New Frontier Media, Inc. announced that the company's board of directors has formed a special committee of its independent directors, called the Nasdaq Compliance Committee.
The Committee has been formed as part of the company's efforts to demonstrate to the Nasdaq Stock Market its commitment to compliance with Nasdaq rules and regulations. The company's continued listing on the Nasdaq SmallCap Market is currently under review by the Nasdaq Listing and Hearing and Review Council.
In August 1999, a Nasdaq Listing Qualification Panel determined that the company had effected two transactions without compliance with Nasdaq rules requiring advance shareholder approval. As described in proxy materials for the company's upcoming October 27 annual meeting, these transactions involved the issuance and sales of securities authorized by the Board of Directors at prices less than market value and each exceeding 20% of the outstanding shares prior to the issuance and sale. The transactions were approved by the Board of Directors and did not require shareholder approval under Colorado law. In addition, the holders of a majority of the company's outstanding shares indicated in writing that they would have approved the transactions if their proxies had been solicited.
Shareholder ratification now is being sought, notwithstanding the fact that the Nasdaq panel has indicated that such ratification will not cure or remedy the violation of the rule.
The transactions were authorized by the Board of Directors, upon the advice of outside securities counsel, as part of a plan to increase the net tangible assets, by converting debt to equity, and to increase liquidity to provide necessary working capital, in the best interests of the company and all its shareholders, during a period after it had received notice that the Nasdaq staff had determined that the company failed to comply with the net tangible assets/market capitalization/net income requirements for continued listing of its shares of common stock on the Nasdaq Small cap Market and the hearing requested by the company to demonstrate that it satisfied all applicable criteria for continued listing.
In one transaction between December 1998 and February 1999, the holders of $1,750,000 in convertible debentures issued in June 1998 converted all of the debentures into more than 20% of the outstanding shares prior to the conversion at a conversion price less than the market price. The conversion reduced liabilities, eliminated interest expense and increased net tangible assets. In the other transaction, in March 1999, the company issued more than 20% of the outstanding shares prior to the issuance in a $5,200,000 private offering. The issuance increased liquidity, provided necessary working capital and increased net tangible assets.
On July 7, 1999, the Nasdaq Listing Panel issued its decision in favor of the New Frontier Media continuing its listing on the Nasdaq SmallCap Market. The panel, however, "was of the opinion that after-the-fact ratification is an inadequate remedy" to a violation of the shareholder approval requirement of the Nasdaq corporate governance rules.
By letter dated August 20, 1999, New Frontier Media has been informed that the Nasdaq Listing and Hearing and Review Council has called for review of the Panel's decision to determine "whether the Panel's decision...was appropriate, given that the Panel found that New Frontier Media had twice violated the shareholder approval requirement and that New Frontier Media had not remedied the violations." On October 5, 1999, New Frontier Media made a written submission urging the Council to affirm the Panel's determination to continue the listing of New Frontier Media's shares.
The Special Committee will review all future corporate transactions to assure their compliance with Nasdaq listing requirements. For assistance in this regard, the Special Committee has retained Harvey L. Pitt, former General Counsel of the Securities and Exchange Commission, and now a partner at the law firm of Fried, Frank, Harris, Shriver & Jacobson in Washington, D.C. In addition, the Company has resolved to consult with the staff of the Nasdaq Stock Market, Inc. in the event that the Company proposes to act contrary to the advice of the Special Committee's legal counsel on any of these matters.
The Company and the Special Committee are committed to ensuring that shareholders are fully informed about these developments and to addressing any related shareholder concerns. Shareholders who have concerns relating to the Company's failure to obtain formal shareholder approval of the transactions described above have been encouraged to contact the Company at a toll free number, 1-888-494-4515, which has been established solely for this purpose.
