This is a reply to d_gasser on yahoo. It was too long for the yahoo board even after trying to split it up into 4 parts, so I'll post it here. Besides, it seems to have too much pertinent information to be of concern to many of the yahoo posters ;-)
Hi Darren,
Thanks for the reminder about the exchange agreement. Here's the skinny from the 1998 10K:
In October 1997, NTN sold and issued an aggregate of 35,000 shares of
Series B Preferred Stock each to two institutional purchasers (the "Investors")
for a total of $7,000,000. The sale of the Series B Preferred Stock was effected
pursuant to Regulation D under the Securities Act of 1993. The Company paid
$210,000 for financial advisory services in connection with the sale of the
Series B Preferred Stock.
("Investor" here is S&S)
As of October 5, 1998, 14,000 shares of the Series B Preferred Stock
(plus accrued dividends) had been converted into 2,430,000 shares of common
stock of the Company, leaving 56,000 shares of the Series B Preferred Stock
outstanding. On October 5, 1998, NTN entered into an Exchange Agreement with the
Investors pursuant to which they agreed to surrender for cancellation all their
shares of Series B Preferred Stock in exchange for warrants and convertible
notes as described below. Pending their surrender and cancellation, the dividend
rate on the Series B Preferred Stock was increased from 4% to 7% and the
conversion price of the Series B Preferred Stock was fixed at $1.275 per share
consistent with the interest rate and conversion price under the convertible
notes described below.
(So no more of the RegD financing notes. The big problem with these securities was that there was an incentive for S&S if the stock price really tanked, which it did.)
The Company also agreed to issue each of the Investors a 7%
Convertible Senior Subordinated Note of the Company in a principal amount equal
to the stated value of their Series B Preferred Stock, plus accrued and unpaid
dividends through the date of issuance of the convertible notes.
(So, ignoring the interest for now, around $5.6M of Notes bearing 7% interest, or about $400k/year in interest.)
The convertible notes were issued January 11, 1999 and bear interest
at the annual rate of 7% per annum. Interest is due and payable in quarterly
installments, in arrears, and the entire principal amount will be due and
payable on February 1, 2001. Interest on the convertible notes may be paid in
cash or, at NTN's election, in shares of its common stock valued for this
purpose at 90% of the average closing bid price of the common stock during the
10 trading days preceding the interest payment date.
(They can pay the interest in stock near the market price. This is good news given the current run.)
At any time after a period of 20 consecutive trading days during which
the daily "Market Price" (as defined) of the common stock equals or exceeds
$1.75 (subject to adjustment), the Company may elect upon 45 days prior written
notice to prepay all or any portion of the convertible notes at a price of 105%
of the outstanding principal amount, plus accrued and unpaid interest. The
convertible notes will continue to be convertible, however, at any time prior
to prepayment in full....
(They can prepay the Notes off with it seems cash if the stock is above $1.75 for 20 consecutive days. We've been above $2 for over 30 days now. So if NTN can come up with around $6M in cash, they can retire the notes, as lnog as they are not converted first. This would be important to do if they were planning to sell a significant stake to another large investor.)
\... The Notes be prepaid in connection with
a merger or consolidation of the Company or other "Major Transaction" (as
defined) if the consideration per share of common stock in the Major
Transaction is at least $1.50. In such event, the prepayment price will be 105%
of the outstanding principal amount of the convertible notes, plus accrued and
unpaid interest.
(i.e. if they sell the company for above $1.50/share [probably a sure bet now, where "sure" means the price is above $1.50, not "sure" that they're going to sell] S&S get all of their money back plus a 5% bonus.)
The holders of the convertible notes may convert them at any time, in
whole or in part, at their option. The number of shares of common stock
issuable upon conversion of each convertible note will be determined by
dividing the outstanding principal amount to be converted, plus any accrued and
unpaid interest, by the conversion price then in effect. The conversion price
will be $1.275 per share, subject to adjustment if certain events, including
stock dividends or subdivisions or reclassifications of the common stock or
any sale or issuance of common stock (or of rights or options to subscribe for
or purchase common stock) for no consideration or for a consideration per share
less than the "Average Market Price" (as defined) of the common stock. The
actual number of shares of common stock issuable upon any conversion of the
convertible notes will depend on the conversion price in effect on the relevant
conversion date.
(Got me on this paragraph. Someone with better English/Legalease skills than I can feel free to jump in. Seems that $1.25/share is some base conversion value subject to adjustment in some cases. This seems to include, BTW, the sale of additional common shares that is proposed.)
5
<PAGE> 5
The convertible notes are subordinate in right of payment to the prior
payment of all "Senior Debt" (as defined). The Company is restricted under the
terms of the convertible notes from incurring any Senior Debt in excess of
$10,000,000 or any other indebtedness (except Senior Debt and "Subordinated
Debt" (as defined)) in excess of $2,000,000 at any time.
(NTN can't go out and borrow $10M in Senior notes from someone else until there are paid off. I think "Senior" here is meant to mean those that get first crack at liquidated assets upon Chapter 11 or 7. Again, this is an assurance that S&S has the greatest chance to retrieve most of its investment. As for the $2M in other borrowing, I don't know why the revolving credit agreement doesn't violate this amount.)
The Company will be in default under the convertible notes if it fails
to pay any principal or interest on the convertible notes when due, and in
certain other events, including in the event of a material adverse change in
the condition, financial or otherwise, or operations of the Company as
determined by the holders of the convertible notes in their discretion. If the
Company defaults under the convertible notes, in the discretion of the holders
of the convertible notes, the entire outstanding principal amount of the
convertible notes and all accrued and unpaid interest will become immediately
due and payable in full.
(S&S can force NTN into Chapter 11 or 7. Note that this is at the risk of only receiving a portion of their investment back. S&S has an incentive for NTN to succeed and pay everything back.)
(That all seems rather normal conversion of securities that guarantee S&S gets their $5.6M+interest back. Next is consideration, i.e. compensation, or "bribe" if you will:-), to S&S in return for letting NTN out of the Reg.D financing agreement.)
On October 5, 1998, in consideration for their entering into the
Exchange Agreement, NTN issued to each of the Investors a warrant to purchase
500,000 shares of common stock at an initial purchase price of $1.25 per share.
(A total of 1,000,000 shares, 500k to each, at a base price of $1.25.)
The purchase price of shares of common stock under the warrants will be subject
to reduction based on the future "Market Price" (as defined) of the common stock
as follows: the purchase price will be (i) $0.75, if the daily Market Price on
each day during any 10 consecutive trading days shall be equal to or greater
than $1.75 but less than $2.00; (ii) $0.625, if the daily Market Price on each
day during any 10 consecutive trading days shall be equal to or greater than
$2.00 but less than $2.25; (iii) $0.50, if the daily Market Price on each day
during any 10 consecutive trading days shall be equal to or greater than $2.25
but less than $2.50; (iv) $0.375, if the daily Market Price on each day during
any 10 consecutive trading days shall be equal to or greater than $2.50 but less
than $3.00; (v) $0.25, if the daily Market Price on each day during any 10
consecutive trading days shall be equal to or greater than $3.00 but less than
$4.00; and (vi) $0.005, if the daily Market Price on each day during any 10
consecutive trading days shall be equal to or greater than $4.00. No adjustments
to the purchase price will be made to increase the purchase price in effect at
any time..../
(We've got over 10 above 3 and currently 7 at $4 or above. S&S can now purchase 1,000,000 shares of stock at 0.25 per share. If we hit 10 days, they can purchase 1,000,000 shares at 1/2 of a cent, or $5000 instead of $250,000. I think we have found our "manipulator" and setter of the price at $4. If this is the case, then this support will end in 3 days, as there is no longer an incentive for S&S to acquire shares at the close to keep it above 4. I'm not predicting a huge fall here, but one of the players will be no longer interested in higher prices in the short term. All, however, may be interested in higher prices in the long term if they will continue to hold their positions hoping for an even bigger windfall. If we see over 1,000,000 shares traded on the 11th day and during a decline, I think we have to assume that S&S dumped near 4.)
/... The warrants are exercisable at any time on or before February 1,
2001. .../
(The price is set and S&S can hold the warrants for over another year.)
/...In the event, however, that a "Major Transaction" (as defined in the
convertible notes as described above) occurs, NTN may elect upon 30 days prior
written notice to the warrant holders to accelerate the expiration date of the
warrants so long as the consideration per share of common stock which would be
received by the warrant holders in the Major Transaction exceeds the
then-applicable purchase price per share under the warrants.
(The 10 day rule is thrown out in the event of a takeover. The conversion price is set at the 10 day value of the takover price.)
The warrants contain certain antidilution provisions that require
adjustments in the purchase price and the number of shares of common stock
purchasable in the event of a stock dividend, subdivision or combination of the
outstanding shares of common stock or in the event of a recapitalization of the
Company and certain similar events. In addition, the exercise price and number
of shares purchasable under the warrants are to be adjusted in the event the
Company issues additional shares of common stock (or rights or options to
subscribe for or purchase common stock) for no consideration, or for a
consideration per share of common stock less than the "Current Market Price"
(as defined) of the common stock under any employee stock option plan or other
employee plan approved by the Company's Board of Directors, provided that the
exercise or purchase price is not less than 85% of the fair market value on the
date of grant.
(In case of dilution by issue of more shares, I think just a straight percentage may be applied. Other comments on this paragraph welcome.)
The warrants allow for cashless exercises by means of the
Company's withholding of shares of common stock otherwise issuable to the
holder, which shares are to be valued for this purpose based on the market
price of the common stock at the time.
(S&S doesn't have to give NTN the $5000, NTN can just withhold $5000 worth of sotck at the market price.)
A registration statement on Form S-3 covering the shares of common
stock issuable upon conversion of the 7% convertible senior subordinated notes
and exercise of the warrants, was declared effective by the Securities and
Exchange Commission on January 8, 1999.
(Legal stuff about the SEC)
(end of 10K quote)
So what we have is $5.6M+interest of possible conversion at $1.275, or 4.39M shares. There is a statement of adjustment of the conversion price, but no specifics given. I would guess that this means that if NTN issues 25% more stock, the conversion price would go down by 25%. I don't understand the comment about market price as it relates to the notes.
In addition, we have 1,000,000 shares available for purchase by S&S for what looks like to be 0.005 per share (yes, 1/2 of a cent) if the price stays above $4 for the next 3 days. This could explain who's buying on the close at $4 in the last few days. The S&S benefit is $245,000 if this is the case. One could imagine a buy on close/sell on open strategy that might cost them a few $10k's, but they will still make money in the end.
In the long run, S&S stands to make a huge return on this incentive if NTN's price remains high or goes higher. Of course, they could elect to exercise in 4 days and try and dump 1,000,000 shares as close to $4 as possible.
You're all welcome to try your best guess at how this will all play out in the stock price.
Comments and alternate interpretations of any or all of the above welcome.
Cheers,
Rich |
