Questions regarding the debentures and warrants.
From the Feb 1 press release:(my emphasis in bold) <<The convertible debentures convert into common stock of Rare Medium based upon an initial conversion price of approximately 140% of an average closing price of Rare Medium during an average number of trading days immediately preceding the execution of definitive documents on January 28, 1999. Under certain circumstances, the Company has the option to redeem the convertible debenture. Beginning six months after the date of issuance, the conversion price may be adjusted. The 8% yield is payable in shares of common stock. The warrants are initially exercisable at the initial conversion price of the debentures.>>
I referred to the 8K filed on Feb 4 to see how much dilution might result from the issuance of these debentures. I came away dazed and confused, unable to nail down a "worst case" dilution. I include excerpts here that shed some light on the issue and welcome feedback, especially any pertaining to the conversion formula, to any adjustments to the conversion price, or to the amendments referred to by the clause "subject to adjustment as provided herein".
<< D. "Conversion Price" means (i) with respect to any Conversion Date
occurring prior to the earliest of (a) the 181st day following January 28, 1999,(b) the first Announcement Date (as defined in Article VIII.C hereof) afterJanuary 28, 1999 or (c) the delivery by the Corporation of the notice specified in Section 4(j)(A) of the Securities Purchase Agreement (such earliest date, whether or not occuring prior to the
date of issuance hereof, referred to herein as the "First Variable Conversion Date"), the Initial Conversion Price and (ii) with respect to any Conversion Date on or after the First Variable Conversion Date, the lower of the Fixed Conversion Price and the Variable Conversion Price, but in no event less than the Floor Price, each in effect as of such date and subject to adjustment as provided herein.
E. "Fixed Conversion Price" means the lower of (i) the Initial Conversion Price and (ii) the amount obtained by multiplying 105% by the Market Price in effect on the First Variable Conversion Date, subject to adjustment as provided herein.
F. "Floor Price" means $2.49, subject to adjustment as provided herein.
G. "Initial Conversion Price" means $5.27, subject to adjustment as
provided herein.
H. "Market Price" means, as of any date of determination, the average of the lowest Closing Bid Prices for the Corporation's common stock, par value $.01 per share ("Common Stock"), for any two (2) trading days during the fifteen (15) consecutive trading days ending on the trading day immediately preceding such date of determination (subject to equitable adjustment for any stock splits, stock dividends, reclassifications or similar events during such fifteen (15)
trading day period), and shall be subject to adjustment as provided herein. For the avoidance of doubt, the trading day immediately preceding any Conversion Date is the last calendar day that is a trading day and which is immediately preceding the Conversion Date.
I. "N" means the number of days from, but excluding, the Issue Date.
J. "Variable Conversion Price" means the amount obtained by multiplying 92% by the Market Price then in effect.>>
<< A. Conversion at the Option of the Holder. (i) Subject to the limitations on conversions contained in Paragraph C of this Article III, the Holder may, at any time and from time to time on or after the Issue Date, convert (an "Optional Conversion") all or any part of the outstanding principal amount of this Debenture, plus all accrued interest thereon through the Conversion Date, into a number of fully paid and nonassessable shares of Common Stock determined in accordance with the following formula:
Conversion Amount
Conversion Price >>
That's how the formula reads. Something omitted? That's no formula.
The registration rights agreement specifies that a specified number of shares be reserved for conversion of the debentures and warrants.
<<A. Reserved Amount. On January 28, 1999, the Corporation shall reserve 3,180,723 shares of the authorized but unissued shares of Common Stock for issuance upon conversion of the Debentures and thereafter the number of authorized but unissued shares of Common Stock so reserved (the "Reserved Amount") shall not be decreased and shall at all times be sufficient to provide for the conversion of the Debentures at the then current Conversion Price thereof, taking into account any adjustments pursuant to Article VIII hereof, and to provide for any shares of Common Stock issued or then issuable as a
result of a Conversion Default hereunder...>>
An aside - Subtracting the maximum aggregate number of warrants that can be issued, 639,642, from the 3,180,723 yields 2,541,081 shares that I assume are reserved for the conversion of the debentures. The stated floor price (before adjustments) is $2.49. Dividing the $6 million loan amount by the 2.5+mil shares yields $2.36, a few cents difference.
What in the 8K says this is not a floorless convertible? The clause <<Variable Conversion Price" means the amount obtained by multiplying 92% by the Market Price then in effect>> is worrisome as I have seen similar statements in floorless convertibles issued by other companies. A provision such as this can provide the lender, among others, incentive and perhaps opportunity to short the stock in order to obtain more shares upon conversion. A floor price is specified but is subject to adjustment. Under what conditions?
Need some help putting my concerns to rest. Thanks in advance.
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