PRXI » Topics » Background to and Reasons for the Financing Transaction

This excerpt taken from the PRXI DEF 14A filed Jul 1, 2009.
Background to and Reasons for the Financing Transaction
 
After the conclusion of the consent solicitation led by Sellers Capital LLC, Sellers Capital Master Fund, Ltd. and their slate of four independent director candidates, on January 28, 2009 we recognized the election of William M. Adams, Christopher J. Davino, Jack Jacobs and Bruce Steinberg as directors of the company. On the same date, Mark A. Sellers was elected as our non-executive chairman of the board, and Mr. Davino, then a principal and head of the corporate rescue group of XRoads Solutions Group, LLC, a corporate restructuring management consulting company, was appointed as our interim president and chief executive officer.
 
Prior to the election of these new directors, we disclosed that due to our deteriorating financial condition we would likely need to raise financing in fiscal year 2010. Soon after our new directors were seated and Mr. Davino began working as our interim president and chief executive officer, we recognized that our efforts to raise financing should begin immediately. At a meeting of our board on February 19, 2009, our directors discussed our need for substantial additional financing and the importance of beginning that process as early as possible to allow us to consider all available options and maximize our potential leverage in any negotiations. At the February 19, 2009 board meeting, our board authorized a process to be led by Mr. Davino in which we would consider all of the types of financings that might be available to us, whether through new credit facilities, a mezzanine financing, a private investment in public equity (or PIPE) offering, a traditional equity financing or a possible strategic transaction.
 
Over the course of the next month, Mr. Davino contacted approximately 20 investors that provide financing to distressed companies and that we believed were the most likely parties to provide funding to the company. Each of these investors declined to make an offer to provide financing to us. We believe that these investors declined to provide financing to us for a variety of reasons, including the uncertain nature of our rights in our Titanic assets, the relatively small size of the investment, the comparatively illiquid nature of an investment in the company, and the high interest rates available elsewhere in the distressed debt markets. During this period of time, we also considered potential licensing arrangements, joint ventures and other strategic transactions that might resolve our need for financing, but determined that these alternatives were either not available, would not provide sufficient financing or would not maximize the company’s enterprise value. Our board and management were also aware during this time period that, due to our deteriorating financial performance, we were likely to lose access to our existing revolving credit facility with Bank of America in the near term.


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In mid-March, Mr. Davino approached our chairman, Mr. Sellers, to inquire whether Sellers Capital might be interested in providing financing to the company. Mr. Sellers indicated that Sellers Capital could consider making a proposal, but that due to Sellers Capital’s investment restrictions any investment would need to be in the form of equity.
 
At a meeting of our board on March 25, 2009, our board determined that, although we would continue to pursue possible financing and other strategic transactions with other parties, a special financing committee should be formed to consider a possible financing by Sellers Capital. The board then approved the formation of the Independent Financing Committee, consisting of Mr. Adams, Mr. Davino and Mr. Alan B. Reed, each of whom was considered to be independent of Sellers Capital. The Independent Financing Committee was given the authority to consider and negotiate the terms of any financing proposal made by Sellers Capital or any other potential investors and to engage its own financial advisors and legal counsel. The Independent Financing Committee subsequently engaged Ladenburg Thalmann & Co. Inc. (“Ladenburg”) as its financial advisor and Greenberg Traurig, P.A. as its legal counsel.
 
The initial proposal provided to us by Sellers Capital provided for a $12.0 million convertible note financing, the principal amount of which would convert into common stock of the company at a premium to prevailing market prices. The offer contemplated that Sellers Capital would provide at least $6 million of the financing, and the balance would be provided by Sellers Capital and other investors that the company would approach after the finalization of terms with Sellers Capital, with Sellers Capital being obligated to provide any part of the financing not provided by other investors. Because the equity feature of the financing proposed by Sellers Capital would require shareholder approval under the listing rules of the NASDAQ Global Market and would require the company to authorize additional shares of common stock (as more fully described below under the section titled “Shareholder Approval Condition”), the conversion of the debt into equity would be conditioned on approval by our shareholders. The offer also provided that, if such shareholder approval was not obtained, the maturity date of the debt would accelerate and a penalty interest rate would apply.
 
In multiple meetings during March and April, the Independent Financing Committee considered the financing proposal made by Sellers Capital and negotiated the terms of the potential transaction directly with Sellers Capital. During these negotiations, the Independent Financing Committee negotiated several enhanced terms for the proposed financing, including a lower interest rate, a longer period for the company to repay the indebtedness if shareholder approval for the conversion feature was not obtained, and a prepayment provision that would allow the company to prepay the convertible notes in the event that the company could obtain alternative financing on better terms, subject to a prepayment fee in the form of warrants to purchase a number of shares of our common stock equal to 7.0% of the number of shares into which the convertible notes would convert. The Independent Financing Committee also agreed that, if shareholder approval for the conversion of the notes was not obtained, the notes would become immediately secured by a first priority security interest in all of our assets, including the stock of our subsidiaries.
 
During March and April, the Independent Financing Committee also continued to consider other possible financing transactions and strategic transactions that might be available to the company, including by utilizing an investment banking firm to contact possible acquirers. The Independent Financing Committee reported its progress to our board in three board meetings held during April. Upon the reporting of our financial results for our fiscal year 2009 in May, we lost access to our existing revolving credit facility with Bank of America, due to our financial performance.
 
In board meetings held on May 4, 5 and 6, the Independent Financing Committee reported its conclusions to our board and explained the reasons for its conclusions. The Independent Financing Committee concluded that the Sellers Capital proposal was the best financing option available to the company and recommended that our board approve the proposal. The Independent Financing Committee based its recommendation on:
 
  •  the terms of Sellers Capital’s offer that the committee believed are favorable to the company, including the relatively low interest rate, the conversion of the debt into equity at a premium to market prices prevailing at the time, and the lack of an upfront security interest in the company’s assets;
 
  •  the enhanced provisions that the committee was able to negotiate with Sellers Capital, including the ability of the company to prepay the notes, subject to a limited equity penalty, if financing became available on better terms;


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  •  the presence of limited restrictive covenants on us in the proposed terms of the Financing Transaction;
 
  •  the lack of any financing proposals from any of the parties that had been approached by the company;
 
  •  the committee’s belief that the Financing Transaction had the potential to maximize our enterprise value to a greater extent than the potential licensing arrangements, joint ventures and other strategic transactions that the committee considered; and
 
  •  the presentation and fairness opinion provided to the committee by Ladenburg, which is described below in the section titled “Fairness Opinion and Analysis of Ladenburg Thalmann & Co. Inc.”
 
Our board considered the recommendation of our Independent Financing Committee during the meetings held on May 4, 5 and 6, and approved the Financing Transaction at the conclusion of these meetings. The board also resolved to put before our shareholders at the annual meeting the proposals that are set forth in Proposal Nos. 2 and 3. Our board also resolved to recommend that our shareholders vote in favor of these proposals.
 
In connection with approving the Financing Transaction, our board approved under Section 607.0902 of the Florida Business Corporation Act (known as the Control Share Acquisition Statute) the issuance of shares of our common stock to Sellers Capital Master Fund, Ltd. upon conversion of the Notes in an amount that would result in it beneficially owning more than one-third of our outstanding common stock. However, our board did not approve the acquisition by Sellers Capital Master Fund, Ltd. of more than a majority of our outstanding common stock, an additional threshold requiring approval under the Florida Control Share Acquisition Statute. Therefore, if Sellers Capital Master Fund, Ltd. desires to acquire shares that would result in it owning more than a majority of our outstanding shares, it would need the approval of our board or our shareholders under such statute in order for the acquired shares to have voting rights in its hands.
 
On May 6, 2009, we entered into a convertible note purchase agreement with Sellers Capital Master Fund, Ltd., and on May 11, 2009, we sold an initial Note to Sellers Capital Master Fund, Ltd. in the principal amount of $6.0 million. Between May 6 and the second closing on June 15, 2009, we approached numerous potential investors, including a number of our existing investors, about participating in the second closing. Only one of these investors, SAF Capital Fund LLC, elected to participate in the Financing Transaction. Therefore, in the second closing, we sold Notes in the principal amount of $0.45 million to SAF Capital Fund LLC and Notes in the principal amount of $5.55 million to Sellers Capital Master Fund, Ltd., pursuant to its obligation to acquire the Notes not acquired by other investors.
 
The terms of the Financing Transaction are summarized above in the section titled “Summary of the Financing Transaction” and are described more fully in the section below titled “The Financing Transaction.”
 
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