I am trying to fully understand the implications of these toxic instruments. I hold a now small position in Orbital Engine (OE) which has in place such an issue, but with certain protections built in (as they are an ADR we have only the info they provide)...would invite opinions on whether they are in fact protected after the issue goes floorless (20 % premium required to convert during first 6 months. Have had mixed responses regarding the protection offered and I am posting in the hope that others will be able to clarify whether or not here is sufficient protection:
FINANCING STRUCTURE(management's response to concern raised by investors)
ASX Code: "OEC" NYSE Code: "OE"
This memorandum is to address concerns that have been expressed on the internet regarding the recently announced
raising of US$20 million by way of a convertible debenture, and to clarify safeguards against potential dilution of existing
shareholders.
The following are the main points which achieve this:
Conversion rate is fixed at a 20% premium to the current market price for the first 6 months. After the initial 6
months the conversion price is at market prices, but is fixed at the 14th and 20th month.
In the event of a drop in the stock price, at each and every conversion of the debenture, a calculation is done to see
what the total number of shares issued would be if the total debenture was converted at that time. If this calculation
shows that the conversion of the total debenture at that stock price, including conversions already made, would result
in an increase of more than 15% in issued share capital, then a shareholder meeting must be called to approve this
possibility. If not approved then the balance of the debenture representing the amount above 15% must be repaid
with a small premium. The maximum dilution that can therefore happen without shareholder approval is 15%.
If this calculation shows that the 15% rule is not breached, or shareholders approve the breach, conversions of up to
100% of the debenture can be made in the first 6 months whilst the conversion price is fixed, but only up to 15% of
the debenture per month can be converted after the first 6 months. Once converted, the investor is restricted as to
the volume of shares that he can sell on a daily basis, based on normal levels of trading in the company's stock.
The placement is with a single investor and is therefore less likely to be the subject of short term decisions based on
temporary fluctuations in the company's stock price.
The contract states that the investor will not at any time hold more than 4.9% of the company's stock. Therefore, in
the event of a significant fall in the stock price and being allowed to convert by shareholders, it is still impossible for
the investor to build up a significant stake in the company.
In the unlikely situation that the company suspects stock manipulation, or decides that the continued conversion of
the debenture is not in the best interests of shareholders, then the company has the right to redeem the balance of
the debenture in full at any time by paying a small premium. This redemption right is only at the discretion of the
company, as the investor has no redemption right.
The contract contains clauses that the investor will not manipulate stock prices. The rules of the New York Stock
Exchange and the Australian Stock Exchange contain rules that prohibit stock manipulation.
The sole investor for this placement is RGC International Investors,LDC (RGC). RGC is a private investment fund
dedicated to providing private capital to publicly traded companies. RGC's investment focus is on growth companies
primarily in the technology and healthcare industries. RGC's investor base includes prominent private and institutional
investors.
Would appreciate opinions, insights and relevant questions.
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