DIOMED HOLDINGS, INC.
One Dundee Park, Suite 5
Andover, MA 01810
-----------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 27, 2006
-----------------------------------
As a stockholder of DIOMED HOLDINGS, INC., a Delaware corporation (the
"Company"), you are cordially invited to be present, either in person or by
proxy, at a special meeting (the "Special Meeting") of stockholders of the
Company to be held at the offices of our counsel, McGuireWoods LLP, 1345 Avenue
of the Americas, 7th Floor, New York, NY 10105 at 11:00 a.m., local time, on
September 27, 2006, for the following purposes:
1. To approve a transaction (the "Financing Transaction") involving the
sale and issuance of approximately 1,736 shares of our proposed
Series 2006 Preferred Stock (the "2006 Preferred Stock"), including
the terms and provisions of the shares of 2006 Preferred Stock that
are exchangeable for shares of our common stock, par value $0.001
per share, as set forth in the attached proxy statement, to certain
institutional and other investors, including existing holders of the
Company's preferred stock; and
2. To approve an amendment to our Certificate of Incorporation to add a
new class of 2006 Preferred Stock and to increase to 65,000,000 the
Company's authorized number of shares of common stock to accommodate
the Financing Transaction.
In management's view, it is critical that our stockholders vote to approve
both of these proposals. If they do not approve them, the Company is not likely
to have sufficient working capital to operate its business and protect its
investment in its intellectual property. Management also expects that the
completion of the Financing Transaction will enable the Company to regain
compliance with the continued listing criteria of the American Stock Exchange
and therefore enable the common stock to continue to be listed for trading on
the AMEX. The Company's board of directors recommends that you vote in favor of
each of the proposals described in the attached proxy statement.
Only stockholders of record at the close of business on August 15, 2006
will be entitled to receive notice of, and to vote, either in person or by
proxy, at the Special Meeting and any adjournment or postponement thereof. The
transfer books will not be closed.
We hope you can attend the Special Meeting in person. Even if you plan to
attend, however, we ask that you MARK, SIGN, DATE and RETURN the enclosed proxy
promptly in the enclosed self-addressed envelope, or use the telephone or
Internet voting options provided in the proxy card, so that we may be assured of
a quorum to transact business at the Special Meeting. If you receive more than
one proxy because you own shares registered in different names or addresses,
each proxy should be completed and returned. Your proxy is revocable and will
not affect your right to vote in person if you are able to attend the Special
Meeting. Your attention is directed to the attached proxy statement.
If you plan to attend the Special Meeting, please note that this is a
stockholders' meeting and attendance will be limited to stockholders of the
Company or their qualified representatives. Each stockholder may be asked to
present valid picture identification, such as a driver's license or passport.
Stockholders holding stock in brokerage accounts ("street name" holders) must
bring a copy of a brokerage statement reflecting stock ownership as of the
record date. A qualified representative of a stockholder must have
identification as well as a properly executed proxy from the stockholder he or
she is representing. Cameras, recording devices and other electronic devices
will not be permitted at the Special Meeting.
PLEASE FILL IN, DATE AND SIGN THE ENCLOSED FORM OF PROXY AND RETURN IT IN THE
ENVELOPE PROVIDED, OR USE THE TELEPHONE OR INTERNET VOTING OPTIONS, AS PROMPTLY
AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING. BY DOING SO,
YOU MAY SAVE DIOMED HOLDINGS, INC. THE EXPENSE OF A SECOND MAILING. IF YOU LATER
DECIDE TO REVOKE YOUR PROXY FOR ANY REASON, YOU MAY DO SO IN THE MANNER
DESCRIBED IN THE ATTACHED PROXY STATEMENT.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the Financing Transaction, passed upon
the fairness or the merits of the Financing Transaction or passed upon the
adequacy or accuracy of the disclosure in this document. Any representation to
the contrary is a criminal offense.
By Order of the Board of Directors,
/s/ David B. Swank
Secretary
Andover, Massachusetts
August 25, 2006
2
DIOMED HOLDINGS, INC.
One Dundee Park, Suite 5
Andover, MA 01810
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD AT 11:00 AM LOCAL TIME ON SEPTEMBER 27, 2006
GENERAL INFORMATION
A special meeting of stockholders (the "Special Meeting") of Diomed
Holdings, Inc., a Delaware corporation (the "Company"), will be held on
September 27, 2006, at the time and place and for the purposes set forth in the
Notice of Special Meeting of Stockholders accompanying this proxy statement.
This proxy statement is furnished in connection with the solicitation of proxies
by our board of directors on behalf of the Company in connection with the
Special Meeting and any continuation or adjournment thereof. We first
distributed this proxy statement and the enclosed form of proxy to our
stockholders on or about August 29, 2006.
There are two matters scheduled for a vote at the special meeting: the
approval of a transaction (the "Financing Transaction") involving the issuance
and sale of our proposed Series 2006 Preferred Stock (the "2006 Preferred
Stock") and the approval of a proposal to amend the Company's Certificate of
Incorporation. The Financing Transaction involves the sale and issuance of (i)
870.4348 shares of the 2006 Preferred Stock, each share having a stated value of
$11,500, which is exchangeable at $1.15 per share into an aggregate of 8,704,348
shares of our common stock, par value $0.001 per share, and (ii) 864.9999 shares
of the 2006 Preferred Stock in exchange for all 3,975,000 currently outstanding
shares of the Company's preferred stock, par value $0.001 per share, issued on
September 30, 2005 (the "2005 Preferred Stock"), exchangeable at $1.15 per share
into 8,649,999 shares of the Company's common stock. The amendment of the
Company's Certificate of Incorporation will, among other things, add the 2006
Preferred Stock as a new class of our preferred stock and increase the Company's
authorized number of shares of common stock to accommodate the conversion of the
2006 Preferred Stock issued in the Financing Transaction.
Throughout this Proxy Statement, we refer to the shares of our proposed
Series 2006 Preferred Stock as the "2006 Preferred Stock" and to the 2006
Preferred Stock, any Par Warrants that we may or may be required to issue and
the common stock purchase warrants as the "Securities."
Vote Required
To be approved, Proposal 1 must receive "For" votes from a majority of the
shares of common stock and preferred stock present and entitled to vote at the
Special Meeting, either in person or by proxy, voting together as a single
class. If you select "Abstain" on your proxy card for Proposal 1, or if you
attend the Special Meeting and abstain from voting, it will have the same effect
as an "Against" vote.
To be approved, Proposal 2 must receive "For" votes from at least a
majority of the issued and outstanding common stock and preferred stock as of
the record date. If you select "Abstain" on your proxy card for Proposal 2, or
if you attend the Special Meeting and abstain from voting, it will have the same
effect as an "Against" vote.
If the stockholders do not approve both Proposal 1 and Proposal 2, we will
be unable to complete the Financing Transaction and will not receive any
proceeds from the Financing Transaction.
If your shares are held by your broker as your nominee (that is, in street
name), you will need to obtain a proxy card from the institution that holds your
shares and follow the instructions included on that proxy card regarding how to
instruct your broker to vote your shares. If you do not give instructions to
your broker, your broker cannot vote your shares for either Proposal 1 or
Proposal 2 at the Special Meeting.
Votes will be counted by the inspector of election appointed for the
meeting, who will separately count "For" and "Against" votes and abstentions.
Abstentions will be counted towards the vote total for each proposal and will
have the same effect as "Against" votes. Preliminary voting results will be
announced by the inspector of election at the Special Meeting and announced
promptly following the Special Meeting in a press release. The final voting
results will be published in a Current Report on Form 8-K.
If the stockholders do not approve both of Proposal 1 and Proposal 2, we
will not be able to complete the Financing Transaction and the Company will not
receive any proceeds from the sale of the 2006 Preferred Stock. This could
significantly harm our ability to achieve our business objectives and adversely
affect the value of the Company. Any alternatives to the Financing Transaction
might substantially diminish the value of our common stock and thus your
investment in the Company. The inability to complete the Financing Transaction
could also frustrate the Company's plan to regain compliance with the continue
listing requirements of the AMEX.
Revocation of Proxies
Any proxy given pursuant to this solicitation may be revoked by filing
with, and the receipt by, the Secretary of the Company of a written revocation
or duly executed proxy bearing a later date. Providing us with your proxy does
not preclude you from voting in person at the Special Meeting. The persons named
in the form of proxy solicited by the board of directors will vote all proxies
that have been properly executed by stockholders of record and returned to the
Company prior to the Special Meeting.
Voting Proxies
If a stockholder specifies on its proxy a choice with respect to each
proposal listed on the proxy card, the proxy will be voted in accordance with
that specification. IF NO DIRECTIONS TO THE CONTRARY ARE INDICATED, THE PERSONS
NAMED IN THE PROXY WILL VOTE THE SHARES REPRESENTED THEREBY FOR EACH PROPOSAL
LISTED ON THE PROXY CARD. If necessary, and unless the shares represented by the
proxy are voted against the Proposals described herein, the persons named in the
proxy also may vote in favor of a proposal to recess the Special Meeting and to
reconvene it on a subsequent date or dates without further notice, in order to
solicit and obtain sufficient votes to approve the matters being considered at
the Special Meeting.
If you receive more than one proxy card, your shares are registered in
more than one name or are registered in different accounts. Please complete,
sign and submit each proxy card by mail, or use the telephone or Internet voting
options, as described in the proxy card, to ensure that all of your shares are
voted.
Stockholders may revoke their proxies at any time before the final vote at
the Special Meeting. You may revoke your proxy in any one of three ways: (i) you
may submit another properly completed proxy card with a later date; (ii) you may
send a written notice that you are revoking your proxy to the Company's
Secretary at One Dundee Park, Andover, MA 01810; or (iii) you may attend the
Special Meeting and vote in person. Simply attending the Special Meeting without
voting will not revoke your proxy.
2
Record Date
Holders of record of our common stock and our preferred stock at the close
of business on the record date, August 15, 2006, have the right to receive
notice of and to vote at the Special Meeting. As of the record date, 19,448,728
shares of common stock and 3,975,000 shares of 2005 Preferred Stock were issued
and outstanding and entitled to vote.
Voting Rights
Each holder of record of common stock and each holder of preferred stock
is entitled to one vote for each share held as of August 15, 2006, with respect
to each matter to be voted upon at the Special Meeting.
If at the close of business on August 15, 2006 your shares were registered
directly in your name with our transfer agent, Continental Stock Transfer &
Trust Company, then you are a stockholder of record. As a stockholder of record,
you may vote in person at the meeting or vote by proxy. Whether or not you plan
to attend the meeting, we urge you to complete and return the enclosed proxy
card to ensure your vote is counted.
If at the close of business on August 15, 2006 your shares were held in an
account at a brokerage firm, bank, dealer, or other similar organization, then
you are the beneficial owner of shares held in street name, and these proxy
materials are being forwarded to you by that organization. The organization
holding your account is considered the stockholder of record for purposes of
voting at the Special Meeting. As a beneficial owner, you have the right to
direct your broker or other agent on how to vote the shares in your account. You
are also invited to attend the Special Meeting. However, since you are not the
stockholder of record, you may not vote your shares in person at the meeting
unless you request and obtain a valid proxy from your broker or other agent.
For each of the matters to be voted on, you may vote "For" or "Against"
the proposal, or abstain from voting. The procedures for voting are fairly
simple:
o If you are a stockholder of record, you may vote in person at the
Special Meeting or vote by proxy using the enclosed proxy card.
Whether or not you plan to attend the meeting, we urge you to vote
by proxy to ensure your vote is counted. You may still attend the
meeting and vote in person if you have already voted by proxy. To
vote using the proxy card, simply complete, sign and date the
enclosed proxy card and return it promptly in the envelope provided,
or use one of the telephone or Internet voting options described in
the proxy card. If you return your signed proxy card to us before
the Special Meeting, we will vote your shares as you direct. To vote
in person, come to the Special Meeting, and we will give you a
ballot when you arrive.
o If you are a beneficial owner of shares registered in the name of
your broker, bank or other agent, you should have received a proxy
card and voting instructions with these proxy materials from that
organization rather than from us. Please complete and mail the proxy
card, or use the telephone or Internet voting options, to ensure
that your vote is counted. To vote in person at the Special Meeting,
you must obtain a valid proxy from your broker, bank or other agent.
Follow the instructions from your broker or bank included with these
proxy materials or contact your broker or bank to request a proxy
form.
3
Quorum
A quorum of stockholders is necessary to hold a valid meeting. A quorum
will be present if at least a majority of the outstanding shares of common stock
and preferred stock are represented by stockholders present at the meeting or by
proxy. On August 15, 2006, the record date, there were 19,448,728 shares of
common stock and 3,975,000 shares of preferred stock outstanding and entitled to
vote. As a result, at least 11,711,865 of these shares must be represented by
stockholders present at the meeting or by proxy to have a quorum.
Your shares will be counted towards the quorum only if you submit a valid
proxy or vote at the meeting. Abstentions will be counted towards the quorum
requirement. If there is no quorum, a majority of the votes present at the
meeting may adjourn the meeting to another date.
Additional Information
Please note that you can find additional information from various sources,
including the web site maintained by the Securities and Exchange Commission (the
"SEC") at http://www.sec.gov. You may also read and copy any document the
Company files with the SEC at its public reference facilities. Please call the
SEC at 1-800-SEC-0330 for further information on the operation of its public
reference facilities. In addition, all of our recent SEC filings are available
at www.diomedinc.com.
Solicitation by the Board
We will pay for the entire cost of soliciting proxies. In addition to
these mailed proxy materials, our directors, officers and other employees may
also solicit proxies in person, electronically (by facsimile, e-mail or through
the Internet), by telephone or by other means of communication. Directors,
officers and other employees will not be paid any additional compensation for
soliciting proxies. We will also request record holders of our common stock and
preferred stock who are brokerage firms, banks, custodians, fiduciaries and
other agents for the cost of forwarding proxy materials to beneficial owners of
such shares and, upon request, will reimburse such record holders for the costs
of forwarding the materials in accordance with customary charges. The
solicitation of proxies will also be supplemented through the services of
Innisfree M&A Incorporated, a proxy solicitation firm. Our proxy solicitor will
receive a customary fee of $10,000, plus expenses, for its services to us.
4
TABLE OF CONTENTS
Page
Cautionary Statement Concerning Forward-Looking Information................................... 6
Cautionary Statement Concerning Representations and Warranties Contained
in the Securities Purchase Agreement or in the Ancillary Agreements........................ 6
Questions and Answers About This Proxy Material and Voting.................................... 7
Beneficial Ownership.......................................................................... 10
Proposal 1
Summary of Terms of the Financing Transaction........................................ 13
Changes in Capitalization Arising from the Sale and Issuance
of the 2006 Preferred Stock....................................................... 15
Reasons for the Financing Transaction................................................ 15
Board Considerations for the Financing Transactions.................................. 16
Anti-Dilution Provisions of the Currently Outstanding Anti-Dilution Securities....... 18
Discussions and Deliberations of the Finance Committee............................... 19
Description of the 2006 Preferred Stock.............................................. 21
Description of the Transaction Documents............................................. 23
Securities Purchase Agreement............................................... 23
Form of Par Warrant......................................................... 30
Registration Rights Agreement............................................... 31
Placement Agent Agreements.................................................. 33
Interests of Directors and Executive Officers in Proposal 1.......................... 34
Required Vote........................................................................ 34
Board Recommendation................................................................. 34
Proposal 2
Proposed Amendment to Our Certificate of Incorporation............................... 35
Purpose of Amendment................................................................. 36
Effect of Amendment.................................................................. 37
Required Vote........................................................................ 38
Board Recommendation................................................................. 38
Other Matters................................................................................. 39
Proposals by Stockholders for Presentation at the 2007
Annual Meeting............................................................................. 39
Appendix A: Certificate of Amendment to the Certificate of Incorporation
5
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This proxy statement, and the documents to which we refer you in this
proxy statement, contain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). These statements appear in a number of
places in this proxy statement and include statements regarding our intent,
belief and current expectations with respect to, among other things, the
expected completion and timing of the proposed transaction, the use of proceeds
from the proposed transaction, and other information related to the transactions
contemplated under the Securities Purchase Agreement and the ancillary
agreements. The words "anticipate," "believe," "expect," "forecast," "guidance,"
"intend," "may," "plan," "project," "will" and other similar expressions
generally identify forward-looking statements. While these forward-looking
statements and the related assumptions are made in good faith and reflect our
current judgment regarding the proposed transaction and the other transactions
contemplated under the Securities Purchase Agreement and the ancillary
agreements as well as the direction of our business, actual results will almost
always vary, sometimes materially, from any estimates, predictions, projections,
assumptions or other future performance suggested herein. These statements are
based upon a number of assumptions and estimates which are inherently subject to
significant uncertainties and contingencies, many of which are beyond our
control and reflect future business decisions which are subject to change. Some
of these assumptions inevitably will not materialize, and unanticipated events
will occur which will affect our results.
We refer you to the "Risk Factors" on pages 23 through 38 of our annual
report filed with the Securities and Exchange Commission on SEC Form 10-KSB/A
for a discussion of certain risks, including those relating to our business as a
medical device company without a significant operating record and with operating
losses, our risks relating to the commercialization of our current and future
products and applications, and risks relating to our common stock and its market
value
CAUTIONARY STATEMENT CONCERNING REPRESENTATIONS AND WARRANTIES CONTAINED IN THE
SECURITIES PURCHASE AGREEMENT OR IN THE ANCILLARY AGREEMENTS
You should not rely upon the representations and warranties in the
Securities Purchase Agreement or in any of the ancillary agreements or the
descriptions of such representations and warranties in this proxy statement as
statements of factual information about the Company or the Investors. These
representations and warranties were made only for purposes of the Securities
Purchase Agreement and the ancillary agreements, were made solely to us or to
the other parties to the Securities Purchase Agreement or the ancillary
agreements as of the dates indicated therein and are subject to modification or
qualification by other disclosures made by us in negotiating the terms of such
agreements. The representations and warranties are reproduced and summarized in
this proxy statement solely to provide information regarding the terms of such
agreements and not to provide you with any other information regarding the
Company or the Investors. Information about the Company can be found elsewhere
in this proxy statement and in other public filings we make with the SEC.
Information about the Investors can also be found elsewhere in this proxy
statement.
6
DIOMED HOLDINGS, INC.
One Dundee Park, Suite 5
Andover, MA 01810
QUESTIONS AND ANSWERS ABOUT THIS PROXY MATERIAL AND VOTING
The following questions and answers address briefly some questions you may
have regarding the special meeting and the proposed transaction. These questions
and answers may not address all questions that may be important to you as a
stockholder of Diomed Holdings, Inc. Please refer to the more detailed
information contained elsewhere in this proxy statement and the annexes to this
proxy statement. In this proxy statement, the terms "Diomed," "Company," "we,"
"our," "ours," and "us" refer to Diomed Holdings, Inc.
Throughout this Proxy Statement, we refer to the shares of our proposed
Series 2006 Preferred Stock as the "2006 Preferred Stock" and to the 2006
Preferred Stock, any Par Warrants that we may or may be required to issue and
the common stock purchase warrants as the "Securities."
What am I being asked to vote on?
We require working capital to operate our business and protect our
intellectual property. To obtain $10,010,000 of capital, we have entered into
agreements for a proposed financing, referred to as the "Financing Transaction."
You are being asked to vote on a proposal that approves the Financing
Transaction and a second proposal that will provide us with the authorized share
capital to complete the Financing Transaction.
Why is the Company seeking stockholder approval for the Financing Transaction?
For two reasons:
o our common stock is currently listed on the AMEX, and the AMEX rules
require stockholder approval for any issuance or sale of common
stock, or securities convertible into common stock, that meets
certain criteria, which are met in the Financing Transaction; and
o under the Securities Purchase Agreement, we agreed to seek the
stockholders' approval of the Financing Transaction at the Special
Meeting.
What will happen to the Company if either or both Proposal 1 or Proposal 2 are
not approved?
If the stockholders do not approve both of Proposal 1 and Proposal 2, we
will not be able to complete the Financing Transaction. We are not likely to
have sufficient capital to operate and protect our intellectual property. This
may well adversely affect the value of your shares. This will likely
significantly harm our business and adversely affect the value of the Company
and your shares. Management also expects that the completion of the Financing
Transaction will enable the Company to regain compliance with the continued
listing criteria of the AMEX and therefore enable the common stock to continue
to be listed for trading on the AMEX. If the common stock ceases to be listed on
the AMEX (or another trading market), then it is likely to be be more difficult
for stockholders to liquidate their investment in the Company.
Will the Financing Transaction dilute our existing stockholders' percentage
ownership of the Company?
Our existing stockholders' percentage ownership in the Company will
decrease if the Financing Transaction is completed. The percentage ownership of
common stockholders will decrease from approximately 59.54% to approximately 40%
following completion of the Financing Transaction. Despite this dilution, we
will receive necessary working capital, aggregating approximately $10,010,000
(before financing expenses). The average price paid per share of underlying
common stock by the Investors is $1.15. For more detailed information as to
dilution, please refer to the table under "Changes in Capitalization Arising
from the Sale and Issuance of the 2006 Preferred Stock" on page 15 below.
7
How will the Financing Transaction impact the Company's AMEX listing?
In the Financing Transaction, the holders of our outstanding preferred
shares have agreed to surrender their shares in exchange for shares of the 2006
Preferred Stock. As a result of the exchange, substantially all of the
investment in the outstanding preferred shares will be reclassified as
stockholders' equity for accounting purposes, as will substantially all of the
cash purchase price of the 2006 Preferred Stock. We expect that this will enable
us to satisfy our plan submitted to the AMEX to increase our stockholders'
equity in excess of the $4,000,000 minimum standard for continued listing
required by the AMEX.
What liquidation preference and other rights will the holders of the 2006
Preferred Stock have?
As a result of the Financing Transaction, the aggregate preference payable
to the holders of our preferred stock will increase to approximately $24,000,000
from its existing level of approximately $12,000,000. Combined with our
convertible notes outstanding in the aggregate principal amount of approximately
$3,700,000, any sale or liquidation of our business would have to net at least
$27,700,000 before our common stockholders participated in the proceeds.
In addition to other rights, the holders of the 2006 Preferred Stock will
have the right to approve future debt financings and future equity financings
that are dilutive to those holders. These rights may make it difficult for us to
raise additional equity financing.
What dividends will the Company pay to the holders of 2006 Preferred Stock?
We will not pay any dividends on the 2006 Preferred Stock unless we
complete a future financing transaction involving the issuance of common stock
for less than $1.15 per share and certain other conditions are met. If dividends
do become payable, they will begin to accrue at an annual rate of 15%.
Does the Company have the ability to consider and act on other financing
proposals?
Although we have agreed with the Investors that our Board will not
withdraw or modify its recommendation for the Financing Transaction and that we
would not initiate discussions of other financing proposals, we also reserved
the right to negotiate and endorse financing proposals that contain better
economic terms if we agree to pay the Investors a cash fee on consummation of an
alternative financing proposal. The amount of the cash fee may substantially
reduce the advantage of an alternative financing to us. For details regarding
our rights and obligations in this respect, see "Description of the Transaction
Documents - Securities Purchase Agreement - Consideration of Superior
Alternative Financing Offers" below at page 29 below.
What warrants will the Company issue to the Investors?
We will not issue warrants to purchase any shares of common stock to the
Investors beyond the number of shares of common stock underlying the 2006
Preferred Stock. The terms of the Financing Transaction do contemplate that we
will issue "Par Warrants" to the Investors, but these Par Warrants will only be
issued instead of actual shares of common stock if and to the extent that the
terms of the Financing Transaction limit an Investor from receiving shares due
to the amount of shares beneficially owned by that Investor.
8
Will I receive any proceeds from the Financing Transaction?
You will not receive any of the proceeds, or any other consideration, from
the Financing Transaction. We are seeking your approval only so that we can sell
to the Investors in the Financing Transaction the securities described above in
return for an investment of $10,010,000 in cash by the Investors and the
surrender by the existing holders of all 3,975,000 currently outstanding shares
of the 2005 Preferred Stock.
Who are the investors in the Financing Transaction?
The investors in the Financing Transaction are (i) 18 persons who
currently own shares of 2005 Preferred Stock, (ii) three investors who currently
hold 2005 Preferred Stock and are investing additional money in the Financing
Transaction and (iii) 16 new investors who do not currently own shares of 2005
Preferred Stock (including two investors who are affiliated with one of our
directors (investing a total of $1,500,000) and one investor who is affiliated
with our co-placement agent in the Financing Transaction. The investors are
institutional investors and individuals, all of whom are accredited investors.
How many votes are needed to approve each proposal?
o To be approved, Proposal 1 must receive "For" votes from a majority
of the shares present and entitled to vote at the Special Meeting,
either in person or by proxy. If you select "Abstain" on your proxy
card or you attend the meeting and abstain from voting, it will have
the same effect as an "Against" vote.
o To be approved, Proposal 2 must receive "For" votes from a majority
of the shares outstanding on the record date. If you abstain from
voting, it will have the same effect as an "Against" vote. Please
note that our stockholders must approve both Proposal 1 and Proposal
2 to enable us to complete the Financing Transaction. If both
Proposal 1 and Proposal 2 are not approved, we will not be able to
complete the Financing Transaction on its terms and we therefore
will receive no proceeds and the 2005 Preferred Stock will remain
outstanding.
IF YOU HOLD YOUR SHARES THROUGH YOUR BROKER, YOUR BROKER MAY NOT VOTE FOR
PROPOSAL 1 OR 2 WITHOUT YOUR WRITTEN AUTHORIZATION. IF YOU WISH TO VOTE "FOR"
THE PROPOSALS, YOU MUST MARK, SIGN AND RETURN THE PROXY CARD SENT TO YOU.
IF YOU HAVE ANY QUESTIONS OR NEED ASSISTANCE WITH VOTING YOUR SHARES, PLEASE
CALL INNISFREE M&A INCORPORATED, THE FIRM ASSISTING US IN THIS SOLICITATION,
TOLL-FREE AT 888-750-5834 (U.S. AND CANADA) OR 00-800-7710-9970 (EU).
9
BENEFICIAL OWNERSHIP
The following table sets forth beneficial ownership information as of
August 15, 2006 for shares of our capital stock or rights to acquire shares of
our capital stock exercisable within 60 days (and without giving effect to the
Financing Transaction) beneficially owned by:
o our chief executive officer and other executive officers whose
salary and bonuses for 2005 exceeded $100,000 and whose annualized
salary exceeds $100,000;
o each director;
o our directors and executive officers as a group; and
o each person who is known by us to beneficially own more than 5% of
the outstanding shares of our common stock and other classes of
voting stock.
To our knowledge, each person, along with his or her spouse, has sole
voting and investment power over the shares unless otherwise noted.
AMOUNT AND NATURE OF
NAME BENEFICIAL OWNERSHIP PERCENT OF CLASS (1)
- ---- -------------------- --------------------
Sidney Braginsky 38,750 (2) 0.2%
Gary Brooks 45,750 (3) 0.23%
A. Kim Campbell 46,750 (4) 0.24%
Joseph Harris 40,750 (5) 0.21%
Geoffrey Jenkins 106,851 (6) 0.55%
Peter Klein 51,850 (7) 0.27%
Edwin Snape 47,750 (8) 0.25%
David Swank 169,593 (9) 0.87%
James A. Wylie, Jr 732,373 (10) 3.66%
Christopher Geberth 46,502 (11) 0.24%
Cary Paulette 87,919 (12) 0.45%
Kevin Stearn 97,501 (13) 0.5%
John J. Welch 82,501 (14) 0.42%
All officers and directors
as a group (13 persons) 1,594,840 8.09%
Beneficial Owners of More than 5% of the Company's Common Stock
Samuel Belzberg 1,714,260 (15) 8.8%
Zesiger Capital Group 1,672,786 (16) 8.6%
Galleon Healthcare Partners, L.P. and
affiliates 1,134,000 (17) 5.8%
Omicron Master Trust and affiliates 1,865,546 (18) 8.75%
ProMed Partners, L.P. and affiliates 2,120,401 (19) 10.3%
Gruber McBain and affiliates 1,403,100 (20) 6.8%
(1) Calculated pursuant to Rule 13d-3 of the Rules and Regulations under the
Exchange Act. Percentages shown for all officers and directors as a group are
calculated on an aggregate basis and percentages shown for individuals are
rounded to the nearest one-tenth of one percent. The mailing address for each of
the directors and officers is c/o Diomed, Inc., One Dundee Park, Andover, MA
01810.
10
(2) Includes 38,750 shares of common stock issuable upon the exercise of stock
options vested through 10/31/06.
(3) Includes 3,000 shares held plus 42,750 shares of common stock issuable upon
the exercise of stock options vested through 10/31/06.
(4) Includes 46,750 shares of common stock issuable upon the exercise of stock
options vested through 10/31/06.
(5) Includes 2,000 shares held plus 38,750 shares of common stock issuable upon
the exercise of stock options vested through 10/31/06.
(6) Includes 6,600 shares held plus 100,251 shares of common stock issuable upon
the exercise of stock options vested through 10/31/06.
(7) Includes 9,100 shares held plus 42,750 shares of common stock issuable upon
the exercise of stock options vested through 10/31/06.
(8) Includes 9,000 shares held plus 38,750 shares of common stock issuable upon
the exercise of stock options vested through 10/31/06.
(9) Includes 15,000 shares held plus 154,593 shares of common stock issuable
upon the exercise of stock options vested through 10/31/06.
(10) Includes 165,961 shares held plus 566,412 shares of common stock issuable
upon the exercise of stock options vested through 10/31/06.
(11) Includes 4,000 shares held plus 42,502 shares of common stock issuable upon
the exercise of stock options vested through 10/31/06.
(12) Includes 87,919 shares of common stock issuable upon the exercise of stock
options vested through 10/31/06.
(13) Includes 97,501 shares of common stock issuable upon the exercise of stock
options vested through 10/31/06.
(14) Includes 82,501 shares of common stock issuable upon the exercise of stock
options vested through 10/31/06.
(15) Includes 1,709,593 shares of common stock held by Gibralt US, Inc. and
4,667 shares issuable upon the exercise of fully vested stock options held by
Mr. Belzberg. Mr. Belzberg is an affiliate of Gibralt Capital Corp. and Gibralt
U.S. Inc., and therefore is deemed to beneficially own the securities it holds.
Mr. Belzberg's address is c/o Gibralt Capital Corp., 1075 W Georgia Street,
Suite 1075, Vancouver, BC V6E 3C9 Canada.
(16) Includes 1,672,786 shares of common stock as to which we believe Zesiger
has sole dispositive power, as investment adviser for Zesiger clients, none of
whom individually owns more than 5% of the common stock. Zesiger's address is
320 Park Avenue, 30th Floor, New York, NY 10022.
(17) Includes 1,134,000 shares of common stock held. Galleon's address is 135 E
57th Street, 16th Floor, New York, NY 10022.
(18) Includes 306,574 shares underlying convertible debentures plus 1,558,972
shares of common stock underlying warrants. Omicron's address is 810 Seventh
Ave., 39th Floor, New York, NY 10019.
11
(19) Includes 1,025,401 shares of common stock held, 775,000 shares of preferred
stock held and 320,000 shares of common stock underlying warrants. Does not give
effect to 9.9% limitations on ownership which restrict the exchange of preferred
stock and exercise of warrants. ProMed's address is 230 Park Avenue, 9th Floor,
New York, NY 10017.
(20) Includes 283,100 shares of common stock held, 800,000 shares of common
stock underlying preferred stock held and 320,000 shares of common stock
underlying warrants held. Does not give effect to 4.9% limitations on ownership
which restrict the exchange of preferred stock and exercise of warrants. Gruber
McBain's address is 50 Osgood Place, San Francisco, CA 94133.
12
PROPOSAL 1
APPROVAL OF THE SALE AND ISSUANCE OF $19,947,500 OF 2006 PREFERRED STOCK,
INCLUDING THE TERMS AND PROVISIONS OF THE 2006 PREFERRED STOCK THAT IS
EXCHANGEABLE FOR SHARES OF OUR COMMON STOCK, TO CERTAIN INSTITUTIONAL AND OTHER
INVESTORS, INCLUDING EXISTING HOLDERS OF OUR PREFERRED STOCK
NOTE TO STOCKHOLDERS: IF YOU DO NOT APPROVE BOTH PROPOSAL 1 AND PROPOSAL 2, WE
WILL NOT BE ABLE TO COMPLETE THE FINANCING TRANSACTION AND WILL NOT RECEIVE ANY
PROCEEDS FROM THE SALE OF THE SECURITIES. AS A RESULT, WE ARE NOT LIKELY TO HAVE
SUFFICIENT WORKING CAPITAL TO OPERATE OUR BUSINESS AND TO PROTECT OUR INVESTMENT
IN OUR INTELLECTUAL PROPERTY. MOREOVER, ANY ALTERNATIVES TO THE FINANCING
TRANSACTION MIGHT SUBSTANTIALLY DIMINISH THE VALUE OF OUR COMMON STOCK AND THUS
YOUR INVESTMENT IN US. WE URGE YOU TO VOTE "FOR" THIS PROPOSAL.
The following is a summary of the terms of the Financing Transaction and
the provisions of the Securities Purchase Agreement, the Certificate of
Amendment, the Registration Rights Agreement, the form of Par Warrant (each as
defined below) and other related documents and agreements (collectively, the
"Transaction Documents"). The sale of the Securities has not been registered
under the Securities Act of 1933, as amended (the "Securities Act"). The
Securities will be sold to accredited investors in reliance upon exemptions from
registration under Section 4(2) of the Securities Act and Rule 506 of Regulation
D promulgated under the Securities Act. None of the Securities or the common
stock issuable upon conversion of the 2006 Preferred Stock or exercise of the
Par Warrants may be offered or sold in the United States absent registration
under or exemption from the Securities Act and any applicable state securities
laws.
THIS SUMMARY OF THE TERMS OF THE FINANCING TRANSACTION IS INTENDED TO
PROVIDE YOU WITH BASIC INFORMATION CONCERNING THE FINANCING TRANSACTION. IT IS
NOT A SUBSTITUTE FOR REVIEWING THE APPENDIX AND THE OTHER TRANSACTION DOCUMENTS
PREVIOUSLY FILED BY THE COMPANY WITH THE SEC. YOU SHOULD READ THIS SUMMARY IN
CONJUNCTION WITH THE SECURITIES PURCHASE AGREEMENT AND THE OTHER TRANSACTION
DOCUMENTS.
THE FINANCING TRANSACTION IS DESCRIBED IN THIS PROXY STATEMENT FOR
INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE AN OFFER TO SELL ANY
SECURITIES TO ANY PERSON.
Summary of Terms of the Financing Transaction
On July 27, 2006, we entered into a Securities Purchase Agreement (the
"Securities Purchase Agreement") with several accredited investors (the
"Investors"), including (i) 18 Investors who currently own shares of the 2005
Preferred Stock, (ii) three Investors who currently hold 2005 Preferred Stock
and are investing additional money in the Financing Transaction and (iii) 16 new
Investors who do not currently own shares of 2005 Preferred Stock. If we
complete the Financing Transaction, we will receive aggregate gross cash
proceeds of $10,010,000 and we will extinguish all of our currently outstanding
2005 Preferred Stock. We filed a copy of the Securities Purchase Agreement with
the SEC in our Current Report on SEC Form 8-K filed August 1, 2006. The rights,
preferences and privileges of the holders of 2006 Preferred Stock are set forth
in the proposed Certificate of Amendment to the Company's Certificate of
Incorporation (the "Certificate of Amendment") annexed hereto as Appendix A.
13
Pursuant to a registration rights agreement to be entered into between the
Company and the Investors at the closing of the Financing Transaction, we will
be obligated to register with the SEC the shares of common stock that are
issuable upon conversion of the 2006 Preferred Stock and upon exercise of the
Par Warrants. We filed a copy of the registration rights agreement with the SEC
in our Current Report on SEC Form 8-K filed August 1, 2006.
Each of Musket Research Associates, Inc. ("MRA") and Roth Capital Partners
LLC ("RCP") acted as placement agent for the Financing Transaction. We filed
copies of our agreements with MRA and RCP with the SEC in our Current Report on
SEC Form 8-K filed August 1, 2006. Upon closing of the Financing Transaction,
MRA and RCP will receive an aggregate cash fee of $610,600. MRA will also
receive warrants to purchase 370,000 shares of our common stock, exercisable at
$1.15 per share.
If the stockholders approve the Financing Transaction and other closing
conditions are met, we will hold the closing of the Financing Transaction as
soon as practicable following the Special Meeting. Under the Securities Purchase
Agreement, we will issue 870.4348 shares of 2006 Preferred Stock for cash and
receive gross proceeds of $10,010,000. We will also issue 864.9999 shares of the
2006 Preferred Stock to the holders of the 2005 Preferred Stock, in exchange for
all 3,975,000 currently outstanding shares of the 2005 Preferred Stock, which
the holders will surrender to us for cancellation. Upon the consummation of the
Financing Transaction, 1,735.4347 shares of the 2006 Preferred Stock will be
outstanding, which will be convertible into a total of 17,354,347 shares of
common stock (subject to anti-dilution provisions of the 2006 Preferred Stock).
No holder of the 2006 Preferred Stock will have the right to exchange
shares of the 2006 Preferred Stock for shares of common stock, nor will we have
the right to require that a holder of the 2006 Preferred Stock receive shares of
our common stock in exchange for the 2006 Preferred Stock, to the extent that an
exchange results in the holders being issued shares of our common stock and
thereby becoming the beneficial owner of more than 4.99%, or in the case of some
Investors, more than 9.99%, of the then-issued and outstanding shares of our
common stock, unless the holder elects to opt out of the benefit of this
limitation. If an Investor's conversion of the 2006 Preferred Stock would cause
the Investor to exceed this limitation, then we will issue warrants (the "Par
Warrants") to the Investor, thereby entitling the Investor to acquire, at
nominal cost, the number of shares of our common stock constituting the excess
of the amount of shares issuable but for the agreed-upon limitation of
ownership. This generally follows certain filing requirements under the Exchange
Act. The Par Warrants are exercisable for $0.001 per share for a period of five
years.
The effective price per share of common stock in the Financing Transaction
is $1.15. This effective price will trigger certain anti-dilution provisions of
currently outstanding securities we previously issued (the "Anti-Dilution
Securities"), which provide for adjustments to the effective price payable for
shares of common stock upon the exercise of the Anti-Dilution Securities in the
event that we complete a transaction at an effective price per share lower than
the current effective price per share of the Anti-Dilution Securities.
As part of the Securities Purchase Agreement, we agreed with the
Investors, among other things, that we will permit an observer to attend board
meetings, pursue the listing of the shares of common stock underlying the
securities with the AMEX, permit the Investors to participate up to certain
limits in future equity financings, limit our incurrences of debt and issuances
of other equity financings, not pay cash dividends or redeem outstanding shares
for cash and not take certain actions that could adversely affect the holders of
the 2006 Preferred Stock.
14
Changes in Capitalization Arising from the Sale and Issuance of the 2006
Preferred Stock
The following table sets forth, as of the record date, information
regarding our common stock issued and outstanding on a fully diluted basis, both
before and after giving effect to the Financing Transaction. When we refer to "a
fully diluted basis," we assume conversion of the 2006 Preferred Stock, exercise
of all outstanding stock options and warrants as of the record date, and the
exchange of all outstanding 2005 Preferred Stock as of the record date,
including the Anti-Dilution Securities.
Before After
Financing Financing
Description of Common Shares Transaction Transaction
- ---------------------------- ----------- -----------
Shares issued and outstanding 19,448,728 19,448,728
Shares to be issued on conversion of
convertible notes 1,620,961 3,227,826
Shares to be issued on exchange of 2005
Preferred Stock 3,975,000 --
Shares to be issued on exchange of 2006
Preferred Stock -- 17,354,347
Shares to be issued on exercise of stock
options and non-investor warrants 3,023,787 3,393,787
Shares to be issued on exercise of investor
warrants 4,596,776 5,085,304
---------- ----------
TOTAL 32,665,252 48,509,992
========== ==========
Of the 32,665,252 shares of our common stock that are issued and
outstanding on a fully diluted basis as of the record date, the holders of those
shares of common stock that are issued and outstanding on the record date hold
approximately 59.54%. Of the 48,509,992 shares of our common stock that will be
issued and outstanding on a fully diluted basis as of the completion of the
Financing Transaction, the holders of those shares of common stock that are
issued and outstanding on the record date will hold approximately 40.0%, a
decrease of approximately 19.5 percentage points.
Reasons for the Financing Transaction
The Company requires additional capital to pursue our strategic business
objectives, particularly in light of the degree of competition in our
marketplace. Certain of that competition is legitimate; we believe, however,
that other forms of competition are unlawful, such as patent infringement. In
the case of patent infringement, our Board believes that it is in the best
interest of our stockholders to pursue our legal rights. Patent litigation is
expensive and requires extensive and frequent funding. Therefore, after
carefully considering potential financing and strategic alternatives, including
alternate financing structures, the Board determined that the Financing
Transaction would provide the greatest potential value for our stockholders, as
well as provide the necessary capital to pursue our short-and long-term
strategic goals, and was the best available transaction.
Our principal business objective is to commercialize our EVLT(R) product
line and we believe that we require additional capital to achieve that
objective. We generated net revenues of $13,384,500, $19,048,751 and $10,651,396
for 2004, 2005 and the first six months of 2006, respectively. During those same
periods, our losses from operations have been $9,813,238, $9,811,986 and
$5,572,258. We ended the second quarter of 2006 with a cash and short term
investment balance of approximately $7.0 million compared with a cash balance of
approximately $9.0 million at the end of the first quarter of 2006. Net cash
used in our operating activities in 2004, 2005 and the first six months of 2006
was $8,730,846, $8,856,793 and $5,176,073, respectively. We are bearing costs
related to the protection of its intellectual property and to defend against
claims of patent infringement from a competitor. These costs were $1,336,766,
$2,684,188 and $1,385,463 in 2004, 2005 and the first six months of 2006.
15
In addition, on June 1, 2006, we received notice from the American Stock
Exchange (the "AMEX") that we were not in compliance with an AMEX listing
standard that requires us to have at least $4,000,000 of stockholders' equity.
Because our stockholders' equity does not include the 2005 Preferred Stock, we
considered issuing shares of a new series of preferred stock that will be
accounted for as stockholders' equity and to seek to have the holders of the
existing mezzanine-level preferred stock issued in 2005 tender their shares of
preferred stock in exchange for shares of the new series of preferred, having a
limit on the overall amount of liquidated damages payable by the Company and
precluding redemption by the holder for cash in the event of any circumstances
beyond the Company's control. As a result, upon completion of the Financing
Transaction, we expect that our balance sheet will show an increase in the
$2,049,000 stockholders' equity that we had as of June 30, 2006, of
approximately $18,000,000 less net losses incurred during the period from June
30, 2006 through the closing of the Financing Transaction. We further expect
that the Financing Transaction will satisfy the concerns that the AMEX has
raised.
Taking into account the above factors and challenges, our management and
Board of Directors, in consultation with our advisors, determined that the
Financing Transaction would provide us with the amount of funds and overall
terms and conditions better than any other strategic alternative available to us
and was in the best interests of our stockholders. We will use the proceeds of
the Financing Transaction primarily for general corporate and working capital
purposes and have agreed that they will not be used to pay dividends, to
increase executive compensation in certain ways, to invest in securities, to
make investments not related to our business or to repay debt (other than in the
ordinary course of business).
If Proposal 1 and Proposal 2 are approved by our stockholders, we would be
authorized to issue the securities contemplated by the Financing Transaction
(the "Securities") and upon satisfaction of the other conditions to closing the
Financing Transaction, we would receive $10,010,000 of gross cash proceeds upon
the closing of the sale of the Securities (approximately $900,000 in net
proceeds after deduction of expenses related to the Financing Transaction).
Board Considerations for the Financing Transaction
In making its determination to approve the Financing Transaction, our
Board of Directors (the "Board") consulted with our officers with respect to
strategic and operational matters. The Board also consulted with its independent
registered public accountants and counsel regarding various matters including
the Securities Purchase Agreement and other Transaction Documents and the desire
to have a majority of the proceeds of the Financing Transaction accounted for as
stockholders' equity. The determination was the result of careful consideration
by our Board of a number of potentially positive factors, including the Board's
evaluation that the Financing Transaction will likely:
o provide critical funding for our operations, to protect our
intellectual property and to defend against patent infringement
proceedings;
o strengthen our financial condition and reduce our financial risk;
o encourage current and prospective customers and collaborators that
we will develop and support our products and services;
o reassure our employees of our continued viability and long-term
prospects as a place to work;
o allow us to seek better terms from suppliers;
16
o make our common stock more attractive to prospective investors for
purchase on the open market;
o strengthen our investor base with the addition of new institutional
investors who will have significant stakes in our long-term success
and will be motivated to provide the support and assistance to
protect and enhance their investments; and
o assist us in our efforts to maintain our listing on the AMEX by
augmenting our stockholders' equity.
The Board also noted that, in contrast to a sale of the Company or other
alternatives, the Financing Transaction will permit our existing stockholders to
continue to own shares of our common stock, thereby giving them the opportunity
to share in any increase in value that we are able to create following the
infusion of funds.
In its review of the Financing Transaction, the Board also considered a
number of potentially negative factors, including the following:
o the risks and uncertainties of our ability to execute our strategic
plan and to enhance stockholder value;
o sales of shares of common stock pursuant to registration statements
that we are obligated to file and maintain after the completion of
the Financing Transaction could have an adverse affect on the market
price of the common stock;
o the issuance of the 2006 Preferred Stock for cash and for the
exchange of the 2005 Preferred Stock for shares of the 2006
Preferred Stock will increase the aggregate liquidation preference
held by the holders of our preferred shares, as a priority to any
distribution to the holders of the common shares, doubling from
approximately $12,000,000 to approximately $24,000,000 (as a result,
if the Company were sold for proceeds of less than approximately
$27,700,000, the holders of the 2006 Preferred Stock would be
unlikely to exchange their shares and would be entitled to receive
the first $24,000,000 of such proceeds available for distribution to
equity holders after payment to the holders of approximately
$3,700,000 principal amount of convertible notes currently
outstanding, before the holders of our common stock participate in
the proceeds);
o the issuance of the 2006 Preferred Stock, the exchange of the 2005
Preferred Stock for the 2006 Preferred Stock and the antidilution
adjustments that benefit the holders of our outstanding convertible
notes and outstanding warrants as a result of the pricing of the
2006 Preferred Stock result in a reduction in the portion of our
common equity owned by the current holders of our issued and
outstanding common shares as of June 30, 2006 from 59.54% to 40.09%,
or, approximately one-third;
o the dilutive effect on our option holders, all of whom are officers
or other employees of the Company or directors, consultants or
others who perform services for us; and
o the agreements that benefit the holders of the 2006 Preferred Stock
will preclude us from seeking debt financing and may make it
difficult for us to raise any additional equity financing; if at a
later date we do seek additional financing, we may have to obtain
the consent of the holders of the 2006 Preferred Stock and their
consent may not be available at all or without providing them with
significant additional consideration, some or all of which may be in
the form of equity, which may be dilutive to the common
stockholders.
17
Acting through its Finance Committee, the Board conducted an overall
analysis of the Financing Transaction in which it weighed the benefits and
advantages against the risks and negative factors described above. Until
reaching agreement on the term sheet for the Financing Transaction, our Board
continued to consider alternatives to the Financing Transaction, including
alternate financing structures, the sale of the Company or a merger with another
entity. Our Board recognized that there can be no assurance that we would be
able to achieve all or significantly all of each anticipated benefits or
advantages in the Financing Transactions, or that we have identified and
accurately assessed each risk and negative factor. However, the Board concluded
that the potential benefits and advantages of the Financing Transaction
significantly outweighed the risks and negative factors, principally because the
proceeds would permit the Company to pursue its business plan, including
protection of its intellectual property and defense of patent litigation.
After taking into account these and other factors, the Finance Committee,
acting on behalf of our Board, unanimously approved the issuance and sale of the
2006 Preferred Stock to the Investors.
Anti-Dilution Provisions of the Currently Outstanding Anti-Dilution Securities
The terms of certain of the Company's currently outstanding Anti-Dilution
Securities provide for adjustments to the effective price payable for shares of
the common stock upon conversion or exercise of those Anti-Dilution Securities
if the Company completes certain future transactions and the effective price per
share of the common stock or common stock equivalents that are issued in the
future transaction is less than the effective price per share under the terms of
the Anti-Dilution Security. If approved by the Company's stockholders, the
Financing, which has an effective price per share of common stock of $1.15, will
constitute a dilutive transaction under the terms of the Anti-Dilution
Securities.
Accordingly, when we complete the Financing Transaction, antidilution
provisions of Anti-Dilution Securities will result in the following adjustments:
o the conversion price of the Debentures ($3.712 million principal
amount currently outstanding) will be reduced from $2.29 per share
of the common stock to $1.15 per share of the common stock which,
when converted will result in an increase in the number of shares of
common stock to be issued from 1,620,961 to 3,227,826;
o the exercise price of the warrants to purchase shares of the common
stock issued to the investors in the Company's financing transaction
completed October 28, 2004 (the "2004 Warrants") will be reduced
from $2.10 to $1.15 per share of the common stock;
o the exercise price of the warrants to purchase shares of the common
stock issued to the investors in the Company's financing transaction
completed September 30, 2005 (the "2005 Warrants") will be reduced
from $2.50 to $1.98 per share, and the number of shares of the
common stock issuable upon exercise of the 2005 Warrants will
increase from 1,800,000 to 2,272,000; and
o the exercise price of certain warrants to purchase shares of the
common stock issued to designees of the Company's former placement
agent, Sunrise Securities Corp. (the "Sunrise Warrants"), will be
reduced and the number of shares of common stock issuable upon
exercise of these Sunrise Warrants will increase from 139,315 to
155,843 as follows:
a. the exercise price of certain Sunrise Warrants will decrease
from $2.32 to $1.77 per share, and the number of shares of
common stock issuable upon exercise of these Sunrise Warrants
will increase from 42,282 to 55,559;
b. the exercise price of certain Sunrise Warrants will decrease
from $1.93 to $1.50 per share, and the number of shares of
common stock issuable upon exercise of these Sunrise Warrants
will increase from 11,455 to 14,706; and
18
c. the exercise price of certain Sunrise Warrants will decrease
from $2.10 to $1.15 per share (no adjustments will impact the
remaining Sunrise Warrants).
The following table sets forth the numbers of shares of common stock
currently underlying the Anti-Dilution Securities and the numbers of shares that
will underlie the Anti-Dilution Securities giving effect to the antidilution
provisions thereof assuming completion of the Financing Transaction:
Number of
Current Underlying Net
Number of Shares Increase in
Underlying Following Underlying
Description of Anti-Dilution Common Antidilution Common
Security Shares Adjustment Shares
- --------------------------------------------------------------------
Debentures 1,620,961 3,227,826 1,606,865
2005 Warrants 1,800,000 2,272,000 472,000
Sunrise Warrants 139,315 155,843 16,528
--------- ------------ -----------
TOTAL 3,560,276 5,655,669 2,095,393
========= ============ ===========
Discussions and Deliberations of the Finance Committee
At a special meeting held on April 7, 2006, our Board resolved to
re-establish its Finance Committee, previously formed on August 16, 2005, and
named Messrs. Wylie, Swank, Snape and Harris as the members of that committee,
with Mr. Jenkins as an ex officio member. The Finance Committee was granted the
authority to approve, negotiate and authorize our officers to enter into
agreements for debt and equity financings, as well as to engage placement agents
for those offerings. On April 26, 2006, at a regular meeting, our Board granted
the Finance Committee the authority to approve, negotiate and enter into
acquisition transactions, whether undertaken by us or proposed to us. During its
meetings in April and May 2006, the Finance Committee met with financial
advisors seeking engagements from us to explore a broad range of strategic
alternatives, including the sale of a significant portion of the Company or its
business and a sale of the entire Company as well. After reviewing its
discussions, the Committee determined that the litigation in which we are
currently involved made a determination of the value of the Company difficult.
Moreover, since we believe that we will prevail in our efforts to protect our
intellectual property and in our defense against claims of patent infringement,
the Finance Committee therefore concluded that further discussions of strategic
alternatives would be more productive after the litigations were complete or,
possibly, as they progressed further. During June and July of 2006, the Finance
Committee met seven times, at which meetings the Committee reviewed successive
drafts of a term sheet for an equity financing (initially drafted by our
placement agent, MRA) and also reviewed meetings and discussions held by our
management requested by third parties to present various strategic alternative
for our growth plans.
In May 2006, we discussed a potential financing with Mr. David Musket, a
principal of MRA, which we engaged in connection with our preferred stock
offering in 2005. Mr. Musket proposed that we engage MRA to assist us in
reviewing proposals for equity financing that we might receive. On June 12, we
engaged MRA under an engagement agreement. A copy of our agreement with MRA is
included with the Current Report on SEC Form 8-K we filed with the SEC on August
1, 2006.
On June 12, 2006, MRA delivered to the Committee a term sheet based on
discussions between MRA and SDS Capital Group SPC, Ltd. ("SDS"), under which SDS
and other institutional investors would purchase between $7,000,000 and
$10,000,000 of a new class of our preferred stock, exchangeable into shares of
our common stock at a suggested price of $1.40 per share, together with warrants
exercisable over a five-year period to acquire a number of shares of common
stock equal to 40% of the shares of common stock into which the preferred shares
were exchangeable. The proposal included a requirement that the preferred shares
have a liquidation preference equal to 120% of the issue price, or effectively
$1.68 per share of our common stock. In these negotiations, SDS represented that
it was negotiating terms and conditions that would be satisfactory to it. We
understood that we might be required to further negotiate the terms and
conditions with the other Investors.
19
The Finance Committee reviewed the correspondence received from the AMEX
on June 1, 2006 in which the AMEX pointed out that our stockholders' equity was
below the $4,000,000 threshold required by the rules of the AMEX for continued
listing. The Finance Committee further considered modifications that we might
propose to the holders of our 2005 Preferred Stock in order to eliminate certain
covenants and permit the 2005 Preferred Stock to be reclassified for accounting
purposes from the mezzanine level to stockholders' equity. At the same time, the
Finance Committee reviewed and discussed the existing contractual rights of the
holders of the 2005 Preferred Stock both to participate in the contemplated
equity financing and to exchange their shares of the 2005 Preferred Stock for
new securities that would be issued in the contemplated financing.
The Finance Committee and MRA proceeded to negotiate with SDS with respect
to the type of securities to be sold, for the elimination of the warrant feature
and for securities that we would be able to account for as stockholders' equity.
SDS responded on June 26, 2006 with a term sheet that offered preferred stock
exchangeable into shares of our common stock at $1.15 per share and with no
warrants to be purchased by investors in conjunction with their purchases of
preferred stock. The liquidation value of the preferred shares would be 120% of
the purchase price, or $1.38 per share, or $0.25 per share less than the prior
proposal. The Finance Committee approved the final term sheet on June 28, 2006,
and both we and SDS executed the term sheet on that date. While the Finance
Committee was reviewing and negotiating the term sheet, on June 16, 2006 we
engaged the services of RCP to act as financial advisor and co-placement agent
in connection with the equity financing under consideration. We believed that it
would be both advisable and expedient to approach existing stockholders that RCP
had previously introduced to us and other investors in two previous financings
with whom RCP had substantial prior relationships with a view to the exercise of
contractual participation rights by those investors, as well as, subject to our
consent, other persons who were not existing stockholders. A copy of our
engagement agreement with RCP is included with the Current Report on SEC Form
8-K we filed with the SEC on August 1, 2006.
While discussions regarding the term sheet were underway, we sent notices
to the holders of our 2005 Preferred Stock as required by the agreements under
which we issued those shares reminding the holders of their right to participate
in additional equity financings. The notices requested that any investor that
desired to receive additional information request that data from the Company.
Ultimately, we received requests from 10 holders of the 2005 Preferred Stock,
and three of those holders became Investors in the Financing Transaction and
have agreed to subscribe for 131 shares of the 2006 Preferred Stock for an
aggregate purchase price of $1,506,500. Similarly, to address rights held by the
holders of the 2005 Preferred Stock to exchange their shares of that stock for
shares of the 2006 Preferred Stock, the Finance Committee instructed that we
contact, through MRA and RCP, the existing holders and determine whether they
would be willing to exchange their shares. Ultimately all 18 of the existing
holders so agreed and executed the Securities Purchase Agreement, subscribing
for an aggregate of approximately 865 shares of the 2006 Preferred Stock that
are exchangeable for 8,649,999 shares of our common stock.
Because the terms of the term sheet and our understandings with SDS
required a total capital raise of $10,010,000, the Finance Committee authorized
us to respond to certain accredited investors who were not existing stockholders
but were interested in becoming so. Mr. Snape, a member of the Finance
Committee, is a partner of New England Partners ("NEP") and suggested that
certain investment partnerships managed by NEP might desire to participate as
investors in the Financing Transaction. Therefore, Mr. Snape recused himself
from all meetings of the Finance Committee and did not participate in any of its
discussions or deliberations. Ultimately, New England Capital, L.P., and Nexus
Medical Partners II S.C.A., SICAR, both of which are managed by NEP and
affiliates of NEP, agreed to purchase an aggregate of $1,500,000 of 2006
Preferred Stock on terms and conditions that were negotiated by other investors
and their counsel, without initiating or participating in any negotiations with
us.
20
The Finance Committee met on July 26, 2006 and reviewed the drafts of the
Securities Purchase Agreement, Certificate of Amendment, Par Warrant and
Registration Rights Agreement that had been circulated in a form believed to be
final. The members reviewed variances from the term sheet and discussed the
terms of the documents and the conditions to be satisfied before completing the
Financing Transaction, including the solicitation of the approval of the
stockholders. For a discussion of the factors that the Board and the Finance
Committee considered at this meeting and prior meetings, see "Board
Considerations for the Financing Transaction," above, in this Proxy Statement.
At this meeting the Finance Committee approved the Financing Transaction and
authorized Mr. Wylie and Mr. Swank to execute the documents providing for the
Financing Transaction.
Description of the 2006 Preferred Stock
The following description provides the material terms of the 2006
Preferred Stock. For additional information about the Company's authorized
securities, see "Proposed Amendment to Our Certificate of Incorporation" under
Proposal 2, on page 35 of this Proxy Statement.
The 2006 Preferred Stock will consist of 1,736 authorized shares.
Following the Financing Transaction, we expect all 1,736 of such authorized
shares to be issued and outstanding with a stated value of $11,500 per share, of
which 871 of the shares will be issued to Investors who have agreed to purchase
these shares for cash, and 865 of the shares will be issued to Investors who
have agreed to tender their shares of the 2005 Preferred Stock in exchange for
shares of the 2006 Preferred Stock under the Securities Purchase Agreement.
Exchange Provisions. At an Investor's option, each share of the 2006
Preferred Stock may be exchanged for shares of the common stock. Subject to
limitations on ownership, each share of the 2006 Preferred Stock is exchangeable
for the number of shares of the common stock equal to $11,500 divided by the
exchange rate. The exchange rate initially is $1.15 and is subject to certain
adjustments, including reduction if the Company makes certain dilutive issuances
of equity securities in the future. The antidilution adjustment provides that if
the Company sells shares of the common stock (or the rights to acquire the
common stock) for a price lower than the then-current exchange rate, the
exchange rate will be reduced to the weighted average price of the common stock
issued after giving effect to the dilutive issuance.
The Company also has the right to require the Investors to exchange their
shares of the 2006 Preferred Stock if the trading price of the common stock
achieves and remains at a price level of $2.875 per share and certain other
conditions are satisfied. Upon a change of control (as defined) of the Company,
shares of the 2006 Preferred Stock will automatically be exchanged for the right
to receive either (1) the liquidation preference of the 2006 Preferred Stock of
$13,800 per share or (2) the consideration which would have become payable in
the change of control transaction to the holders of the 2006 Preferred Stock in
respect of the shares of common stock underlying the 2006 Preferred Stock,
whichever is greater. For purposes of the 2006 Preferred Stock, a "change of
control" is defined to include only (i) the sale by the Company of all or
substantially all of its assets or (ii) a merger, consolidation or other
business combination where either (1) the Company is not the surviving entity or
(2) either the holders of the Company's capital stock immediately prior to the
transaction have 50% or less of the voting rights of the surviving entity or own
50% or less of the outstanding voting securities of the surviving entity
immediately following the transaction or the board of directors of the Company
immediately prior to the transaction comprise 50% or less of the board of
directors of the surviving entity. A change in ownership of the Company's
outstanding capital stock is excluded from the definition of "change in
control."
21
We did not structure the definition of "change of control" for the purpose
of discouraging a takeover of the Company. Rather, we defined "change of
control" in this manner to ensure that the 2006 Preferred Stock would not become
redeemable by the holders as a result of an event outside of the Company's
control. We believe that under applicable accounting standards, this, together
with the other terms and conditions of the 2006 Preferred Stock, will enable us
to categorize the 2006 Preferred Stock as stockholders' equity on our balance
sheet, which in turn will assist us in complying with the minimum stockholders'
equity required by the AMEX in its continued listing criteria.
Redemption. The Investors do not have the right to require the Company to
redeem their shares of the 2006 Preferred Stock. The Company, however, has the
right to redeem the 2006 Preferred Stock after the fifth anniversary of the
completion of the Financing Transaction at a price equal to 120% of the issue
price, or $13,800 per share.
Dividends. Dividends do not accrue on the 2006 Preferred Stock unless and
until the Company completes a transaction in the future that reduces the
effective conversion price of the Company's Variable Rate Convertible Debentures
due 2008 (the "Debentures") below the conversion price in effect upon the
completion of the Financing Transaction (which will be $1.15), as a result of
the operation of the antidilution rights of the holders of the Debentures, but
only if at the time of the future transaction the reduction in conversion price
affects Debentures having an aggregate principal amount of at least $1,000,000.
Thereafter, dividends will accrue on the issued and outstanding shares of the
2006 Preferred Stock at the rate of 15% per annum and will be payable quarterly
in arrears.
Voting Rights. The holders of 2006 Preferred Stock will be entitled to
vote on all matters submitted to a vote of the Company's stockholders, together
with the holders of common stock, voting as a single class. The holders of 2006
Preferred stock will vote their shares on the basis of the number of shares of
common stock into which the 2006 Preferred Stock is then exchangeable (subject
to the applicable limitations on ownership described below). If, under the
Delaware General Corporation Law, the holders of 2006 Preferred Stock are
required to approve any action of the Company by separately voting as a class,
the vote of the holders of at least 65% of the outstanding shares of the 2006
Preferred Stock is required to approve such action.
Liquidation. The 2006 Preferred Stock shall be preferred over and senior
to the common stock and any other class or series of capital stock created by
the Company. Upon the occurrence of any event causing the liquidation of the
Company or any change of control transaction (as defined) by the Company, the
holders of then-outstanding shares of 2006 Preferred Stock will be entitled to
receive, from the proceeds of such event or transaction, before any distribution
is made to any other class or series of capital stock of the Company, an amount
equal to the greater of (i) $13,800 per share of the 2006 Preferred Stock or
(ii) such amount per share of the 2006 Preferred Stock as would have been
payable had each share been exchanged into common stock immediately prior to the
event or transaction. If there are sufficient proceeds from the liquidation or
change of control transaction (as defined) remaining after the distribution to
the holders of the 2006 Preferred Stock, the remaining proceeds will be
distributed ratably among the holders of the common stock.
22
Anti-Dilution Adjustments to the Exchange Rate. The exchange rate of the
2006 Preferred Stock will be adjusted if the Company offers or sells any common
stock or common stock equivalent securities at an effective price per share of
less than the exchange rate of the 2006 Preferred Stock, which shall initially
be set at $1.15. The exchange rate will not be adjusted, however, for the
Company's issuance of common stock or common stock equivalent securities
exercisable below the exchange rate if such issuance is limited to: (i) shares
of common stock or options issued to employees, officers, directors or
consultants pursuant to an equity plan approved by the stockholders; (ii) the
exchange of exchangeable or convertible securities already outstanding as of the
date of the Securities Purchase Agreement.
Liquidated Damages. The Company may be required to pay liquidated damages
to the Investors if the Company fails to timely comply with an Investor's
request to exchange shares of the 2006 Preferred Stock for shares of the common
stock or if the Company does not timely remove restrictive legends from
certificates representing shares of the common stock when requested by the
Investor and permitted by applicable law. The liquidated damages are payable in
the amount of 1% per day of the issue price of the shares of the 2006 Preferred
Stock subject to the Investor's request and are subject to an aggregate cap of
25% of the issue price paid by the Investor for the 2006 Preferred Stock
(inclusive of any other liquidated damages payable by the Company in respect of
the 2006 Preferred Stock). If the Company fails to timely issue shares of the
common stock upon exchange or remove legends from shares of the common stock
when requested by Investors and permitted by applicable law and the Investor
purchases other shares of the common stock to settle the sale of shares of the
common stock that were intended to be settled by shares of the common stock
issuable upon exchange or the unlegended shares, then the Company may also be
required to pay to the Investors the difference between the proceeds of sale of
the shares of the common stock sold and the price paid for the other shares of
the common stock purchased for settlement purposes.
Description of the Transaction Documents
Securities Purchase Agreement
The following summary sets forth the provisions of the Securities Purchase
Agreement. The full text of the Securities Purchase Agreement is included in the
Current Report on SEC Form 8-K we filed with the SEC on August 1, 2006.
On July 27, 2006, the Company entered into a Securities Purchase Agreement
with the Investors, under which the Company agreed to issue and sell to the
Investors an aggregate of 1,735.4347 shares of the 2006 Preferred Stock. Of this
total, the Company agreed to sell approximately 870.4348 shares of the 2006
Preferred Stock for cash at a price per share of $11,500 per share, which will
result in gross proceeds of $10,010,000 to the Company. The Company agreed to
issue the other 864.9999 shares of the 2006 Preferred Stock in exchange for all
3,975,000 currently outstanding shares of the 2005 Preferred Stock. Each share
of the 2006 Preferred Stock will be exchangeable for 10,000 shares of the
Company's common stock. For a discussion of the terms and conditions on which
the Company and the Investors have agreed that the shares of the 2006 Preferred
Stock may be exchanged, see the "Description of the 2006 Preferred Stock"
section of this Proposal 1, above. Upon completion of the transactions set forth
in the Securities Purchase Agreement, no shares of the 2005 Preferred Stock will
be issued or outstanding, and 1,735.4347 shares of the 2006 Preferred Stock will
be issued and outstanding. The shares of the 2006 Preferred Stock then issued
and outstanding will initially be exchangeable, in the aggregate, for 17,354,347
shares of common stock.
23
At the closing of the transactions set forth in the Securities Purchase
Agreement, the Company will be required to deliver the following items to the
Investors:
o the executed Securities Purchase Agreement;
o certificates evidencing the shares of the 2006 Preferred Stock
purchased by each Investor or exchanged for each Investor's shares
of 2005 Preferred Stock;
o an executed Registration Rights Agreement (described below in this
Proxy Statement) providing the holders of 2006 Preferred Stock with
registration rights for the shares of common stock into which the
2006 Preferred Stock or Par Warrants are convertible or exercisable;
o a copy of the certificate of amendment to the Company's charter
establishing the rights, powers and preferences of the 2006
Preferred Stock;
o a legal opinion of the Company's counsel; and
o a copy of the resolutions or consents authorizing the Company's
execution of the Securities Purchase Agreement and related
transactions.
At the closing, the Investors must deliver to the Company the purchase
price of the shares of 2006 Preferred Stock they are purchasing, if they are
purchasing their shares for cash consideration, or the shares of the 2005
Preferred Stock they are exchanging for their shares of 2006 Preferred Stock.
Additionally, the Investors must deliver to the Company executed copies of the
Registration Rights Agreement.
Each of the following Investors has agreed to purchase the Securities for
cash for the purchase price set forth opposite its name in the table below:
No. Shares
Dollar No. Shares 2006 Common Stock
Amount Preferred Stock Underlying 2006
Name of Investor Invested to be Purchased Preferred Stock
- -----------------------------------------------------------------------------------------
SDS Capital Partners, L.P. 2,990,000 260 2,600,000
Westfield Life Sciences Fund, L.P. 195,500 17 170,000
Westfield Life Sciences Fund II, L.P. 1,736,500 151 1,510,000
Westfield Microcap Fund, L.P. 69,000 6 60,000
ProMed Partners, L.P. 368,000 32 320,000
ProMed Offshore Fund, Ltd 46,000 4 40,000
ProMed Offshore Fund II, Ltd 1,092,500 95 950,000
New England Partners Capital, L.P. 750,000 65.2174 652,174
Nexus Medical Partners II S.C.A. SICAR 750,000 65.2174 652,174
MCF Navigator Master Fund, Ltd. 299,000 26 260,000
Camber Capital Fund, L.P. 253,000 22 220,000
Robert Martin 253,000 22 220,000
Oliveira Capital 253,000 22 220,000
Alan W. Steinberg, L.P. 253,000 22 220,000
Valley Forge Investments, Ltd. 253,000 22 220,000
Cipher 06, LLC 218,500 19 190,000
David B. Musket 138,000 12 120,000
Guerrilla IRA Partners, L.P. 46,000 4 40,000
Doug Schmidt 46,000 4 40,000
---------- ---------- ---------
TOTAL 10,010,000 870.4348 8,704,348
========== ========== =========
24
Each of the following Investors has agreed to surrender the shares of 2005
Preferred Stock held by it in exchange for the issuance of 2006 Preferred Stock
as set forth in the table below:
No. Shares
2005 No. Shares 2006 No. Shares
Preferred Preferred Stock Common Stock
Stock to be to be Issued underlying 2006
Name of Investor Exchanged upon Exchange Preferred Stock
- -----------------------------------------------------------------------------------------
ProMed Partners, LP 144,000 31.3043 313,043
ProMed Partners II, LP 11,000 2.3913 23,913
ProMed Offshore Fund, Ltd. 24,000 5.2174 52,174
ProMed Offshore Fund II, Ltd 596,000 129.5652 1,295,652
Advantage Advisors 42,000 9.1304 91,304
Advantage Advisors Catalyst Intl. Ltd. 30,000 6.5217 65,217
Ridgecrest Partners Ltd. 24,000 5.2174 52,174
Ridgecrest Partners L.P. 4,000 .8696 8,696
Ridgecrest Partners QP, L.P. 100,000 21.7391 217,391
Lagunitas Partners LP 520,000 113.0435 1,130,435
Gruber & McBaine International 160,000 34.7826 347,826
Jon D. and Linda W. Grubert Trust 60,000 13.0435 130,435
J. Patterson McBaine 60,000 13.0435 130,435
Broadfin Healthcare Fund LP 60,000 13.0435 130,435
Alpha Capital 120,000 26.0870 260,870
Fractal Holdings, LLC 20,000 4.3478 43,478
North Sound Legacy International Ltd 1,440,000 313.9130 3,139,130
North Sound Legacy Institutional Fund LLC 560,000 121.7391 1,217,391
------------ --------------- -------------
TOTAL 3,975,000 864.9999 8,649,999
============ =============== =============
The beneficial ownership percentages presented above have been determined
in accordance with SEC Rule 13d-3 based on the number of shares of common stock
outstanding on August 15, 2006 and in each case assumes that the Investor has
exercised its Warrant in full. Please see "Security Ownership of Certain
Beneficial Owners and Management" for more information on how beneficial
ownership is determined.
Representations and Warranties
The Securities Purchase Agreement contains representations and warranties
relating to our organization and qualification, including representations and
warranties as to: the authorization and enforceability of the Securities
Purchase Agreement; the absence of conflicts with the transactions contemplated
by the Securities Purchase Agreement; our filings with the SEC; our legal and
regulatory compliance; our authority and good standing to do business; and our
maintenance of proper permits and registrations to perform our business
operations.
25
Further, we provided representations and warranties as to the operating of
the Company's business, including representations and warranties covering: our
subsidiaries, the absence of material changes in our business; litigation; our
labor relations; title to our assets, including our real and personal property;
our intellectual property; our insurance policies; transactions with our
affiliates and our employees; our internal accounting controls; the absence of
brokerage or other related fees; the applicability of anti-takeover provisions
to the Company; our solvency; our tax status; our compliance with the Foreign
Corrupt Practices Act; our compliance with environmental laws; and the absence
of disagreements with our accountants and lawyers.
We also provided the Investors with representations and warranties as to
our securities, including: our capitalization; the authorization and validity of
the Securities; our ability to sell the Securities in a private placement
transaction; our status as a company that is not an investment company;
registration rights granted by the Company; the trading market and maintenance
of our registration on a trading market; our lack of disclosure of material
non-public information to the Investors; the integration of the Investors'
purchases with other offerings; our failure to have engaged in a general
solicitation; our ability to register securities on Form SB-2; and our
acknowledgement of the independent purchase of each Investor.
The Securities Purchase Agreement also contains representations and
warranties of each of the Investors, including representations and warranties as
to: the organization, good standing and authority of each Investor; the
Investor's understanding of the applicable restrictions on the sale of the
Securities; the Investor's status as an accredited investor or qualified
institutional buyer; the knowledge and experience of the Investor; the
Investor's abstinence from short sale transactions in our common stock; the
absence of a general solicitation by the Company to the Investor; and the
compliance, by the Investor and its family members, with the laws of the United
States.
Transfer Restrictions and Dilution
The Securities purchased under the Securities Purchase Agreement will be
restricted securities which may only be transferred by the Investors pursuant to
an effective registration statement or Rule 144 promulgated by the SEC under the
Securities Act. Until the Company an effective registration statement covering
the Securities is on file with the SEC or until the shares are transferred under
Rule 144, the stock certificates evidencing the shares of 2006 common stock will
bear a restrictive legend.
The Company acknowledged in the Securities Purchase Agreement that the
transactions contemplated thereby will cause significant dilution to the
outstanding shares of common stock of the Company. The Company further
acknowledged that taking the potential for significant dilution of the common
stock into account, the Board determined in its good faith business judgment
that the issuance of the 2006 Preferred Stock under the Securities Purchase
Agreement was in the best interests of the Company and its stockholders.
Additional Covenants
In addition to our covenant to sell the Securities to the Investors, the
Securities Purchase Agreement contains a number of covenants of the Company,
including the following:
o the Company will reserve for issuance upon conversion of the 2006
Preferred Stock common stock in an amount equal to 125% of the
shares underlying the 2006 Preferred Stock;
26
o the Company will timely file all reports required by the Exchange
Act, in order to meet the requirements of Rule 144, even if the
Company is no longer obligated to file such reports, until the
Investors no longer own the Securities;
o the Company will make available all financial information and press
releases to the Investors;
o as long as the Investors or their affiliates own, in the aggregate,
at least 25% of the outstanding shares of the 2006 Preferred Stock,
the Investors may appoint one person to observe meeting of the
Board;
o the Company will maintain in reserve a sufficient number of shares
of common stock to issue shares of common stock to Investors or the
holders of 2006 Preferred Stock upon the conversion of their shares
of 2006 Preferred Stock;
o the Company will make all filings required under the federal and
state securities laws in order to comply with Regulation D
promulgated by the SEC and each state's blue sky laws;
o the Company and its directors, officers and employees will not
enforce any rights under stockholder rights plans or similar plans;
o the Company will not have provided the Investors with any material
non-public information after the closing of the Securities Purchase
Agreement;
o the Company will use the proceeds of the sale of the 2006 Preferred
Stock for working capital purposes, and will not use the proceeds to
pay dividends (other than dividends on the 2005 Preferred Stock or
2006 Preferred Stock), pay for increased executive compensation
(without prior Board approval) or loan to employees, officers or
directors, purchase debt or equity securities, make any investment,
or pay off any extraordinary debt of the Company;
o the Company will reimburse the Investors for their expenses related
to the Transaction Documents, in an amount of up to $50,000;
o the Company will indemnify each Investor and its officers,
directors, employees, agents and consultants against losses incurred
as a result of a breach of our representations, warranties or
covenants in the Securities Purchase Agreement and other related
Transaction Documents;
o the Company will apply to list the shares of common stock underlying
Securities with the AMEX and to take all steps necessary to cause
those shares to be listed for trading as soon as possible after the
closing date;
o after the completion of the Financing Transaction, and for so long
as an Investor holds at least 25% of the Securities purchased, the
Company will allow the Investor to participate in future equity
financings (other than those equity financings that are expressly
exempt from the right of participation) up to the greater of (i) 50%
of the amount paid by the Investor to purchase the Securities and
(ii) $11,500 multiplied by the number of shares of 2006 Preferred
Stock held by the Investor, on the same terms and conditions as the
other investors in the future financing, without obtaining the
approval of the holders of at least 65% of the 2006 Preferred Stock;
o from the date of the Securities Purchase Agreement and for as long
as Investors or their affiliates own, in the aggregate, at least 25%
of the 2006 Preferred Stock, the Company will not incur indebtedness
(other than trade payables and installment loans incurred in the
ordinary course of business), without obtaining the approval of the
holders of at least 65% of the 2006 Preferred Stock, provided that
the Company will be able to establish a line of credit secured by
its accounts receivable in an amount of up to $1,000,000;
o from the date of the Securities Purchase Agreement and for as long
as any Investor or its affiliates beneficially owns any 2006
Preferred Stock, the Company will not repurchase, redeem or declare
or pay any cash dividend on distribution on any shares of our
capital stock or repay any indebtedness other than as required by
its terms, without obtaining the approval of the holders of at least
65% of the 2006 Preferred Stock;
27
o from the date of the Securities Purchase Agreement and for as long
as any shares of the 2006 Preferred Stock are outstanding, the
Company will not to take certain actions that could adversely affect
the holders of the 2006 Preferred Stock;
o the Company will allow Investors to transfer or assign the
Securities held by the Investors provided that the transferee does
not end up owning more than either 4.99% or 9.99% of the
then-outstanding shares of common stock of the Company following the
transfer;
o for so long as any shares of 2006 Preferred Stock are held by any of
the Investors, the Company will not consummate a merger,
consolidation or sale of substantially all of the Company's assets
without ensuring that the Company's successor assumes the
obligations under the Securities Purchase Agreement or where
consideration for the transaction is paid in cash or shares of a
publicly traded company;
o the Company will not pay consideration to any Investor to amend or
consent to an amendment or waiver of any provision of a Transaction
Document unless the same consideration is also given to all parties
to the Transaction Documents; and
o the Company will comply with all laws, ordinances and regulations of
government entities applicable to the Company's business.
Under the Securities Purchase Agreement, the Company agreed to prepare
this proxy statement and file it with the SEC and to include in the proxy
statement the recommendation of the Board of Directors that the stockholders
approve our proposals to approve the Financing Transaction and increase our
authorized shares of common stock. We agreed to solicit the approval of such
proposals from our stockholders, and undertook to obtain such approval as
promptly as practicable, but no later than October 31, 2006. The Company agreed
not to withdraw or modify its recommendation to the Company's stockholders or
seek financing proposals other than those allowed under the Securities Purchase
Agreement.
We agreed that the laws of New York would govern all questions concerning
the construction, validity, enforcement and interpretation of the Securities
Purchase Agreement and related documents.
Closing Conditions
Unless waived by an Investor, each Investor's obligation to purchase the
Securities under the Securities Purchase Agreement is conditioned upon the
following:
o the accuracy in of the Company's representations and warranties
contained in the Securities Purchase Agreement;
o the Company's performance, satisfaction or completion of all its
obligations, covenants and agreements prior to the closing date;
o the delivery by the Company of executed Transaction Documents;
o the Certificate of Amendment to the Company's Certificate of
Incorporation shall have been filed with the Secretary of State of
the State of Delaware;
o there shall have been no material adverse change with respect to the
Company since the date of the Securities Purchase Agreement;
28
o the written confirmation of all holders of existing rights with
respect to our securities, waiving protections that could cause such
holders to block the sale of Securities under the Securities
Purchase Agreement;
o trading in the common stock shall not have been suspended by the SEC
or the Company's principal trading market (the AMEX), nor shall a
banking moratorium have been declared either by the United States or
New York State authorities, nor shall there have occurred any
material outbreak or escalation of hostilities or other national or
international calamity of such magnitude in its effect on, or any
material adverse change in, any financial market which, in each
case, in the reasonable judgment of each Investor, makes it
impracticable or inadvisable to purchase the 2006 Preferred Stock at
the closing; and
o the Company shall obtain and deliver any required third party
consents.
Unless waived by us, our obligation to issue and sell the Securities
is conditioned upon:
o the written confirmation of all holders of existing rights with
respect to our securities, waiving protections that could cause such
holders to block the sale of Securities under the Securities
Purchase Agreement;
o the accuracy of the representations and warranties of the Investors
contained in the Securities Purchase Agreement;
o all obligations, covenants and agreements of the Investors required
to be performed at or prior to the Closing Date shall have been
performed;
o stockholder approval (which we are seeking at the Special Meeting)
has been obtained in connection with transactions contemplated by
the Transaction Documents; and
o the delivery by the Investors of their respective subscription
amounts.
Consideration of Superior Alternative Financing Offers
To induce the Investors to enter into the Securities Purchase Agreement
and commit to provide funds for the Financing Transaction, we agreed that the
Board will not (a) withdraw or modify its recommendation to the stockholders
that they approve the Financing Transaction; (b) encourage, solicit, participate
in or initiate discussions with or provide information to anyone in connection
with an alternative equity financing, with certain permitted exceptions; and (c)
approve or recommend any proposal that we receive for an alternative equity
financing or enter into any agreement with respect to any proposed alternative
equity financing.
Notwithstanding these agreements, we reserved the following rights:
o to participate in discussions for a proposed alternative equity
financing if the proposed financing is a bona fide written proposal
that was submitted on an unsolicited basis and our Board has
determined that the proposed financing represents a transaction on
better economic terms than the Financing Transaction, so long as we
have notified each Investor of the proposed financing and identified
its proponent within a specified time period; and
o to withdraw or modify our approval or recommendation of the
Financing Transaction and to approve or recommend a proposed
financing on better economic terms, but only if we agree to pay to
the Investors a cash amount calculated according to the terms
described under "Description of the Transaction Documents -
Securities Purchase Agreement," below. The purpose of the cash fee
is to place the Investors in the position in which they would have
been had the Financing Transaction been completed.
29
The cash fee that the Company must pay each Investor upon the consummation
of a superior alternative financing is equal to the sum of (i) the product of
(x) the number of shares of common stock underlying the shares of 2006 Preferred
Stock that would have been issuable to each Investor upon the Investor's payment
of the purchase price, multiplied by (y) the excess of: (I) the effective
purchase price of the common stock issued in the superior alternative financing,
in excess of (II) $1.15, plus (ii) the Investors' reasonable expenses (subject
to a $50,000 maximum). If the superior alternative financing involves the sale
of common stock, the effective purchase price of common stock issued in the
superior alternative financing will be increased by $0.15 per share. The amount
of the cash fee may substantially reduce the advantage of an alternative
financing to us.
Termination of Obligations under the Securities Purchase Agreement
Either the Investors or we may terminate the Purchase Agreement if the
closing of the Financing Transaction has not occurred within ten days after the
Company obtains the approval of the stockholders for the transaction or November
20, 2006, whichever comes first.
Form of Par Warrant
The Securities Purchase Agreement places limitations on ownership on the
Investors of either 4.99% of the total outstanding shares of common stock or
9.99% of the outstanding shares of common stock. To the extent that exchanging
shares of the 2006 Preferred Stock for shares of common stock would violate
these limitations on ownership of the common stock, the Company may issue a
common stock purchase warrant (the "Par Warrant"), exercisable for the number of
shares of the Company's common stock which exceeds the shares that the Investor
could have acquired if not for the limitation on ownership.
The following summary of the provisions of the Par Warrants should be read
in conjunction with the full text of the form of Par Warrant which is included
in the Current Report on SEC Form 8-K we filed with the SEC on August 1, 2006.
Each Par Warrant will be exercisable for a purchase price of $0.001 per
share for a period of 5 years from the date the Par Warrant is issued to
Investors. The Par Warrants are exercisable by the holder at any time (subject
to common stock ownership limitations) by delivering a Notice of Exercise Form
to the Company in substantially the form attached to the Par Warrants, provided
that the Investor delivers the original Par Warrant to the Company within three
days of sending the Notice of Exercise to the Company. No Par Warrant exercise
will be accepted by the Company if such exercise causes the common stock
ownership of the Investor exercising the Par Warrant to exceed 4.99% or 9.99%,
in either case the same limitation on common stock ownership set forth in the
Securities Purchase Agreement as to such Investor. The Company will register the
shares of common stock underlying the Par Warrants on the same registration
statement as the other Securities and upon the terms set forth in the
Registration Rights Agreement.
Upon an Investor's exercise of his Par Warrant, the Company will deliver
to the Investor a certificate representing the shares underlying the exercised
Par Warrant within two trading days of the exercise date. If at any time the
Company fails to deliver the common stock underlying the Par Warrant to an
Investor upon the Investor's proper exercise of the Par Warrant, the Company
will pay the Investor any difference in market price of such shares of common
stock on the date the common stock should be delivered and the date the common
stock is actually delivered to the Investor. Penalties under the Par Warrant are
subject to the 25% cap on liquidated damages set forth in the Securities
Purchase Agreement.
30
The exercise price of the Par Warrants will be adjusted in the event of
any stock dividends, stock splits, distributions of the Company's assets and pro
rata distribution by the Company of convertible securities or instruments to
holders of common stock. Additionally, in the event the Company undergoes a
change of control (as defined), liquidation, share exchange or other fundamental
transaction, the Par Warrant holder will have the right to receive the stock,
cash or other property such holder would have received had the Par Warrant
holder held the number of shares of common stock for which the Par Warrant is
exercisable.
The laws of New York would govern the construction and enforcement of the
Par Warrants.
Registration Rights Agreement
Upon the closing of the Financing Transaction, the Company will enter into
a registration rights agreement among the Company and the Investors (the
"Registration Rights Agreement"). Pursuant to the Registration Rights Agreement,
the Company will agree to file (at the Company's expense) a registration
statement on Form SB-2 (the "Registration Statement") with the SEC, registering
for public resale the "registrable securities" consisting of the shares of the
common stock that are issuable upon exchange of the shares of 2006 Preferred
Stock to be issued to Investors in the Financing Transaction and the shares of
common stock that are issuable upon exercise of the Par Warrants, should any Par
Warrants be issued in lieu of common stock as a result of the ownership limits
set forth in the Securities Purchase Agreement and the Certificate of Amendment.
The Company is required to file the Registration Statement within 45 days of the
closing of the Financing Transaction, and to use its best efforts to cause the
registration statement to be declared as soon as practicable but no more than
120 days of the closing of the Financing Transaction.
The Investors may require the Company to pay liquidated damages if the
registration statement is not filed within 45 days of the closing date of the
Financing Transaction, not declared effective within 120 days of the closing
date, not continually effective for any period that exceeds 20 consecutive days
or 30 aggregate days during any 12-month period, or if the common stock does not
remain listed on an applicable stock exchange after the effective date of the
Registration Statement. If any of the foregoing occurs, the Company may be
required to pay each Investor liquidated damages for the period from the date on
which such event occurs until the event is cured, at a monthly rate equal to 3%
of the original issue price of the 2006 Preferred Stock, prorated for partial
months based on the number of days in the month. The liquidated damages are
subject to an aggregate cap of 25% of the issue price paid by the Investors for
the shares of the 2006 Preferred Stock (inclusive of any other liquidated
damages payable by the Company in respect of the 2006 Preferred Stock).
The initial number of securities included in the Registration Statement
and any increase in the number of registrable securities included therein shall
be allocated pro rata among the Investors based on the number of registrable
securities held by each Investor at the time the Registration Statement is
declared effective by the SEC. If an Investor sells or otherwise transfers any
of the Investor's securities to one or more of the other Investors, each
transferee Investor shall be allocated a pro rata portion of the number of
registrable securities included in such Registration Statement for such
transferor Investor at the time of transfer. Any shares of common stock included
in a Registration Statement that remain allocated to any Investor which ceases
to hold any securities covered by the Registration Statement shall be allocated
to the remaining Investors, pro rata, based on the number of registrable
securities covered by the Registration Statement which are then held by such
Investors.
31
In the event that the SEC does not permit the shares of common stock
underlying the Par Warrants (the "Warrant Shares") to be registered in the same
Registration Statement as the shares of common stock issuable upon exchange of
the 2006 Preferred Stock, the Company shall prepare and file with the SEC, as
soon as practicable and in any event no later than the first issuance by the
Company of any Par Warrants, an additional resale registration statement
covering the resale of the Warrant Shares issuable upon exercise of any and all
Par Warrants that the Company may issue from time to time.
In connection with the Company's registration obligations hereunder, the
Company is obligated, under the Registration Rights Agreement, to:
o cause its officers, directors and counsel, and use its best efforts
to cause its independent registered public accountants to respond to
such inquiries as shall be necessary within the meaning of the
Securities Act;
o permit a single firm of counsel, to be designated by the Investors,
a reasonable period of time to review any Registration Statement
prior to filing;
o prepare and file with the SEC any amendments to the Registration
Statement required to keep the Registration Statement continuously
effective; amend or supplement the prospectus as required; respond
promptly to any comments received from the SEC; comply with the
provisions of the Securities Act and the Exchange Act with respect
to the disposition of all registrable securities covered by the
Registration Statement; and submit to the SEC a request for
acceleration of the effectiveness of the Registration Statement if
the SEC indicates it has no further comments on the Registration
Statement;
o register, and cause to remain registered, such number of shares of
common stock on the Registration Statement as is sufficient to cover
125% of the registrable securities issued in the Financing
Transaction or issuable upon exchange of the 2006 Preferred Stock;
o notify the holders of registrable securities when: (i) a prospectus,
prospectus supplement or post-effective amendment to the
Registration Statement is proposed to be filed; (ii) the SEC
notifies the Company whether there will be a review of the
Registration Statement; (iii) there are any requests by the SEC or
any federal or state government for more information; (iv) there is
any stop order issued by the SEC suspending the effectiveness of the
Registration Statement; (v) the financial statements become
ineligible for inclusion in the Registration Statement; (vi) there
is any occurrence or existence of a material corporate development
that makes it contrary to the best interests of the Company to allow
continued availability of the Registration Statement or prospectus
thereto;
o use its best efforts to avoid suspension, or lift any suspension, of
the effectiveness of the Registration Statement;
o provide a copy of the Registration Statement to each Investor upon
request, without charge;
o deliver as many copies of the prospectus as each Investor requests;
o use its best efforts to register or qualify the registrable
securities for resale under the securities or "blue sky" laws of any
jurisdiction upon request by an Investor;
o cooperate with the Investors to facilitate the timely preparation
and delivery of certificates representing the registrable securities
to be delivered free of restrictive legends to a transferee pursuant
to the Registration Statement;
32
o within three days of effectiveness of the Registration Statement,
deliver an opinion of legal counsel to the Company's transfer agent
to facilitate the removal of restrictive legends from the Investors'
stock certificates;
o supplement or amend the Registration Statement and prospectus in the
event either document contains an untrue statement of a material
fact or omits a material fact necessary to make the statements in
the Registration Statement not misleading;
o list or designate for quotation the registrable securities on any
U.S. national securities exchange or automated quotation systems on
which securities of the Company of the same class or series are then
listed or quoted;
o comply with all applicable rules and regulations of the SEC;
o make available to the Investors, by filing a report under the
Exchange Act or otherwise, an earnings statement covering the
12-month period beginning not later than the first day of the fiscal
quarter following the effective date of the Registration Statement;
o make available for inspection all pertinent financial and other
records and pertinent corporate documents and properties of the
Company as shall be reasonable for due diligence;
o in the case of an underwritten offering, on the effective date of
the Registration Statement, furnish an opinion of counsel and a
letter of the Company's independent certified public accountant as
is customary for an underwritten public offering; and
o require each Investor to furnish a certified statement as to the
number of shares of common stock beneficially owned and the person
having voting and dispositive control over the shares.
All fees and expenses incident to the performance of or compliance with
the Registration Rights Agreement shall be borne by the Company, whether or not
any registrable securities are sold pursuant to the registration statement.
The Registration Rights Agreements contain indemnification provisions that
obligate the Company to indemnify and hold harmless each Investor and its
directors, legal counsel and accountants and any underwriter for losses caused
by (i) any untrue statement of material fact or omission of a material fact in
the registration statement or any prospectus included therein, (ii) our
violation of the Securities Act or the Exchange Act, or any rule or regulation
thereunder relating to our acts or omissions in connection with the registration
statement.
The laws of New York are expected to govern the construction and
enforcement of the Registration Rights Agreements. The Registration Rights
Agreements also contain other customary terms found in similar agreements,
including provisions concerning registration procedures.
Placement Agent Agreements
As described above, we engaged Musket Research Associates, Inc. ("MRA")
and Roth Capital Partners, LLC ("RCP") as its placement agents in connection
with the Financing Transaction, and we agreed to pay fees to MRA and RCP out of
the proceeds of the Financing Transaction for their services, as follows:
o MRA. We will (i) pay cash fees equal to 6.0% of the aggregate cash
proceeds received from the MRA Contacts (as defined in the agreement
between the Company and MRA) and (ii) issue common stock purchase
warrants to purchase common stock at the same price per share as
paid by the Investors in the Financing, exercisable for five years
(the "Placement Agent Warrants") in that number equal to 5% of the
number of the common stock equivalent securities actually purchased
by MRA Contacts, and
33
o RCP. We will (i) pay cash fees equal to the greater of (a) 6% of the
amount raised by RCP from Existing RCP Investors and New RCP
Investors (as defined in the agreement between RCP and the Company)
and (ii) $100,000, as long as each of the Existing RCP Investors has
either exercised its rights to receive the benefit of future
preferential financing terms or has waived certain redemption and
other rights pursuant to the waiver attached to the term sheet for
the Financing, in each case as to all shares of the 2005 Preferred
Stock purchased by the Existing RCP Investors from the Company on
September 30, 2005, and (ii) issue Placement Agent Warrants in that
number equal to 5% of the number of the common stock equivalents
purchased by New RCP Investors.
Accordingly, upon completion of the Financing Transaction, we expect to
pay an aggregate of $610,600 in cash to MRA and RCP, and issue Placement Agent
Warrants representing 370,000 shares of common stock to MRA (no Placement Agent
Warrants will be issued to RCP).
David Musket, a principal of MRA, agreed to invest, as an Investor in the
Financing, $138,500 from the fees payable by the Company to MRA.
Interests of Directors and Executive Officers in Proposal 1
One of our directors, Ed Snape, is a principal of the general partner of
New England Partners Capital, L.P. ("NEP") and a director of the management
company of Nexus Medical Partners II S.C.A., SICAR ("Nexus"), an affiliate of
NEP and Nexus is an Investor. As noted above under "Discussions and
Deliberations of the Finance Committee," although a member of our Board's
Finance Committee, Mr. Snape did not participate in any of its discussions or
deliberations, when he first indicated that NEP and its affiliates might have an
interest in investing.
As discussed above under "Summary of Terms of the Financing," 21 of the
Investors currently are stockholders. With the exception of NEP, none of the
Investors or their affiliates are directors or officers of ours.
Required Vote
The affirmative vote of a majority of the outstanding shares of our common
stock and preferred stock, voting together as a single class, which are present
at the meeting and entitled to vote is required to approve this Proposal. If you
select "Abstain" on your proxy card or you attend the meeting and abstain from
voting, it will have the same effect as an "Against" vote.
If the stockholders do not approve both Proposal 1 and Proposal 2, we will
be unable to complete the Financing Transaction and will not receive any
proceeds from the proposed sale of the Securities.
Board Recommendation
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE PROPOSAL TO
APPROVE THE SALE AND ISSUANCE OF $19,947,500 OF 2006 PREFERRED STOCK, INCLUDING
THE TERMS AND PROVISIONS OF THE 2006 PREFERRED STOCK THAT IS EXCHANGEABLE FOR
SHARES OF OUR COMMON STOCK, TO CERTAIN INSTITUTIONAL AND OTHER INVESTORS,
INCLUDING HOLDERS OF OUR PREFERRED STOCK.
34
PROPOSAL 2
APPROVAL OF THE AMENDMENT OF OUR CERTIFICATE OF INCORPORATION TO ADD A NEW CLASS
OF PREFERRED STOCK AND TO INCREASE TO 65,000,000 THE NUMBER OF AUTHORIZED SHARES
OF OUR COMMON STOCK
NOTE TO STOCKHOLDERS: IF YOU DO NOT APPROVE BOTH OF PROPOSAL 1 AND PROPOSAL 2,
WE WILL NOT BE ABLE TO COMPLETE THE FINANCING TRANSACTION AND WILL NOT RECEIVE
ANY PROCEEDS FROM THE SALE OF THE SECURITIES. AS A RESULT, WE ARE NOT LIKELY TO
HAVE SUFFICIENT WORKING CAPITAL TO OPERATE OUR BUSINESS AND TO PROTECT OUR
INVESTMENT IN OUR INTELLECTUAL PROPERTY. MOREOVER, ANY ALTERNATIVES TO THE
FINANCING TRANSACTION MIGHT SUBSTANTIALLY DIMINISH THE VALUE OF OUR COMMON STOCK
AND THUS YOUR INVESTMENT IN US. WE URGE YOU TO VOTE "FOR" THIS PROPOSAL.
Proposed Amendment to Our Certificate of Incorporation
Our Certificate of Incorporation currently authorizes us to issue up to
70,000,000 shares of capital stock, 50,000,000 shares of which are common stock
and 20,000,000 shares of which are preferred stock. Upon approval by our
stockholders, Proposal 2 would amend the Company's Certificate of Incorporation
in two respects:
o to authorize us to issue up to 1,736 shares of the 2006 Preferred
Stock for the purposes described in Proposal 1, and
o to increase the number of shares of our common stock that we are
authorized to issue to 65,000,000 from 50,000,000 shares.
Additionally, the Certificate of Amendment will in effect cancel the
shares of preferred stock that we issued on September 30, 2005 and that are to
be surrendered by the holders of these shares and exchanged for shares of 2006
Preferred Stock in the Financing Transaction. Assuming the stockholders approve
the Financing Transaction, when we file the Certificate of Amendment, we will
remove the provision of our current Certificate of Incorporation that authorizes
our Board to issue preferred shares with voting and preference rights as
assigned by the Board. Therefore, if the stockholders approve Proposal 2 and if
the Financing Transaction is completed according to its existing terms, we will
be authorized to issue only 1,736 shares of our 2006 Preferred Stock, all of
which will be issued and outstanding, and 65,000,000 shares of our common stock,
19,448,728 of which will be issued and outstanding (assuming we issue no
additional shares of common stock issued after the record date of August 15,
2006, whether upon exercise of Anti-Dilution Securities or otherwise). The net
result of these changes is that the total number of shares authorized by our
Certificate of Incorporation will be 65,001,736, rather than 70,000,000.
The preferred stock to be authorized by the Certificate of Amendment is
the 2006 Preferred Stock. The Certificate of Amendment will provide for 1,736
shares of our 2006 Preferred Stock. The rights, preferences and privileges
relating to our 2006 Preferred Stock are described at "Description of the 2006
Preferred Stock" above in Proposal 1, and the complete text of the Certificate
of Amendment is annexed to this proxy statement as Appendix A.
The additional shares of common stock to be authorized by adoption of the
Certificate of Amendment will have rights identical to the currently outstanding
shares of our common stock. Adoption of the proposed Certificate of Amendment
and issuance of the common stock will not affect the rights of the holders of
our currently outstanding common stock, except for effects incidental to
increasing the number of shares of our common stock outstanding, such as
dilution of the earnings per share.
35
Currently, though our Board has no other plans to issue the additional
shares of common stock, it desires to have the shares available to enable us to
have a limited number of shares reserved and to provide additional flexibility
to use common stock for business and financial purposes in the future. The
additional shares may be used for various purposes without further stockholder
approval, except to the extent required by applicable rules of the AMEX. These
purposes may include raising capital, establishing strategic relationships with
other companies, expanding our business or product lines through the acquisition
of other businesses or products, and other purposes.
If our stockholders adopt the proposal, we could also use the additional
shares of common stock that would become available for issuance to oppose a
hostile takeover attempt or to delay or prevent changes in control or our
management, although the number of shares is unlikely to be large enough to be
effective in that regard. Nevertheless, it is possible that, without further
stockholder approval, our Board could strategically sell shares of common stock
in a private transaction to purchasers who would oppose a takeover or favor the
current Board, and the number of shares so issued could result in a vote in
favor of our current Board. Although this proposal to increase the authorized
common stock and permit the issuance of the 2006 Preferred Stock has been
prompted by the business and financial considerations described in this proxy
statement and not by the threat of any hostile takeover attempt, stockholders
should be aware that approval of this Proposal 2 could facilitate future efforts
by us to deter or prevent changes in control, including transactions in which
the stockholders might otherwise receive a premium for their shares over then
current market prices.
If the Certificate of Amendment is adopted, it will become effective upon
the filing of the Certificate of Amendment with the Secretary of State of the
State of Delaware.
Purpose of Amendment
We are asking our stockholders to approve the proposed Certificate of
Amendment because we require stockholder approval:
o to authorize the shares of 2006 Preferred Stock necessary for the
Financing Transaction; and
o to authorize the shares of our common stock necessary for us to
comply with obligations we will undertake as part of the Financing
Transaction.
The Financing Transaction requires that the stockholders authorize the 2006
Preferred Stock. In addition, upon completion of the Financing Transaction we
will become subject to obligations to keep reserved for future issuance to the
Investors or their assignees the number of shares of our common stock that we
have agreed to keep reserved. In general, when we agree to issue securities that
are exchangeable or exercisable for shares of our common stock, the security
holders require that we reserve for issuance 125% of the underlying shares. We
agreed to do so in the Securities Purchase Agreement pursuant to which the
Financing Transaction is to occur.
We also believe that the elimination of our existing preferred stock that
delegates to our Board the authority to assign preferences and voting rights
prior to issuance will be in the best interests of our stockholders, because it
will remove the possibility that any new class of stock with rights senior to
our common stock can be issued.
36
The following table shows the calculation of the number of shares of our
common stock that we will be required to reserve for issuance under the
applicable provisions of our outstanding securities, as well as the Securities
Purchase Agreement and Registration Rights Agreement in connection with the
proposed Financing Transaction referred to in Proposal 1, assuming that the
Financing Transaction is consummated in accordance with its terms. The table
includes, in the case of shares required for issuance of securities to investors
prior to 2006, 2,078,865 shares of our common stock that will become issuable as
a result of the repricing of certain of our outstanding convertible notes and
warrants as a consequence of the Financing Transaction. We are obligated under
existing agreements to reserve 125% of those shares and to cause additional
shares to be authorized if a sufficient number of reserved shares has not been
set aside.
Common Stock as of June 30, 2006
--------------------------------
Shares authorized 50,000,000
Shares outstanding 19,448,728
-----------
Shares available for issue 30,551,272
Shares reserved for issue on exercise of:
outstanding options (2,423,787)
outstanding non-investor warrants (970,000)
-----------
27,157,485
Shares required for issuance of
securities issued to investors prior to 2006 (8,313,130)
Additional shares agreed to be reserved
for the holders of such securities (2,078,283)
-----------
16,766,072
Shares required for issuance under the 2006 Preferred
Stock in the Financing Transaction (17,354,347)
Additional shares agreed to be reserved
for the holders of the Securities (4,338,587)
-----------
(4,926,862)
Accordingly, because the number of authorized shares is 4,926,862 fewer
than the number of shares that we have agreed to reserve for issuance, we are
asking our stockholders to authorize 15,000,000 additional shares of our common
stock.
If our stockholders approve Proposal 2, we will have authorized 10,073,138
shares of our common stock in excess of the number that is reserved for future
issuance. Under the terms of our existing 2003 Omnibus Incentive Plan
(previously approved by the stockholders), we may issue options for 807,213
shares that have not yet been reserved for issuance. It is possible that
existing optionees may permit their granted options to expire, and upon
expiration the shares reserved for those options would become available for
future grants. Nevertheless, for planning purposes we assume that when we
reserve these 807,213 shares, it will reduce the number of authorized but
unissued shares of our common stock to 10,073,138 shares.
Effect of Amendment
Under our current Certificate of Incorporation we are authorized to issue
up to 20,000,000 shares of preferred stock. Our preferred shares are to have
such preferences as to voting rights as our Board may assign to them prior to
issuance. If the preferred shares have been assigned voting rights, then each
holder is to have one vote per share that was issued to that holder. The
preferred shares are entitled to those preferences in liquidation that have been
assigned.
37
When filed, the Certificate of Amendment will eliminate the delegation to
our Board to assign preferences and voting rights for preferred shares and will
eliminate all preferred shares other than the 2006 Preferred Stock. Assuming
that all Investors perform their obligations to pay for their shares, all of the
authorized shares of 2006 Preferred Stock will be issued at the closing of the
Financing Transaction, and no authorized but unissued shares will remain.
For a more complete description of the rights of the holders of the 2006
Preferred Stock as to dividends, voting rights, preferences in liquidation and
exchange rights, see "Description of the 2006 Preferred Stock" above under
Proposal 1.
Required Vote
To be approved, Proposal 2 must receive "For" votes from the holders of a
majority of the shares of our preferred stock and our common stock that are
outstanding on the record date. If you abstain from voting, it will have the
same effect as an "Against" vote.
If the stockholders do not approve Proposal 1 and Proposal 2, we will be
unable to complete the Transaction and will not receive any cash from the
proposed sale of the Securities.
Board Recommendation
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE PROPOSAL TO AMEND
OUR CERTIFICATE OF INCORPORATION TO ADD A NEW CLASS OF PREFERRED STOCK AND TO
INCREASE TO 65,000,000 THE NUMBER OF AUTHORIZED SHARES OF OUR COMMON STOCK.
38
OTHER MATTERS
If any other matters are properly brought before the Special Meeting, your
proxy may be voted by the proxies in such manner as they deem proper. At this
time, we do not know of any other matters that will be presented at the Special
Meeting.
PROPOSALS BY STOCKHOLDERS FOR PRESENTATION
AT THE 2007 ANNUAL MEETING
Section 5 of Article II of our By-laws provides that, in addition to other
applicable requirements, for business to be properly brought before an annual
meeting by a stockholder, the stockholder must give timely written notice to the
Secretary or an Assistant Secretary at the principal executive office of the
Company. Any such notice must be received (i) not less than 30 nor more than 90
days prior to the annual meeting, if clause (ii) is not applicable, or (ii) not
less than 10 days before the date of the meeting if less than 40 days' notice of
the date of the meeting is given by the Company. The stockholder's notice shall
set forth as to each matter the stockholder proposes to bring before the
meeting: (a) a brief description of the business desired to be brought before
the meeting, and in the event that such business includes a proposal to amend
either the certificate of incorporation or the by-laws of the Company, the
language of the proposed amendment, (b) the name and address of the stockholder
proposing such business, (c) the number of shares of common stock that are owned
by such stockholder and (d) any material personal interest of the stockholder in
such business. The proxies will have discretionary authority to vote on any
matter that properly comes before the meeting if the stockholder has not
provided timely written notice as required by the by-laws.
Any proposal that a stockholder desires to have included in the proxy
statement for the 2007 annual meeting of stockholders must be received by us no
later than December 26, 2006 and must comply with the other applicable
requirements of Rule 14a-8 promulgated by the Securities and Exchange Commission
under the Securities Act of 1934, as amended.
39
APPENDIX A
DIOMED HOLDINGS, INC.
---------------------------
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
---------------------------
Pursuant to Section 242 of the Delaware General Corporation Law
---------------------------
Diomed Holdings, Inc., a corporation organized and existing under the laws
of the State of Delaware, hereby certifies as follows:
FIRST: The name of the Corporation (hereinafter called the "Corporation")
is Diomed Holdings, Inc., a corporation organized and now existing under the
General Corporation Law of the State of Delaware ("DGCL").
SECOND: The certificate of incorporation of the Corporation was filed at
the Office of the Secretary of State of the State of Delaware on April 19, 2002
(the "Certificate of Incorporation").
THIRD: The article of the Certificate of Incorporation affected by this
Certificate is Article FIFTH.
FOURTH: This Certificate of Amendment is being filed:
(1) to authorize the Corporation to issue from the Twenty Million
(20,000,000) shares of preferred stock, par value $0.001 per share, that are
authorized by the Certificate of Incorporation (the "Authorized Preferred
Stock") a new series of Authorized Preferred Stock, which shall be in addition
to the Preferred Stock created under the Certificate of Designations of the
Corporation filed with the Secretary of State of the State of Delaware on
September 30, 2005, and which shall have the voting powers (if any),
designations, preferences and relative, participating, option or other special
rights and the qualifications, limitations and restrictions as set forth in the
amendment to Article FIFTH set forth below;
(2) to increase the number of shares of common stock, par value $0.001 per
share, that are authorized by the Certificate of Incorporation to 65,000,000;
and
(3) to delete from the authorized capital stock of the Corporation all
shares of the preferred stock other than the Authorized Preferred Stock.
Page 1
FIFTH: The Certificate of Incorporation is hereby amended by amending and
restating Sections 1 and 2 of Article FIFTH thereof in their entirety as follows
and inserting thereafter the following new text:
Section 1. Authorized Capital. The aggregate number of shares and
the amount of the total authorized capital of this Corporation shall consist of
65,001,736 shares, of which 65,000,000 shall be common stock, $.001 par value,
and 1,736 shall be preferred stock, $.001 par value.
Section 2. Share Status. All common shares will be equal to each
other, and when issued, shall be fully paid and nonassessable, and the private
property of shareholders shall not be liable for corporate debts. Each holder of
a common share of record shall have one vote for each share of stock outstanding
in his or her name on the books of the Corporation and shall be entitled to vote
said stock.
Section 2A. 2006 Preferred Stock. All of the one thousand seven
hundred thirty-six (1,736) shares of the Authorized Preferred Stock of the
Corporation which are authorized but unissued shares shall hereby be designated
Series 2006 Preferred Stock, par value $0.001 per share (the "2006 Preferred
Stock"), and shall possess the voting powers (if any), designations, preferences
and relative, participating, option or other special rights and the
qualifications, limitations and restrictions set forth below. The face amount
(the "Face Amount") shall be Eleven Thousand Five Hundred Dollars ($11,500) per
share of 2006 Preferred Stock.
1. Dividends. The holders of outstanding shares of 2006 Preferred Stock
(each a "Holder" and collectively, the "Holders") shall be entitled to receive,
as, when and if declared by the Board of Directors of the Corporation (the
"Board of Directors"), out of lawfully available funds cumulative dividends
("Dividends") as set forth below. No Dividends shall accrue or become payable
unless and until a Dividend Commencement Event shall occur. For purposes hereof,
the term "Dividend Commencement Event" shall mean the consummation by the
Corporation, from and after the Closing Date (as defined in the Securities
Purchase Agreement, dated as of July 27, 2006, between the Corporation and those
Purchasers signatory thereto (the "Securities Purchase Agreement")), of a
transaction (other than the issuance and sale of the 2006 Preferred Stock) that
reduces the price (the "Conversion Price") at which common stock, par value
$0.001 per share, of the Corporation (the "Common Stock"), shall become issuable
upon conversion of the Debentures (as defined in the Securities Purchase
Agreement) pursuant to the provisions of Section 5(b) thereof; provided, that
such reduction in the Conversion Price takes effect for Debentures that are
outstanding in the aggregate principal amount of at least One Million Dollars
($1,000,000). From and after the date of a Dividend Commencement Event,
Dividends shall accrue at the rate of Fifteen Percent (15%) per annum, and shall
be payable (pro rata over the applicable period, if less than a full quarterly
period) (i) quarterly in arrears as of the end of each fiscal quarter of the
Corporation (payable on the first business day of the subsequent fiscal quarter
of the Corporation), for so long as shares of 2006 Preferred Stock are
outstanding, (ii) upon the date of (1) the consummation of a Liquidating Event
pursuant to Section 3 of this Article FIFTH or (2) exchange by the Holder
pursuant to Section 4 below or by the Corporation pursuant to Section 6 or 7 of
this Article FIFTH or (iii) upon the redemption by the Corporation pursuant to
Section 8 of this Article FIFTH (as applicable, the "Dividend Payment Date").
Such Dividends shall be cumulative so that if Dividends in respect of any
previous or current quarterly Dividend period shall not have been paid or
declared and a sum sufficient for the payment thereof has not been set aside by
the Corporation, the deficiency shall first be fully paid before any Dividend or
other distribution shall be paid or declared and set aside for the Common Stock.
Dividends shall be payable in cash only.
2. Voting.
(a) Except as otherwise expressly provided elsewhere in the
Certificate of Incorporation or as otherwise required by the DGCL, (i) each
share of 2006 Preferred Stock shall be entitled to a number votes equal to the
number of shares of Common Stock into which such share of 2006 Preferred Stock,
on the record date for the determination of stockholders entitled to vote on all
matters submitted to a vote of the stockholders of the Corporation would be
exchangeable pursuant to Section 4 of this Article FIFTH (subject to the
Limitations on Ownership (as defined in Section 4(a)), and (ii) the holders of
shares of 2006 Preferred Stock and Common Stock shall vote together (or consent
in writing in lieu of a vote) as a single class on all matters submitted to the
stockholders of the Corporation.
(b) The Corporation shall provide each holder of 2006 Preferred
Stock with prior notification of any meeting of the stockholders (and copies of
proxy materials and other information sent to stockholders). If the Corporation
takes a record of its stockholders for the purpose of determining stockholders
entitled (i) to receive payment of any Dividend or other distribution, any right
to subscribe for, purchase or otherwise acquire (including by way of merger,
consolidation or recapitalization) any share of any class or any other
securities or property, or to receive any other right, or (ii) to vote in
connection with any proposed sale, lease or conveyance of all or substantially
all of the assets of the Corporation, or any proposed merger, consolidation,
liquidation, dissolution or winding up of the Corporation, the Corporation shall
mail a notice to each holder of 2006 Preferred Stock, at least 15 days prior to
the record date specified therein (or 45 days prior to the consummation of the
transaction or event, whichever is earlier, but in no event earlier than public
announcement of such proposed transaction), of the date on which any such record
is to be taken for the purpose of such vote, dividend, distribution, right or
other event, and a brief statement regarding the amount and character of such
vote, dividend, distribution, right or other event to the extent known at such
time.
(c) To the extent that under the DGCL the vote of the holders of
the 2006 Preferred Stock, voting separately as a class or series, as applicable,
is required to authorize a given action of the Corporation, the affirmative vote
or consent of the holders of at least 65% of the shares of the 2006 Preferred
Stock at the time issued and outstanding (the "Required Holders") present in
person or by proxy at a duly held meeting at which a quorum is present or by
written consent of the Required Holders (except as otherwise may be required
under the DGCL) shall constitute the approval of such action by the class.
3. Liquidation.
(a) The 2006 Preferred Stock shall be preferred over and senior to
the Common Stock and any class or series of capital stock of Corporation
hereafter created as to the assets of the Corporation available for distribution
to its stockholders upon the occurrence of any Liquidating Event (as defined
below), whether voluntary or involuntary, or from the net proceeds from a sale,
lease, exchange or other disposition of the assets of the Corporation in
connection with a Change of Control (as defined in Section 7 of this Article
FIFTH) (in any such case, the "Proceeds"). In the case of any Liquidating Event
(as defined below) or Change of Control, upon the consummation of such
Liquidating Event or Change of Control, all then-outstanding shares of 2006
Preferred Stock shall be extinguished automatically and in lieu of such shares
of 2006 Preferred Stock the holders of the 2006 Preferred Stock so extinguished
shall be entitled to receive out of the Proceeds, and before any distribution or
payment is made to any holders of any shares of Common Stock or any other class
or series of capital stock of the Corporation hereafter created (but following
distribution of Proceeds to repay the Corporation's obligations under the
Debentures and the Corporation's Preferred Stock issued on September 30, 2005
(the "2005 Preferred Stock"), an amount equal to the greater of: (i) Thirteen
Thousand Eight Hundred Dollars ($13,800) per share of 2006 Preferred Stock, plus
all accrued and unpaid Dividends thereon, if any, whether or not earned or
declared, up to and including the date full payment shall be tendered to the
holders of the 2006 Preferred Stock with respect to such Liquidating Event
(which amount per share shall be payable in cash) and (ii) such amount per share
of 2006 Preferred Stock as would have been payable had each such share been
tendered by the Holder thereof for exchange into Common Stock pursuant to
Section 4 of this Article FIFTH (without giving effect to the Limitations on
Ownership (as defined in Section 4(a) of this Article FIFTH)) immediately prior
to such Liquidating Event (which amount per share shall be payable in cash,
securities and/or other property in the same amount and proportion as would be
paid to the holders of Common Stock) (as applicable, the "Liquidation
Preference").
(b) If, upon any Liquidating Event or Change of Control, the
Proceeds available for distribution to the holders of the 2006 Preferred Stock
shall be insufficient to permit payment to such Holders of the full preferential
amounts as provided for above, then such Holders shall share ratably in any
distribution of available assets according to the respective amounts which would
otherwise be payable with respect to the shares of 2006 Preferred Stock held by
them upon such Liquidating Event or Change of Control distribution if all
amounts payable on or with respect to said shares were paid in full, based upon
the aggregate liquidation value of all 2006 Preferred Stock outstanding
immediately prior to such Liquidating Event or Change of Control.
(c) After such payment shall have been made in full to the holders
of the 2006 Preferred Stock, the remaining Proceeds shall be distributed ratably
among the holders of the shares of Common Stock.
(d) The amounts to be paid or set aside for payment as provided
above in Section 3(a) of this Article FIFTH shall be proportionately increased
or decreased in inverse relation to the change in the number of outstanding
shares resulting from any consolidation or combination of capital stock, stock
split, stock dividend, subdivision of shares, recapitalization, reclassification
or similar event.
(e) Liquidating Event. Any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, other than in connection
with a Change of Control shall be considered a "Liquidating Event" and shall
entitle the holders of the 2005 Preferred Stock, the 2006 Preferred Stock and
the Common Stock to receive promptly after the Corporation's realization
thereof, in cash, securities or other property, those amounts specified in
Section 3(a) of this Article FIFTH in accordance with the terms thereof.
4. Holder's Right to Exchange 2006 Preferred Stock for Common Stock.
(a) Subject to the applicable Limitations on Ownership (as defined
below) at any time and from time to time, the Holder may tender any whole number
of shares of 2006 Preferred Stock held by it in exchange for a number of fully
paid and non assessable shares of Common Stock per share of 2006 Preferred Stock
determined in accordance with the following formula (the "Exchange Formula"):
Face Amount of Shares Tendered for Exchange
-------------------------------------------
Exchange Rate
Where:
"Exchange Rate" shall mean $1.15, subject to adjustment as set forth in
Section 5 of this Article FIFTH.
The following provisions shall also apply: Unless a Holder has delivered
to the Corporation written notice prior to the Closing Date (as defined in
the Securities Purchase Agreement) or at least sixty-one (61) days prior
to the effective date of such notice that the Limitations on Ownership (as
defined below) shall not apply to such Holder, in no event shall a Holder
have the right to exchange shares of 2006 Preferred Stock into, nor shall
the Corporation issue to such Holder, shares of Common Stock, or to
dispose of or vote any shares of 2006 Preferred Stock, to the extent that
such exchange, disposition or voting would result in the Holder and its
affiliates together beneficially owning more than (a) with respect to
those Holders identified on Schedule 4.17A of the Securities Purchase
Agreement, 4.99% of the then issued and outstanding shares of Common
Stock, or (b) with respect with respect to those Holders identified on
Schedule 4.17B of the Securities Purchase Agreement, 9.99% of the then
issued and outstanding shares of Common Stock (each, a "Limitation on
Ownership," and together, the "Limitations on Ownership"); provided, that,
if and to the extent that the Limitation on Ownership applicable to any
Holder would otherwise be violated by the issuance of shares of Common
Stock as aforesaid, the Corporation may issue to such Holder a Common
Stock purchase warrant (a "Par Warrant"), in substantially the form
attached as Exhibit E to the Securities Purchase Agreement, exercisable
for the purchase at $0.001 per share (or the then-current par value of the
Common Stock, if other than $0.001 per share) of that number of shares of
Common Stock constituting the excess of the amount which would otherwise
be issuable but for the Limitations on Ownership less that number of
shares of Common Stock issued to such Holder in compliance with the
applicable Limitation on Ownership. Notwithstanding the foregoing, in no
event shall SDS Capital Group SPC, Ltd. have the right to exchange shares
of 2006 Preferred Stock into, and in no event shall the Corporation issue
to SDS Capital Group SPC, Ltd., shares of Common Stock, or to dispose of
or vote shares of Common Stock, to the extent that such exchange,
disposition or voting would result in SDS Capital Group SPC, Ltd. and its
affiliates together beneficially owning more than 9.99% of the then
outstanding shares of Common Stock. For purposes of this Section 4.17,
beneficial ownership shall be determined in accordance with Section 13(d)
of the Securities Exchange Act of 1934, as amended, and Regulation 13D-G
thereunder.
Furthermore, if on the Exchange Date (as defined in Section 4(b) of this
Article FIFTH), the Common Stock is listed on a Trading Market (as defined
in Section 4(e) of this Article FIFTH) and the rules of such Trading
Market require that any shares of Common Stock to be issued by the
Corporation must first be listed for trading or exchange with such Trading
Market, then the Holder's right to exchange the 2006 Preferred Stock shall
be conditioned on the listing with such Trading Market of the shares of
Common Stock sought to be issued upon exchange by the Holder, and limited
to the number of shares of Common Stock then listed on such Trading Market
which are available for issuance upon the exchange of the 2006 Preferred
Stock.
(b) The Holders may exercise their exchange right under Section
4(a) of this Article FIFTH by providing written irrevocable notice to the
Corporation (the "Exchange Notice"), substantially in the form of Exhibit A
hereto (and, if the 2006 Preferred Stock is in certificated form, surrendering
to the Corporation along with the Exchange Notice the Holder's stock
certificate(s), with stock power(s) endorsed in blank, representing the 2006
Preferred Stock tendered for exchange), in accordance with Section 14 of this
Article FIFTH, which Exchange Notice shall be deemed given and effective on the
date (the "Exchange Date") as provided under Section 14 of this Article FIFTH.
Upon receipt by the Corporation of an Exchange Notice from a Holder (the
"Exchanging Holder"), the Corporation shall promptly send, via facsimile, a
confirmation to such Exchanging Holder stating that the Exchange Notice has been
received, the date upon which the Corporation expects to deliver the Common
Stock issuable upon such exchange and the name and telephone number of a contact
person at the Corporation regarding the exchange.
(c) Upon delivery of an Exchange Notice, the Corporation (itself,
or through its transfer agent) shall, no later than the second Trading Day
following the Exchange Date (the "Delivery Period"), issue and deliver (i.e.,
deposit with a nationally recognized overnight courier service postage prepaid)
to the Exchanging Holder or its nominee that number of shares of Common Stock
issuable upon exchange of such shares of 2006 Preferred Stock being exchanged.
Notwithstanding the foregoing, if the Corporation's transfer agent is
participating in the Depository Trust Corporation ("DTC") Fast Automated
Securities Transfer program, and so long as the certificates therefor do not
bear a legend and the holder thereof is not then required to return such
certificate for the placement of a legend thereon, the Corporation shall cause
its transfer agent to promptly electronically transmit the Common Stock issuable
upon the exchange to the Exchanging Holder by crediting the account of the
Holder or its nominee with DTC through its Deposit Withdrawal Agent Commission
system ("DTC Transfer"). If the aforementioned conditions to a DTC Transfer are
not satisfied, and the 2006 Preferred Stock is in certificated form, the
Corporation shall deliver as provided above to the Holder physical certificates
representing the Common Stock issuable upon exchange. Further, if the 2006
Preferred Stock is in certificated form, an Exchanging Holder may instruct the
Corporation to deliver to the Exchanging Holder physical certificates
representing the Common Stock issuable upon the exchange in lieu of delivering
such shares by way of DTC Transfer.
(d) The Corporation shall pay any and all taxes that may be
imposed upon it with respect to the issuance and delivery of the shares of
Common Stock upon the exchange of the 2006 Preferred Stock hereunder.
(e) If any exchange of 2006 Preferred Stock would result in the
issuance of a fractional share of Common Stock (aggregating all shares of 2006
Preferred Stock being exchanged pursuant to a given Exchange Notice), such
fractional share shall be payable in cash based upon the ten day VWAP (as
defined below) of the Common Stock at such time, and the number of shares of
Common Stock issuable upon exchange of the 2006 Preferred Stock shall be the
next lower whole number of shares. For purposes of the foregoing, "VWAP" means,
for any Trading Day, the price determined by the first of the following clauses
that applies: (i) if the Common Stock is then listed or quoted on a Trading
Market, the daily volume weighted average price of the Common Stock for such
date on the Trading Market on which the Common Stock is then listed or quoted as
reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30 a.m.
Eastern Time to 4:00 p.m. Eastern Time); (ii) if the Common Stock is not then
listed or quoted on a Trading Market and if prices for the Common Stock are then
quoted on the OTC Bulletin Board, the volume weighted average price of the
Common Stock for such date on the OTC Bulletin Board; (iii) if the Common Stock
is not then listed or quoted on the OTC Bulletin Board and if prices for the
Common Stock are then reported in the "Pink Sheets" published by the National
Quotation Bureau Incorporated (or a similar organization or agency succeeding to
its functions of reporting prices), the most recent bid price per share of the
Common Stock so reported; or (iv) in all other cases, the fair market value of a
share of Common Stock as determined by an independent appraiser selected in good
faith by the holders of the 2006 Preferred Stock and reasonably acceptable to
the Corporation, where "Trading Day" means a day on which the Common Stock is
traded on a Trading Market, and "Trading Market" means the following markets or
exchanges on which the Common Stock is listed or quoted for trading on the date
in question: the Nasdaq SmallCap Market, the American Stock Exchange, the New
York Stock Exchange or the Nasdaq National Market.
(f) In the case of any dispute with respect to an exchange, the
Corporation shall promptly issue such number of shares of Common Stock as are
not disputed in accordance with subparagraph (ii) above. If such dispute
involves the calculation of the Exchange Rate, and such dispute is not promptly
resolved by discussion between the Exchanging Holder and the Corporation, the
Corporation shall submit the disputed calculations to an independent outside
accountant via facsimile within three business days of receipt of the Exchange
Notice. The accountant, at the Corporation's sole expense, shall promptly audit
the calculations and notify the Corporation and the Exchanging Holder of the
results no later than three business days from the date it receives the disputed
calculations. The accountant's calculation shall be deemed conclusive, absent
manifest error. The Corporation shall then issue the appropriate number of
shares of Common Stock in accordance with subparagraph (ii) above.
(g) Upon the exchange of any shares of 2006 Preferred Stock, all
amounts then accrued or payable on such shares hereunder (including, without
limitation, any Dividends, if any Dividends have accrued and have not been paid)
or under the Securities Purchase Agreement or the Registration Rights Agreement
(as defined in the Stock Purchase Agreement) through and including the Exchange
Date shall be paid in cash by the Corporation.
(h) If fewer than all shares of 2006 Preferred Stock held by an
Exchanging Holder are tendered for exchange, then the Corporation shall record
the cancellation of those shares which were tendered on its books and records
(and, if the 2006 Preferred Stock is in certificated form, shall issue in due
course one or more new stock certificates representing those shares held by the
Exchanging Holder which remain issued and outstanding).
(i) If, at any time, (i) an Exchanging Holder submits an Exchange
Notice and the Corporation fails for any reason (other than because such
issuance would exceed such Exchanging Holder's Limitations on Ownership) to
deliver, on or prior to the fifth Trading Day following the expiration of the
Delivery Period for such exchange, such number of freely tradable shares of
Common Stock to which such Holder is entitled upon such exchange, or (ii) the
Corporation provides written notice to any holder of 2006 Preferred Stock (or
makes a public announcement via press release) at any time of its intention not
to issue freely tradable shares of Common Stock upon exercise by any Exchanging
Holder of its exchange rights in accordance with the terms of this Agreement
(other than because such issuance would exceed such Holder's Limitations on
Ownership) (each of (i) and (ii) being an "Exchange Default"), then, subject to
the Liquidated Damages Cap (as defined in the Securities Purchase Agreement),
the Corporation shall pay to the Exchanging Holder Liquidated Damages (as
defined below) until the earliest to occur of (i) the date of the cure of such
Exchange Default by the Corporation and (ii) the date when the Liquidated
Damages Cap has been met, as the case may be. For purposes hereof, "Liquidated
Damages" shall mean an amount in cash equal to 1% per day of the aggregate Issue
Amount paid by the initial Purchaser of the shares of 2006 Preferred Stock for
those such shares which are the subject of the Exchange Default, payable on
demand by the Holder, as full liquidated damages and not as a penalty, provided,
that the aggregate Liquidated Damages payable in respect of such shares of 2006
Preferred Stock shall in no event exceed the Liquidated Damages Cap.
(j) Unless the Corporation has notified the Exchanging Holder in
writing prior to the delivery by such Holder of an Exchange Notice that the
Corporation is unable to honor requests for exchanges, if (i) (a) the
Corporation fails to promptly deliver during the Delivery Period shares of
Common Stock to an Exchanging Holder upon an exchange of shares of 2006
Preferred Stock or (b) there shall occur a Legend Removal Failure (as defined
below) and (ii) thereafter, such Exchanging Holder purchases (in an open market
transaction or otherwise) shares of Common Stock to make delivery in
satisfaction of a sale by such Exchanging Holder of the unlegended shares of
Common Stock (the "Sold Shares") which such Exchanging Holder anticipated
receiving upon such exchange (a "Buy-In"), the Corporation shall pay such
Exchanging Holder, in addition to any other remedies available to the Exchanging
Holder, the amount by which (x) such Exchanging Holder's total purchase price
(including brokerage commissions, if any) for the unlegended shares of Common
Stock so purchased exceeds (y) the net proceeds received by such Exchanging
Holder from the sale of the Sold Shares. For example, if an Exchanging Holder
purchases unlegended shares of Common Stock having a total purchase price of
$11,000 to cover a Buy-In with respect to shares of Common Stock it sold for
$10,000, the Corporation will be required to pay the Exchanging Holder $1,000.
An Exchanging Holder shall provide the Corporation written notification and
supporting documentation indicating any amounts payable to such Holder pursuant
to this provision. For purposes hereof, a "Legend Removal Failure" shall occur
if the Corporation fails to remove any restrictive legend on any certificate or
any shares of Common Stock issued to the Holder of 2006 Preferred Stock upon
exchange of the 2006 Preferred Stock as and when required hereunder or under the
Registration Rights Agreement and permitted by applicable law, and any such
failure continues uncured for five business days after the Corporation has been
notified thereof in writing by the Holder. The rights set forth in this Section
4(j) shall be in addition to the rights to seek payment set forth in Section
4(i) above.
5. Adjustments to Exchange Rate.
(a) If at any time while shares of 2006 Preferred Stock are issued
and outstanding, the Corporation proposes to offer, sell, grant any option to
purchase or offer, sell or grant any right to reprice its securities, or
otherwise dispose of or issue (or announce or be deemed to have made any offer,
sale, grant or any option to purchase or other disposition) any Common Stock or
Common Stock Equivalents (as defined below) (i) entitling any Person to acquire
shares of Common Stock at an effective price per share less than the Exchange
Rate (but excluding (A) shares of Common Stock or options issued to employees,
officers, directors or consultants of the Company pursuant to any stock or
option plan duly adopted by the stockholders of the Company in any amount or
outside of any such plan in an amount not to exceed 100,000 shares of Common
Stock (or the equivalent thereof) in any fiscal year of the Company and (B)
Existing Securities Rights (as defined in the Securities Purchase Agreement)) or
(ii) which would cause a reduction (whether by operation of an anti-dilution
adjustment or otherwise) in the effective purchase price at which a holder of
Common Stock Equivalents outstanding immediately prior to such issuance would be
entitled to purchase shares of Common Stock (at any time after such issuance)
upon the conversion, exchange or exercise of such Common Stock Equivalents, to a
price below the Exchange Rate (in each case, such lower price, with respect to
each class of securities being issued, the "Base Share Price" of such
securities, and each such issuance a "Dilutive Issuance"), as adjusted
hereunder, then upon consummation of the Dilutive Issuance, provided, that the
holders of 2006 Preferred Stock have approved such Dilutive Issuance pursuant to
Section 4.27(j) of the Securities Purchase Agreement, the Exchange Rate shall be
adjusted to the amount determined by the following calculation:
(Fully Diluted Shares Outstanding Before x Base Share Price)
+ Total Consideration
AER = ER x --------------------------------------------------------------------
Fully Diluted Shares Outstanding After
Where:
"AER" shall mean the adjusted Exchange Rate;
"ER" shall mean the Exchange Rate in effect immediately prior to the
consummation of the Dilutive Issuance;
"Fully Diluted Shares Outstanding Before" shall mean the total
number of shares of Common Stock outstanding immediately prior to
the consummation of such Dilutive Issuance, assuming the issuance of
all shares of Common Stock underlying Common Stock Equivalents (as
defined below) then outstanding;
"Common Stock Equivalents" shall mean any securities of the
Corporation or its Subsidiaries which would entitle the holder
thereof to acquire at any time Common Stock, including without
limitation, any securities or other instruments which are
convertible into or exercisable or exchangeable for Common Stock
("Convertible Securities") or options, warrants or other rights to
purchase or subscribe for Common Stock or Convertible Securities
("Purchase Rights"), whether or not such Convertible Securities or
Purchase Rights are immediately convertible, exercisable or
exchangeable, including without limitation the 2006 Preferred Stock
and the 2005 Preferred Stock;
"Total Consideration" shall mean the sum of all consideration
received by the Corporation in the Dilutive Issuance, calculated
pursuant to this Section 5(b)(iv) of this Article FIFTH; and
"Fully Diluted Shares Outstanding After" shall mean the total number
of shares of Common Stock outstanding immediately after the
consummation of such Dilutive Issuance, assuming the issuance of all
shares of Common Stock underlying Common Stock Equivalents then
outstanding.
In each instance of an adjustment pursuant to the foregoing, such adjustment
shall be made whenever Common Stock or Common Stock Equivalents are issued in a
Dilutive Issuance. The Corporation shall notify each Holder that holds 2006
Preferred Stock in writing, no later than five (5) Trading Days following the
consummation of a Dilutive Issuance, indicating therein the applicable issuance
price and other pricing terms. For the avoidance of doubt, in no event shall the
Exchange Rate after giving effect to the Dilutive Issuance be greater than the
Exchange Rate in effect prior to such Dilutive Issuance, subject to adjustment
for reverse and forward stock splits, stock dividends, stock combinations and
other similar transactions of the Common Stock that occur in connection with the
Dilutive Issuance.
(b) Effect on Exchange Rate of Certain Events. For purposes of
determining the adjusted Exchange Rate under Section 5(a) of this Article FIFTH,
the following will be applicable:
(i) Issuance of Purchase Rights. If, after the Closing Date
(as defined in the Securities Purchase Agreement), the Corporation
issues or sells any Purchase Rights, whether or not immediately
exercisable, and the price per share for which Common Stock is
issuable upon the exercise of such Purchase Rights (and the price of
any conversion of Convertible Securities, if applicable) is less
than the Exchange Rate in effect on the date of issuance or sale of
such Purchase Rights, then the maximum total number of shares of
Common Stock issuable upon the exercise of all such Purchase Rights
(assuming full conversion, exercise or exchange of Convertible
Securities, if applicable) shall, as of the date of the issuance or
sale of such Purchase Rights, be deemed to be outstanding and to
have been issued and sold by the Corporation for such price per
share. For purposes of the preceding sentence, the "price per share
for which Common Stock is issuable upon the exercise of such
Purchase Rights" shall be determined by dividing (A) the total
amount, if any, received or receivable by the Corporation as
consideration for the issuance or sale of all such Purchase Rights,
plus the minimum aggregate amount of additional consideration, if
any, payable to the Corporation upon the exercise of all such
Purchase Rights, plus, in the case of Convertible Securities
issuable upon the exercise of such Purchase Rights, the minimum
aggregate amount of additional consideration payable upon the
conversion, exercise or exchange thereof (determined in accordance
with the calculation method set forth above) at the time such
Convertible Securities first become convertible, exercisable or
exchangeable, by (B) the maximum total number of shares of Common
Stock issuable upon the exercise of all such Purchase Rights
(assuming full conversion, exercise or exchange of Convertible
Securities, if applicable). No further adjustment to the Exchange
Rate shall be made upon the actual issuance of such Common Stock
upon the exercise of such Purchase Rights or upon the conversion,
exercise or exchange of Convertible Securities issuable upon
exercise of such Purchase Rights.
(ii) Issuance of Convertible Securities. If the Corporation
issues or sells any Convertible Securities, whether or not
immediately convertible, exercisable or exchangeable (and whether in
contravention of any restriction in this Certificate, the Securities
Purchase Agreement or otherwise), and the price per share for which
Common Stock is issuable upon such conversion, exercise or exchange
is less than the Exchange Rate in effect on the date of issuance or
sale of such Convertible Securities, then the maximum total number
of shares of Common Stock issuable upon the conversion, exercise or
exchange of all such Convertible Securities shall, as of the date of
the issuance or sale of such Convertible Securities, be deemed to be
outstanding and to have been issued and sold by the Corporation for
such price per share. If the Convertible Securities so issued or
sold do not have a fluctuating conversion or exercise price or
exchange ratio, then for the purposes of the preceding sentence, the
"price per share for which Common Stock is issuable upon such
conversion, exercise or exchange" shall be determined by dividing
(A) the total amount, if any, received or receivable by the
Corporation as consideration for the issuance or sale of all such
Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon
the conversion, exercise or exchange thereof (determined in
accordance with the calculation method set forth in this clause (i)
of above) at the time such Convertible Securities first become
convertible, exercisable or exchangeable, by (B) the maximum total
number of shares of Common Stock issuable upon the exercise,
conversion or exchange of all such Convertible Securities. If the
Convertible Securities so issued or sold have a fluctuating
conversion or exercise price or exchange ratio (a "Variable Rate
Convertible Security"), then for purposes of the next preceding
sentence, the "price per share for which Common Stock is issuable
upon such conversion, exercise or exchange" shall be deemed to be
the lowest price per share which would be applicable (assuming all
holding period and other conditions to any discounts contained in
such Variable Rate Convertible Security have been satisfied) if the
conversion price of such Variable Rate Convertible Security on the
date of issuance or sale thereof was seventy-five percent (75%) of
the actual conversion price on such date (the "Assumed Variable
Market Price"), and, further, if the conversion price of such
Variable Rate Convertible Security at any time or times thereafter
is less than or equal to the Assumed Variable Market Price last used
for making any adjustment under this Section 7(b) of this Article
FIFTH with respect to any Variable Rate Convertible Security, the
Exchange Rate in effect at such time shall be readjusted to equal
the Exchange Rate which would have resulted if the Assumed Variable
Market Price at the time of issuance of the Variable Rate
Convertible Security had been seventy-five percent (75%) of the
actual conversion price of such Variable Rate Convertible Security
existing at the time of the adjustment required by this sentence. No
further adjustment to the Exchange Rate shall be made upon the
actual issuance of such Common Stock upon conversion, exercise or
exchange of such Convertible Securities.
(iii) Change in Option Price or Conversion Rate. If there is a
change at any time in (A) the amount of additional consideration
payable to the Corporation upon the exercise of any Purchase Rights;
(B) the amount of additional consideration, if any, payable to the
Corporation upon the conversion, exercise or exchange of any
Convertible Securities; or (C) the rate at which any Convertible
Securities are convertible into or exercisable or exchangeable for
Common Stock (in each such case, other than under or by reason of
provisions designed to protect against dilution), the Exchange Rate
in effect at the time of such change shall be readjusted to the
Exchange Rate which would have been in effect at such time had such
Purchase Rights or Convertible Securities still outstanding provided
for such changed additional consideration or changed conversion,
exercise or exchange rate, as the case may be, at the time initially
issued or sold.
(iv) Calculation of Consideration Received. If any Common
Stock, Purchase Rights or Convertible Securities are issued or sold
for cash, the consideration received therefor will be the amount
received by the Corporation therefor (in the case of an underwritten
public offering, after deduction of all underwriting discounts or
allowances) in connection with such issuance, grant or sale. In case
any Common Stock, Purchase Rights or Convertible Securities are
issued or sold for a consideration part or all of which shall be
other than cash, including in the case of a strategic or similar
arrangement in which the other entity will provide services to the
Corporation, purchase services from the Corporation or otherwise
provide intangible consideration to the Corporation, the amount of
the consideration other than cash received by the Corporation
(including the net present value of the consideration expected by
the Corporation for the provided or purchased services) shall be the
fair market value of such consideration, except where such
consideration consists of securities the class of which is listed
for trading or exchange on a Trading Market, in which case the
amount of consideration received by the Corporation will be the
median bid and ask prices thereof on the Trading Market as of the
date of receipt thereof by the Corporation. In case any Common
Stock, Purchase Rights or Convertible Securities are issued in
connection with any merger or consolidation in which the Corporation
is the surviving corporation, the amount of consideration therefor
will be deemed to be the fair market value of such portion of the
net assets and business of the non-surviving corporation as is
attributable to such Common Stock, Purchase Rights or Convertible
Securities, as the case may be. Notwithstanding anything else herein
to the contrary, if Common Stock, Purchase Rights or Convertible
Securities are issued or sold in conjunction with each other as part
of a single transaction or in a series of related transactions, the
Holder may elect to determine the amount of consideration deemed to
be received by the Corporation therefor by deducting the fair value
of any type of securities (the "Disregarded Securities") issued or
sold in such transaction or series of transactions. If the Holder
makes an election pursuant to the immediately preceding sentence, no
adjustment to the Exchange Rate shall be made pursuant to this
Section 7 of this Article FIFTH for the issuance of the Disregarded
Securities or upon any conversion, exercise or exchange thereof. The
Corporation shall calculate, using standard commercial valuation
methods appropriate for valuing such assets, the fair market value
of any consideration other than cash or securities; provided,
however, that if the Holder does not agree to such fair market value
calculation within three business days after receipt thereof from
the Corporation, then such fair market value shall be determined in
good faith by an investment banker or other appropriate expert of
national reputation selected by the Corporation and reasonably
acceptable to the Holder, with the costs of such appraisal to be
borne by the Corporation.
6. Forced Exchange by Corporation.
(a) So long as that number of shares of Common Stock into which
the 2006 Preferred Stock is exchangeable hereunder are listed with or eligible
to be traded on, as applicable, a Trading Market, if the VWAP equals or exceeds
Two and One Half (2.5) times the Exchange Price (the "Trigger Price") for a
period of at least thirty (30) consecutive Trading Days, the Corporation may
force the Holders of 2006 Preferred Stock to exchange into that number of shares
of Common Stock determined by the Exchange Formula some or all of the
outstanding shares of 2006 Preferred Stock (a "Forced Exchange"), provided, that
each of the following conditions (the "Required Conditions") shall have been met
and shall at all times during the period beginning on the date on which the VWAP
equals or exceeds the Trigger Price and ending as of the opening of business on
the Forced Exchange Date (as defined in Section 6(b) of this Article FIFTH): (i)
the Common Stock underlying the 2006 Preferred Stock included in such Forced
Exchange Notice (including without limitation the Common Stock issuable upon
exercise of any Par Warrants) is (1) covered by a valid Registration Statement
which has been declared effective by the United States Securities and Exchange
Commission and which remains effective at all times during such period and (2)
is listed with or eligible to be traded on, as applicable, a Trading Market;
(ii) the number shares of Common Stock shares underlying the 2006 Preferred
Stock to be exchanged in the Forced Exchange does not exceed the cumulative
trading volume of the Common Stock for the thirty (30) consecutive Trading Days
prior to such notice; (iii) the Corporation has not issued a Forced Exchange
Notice within the sixty (60) days prior to the date of the Forced Exchange
Notice; (iv) the Corporation has not filed, and has no plans to file, a
registration statement with the Securities and Exchange Commission in connection
with a proposed new equity financing in the sixty (60) days prior to or
following the Forced Exchange Notice (as defined in Section 6(b) of this Article
FIFTH); (v) all amounts, if any, then accrued and payable under the Transaction
Documents (as defined in the Securities Purchase Agreement) shall have been
paid; (vi) the Corporation shall have obtained such approval(s) of the Holders
as may be required pursuant to Section 4.27 of the Securities Purchase
Agreement; and (vii) the Corporation shall at the time not otherwise be in
material breach or violation of any provision of the Transaction Documents.
(b) Procedures for Forced Exchange. The Corporation may effect a
Forced Exchange by providing written irrevocable notice to the Holders in any
manner set forth in Section 14 of this Article FIFTH (a "Forced Exchange
Notice") in such form as the Corporation shall approve, setting forth the number
of shares of 2006 Preferred Stock subject to the Forced Exchange (and if less
than all, the percentage of shares held by each Holder on a pro rata basis), the
Exchange Rate then in effect, the Trigger Price, the date that the Forced
Exchange is proposed to occur (which date shall be not less than Thirty (30)
days following the effective date of the Forced Exchange Notice (the "Forced
Exchange Date"), a certification from the Company that all of the Required
Conditions have been met and remain satisfied as of the opening of business on
the Forced Exchange Date, and such other information as the Corporation shall in
its discretion determine. If any shares of 2006 Preferred Stock to be redeemed
are held in certificated form, the Forced Exchange Notice shall also include
instructions for Holders to surrender their shares, duly endorsed in blank, to
the Corporation for redemption. On the Forced Exchange Date, all 2006 Preferred
Stock to be exchanged in the Forced Exchange shall be exchanged for Common Stock
(and/or, to the extent necessary to satisfy the Holder's applicable Limitations
on Ownership, a Par Warrant) in accordance with the Exchange Formula.
7. Exchange upon Change of Control. If there shall occur a Change of
Control (as defined below), all issued and outstanding shares of 2006 Preferred
Stock that are not the subject of a pending exchange under Section 4 or Section
6 of this Article FIFTH shall, automatically and without any other action
required by the Holder or the Corporation, be exchanged for the right to receive
the greater of (a) the Liquidation Preference of such shares, plus an amount
equal to accrued but unpaid dividends, and (b) such cash, shares of stock,
securities and/or other property as would have been issued or payable pursuant
to the transaction effecting the Change of Control (the "Change of Control
Consideration") in exchange for the shares of Common Stock issuable pursuant to
Section 6 of this Article FIFTH (assuming that the date that the Change of
Control occurs is the Exchange Date and that all Required Conditions had been
satisfied, and without giving effect to the applicable Limitations on Ownership)
on an as-exchanged basis, without giving effect to the Limitations on Ownership,
where the Change of Control Consideration shall be valued, if all or part
thereof consists of property other than cash, at the value ascribed thereto by
the Board of Directors in the Change of Control transaction and agreed by the
Required Holders, which agreement shall not be unreasonably withheld or delayed.
For purposes hereof, "Change of Control" shall mean the occurrence of either of
the following events which is not deemed a Liquidating Event: the Corporation
shall (i) sell, convey or dispose of all or substantially all of its assets (the
presentation of any such transaction for stockholder approval being conclusive
evidence that such transaction involves the sale of all or substantially all of
the assets of the Company); or (ii) merge or consolidate with or into, or engage
in any other business combination with, any other person or entity, in any case,
in which the Corporation is not the surviving entity, or which results in either
(x) the holders of the voting securities of the Corporation immediately prior to
such transaction holding or having the right to direct the voting of fifty
percent (50%) or less of the total outstanding voting securities of the
Corporation immediately following such transaction or (y) the members of the
board of directors or other governing body of the Corporation comprising fifty
percent (50%) or less of the members of the board of directors of the
Corporation immediately following such transaction.
8. Redemption by the Corporation.
(a) Corporation's Optional Redemption Rights. From and after the
fifth (5th) anniversary of the Closing Date, to the extent that the Holder has
not exercised its exchange rights under Section 4(a) of this Article FIFTH with
respect to such shares, the Corporation may redeem for cash any or all shares of
2006 Preferred Stock then outstanding (an "Optional Redemption") at a price (the
"Optional Redemption Price") equal to One Hundred Twenty Percent (120%) of the
Face Amount of the 2006 Preferred Stock being redeemed, together with any and
all accrued and unpaid Dividends thereon. If the Corporation elects to redeem in
an Optional Redemption less than all shares of 2006 Preferred Stock then
outstanding, then the Corporation shall redeem shares of 2006 Preferred Stock
pro rata, based on the total amount of shares to be redeemed and the proportion
that the number of shares held by each Holder bears to the number of shares then
held by all Holders.
(b) Procedures for Optional Redemption by Corporation. The
Corporation may effect an Optional Redemption by providing written irrevocable
notice to the Holders in any manner set forth in Section 14 of this Article
FIFTH (the "Optional Redemption Notice") in such form as the Corporation shall
approve, setting forth the number of shares of 2006 Preferred Stock being
redeemed (and, if less than all, the percentage of shares held by each Holder on
a pro rata basis), the Optional Redemption Price, the date that the Optional
Redemption is proposed to occur (which date shall be not less than Twenty (20)
days following the effective date of the Optional Redemption Notice (the
"Optional Redemption Date") and such other information as the Corporation shall
in its discretion determine. If any shares of 2006 Preferred Stock to be
redeemed are held in certificated form, the Optional Redemption Notice shall
also include instructions for Holders to surrender their shares, duly endorsed
in blank, to the Corporation for redemption. On the Optional Redemption Date,
unless earlier tendered for exchange by the Holders pursuant to Sections 4(a)
and 8(c) of this Article FIFTH, the Corporation shall issue payment of the
Optional Redemption Price to the Holders and the Corporation shall record the
cancellation of those shares which were so redeemed on its books and records
(and, if the 2006 Preferred Stock is in certificated form, shall issue in due
course one or more new stock certificates representing those shares held by the
Holder which remain issued and outstanding).
(c) Holders' Right to Exchange following Corporation's Optional
Redemption Notice. For the first Twenty (20) days following the Holder's receipt
of an Optional Redemption Notice and prior to the Optional Redemption Date, each
Holder shall have the right to tender for exchange into Common Stock any or all
shares of 2006 Preferred Stock held by it (including those that are the subject
of the Optional Redemption Notice) in the manner set forth under Section 4(a) of
this Article FIFTH.
9. Uncertificated Shares. The shares of the 2006 Preferred Stock shall
be uncertificated shares; provided, that, to the extent permitted by the DGCL,
every Holder having uncertificated shares shall be entitled to have a
certificate signed by, or in the name of, the Corporation representing the
number of shares owned of record by such Holder in certificated form if such
Holder so requests.
10. Cancellation of 2006 Preferred Stock. If any shares of 2006
Preferred Stock are exchanged for Common Stock, redeemed or repurchased by the
Corporation, the shares so exchanged, redeemed or repurchased shall be canceled,
shall return to the status of shares of authorized, but unissued, Authorized
Preferred Stock and shall not be issuable by the Corporation as 2006 Preferred
Stock.
11. Payment of Cash; Defaults. Whenever the Corporation is required to
make any cash payment to a Holder under this Certificate of Incorporation (as
payment of any Dividend or otherwise), such cash payment shall be made to the
Holder within five business days after the earlier of (a) the date for such
payment provided for in this Certificate of Incorporation or (b) delivery by
such Holder of a notice specifying that the Holder elects to receive such
payment in cash and the method (e.g., by check, wire transfer, including
instructions therefor) in which such payment should be made and any supporting
documentation reasonably requested by the Corporation to substantiate the
Holder's claim to such cash payment or the amount thereof. If such payment is
not delivered within such five business day period, such Holder shall thereafter
be entitled to interest on the unpaid amount at a per annum rate equal to the
lower of eighteen percent (18%) and the highest interest rate permitted by
applicable law until such amount is paid in full to the Holder.
12. Remedies Cumulative. The remedies provided in this Certificate of
Incorporation shall be cumulative and in addition to all other remedies
available under this Certificate of Incorporation, at law or in equity
(including a decree of specific performance and/or other injunctive relief), and
nothing herein shall limit a Holder's right to pursue actual damages for any
failure by the Corporation to comply with the terms of this Certificate of
Incorporation. The Corporation acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the holders of 2006
Preferred Stock and that the remedy at law for any such breach may be
inadequate. The Corporation therefore agrees, in the event of any such breach or
written threatened breach, that the holders of 2006 Preferred Stock shall be
entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
13. Waiver. Notwithstanding any provision in this Certificate of
Incorporation to the contrary, any provision contained herein and any right of
the holders of 2006 Preferred Stock granted hereunder may be waived as to all
shares of 2006 Preferred Stock (and the holders thereof) upon the written
consent of the Required Holders, unless a higher percentage is required by
applicable law, in which case the written consent of the Holders of not less
than such higher percentage of shares of 2006 Preferred Stock shall be required.
14. Notices. Any notices required or permitted to be given under the
terms hereof shall be sent by certified or registered mail (return receipt
requested) or delivered personally, by nationally recognized overnight carrier
or by confirmed facsimile transmission, and shall be effective five days after
being placed in the mail, if mailed, or upon receipt or refusal of receipt, if
delivered personally or by nationally recognized overnight carrier or confirmed
facsimile transmission, in each case addressed to a party. The addresses for
such communications are (i) if to the Corporation to Diomed Holdings, Inc., One
Dundee Park, Andover, MA 01810, Attn: Chief Executive Officer, Telephone: (978)
475-7771, Facsimile: (978) 475-8488, with a copy to McGuireWoods LLP, 1345
Avenue of the Americas, 7th Floor, New York, NY 10105, Attn: William A. Newman,
Esq., Telephone (212) 548-2160, Facsimile (212) 548-2170, and (ii) if to any
Holder to the address set forth under such Holder's name on the books and
records of the Corporation.
SIXTH: The Certificate of Incorporation is hereby amended by amending and
restating Section 6 of Article FIFTH thereof in its entirety as follows:
Section 6. Distribution in Liquidation. Upon any liquidation,
dissolution or winding up of the corporation, and after paying or adequately
providing for the payment of all its obligations, the remainder of the assets of
the Corporation shall be distributed, either in cash or in kind, pro rata to the
holders of the common stock, subject to the rights of the holders of the shares
of the Authorized Preferred Stock that at the time are issued and outstanding.
The Board of Directors may, from time to time, distribute to the shareholders in
partial liquidation from stated capital of the Corporation, in cash or property,
without the vote of the stockholders, in the manner permitted and upon
compliance with limitations imposed by law.
SEVENTH: This Certificate of Amendment of the Certificate of Incorporation
was authorized by the unanimous vote of the directors of the Corporation at a
meeting of the Board of Directors duly noticed and held, and by the affirmative
vote of the holders of a majority of the capital stock of the Corporation issued
and outstanding as of the record date for a special meeting of stockholders duly
noticed and conducted on [_____________], 2006 in accordance with the By-Laws of
the Corporation.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by [_______________], its Secretary, on
[____________________], 2006.
DIOMED HOLDINGS, INC.
By:
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Name: [____________________]
Title: Secretary