Interesting Conundrum
Ray: Thanks for pointing out my mistake. When I initially read the following text in the PRE 14A, I misinterpreted it to mean that all un-returned proxies would be voted FOR the proposals.
"If no instructions are specified, the shares will be voted FOR the election of the named nominees for Directors, FOR the ratification of the auditors, FOR the amendment to the Articles of Incorporation increasing the authorized capital by increasing the authorized shares of common stock from 100 million to 200 million, FOR the approval of the issuance upon conversion of the 14% Convertible Notes of more than 9,807,150 shares of common stock, representing 19.9% of the outstanding shares of common stock on the date of the sale of the 14% Convertible Notes, as required by the rules of The Nasdaq Stock Market, Inc., and FOR the approval of the issuance upon conversion of the 5% Convertible Secured Debenture of more than 13,243,377 shares of common stock, representing 19.9% of the outstanding shares of common stock on the date of the sale of the 5% Convertible Secured Debenture, as required by the rules of The Nasdaq Stock Market, Inc."
When I re-read the document following your post, it became clear that the above qualification only relates to properly signed and returned proxies where no instructions are specified.
You were absolutely correct to point out the fact that additional text further down in the document explicitly states the following:
"Proposal 3. Proposed Amendment to the Articles of Incorporation to Increase the Authorized Capital Stock by Increasing the Authorized Shares of Common Stock from 100 Million to 200 Million...
As a result, any shares not voted (whether by abstention,broker non-vote or otherwise) will have the same effect as a vote AGAINST the proposal."
So thanks again for correcting me.
In light of the above, I will be the first to admit that this restriction will no doubt make it more difficult for Proposal 3 (the increase in authorized shares) to be ratified. That doesn't necessarily mean that it will be rejected. It just makes it much more difficult to ratify.
It would be very interesting to know how management and the other members of the board will vote on Proposals 3, 4, and 5. Since the Board recommended that shareholders vote FOR each of these proposals, I expect them to vote accordingly themselves, but I wouldn't be surprised to hear them craft an argument to the contrary: e.g., pointing to terms and conditions of the debenture documents as the ONLY reason for having submitted the proposals, and arguing that they actually voted AGAINST the proposals themselves. (It wouldn't be the first time such an argument was made by a company that chose to use floorless convertible financing.) Anyway, perhaps someone that attends the meeting will ask each of the management team and members of the board individually? I doubt there is any way of verifying whether what they tell you is true, but it would be interesting to hear their responses nonetheless.
Another thing that I noted upon re-reading the PRE 14A is that there are differing standards for how the aforementioned proposals will be individually ratified or rejected. The following excerpt from the document specifies the groundrules:
"As of May 5, 1999, 66,784,943 shares of the common stock of the Company, par value $.08 ("Common Stock"), were outstanding. Each share of Common Stock is entitled to one vote. The affirmative vote of the plurality of the votes cast in person or by proxy at the Meeting and entitled to vote will determine the election of Directors. The affirmative vote of the majority of the votes present in person or by proxy at the Meeting and entitled to vote is required to ratify the selection of the auditors, the issuance of more than 9,807,150 shares of Common Stock upon conversion of the 14% Convertible Notes and the issuance of more than 13,243,377 shares of Common Stock upon conversion of the 5% Convertible Secured Debenture. The affirmative vote of a majority of the outstanding shares of Common Stock is required for approval of the amendment to the Company's Articles of Incorporation to increase the authorized capital by increasing the number of authorized shares of Common Stock from 100 million to 200 million."
Note that even if Proposal 3 gets rejected, Proposals 4 and 5 (removal of the current share limitations on the 14% and 5% Convertible holders) could still be ratified since the required vote hurdle is much less stringent (i.e., Proposals 4 and 5: "majority of the votes present in person or by proxy at the Meeting and entitled to vote"; versus Proposal 3: "majority of the outstanding shares of Common Stock").
Most interesting of all, however, is the conundrum that the Company and shareholders face over the possibility that Proposals 4 and 5 actually get rejected. According to the PRE 14A, the consequences could impose a severe constraint upon available working capital (which was already over $2 million in the red on 3/31/99):
"Proposal 4... If this proposal is not approved by shareholders, upon any conversion that, together with prior conversions, would result in the issuance of more than 9,807,150 shares of Common Stock, but for the limitation discussed above, the Company will be required to pay the holder requesting conversion an amount in cash equal to the closing price of the Common Stock on the date of conversion times the number of shares in excess of 9,807,150 shares. The number of shares available for conversion without exceeding this number is currently 1,142,493 shares. As of the date hereof, the Company had either redeemed or converted an aggregate principal amount of $9,664,554, leaving an outstanding principle balance of only $2,335,446 on the Notes. The Company's ability to make such cash payments will depend on its available cash resources at the time of a request for conversion. The payment of such amounts instead of the issuance of shares of Common Stock upon conversion may adversely affect the liquidity and financial condition of the Company."
-and-
"Proposal 5... If this proposal is not approved by shareholders, upon any conversion that, together with prior conversions, would result in the issuance of more than 13,243,377 shares of Common Stock, but for the limitation discussed above, the Company will be required to redeem in cash the principal amount that may not be converted at 125% of the principal amount plus accrued interest and penalty interest. The Company's ability to make such cash payments will depend on its available cash resources at the time of a request for conversion. The payment of such amounts instead of the issuance of shares of Common Stock upon conversion may adversely affect the liquidity and financial condition of the Company."
So the real question in my mind is: How will the shareholders vote for the aforementioned proposals under the conditions imposed by the PRE 14A?
I suspect the Convertible holders will vote FOR Proposals 3, 4, and 5, but I will be curious to hear from the rest of the thread.
Razor |
