PROPOSAL
ONE
APPROVAL
OF THE ISSUANCE AND SALE OF
COMMON
STOCK AND WARRANTS
We
are
asking our stockholders to consider and approve the issuance and sale of
63,008,140 shares of our common stock and warrants to purchase 3,150,407 shares
of our common stock to a group of Investors, including Three Arch Partners,
which currently is our largest stockholder, and SF Capital Partners, which
also
is one of our significant stockholders, in a private placement
transaction.
The
Private Placement
On
December 12, 2007, we entered into the Securities Purchase Agreement (the
“Purchase Agreement”) with Three Arch Partners IV, L.P. and affiliated funds
(“Three Arch Partners”), SF Capital Partners Ltd. (“SF Capital”) and CHL Medical
Partners III, L.P. and an affiliated fund (“CHL,” and together with Three Arch
Partners and SF Capital, the “Investors”) providing for the private placement
(the “Private Placement”) of 63,008,140 shares (the “Shares”) of our common
stock, par value $0.01 per share, and warrants to purchase 3,150,407 shares
of
our common stock (the “Warrants” and together with the Shares, the “Securities”)
for a total purchase price of $15.5 million.
The
purchase price is equal to $0.246 per Security, of which $0.01 is allocated
to
the Warrants. The purchase price represents a 40% discount to the volume
weighted average price of our common stock on the Nasdaq Global Market, as
reported by Bloomberg Financial Markets, for the 20 trading day period ending
on
the trading day immediately preceding the date of the Purchase Agreement. The
Warrants have an exercise price of $0.246 per share, subject to certain
adjustments. The Warrants may be exercised no earlier than 180 days from the
completion of the Private Placement and will expire seven years from the date
of
issuance.
The
Investors have agreed to purchase the following amounts of Shares and Warrants
in the Private Placement:
|
Investor
|
Shares
|
Warrants
(Shares issuable upon exercise)
|
|
Three
Arch Partners
|
40,650,420
|
2,032,521
|
|
SF
Capital
|
10,162,600
|
508,130
|
|
CHL
|
12,195,120
|
609,756
|
Currently,
Three Arch Partners owns 5,121,638 shares of our common stock and SF Capital
owns 2,694,504 shares of our common stock. If the transaction is consummated,
Three Arch Partners’ percentage ownership of our outstanding common stock will
increase from approximately 17.3% to 49.4% (and 44.4% of our common stock on
a
fully diluted basis), SF Capital Partners’ percentage ownership of our
outstanding common stock will increase from approximately 9.1% to 13.9% (and
12.6% of our common stock on a fully diluted basis), and the Investors will
own
in the aggregate approximately 76.5% of our outstanding common stock (and 68.0%
of our common stock on a fully diluted basis).
The
net
proceeds to us of the Private Placement after payment of fees and expenses
are
expected to be approximately $14,115,000. The terms of the Private Placement
were approved by a committee of our Board of Directors consisting only of
disinterested directors.
The
closing price for our common stock on the Nasdaq Global Market was $0.35 per
share on December 12, 2007, the date of the Purchase Agreement.
The
Private Placement will occur as soon as practicable after we receive the written
consent of our stockholders approving this proposal and Proposal Two to amend
our Certificate of Incorporation.
Reasons
for Stockholder Approval
Our
common stock is listed on the Nasdaq Stock Market (“Nasdaq”). Nasdaq rules
governing issuers whose shares are listed on Nasdaq (the “Marketplace Rules”)
require stockholder approval prior to issuances of securities under certain
circumstances, including the following, which apply to the Private
Placement:
Private
Placement at a Discount to an Affiliated Entity
.
Marketplace Rule 4350(i)(1)(A) requires stockholder approval in the case of
the
private placement of an issuer’s securities at a discount to an affiliated
entity. In the Private Placement, the Shares are to be sold at a 40% discount
to
the volume weighted average price of our common stock on the Nasdaq Global
Market, as reported by Bloomberg Financial Markets, for the 20 day trading
period immediately preceding the date of the Purchase Agreement, as well as
at a
discount to the closing bid price of our common stock on the Nasdaq Global
Market on the day before the Purchase Agreement was executed. Under Nasdaq
interpretations of this rule, Three Arch Partners is an affiliated entity of
ours because two members of our Board of Directors, Dr. Wilfred E. Jaeger and
Roderick A. Young, are affiliates of Three Arch Partners.
Change
of Control
.
Marketplace Rule 4350(i)(1)(B) requires stockholder approval when the issuance
or potential issuance of securities will result in a change of control of the
issuer. Nasdaq considers a change of control to have occurred if, following
one
or more transactions in which an investor (or group of investors) acquires
an
issuer’s securities, the investor or group of investors owns, or has the right
to acquire, 20% or more of the outstanding equity securities of the issuer,
which investor or group of investors did not own or have the right to acquire
20% or more of the outstanding equity securities of the issuer prior to the
transaction, unless there is another stockholder or group of stockholders
unaffiliated with the investor that has a larger interest in the issuer than
the
investor. If the Private Placement is completed in accordance with its terms,
Three Arch Partners would own more than 49% of our common stock and the
Investors taken together would own more than 75% of our common stock, so that
under the Nasdaq interpretations, a change of control will have occurred.
However, neither we nor any of the Investors are hereby agreeing that a change
of control will occur for any other purposes upon completion of the Private
Placement.
Sale
of More than 20% of Stock at a Discount
.
Marketplace Rule 4350(i)(1)(D) requires that an issuer obtain stockholder
approval prior to the issuance of securities when the issuance is for an amount
of common stock that is equal to or greater than 20% of the outstanding stock
of
the issuer and is issued for a price that is less than the greater of book
or
market value of the stock. In the Private Placement, the Shares (which are
in an
amount substantially in excess of 20% of our outstanding common stock) are
to be
sold at a 40% discount to the volume weighted average price of our common stock
on the Nasdaq Global Market, as reported by Bloomberg Financial Markets, for
the
20 day trading period immediately preceding the date of the Purchase Agreement,
as well as at a discount to the closing bid price of our common stock on the
Nasdaq Global Market on the day before the Purchase Agreement was executed.
Although the per share price being paid for the shares in the Private Placement
is greater than the book value of our common stock, it was less than the market
value of the common stock, so the Private Placement requires approval under
this
Marketplace Rule.
Reasons
for and Background of the Private Placement
On
December 12, 2006, we engaged CIBC World Markets Corp. (“CIBC”) to assist us in
evaluating strategic alternatives for our NOMOS radiation oncology business
including the possible sale thereof.
During
the early months of fiscal 2007, we determined that in order to fund continuing
operations over the longer term and to develop our breast brachytherapy
business, which we believe presents significant opportunities for us, we needed
to raise additional capital and to streamline our operations to reduce costs.
Our Board and management were open to both debt and equity financings to obtain
additional capital.
On
May
14, 2007, our Board formed a special financing committee (the “Special Finance
Committee”) to consider possible financing alternatives. The current members of
the Special Finance Committee are John M. Sabin, Richard A. Sandberg, Dr. Gary
N. Wilner and Nancy J. Wysenski, each of whom is a disinterested director with
respect to the financing transactions described in this consent solicitation
statement. This action was taken, at least in part, because two of our
directors, Dr. Wilfred E. Jaeger and Roderick A. Young, are deemed to be
interested because of their affiliation with Three Arch Partners.
On
June
29, 2007, we engaged CIBC to assist us in identifying potential investors.
We
had previously engaged CIBC to act as placement agent in a private placement
that was consummated in June 2006.
On
August
3, 2007, we announced our intention to divest our NOMOS radiation oncology
business. The purposes of this transaction were to enhance operations, reduce
losses and possibly raise additional funds. On September 17, 2007, we completed
the divestiture of the NOMOS business. This transaction reduced our liabilities
and ongoing losses, but did not generate a significant amount of additional
funds for our business.
On
September 21, 2007, we received a notice from Nasdaq indicating that we did
not
comply with the minimum $10 million stockholders’ equity requirement for
continued listing of our common stock on the Nasdaq Global Market. Because
we
believe that the listing of the common stock on Nasdaq is beneficial to us
and
our stockholders, among other reasons, we concluded it would be advantageous
that at least a significant portion of the capital raised in a financing be
in
the form of equity.
During
the second half of fiscal 2007 and early fiscal 2008, CIBC contacted more than
50 potential investors on our behalf. We provided additional information and
made in-person presentations to certain of these potential
investors.
We
received preliminary financing proposals from only two potential investors.
The
Special Finance Committee and the Board carefully considered these proposals,
but concluded that neither one would be in the best interests of us and our
stockholders. One of the proposals was in the form of debt, without an equity
component, which would not provide us with the equity capital we need, among
other reasons, to retain our listing on Nasdaq, and the other proposal contained
conditions that it was determined we would be unlikely to be able to
satisfy.
Beginning
in September 2007, in order to meet our cash needs, in addition to extending
the
maturity of our loan facility with Silicon Valley Bank, we borrowed funds on
a
short-term basis in the following aggregate amounts from the following parties:
$1,000,000 from Agility Capital LLC (“Agility”), $250,000 from John A. Friede, a
current stockholder and a former director, and $1,000,000 from Three Arch
Partners. The reasons for the Private Placement include the need to repay these
short-term borrowings, and a portion of the proceeds received upon closing
of
the Private Placement will be used for this purpose, to the extent such loans
have not been repaid prior to that time.
In
October 2007, our management and the Special Finance Committee initiated
discussions concerning our capital needs with Three Arch Partners, our largest
stockholder. Three Arch Partners expressed interest in providing some of the
capital that we would need to continue operating and to grow our
business.
On
October 31, 2007, Three Arch Partners submitted a term sheet for an equity
investment in us. On November 4, 2007, after negotiation with the Special
Finance Committee, Three Arch Partners submitted a revised term sheet that
provided the basis for the proposed Private Placement.
During
the balance of November and early December 2007, our management and counsel
negotiated definitive documentation for the Private Placement with the Investors
and their representatives. During this period, CIBC and management continued
to
seek other potential investors.
On
November 29, 2007, we had a hearing before a Nasdaq Listing Qualifications
Panel
in which we presented a plan to achieve compliance with the listing requirements
of the Nasdaq Global Market, including the proposed Private Placement, and
requested an extension of 60 days to complete the plan. We also indicated our
intention to apply to transfer the listing of our common stock to the Nasdaq
Capital Market (which has a minimum stockholders’ equity requirement of $2.5
million) to reduce the risk of non-compliance in the future.
On
December 4 and 5, 2007, the Special Finance Committee reviewed the terms of
Private Placement and determined that it was critical to our continued
operations and was fair, reasonable and in the best interests of us, our
stockholders and creditors, and recommended its approval by the Board. On
December 5, 2007, the Private Placement was approved by the Board. Dr. Jaeger
and Mr. Young did not participate in the Special Finance Committee’s
deliberations or the Board approval.
On
December 11, 2007, the Special Finance Committee affirmed its determination
concerning the Private Placement. Also on December 11, 2007, we received
notification from Nasdaq that the Nasdaq Listing Qualifications Panel had
granted our transfer from the Nasdaq Global Market to the Nasdaq Capital Market,
and continued listing on the Nasdaq Capital market, subject to certain
conditions. These conditions included a requirement that we meet the continued
listing requirement of maintaining stockholders’ equity of at least $2.5 million
on or before January 17, 2008.
On
December 12, 2007, we entered into the Purchase Agreement with the Investors.
Our
Board
of Directors and management reviewed and considered numerous financing
alternatives to the Private Placement. Each of the members of the Special
Finance Committee, which is composed solely of disinterested, independent
members of our Board of Directors, and our entire Board of Directors, other
than
the members who are affiliated with Three Arch Partners, has approved the
Private Placement and has resolved that the Private Placement is in our best
interest and the best interest of our stockholders and creditors. We intend
to
utilize net proceeds from the Private Placement to fund our continuing
operations, for new product development, including our ClearPath
TM
breast
brachytherapy devices, to repay short-term borrowings and for other general
corporate purposes.
Appraisal
Rights
Under
Delaware law, our stockholders are not entitled to appraisal rights or other
similar rights in connection with the transactions contemplated by the Purchase
Agreement.
Summary
of Terms of the Purchase Agreement
In
order
to participate in the Private Placement, the Investors entered into the Purchase
Agreement with us. A copy of the Purchase Agreement has been filed by us as
an
exhibit to our Current Report on Form 8-K, filed with the Securities and
Exchange Commission (the “Commission”) on December 13, 2007. In order to reduce
the cost of this consent solicitation, we have not attached a copy of the
Purchase Agreement to this consent solicitation statement. A copy of the
Purchase Agreement, as attached to our previously referenced Current Report
on
Form 8-K, may be obtained from commercial document retrieval services or on
the
Commission’s website at http://www.sec.gov. We will provide a copy of the
Purchase Agreement (without charge) upon stockholder request. Stockholders
may
request a copy of the Purchase Agreement by contacting our Secretary in writing
at 20200 Sunburst Street, Chatsworth, California, 91311 or by calling (818)
734-8600. We have summarized the material provisions of the Purchase Agreement
below. Please see also the description of certain terms of the Purchase
Agreement above under the caption “The Private Placement.”
Representations
and Warranties
.
We
provided the Investors with representations and warranties in the Purchase
Agreement that we believe are customary for transactions of this nature for
similar businesses. In addition, each Investor made representations and
warranties to us that we believe are customary for transactions of this nature.
The representations and warranties in the Purchase Agreement were made only
for
the purposes of the Purchase Agreement and solely for the benefit of the parties
to the Purchase Agreement as of specific dates.
Covenants
.
The
Purchase Agreement contains covenants that we believe are customary for
transactions of this nature, including, but not limited to filing this consent
statement with the Commission within five business days of the date of the
Purchase Agreement and recommending to the stockholders that the transaction
be
approved, subject to the fiduciary duties of the directors.
Conditions
to the Closing
Conditions
of the Investors’ Obligations.
The
obligation of the Investors to purchase the Shares and Warrants on the date
that
the transaction occurs (the “Closing”) is subject to the satisfaction or waiver
of specified conditions, including, but not limited to, the following: the
representations and warranties made by us set forth in the Purchase Agreement
being true and correct in all material respects as of the Closing, execution
by
each Investor and each of our executive officers and directors of a written
lock-up agreement and approval by our stockholders of this proposal.
Conditions
to Our Obligations.
Our
obligation to issue the Shares and Warrants at the Closing is subject to, among
other things, the satisfaction or waiver of specified conditions, including:
the
receipt of funds, the accuracy of the representations and warranties made by
each Investor in the Purchase Agreement and approval by our stockholders of
this
Proposal.
Summary
of the Registration Rights
Registrable
Securities
.
The
securities covered by the registration rights provisions under the Purchase
Agreement (referred to in this consent solicitation statement as the
“registrable securities”) consist of the shares of our common stock and the
shares of our common stock underlying the Warrants that are to be sold to the
Investors pursuant to the Purchase Agreement.
Mandatory
Registration
.
We have
agreed to use our reasonable best efforts, subject to receipt of necessary
information from the Investors, to file a resale registration statement as
soon
as practicable after the completion of the Private Placement, and to cause
the
resale registration statement to become effective within 180 days after the
completion of the Private Placement, but no earlier than after the filing of
our
Annual Report on Form 10-K for the fiscal year ended October 31, 2007. The
registration statement shall be on Form S-3 or other applicable form available
to us. If a resale registration statement is not declared effective within
that
180-day period, or, if additional registration statements are required to be
filed to register such shares because of limitations imposed by the staff of
the
Commission on the number of shares that may be registered on behalf of selling
stockholders on Form S-3, within 45 days of filing each such additional
registration statement (or 90 days, if such filing is reviewed by the
Commission), we will be obligated to pay liquidated damages to the Investors
as
follows:
|
|
·
|
an
amount equal to 1% of the aggregate purchase price paid by such Investor
with respect to the shares then held by such Investor other than
the
shares issued or issuable upon the exercise of the Warrants;
and
|
|
|
·
|
an
additional amount equal to 1% of such aggregate purchase price on
each
monthly anniversary of the date on which the resale registration
statement
was required to have been declared effective, or a pro rata amount
for
each portion of such month that the resale registration statement
has not
been declared effective;
|
provided
that the maximum aggregate liquidated damages shall not exceed 12% of such
purchase price.
Our
Other Related Obligations
.
During
the registration period, we are required to, among other things:
|
|
·
|
notify
each holder of the filing or effectiveness of registration statements
or
amendments thereto, and of any stop orders or suspensions of the
qualification of any of the registrable
securities;
|
|
|
·
|
use
our reasonable best efforts to file post-effective amendments or
any other
required document so that the prospectus will not contain any untrue
statement of a material fact or omit to state any material
fact;
|
|
|
·
|
use
commercially reasonable efforts to file the documents required under
state
securities or blue sky laws in any state specified in writing by
an
Investor, provided that we shall not be required to qualify to do
business
or consent to service of process in any jurisdiction in which we
are not
now so qualified or have not so consented;
and
|
|
|
·
|
make
and keep public information available, file all Commission reports
and
other documents in a timely manner and furnish to holders a written
statement as to our compliance with Rule 144 and copies of our most
recent
annual and quarterly reports and other reports reasonably
requested.
|
Registration
Period.
The
registration rights under the Purchase Agreement shall be effective until the
earlier of (i) the second anniversary of the completion of the Private
Placement, (ii) such time as all registrable securities have been sold
pursuant to the registration statement or (iii) the date on which all of
the registrable securities may be resold by each of the Investors without
registration pursuant to Rule 144(k) of the Securities Act of 1933, as
amended.
Expenses
.
We will
bear all the expenses incurred in connection with the registration of the
registrable securities, other than fees and expenses, if any, of counsel or
other advisors to the Investors or underwriting discounts, brokerage fees and
commissions incurred by the Investors, if any, in connection with an
underwritten offering of the registrable securities.
Composition
of the Board
The
Purchase Agreement requires that we decrease the number of members of the Board
of Directors from nine members to seven members at or by the time of its next
annual meeting of stockholders. We previously had nine Board members; however,
due to the recent resignation of Mr. John A. Friede, our Board presently
consists of eight members. Under the Purchase Agreement, Three Arch Partners
has
the right to name one member to the Board so long as it beneficially owns
greater than 5,000,000 shares of our common stock (including shares of our
common stock issuable upon exercise of the Warrants, and as appropriately
adjusted for stock splits, stock dividends and recapitalizations). Two of the
current members of our Board, Dr. Wilfred E. Jaeger and Roderick A. Young,
have
been designated by Three Arch Partners. Under the Purchase Agreement, we have
agreed to add two new independent members to the Board at or before our next
annual meeting.
Preemptive
Rights
Under
the
Purchase Agreement, the Investors will be granted certain preemptive rights
if
the Private Placement is completed. For a period of three years following
the completion of the Private Placement, so long as an Investor beneficially
owns at least 10% of our issued and outstanding common stock, such Investor
will
be entitled, subject to certain specified terms, conditions, limitations and
exclusions, to participate pro rata in future capital raising transactions
involving the issuance of our common stock (or securities convertible into
our
common stock).
Lock-Up
Agreements
In
connection with the Private Placement, each Investor has agreed not sell or
offer for sale any shares of our common stock held by such Investor for a period
of 180 days from the date the Private Placement is completed, subject to certain
specified terms, conditions, limitations and exclusions.
Principal
Effects of Approval or Non-Approval of the Proposal
While
each of the Board of Directors and the disinterested directors have approved
the
Private Placement, including the issuance and sale of the Shares and Warrants,
and have resolved that the Private Placement is in our best interest and the
best interest of our stockholders, our stockholders should consider the
information contained in this consent solicitation statement in evaluating
the
proposal. If our stockholders approve the proposal, we will issue the Shares
and
Warrants at the Closing, as described in this consent solicitation statement
and
the Purchase Agreement, which we will undertake to complete as soon as
practicable following approval. Our stockholders should note that as of the
record date, Three Arch Partners owned an aggregate of 5,121,638 shares of
our
common stock and warrants to purchase 3,586,460 shares of our common stock,
or approximately 17.3% of the 29,601,352 shares outstanding on the record date
(19.4% on a fully diluted basis), and SF Capital owned an aggregate of
2,694,504, shares of our common stock and warrants to purchase 1,280,409 shares
of our common stock, or approximately 9.1% of the 29,601,352 shares outstanding
on the record date (8.8% on a fully diluted basis).
Ability
to Control Stockholder Matters
If
the
proposal is approved, and the other conditions to the Closing are satisfied
or
waived, at the Closing, Three Arch Partners will acquire an additional
40,650,420 shares and warrants to purchase 2,032,521 shares of our common stock
and will own 45,772,058 shares of our common stock or approximately 49.4% of
the
92,609,494 shares outstanding after the Closing (44.4% on a fully diluted
basis). Three Arch, SF Capital and CHL Medical will own approximately 76.5%
of
the outstanding common stock in the aggregate following the offering (68.0%
on a
fully diluted basis).
Three
Arch Partners will have significant voting power on account of its ownership
of
our common stock. Accordingly, Three Arch Partners may be able to control the
outcome of matters brought before the stockholders, including a vote for the
election of directors and the approval of mergers and other business combination
transactions. If the Investors act together, they will be able to control the
outcome of such matters. In most instances when our certificate of incorporation
or Delaware law require stockholder approval, stockholder approval is obtained
when we receive the vote of either a majority of the votes cast or a majority
of
the votes outstanding. Since the Investors will own a majority of the votes
outstanding, they will be able to approve stockholder matters irrespective
of
the voting of the other stockholders. Since under Delaware law, actions can
be
taken by stockholders with the written consent of the stockholders necessary
to
approve the action, the Investors may take action on behalf of the stockholders,
without prior notice to the other stockholders.
Dilutive
Effect of Warrants and Options
The
Investors also will own a significant percentage of our outstanding warrants
if
the Private Placement is completed. The exercise price of the warrants purchased
in the Private Placement will be significantly lower than the exercise prices
of
some of our other outstanding warrants. If the Investors are able to exercise
their Warrants, they may increase the percentage of our common stock that they
own.
Outstanding
warrants that we issued to Silicon Valley Bank in connection with loans made
by
Silicon Valley Bank to us contain anti-dilution provisions that will be
triggered if the Private Placement is completed. As a result, the number of
shares that Silicon Valley Bank may purchase upon exercise of its warrants
would
be increased, and the exercise price would be decreased. In addition, if we
complete the Private Placement, the number of shares that Agility Capital may
purchase upon exercise of its warrants, and the exercise price of its warrants,
which we issued in connection with loans made by Agility Capital to us, will
be
determined by the price per share paid in the Private Placement. As a result
of
these provisions, the warrants held by Silicon Valley Bank and Agility Capital,
if exercised, could result in significant dilution to our stockholders.
We
have
also agreed to issue additional options to purchase shares of our common stock
to certain of our newer senior employees, including two of our executive
officers, in connection with the completion of the offering, as part of the
inducement for their acceptance of employment with us. We have agreed to grant
to John Rush, our President and Chief Executive Officer, options to acquire
an
additional number of shares of our common stock equal to 3% of the number of
shares issued in connection with the Private Placement. We have agreed to grant
to Troy Barring, our Senior Vice President and Chief Operating Officer, options
to acquire an additional number of shares of our common stock so that Mr.
Barring would hold options (including the options granted to Mr. Barring upon
commencement of employment with us) equal to 1.5% of the shares of our common
stock outstanding after completion of the Private Placement.
Upon
the
completion of the Private Placement, the number of shares of our common stock
issuable upon exercise of our warrants to Silicon Valley Bank would increase
from 633,844 to 1,641,309, and the number of shares of our common stock
issuable to Agility Capital upon exercise of its warrants would be 3,226,626.
Upon completion of the Private Placement, our employees would be entitled to
receive options to purchase an additional 3,465,448 shares of our common stock,
including 1,890,244 shares of our common stock in the case of Mr. Rush, and
945,122 shares of our common stock in the case of Mr. Barring. In addition,
whether or not the Private Placement is completed, Three Arch Partners will
hold
warrants to purchase 1,025,641 shares of our common stock, which warrants were
issued in connection with the loan by Three Arch Partners to us previously
described herein.
Dilution
of Outstanding Common Stock
If
approved, this proposal would result in an increase in the number of shares
of
our common stock outstanding, and, as a result, current stockholders who are
not
participating in the Private Placement would own a smaller percentage of our
outstanding common stock and, accordingly, a smaller percentage interest in
the
voting power, liquidation value and book value of us. The sale or resale of
any
of our common stock issued pursuant to the Private Placement could cause the
market price of our common stock to decline.
Ability
to Complete Subsequent Offerings
Approval
of this proposal will not limit our ability to engage in future public
offerings, as defined by Nasdaq, or our ability to issue or sell in future
private offerings a number of shares of our common stock (including shares
issuable upon conversion or exercise of convertible debt, warrants or other
securities exercisable for or convertible into our common stock) that is less
than 20% of the outstanding shares on terms that might or might not be similar
to those in this proposal.
Raising
Capital
If
our
stockholders do not approve the proposal, the Closing will not occur and we
will
not issue the Shares and Warrants. In the event that we do not complete the
Closing and we are unable to promptly
raise
additional capital from an alternative source, we may be required to further
reduce expenses or take other steps which could have a material adverse effect
on us, including but not limited to, the
premature
sale of some or all of our assets or product lines on undesirable terms, merger
with or acquisition by another company on unsatisfactory terms, or the cessation
of operations.
Repayment
of Outstanding Debt
We
have
obtained loans from certain parties that have enabled us to maintain our working
capital in the short-term. However, if we are unable to complete the Private
Placement, we may not be able to repay these loans as they come due or obtain
alternative financing to meet our working capital needs. As of December 31,
2007, we were indebted to Silicon Valley Bank in the principal amount of
$2,435,000, Agility Capital in the principal amount of $1,000,000 and Three
Arch
Partners in the principal amount of $1,000,000, in each case plus accrued
interest on these amounts. These loans mature as of (i) February 1, 2008 in
the case of the Silicon Valley Bank loan, provided that the maturity date of
the
Bridge Loan Sublimit under this loan is the earlier of February 1, 2008 or
the
closing date of the Private Placement, (ii) February 1, 2008 in the case of
the
Agility Capital loan, and (iii) the earliest of (a) February 4, 2008, (b) the
closing of the Private Placement, or (c) the maturity date under the Silicon
Valley Bank loan agreement, in the case of the loan from Three Arch Partners.
We
are in default of the net worth covenant under the loan from Silicon Valley
Bank, although the lender has agreed to forbear from exercising its remedies
arising out of such default until such time as it determines in its discretion
to cease such forbearance.
If
the
Private Placement does not occur and we are unable to renew or extend these
loans, we may be required to further reduce expenses or take other steps that
could have a material adverse effect on us, including but not limited to, the
premature sale of some or all of our assets or product lines on undesirable
terms, merger with or acquisition by another company on unsatisfactory terms,
or
the cessation of operations.
Nasdaq
Listing
In
addition, if we are unable to complete the Private Placement, it is unlikely
that we will be able to obtain financing that will allow us to meet the $2.5
million minimum stockholders’ equity required by Nasdaq before January 17, 2008,
the date that the Nasdaq Listing Qualifications Panel has given us to regain
compliance with this requirement. If we are unable to meet this requirement,
our
listing will not be transferred from the Nasdaq Global Market to the Nasdaq
Capital Market and we will likely be delisted by Nasdaq. If we are unable to
maintain our Nasdaq listing, the market price of our common stock may
significantly decrease.
Interests
of Certain Officers and Directors
Dr.
Jaeger and Mr. Young, members of our Board, are affiliates of Three Arch
Partners. Each of their beneficial ownership of our common stock is disclosed
below in “Security Ownership of Certain Beneficial Owners and
Management.”
Vote
Required; Recommendation of the Board of Directors
The
written consent of a majority of our outstanding shares of common stock is
required for the approval of this proposal. Abstentions and broker non-votes
are
not considered consents and, therefore, will have the same effect as votes
against this proposal. The approval of Proposal Two is necessary to have
sufficient shares of our common stock to issue and reserve for issuance for
our
warrants in order to complete the sale of our common stock in the Private
Placement discussed in this proposal. If Proposal Two is not approved by the
stockholders, the Private Placement discussed in this proposal will not occur.
However, we intend to amend our Certificate of Incorporation if approved by
our
stockholders, even if this proposal is not approved by our
stockholders.
THE
BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS CONSENT TO
THE
ISSUANCE AND SALE OF 63,008,140 SHARES OF OUR COMMON STOCK AND WARRANTS TO
PURCHASE 3,150,407 SHARES OF OUR COMMON STOCK TO A GROUP OF
INVESTORS
.
PROPOSAL
TWO
APPROVAL
OF AN AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED
NUMBER OF SHARES OF COMMON STOCK
The
Board
has determined that it is in our best interest and in the best interest of
our
stockholders to amend our Certificate of Incorporation to
increase
the
total number of
authorized
shares
of
common stock from 100,000,000 shares to 150,000,000 shares. The Board
unanimously approved this proposed amendment to the Certificate of Incorporation
(the “Amendment”), declared it to be advisable and hereby seeks the approval of
the Amendment by our stockholders.
If
the
Amendment is approved by our stockholders, the Amendment will become effective
upon the filing of a certificate of amendment with the Delaware Secretary of
State, which filing is expected to occur promptly after consents signed by
holders
of a majority of the outstanding shares of common stock approving the Amendment
are
received by us or our agent.
The
Amendment
The
Amendment would be to Article FOURTH of our Certificate of Incorporation. Under
the Amendment, Article “FOURTH” Section (a) will be deleted in its entirety and
replaced with a new Article “FOURTH” Section (a) (additions
underlined
)
as
follows:
“The
total number of shares of stock which the Corporation is authorized to issue
is
One
Hundred Fifty-two Million (152,000,000)
shares,
One
Hundred Fifty Million (150,000,000)
of which
shall be classified as Common Stock, par value $0.01 per share (the “Common
Stock”), and Two Million (2,000,000) of which shall be classified as Preferred
Stock, par value $0.01 per share (the “Preferred Stock”).”
Purpose
of the Amendment
The
purpose of the Amendment is to
increase
the
total number of
authorized
shares
of
common stock from 100,000,000 shares to 150,000,000 shares. As of December
14,
2007, we had 100,000,000 authorized shares of common stock, of which 29,601,352
shares were outstanding and 15,683,807 shares were reserved for issuance
upon exercise of outstanding options and warrants granted or issued by us,
leaving us with 54,714,841 authorized shares available for other possible
uses.
We
have
entered into the Purchase Agreement, discussed above in Proposal One, under
which we will issue 63,008,140 shares of common stock and will be required
to
issue 3,150,407 additional shares of common stock upon the exercise of the
warrants being issued under the agreement. If the securities issuance discussed
in Proposal One is completed, certain holders of other securities will be
entitled to rights granting them additional shares or warrants covering
additional shares of our common stock. The sum of the issued and outstanding
shares of our common stock, the shares of our common stock underlying warrants
we have issued and the Shares and Warrants to be issued in the Private
Placement, if approved, would exceed the number of shares we are currently
authorized to issue.
In
addition to such issuance, possible business and financial uses for the
additional shares of common stock include, without limitation, raising capital
through the sale of common stock, acquiring other companies, businesses or
products in exchange for shares of common stock, attracting and retaining
employees by the issuance of additional securities under our various equity
compensation plans, future stock splits, fulfillment of our obligations under
the rights agreement and other transactions and corporate purposes that the
Board deems are in our best interest. The additional authorized shares would
enable us to act quickly in response to opportunities that may arise for these
types of transactions, in most cases without the necessity of obtaining further
stockholder approval and holding a special stockholders’ meeting before such
issuance(s) could proceed, except as provided under Delaware law or under the
Nasdaq Marketplace Rules.
Other
than the shares to be issued and the shares to be reserved for issuance pursuant
to the warrants to purchase shares of our common stock, both in connection
with
the Purchase Agreement discussed in Proposal One, as of the date of this consent
solicitation statement, we have no current plans, arrangements or understandings
regarding the additional shares that would be authorized pursuant to this
proposal. However, we review and evaluate potential capital raising activities,
transactions and other corporate actions on an on-going basis to determine
if
such actions would be in the best interests of us and our stockholders.
Future
Amendments
On
October 5, 2007, we received a notice from Nasdaq indicating that, for the
preceding 30 consecutive business days, the bid price of our common stock had
closed below the minimum $1.00 per share requirement for continued inclusion
under Marketplace Rule 4450(a)(5). In accordance with the rule, we have until
April 2, 2008, to regain compliance. In order to regain compliance, the bid
price of our common stock must close at $1.00 per share or more for a minimum
of
10 consecutive business days. Since it is unlikely that such bid price will
increase as required without action by us, it is likely that we will need to
amend our Certificate of Incorporation before April 2, 2008 to effect a reverse
stock split at a level that may allow us to meet the Nasdaq requirement. If
we
do not regain compliance with the rule by April 2, 2008, we understand that
the
Nasdaq Staff will provide written notification to us that our common stock
will
be delisted. At that time, we may appeal the Staff’s determination to NASDAQ
Listing Qualifications Panel, but no assurance can be given that any such appeal
would be successful.
Possible
Effects of the Amendment
Upon
issuance, the additional shares of authorized common stock would have rights
identical to the currently outstanding shares of our common stock. Adoption
of
the Amendment would not have any immediate dilutive effect on the proportionate
voting power or other rights of existing stockholders, however, the occurrence
of the transactions discussed in Proposal One will have a dilutive effect.
See
“Proposal One - Principal Effects of Approval or Non-approval of the Proposal.”
Current stockholders have no preemptive or similar rights, which means that
current stockholders do not have a prior right to purchase any new issue of
common stock in order to maintain their proportionate ownership thereof,
however, the Investors will be granted certain preemptive rights if the Private
Placement is completed, as described in “Proposal One - Preemptive
Rights.”
We
have
not proposed the
increase
in the
number of
authorized
shares
of
common stock with the intention of using the additional authorized shares for
anti-takeover purposes, but we would be able to use the additional shares to
oppose a hostile takeover attempt or delay or prevent changes in control or
our
management. For example, without further stockholder approval, the Board could
sell shares of common stock in a private transaction to purchasers who would
oppose a takeover or favor the current Board. Although this proposal to increase
the authorized number of shares of common stock has been prompted by the
considerations described above and not by the threat of any known or threatened
hostile takeover attempt or any effort of which we are aware to accumulate
our
stock or to obtain control of us (nor is the Board currently aware of any such
attempt directed at us), stockholders should be aware that approval of this
proposal could facilitate future efforts by us to oppose changes in control
and
perpetuate our management, including transactions in which the stockholders
might otherwise receive a premium for their shares over then current market
prices.
We
could
also use the additional shares of common stock for potential strategic
transactions including, among other things, acquisitions, spin-offs, strategic
partnerships, joint ventures, restructurings, divestitures, business
combinations and investments, although we have no present plans to do so. We
cannot provide assurances that any such transactions will be consummated on
favorable terms or at all, that they will enhance stockholder value or that
they
will not adversely affect our business or the trading price of our common stock.
Any such transactions may require us to incur non-recurring or other charges
and
may pose significant integration challenges or management and business
disruptions, any of which could materially and adversely affect our business
and
financial results.
Vote
Required; Recommendation of the Board of Directors
The
written consent of a majority of our outstanding shares of common stock is
required for the approval of this proposal. Abstentions and broker non-votes
are
not considered consents and, therefore, will have the same effect as votes
against this proposal. The approval of this proposal is necessary to have enough
shares to close on the sale of our common stock in a private placement discussed
in Proposal One. If Proposal Two is not approved by the stockholders, the sale
discussed in Proposal One will not occur. However, we intend to implement the
Amendment if approved by our stockholders, even if Proposal One is not approved
by our stockholders.
THE
BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS CONSENT TO APPROVAL OF THE
PROPOSED AMENDMENT TO OUR CERTIFICATE OF INCORPORATION.