1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D
AMENDMENT NO. 2
UNDER THE SECURITIES EXCHANGE ACT OF 1934
Internet Pictures Corporation
---------------------------------
(Name of Issuer)
COMMON STOCK
--------------------------------
(Title of Class of Securities)
46059S200
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(CUSIP Number)
Warner B. Rodda, Esq.
Paradigm Capital Equity Partners, LLC
6410 Poplar Ave., Ste 395
Memphis, TN 38119
(901) 682-6060
----------------------------------------
(Name, Address and Telephone Number of Person Authorized to
Receive Notices and Communications)
September 26, 2001
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(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to
report the acquisition that is the subject of this Schedule 13D, and is filing
this schedule because of Sections 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g),
check the following box. |_|
NOTE: Schedules filed in paper format shall include a signed original and five
copies of the schedule, including all exhibits. See Section 240.13d-7(b) for
other parties to whom copies are to be sent.
* The remainder of this cover page shall be filled out for a reporting
person's initial filing on this form with respect to the subject class of
securities, and for any subsequent amendment containing information which
would alter disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be
deemed to be "filed" for the purpose of Section 18 of the Securities Exchange
Act of 1934 ("Act") or otherwise subject to the liabilities of that section of
the Act but shall be subject to all other provisions of the Act (however, see
the Notes).
(Continued on following page(s))
Page 1 of 13 pages
2
Page 2 of 14 pages
CUSIP No. 46059S200 13D
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(1) Names of Reporting Persons. SS or I.R.S. Identification Nos. of Above Persons
Image Investor Portfolio, a separate series of Memphis Angels, LLC
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(2) Check The Appropriate Box If A Member Of A Group (a) : X
(b) :
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(3) SEC Use Only
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(4) Source Of Funds*
WC
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(5) Check Box If Disclosure Of Legal Proceedings Is Required Pursuant To Items 2(d) Or 2(e):
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(6) Citizenship Or Place Of Organization
Delaware
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Number Of Shares (7) Sole Voting Power 7,030,640 (1)
Beneficially Owned
By Each Reporting
Person With (8) Shared Voting Power 0
(9) Sole Dispositive Power 7,030,640 (1)
(10) Shared Dispositive Power 0
(11) Aggregate Amount Beneficially Owned By Each Reporting Person 7,030,640 (1)
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(12) Check If The Aggregate Amount In Row (11) Excludes Certain Shares* [ ]
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(13) Percent Of Class Represented By Amount In Row (11) 51.2% (2)
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(14) Type Of Reporting Person OO
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(1) Consists of shares of Common Stock issuable upon conversion of (i) 500,000
shares of Series B Preferred Stock acquired in the Third Closing (as
defined herein) upon conversion of the outstanding principal of a
convertible promissory note that had been issued in connection with the
First Closing and Second Closing (each as defined herein) and 13,830
shares of Series B Preferred Stock issued in consideration for
substantially all of the accrued interest on such promissory note at the
time of conversion; (ii) 250,000 shares of Series B Preferred Stock
underlying warrants (the "Tranche A Warrants") issued in the First Closing
and Second Closing; and (iii) 115,000 shares of Series B Preferred Stock
acquired upon partial exercise of a warrant (the "Tranche B Warrant") in
the Third Closing. Each share of Series B Preferred Stock is initially
convertible into 8 shares of Common Stock (subject to adjustment--See Item
4 of this Amendment).
(2) Calculated in accordance with Rule 13d-3 under the Securities Exchange Act
of 1934, as amended. The Reporting Person's actual voting interest is
39.9% because all shares of Series B Preferred Stock, including the shares
acquired by the New Investors (as defined herein), vote on an as-converted
basis with the Common Stock.
SEE INSTRUCTION BEFORE FILLING OUT!
3
Page 3 of 14 pages
CUSIP No. 46059S200 13D
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(1) Names of Reporting Persons. SS or I.R.S. Identification Nos. of Above Persons
Memphis Angels, LLC
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(2) Check The Appropriate Box If A Member Of A Group (a) : X
(b) :
----------------------------------------------------------------------------------------------
(3) SEC Use Only
----------------------------------------------------------------------------------------------
(4) Source Of Funds*
WC
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(5) Check Box If Disclosure Of Legal Proceedings Is Required Pursuant To Items 2(d) Or 2(e):
----------------------------------------------------------------------------------------------
(6) Citizenship Or Place Of Organization
Delaware
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Number Of Shares (7) Sole Voting Power 7,030,640 (1)
Beneficially Owned
By Each Reporting
Person With (8) Shared Voting Power 0
(9) Sole Dispositive Power 7,030,640 (1)
(10) Shared Dispositive Power 0
(11) Aggregate Amount Beneficially Owned By Each Reporting Person 7,030,640 (1)
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(12) Check If The Aggregate Amount In Row (11) Excludes Certain Shares* [ ]
-----------------------------------------------------------------------------------------------------
(13) Percent Of Class Represented By Amount In Row (11) 51.2% (2)
-----------------------------------------------------------------------------------------------------
(14) Type Of Reporting Person OO
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(1) Consists of shares of Common Stock issuable upon conversion of (i) 500,000
shares of Series B Preferred Stock acquired in the Third Closing (as
defined herein) upon conversion of the outstanding principal of a
convertible promissory note that had been issued in connection with the
First Closing and Second Closing (each as defined herein) and 13,830
shares of Series B Preferred Stock issued in consideration for
substantially all of the accrued interest on such promissory note at the
time of conversion; (ii) 250,000 shares of Series B Preferred Stock
underlying warrants (the "Tranche A Warrants") issued in the First Closing
and Second Closing; and (iii) 115,000 shares of Series B Preferred Stock
acquired upon partial exercise of a warrant (the "Tranche B Warrant") in
the Third Closing. Each share of Series B Preferred Stock is initially
convertible into 8 shares of Common Stock (subject to adjustment--See Item
4 of this Amendment). All of such shares are held or may be acquired by
Image Investor Portfolio, a separate series of Memphis Angels LLC, a
Delaware limited liability company.
(2) Calculated in accordance with Rule 13d-3 under the Securities Exchange Act
of 1934, as amended. The Reporting Person's actual voting interest is
39.9% because all shares of Series B Preferred Stock, including the shares
acquired by the New Investors (as defined herein), vote on an as-converted
basis with the Common Stock.
SEE INSTRUCTION BEFORE FILLING OUT!
4
Page 4 of 13 pages
CUSIP No. 46059S200 13D
---------
----------------------------------------------------------------------------------------------
(1) Names of Reporting Persons. SS or I.R.S. Identification Nos. of Above Persons
Paradigm Capital Equity Partners, LLC
----------------------------------------------------------------------------------------------
(2) Check The Appropriate Box If A Member Of A Group (a) : X
(b) :
----------------------------------------------------------------------------------------------
(3) SEC Use Only
----------------------------------------------------------------------------------------------
(4) Source Of Funds*
AF
----------------------------------------------------------------------------------------------
(5) Check Box If Disclosure Of Legal Proceedings Is Required Pursuant To Items 2(d) Or 2(e):
----------------------------------------------------------------------------------------------
(6) Citizenship Or Place Of Organization
Delaware
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Number Of Shares (7) Sole Voting Power 7,030,640 (1)
Beneficially Owned
By Each Reporting
Person With (8) Shared Voting Power 0
(9) Sole Dispositive Power 7,030,640 (1)
(10) Shared Dispositive Power 0
(11) Aggregate Amount Beneficially Owned By Each Reporting Person 7,030,640 (1)
----------------------------------------------------------------------------------------------
(12) Check If The Aggregate Amount In Row (11) Excludes Certain Shares* [ ]
----------------------------------------------------------------------------------------------
(13) Percent Of Class Represented By Amount In Row (11) 51.2% (2)
----------------------------------------------------------------------------------------------
(14) Type Of Reporting Person OO
--------------------------------------------------------------------------------
(1) Consists of shares of Common Stock issuable upon conversion of (i) 500,000
shares of Series B Preferred Stock acquired in the Third Closing (as
defined herein) upon conversion of the outstanding principal of a
convertible promissory note that had been issued in connection with the
First Closing and Second Closing (each as defined herein) and 13,830
shares of Series B Preferred Stock issued in consideration for
substantially all of the accrued interest on such promissory note at the
time of conversion; (ii) 250,000 shares of Series B Preferred Stock
underlying warrants (the "Tranche A Warrants") issued in the First Closing
and Second Closing; and (iii) 115,000 shares of Series B Preferred Stock
acquired upon partial exercise of a warrant (the "Tranche B Warrant") in
the Third Closing. Each share of Series B Preferred Stock is initially
convertible into 8 shares of Common Stock (subject to adjustment--See Item
4 of this Amendment). All of such shares are held or may be acquired by
Image Investor Portfolio, a separate series of Memphis Angels LLC, a
Delaware limited liability company, of which Paradigm Capital Equity
Partners, LLC, a Delaware limited liability company, is the Manager.
(2) Calculated in accordance with Rule 13d-3 under the Securities Exchange Act
of 1934, as amended. The Reporting Person's actual voting interest is
39.9% because all shares of Series B Preferred Stock, including the shares
acquired by the New Investors (as defined herein), vote on an as-converted
basis with the Common Stock.
SEE INSTRUCTION BEFORE FILLING OUT!
5
Page 5 of 13 pages
CUSIP No. 46059S200 13D
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(1) Names of Reporting Persons. SS or I.R.S. Identification Nos. of Above Persons
Paradigm Holdings
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(2) Check The Appropriate Box If A Member Of A Group (a) : X
(b) :
-----------------------------------------------------------------------------------------------------
(3) SEC Use Only
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(4) Source Of Funds*
AF
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(5) Check Box If Disclosure Of Legal Proceedings Is Required Pursuant To Items 2(d) Or 2(e):
-----------------------------------------------------------------------------------------------------
(6) Citizenship Or Place Of Organization
Delaware
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Number Of Shares (7) Sole Voting Power 7,030,640 (1)
Beneficially Owned
By Each Reporting
Person With (8) Shared Voting Power 0
(9) Sole Dispositive Power 7,030,640 (1)
(10) Shared Dispositive Power 0
(11) Aggregate Amount Beneficially Owned By Each Reporting Person 7,030,640 (1)
-----------------------------------------------------------------------------------------------------
(12) Check If The Aggregate Amount In Row (11) Excludes Certain Shares* [ ]
-----------------------------------------------------------------------------------------------------
(13) Percent Of Class Represented By Amount In Row (11) 51.2% (2)
-----------------------------------------------------------------------------------------------------
(14) Type Of Reporting Person PN
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(1) Consists of shares of Common Stock issuable upon conversion of (i) 500,000
shares of Series B Preferred Stock acquired in the Third Closing (as
defined herein) upon conversion of the outstanding principal of a
convertible promissory note that had been issued in connection with the
First Closing and Second Closing (each as defined herein) and 13,830
shares of Series B Preferred Stock issued in consideration for
substantially all of the accrued interest on such promissory note at the
time of conversion; (ii) 250,000 shares of Series B Preferred Stock
underlying warrants (the "Tranche A Warrants") issued in the First Closing
and Second Closing; and (iii) 115,000 shares of Series B Preferred Stock
acquired upon partial exercise of a warrant (the "Tranche B Warrant") in
the Third Closing. Each share of Series B Preferred Stock is initially
convertible into 8 shares of Common Stock (subject to adjustment--See Item
4 of this Amendment). All of such shares are held or may be acquired by
Image Investor Portfolio, a separate series of Memphis Angels LLC, a
Delaware limited liability company, of which Paradigm Capital Equity
Partners, LLC, a Delaware limited liability company, is the Manager, of
which Paradigm Holdings, a Delaware general partnership, is the Managing
Member.
(2) Calculated in accordance with Rule 13d-3 under the Securities Exchange Act
of 1934, as amended. The Reporting Person's actual voting interest is
39.9% because all shares of Series B Preferred Stock, including the shares
acquired by the New Investors (as defined herein), vote on an as-converted
basis with the Common Stock.
SEE INSTRUCTION BEFORE FILLING OUT!
6
Page 6 of 13 pages
CUSIP No. 46059S200 13D
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(1) Names of Reporting Persons. SS or I.R.S. Identification Nos. of Above Persons
Frank A. McGrew IV
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(2) Check The Appropriate Box If A Member Of A Group (a) : X
(b) :
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(3) SEC Use Only
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(4) Source Of Funds*
AF
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(5) Check Box If Disclosure Of Legal Proceedings Is Required Pursuant To Items 2(d) Or 2(e):
-----------------------------------------------------------------------------------------------------
(6) Citizenship Or Place Of Organization
Tennessee
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Number Of Shares (7) Sole Voting Power 7,030,640 (1)
Beneficially Owned
By Each Reporting
Person With (8) Shared Voting Power 0
(9) Sole Dispositive Power 7,030,640 (1)
(10) Shared Dispositive Power 0
-----------------------------------------------------------------------------------------------------
(11) Aggregate Amount Beneficially Owned By Each Reporting Person 7,030,640 (1)
-----------------------------------------------------------------------------------------------------
(12) Check If The Aggregate Amount In Row (11) Excludes Certain Shares* [ ]
-----------------------------------------------------------------------------------------------------
(13) Percent Of Class Represented By Amount In Row (11) 51.2% (2)
-----------------------------------------------------------------------------------------------------
(14) Type Of Reporting Person IN
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(1) Consists of shares of Common Stock issuable upon conversion of (i) 500,000
shares of Series B Preferred Stock acquired in the Third Closing (as
defined herein) upon conversion of the outstanding principal a convertible
promissory note that had been issued in connection with the First Closing
and Second Closing (each as defined herein) and 13,830 shares of Series B
Preferred Stock issued in consideration for substantially all of the
accrued interest on such promissory note at the time of conversion; (ii)
250,000 shares of Series B Preferred Stock underlying warrants (the
"Tranche A Warrants") issued in the First Closing and Second Closing; and
(iii) 115,000 shares of Series B Preferred Stock acquired upon partial
exercise of a warrant (the "Tranche B Warrant") in the Third Closing. Each
share of Series B Preferred Stock is initially convertible into 8 shares
of Common Stock (subject to adjustment--See Item 4 of this Amendment). All
of such shares are held or may be acquired by Image Investor Portfolio, a
separate series of Memphis Angels LLC, a Delaware limited liability
company, of which Paradigm Capital Equity Partners, LLC, a Delaware
limited liability company, is the Manager, of which Paradigm Holdings, a
Delaware general partnership, is the Managing Member, of which Mr. McGrew
is the Managing Partner.
(2) Calculated in accordance with Rule 13d-3 under the Securities Exchange Act
of 1934, as amended. The Reporting Person's actual voting interest is
39.9% because all shares of Series B Preferred Stock, including the shares
acquired by the New Investors (as defined herein), vote on an as-converted
basis with the Common Stock.
SEE INSTRUCTION BEFORE FILLING OUT!
7
Page 7 of 13 pages
ITEM 1. SECURITY AND ISSUER.
This Amendment No. 2 to Schedule 13D (this "Amendment") relates to the
Common Stock, $.001 par value per share (the "shares"), of Internet Pictures
Corporation, a Delaware corporation (the "Company"), and is being filed on
behalf of the undersigned to amend the Schedule 13D originally filed on May
24, 2001 (the "Schedule 13D") and amended on May 30, 2001. The principal
executive offices of the Company are located at 3160 Crow Canyon Road, Suite
400, San Ramon, CA 94503, (925) 242-4000. Unless otherwise indicated, all
capitalized terms used herein but not defined shall have the same meaning as
set forth in the Schedule 13D.
ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
Item 3 of the Schedule 13D is amended, in pertinent part, to add the
following paragraph:
On September 26, 2001, pursuant to the Third Closing to the Purchase
Agreement, Image exercised a portion of the Tranche B Warrant, acquiring
115,000 shares of Series B Preferred Stock of the Company in exchange for an
aggregate exercise price of $2,300,000. Additionally, Image transferred a
portion of the Tranche B Warrant that it did not exercise to certain
unaffiliated third parties (the "New Investors"). The New Investors exercised
such portion of the Tranche B Warrant for their own accounts, acquiring an
aggregate of 486,250 shares of Series B Preferred Stock of the Company for an
aggregate exercise price of $9,725,000. The unexercised remainder of the
Tranche B Warrant expired according to its terms at the time of the Third
Closing. The source of funds used by Image in connection with the exercise of
the Tranche B Warrant in the Third Closing was working capital and other
funds.
In connection with the Third Closing, the principal amount of the
Promissory Note was automatically converted, along with substantially all of
the accrued interest, into an aggregate of 513,830 shares of Series B
Preferred Stock.
ITEM 4. PURPOSE OF TRANSACTION.
Item 4 of the Schedule 13D is amended and restated in its entirety as
follows:
Image acquired the securities of the Company to obtain a controlling
equity interest in the Company. Depending on its evaluation of the Company's
business and prospects, and upon future developments (including, but not
limited to, performance of the Common Stock in the market, availability of
funds, alternative uses of funds, and money, stock market and general economic
conditions), Image may, from time to time, purchase additional securities of
the Company, dispose of all or a portion of the securities held by it, or
cease buying or selling such securities. Any such additional purchases or
sales of the securities of the Company may be in open market or privately
negotiated transactions or otherwise.
Pursuant to the Purchase Agreement, in the First Closing, Image
received the Promissory Note in the principal amount of $3,000,000 in exchange
for its initial cash investment of $3,000,000. The Promissory Note was secured
by substantially all of the assets of the Company and its subsidiaries and was
initially convertible into 150,000 shares of the Company's newly authorized
Series B Preferred Stock. In addition, the Company issued to Image two
warrants (the "Tranche A Warrants") to purchase shares of the Series B
Preferred Stock. One of the Tranche A Warrants was initially exercisable for
45,000 shares of Series B Preferred Stock at an
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Page 8 of 13 pages
exercise price of $20 per share and the other Tranche A Warrant was initially
exercisable for 30,000 shares of Series B Preferred Stock at an exercise price
of $40 per share. Except for standard adjustment provisions in connection with
stock splits, stock dividends, combinations, recapitalizations and other
similar corporate events, the exercise prices of the Tranche A Warrants are
fixed.
On May 29, 2001, pursuant to the terms and conditions of the Purchase
Agreement, Image exercised its right to make an additional investment in the
Company in connection with the Second Closing (as defined in the Purchase
Agreement). In the Second Closing, Image invested an additional $7,000,000 in
the Company. In exchange for such additional investment, the principal amount
of the Promissory Note was increased to $10,000,000 and the Promissory Note
became convertible into 500,000 shares of Series B Preferred Stock. The number
of shares underlying each of the Tranche A Warrants also increased in
connection with the Second Closing. The first Tranche A Warrant became
exercisable for 150,000 shares of Series B Preferred Stock (at an exercise
price of $20 per share) and the second Tranche A Warrant became exercisable
for 100,000 shares of Series B Preferred Stock (at an exercise price of $40
per share). In addition, Image received a warrant (the "Tranche B Warrant") to
purchase 1,000,000 shares of Series B Preferred Stock at an exercise price of
$20 per share.
The Promissory Note had a 15-month term, accrued interest at 8% per
annum and was, by its terms, automatically convertible into Shares of Series B
Preferred Stock upon the Third Closing. The Tranche A Warrants expire on May
14, 2006. The expiration date of the Tranche B Warrant was the earlier of (i)
the date of the Third Closing (as defined in the Purchase Agreement) or (ii)
if no Third Closing occurred, 15 months from the date of issuance.
The Third Closing occurred on September 26, 2001. In connection with
the Third Closing, the principal amount of the Promissory Note automatically
converted into 500,000 shares of Series B Preferred Stock and substantially
all of the accrued interest on the Promissory Note converted into 13,830
shares of Series B Preferred Stock. Additionally, Image exercised a portion of
the Tranche B Warrant, acquiring 115,000 shares of Series B Preferred Stock
upon the payment of an exercise price of $2,300,000. Additionally, in
connection with the Third Closing, Image transferred a portion of the Tranche
B Warrant to the New Investors who exercised such portion of the Tranche B
Warrant for their own accounts, acquiring an aggregate of 486,250 shares of
Series B Preferred Stock of the Company for an aggregate exercise price of
$9,725,000. The unexercised remainder of the Tranche B Warrant expired
according to its terms at the time of the Third Closing.
The foregoing description of the Purchase Agreement and the
description of the Purchase Agreement throughout this Schedule 13D are
qualified in their entirety by reference to the copy of the Purchase
Agreement, which was filed as Exhibit 1 to the Schedule 13D and is
incorporated herein by reference.
Image has also been granted certain registration rights pursuant to a
Registration Rights Agreement dated as of May 14, 2001, between Image and the
Company (the "Registration Rights Agreement"). Under the Registration Rights
Agreement, Image may require the Company to file a registration statement
covering resales of Common Stock issuable upon conversion of the Series B
Preferred Stock within twenty days of each of the Second Closing and the Third
Closing. In addition, Image has demand and piggy-back registration rights with
respect to the shares purchased by it pursuant to the Purchase Agreement.
Image agreed to waive its right to
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Page 9 of 13 pages
require the Company to file a registration statement covering resales within
twenty days of the Second Closing, but has not waived its right to require
such a filing within twenty days of the Third Closing. The foregoing summary
of the Registration Rights Agreement is qualified in its entirety by reference
to the Registration Rights Agreement filed as Exhibit 2 to the Schedule 13D
and incorporated herein by reference.
In accordance with the provisions of the Purchase Agreement, the
Company's Board of Directors was reduced from nine to seven members at the
time of the Second Closing. At the time of the Second Closing, four directors
resigned from the Board of Directors of the Company and four nominees of
Image, including Mr. McGrew, were appointed to fill the resulting vacancies in
the Board of Directors of the Company. Pursuant to the Purchase Agreement,
Image was entitled to retain its representatives on the Board of Directors
until the Third Closing. In connection with the Third Closing, Mr. McGrew
resigned from the Board of Directors of the Company and the resulting vacancy
was filled by a representative of First Avenue Partners, L.P ("First Avenue"),
a New Investor. Pursuant to the terms of the Preferred Stockholders Agreement
described below, following the Third Closing, one additional representative of
Image will resign from the board and the resulting vacancy will be filled by a
representative designated by NewSouth Capital Management Inc. ("NewSouth"),
another New Investor, at such time as NewSouth designates such representative.
Following the Third Closing, the holders of Series B Preferred Stock are
entitled, as a class, to elect four of the Company's seven directors.
In connection with the Third Closing, Image, PCEP and each of the New
Investors entered into a Preferred Stockholders Agreement (the "Stockholders
Agreement"). The Stockholders Agreement sets forth, among other things,
restrictions on transfer of Series B Preferred Stock, including rights of
first refusal, drag-along and tag-along rights, as well as certain voting
agreements. For the purposes of the following description of the Stockholders
Agreement, PCEP, Image, Paradigm and Memphis Angels are each individually
referred to as a "Paradigm Entity" and collectively as the "Paradigm
Entities." The Paradigm Entities and the New Investors are collectively
referred to as the "Series B Stockholders."
Prior to transferring any shares of Series B Preferred Stock to a
third party, a New Investor must first provide PCEP with the opportunity to
purchase such shares on the same terms as those of the proposed sale. Any
shares not acquired by PCEP or its designee must then be offered to the other
New Investors on the same terms. Any shares not acquired by PCEP or the other
New Investors may then be transferred to such third party on the terms
originally proposed. Notwithstanding the foregoing, each New Stockholder may
transfer an unlimited number of shares of Series B Preferred Stock to one or
more of its affiliates, or to its partners, members or stockholders as part of
a distribution, and may transfer up to 20% of the aggregate shares of Series B
Preferred Stock owned by such stockholder on the date of the Stockholders
Agreement, without complying with the above provisions.
In the event that a Paradigm Entity wishes to transfer any of its
shares of Series B Preferred Stock, other than to another Paradigm Entity or
to an affiliate of PCEP, the Paradigm Entity must allow the New Investors to
participate in such proposed sale (the "Tag-Along Right"). A New Investor who
exercises its Tag-Along Right will be entitled to include in the transaction a
portion of its shares of Series B Preferred Stock that represents the same
percentage of its total shares of Series B Preferred Stock as the shares being
transferred by the Paradigm Entity represent to the total number of shares of
Series B Preferred Stock held by all Paradigm Entities. Notwithstanding the
foregoing, any Paradigm Entity may transfer an unlimited number
10
Page 10 of 13 pages
of shares of Series B Preferred Stock to one or more of its affiliates or to
any other Paradigm Entity, or to its partners, members or stockholders as part
of a distribution, and may transfer up to 20% of the aggregate shares of
Series B Preferred Stock owned by the Paradigm Entities on the date of the
Stockholders Agreement without complying with the above provisions.
In the event that any one or more of the Paradigm Entities wish to
sell at least 50% of the aggregate shares of Series B Preferred Stock held by
the Paradigm Entities on the date of the Stockholders Agreement, the Paradigm
Entity may require the New Investors to participate in the proposed sale (the
"Drag-Along Right"). If the Paradigm Entity exercises the Drag-Along Right,
each New Investor will be obligated to transfer a portion of its shares of
Series B Preferred Stock that represents the same percentage of its total
shares of Series B Preferred Stock as the shares being transferred by the
Paradigm Entities represent to the total number of shares of Series B
Preferred Stock held by all Paradigm Entities.
Notwithstanding the foregoing, no Series B Stockholder may transfer
any shares of Series B Preferred Stock to any competitor of the Company (or
any employee, shareholder, officer, director or other affiliate of any such
competitor) without the Company's prior written consent.
The Stockholders Agreement also prohibits any of the Series B
Stockholders from transferring any shares of Common Stock (or securities
convertible into, or exercisable or exchangeable for, Common Stock) for a
period of 180 days after the date of the Stockholders Agreement (the "Lock-Up
Period"), otherwise than: (i) a bona fide gift, provided that the donee agrees
to be bound by this restriction; (ii) a distribution to a Series B
Stockholder's partners, members or stockholders; or (iii) transfers of Series
B Preferred Stock in compliance with the paragraphs above. This prohibition
prohibits the Series B Stockholders from engaging in any hedging or other
transaction that is designed or reasonably expected to result in a transfer of
Common Stock by a third party during the Lock-Up Period (e.g., short sale, put
or call option, etc.).
Additionally, the Stockholders Agreement includes an agreement among
the Series B Stockholders to vote all shares of Series B Preferred Stock held
by them so as to elect two representatives of Image, one representative of
First Avenue and one representative of NewSouth to serve as the four members
of the Company's Board of Directors that are elected by the holders of the
Series B Preferred Stock.
The Stockholders Agreement will terminate and be of no further force
and effect upon the first to occur of (i) the date that the Paradigm Entities
no longer own at least 25% of the Series B Preferred Stock and (ii) the date
upon which PCEP and the holders of at least fifty percent (50%) of the shares
of Series B Preferred Stock then held by the New Investors agree to terminate
the Stockholders Agreement.
The foregoing description of the Stockholders Agreement and the
description of the Stockholders Agreement throughout this Schedule 13D are
qualified in their entirety by reference to the copy of the Stockholders
Agreement, which is filed as Exhibit 4 hereto and is incorporated herein by
reference.
The Company's amended certificate of designation setting forth the
rights and privileges of the Series B Preferred Stock (the "Certificate of
Designation") provides, in pertinent part, that
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Page 11 of 13 pages
the shares of Series B Preferred Stock vote on an as-converted basis with the
Common Stock (subject to certain class vote matters). The Series B Preferred
Stock accrues dividends at 8% per annum and has a liquidation preference of
$20 per share plus all accrued and unpaid dividends (as adjusted for any stock
dividends, stock splits, combinations, recapitalizations or other similar
corporate events). The Series B Preferred Stock is initially convertible into
Common Stock at a conversion price of $2.50 (the "Conversion Price") per share
(or 8 shares of Common Stock per share of Series B Preferred Stock). The
Conversion Price is subject to adjustment for stock splits, stock dividends,
combinations, recapitalizations and other similar corporate events.
Additionally, the Series B Preferred Stock contains a reset feature (the
"Reset Feature") that would result in a one-time reduction of the Conversion
Price if the average daily trading price of the Common Stock for the twenty
days prior to the 180 day anniversary of the Third Closing (the "Average
Trading Price") is below $2.50. If the Reset Feature is triggered, the
Conversion Price will be reset to the greater of the Average Trading Price or
$2.00. As a result, the number of shares issuable upon conversion of the
Series B Preferred Stock may increase by as much as 25% (with each share of
Series B Preferred Stock converting into a maximum of 10 shares of Common
Stock). If the Average Trading Price ultimately is less than or equal to $2.00
and, as a result of the Reset Feature, the Conversion Price is reset to $2.00,
the total number of shares of Common Stock beneficially owned by the Filing
Persons would increase to 8,788,300 and the corresponding percentage ownership
of the Filing Persons would be 56.7% (assuming no intervening change in the
total outstanding shares of the Company). Because it is based solely on the
trading price of the Common Stock during a period after the date of this
Amendment, there can be no assurance that the Reset Feature will not be
triggered, or if it is triggered, what the resulting Conversion Price will be.
The Conversion Price is also subject to a weighted-average antidilution
adjustment in the event that the Company sells shares of Common Stock (or
securities convertible into, or exercisable or exchangeable for Common Stock)
at a price less than the Conversion Price, subject to certain exceptions.
The Series B Preferred Stock is also redeemable at the option of the
Company any time on or after May 29, 2006, upon the affirmative vote of at
least five of the Company's directors. If the Company elects to redeem the
Series B Preferred Stock, the redemption price shall be equal to $20 per share
plus all accrued and unpaid dividends.
Other than as described above, none of the Filing Persons have any
current plans or proposals which relate to or would result in any transaction,
change or event specified in clauses (a) through (j) of Item 4 of Schedule
13D. The Filing Persons reserve the right to develop such plans or proposals
in the future.
ITEM 5. INTEREST IN SECURITIES OF THE ISSUER.
Item 5 of the Schedule 13D is amended and restated in its entirety as
follows:
Each of the Filing Persons may be deemed to beneficially own 7,030,640
shares of Common Stock. Such shares, based on the capitalization of the
Company as of September 26, 2001 as represented to Image in the Purchase
Agreement in connection with the Third Closing, constitute 51.2% of the Common
Stock. However, the Filing Persons' actual voting interest is 39.9% because
all shares of Series B Preferred Stock, including the shares acquired by the
New Investors, vote on an as-converted basis with the Common Stock.
12
Page 12 of 13 pages
The 7,030,640 shares of Common Stock beneficially owned by the Filing
Persons include 4,110,640 shares of Common Stock underlying the 513,830 shares
of Series B Preferred Stock that Image acquired upon conversion of the
principal amount of, and substantially all of the accrued interest on, the
Promissory Note at the Third Closing and 920,000 shares of Common Stock
underlying the 115,000 shares of Series B Preferred Stock that Image acquired
upon exercise of a portion of the Tranche B Warrant at the Third Closing. It
also includes an additional 2,000,000 shares of Common Stock issuable upon
conversion of 250,000 shares of Series B Preferred Stock currently underlying
the Tranche A Warrants.
Other than under the transactions described above, no transactions in
the Common Stock of the Company have been effected by Image, Memphis Angels,
PCEP, Paradigm or Mr. McGrew, or to the knowledge of Image, Memphis Angels,
PCEP, Paradigm or Mr. McGrew, by any of the general partners of Paradigm,
during the past 60 days.
To the knowledge of the Filing Persons, no other person has the right
to receive or the power to direct the receipt of dividends from, or the
proceeds from the sale of, the securities covered by this Schedule 13D.
ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH
RESPECT TO THE SECURITIES OF THE ISSUER.
Item 6 of the Schedule 13D is amended and restated in its entirety as
follows:
Other than the Securities Purchase Agreement, the Registration Rights
Agreement, the Stockholders Agreement and the Certificate of Designation, to
the knowledge of the Filing Persons, there are no contracts, arrangements,
understandings or relationships among the persons named in Item 2 and between
such persons and any person with respect to any securities of the Company,
including but not limited to transfer or voting of any of the securities,
finder's fees, joint ventures, loan or option arrangements, puts or calls,
guarantees of profits, division of profits or loss, or the giving or
withholding of proxies.
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS.
Exhibit 1: Securities Purchase Agreement, dated May 14, 2001, by and between
Image and the Company. (1)
Exhibit 2: Registration Rights Agreement, dated May 14, 2001, by and between
Image and the Company. (1)
Exhibit 3: Joint Filing Statement. (1)
Exhibit 4: Series B Preferred Stockholders Agreement, dated September 26,
2001, by and among Image, PCEP, the New Investors and the Company.
(1) previously filed as an exhibit to the Schedule 13D (File No. 5-57597) on
May 24, 2001.
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Page 13 of 13 pages
SIGNATURES
After reasonable inquiry and to the best of its knowledge and belief,
the undersigned each certifies that the information set forth in this
statement is true, complete and correct.
Dated October 1, 2001
IMAGE INVESTOR PORTFOLIO,
a separate series of
MEMPHIS ANGELS, LLC,
a Delaware limited liability company
By: PARADIGM CAPITAL EQUITY
PARTNERS, LLC,
its Manager
By: PARADIGM HOLDINGS,
its Managing Member
By: /s/ Frank A. McGrew IV
----------------------
Name: Frank A. McGrew IV
Title: Managing Partner
PARADIGM CAPITAL EQUITY
PARTNERS, LLC,
a Delaware limited liability company
By: PARADIGM HOLDINGS,
its Managing Member
By: /s/ Frank A. McGrew IV
-----------------------------
Name: Frank A. McGrew IV
Title: Managing Partner
PARADIGM HOLDINGS,
a Delaware general partnership
By: /s/ Frank A. McGrew IV
--------------------------------
Name: Frank A. McGrew IV
Title: Managing Partner
FRANK A. MCGREW IV
/s/ Frank A. McGrew IV
--------------------------------------