shares Held Currently Convertible Issued At Meeting
-------------------- --------------------- -----------------
100 shares of Series
A Preferred Stock 100 140
100 shares of Series
B Preferred Stock 100 120
100 shares of Series
B-1 Preferred Stock 100 120
100 shares of Series
C Preferred Stock 100 160
9
No Appraisal Rights
No appraisal or dissenters' rights are available to Ovation's
stockholders with respect to the Common Stock Conversion and Ovation will not
independently provide stockholders with any such rights.
Dividends on the Common Stock and Preferred Stock
We have never declared or paid dividends on our shares of common stock
or our shares of preferred stock.
The holders of common stock are entitled to receive distributions if,
as and when authorized and declared by Ovation's board of directors out of
assets legally available for the payment of distributions. Shares of common
stock have equal distribution rights.
Holders of the preferred stock are entitled to 6% per annum cumulative
dividends, from funds legally available therefor, payable when declared by our
board of directors or upon a liquidation of our Company. Unless full dividends
on the issued and outstanding Series A Preferred Stock, Series B Preferred
Stock, Series B-1 Preferred Stock and Series C Preferred Stock have been paid
for all past dividend periods, no dividends may generally be paid on the common
stock.
Preemptive Rights and Anti-Dilution Provisions
Under certain circumstances, the holders of preferred stock may
currently have preemptive rights to acquire common stock. The holders of common
stock do not have any preemptive rights. Accordingly, once holders of preferred
stock convert their shares, they will no longer have any preemptive rights.
Currently, holders of preferred stock have anti-dilution protection. If
we sell shares of capital stock at a per share price lower than the per share
conversion price applicable to a class of our preferred stock (1) the holders of
the Series A, Series B and Series B-1 Preferred Stock are entitled to a weighted
average anti-dilution protection adjustment and (2) the holders of our Series C
Preferred Stock are entitled to an adjustment of the conversion price of the
Series C Preferred Stock held by them to the price at which such sale occurs.
Vote Required by Holders of the Common Stock
If the proposal is approved by the holders of a majority of the shares
of common stock and a majority of the shares of preferred stock voted at the
meeting, if a quorum is present, and all other closing conditions are satisfied,
including receipt of the necessary approval from each series of preferred stock
for the conversion of that series, the Common Stock Conversion will be
consummated and the shares of each series of preferred stock outstanding
following the stockholders meeting will automatically be converted into shares
of our common stock. Each share of common stock outstanding on the record date
for the special meeting is entitled to one vote.
Vote Required by Holders of each Series of Preferred Stock
The holders of our preferred stock are entitled to vote with the
holders of our common stock on an as-converted basis, assuming a one-for-one
conversion, on all matters brought to a vote of common stockholders.
Accordingly, we will require that a majority of the holders of our common stock
and the preferred stock voting together approve the amendment to our certificate
of incorporation in conjunction with the Common Stock Conversion. In addition,
the majority of the outstanding shares of each series of our preferred stock are
entitled to vote separately as a series in connection with any action that may
adversely affect such series. Consequently, we will require that a majority of
the outstanding shares of each series of preferred stock, voting separately by
series, votes in favor of a conversion of such series into common stock.
Fees and Expenses
The estimated fees and expenses payable by Ovation in connection with
the Common Stock Conversion and the other proposals are set forth in the table
below:
10
LEGAL, ACCOUNTING AND OTHER PROFESSIONAL FEES $ 10,000
PRINTING AND MAILING COSTS .................. 5,000
MISCELLANEOUS ............................... 1,000
------------
TOTAL ....................................... $ 16,000
Ovation will be responsible for all fees and expenses incurred by it in
connection with the special meeting.
Conditions to the Common Stock Conversion
We will not complete the Common Stock Conversion (including the conversion
of the preferred stock) unless the following conditions are satisfied:
o The conversion of each series of preferred stock is approved by a
majority of the holders of the applicable series of preferred stock.
o The amendments to Ovation's certificate of incorporations are
approved by a majority of the holders of the common stock and
preferred stock voting together present at a meeting of the holders
of the common stock and preferred stock at which a quorum is
present.
Board Recommendation
After careful consideration, Ovation's board of directors determined that
the conversion to common stock of all outstanding shares of Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock and Series C
Preferred Stock is advisable and in the best interests of Ovation and its
stockholders, and is fair to all of its stockholders, including its unaffiliated
stockholders of each series or class, and directed that the proposal to
authorize the conversion and the issuance of additional shares of common stock
be submitted to Ovation's stockholders for their approval. Ovation's board of
directors recommends that you vote "FOR" the proposal.
Possible Adjournment of the Meeting
In addition to being asked to vote on whether to authorize the issuance of
additional shares of common stock pursuant to the Common Stock Conversion and,
in the case of each series of preferred stockholders, on whether to authorize
the conversion of that series of preferred stock into common stock, the
stockholders also are being asked to grant a proxy giving the proxy holders the
authority to vote their shares in favor of an adjournment of the special
meeting. Although we have attempted to allow sufficient time for stockholders to
submit their proxies to Ovation, we are concerned that an adjournment of the
meeting might be necessary in order to give us the opportunity to solicit
additional proxies in favor of the proposal. We do not know whether an
adjournment will be necessary, and will not seek an adjournment if a sufficient
number of proxies in favor of the proposal have been received on or prior to the
date of the special meeting. Ovation's board of directors recommends that you
vote "FOR" Proposal 4.
11
PROPOSAL 2:
AUTHORIZATION TO SPLIT THE OUTSTANDING COMMON STOCK ON A THREE-FOR-ONE-BASIS
The board of directors believes that it is necessary to split our
outstanding common stock on a three-for-one basis. The board believes that this
will be helpful in providing more liquidity once Ovation's common stock is
approved for listing on a securities exchange. The board of directors intends to
implement the stock split immediately upon approval by the stockholders.
However, if the Common Stock Conversion is approved, the stock split will be
implemented following the Common Stock Converstion.
Implementation and Effects of the Stock Split
Once the authorized number of shares of common stock is increased, in
order to implement the proposed three-for-one stock split, we will file an
Amended and Restated Certificate of Incorporation in the form set forth as
Appendix A to this Proxy Statement with the Delaware Secretary of State.
The Amended and Restate Certificate of Incorporation would specify that,
on its filing, each share of common stock outstanding would automatically be
converted into three shares.
No Effect on Percentage of Ownership
The completion of a three-for-one stock split would not affect any
stockholder's proportionate equity interest in Ovation. By way of example, a
stockholder who owns a number of shares that prior to the stock split
represented one percent of the outstanding shares of Ovation would continue to
own one percent of its outstanding shares after the stock split, although
thereafter, the number of shares held would be increased.
The stock split will not affect the number of shares of common stock that
the board of directors is authorized to issue by the certificate of
incorporation, which would remain unchanged at 8,000,000 shares. Assuming there
are 2,525,385 shares of common stock outstanding following the conversion of the
preferred stock, or immediately prior to the time the stock split was to take
place, post-split there would be 7,576,155 shares issued and outstanding, and
Ovation would be authorized to issue as many as 423,845 additional shares,
including shares issuable to warrant and option holders. However, the stock
split will have the effect of decreasing the number of shares available for
future issuance because of the increase in the number of shares that will be
outstanding after giving effect to the stock split. As part of Proposal 3,
Ovation is seeking approval for an amendment to the certificate of incorporate,
which would, among other things, increase the number of authorized shares of
common stock.
Appraisal Rights
No appraisal rights are available under the Delaware General Corporation
Law or under our amended and restated certificate of incorporation or bylaws to
any stockholder who dissents from the proposal to approve the amendment to
effect the stock split.
Effect of Split on Options and Other Rights to Acquire Common Stock
The number of shares subject to outstanding options and other rights to
purchase shares of the common stock would also automatically be increased at the
three-for-one ratio. Correspondingly, the per share exercise price of those
options will be decreased by a factor of 33% in direct proportion to the stock
split ratio, so that the aggregate dollar amount payable for the purchase of the
shares subject to the options or other purchase rights will remain unchanged.
For example, if the three-for-one stock split is implemented and an optionee
holds options to purchase 1,000 shares at an exercise price of $1.00 per share,
on the effectiveness of the stock split, the number of shares subject to that
option would be increased to 3,000 shares and the exercise price would be
proportionately decreased to $0.33 per share.
12
Exchange of Stock Certificates
The split of, and increase in, the number of the Company's outstanding
shares as a result of the stock split will occur automatically on the date that
the amendment is filed with the Delaware Secretary of State (the "Effective
Date"), without any action on the part of the Company's stockholders and without
regard to the date that stock certificates representing the shares prior to the
stock split are physically surrendered for new stock certificates.
As soon as practicable after the Effective Date, transmittal forms will
be mailed to each holder of record of certificates for shares of the common
stock to be used in forwarding such certificates for surrender and exchange for
certificates representing the number of shares of the common stock such
stockholder is entitled to receive as a result of the stock split. The
transmittal forms will be accompanied by instructions specifying other details
of the exchange. Upon receipt of such transmittal form, each stockholder should
surrender the certificates representing shares of the common stock prior to the
stock split in accordance with the applicable instructions. Each holder who
surrenders certificates would receive new certificates representing the number
of shares of the common stock that he, she or it holds as a result of the stock
split.
Stockholders Should Not Send Their Stock Certificates Until They Receive a
Transmittal Form
After the Effective Date, each certificate representing shares of the
common stock outstanding prior to the Effective Date (an "Old Certificate")
would, until surrendered and exchanged as described above, be deemed, for all
corporate purposes, to evidence ownership of the whole number of shares of the
common stock into which the shares of the common stock evidenced by such
certificate have been converted by the stock split. However, the holder of such
unexchanged certificates will not be entitled to receive any dividends or other
distributions payable by Ovation after the Effective Date until the Old
Certificates have been surrendered. Such dividends and distributions, if any,
will be accumulated, and at the time of surrender of the Old Certificates, all
such unpaid dividends or distributions will be paid without interest.
Certain Federal Income Tax Consequences
The following discussion describes certain federal income tax
considerations relating to the stock split. This discussion is based upon the
Internal Revenue Code of 1986, as amended, final, temporary and proposed
regulations promulgated thereunder, legislative history, judicial decisions, and
current administrative rulings and practices, all as amended and in effect on
the date of this Proxy Statement. Any of these authorities could be repealed,
overruled, or modified at any time and could be retroactive and, accordingly,
could cause the tax consequences to vary substantially from the consequences
described herein. No ruling from the Internal Revenue Service (the "IRS") with
respect to the matters discussed herein has been requested, and there is no
assurance that the IRS would agree with the conclusions set forth in this
discussion. All stockholders should consult with their own tax advisors.
This discussion does not address certain federal income tax
consequences that may be relevant to particular stockholders in light of their
personal circumstances (such as persons subject to the alternative minimum tax)
or to certain types of stockholders (such as dealers in securities, insurance
companies, foreign individuals and entities, financial institutions, and
tax-exempt entities) who may be subject to special treatment under the federal
income tax laws. This discussion also does not address any tax consequences
under state, local, or foreign laws.
STOCKHOLDERS ARE ENCOURAGED TO CONSULT THEIR TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE STOCK SPLIT, INCLUDING THE
APPLICABILITY OF ANY STATE, LOCAL, OR FOREIGN TAX LAWS, CHAGNES IN APPLICABLE
TAX LAWS, AND ANY PENDING OR PROPOSED LEGISLATION.
Tax Consequences to the Company. The Company should not recognize any
gain or loss as a result of the stock split.
Tax Consequences to Stockholders Generally. A stockholder who receives
the common stock should not recognize any gain or loss as a result of the stock
13
split. The aggregate tax basis of the shares of the common stock held by a
stockholder following the stock split will equal the stockholder's aggregate tax
basis in the shares of common stock held by the stockholder immediately prior to
the stock split and generally will be allocated among the shares of the common
stock held following the stock split on a pro rata basis.
Required Vote; Recommendation of the Board of Directors
Authorization for an amendment to our certificate of incorporation to
implement a three-for-one stock split in the Company's common stock requires the
affirmative vote of a majority of the outstanding shares entitled to vote.
The board of directors unanimously recommends a vote "FOR" this
Proposal 2.
14
PROPOSAL 3: AUTHORIZATION TO AMEND AND RESTATE THE CERTIFICATE OF INCORPORATION
Ovation is seeking the affirmative vote of the holders of its common stock
and holders of its preferred stock to approve amendments to Ovation's
certificate of incorporation to:
o effect the three-for-one stock split;
o reduce the par value of the common stock from $1.00 to $0.01 per
share of common stock and reduce the par value of the preferred
stock from $1.00 to $0.01 par value per share of the preferred
stock;
o eliminate the designation of the four series of preferred stock (if
approved by the required vote of each series of preferred stock);
o increase the authorized number of shares of common stock to
40,000,000 shares;
o increase the authorized number of shares of preferred stock to
10,000,000; and
o provide for undesignated shares of preferred stock.
Required Vote; Recommendation of the Board of Directors
Authorization for an amendment to the certificate of incorporation
requires the affirmative vote of a majority of the outstanding shares entitled
to vote.
In an effort to reduce expenditures for annual franchise taxes to the
State of Delaware, the board of directors unanimously approved the reduction of
the par value of the common stock and the preferred stock. The reduction in the
par value of the common stock and the preferred stock will not affect the rights
of the holders of such securities.
If the holders of a majority of each series of preferred stock vote to
approve the conversion of their shares of preferred stock to common stock,
Ovation will amend the certificate of incorporation to eliminate all authorized
shares of previously designated preferred stock. Ovation also will amend the
certificate of incorporation to include 10,000,000 shares of preferred stock,
which will remain undesignated. The amendment to the certificate of
incorporation will increase the authorized number of shares of common stock to
40,000,000.
In order to effect all of the proposed amendments to the certificate of
incorporation, if approved, Ovation will file with the Delaware Secretary of
State an amended and restated certificate of incorporation substantially in the
form included as Appendix A to this proxy statement. You should review carefully
the proposed amended and restated certificate of incorporation, which is
included as Appendix A to this proxy statement.
The board of directors unanimously approved these changes to Ovation's
certificate of incorporation and recommends that you vote "FOR" this Proposal 3.
15
DESCRIPTION OF OUR CAPITAL STOCK
As of the date of this proxy statement, we have 8,000,000 authorized
shares of common stock, $1.00 par value per share, and 2,000,000 authorized
shares of preferred stock, $1.00 par value per share. Of the 2,000,000
authorized shares of preferred stock, we have 200,000 authorized shares of
Series A Preferred Stock, 300,000 authorized shares of Series B Preferred Stock,
300,000 authorized shares of Series B-1 Preferred Stock and 775,000 authorized
shares of Series C Preferred Stock.
As of the date of this proxy statement, there are 794,301 shares of
common stock, 160,000 shares of Series A Preferred Stock, 294,102 shares of
Series B Preferred Stock, 131,000 Series B-1 Preferred Stock and 542,016 Series
C Preferred Stock outstanding, as well as outstanding warrants and options to
purchase additional shares of capital stock as discussed below.
The following description of capital stock of the Company is qualified
in its entirety by reference to the Company's Second Amended and Restated
Certificate of Incorporation, which has been filed with the SEC.
Capital Stock Following Conversion
If the holders of common stock and preferred stock approve the
amendments to the certificate of incorporation and the holders of a majority of
each series of preferred stock approve the conversion of that series of
preferred stock to common stock, we will adopt an amended and restated
certificate of incorporation substantially in the form that is included as an
appendix to this proxy statement.
If all of the series of preferred stock do not approve the conversion
into common stock, we may choose to effect a partial recapitalization and
convert only those series of preferred stock for which approval was received.
Assuming that all of the series of preferred stock vote to convert into
common stock, our amended and restated certificate of incorporation will provide
for an authorized share capital of 40,000,000 authorized shares of common stock,
$0.01 par value per share, of which 2,525,385 shares of common stock will be
outstanding based on June 30, 2005 outstanding capital stock, and 10,000,000
authorized shares of preferred stock, $0.01 par value per share, none of which
will be outstanding. All of the shares of preferred stock will remain
undesignated. These share numbers do not reflect the proposed three-for-one
stock split.
Our board of directors will have the power to issue the shares of
preferred stock from time to time in one or more series or classes and fix the
designations, preferences, conversion rights or other rights, including voting
rights, and the qualifications, limitations or restrictions thereof, without
further action by our stockholders, except as may be required by applicable law
or pursuant to the requirements of any exchange upon which our securities are
then trading.
Our board of directors believes that our ability to issue shares of
preferred stock will provide us with maximum flexibility in capital raising
transactions, as well as in connection with structuring potential acquisitions,
joint ventures and strategic alliances. Our board of directors also believes
that our ability to issue shares of our preferred stock will enable us to
respond quickly to, and take advantage of, market conditions and other favorable
opportunities without incurring the delay and expense associated with calling a
special stockholders' meeting to approve any contemplated stock issuance. At
this time, we have no specific agreements, commitments or plans for the issuance
of shares of preferred stock, although opportunities for issuance could arise at
any time.
The holders of our common stock will not have any preemptive rights or
anti-dilution protection. It is not possible to determine the actual effect of
the designation of a class or a series of preferred stock on the rights of the
holders of common stock until our board of directors determines the rights of
the holders of such class or series of preferred stock.
16
Common Stock
The holders of our common stock:
o have rights, subordinate to those of the holders of our preferred
stock, to share ratably in dividends from funds legally available
therefor, when, as and if declared by our board of directors;
o are subject to the liquidation preferences of holders of our
preferred stock and are entitled to share ratably, with the holders
of our preferred stock on an as converted basis, in all of the
assets of our Company available for distribution to holders of our
common stock upon liquidation, dissolution or winding up of the
affairs of our Company, following the satisfaction of the
liquidation preferences of holders of our preferred stock;
o do not have preemptive, anti-dilution, subscription or conversion
rights and do not enjoy any redemption or sinking fund provisions
applicable thereto; and
o are entitled to one vote per share on all matters on which
stockholders may vote at all meetings of stockholders.
All shares of our common stock now outstanding are fully paid and
nonassessable.
The holders of our common stock do not have cumulative voting rights,
which means that the holders of more than 50% of such outstanding shares voting
for the election of directors can elect all of the directors of our Company if
they so choose. In such event, the holders of the remaining shares will not be
able to elect any of our directors.
Our payment of dividends, if any, in the future rests within the
discretion of the board of directors and will depend, among other things, upon
our earnings, capital requirements and financial condition, as well as other
relevant factors. We have never paid or declared a dividend on our capital
stock, and due to our anticipated financial needs and future plans, we do not
contemplate paying any dividends upon our capital stock in the foreseeable
future.
The rights associated with our common stock will not change as a result of
the proposed amendment to our certificate of incorporation.
Current Preferred Stock
The holders of our outstanding preferred stock have equal ratable rights
to six percent (6%) per annum cumulative dividends, from funds legally available
therefor, payable when declared by our board of directors or upon a liquidation
of our Company. The holders of our preferred stock are entitled to receive their
proportionate share, on an "as-converted" basis, prior to any dividend declared
on our common stock. We have never declared a dividend on any shares of our
preferred stock.
In the event of any liquidation and distribution of the assets of our
Company, the holders of our preferred stock will be entitled to receive all
accrued and unpaid dividends prior to payment to holders of common stock.
Remaining assets, if any, will then be distributed pro rata to the holders of
our preferred stock and common stock, counting preferred stock on an
"as-converted" basis. In the event that the available assets of our Company are
insufficient to pay the preferred dividend on all outstanding shares of
preferred stock, the holders of preferred stock will share in any distribution
in proportion to their respective accrued and unpaid preferred dividend.
Shares of our preferred stock are convertible at the option of the holder
thereof into shares of our common stock at any time on a share-for-share basis
and upon the occurrence of a reorganization by our Company that entitles holders
of our common stock to receive stock, securities or assets with respect to or in
exchange for shares of our common stock, the holders of our preferred stock will
be treated as having exercised their conversion right immediately prior to the
consummation of such reorganization.
In the event that we sell shares of capital stock at a per share price
lower than the per share conversion price applicable to a class of our preferred
stock: (1) the holders of the Series A, Series B and Series B-1 Preferred Stock
17
are entitled to a weighted average anti-dilution protection adjustment and (2)
the holders of our Series C Preferred Stock are entitled to an adjustment of the
conversion price of the Series C Preferred Stock held by them to the price at
which such sale occurs.
Our preferred stock is not redeemable.
Holders of our Series A Preferred Stock are entitled to elect two members
of our board of directors. On all matters submitted for a vote of our
stockholders, other than those described below, holders of the Series C
Preferred Stock will vote (on an "as-converted" basis) with holders of our
common stock and other outstanding series of preferred stock.
In addition to any other consent required by law, without the consent of
the holders of a majority of the outstanding shares of our Series A Preferred
Stock, we may not:
o authorize or designate any shares having priority over the Series A
Preferred Stock or ranking on a parity therewith as to dividends or
distribution of assets upon any liquidation of our Company,
o with respect to our common stock, make any redemption, repurchase or
payment of dividends or other distribution (with an exception for
certain common stock repurchases),
o amend our Second Amended and Restated Certificate of Incorporation
or Bylaws so as to adversely affect any existing provision relating
to the rights of the holders of our Series A Preferred Stock, or
o voluntarily dissolve or liquidate our Company.
In addition to any other consent required by law, without the consent of
the holders of a majority of the outstanding shares of our Series C Preferred
Stock, Series B-1 Preferred Stock and Series B Preferred Stock voting together
as a class, we may not:
o authorize or designate any shares having priority over the Series C
Preferred Stock, Series B-1 Preferred Stock or Series B Preferred
Stock or ranking on a parity therewith as to dividends or
distribution of assets upon any liquidation of our Company,
o with respect to our common stock, make any redemption, repurchase or
payment of dividends or other distribution (with an exception for
certain common stock repurchases),
o amend our Second Amended and Restated Certificate of Incorporation
or Bylaws so as to adversely affect any existing provision relating
to the rights of the holders of our Series C preferred stock, Series
B-1 Preferred Stock or Series B Preferred Stock, or
o voluntarily dissolve or liquidate our Company.
These provisions of our current preferred stock will be eliminated upon
conversion of the preferred stock into common stock.
Additional Rights of Holders of Current Preferred Stock
In connection with the sale of the Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock and Series C Preferred Stock,
holders of Series A Preferred Stock, Series B Preferred Stock, Series B-1 and
Series C Preferred Stock entered into the Third Amended and Restated Investor
Rights Agreement, whereby we granted such holders certain "piggyback"
registration rights on any registration statement filed by us, except for
registration statements on Forms S-4 or S-8. The holders of the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock and Series
C Preferred Stock will continue, following conversion of their shares of
preferred stock, to have registration rights related to the underlying shares of
common stock.
18
In connection with the sale of the Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock and Series C Preferred Stock,
holders of Series A Preferred Stock, Series B Preferred Stock, Series B-1
Preferred Stock and Series C Preferred Stock also were granted a right of first
refusal and co-sale rights on shares of our common stock held by certain
officers and directors. Pursuant to the Third Amended and Restated First Refusal
and Co-Sale Agreement, if such holders of common stock desire to transfer their
shares of common stock, a holder must first offer the shares to us and then to
the holders of Series A Preferred Stock, Series B Preferred Stock, Series B-1
Preferred Stock, Series C Preferred Stock and other holders of common stock. If
we or the holders of Series A Preferred Stock, Series B Preferred Stock, Series
B-1 Preferred Stock and Series C Preferred Stock decline to purchase the offered
shares and intend to sell such offered shares, the holders of Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock and Series C
Preferred Stock are entitled to elect to participate in the transfer of shares
on an as-converted basis. These provisions of our current preferred stock will
be eliminated upon conversion of the preferred stock into common stock.
Stock Options and Warrants
In October 2004, the Company's stockholders approved an increase in the
stock option pool from 350,000 to 450,000 shares. At June 30, 2005, we had
outstanding options to purchase up to 443,762 shares of common stock granted
under our 1999 Stock Option Plan, and an additional 6,238 shares available under
the plan for future grants of stock options.
At June 30, 2005, the Company had outstanding warrants to purchase 72,000
shares of common stock at $2.50 per share, warrants to purchase 302,964 shares
of common stock at $5.00 per share, warrants to purchase 200,000 shares of
common stock at $6.00 per share, and warrants to purchase 210,600 shares of
Series C Preferred Stock at $5.00 per share.
The holders of our warrants have no right to vote in respect of the
recapitalization. As required pursuant to the various warrant agreements, we
have provided notices to our warrant holders regarding the setting of a record
date for this special meeting of stockholders.
19
FORWARD-LOOKING STATEMENTS
Any statements in this proxy statement and the documents incorporated by
reference in and attached to this proxy statement about our expectations,
beliefs, plans, objectives, assumptions or future events or performance are not
historical facts and are forward-looking statements. These statements are often,
but not always, made through the use of words or phrases such as "believe,"
"will likely result," "expect," "will continue," "anticipate," "estimate,"
"intend," "plan," "projection," "would" and "outlook." Accordingly, these
statements involve estimates, assumptions and uncertainties which could cause
actual results to differ materially from those expressed in them. Any
forward-looking statements are qualified in their entirety by reference to the
factors discussed throughout this proxy statement. Such statements may include,
but not be limited to:
o estimates of the value of our preferred stock,
o predictions as to whether we attain product sales,
o our ability to continue as a going concern,
o our ability to achieve profitability,
o our ability to raise additional funds,
o our ability to manufacture our product on a commercial scale,
o our ability to protect our proprietary rights, and
o the existence of a liquid market for our securities.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward looking statements. Statements in this proxy
statement describe factors, among others, that could contribute to or cause such
differences. You should not place undue reliance on any such forward-looking
statements. Further, any forward-looking statement speaks only as of the date on
which it is made, and we undertake no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events.
SUMMARY FINANCIAL INFORMATION
We have filed and incorporate herein by reference our audited consolidated
financial statements for the years ended December 31, 2003 and 2004 included as
part of our registration statement on Form 10-SB. These financial statements
should be read in conjunction with the information included in the section of
the Form 10-SB captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
20
BACKGROUND OF THE RECAPITALIZATION
General
At the special meeting, you will be asked to consider and approve the
issuance of additional shares of Ovation's common stock pursuant to an important
recapitalization transaction intended to simplify our capital structure. Holders
of our preferred stock will be asked to consider and approve the conversion of
their preferred stock into common stock. The recapitalization involves the
conversion of the shares of each of our series of preferred stock (Series A,
Series B, Series B-1 and Series C) into shares of common stock (the "Common
Stock Conversion"). As a result, we are seeking the approval by the holders of
common stock and by the holders of each series of our preferred stock of the
amendment of Ovation's certificate of incorporation in order to implement the
Common Stock Conversion.
If the amendment to the certificate of incorporation authorizing the
conversion of any outstanding shares of Series A, Series B, Series B-1 and
Series C Preferred Stock into common stock is approved and the issuance of
additional shares of common stock is approved, the Common Stock Conversion
(including the issuance of additional shares of common stock) is expected to be
completed and become effective as soon as practicable following the special
meeting.
The Common Stock Conversion is part of an important recapitalization
transaction that is intended to simplify Ovation's capital structure in order to
enhance our ability to access the capital markets to raise additional funds, to
pursue strategic alternatives and to enhance overall stockholder value. If the
recapitalization is completed successfully, the four existing series of
preferred stock will be eliminated.
Regardless of whether the conversion of the preferred stock is approved
by the preferred stockholders of a particular series of preferred stock, the
preferred stockholders of the remaining series of preferred stock may vote for
the conversion of their respective series of preferred stock into common stock.
Therefore, the complete recapitalization depends upon the conversion of each
series of preferred stock while Ovation may determine to complete only part of
the recapitalization as decided by vote of a majority of each series of
preferred stock.
Reasons for the Recapitalization
The board of directors believes that we need to simplify our capital
structure in order to be able to have greater flexibility in accessing the
capital markets and in pursuing strategic alternatives.
We need to raise additional funds in order to continue our operations.
Wolf & Company, P.C., our independent registered public accounting
firm, has included a going concern qualification in its audit report on our
financial statements for the year ended December 31, 2004. Since inception, we
have dedicated our efforts to research and development activities. We have not
generated any revenues from our operations. To date, we have not commercialized
any products and have produced only prototype versions for testing purposes. At
June 30, 2005, we had a working capital deficit of approximately $1.1 million
and a stockholders' deficit of $760,239. We have had to scale back our
operations because we have been unable to raise additional capital on a timely
basis. If we are unable to raise sufficient additional capital to continue our
efforts we may be required to reduce further the scope of our operations or
cease our operations entirely.
We believe that if we liquidate our assets we may receive significantly
less than the values at which they are carried on our financial statements. Most
of our assets are intangible in nature and are comprised principally of our
21
intellectual propriety portfolio and our technology know-how. It is unlikely
that we will be able to conduct a successful liquidation given the nature of our
assets. Moreover, the substantial majority of our assets are secured. Any
shortfall in the proceeds from a liquidation of our assets will reduce the
amounts available to our preferred stockholders (in order of priority among the
series of preferred stock) and, then, to our common stockholders.
We believe that our efforts to raise additional capital have been
hampered in large part as a result of our complex capital structure. Currently,
we are an emerging development stage company, yet we have four series of
preferred stock and various outstanding warrants, some of which are exercisable
for common stock and some of which are exercisable for shares of Series C
Preferred Stock. As we discuss in the section titled "Description of Capital
Stock," the holders of the various series of preferred stock currently have
preemptive and other rights, including rights of first refusal, as well as
anti-dilution protection. The existence of these various rights, many of which
require us to obtain the prior consent of the holders of the outstanding
preferred stock prior to attempting a financing transaction, have the effect of
limiting the Company from financing opportunistically. As a small company, we
generally are required to incur the time and expense associated with contacting
all of the holders of our preferred stock in connection with every possible
financing opportunity to solicit their interest in participating in such a
financing. Moreover, as we have indicated in our communications with
stockholders, we recently incurred the time and expense associated with becoming
a reporting company by filing a registration statement on Form 10-SB with the
SEC. We intend to seek to have our common stock included for quotation on the
Nasdaq's Over-the-Counter Bulletin Board system or on the Pink Sheets. We
believe that by providing a securities exchange on which our common stock will
be traded, we will be able to provide some liquidity for our holders. We cannot
assure you that a liquid market for our securities will develop if our
securities are accepted for quotation. In addition, we believe that we will have
greater flexibility in accessing the capital markets if there is a market for
our securities. However, we cannot realize the full benefits associated with a
public trading market for our securities if we continue to maintain the existing
web of rights associated with our outstanding preferred stock.
Recommendation of the Board of Directors; Fairness of the Recapitalization
The board of directors has considered the Company's need for additional
capital and has assessed the Company's current ability to raise capital through
equity offerings, strategic alliances and other financing vehicles. The report
of the Company's independent registered public accounting firm in connection
with the financial statements for the year ended December 31, 2004 include a
going concern qualification, raising substantial doubt regarding the Company's
ability to continue as a going concern without raising significant additional
capital. The board of directors also has considered the possibility of a
liquidation. Given the nature of the Company's assets, the board of directors
does not believe that a liquidation is likely to return any value to the holders
of its preferred stock and to the holders of its common stock. Moreover, the
substantial majority of our assets are secured. Over the short-term, in order to
conserve its resources, the Company and its management have slowed the Company's
research and development efforts. This has resulted in delays in delivering
prototypes to the Company's manufacturing partners. The Company's founder and
Chairman of the Board, its current Chief Executive Officer and its President
have foregone payment of their salaries during portions of 2005.
The board of directors reviewed and considered the terms of the
recapitalization and unanimously recommended the approval of those terms,
including the issuance of additional shares of common stock as a result of the
Common Stock Conversion. The board of directors has determined that the
recapitalization is both substantively and procedurally fair to Ovation's
unaffiliated preferred stockholders of each series and is advisable and in the
best interests of Ovation and its stockholders, and recommends that Ovation's
stockholders vote to authorize the issuance of additional shares of common stock
in connection with the Common Stock Conversion and that each series of preferred
stock vote to authorize the Common Stock Conversion. The determination of the
established conversion ratios for the conversion of each respective series of
preferred stock into common stock involved consideration by the Board of the
following: the prices paid by common and preferred stockholders for their
respective shares, the dates on which those investments were made, the
liquidation preferences of the preferred stock, the degree of anti-dilution
protection and the relative base prices of that protection, and other features
and rights pertaining to each series of preferred stock.
Given the Company's current financial constraints, the board of
directors did not retain the services of a financial advisor to render an
opinion as to the fairness of the recapitalization transaction.
Although the board of directors did not obtain an appraisal or fairness
opinion from a separate financial advisor, the board believes that the Common
Stock Conversion is both substantively and procedurally fair to the existing
holders of common stock and preferred stock, including the unaffiliated
stockholders of each class or series. The reasons for the board's determination
include:
22
o the holders of common stock may benefit from the recapitalization
notwithstanding the issuance of additional shares of common stock in
the Common Stock Conversion because the recapitalization may
increase our liquidation value per common share; and
o the fact that the common stock conversion will not take place unless
the issuance of additional shares of common stock is approved by the
holders of a majority of the stockholders (both common stock and
preferred stock) present at a meeting of the stockholders of
Ovation, and the fact that because the members of the board of
directors and four executive officers of Ovation hold approximately
41% of the outstanding shares of the common stock, this approval
requirement will require substantial support by the unaffiliated
holders of common stock.
Interests of Ovation's Directors and Affiliated Parties in the Recapitalization
In considering the recommendations of the board of directors, you should
be aware that three of Ovation's eight directors are beneficial owners of
Preferred Stock and may have interests that conflict with your interests as a
holder of the common stock.
Because these directors own preferred stock, their interests in
establishing terms that provide for the receipt of additional shares of common
stock are different from the interests of the holders of common stock, and it is
possible that their recommendations with respect to the Common Stock Conversion
may have been influenced by economic interests not shared by the holders of
common stock.
EFFECT OF THE COMMON STOCK CONVERSION ON THE COMMON STOCK
The holders of our four series of preferred stock currently have the
option to convert their existing preferred shares for shares of our common stock
on a one-for-one basis. In order to create an incentive for the holders of our
outstanding preferred stock to convert their shares into common stock in
connection with the proposed recapitalization, the board of directors approved a
beneficial conversion ratio. If the holders of a majority of each series of
preferred stock approve the conversion of their series into shares of common
stock, we will issue a significant number of additional shares of our common
stock for no additional consideration.
Assuming that all of the outstanding shares of Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock and Series C Preferred
Stock are exchanged for common stock, the Preferred Stockholders will receive,
in exchange for their currently outstanding 1,127,118 shares of preferred stock,
an aggregate of approximately 1,713,348 shares of common stock and the Series A
Preferred Stockholders will receive an additional 82,736 shares of common stock
pursuant to their anti-dilution rights at June 30, 2005.
In addition, the holders of Series C Warrants and the holders of William
M. Sherman Enterprises Warrants are being given the opportunity to convert their
warrants into common stock on a one-to-one basis with no additional payment,
provided the Series C Preferred stockholders approve the Common Stock
Conversion.
The issuance of these additional shares of common stock will result in
substantial dilution to our existing holders of common stock.
Nonetheless, despite the substantial dilution, the board of directors
believes that the recapitalization will benefit existing holders of our common
stock for the following reasons:
o The elimination of the four series of preferred stock outstanding
will simplify Ovation's capital structure and should create improved
opportunities for Ovation access the capital markets, to engage in
strategic transactions and/or reinvest in business activities.
o Because we are not using cash to effect the Common Stock Conversion,
the recapitalization will permit us to accomplish our objectives
while retaining cash for strategic initiative purposes.
23
The board of directors believes, as discussed above, that it has
considered the various options available to the Company, including a
liquidation, a strategic alliance and not undertaking the recapitalization. In
light of the Company's need for additional financing, and the constraints
imposed by the Company's complex capital structure on its ability to finance
opportunistically, the board of directors believes that it must undertake the
recapitalization. The board of directors believes that, given the nature of the
Company's assets, a liquidation would be unlikely to result in a return of any
investment to the holders of the common stock, who would only receive a
distribution following payment of the preference in liquidation of the holders
of the four series of preferred stock.
EFFECT OF THE COMMON STOCK CONVERSION ON THE PREFERRED STOCK
Currently, in addition to the right to receive a liquidation preference,
the holders of the preferred stock have certain preemptive and other rights. We
describe these rights under "Description of Capital Stock." All of these rights,
other than the registration rights, will terminate upon a conversion of the
preferred stock into common stock.
24
CAPITALIZATION
The following table sets forth our capitalization at June 30, 2005. Our
capitalization is presented:
o on an actual basis; and
o on an as adjusted basis assuming that (1) the holders of our common
stock and our preferred stock approve the amendment to our
certificate of incorporation; and (2) a majority of the holders of
each series of our preferred stock approve the conversion of their
preferred stock into common stock. We have not given effect to the
exchange of any warrants in this table.
You should read this table in conjunction with the entire proxy statement
and the amendment to our certificate of incorporation included as an appendix to
this proxy statement. This table does not reflect the proposed three-for-one
stock split.
June 30, 2005
----------------------------
(unaudited)
----------------------------
Actual As Adjusted
------------ ------------
Current assets:
Cash and cash equivalents ................................................... $ 293,324 $ 293,324
============ ============
Total current liabilities ........................................................ 1,397,923 1,397,923
Stockholders' deficit:
Series A Preferred Stock, $1.00 par value; 200,000 shares authorized;
160,000 shares issues and outstanding (preference in liquidation of
$441,315 at June 30, 2005) actual; none as adjusted ......................... 1,746,968 --
Series B Preferred Stock, $1.00 par value, 300,000 shares authorized;
294,102 shares issued and outstanding (preference in liquidation of $250,741
at June 30, 2005) actual; none as adjusted .................................. 1,379,205 --
Series B-1 Preferred Stock, $1.00 par value; 300,000 shares authorized;
131,000 shares issued and outstanding (preference in liquidation of $84,239
at June 30, 2005) actual; none as adjusted .................................. 607,290 --
Series C Preferred Stock, $1.00 par value; 775,000 shares authorized; 538,016
shares issued and outstanding (preference in liquidation of $162,826 at June
30, 2005) actual; none as adjusted .......................................... 2,276,759 --
Common stock, $1.00 par value; 8,000,000 shares authorized; 729,301 shares
issued and outstanding at June 30, 2005; 2,442,649 as adjusted .............. 729,301 2,442,649
Additional paid-in capital .................................................. 4,067,192 8,364,066
Deficit accumulated during development stage ................................ (11,566,954) (11,566,954)
------------ ------------
Total stockholders' deficit ................................................. $ (760,239) $ (760,239)
------------ ------------
Total capitalization .................................................... $ 10,806,715 $ 10,806,715
============ ============
25
MANAGEMENT
Name Age Position
- ---- --- --------
William Zebuhr 62 Chairman, Director
Robert MacDonald 60 Chief Executive Officer and Director
William Lockwood 57 President, Chief Operating Officer, Director
Fred Becker 60 Vice-President of Engineering
Dr. Louis Padulo 68 Director
Beverly Shaw 71 Director
Laurie Lewandowski 52 Director
Nathan Fetting 43 Director
Yiannis Monovoukas 44 Director
William Zebuhr
Mr. Zebuhr, the founder of our Company, became Ovation's Chairman in
June 2005. Mr. Zebuhr has been a director since 1996 and previously served as
Chairman from 1996 to December 2001. From 1996 until May 2005, Mr. Zebuhr also
served as Ovation's Chief Executive Officer. From 1992 to 1995, he was
co-founder and President of Dynaproducts, a company that developed the first
motorized dental flosser. The technology was licensed to a major consumer
products company in 1998. From 1985 to 1991 he was the founder, chief
fund-raiser, and CEO of American Thermal Corporation. At American Thermal he
invented and guided the development of the Pressure Transfer Module (PTM), a
revolutionary advance in hot water heater technology which enabled the
development of unpressurized low-cost water heaters. Mr. Zebuhr received a B.A.
and an M.A. in Mechanical Engineering in 1966 from Cornell University. He holds
22 United States patents.
Robert MacDonald
Mr. MacDonald became Ovation's Chief Executive Officer in June 2005.
Mr. MacDonald has been a director since 1996 and was Chairman from January 2002
to May 2005. Since 1997, Mr. MacDonald has been President, Chief Executive
Officer and Chairman of the board of directors of BiosGroup, Inc., a consulting
and software development company founded by Ernst & Young and Dr. Stuart
Kauffman (of the Santa Fe Institute) specializing in the application of
complexity theory for Fortune 500 clients. Mr. MacDonald also is a member of the
board of directors of Commodicast and Genpathway which were founded by BiosGroup
and is a member and the chairman of the board of directors of Nutech Solutions
which acquired the consulting and software development assets of BiosGroup in
2003. Mr. MacDonald received a B.S. in Engineering Physics in 1966 and a M.S. in
Electrical Engineering in 1967 from Cornell University, and a M.B.A. from
Harvard Business School in 1973.
William Lockwood
Mr. Lockwood has been our President, Chief Operating Officer and a
director since April 2000. He had been involved with Ovation on a part-time
basis between 1996 and 1999, after which point he became a full-time employee of
the Company. From 1996 to 2000, he was a Principal of Plexus Research, a leading
26
engineering consulting firm engaged in projects for the electric power industry,
where he specialized in business development strategies and valuations for
emerging technologies. Mr. Lockwood received a B.A. from Michigan State
University in 1970, an M.B.A. from Michigan State in 1971, and passed the New
Hampshire CPA examination in 1992.
Fred Becker
Mr. Becker, our Vice-President of Engineering, joined Ovation in May
2001. From 1998 to 2001, Mr. Becker was President of the Thermo Technologies
division of Thermo Electron Corporation. In that position, he was responsible
for defining and implementing strategic technology and commercialization
business plans for the company, as well as managing the overall business
activities. Specific areas of opportunity focused on creating new products in
the commercial and residential appliance markets. Mr. Becker received a B.S.M.E.
degree from the University of Pittsburgh, a M.S.M.E. from the Massachusetts
Institute of Technology, and a M.B.A. from Northeastern University. He has
authored or co-authored over 60 technical publications and holds 13 United
States patents in various areas.
Dr. Louis Padulo
Dr. Padulo has been a director since June 1998 and Vice Chairman since
May 2004. Since 1997, Dr. Padulo has served as a consultant to several
organizations and is President Emeritus of a highly successful business
incubator, the University City Science Center in Philadelphia. Prior to that, he
was a professor at Stanford before becoming Dean of Engineering at Boston
University, President of the University of Alabama in Huntsville, and CEO of the
University City Science Center in Philadelphia. Dr. Padulo received a B.S. in
Electrical Engineering from Fairleigh Dickinson University, a M.S. in Electrical
Engineering from Stanford University and a Ph.D. from Georgia Institute of
Technology.
Beverly Shaw
Mr. Shaw has been a director since 1998. Since 1995, Mr. Shaw has been
a materials science and project management consultant. The author of numerous
technical papers and the holder of eight patents, Mr. Shaw retired from Raytheon
in 1995 where he managed a central materials center providing development and
problem solving services to other divisions. Previously, he was a Vice President
at the following companies: BTU Engineering Inc., Asoma Chemicals Inc., and
International Materials Inc. Mr. Shaw has received a B.Sc. in Metallurgy and a
Licentiate of the Institution of Metallurgists from London University in 1956.
Mr. Shaw also attended Harbridge House for Engineering Management and Advanced
Management in 1974.
Laurie Lewandowski
Ms. Lewandowski has been a director since January 2001. Since 1981, Ms.
Lewandowski has held various positions at S.J. Electro Systems, Inc., our
strategic partner, and has served as its Chief Executive Officer since 1985.
Nathan Fetting
Mr. Fetting has been a director since January 2001. Since 1989, Mr.
Fetting has served as the Chief Financial Officer of S.J. Electro Systems, Inc.
Mr. Fetting has received a B.S. in Accounting from the University of North
Dakota.
Yiannis Monovoukas
Dr. Monovoukas has been a director since October 2002. Dr. Monovoukas
is currently President and CEO of TEI Biosciences, Inc., a tissue engineering
and regenerative medicine company, which he joined in April 2001. From 1996 to
2001, he was the President, Chief Executive Officer and Chairman of Thermo
Fibergen, a publicly traded subsidiary of the Thermo Electron Corporation.
Thermo Fibergen, now Kadant Composites, is a world leader in cellulose-based
controlled-release carriers for the delivery of agricultural chemicals and in
fiber-based engineered composite materials. Dr. Monovoukas holds an MBA from
Harvard Business School, a B.S. degree from Columbia University, and a Masters
and Ph.D. degrees from Stanford University, all in chemical engineering. His
Ph.D. thesis work focused on the nucleation, growth and optical properties of
colloidal crystals made from nanoparticles of high surface charge density.
27
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of our
outstanding capital stock as of June 30, 2005 by (1) each person known to us to
be the beneficial owner of more than five percent of our common stock, (2) each
of our directors or executive officers and (3) all directors and executive
officers as a group.
The share numbers do not give effect to the proposed three-for-one
stock split. The number of shares beneficially owned by each entity, person,
director or executive officer is determined under the rules of the SEC 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 the sole or shared voting power or investment power and also
any shares that the individual had the right to acquire as of August 29, 2005,
60 days after June 30, 2005, through the conversion of any class of our
preferred stock and/or exercise of any stock option, warrant or other right.
Unless otherwise indicated, each person has sole investment and voting power, or
shares such powers with his or her spouse, with respect to the shares set forth
in the following table. Each of our outstanding classes or preferred stock is
immediately convertible, at the option of the holder, on a one-to-one basis into
shares of our common stock. Please see "Description of Capital Stock" for a
description of our common stock and each of our classes of preferred stock.
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership Percent of Class
-------------------------------------------------- -------------------- ----------------
5% Stockholders:
WMS Enterprises (1)............................... 385,798 34.6%
S.J. Electro Systems, Inc. (2).................... 294,836 28.8%
Abby Rockefeller (3).............................. 151,232 17.2%
Wistar Morris (4)................................. 146,755 16.8%
Nicholas Negroponte (5)........................... 142,571 16.4%
Charles Heick (6)................................. 97,800 11.8%
Ivan Sutherland (7)............................... 84,085 10.5%
James McCormick (8)............................... 60,355 7.6%
John Hatsopoulas (9).............................. 54,500 7.0%
Lucius Wilmerding (10)............................ 46,101 6.0%
Anthony Low-Beer (11) 193,000 20.9%
Garrett & Carol Thunen (12) 90,000 11.4%
Ronald Szarek..................................... 36,320 5.0%
Directors and Executive Officers:
William Zebuhr (13)............................... 238,950 24.7%
Dr. Louis Padulo (14)............................. 62,534 7.9%
William Lockwood (15)............................. 50,000 6.4%
Robert MacDonald (16)............................. 55,525 7.2%
Frederick Becker (17)............................. 30,500 4.0%
Beverly Shaw (18)................................. 7,000 *
Laurie Lewandowski (19)........................... 294,836 28.8%
Nathan Fetting (19)............................... 294,836 28.8%
Yiannis Monovoukas (20)........................... 3,000 *
Directors and Officers as a group (9 persons)..... 742,345 50.4%
-----------------------------
* Less than 1%
(1) The number of shares beneficially owned consists of: 352,964 shares of our
common stock issuable upon exercise of warrants and options to purchase
shares of our common stock (which options and warrants are exercisable
28
within 60 days of June 30, 2005), shares of our common stock issuable upon
conversion of 24,334 shares of our Series C Preferred Stock, and shares of
our common stock issuable upon exercise of warrants to purchase 8,500
shares of our Series C Preferred Stock (which warrants are exercisable
within 60 days of June 30, 2005). Wilfred M. Sherman possesses voting
rights and control over shares issued to Wilfred M. Sherman, WMS
Enterprises, and WMS Family Trust.
(2) The number of shares beneficially owned consists of: shares of our common
stock issuable upon conversion of 160,000 shares of our Series A Preferred
Stock, 82,736 shares of common stock issuable pursuant to anti-dilution
provisions, 40,100 shares of our Series B Preferred Stock and shares of our
common stock issuable upon exercise of warrants to purchase 12,000 shares
of our common stock (which warrants are exercisable within 60 days of June
30, 2005). As holder of all of our issued and outstanding Series A
Preferred Stock, S.J. Electro Systems, Inc. is entitled to appoint two
members of our Board of our Directors. S.J. Electro Systems, Inc. has
appointed Laurie Lewandowski and Nathan Fetting. Ms. Lewandowski and Mr.
Fetting share voting and investment control over shares held by SJE.
(3) The number of shares beneficially owned consists of shares of our common
stock issuable upon conversion of 104,794 shares of our Series C Preferred
Stock and upon the exercise of warrants to purchase 46,438 shares of our
Series C Preferred Stock (which warrants are exercisable within 60 days of
June 30, 2005).
(4) The number of shares beneficially owned includes: shares of our common
stock issuable upon conversion of 5,000 shares of our Series B-1 Preferred
Stock, shares of our common stock issuable upon conversion of 30,835 shares
of our Series C Preferred Stock, shares of our common stock issuable upon
exercise of options and warrants to purchase an aggregate of 12,500 shares
of our common stock (which options and warrants are exercisable within 60
days of June 30, 2005), shares of our common stock issuable upon exercise
of warrants to purchase 12,250 shares of our Series C Preferred Stock; and
options and warrants to purchase 6,250 shares of our Series C Preferred
Stock (which options and warrants are exercisable within 60 days of June
30, 2005), shares of our common stock issuable upon conversion of 20,000
shares of our Series B Preferred Stock and upon conversion of 10,835 shares
of our Series C Preferred Stock, which securities are directly beneficially
owned by a family-owned investment fund managed by Mr. Morris; and shares
of our common stock issuable upon exercise of warrants to purchase 6,250
shares of our Series C Preferred Stock, and conversion of 10,835 shares of
our Series C Preferred Stock, both of which are directly beneficially owned
by Mr. Morris' wife.
(5) The number of shares beneficially owned includes: shares of our common
stock issuable upon conversion of 5,000 shares of our Series B Preferred
Stock, upon conversion of 5,000 shares of our Series B-1 Preferred Stock,
upon conversion of 40,000 shares of our Series C Preferred Stock, and
shares of our common stock issuable upon exercise of warrants to purchase
an aggregate of 12,000 shares of our Series C Preferred Stock (which
warrants are exercisable within 60 days of June 30, 2005); shares of our
common stock issuable upon (1) conversion of 5,000 shares of our Series B
Preferred Stock, which securities are directly beneficially owned by Mr.
Negroponte's wife, and (2) shares of our common stock issuable upon
exercise of warrants to purchase 15,750 shares of our Series C Preferred
Stock (which warrants are exercisable within 60 days of June 30, 2005), and
the issuance of our common stock upon conversion of 46,501 shares of our
Series C Preferred Stock, both of which are directly beneficially owned by
an investment fund managed by Mr. Negroponte.
(6) The number of shares beneficially owned consists of: shares of our common
stock issuable upon conversion of 40,000 shares of our Series B-1 Preferred
Stock; and shares of common stock issuable upon conversion of 50,000 shares
of our Series B Preferred Stock, upon conversion of 6,000 shares of our
Series C Preferred Stock, and shares of our common stock issuable upon
exercise of warrants to purchase 1,800 shares of our Series C Preferred
Stock (which warrants are exercisable within 60 days of June 30, 2005),
which securities are directly beneficially owned by a family trust.
(7) The number of shares beneficially owned consists of: shares of our common
stock issuable upon conversion of 19,000 shares of our Series B Preferred
Stock, upon conversion of 10,000 shares of our Series B-1 Preferred Stock
and upon conversion of 30,835 shares of our Series C Preferred Stock, and
shares of our common stock issuable upon exercise of warrants to purchase
12,250 shares of our Series C Preferred Stock (which warrants are
exercisable within 60 days of June 30, 2005).
(8) The number of shares beneficially owned includes options to purchase 1,000
shares of our common stock (which options are exercisable within 60 days of
June 30, 2005), shares of our common stock issuable upon conversion of
15,001 shares of our Series B Preferred Stock, shares of our common stock
issuable upon conversion of 2,000 shares of our Series B-1 Preferred Stock,
shares of our common stock issuable upon conversion of 14,334 shares of our
Series C Preferred Stock, and shares of our common stock issuable upon
exercise of warrants to purchase 5,500 shares of our Series C Preferred
Stock (which warrants are exercisable within 60 days of June 30, 2005).
(9) The number of shares beneficially owned consists of: shares of our common
stock issuable upon conversion of 20,000 shares of our Series B Preferred
Stock, upon conversion of 3,000 shares of our Series B-1 Preferred Stock,
29
and common stock issuable upon the exercise of options to purchase 1,500
shares of our common stock (which options are exercisable within 60 days of
June 30, 2005);and common stock issuable upon the conversion of 10,000
shares of our Series B-1 Preferred Stock, and common stock issuable upon
the exercise of warrants to purchase 20,000 shares of our common stock,
both of which are beneficially owned by a consulting firm managed by Mr.
Hatsopoulas.
(10) The number of shares beneficially owned consists of: shares of our common
stock issuable upon conversion of 21,000 shares of our Series B-1 Preferred
Stock and 13,201 shares of our Series C Preferred Stock; shares of our
common stock issuable upon exercise of warrants to purchase 5,400 shares of
our Series C Preferred Stock (which warrants are exercisable within 60 days
of June 30, 2005); and shares of our common stock issuable upon conversion
of 5,000 shares of our Series C Preferred Stock and shares of our common
stock issuable upon the exercise of warrants to purchase 1,500 shares of
our Series C Preferred Stock (which warrants are exercisable within 60 days
of June 30, 2005), which shares are directly beneficially owned by Mr.
Wilmerding's wife.
(11) The number of shares beneficially owned consists of: shares of our common
stock issuable upon conversion of 10,000 shares of our Series C Preferred
Stock; shares of our common stock issuable upon the exercise of warrants to
purchase 3,000 shares of our Series C Preferred Stock; shares of our common
stock issuable upon the exercise of warrants to purchase 40,000 shares of
common stock (which warrants are exercisable within 60 days of June 30,
2005); and shares of our common stock issuable upon the exercise of
warrants to purchase 80,000 shares of our common stock, which warrants are
directly beneficially owned by an investment fund controlled by Mr.
Low-Beer.
(12) The number of shares beneficially owned consists of shares of our common
stock issuable upon the exercise of warrants to purchase 60,000 shares of
our common stock (which warrants are exercisable within 60 days of June 30,
2005).
(13) The number of shares beneficially owned includes: shares of our common
stock issuable upon the exercise of options to purchase 17,750 shares of
our common stock (which options are exercisable within 60 days of June 30,
2005) and upon the exercise of options to purchase 800 shares of our common
stock (which options are exercisable within 60 days of June 30, 2005),
which options are directly beneficially owned by Mr. Zebuhr's wife.
(14) The number of shares beneficially owned includes: shares of our common
stock issuable upon the conversion of 8,167 shares of our Series C
Preferred Stock, shares of our common stock issuable upon exercise of
options and warrants to purchase an aggregate of 7,000 shares of our common
stock (which options and warrants are exercisable within 60 days of June
30, 2005), shares of common stock issuable upon the exercise of warrants to
purchase 3,050 shares of our Series C Preferred Stock(which warrants are
exercisable within 60 days of June 30, 2005); and shares of our common
stock issuable upon the exercise of warrants to purchase 2,150 shares of
our Series C Preferred Stock (which warrants are exercisable within 60 days
of June 30, 2005), common stock issuable upon the conversion of 5,167
shares of our Series C Preferred Stock, and shares of our common stock
issuable upon conversion of 5,000 shares of our Series B Preferred Stock
which securities are directly beneficially owned by Dr. Padulo's wife.
(15) The number of shares beneficially owned includes shares of our common stock
issuable upon the exercise of options to purchase 18,000 shares of our
common stock (which options are exercisable within 60 days of June 30,
2005).
(16) The number of shares beneficially owned consists of shares of our common
stock issuable upon the exercise of options to purchase 45,125 shares of
our common stock (which options are exercisable within 60 days of June 30,
2005).
(17) The number of shares beneficially owned consists of shares of our common
stock issuable upon the exercise of options to purchase 30,500 shares of
our common stock (which options are exercisable within 60 days of June 30,
2005).
(18) The number of shares beneficially owned includes shares of our common stock
issuable upon the exercise of options to purchase 1,000 shares of our
common stock (which options are exercisable within 60 days of June 30,
2005).
(19) Ms. Lewandowski and Mr. Fetting may be deemed to beneficially own the
shares directly beneficially owned by S.J. Electro Systems, Inc. due to
their positions as officers of S.J. Electro Systems, Inc.
(20) The number of shares beneficially owned consists of shares of our common
stock issuable upon the exercise of options to purchase 3,000 shares of our
common stock (which options are exercisable within 60 days of June 30,
2005).
30
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Lease Agreements
In November 2004, the Company and William Zebuhr, our founder and
Chairman, entered into a lease, which remains in effect until November 2006, for
the lease of the 3,000 square feet of combined laboratory, research and
development, prototype manufacturing and office space which comprises our main
facility. Pursuant to the terms of the lease, we pay Mr. Zebuhr $2,500 per
month. We also rent 1,950 square feet of manufacturing space in Nashua, New
Hampshire, which was rented from a third party commencing in November 2003 for a
monthly rate of $700, and is rented on a month-to-month basis. The Company
believes that the lease terms are as favorable to the Company as would be
available from an unaffiliated party.
WMS Enterprises
In August 1997, we entered into a series of agreements with WMS
including a Debenture Purchase Agreement, a License Agreement, and a
Distribution Agreement. The Debenture Purchase Agreement provided for the
purchase of $180,000 aggregate principal amount of convertible debentures (the
"WMS Convertible Debentures"), which was funded $40,000 at closing and monthly
amounts of $20,000 in the following seven months. The WMS Convertible Debentures
were convertible, at WMS' option, into shares of our common stock at a
conversion price of $2.50 per share, subject to adjustments. Any outstanding WMS
Convertible Debentures would automatically be converted into shares of common
stock at the conversion price upon the consummation of a public offering raising
at least $2,000,000 in proceeds. WMS also was granted the right of first offer
to purchase, pro rata, a portion of any new securities that we may propose to
issue and sell. WMS' pro rata share of new securities is calculated as WMS'
total owned or issuable stock holdings as a percentage of the Company's total
outstanding equity securities. This right expired 30 days after execution of the
agreement. The WMS Convertible Debentures carried an interest rate of prime plus
one percent (1%) (6.25% at December 31, 2004) per annum, payable quarterly.
Amounts outstanding on the WMS Convertible Debentures at December 31, 2003 and
2004 were $60,000 and $0, respectively.
In September 2000, we reached an agreement with WMS to convert all
outstanding accrued interest on the WMS Convertible Debentures into a demand
note (the "WMS Demand Note") which carried an interest rate of prime plus one
percent (1%) (6.25% at December 31, 2004) payable monthly with an additional 5%
due upon default of monthly payments. In conjunction with this agreement, we
issued certain warrants to purchase shares of our common stock. In addition, all
future interest accruing on the WMS Convertible Debentures and the WMS Demand
Note would be satisfied monthly by the issuance of a promissory note for the
interest due, plus a warrant to purchase the same dollar amount of common stock
at the lower of the then market price or $7.50. We also issued additional WMS
Demand Notes on these same terms for amounts due to WMS for interest and an
initial installment provided in 2001 and 2002 totaling $60,000 and $20,020,
respectively. In 2003, WMS advanced us $160,000 in additional WMS Demand Notes
and converted the $60,000 WMS Convertible Debenture that came due in 2003 into a
WMS Demand Note.
In conjunction with the issuance of the WMS Demand Notes, the Company
issued WMS common stock purchase warrants with a fair value of $193,263 which
were recorded as a discount on the WMS Demand Notes.
Interest expense on the WMS Convertible Debentures and WMS Demand Notes
for the six months ended June 30, 2005, was $18,542.
In June 2004, we renegotiated our outstanding 1997 Debenture Purchase
Distribution and License Agreements with WMS, consolidating the two into an
Amended and Restated Debt Agreement (the "Debt Agreement") and a Restated
License Agreement (the "Revised License"). Pursuant to the Debt Agreement, the
outstanding WMS Convertible Debentures and WMS Demand Notes were consolidated
into a single note and all warrants previously issued to WMS and all contractual
rights to purchase shares of our common stock that WMS previously enjoyed
(related to the WMS Convertible Debentures) were replaced by two new warrants.
31
Additionally, and as part of the new Debt Agreement, WMS purchased $100,000 in
shares of our Series C Preferred Stock. The Debt Agreement contains multiple
covenants, including a negative covenant restricting our ability to enter into
any transaction selling or transferring more than fifty percent (50%) of our
common stock, unless all debt owed to WMS is repaid at the closing. In event of
default, the debt balances outstanding shall become due and payable immediately.
The Debt Agreement provides WMS with a right of first offer to purchase a pro
rata portion of securities we may offer in the future, subject to certain
exceptions (including an initial public offering). The amounts due under the
Debt Agreement carry an interest rate of prime plus 1% (6.25% at December 31,
2004) and are due January 2, 2005 with six possible six month extensions, each
at our option. Each extension would require us to issue WMS a warrant to
purchase 50,000 shares of common stock at $5.00 per share. At December 31, 2004,
we issued WMS additional warrants to purchase 50,000 shares of common stock for
the first possible loan extension, extending the maturity date to July 2005, as
well as warrants to purchase 15,000 shares of common stock for a prior loan
extension past December 31, 2003. In conjunction with the Debt Agreement, the
warrants previously issued to WMS totaling 96,486 shares exercisable at $5.00
per share and the rights to purchase shares under the WMS Convertible Debentures
were exchanged for two warrants to purchase an aggregate of 72,000 and 170,964
shares of our common stock exercisable at $2.50 and $5.00 per share,
respectively. The warrants each have a term of ten years. Because the warrants
were issued in conjunction with the debt consolidation and extension, the
relative fair value of the warrants, $322,106, was recorded as additional paid
in capital and a debt discount on the Note Payable. The total discount is being
amortized to interest expense over the term of the Debt Agreement. For the six
months ended June 30, 2005, there was no non-cash interest expense related to
the amortization of these discounts.
In March 2005, Ovation exercised its second of five six-month
extensions on the WMS Note Payable, extending the maturity date to January 2006.
In exchange for the extension, Ovation issued to WMS a warrant to purchase
50,000 shares of common stock at $5.00 per share with a term of ten years. The
fair value of the warrant was recorded as non-cash interest expense at March 31,
2005 in the amount of $196,892.
Amounts outstanding on the Demand Notes at December 31, 2004 and June
30, 2005 were $478,535. The Note Payable has been classified as a current
liability as it is due to mature within a year.
The Revised License grants WMS a license to manufacture, use, market,
distribute and/or sell a counter-top version of our Clean Water Appliance. It
also grants WMS the right to sublicense the sale, distribution and manufacture
counter-top distillers that incorporate our distillation technology, subject
only to the Company's review and approval, which shall not be unreasonably
withheld. The Revised License provides exclusivity in the United States, Canada,
and Mexico so long as WMS pays the Company certain minimum royalties. In
addition, WMS agrees to pay royalties to the Company on product sales, subject
to minimum royalty payments. Sales by sublicensees will render the same royalty
payments as though the sales were made directly by WMS. In order to maintain the
exclusivity of the Revised License, WMS must pay the Company minimum royalties
equal to $50,000 for the first year of production and distribution, and amounts
increasing $25,000 per year for each subsequent year up to a maximum of $200,000
per year. Should these royalties not be paid within 45 days of the end of each
annual period, Ovation will have the option to convert the license to a
non-exclusive status. Additionally, WMS will pay the Company royalties as a
percentage of total product sales, payable quarterly and based on total payments
made to WMS by its customers. The royalty percentages are tiered based on sales
volume; WMS will pay Ovation 6%, 5%, and 4% for the first $20 million, the next
$50 million, and sales over $70 million, respectively, in sales per year. The
quarterly royalty payments are due within 45 days of quarter-end, subject to
termination of the License by Ovation if WMS fails to make a payment more than
two times in one year. After an initial five-year term starting from date of
first commercial shipment, the Revised License will be automatically renewed
annually thereafter, and may be terminated upon six months written notice by the
Company if WMS fails to attain certain sales targets or royalty levels, or by
WMS if the Revised License is rendered non-exclusive. Prior to December 31,
2005, WMS may terminate the Revised License on 30 days' prior written notice and
upon such termination, the Company will issue WMS a five-year warrant to
purchase 30,000 shares of the Company's common stock at an exercise price of
$5.00 per share. Should the Company provide licensing to any other third party
during the term of the Revised License, it will be deemed to have provided WMS a
like license, except that WMS would not be obligated to pay any engineering or
reimbursement costs that the original license may contemplate.
The Distribution Agreement provided for the supply of product by the
Company at least as favorable as the best discount rate offered by the Company
to any of its customers. The Distribution Agreement shall run for an initial
five-year term commencing on the date of first product manufacture. Thereafter,
the Distribution Agreement shall be renewable for three successive five-year
periods unless terminated at the sole discretion of WMS prior to the end of the
then-current period.
32
S.J. Electro Systems, Inc.
In conjunction with the issuance of 160,000 shares of Series A
Preferred Stock for proceeds of $1,800,000 on December 29, 2000, payable in
twelve consecutive monthly installments of $150,000, the Company entered a
Strategic Alliance Agreement (the "Agreement") with S.J. Electro Systems, Inc.
("SJE"), an international distributor of septic system appliances, to develop,
market, sell and distribute the Company's distillation technology. Ovation will
be responsible for the design, development, and testing of the distillation
technology to be included in a septic device, and SJE will be responsible for
the external testing, development and sale of a standard control panel for the
resulting septic device, as well as marketing, sales and distribution of the
septic device itself. The two companies will form a task force to manage the
project and track project expenditures and revenues. At the end of each calendar
year, the task force will finalize an annual business plan of the alliance for
the following year, which includes targeted geographic markets, product
development activities, sales objectives, expense budget, planned financial
statements, pricing policies, planned distribution, and critical issues and
strategies. At the end of each fiscal year, the task force also will finalize a
three-year plan, which includes each item specified in the annual business plan.
After the signing of the Agreement and until the end of the quarter which is
immediately prior to the first quarter in which the alliance realizes a net
profit, the companies will receive reimbursement for all expenditures properly
incurred by either party to perform its responsibilities relating to the
alliance and which is approved by the task force, including, but not limited to,
the detailed itemization of proper expenditures set forth in the Agreement.
Reimbursements are distributed as a proportion of the project revenues equal to
the total project expenditures incurred by a party divided by the total project
expenditures incurred by both parties. Due to prolonged cash constraints and
consequent delays in production, this process has not yet been executed. For
each fiscal quarter that project revenues result in a profit, the companies will
share the profit 50% each. As part of the Agreement, the Company granted an
exclusive license to SJE in its intellectual property for use in certain septic
appliances. Under the Agreement, SJE will be responsible for developing and
maintaining market channels for products incorporating Ovation's distillation
technology. As part of the agreement, the Company granted SJE with exclusive
distribution rights in the United States, Canada, and Mexico. The exclusivity
term shall commence on the date that both parties agree in writing that sales of
commercial quantities of product are initially made, and terminates on the later
of the 7th anniversary of the commencement date or the date that SJE received a
total of $50 million in profit-sharing. In no event shall the termination date
exceed the 10th anniversary of the commencement date. The Agreement shall
terminate upon the earlier of the exclusivity termination within the
distribution rights terms or the termination of the distribution rights term.
Contemporaneous with the Agreement, the Company signed a License Agreement with
SJE, which provided for payment of royalties to the Company equal to 5% of all
products sold by SJE.
In conjunction with the Agreement with SJE, the Company agreed to pay
WMS, in exchange for WMS waiving its exclusive worldwide marketing rights, 4% of
any cash or other consideration received from SJE up to a total payment of
$450,000. At the option of WMS, this payment may be made in cash, common stock
or notes payable and warrants to purchase common stock. If the payment method
selected by WMS includes warrants, the number of warrants issued will be
calculated by dividing the amount due by the then current market value of the
Company's common stock. WMS elected the receipt of long term notes with
accompanying warrants to purchase the Company's common stock at $5.00 per share.
The warrants expire on the later of January 2, 2003 or three years from date of
issuance. At December 31, 2003, these warrants totaled 16,004 shares at $5.00
per share, and have been recorded at fair value using the Black-Scholes
option-pricing model assumptions. The resulting compensation expense of $25,864
was net against the proceeds of the Series A and Series B Preferred Stock in
2002 and 2001.
The agreement appended a forecast that estimated growing to 37,500
units in 2008 with unit selling costs of $3,200 to $2,750 and unit manufacturing
costs starting at $1,864 and dropping to $574. As of the date of this filing the
Company has not sold any units due to lack of funding to finish development, and
also due to the Clean Water Appliance going through design iterations to
increase reliability, increase output and reduce cost.
On June 1, 2005, the Company secured a loan in the amount of $60,000
with SJE to fund ongoing operational expenses (the "SJE Loan"). Under the terms
of the SJE Loan, Ovation has agreed to repay the principal amount of the loan on
or before June 1, 2006. Interest will accrue and compound monthly at the Prime
Rate plus 1% (the "Interest Rate") and will be payable to SJE on a monthly
basis. The SJE Loan is subject to customary terms and conditions, including
33
acceleration and penalty interest of 7% above the Interest Rate in the event of
certain defaults or events of nonpayment. In conjunction with the loan, SJE
received a warrant to purchase up to 12,000 shares of Ovation's common stock at
$5.00 per share. The warrant has a term of ten years. Because the warrant was
issued in conjunction with the debt, the relative fair value of the warrants,
$26,243, was recorded as additional paid-in capital and a debt discount on the
SJE Loan. The total discount is being amortized to interest expense over the
term of the loan. For the three month period ended June 30, 2005, non-cash
interest expense related to the amortization of this discount was $2,186.
Alexandros Partners LLC
On April 1, 2002, the Company entered a consulting agreement with
Alexandros Partners LLC ("Alexandros"). Alexandros was retained to provide
services as advisors to the Company with respect to proposed capital financing
as well as other financial management services, and the agreement was to
continue until completion of a financing, but no later than April 1, 2003. Upon
the initial closing of a financing, the Company is required to pay Alexandros
$50,000 in cash, and issue Alexandros a warrant to purchase 20,000 shares of the
Company's common stock. The warrant will have a five-year life at an exercise
price equal to the price per share of the securities issued at the initial
closing of the financing. Under the consulting agreement, the Company issued
Alexandros a warrant to purchase 20,000 shares of the Company's common stock,
which resulted in a charge of $60,184 to general and administrative expenses in
July 2002. In lieu of the $50,000 cash payment, the Company issued Alexandros
10,000 shares of its Series B Preferred Stock.
On July 7, 2004, and after the expiration of the initial agreement, the
Company entered into a second consulting agreement with Alexandros. The term of
the agreement will expire upon the earlier of completion of a financing or July
7, 2005. Upon execution of the agreement, the Company paid Alexandros $22,000,
and upon closing of either (1) a financing in an amount of at least $1 million,
or (2) the execution of a transaction (defined as "any merger, consolidation,
reorganization or other business combination pursuant to which the business of
the Company is combined with that of another party"), the Company will pay it's
option of either (a) $50,000 in cash, or (b) shares of the Company's or its
successor's common stock calculated as $50,000 divided by the purchase price per
share of common stock issued in the financing. In addition, within 30 days of
the financing, the Company will issue a warrant for 50,000 shares of common
stock. The warrant will provide for full ratchet anti-dilution and will be
exercisable at any time for a period of seven years at an exercise price equal
to the purchase price per share of common stock issued in the financing. The
number of shares under the warrant will be adjusted to reflect certain instances
of stock splits, recapitalizations, or dividends that may occur during the term
of the warrant. The warrant will become fully exercisable upon any liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary, or
upon the closing or completion of any transaction. The Company will be obligated
to provide the compensation outlined above for a financing or a transaction, as
defined, but not for both and only for the first to occur.
On July 7, 2005, and after the expiration of the second consulting
agreement, the Company entered into a third consulting agreement with
Alexandros. The term of the agreement will expire upon the earlier of completion
of a financing or July 7, 2006. Upon execution of the agreement, the Company
paid Alexandros $25,000. Upon closing of one or more financings after August 1,
2005 raising an aggregate amount of at least $500,000, the Company, at
Alexandros' option, will either (a) pay $50,000 in cash, or (b) issue a number
of shares of common stock equal to the quotient of $50,000 divided by the
purchase price per share of common stock issued in the financing. In addition,
within 30 days of the financing, the Company will issue a warrant for 50,000
shares of common stock. For any investor introduced to the Company by
Alexandros, Alexandros will receive (a) a cash payment equal to 5% of the gross
proceeds to the Company from the investor and (b) a number of warrants equal to
5% of the number of shares of the Company's capital stock purchased by the
investor. The warrant will be exercisable at any time for a period of ten years
at an exercise price equal to the purchase price per share of common stock
issued in the financing. The number of shares under the warrant will be adjusted
to reflect certain instances of stock splits, recapitalizations, or dividends
that may occur during the term of the warrant. The Company will be obligated to
provide the compensation outlined above for a financing or a transaction, as
defined, but not for both and only for the first to occur.
34
INDEPENDENT ACCOUNTANTS
Wolf & Company, P.C., independent registered public accountants, have
audited the Company's financial statements for the years ended December 31, 2003
and 2004 and the report, which contains an explanatory paragraph raising
uncertainty with respect to the Company's ability to continue as a going
concern, is included in the Company's Registration Statement on Form 10-SB.
Representatives of Wolf & Company, P.C. are not expected to attend the special
meeting.
STOCKHOLDER PROPOSALS
Any proposal that a stockholder wishes to present at the 2006 Annual
Meeting of Stockholders and to have included in Ovation's proxy materials must
have been received in writing by the Secretary of Ovation Products Corporation
at least 45 days prior to the Company's annual meeting date.
INCORPORATION BY REFERENCE
Ovation hereby incorporates by reference into this proxy statement the
following:
o Ovation's Registration Statement on Form 10-SB, as amended;
o Ovation's Quarterly Reports on Form 10-QSB for the quarter ended
March 31, 2005 and June 30, 2005; and
o Ovation's Current Reports on Form 8-K filed with the SEC on June 6,
2005 and August 11, 2005.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this proxy statement to the extent that a statement contained
herein, or in any other subsequently filed document which also is incorporated
or deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this proxy statement.
Copies of these materials may be received without charge upon request
from Ovation Products Corporation at the following address:
Ovation Products Corporation, Inc.
395 East Dunstable Road
Nashua, New Hampshire 03062
Attn: Robert MacDonald
OTHER BUSINESS
No other matters are to be presented for action at the special meeting
other than as set forth in this proxy statement. If other matters should
properly come before the special meeting, however, the persons named in the
accompanying proxy will vote all proxies in accordance with their best judgment.
By Order of the Board of Directors
/s/ William Zebuhr
----------------------------------
William Zebuhr
Chairman of the Board
NASHUA, NEW HAMPSHIRE
AUGUST __, 2005
35
APPENDIX A
THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
OVATION PRODUCTS CORPORATION
Pursuant to Sections 242 and 245
of the General Corporation Law
of the State of Delaware
Ovation Products Corporation, a Delaware corporation (the "Corporation" or
the "Company"), does hereby certify that this Third Amended and Restated
Certificate of Incorporation of Ovation Products Corporation was duly adopted in
accordance with Sections 242 and 245 of the General Corporation Law of the State
of Delaware and that the Corporation's original Certificate of Incorporation was
filed with the Delaware Secretary of State on April 22, 1999.
Article 1. The name of the Corporation is Ovation Products Corporation.
Article 2. The address of its registered office in the state of Delaware
is 1209 Orange Street, Wilmington, DE 19801, and the name of its registered
agent at such address is The Corporation Trust Company (New Castle County).
Article 3. The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of Delaware.
Article 4.
A. This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the Corporation is authorized to issue is fifty million
(50,000,000) shares, forty million (40,000,000) shares of which shall be Common
Stock (the "Common Stock") and ten million (10,000,000) shares of which shall be
Preferred Stock (the "Preferred Stock"). The Preferred Stock shall have a par
value of one cent ($0.01) per share and the Common Stock shall have a par value
of one cent ($0.01) per share.
Upon filing of this Third Amended and Restated Certificate of
Incorporation, each outstanding one (1) share of Common Stock of the Corporation
shall be split and divided into three (3) shares of Common Stock. No fractional
shares shall be recorded in the stock ledger of the Corporation as a result of
the stock split provided for above. Any fractional share (a "Fractional
Interest") that would otherwise be issuable to a holder of Common Stock (a
"Fractional Share Holder") shall be treated as described in the following
sentence: The Fractional Interest shall be cancelled and the Fractional Share
Holder shall be entitled to receive an amount in cash equal to the product of
the Fractional Interest to which such Fractional Share Holder would otherwise
have been entitled, multiplied by the fair market value of one share of Common
Stock immediately following the effectiveness of the stock split provided for
above, as determined by the board of directors. Whether or not a Fractional
Interest is to be recorded as a result of the stock split provided for above
shall be determined on the basis of the total number of shares of Common Stock
held by the record holder at the time the stock split occurs.
B. The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares of Common Stock then outstanding)
by the affirmative vote of the holders of a majority of the stock of the
Corporation (voting together on an as-if-converted basis if there are any shares
of convertible Preferred Stock outstanding having the right to vote on an
as-if-converted basis).
C. The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The board of directors is hereby
authorized, in the resolution or resolutions adopted by the board of directors
providing for the issue of any wholly unissued series of Preferred Stock, within
A-1
the limitations and restrictions stated in this certificate of incorporation, to
fix the designations, preferences and relative, participating, optional, or
other special rights, and qualifications, limitations or restrictions thereof,
including, without limitation, the authority to fix or alter the dividend
rights, dividend rate, conversion rights, voting rights, rights and terms of
redemption (including sinking fund provisions), the redemption price or prices,
and the liquidation preferences of any wholly unissued series of Preferred
Stock, and the number of shares constituting any such series and the designation
thereof, or any of them, and to increase or decrease the number of shares of any
series subsequent to the issue of shares of that series, but not below the
number of shares of such series then outstanding. In case the number of shares
of any series shall be so decreased, the shares constituting such decrease shall
resume the status that they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
Article 5. In furtherance and not in limitation of the powers conferred
by statute the board of directors is expressly authorized to adopt, amend, or
repeal the bylaws of the Corporation.
Article 6. Elections of directors need not be by written ballot unless
the by-laws of the corporation shall so provide.
Article 7. The personal liability of the directors of the Corporation
shall be eliminated to the fullest extent permitted by law. The Corporation is
authorized to indemnify (and advance expenses to) its directors and officers to
the fullest extent permitted by law. Neither the amendment, modification or
repeal of this Article nor the adoption of any provision in this certificate of
incorporation inconsistent with this Article shall adversely affect any right or
protection of a director or officer of the corporation with respect to any act
or omission that occurred prior to the time of such amendment, modification,
repeal or adoption.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
A-2
IN WITNESS WHEREOF, OVATION PRODUCTS CORPORATION has caused this Third
Amendment and Restated Certificate of Incorporation to be signed by its Chief
Executive Officer this ___ day of __________, 2005.
OVATION PRODUCTS CORPORATION
By: ____________________
Robert MacDonald,
Chief Executive Officer
A-3
OVATION PRODUCTS CORPORATION, INC.
REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF OVATION
PRODUCTS CORPORATION, INC., FOR USE ONLY AT THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER _, 2005 AND ANY ADJOURNMENT THEREOF.
THE UNDERSIGNED HEREBY ACKNOWLEDGES PRIOR RECEIPT OF THE NOTICE OF
SPECIAL MEETING OF STOCKHOLDERS (THE "MEETING") AND THE PROXY STATEMENT
DESCRIBING THE MATTERS SET FORTH BELOW, AND INDICATING THE DATE, TIME AND PLACE
OF THE MEETING, AND HEREBY APPOINTS THE BOARD OF DIRECTORS OF OVATION PRODUCTS
CORPORATION, INC. (THE "COMPANY"), OR ANY OF THEM, AS PROXY, EACH WITH FULL
POWER OF SUBSTITUTION TO REPRESENT THE UNDERSIGNED AT THE MEETING, AND AT ANY
ADJOURNMENT OR ADJOURNMENTS THEREOF, AND THEREAT TO ACT WITH RESPECT TO ALL
VOTES THAT THE UNDERSIGNED WOULD BE ENTITLED TO CAST, IF THEN PERSONALLY PRESENT
ON THE MATTERS REFERRED TO ON THE REVERSE SIDE IN THE MANNER SPECIFIED.
THIS PROXY, IF EXECUTED, WILL BE VOTED AS DIRECTED, BUT, IF NO
INSTRUCTIONS ARE SPECIFIED, THIS PROXY WILL BE VOTED FOR EACH OF THE PROPOSALS
LISTED. PLEASE DATE AND SIGN THIS PROXY ON THE REVERSE SIDE AND RETURN IT IN THE
ENCLOSED ENVELOPE. THIS PROXY MUST BE RECEIVED BY THE COMPANY NO LATER THAN
SEPTEMBER __, 2005.
THIS PROXY IS REVOCABLE AND THE UNDERSIGNED MAY REVOKE IT AT ANY TIME
PRIOR TO THE MEETING BY GIVING WRITTEN NOTICE OF SUCH REVOCATION TO THE
SECRETARY OF THE COMPANY. SHOULD THE UNDERSIGNED BE PRESENT AND WANT TO VOTE IN
PERSON AT THE MEETING, OR ANY ADJOURNMENT THEREOF, THE UNDERSIGNED MAY REVOKE
THIS PROXY BY GIVING WRITTEN NOTICE OF SUCH REVOCATION TO THE SECRETARY OF THE
COMPANY ON A FORM PROVIDED AT THE MEETING.
(Continued and to be signed on the reverse side)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF PROPOSAL 1, PROPOSAL 2,
PROPOSAL 3 AND PROPOSAL 4
FOR AGAINST ABSTAIN
1. Approval of issuance of additional shares of common stock.
|_| |_| |_|
FOR AGAINST ABSTAIN
2. Approval to split the outstanding common stock on a three-for-one
basis. |_| |_| |_|
FOR AGAINST ABSTAIN
3. Approval to amend the certificate of incorporation.
|_| |_| |_|
4. Approval of adjournments of the Meeting. A vote for this proposal will FOR AGAINST ABSTAIN
permit the Meeting to be adjourned in order to allow the Company
to solicit additional proxies for the approval of the issuance of |_| |_| |_|
additional shares.
PREFERRED STOCKHOLDERS MUST VOTE BELOW BY
SERIES AS TO CONVERSION OF THE PREFERRED STOCK
To vote, in its discretion, upon any other matters that may properly
come before the Meeting or any adjournment thereof. The board of directors is
not aware of any other matters that will come before the Meeting.
NAME (EXACTLY AS IT APPEARS ON YOUR STOCK CERTIFICATE):
DATE:
--------------------
SIGNATURE(S)
--------------------------------
SIGNATURE(S)
--------------------------------
PLEASE DATE THIS PROXY AND SIGN YOUR NAME EXACTLY AS YOUR NAME APPEARS
ABOVE. JOINT ACCOUNTS NEED ONLY ONE SIGNATURE, BUT ALL STOCKHOLDERS SHOULD SIGN
IF POSSIBLE. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE,
GUARDIAN OR SIMILAR POSITION, PLEASE ADD YOUR FULL TITLE AS SUCH TO YOUR
SIGNATURE. IF A CORPORATION, PLEASE SIGN THE FULL CORPORATE NAME BY PRESIDENT OR
AN AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY
AUTHORIZED PERSON. PLEASE RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
POSTAGE-PAID ENVELOPE.
PREFERRED STOCKHOLDERS MUST VOTE BY SERIES.
If you are a holder of Preferred Stock, you must vote separately by
series. If you hold more than one series of preferred stock, please cast a vote
with respect to each series you hold.
- -------------------------------------------------------- ----------------------- --------------------- ---------------
1. Approval of the conversion of the Series A SERIES A FOR SERIES A AGAINST ABSTAIN
Preferred Stock at a ratio of five shares of
preferred to seven shares of common stock. |_| |_| |_|
- -------------------------------------------------------- ----------------------- --------------------- ---------------
2. Approval of the conversion of the Series B SERIES B FOR SERIES B ABSTAIN
Preferred Stock at a ratio of five shares of AGAINST
preferred to six shares of common stock. |_| |_| |_|
- -------------------------------------------------------- ----------------------- --------------------- ---------------
- -------------------------------------------------------- ----------------------- --------------------- ---------------
3. Approval of the conversion of the Series B-1 SERIES B-1 FOR SERIES B-1 AGAINST ABSTAIN
Preferred Stock at a ratio of five shares of
preferred to six shares of common stock. |_| |_| |_|
- -------------------------------------------------------- ----------------------- --------------------- ---------------
4. Approval of the conversion of the Series C SERIES C FOR SERIES C AGAINST ABSTAIN
Preferred Stock at a ratio of five shares of
preferred stock to eight shares of common stock. |_| |_| |_|
- -------------------------------------------------------- ----------------------- --------------------- ---------------