Item
7.01 Regulation FD Disclosure
On
March
24, 2008, the Registrant entered into an Amendment and Exchange Agreement with
each of the institutional investors (“Investors”) signatory to that certain
Securities Purchase Agreement dated November 29, 2007 (“Securities Purchase
Agreement”), pursuant to which, among other things, the Investors purchased from
the Registrant (i) senior secured convertible notes in the aggregate principal
amount of $7,000,000 (the “Existing Notes”), which are convertible into shares
of the Registrant’s common stock, par value $0.001 per share (the “Common
Stock”), in accordance with the terms thereof and (ii) warrants (the “Existing
Warrants”), which are exercisable into shares of Common Stock.
Under
the
terms of the Amendment and Exchange Agreements, the Registrant and each Investor
have agreed to restructure the financing consummated under the Securities
Purchase Agreement to reduce the amount of the financing to $3,000,000, with
each Investor receiving repayment of its pro-rata share of $4,000,000, through
the exchange of Existing Notes for a combination of amended and restated senior
secured convertible notes (“Amended and Restated Notes”) and an aggregate of
1,000,000 shares of Common Stock (the “Common Shares”), and through the exchange
of Existing Warrants for amended and restated warrants (“Amended and Restated
Warrants”). The Amended and Restated Notes will have an aggregate principal
amount of $3,000,000 and a term of three years commencing from November 30,
2007. The Amended and Restated Warrants will have a term of five years
commencing from November 30, 2007 and will entitle the Investors to initially
purchase an aggregate of 750,002 shares of Common Stock (subject to adjustment
as provided in the Amended and Restated Warrants, including pursuant to economic
anti-dilution adjustments). The Amended and Restated Notes will carry interest
at 7.50% per annum on the unpaid/unconverted principal balance, payable
quarterly in cash, and will be secured on a senior basis against all of the
assets of the Registrant. The Registrant will also be required to make aggregate
monthly principal payments of $25,000, plus accrued interest thereon, beginning
July 1, 2008.
The
Amended and Restated Notes will convert into approximately 1,500,000 shares,
based on a conversion price equal to $2.00 per share (subject to adjustment
as
provided in the Amended and Restated Notes, including pursuant to economic
anti-dilution adjustments), which shall reset on March 25, 2009 to the greater
of (i) 105% of the arithmetic average of the dollar weighted average price
of
the Common Stock over each of the five (5) consecutive trading days ending
on
the trading day immediately prior to March 25, 2009 and (ii) $1.00 (as adjusted
for any stock splits, stock dividends, recapitalizations, combinations, reverse
stock splits or other similar events); provided however, that in no event shall
the adjusted conversion price be greater than $3.00 (as adjusted for any stock
splits, stock dividends, recapitalizations, combinations, reverse stock splits
or other similar events). The Amended and Restated Warrants will have an
exercise price of $0.9590 per share (subject to adjustment as provided in the
Amended and Restated Warrants, including pursuant to economic anti-dilution
adjustments).
The
Amended and Restated Notes will be convertible at the option of the Investors
prior to their maturity. Additionally, beginning November 30, 2008, and provided
that the Registrant has complied with certain equity conditions, the Registrant
will be able to require the Investors to convert the Amended and Restated Notes
to Common Stock if the dollar volume weighted average price of the Common Stock
is $2.75 for twenty (20) out of thirty (30) consecutive trading
days.
The
maturity date of the Amended and Restated Notes will be three years following
the issuance date of November 30, 2007. The Investors will be entitled to
accelerate the maturity in the event that there occurs an event of default
under
the Amended and Restated Notes, including, without limitation, if the Registrant
fails to register for resale the shares underlying the Amended and Restated
Notes and Amended and Restated Warrants, if the Registrant fails to pay any
amount under the Amended and Restated Notes when due, if a judgment is rendered
against the Registrant in an amount set forth in the Amended and Restated Notes,
if the Registrant breaches any representation or warranty under the Securities
Purchase Agreement or other transaction documents, or if the Registrant fails
to
comply with the specified covenants set forth in the Amended and Restated Notes.
Among the other covenants, the Amended and Restated Notes contain a financial
covenant whereby the Registrant will be required to achieve specified EBITDA
(earnings before interest, tax, depreciation and amortization) and revenue
targets in each of the fiscal quarters during which the Amended and Restated
Notes are outstanding. Any failure by the Registrant to achieve an EBITDA or
revenue target will be considered a breach of the financial covenant. In
connection with the restructuring, the Registrant disclosed (subject to review
by the Registrant’s finance department and independent registered public
accounting firm) to the Investors in the schedules to the Amended and Restated
Notes the estimated expenses and accounting charges for the restructuring (in
the range of $1,000,000 to $2,000,000), preliminary net revenues for January
and
February of 2008 (approximately $3,037,000), and cash on hand as of February
29,
2008 ($6,031,000).
Pursuant
to the Amendment and Exchange Agreements, the Registration Rights Agreement
dated November 30, 2007 (the “Registration Rights Agreement”) will be amended to
provide that the Registrant must register for resale 100% of the sum (i) the
aggregate number of shares of common stock issued or issuable upon conversion
of
the Amended and Restated Notes as of the trading day immediately preceding
the
date the registration statement is initially filed with the Securities and
Exchange Commission (the “SEC”), (ii) the aggregate number of shares of common
stock issued or issuable upon exercise of the Amended and Restated Warrants
as
of the trading day immediately preceding the date the registration statement
is
initially filed with the SEC, and (iii) the Common Shares, and to remove
provisions related to payments to the Investors in connection with the
Registrant’s failure to effectuate a registration statement or maintain its
effectiveness.
In
addition, under the terms of the Amendment and Exchange Agreements, if a
registration statement is not available for the resale of the Common Shares
and
the shares of Common Stock underlying the Amended and Restated Notes and the
Amended and Restated Warrants and the Registrant fails to satisfy the current
public information requirement under Rule 144 promulgated under the Securities
Act, the Registrant has agreed to pay the Investors as a result of the event
and
for each month thereafter that such event continues (or until such time such
information is no longer required under the rule), an amount in cash as partial
liquidated damages equal to 1.5% of the aggregate purchase price of the
Investors’ Amended and Restated Notes.
Under
the
terms of the Amendment and Exchange Agreements, so long as the Amended and
Restated Notes are outstanding, each Investor is not permitted to sell a number
of Common Shares exceeding more than two-thirds (2/3) of the number of shares
previously issued, or required to have been issued, to such Investor upon
conversion of such Investor's Amended and Restated Notes.
The
restructuring transaction is expected to close on March 26, 2007. The net
proceeds of approximately $2.1 million, after the payment of aggregate
transaction expenses, will be used for strategic initiatives and general working
capital purposes.
In
connection with the restructuring transaction, VM Investors, LLC, the
Registrant’s majority shareholder (whose members include Craig Ellins, the
Registrant’s Chief Executive Officer, and Amy Black, the President of the
Registrant’s subsidiary, VMdirect, L.L.C.), will enter into an Amended and
Restated Lock-Up Letter Agreement in favor of the Investors pursuant to which
VM
Investors, LLC will agree not to offer, sell, pledge or otherwise dispose of
any
shares of common stock of the Registrant
until
the
date that none of the Amended and Restated Notes remain outstanding
,
subject
to specified limited exceptions including the transfer of 1,000,000 shares
of
Common Stock to the Company in connection with the restructuring transaction.
Each of the Investors and the Registrant’s affiliates (including its officers
and directors) has also agreed not to engage in any transactions in the
Registrant’s securities during the thirty (30) trading day period ending on the
one-year anniversary of the closing of the restructuring
transaction.
Also
in
connection with the restructuring transaction, the Registrant agreed to
reimburse the fund manager of one of the Investors for its out-of-pocket
expenses incurred in connection with the transactions contemplated by the
Securities Purchase Agreement, including the actual and reasonable fees and
disbursements of the fund manager’s legal counsel, up to an aggregate amount of
$20,000.
The
issuance of the Amended and Restated Notes, the Common Shares and the Amended
and Restated Warrants, is intended to be exempt from registration under the
Securities Act pursuant to Section 3(a)(9) thereof, as such securities will
be
exchanged by the Registrant with existing security holders exclusively and
no
commission or other remuneration will be paid or given directly or indirectly
for soliciting such exchange. No registration statement covering these
securities has been filed with the SEC or with any state securities commission
in respect of the transactions contemplated by the Amendment and Exchange
Agreements.
The
foregoing descriptions do not purport to be a complete description of the terms
of the documents, and this description is qualified in its entirety by the
terms
of the transaction documents, including forms of the Amendment and Exchange
Agreement, the Amended and Restated Senior Secured Convertible Note and the
Amended and Restated Warrant, which are attached hereto as Exhibits 10.1, 10.2
and 10.3, respectively, and incorporated herein by reference.
On
March
25, 2008, the Registrant issued a press release announcing its entry into the
Securities Purchase Agreement, which release is furnished herewith as Exhibit
99.1.