TO ALL:
Again this is for my buddies on the Yahoo thread where the posting is simply too long. I hope those of you here on SI enjoy it as well.....
TO ALL,
Following is MY personal analysis of the current situation involving SCUR management, Credit Suisse First Boston (CSFB) & Castle Creek Partners (CCP), and the Institutional holders, concerning the warrants (Class C preferred stock) and certain covenants pertaining to the warrant agreement as set forth in the Form 8K filing dated 7/15/98.
According to the warrant agreement, if the stock price has a closing bid price for 20 consecutive trading days at less than $5/share, SCUR management has the option to redeem the outstanding warrants for 125% of original value. In other words if the closing bid price today is below $5 (this will be the 20th consecutive day), come Monday SCUR can fax CFSB & CCP and exercise their option to redeem or "call in" the warrants for $20million cash lump sum. If SCUR does not have the cash to do this (which they don't) they can pay 13% interest on the $20million debt until it is paid off.
Conversely, CSFB & CCP have had the right to convert their warrants since Dec.31st 1998 at any time based on two (2) formulas…1.) 103% of the average closing bid price for the 15 previous days before conversion notice date; or, 2.) Average closing bid price for the previous 5 days prior to notice date of conversion. Notably, either of these conversion factors at current levels over the last twenty (20) days would give CSFB & CCP the right to convert at the maximum amount (cap of 3.25 million shares, or 19.99% of outstanding shares on issuance date of warrants) shares convertible under the agreement. There are ambiguities within the Form 8 filing that lead me to believe that this could be increased up to approximately 4.2 million shares. The most important thing to note is that if CFSB and CCP are going to convert to common shares and become huge percentage shareholders now is the time they can convert at the maximum amount.
POSSIBLE SCENARIOS: This is all my personal speculation on the situation.
1.) The Institutional partners and SCUR want CSFB &CCP, along with their tremendous investment banking sides, in the company in a sizeable fashion. I feel that the institutional sellers have kept just enough sell side pressure on the stock price to create this scenario. By keeping the stock price at a closing bid below $5 for 20 consecutive trading days they have given SCUR management the option under the warrant agreement to "redeem" the outstanding warrants for $20 million come Monday morning. But, by keeping the price at these levels the have also given CSFB & CCP the ability to convert at the maximum number of shares under the agreement. Will SCUR choose to redeem? I don't know! Could they fax CSFB & CCP telling them they intend to exercise their right of optional early redemption, IF CSFB & CCP don't convert its warrants to common shares right now? I would guess, Yes! In essence they have forced CSFB & CCP's hand. Does CFSB & CCP tell SCUR….Do your redemption, we will take the $20 million. To which SCUR may reply …we won't pay you the $20 million, we choose to pay you the 13% APR instead and keep the $15 million we have on the books and carry the long term debt. To which CSFB and CCP would have to consider, do we want to make $2.6million/yr in interest on essentially what would now be a $20 million note. In which case, if no principal were paid for years, would take 6 years just to get back their initial $16million investment. Or, do they say we chose to convert and take the 3.25 million share and 179,000 warrant shares, thus diluting the stock about 6%, but gaining about 17% of a company on difficult times. They could also try to sell the warrants to a third party, but it seems would be impossible given SCURS recent "problems". To me it only makes sense that CSFB & CCP would convert their warrants becoming huge partners in the company, which I believe is what Mr. Waxman, and the institutions wanted in the first place.
2.) CSFB & CCP convert before SCUR can exercise their option to redeem. Very possible I think.
3.) SCUR chooses not to exercise its right to redeem and CSFB & CCP do nothing. Unlikely I think.
4.) SCUR choose to redeem, CSFB & CCP accept this. Unlikely I think.
5.) SCUR chooses to redeem but wants to pay CSFB and CCP off so as to avoid interest eating mightily into earnings years out. The only way to achieve this would be to either find new large investors to issue a new set of warrants to, too pay off the old; or, do a secondary offering with the extra 25 million shares stockholders authorized in November. I think this unlikely as well, unless they are able to get the stock up to a price where the dilution won't kill the company, which none of the parties wants in my opinion.
It is my opinion that SCUR management and the other institutional investors want CSFB & CCP in the company. And, by appearances they have done their best to get these warrant holders in at the maximum conversion possible. While also putting the pressure on them to convert by seemingly keeping the price artificially low so as to give management the right of early redemption. Combine these two entities (CSFB & CCP) with American Expresses large position and you have some of the largest investment bankers in the world as approximately 23% partners in your company and $15million on the books. Dilution is minimal (6%) because 1.99 million shares have already been "shelf" registered and you now have these large entities in a semi-illiquid stock that would only serve their interest if the price appreciated tremendously. And all big investment bankers have analysts that initiate "buy" and "strong buy" ratings on stocks they like (wink…nudge). Hopefully if this is what is playing out we should know something by mid-week next week. Either by stock price action or SEC filings to register additional shares to cover conversion. Again, this is all my own analysis and speculation and not a recommendation to either buy or sell SCUR securities. I just felt it was a noteworthy sequence of coincidental events that might be worth knowing. As always.
Best Wishes,
Swedelo
PS: I re-iterate Waxman has yet not to meet his incentive bonus stock price. This year it is to exceed $31.125 closing price for ten (10) consecutive trading days before February 13th, 2000. Good luck to us all!
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