BOARD DISCRETION TO EFFECT REVERSE STOCK SPLIT
Background
In July 2002, the Company received notice from the staff (the "Staff") of the Nasdaq National Market System (the "National Market") of the potential delisting of the Common Stock because its shares had closed at a per share price of less than $1.00 since May 23, 2002. In August 2002, the Company received notice from the Staff that the Common Stock no longer complied with the minimum $5 million market value of publicly held shares as required for continued listing on National Market. On October 9, 2002, the Company also received notice from the Staff of its decision to delist the Common Stock from the National Market as of the opening of trading on October 17, 2002. The Staff cited the Company's failure to meet the minimum $10 million stockholders' equity requirement for continued listing on the National Market. The delisting action has been stayed pending the determination following a hearing before the Nasdaq Listing Panel that was held on November 21, 2002. On November 7, 2002, the Company received notice from the Staff that the Company's compliance with the required minimum bid price and market value of publicly held shares will also be addressed at the hearing.
In connection with the hearing, the Company submitted to Nasdaq its request, substantiated by supporting documentation, to have the Company's securities listed on the Nasdaq SmallCap Market ("SmallCap Market"). For continued listing on the SmallCap Market, the Company must, among other things, maintain a per share minimum bid price of $1.00 and maintain a minimum stockholders' equity of $2.5 million. The Company has been advised by Nasdaq that a determination on the Company's application will be forthcoming.
In order to meet the minimum bid price requirement and thereby increase the Company's prospects for having its securities listed on the SmallCap Market, the Board, on October 28, 2002, adopted a resolution approving an amendment to the Company's Certificate of Incorporation to effect a reverse split of all outstanding shares of the Common Stock in a range of 1:6 to 1:10, as determined in the sole discretion of the Board.
Even if the Company satisfies the minimum per share bid price and the other criteria, Nasdaq may deny the application to transfer to the SmallCap Market. The Nasdaq staff has advised the Company of its concern that following the Asset Sale, the Company will become a "public shell" corporation, of which the continued listing on a Nasdaq market may be inconsistent with Nasdaq's public interest policy. Thus, notwithstanding management's efforts, the Common Stock could be delisted from Nasdaq by the time that the Special Meeting is held.
No assurance can be provided that the Company will be able to successfully transfer to the SmallCap Market. If the Company is unable to transfer to the SmallCap Market, the Common Stock may be eligible for trading on the OTC Bulletin Board or other over-the-counter markets, although there can be no assurance that the Company's Common Stock will be eligible for trading on any alternative exchanges or markets. These developments would have an adverse effect on the liquidity of the Common Stock.
Additionally, even if the Company successfully transfers to the Nasdaq SmallCap Market, if following the Asset Sale, the Company were to acquire an operating business, it may have to qualify for listing on either the Nasdaq SmallCap or National Market's initial listing standards, which are more stringent than the continued listing standards.
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Overview
The Stockholders are being asked to approve a reverse stock split of the Company's outstanding Common Stock in the range of 1:6 to 1:10, as determined in the sole discretion of the Board (the "Reverse Split"). The Board has adopted a resolution (i) declairing the advisability of a reverse stock split in the range of 1:6 to 1:10, subject to Stockholder approval, (ii) in connection therewith, amending the Company's Certificate of Incorporation to effect such a reverse stock split, subject to stockholder approval, and (iii) authorizing any other action it deems necessary to effect such a reverse stock split, without further approval or authorization of the Company's stockholders, at any time on or prior to the date of the 2003 annual stockholder meeting. If the proposed Reverse Split is approved, the Company's Board would have the discretion to elect, as it determines to be in the best interests of the Company and its Stockholders, to effect the Reverse Split at any exchange ratio within the range at any time before the Company's 2003 annual stockholder meeting. The Board may elect not to implement the approved Reverse Split at its sole discretion. The Board believes that approval of a proposal granting this discretion to the Board provides the Board with appropriate flexibility to achieve the purposes of the Reverse Split, if implemented, and to act in the best interests of the Company and its Stockholders.
THE SOLE PURPOSE FOR WHICH THE BOARD WOULD EFFECT THE REVERSE SPLIT IS TO
MAINTAIN A NASDAQ LISTING.
To effect the Reverse Split, the Company would file an amendment to its Certificate of Incorporation with the Delaware Secretary of State. The form of amendment to the Certificate of Incorporation to effect the proposed Reverse Split is attached to this Proxy Statement as Annex C. If the Board elects to implement the Reverse Split, the number of issued and outstanding shares of the Company's Common Stock would be reduced in accordance with the selected exchange ratio for the Reverse Split. The par value and number of authorized shares of the Common Stock would remain unchanged. The Reverse Split would become effective upon filing the amendment to the Certificate of Incorporation with the Delaware Secretary of State.
No further action on the part of Stockholders would be required to either effect or abandon the Reverse Split.
Potential Effects of the Proposed Reverse Split
The immediate effect of the Reverse Split would be to reduce the number of shares of the outstanding Common Stock and to increase the trading price of such Common Stock. However, the effect of any effected Reverse Split upon the market price of the Common Stock cannot be predicted, and the history of reverse stock splits for companies in similar circumstances sometimes improves stock performance, but in many cases does not. There can be no assurance that the trading price of the Common Stock after the Reverse Split will rise in proportion to the reduction in the number of shares of the Company's Common Stock outstanding as a result of the Reverse Split or remain at an increased level for any period. Also, there is no assurance that a reverse stock split would not eventually lead to a decrease in the trading price of the Common Stock, that the trading price would remain above the thresholds required by the SmallCap Market or that the Company will be able to continue to meet the other continued listing requirements of the SmallCap Market. The trading price of the Common Stock may change due to a variety of other factors, including our operating results, other factors related to the Company's business and general market conditions.
Effects on Ownership by Individual Stockholders
If the Company implements the Reverse Split, the number of shares of its Common Stock held by each Stockholder would be reduced by multiplying the number of shares held immediately before the Reverse Split by the selected exchange ratio, and then rounding up to the nearest whole share. The Company would not pay cash to each Stockholder in respect of any fractional interest in a share resulting from the Reverse Stock Split. The Reverse Split would not affect any Stockholder's percentage ownership interests in the Company or proportionate voting power, except to the extent that interests in fractional shares would be rounded up to the nearest whole share.
Effect on Options, Warrants and Other Securities
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In addition, all outstanding options, warrants and other securities entitling their holders to purchase shares of the Company's Common Stock would be adjusted as a result of the Reverse Split, as required by the terms of these securities. In particular, the exchange ratio for each instrument would be reduced, and the exercise price per share, if applicable, would be increased, in accordance with the terms of each instrument and based on the selected exchange ratio of the Reverse Split. Also, the number of shares reserved for issuance under the existing employee stock option plans would be reduced proportionally based on the selected exchange ratio of the Reverse Split.
Other Effects on Outstanding Shares
If the Reverse Split is implemented, the rights and preferences of the outstanding shares of the Common Stock would remain the same after the Reverse Split. Each share of Common Stock issued pursuant to the Reverse Split would be fully paid and nonassessable.
The Reverse Split would result in some Stockholders owning "odd-lots" of less than 100 shares of the Common Stock. Brokerage commissions and other costs of transactions in odd-lots are generally higher than the costs of transactions in "round-lots" of even multiples of 100 shares.
The Company's Common Stock is currently registered under Section 12(g) of the 1934 Securities Exchange Act of 1934 (the "1934 Act"). As a result, the Company is subject to the periodic reporting and other requirements of the 1934 Act. The proposed Reverse Split would not affect the registration of the Company's Common Stock under the 1934 Act.
Authorized Shares of Common Stock
The Reverse Split, if implemented, would not change the number of authorized shares of the Common Stock as designated by the Certificate of Incorporation. Therefore, because the number of issued and outstanding shares of Common Stock would decrease, the number of shares remaining available for issuance under the Company's authorized pool of Common Stock would increase.
These additional shares of Common Stock would also be available for issuance from time to time for corporate purposes such as raising additional capital, acquisitions of companies or assets and sales of stock or securities convertible into Common Stock. The Company believes that the availability of the additional shares will provide it with the flexibility to meet business needs as they arise, to take advantage of favorable opportunities and to respond to a changing corporate environment. There are no current plans or arrangements to issue any additional shares of Common Stock, except that if the Board elects following the closing of the Asset Sale to acquire other businesses, it may issue additional shares.
The additional shares of Common Stock that would become available for issuance if the Reverse Split is approved could also be used by the Company's management to oppose a hostile takeover attempt or delay or prevent changes of control or changes in or removal of management, including transactions that are favored by a majority of the Stockholders or in which the Stockholders might otherwise receive a premium for their shares over then-current market prices or benefit in some other manner. For example, without further Stockholder approval, the Board could sell shares of the Common Stock in a private transaction to purchasers who would oppose a takeover or favor the current Board. Although the proposed Reverse Stock Split has been prompted by business and financial considerations, Stockholders nevertheless should be aware that approval of the proposal could facilitate future efforts by Company management to deter or prevent a change in control of the Company. The Board has no plans to use any of the additional shares of Common Stock that would become available following the approval of the Reverse Split, if any, for any such purposes.
In the event that the Board does in fact effect a Reverse Split, then it anticipates that it will present to the Company's stockholders at the 2003 annual stockholder meeting a proposal to decrease the number of authorized shares of Common Stock available for issuance by a factor equal to the ratio in which the Reverse Split was effected.
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Procedure for Implementing the Proposed Reverse Split and Exchange of Stock Certificates
If Stockholders approve the proposed amendment to the Certificate of Incorporation, the Board may elect whether or not to declare a Reverse Split at any time before the Company's 2003 annual stockholders meeting. The Reverse Split would be implemented by filing the appropriate amendment to the Company's Certificate of Incorporation with the Delaware Secretary of State, and the Reverse Split would become effective on the date the filing is accepted by the Delaware Secretary of State.
As of the effective date of the Reverse Split, each certificate representing shares of the Company's Common Stock before the Reverse Stock Split would be deemed, for all corporate purposes, to evidence ownership of the reduced number of shares of the Company's Common Stock resulting from the Reverse Split, except that holders of unexchanged shares would not be entitled to receive any dividends or other distributions payable by the Company after the effective date until they surrender their old stock certificates for exchange. All shares, underlying options and warrants and other securities would also be automatically adjusted on the effective date.
The Company's transfer agent would act as the exchange agent for purposes of implementing the exchange of stock certificates. As soon as practicable after the effective date, Stockholders and holders of securities convertible into the Company's Common Stock would be notified of the effectiveness of the Reverse Split. Stockholders of record would receive a letter of transmittal requesting them to surrender their stock certificates for stock certificates reflecting the adjusted number of shares as a result of the Reverse Split. Persons who hold their shares in brokerage accounts or "street name" would not be required to take any further actions to effect the exchange of their certificates. No new certificates would be issued to a Stockholder until such Stockholder has surrendered the outstanding certificate(s) together with the properly completed and executed letter of transmittal to the exchange agent. Until surrender, each certificate representing shares before the Reverse Stock Split would continue to be valid and would represent the adjusted number of shares based on the exchange ratio of the Reverse Stock Split, rounded up to the nearest whole share. Stockholders should not destroy any stock certificate and should not submit any certificates until they receive a letter of transmittal.
Accounting Consequences
The par value per share of the Company's Common Stock would remain unchanged at $0.001 per share after the Reverse Stock Split. As a result, on the effective date of the Reverse Stock Split, the stated capital on the Company's balance sheet attributable to the Common Stock will be reduced proportionally, based on the selected exchange ratio of the Reverse Stock Split, from its present amount, and the additional paid-in capital account will be credited with the amount by which the stated capital is reduced. The per share Common Stock net income or loss and net book value will be increased because there will be fewer shares of the Common Stock outstanding. The Company does not anticipate that any other accounting consequences would arise as a result of the Reverse Stock Split.
Fractional Shares
The Company will not issue fractional shares in connection with the Reverse Split. In order to avoid the expense and inconvenience of issuing and transferring fractional shares of its Common Stock to Stockholders who would otherwise be entitled to receive fractional shares of Common Stock following the Reverse Split, any fractional shares which result from the Reverse Split will be rounded up to the next whole share.
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No Appraisal Rights
Under the Delaware General Corporation Law, the Stockholders are not entitled to appraisal rights with respect to the proposed amendment to the Company's Certificate of Incorporation to effect the Reverse Split.
United States Federal Income Tax Consequences of the Reverse Split
The following is a summary of important U.S. tax considerations of the Reverse Split. It addresses only Stockholders who hold the pre-Reverse Split shares and post-Reverse Split shares as capital assets. It does not purport to be complete and does not address Stockholders subject to special rules, such as financial institutions, tax-exempt organizations, insurance companies, dealers in securities, mutual funds, foreign stockholders, stockholders who hold the pre-Reverse Split shares as part of a straddle, hedge, or conversion transaction, Stockholders who hold the pre-Reverse Split shares as qualified small business stock within the meaning of Section 1202 of the Internal Revenue Code of 1986, as amended (the "Code"), Stockholders who are subject to the alternative minimum tax provisions of the Code, and Stockholders who acquired their pre-Reverse Split shares pursuant to the exercise of employee stock options or otherwise as compensation. This summary is based upon current law, which may change, possibly even retroactively. It does not address tax considerations under state, local, foreign, and other laws. Furthermore, the Company has not obtained a ruling from the Internal Revenue Service or an opinion of legal or tax counsel with respect to the consequences of the Reverse Split. Each Stockholder is advised to consult a qualified tax advisor.
The proposed Reverse Split is intended to constitute a reorganization within the meaning of Section 368 of the Code. Assuming the Reverse Split qualifies as a reorganization, a Stockholder generally will not recognize gain or loss on the Reverse Split. The aggregate tax basis of the post-Reverse Stock Split shares received will be equal to the aggregate tax basis of the pre-Reverse Split shares exchanged therefor (excluding any portion of the holder's basis allocated to fractional shares), and the holding period of the post-Reverse Split shares received will include the holding period of the pre-Reverse Split shares exchanged. The rounding up in respect of fractional shares will not result in a taxable event to a Stockholder; however, there will be an adjustment to the Stockholder's basis equal to the fractional share times the market value on the date of issuance.
No gain or loss will be recognized by the Company as a result of the Reverse Split.
BOARD RECOMMENDATION
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE TO
APPROVE THE REVERSE SPLIT.
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN
BENEFICIAL HOLDERS
The following table sets forth certain information, as of the Record Date (except as otherwise disclosed in the footnotes to the table), concerning the ownership of the Common Stock by (a) each person who, to the Company's knowledge, beneficially owned on that date more than 5% of the outstanding Common Stock, (b) each of the Company's directors and executive officers and (c) all current directors and executive officers of the Company as a group.
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Number of Shares Percent of
Name of Beneficial Owner (1) Beneficially Owned (2) Common Stock (2)
Daniel C. Stein, President,
Chief Executive Officer and
Director -(3) *
Sam Brill, Chief Operating
Officer and Director -(4) *
Richard Gottehrer, Director -(5) *
Michael Paolucci, Director -(6) *
Joel Schoenfeld, Director -(6) *
Neil Subin, Director -(6) *
Marc D. Tokayer, former President,
Chief Executive Officer and Director 1,482,747(7) 7.8%
Macrovision Corporation 1,880,937(8) 10.3%
Joseph D. Samberg 3,045,800(9) 16.7%
All directors and executive officers as
a group(6 persons)(11) ................... - *
* Indicates less than 1%.
(1) Unless otherwise indicated, the address of each person listed is c/o TTR Technologies, Inc., 575 Lexington Avenue, New York, New York 10022.
(2) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (the "SEC") and generally includes voting or investment power with respect to securities. In accordance with SEC rules, shares of Common Stock issuable upon the exercise of options or warrants which are currently exercisable or which become exercisable within 60 days of the Record Date are deemed to be beneficially owned by, and outstanding with respect to, the holder of such options or warrants. Except as indicated by footnote, and subject to community property laws where applicable, to the knowledge of the Company, each person listed is believed to have sole voting and investment power with respect to all shares of Common Stock owned by such person.
(3) Does not include options for 550,000 shares of Common Stock issuable upon the exercise of employee stock options issued under the Company's Equity Incentive Plan, of which options for
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one-third of the shares are scheduled to vest in May 2003 and options for the remainder of the shares are to vest in eight subsequent equal quarterly installments; provided, that, if the Stockholders approve Proposal No. 1 (The Asset Sale), then the options will, upon closing of the Asset Sale, vest and become immediately exercisable.
(4) Does not include options for 250,000 shares of Common Stock issuable upon the exercise of employee stock options issued under the 2000 Equity Incentive Plan, of which options for 90,000 shares of Common Stock are scheduled to vest in January 2003 and the options for the balance of 160,000 shares of Common Stock are scheduled to vest over the succeeding two and one-half years, provided, that, if the Stockholders approve Proposal No. 1 (The Asset Sale), then the options will, upon closing of the Asset Sale, vest and become immediately exercisable.
(5) Does not include options for 45,000 shares of Common Stock issuable upon the exercise of stock options issued under the Company's 2002 Non-Employee Directors Stock Option Plan, of which options for 22,500 shares becomes are scheduled to vest and become first exercisable in August 2003 and the options for the remaining 22,500 shares will vest and become first exercisable in August 2004.
(6) Does not include options for 55,000 shares of Common Stock issuable upon the exercise of stock options issued under the Company's 2002 Non-Employee Directors Stock Option Plan, of which options for 27,500 shares are scheduled to vest and become first exercisable in August 2003 and the options for the remaining 27,500 shares will vest and become first exercisable in August 2004.
(7) Comprised of (i) 270,273 shares of Common Stock, (ii) 888,200 shares of Common Stock issuable upon the exercise of currently exercisable employee stock options issued under the Company's 1996 Employee Stock Option Plan and 2000 Equity Incentive Plan and (iii) 324,274 shares of Common Stock held by The Tokayer Family Trust (the "Trust"). Mr. Tokayer's wife is the trustee of the Trust and Mr. Tokayer's children are its income beneficiaries. Mr. Tokayer disclaims beneficial ownership of all shares held by the Trust. Does not include 82,500 shares of Common Stock issuable upon exercise of employee stock options issued under the Company's 2000 Equity Incentive Plan, which are scheduled to vest over the next one and one-half years. Mr. Tokayer's employment with the Company ended in September 2002 and he is currently providing consulting services to the Company through December 31, 2002. The principal address of Marc D. Tokayer is 42 Yud Dalet HaBanim Street, Petach Tikva, Israel.
(8) The address of such person is 2830 De La Cruz Boulevard, Santa Clara, California 95050. The foregoing is based on a Schedule 13D filed by the stockholder in June 2000. Following (and subject to) the approval of Proposal No. 1 (the Asset Sale) and the consummation of the Asset Sale, these shares will be returned to the Company for eventual cancellation and returned to the
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Company's treasury.
(9) Mr. Samberg is the managing member JDS Capital Management, LLC, a Delaware limited liability company ("JDSCM"). JDSCM is the general partner of JDS Capital, LP ("JDS Capital"). These shares are held of record by JDS capital. As such, Mr. Samberg has shared voting and dispositive power over the shares of Common Stock held by JDS Capital and each of Mr. Samberg and JDSCM may be deemed a beneficial owner of those shares. The address of the principal business office of JDSCM, JDS Capital and Mr. Samberg is 780 Third Avenue, 45th Floor, New York, New York 10017. The foregoing disclosure is based on the Schedule 13D (Amendment)filed by the stockholder on November 8, 2002 and on a Form 4 filed on November 13, 2002.
In order to allow open market purchases of Company stock by JDSCM and affiliated entities, in July 2002 the Company's Board of Directors approved a resolution providing that such entities would not, solely by virtue of such open market transactions, be deemed to be subject to the restrictions imposed by Section 203 of the Delaware Corporation Law in connection with any subsequent transaction, including a financing transaction, between the Company and these entities, so long as following such open market purchases the aggregate holdings of all such entities do not exceed 40% of the Company's outstanding Common Stock. Generally, subject to certain exceptions and other provisions, Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" (generally, a merger, asset or stock sale, or another transaction of financial benefit to an interested stockholder) with an "interested stockholder" (generally, a person, who, together with affiliates and associates, owns (or within three years prior did own) 15% or more of the corporation's voting stock) for a period of three years after the date that the person became an interested stockholder. Although the Company and JDSCM previously entered into a non-binding agreement-in-principle pursuant to which JDSCM (or affiliated entities) had agreed to provide financing to the Company, as reported in the Company's Current Report on Form 8-K dated April 24, 2002, JDSCM subsequently informed the Company that it did not intend to move forward on such transaction at that time, as the Company reported in a Current Report on Form 8-K dated June 13, 2002. There currently are no plans or commitments for any such financing transaction.
(11) See Footnotes 3-6. |
