PORTFOLIO UPDATE:
HYBR: Upon review, the HYBR convertible owned by LDP was not a part of the $18.1 million conversion referred to in Hybrid's recent press release. My mistake.
In accord with the reference below, a revision is made in the portfolio regarding the conversion price, i.e., to $6.64, and the number of shares, to 828,454.
I believe the CNSW and HYBR debentures are convertible at any time by LDP at a price lower than the current market price. That's why in the SI portfolio they appear as an equity asset. Obviously, this is a device used for tracking purposes since the shares are not presently owned outright by LDP, but in my view it is appropriate. As long as investors know HYBR and CNSW are convertibles, they can adjust the portfolio as they see fit.
Also, as noted below, the debentures are in default because HYBR exceeded the limit on capital expenditures provision. I did not review LDP's remedies under the agreement.
Concerning these two, HYBR and CNSW, I admit the research was done quickly and could have been done more carefully. At the time I put together the port, HYBR was a OTC.BB stock and it was difficult to even get a quote on the stock, so it was not originally included. However, I am comfortable that the portfolio is, as I stated before, "pretty darn close," since the other holdings are independently verifiable through SEC filings and other documents.
Of course, comments regarding further revision/correction of the portfolio are encouraged. (Particularly concerning any revision or comments on the CNSW holding.)
The following paragraph is an excerpt from HYBR’s 10-K for 1999 (filed in March 2000) which refers to the Exhibit 10.12. The issue date alone distinguishes these from those referred to in the recent HYBR press release:
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10.12 Senior Secured Convertible $5.5 Million Debenture Purchase Agreement between Registrant and London Pacific Life & Annuity Company dated April 30, 1997 and related Senior Secured Convertible $5.5 Million Debenture Due 2002 and Security Agreement and Senior Secured Convertible $5.5 Million Debenture Due.(3)
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The following is from footnotes to the financial statement, again from the 10-K:
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5. CONVERTIBLE DEBENTURES
In 1997, the Company issued a senior convertible secured debenture in the amount of $5,500,000, bearing interest at 12% per annum, payable quarterly, and maturing on April 30, 2002. An arrangement fee of $500,000 was paid by the Company. If the Company issues any shares (with certain exceptions for employee
stock options and the like) for consideration less than the current conversion price, any such issuance would be subject to certain "weighted average" antidilution provisions.
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HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CONVERTIBLE DEBENTURES (CONTINUED)
During 1999, the Company issued certain securities which triggered antidilution adjustments to the conversion price of the $5.5 million debenture. These issuances included:
(i) Warrants issued to customers to purchase 210,000 shares of common stock at $0.50 per share,
(ii) Grants of options under the Company's stock option plans to purchase up to 1,321,907 shares of common stock at $0.50 per share (which was less than the fair market value of the stock on the date of grant),
(iii) Issuance of $18.1 million in convertible debentures convertible into common stock at a conversion price of $2.85 per share (subject to adjustment), and
(iv) Commitment to issue 3,057,459 shares of common stock in settlement of the Class Action litigation.
As a result of these issuances, the conversion price of the $5.5 million debenture decreased to $6.64 (and the total number of shares issuable upon conversion increased to 828,454).
The debenture is collateralized by substantially all of the Company's assets. The Company is prohibited from making plant or fixed capital expenditures in excess of $5,500,000 and $11,000,000 during the 12 months ending March 31, 2000 and 2001, respectively. Additionally, the Company is prohibited from, among other things, declaring dividends, retiring any subordinated debt other than in accordance with the debenture's terms, or distributing its assets to any stockholder as long as the debenture remains outstanding.
The Company's capital expenditures exceeded the maximum capital expenditures allowed for the 12 months ending March 31, 1999. Consequently, the debt has been classified as a current liability in the accompanying financial statements as the holder has the right to declare a default under the convertible debenture at any time.
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Link to the 10-K
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The convertible still appears on Hybrid’s balance sheet according to the 10-Q for 1st quarter 2000:
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