On
May
29, 2007, Dancing Bear Investments, Inc. (the “Noteholder”) entered into a Note
Purchase Agreement with the Company pursuant to which it acquired a convertible
promissory note (the “Convertible Note”) in the aggregate principal amount of
$250,000, together with an option to acquire an additional $2,750,000 of
Convertible Notes on or before November 25, 2007 (the “Option”). The Noteholder
is controlled by our Chairman, Michael Egan. The Convertible Notes are
convertible at anytime prior to payment into shares of the Company’s common
stock at the rate of $.01 per share. Assuming the Option is fully exercised
and
all Convertible Notes are thereafter converted at the initial conversion
rate,
and without regard to potential anti-dilutive adjustments resulting from
stock
splits and the like, approximately 300,000,000 shares of common stock could
be
issued. To the extent that the Company does not have a number of authorized
shares of common stock (after taking into account outstanding options,
warrants
and other convertible securities of the Company) sufficient to permit conversion
of the Convertible Notes in full, then the Convertible Notes shall, until
additional shares have been authorized, be convertible only to the extent
of
available shares. At the present time, if the Option was fully exercised,
approximately $803,800 of the resulting $3,000,000 aggregate amount of
Convertible Notes (equal to approximately 80,380,000 shares) could not
be
converted into shares until the Company’s authorized capital stock is increased.
The Company anticipates that it will seek to amend its Certificate of
Incorporation so as to increase its authorized shares of common stock at
its
next annual meeting of shareholders. The Convertible Notes are due 5 days
after
demand from the holder, and are secured by a pledge of all of the assets
of the
Company and its subsidiaries, subordinate to existing liens on such assets.
The
Convertible Notes bear interest at the rate of ten (10%) percent per annum.
The
Convertible Note was not registered under applicable securities laws and
was
sold in reliance on an exemption from such registration. The Noteholder
is an
“accredited investor” and the Company believes that the issuance and sale of the
Convertible Note qualified for an exemption from registration pursuant
to
Section 4(2) of the Securities Act of 1933.
The
Noteholder is entitled to certain demand and piggy-back registration rights
in
connection with its investment. The conversion price of the Convertible
Notes is
subject to adjustment upon the occurrence of certain events, including
with
respect to stock splits or combinations.
The
Company intends to use the proceeds from the sale of the Convertible Notes
for
general working capital. The proceeds from the $250,000 Convertible Note
are
intended to provide the Company with temporary liquidity to conduct its
business
while it seeks to raise additional capital or the Noteholder elects to
acquire
additional Convertible Notes pursuant to the Option.
After
giving affect to the issuance of the Convertible Note and the Option, our
Chairman, Michael Egan, is now the beneficial owner (which under applicable
rules assumes the exercise of the Option and conversion of the Convertible
Notes
and all other outstanding options, warrants and convertible instruments
held by
Mr. Egan and his affiliates which are exercisable or convertible within
60 days)
of approximately 78% of our common stock. For purposes of the foregoing
calculation, the approximately 80,380,000 shares of common stock which
could not
be issued until we amend our authorized capital stock have not been included,
as
such amendment is not anticipated within the next 60 days.
Absent
additional financing, in the event demand is made for repayment of the
Convertible Notes, the Company will not have the resources to repay the
Convertible Notes. Similarly, we would not have the resources to pay the
$3.4
million of outstanding demand convertible notes which were issued in 2005.
Inasmuch as substantially all of the assets of the Company and its subsidiaries
secure the Convertible Notes and the 2005 convertible notes, in connection
with
any resulting proceeding to collect the indebtedness relating to the Convertible
Notes, the Noteholders (subject to the prior rights of the 2005 convertible
noteholders) could seize and sell the assets of the Company and its
subsidiaries. Any or all of the foregoing would have a material adverse
effect
on the Company and its operations.