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Frequently Asked Questions
  Staff Interpretation Letter 2009-5  
Identification Number 723
This is in response to your correspondence wherein you asked that the company be granted an exception to the shareholder approval requirements pursuant to Marketplace Listing Rule 4350(i)(2) for the issuance of warrants in connection with a proposed amendment to the financial covenants under the company’s Term Loan Agreement (the “Amendment”).
 
Under the Amendment, the holders of the Term Loan have agreed to, among other things, provide relief from the financial covenants for one year in exchange for warrants to purchase more than 20% of the shares outstanding at a price less than both book and market value.  Additional warrants with the same terms could be issued 90 days and 150 days after the effective date of the Amendment if at least 75% of the Convertible Notes are not converted into equity securities of the company.  The company also agreed that the Term Loan holders would be allowed to designate a number of board members that would be approximately proportional to their post-exercise ownership interest in the company on a fully diluted basis.
 
Without the requested exception, shareholder approval would be required pursuant to: (i) Listing Rule 4350(i)(1)(B) because the issuance could result in a change of control; and (ii) Listing Rule 4350(i)(1)(D)(ii) because the issuance would exceed 20% of the pre-transaction outstanding shares at a discount to the greater of book or market value.  Additionally, without an exception, the Amendment would not comply with the voting rights rule contained in Listing Rule 4351 because the Term Loan holders would be able to appoint members to the board based on their post-exercise ownership interest, and not their actual equity interest in the company.
 
According to the information you provided, the Amendment is necessary to avoid the default and potential cross-default and cross-acceleration of the company’s debt obligations.  You stated that the company’s financial predicament is not the result of insufficient cash.  You explained that the recent economic downturn has affected the company’s ability to meet certain financial ratios required by the Term Loan that were set approximately 2 years ago based on then-current projections, and in light of a relatively stable economy.  Because these ratios are calculated on a rolling four-quarter basis, the company expects to fail to meet these ratios early this year because the results from the first and second quarters last year will be replaced with current results reflecting the severe economic slow-down.  The Amendment would provide the company with at least four quarters of relief from its financial covenants.  In addition, the company’s independent auditors indicated that they would be unable to provide a “clean” audit opinion for its most recently completed fiscal year absent the Amendment, loan modifications to other loan agreements and significant borrowings thereunder, or an infusion of capital.  A going concern opinion would result in a default under the Revolving Line of Credit, which in turn, could allow the Term Loan holders to declare the full amount of the Term Loan to be immediately due and payable.  Furthermore, you stated that default under the Revolving Line of Credit would trigger a cross-default of the Convertible Notes resulting in the potential for cross-acceleration of all three debt instruments.  The company does not have the cash on hand to satisfy repayment of the debt instruments and would be unable to arrange alternate borrowings.  As a result, you stated that failure to enter into the Amendment will result in a cross-acceleration of these loans, which would require the company to seek bankruptcy protection.
 
You stated that the company has been in negotiations with the holders of the Term Loan for approximately four months and has explored numerous alternatives, including a possible sale of the company, to avoid the need for an amendment to the Term Loan.  However, due to the prevailing instability in the credit and financial markets, the company has been unable to enter into any other refinancing transaction.  The company proposed various amendments to the Term Loan holders which would have not required shareholder approval.  However, the Term Loan holders insisted that the stock issuance be completed in a manner necessitating complying with, or obtaining an exception from, NASDAQ’s shareholder approval requirements, and the company was unable to identify any viable alternatives.
 
The company believes that the Amendment would enable it to secure a supply of inventory sufficient to meet its needs for at least the next several months.  The company expects that if it receives the exceptions discussed above and completes the Amendment, it will meet the requirements for continued listing on NASDAQ for the next several months, except for the bid-price requirement.  In that regard, the company has committed, if necessary, to complete a reverse stock split of a ratio sufficient to comply with the bid-price requirement.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the exception from the shareholder approval requirements.  This determination is based on your representations regarding the company’s inability to find alternative sources of capital and its likely need to seek bankruptcy protection in the event that the Amendment is delayed.  In addition, we have determined to grant an exception from the voting rights requirement of Listing Rule 4351.  In that regard, we note that under the former SEC Rule 19c-4, as well as under the Listing Rule 4351, it is appropriate to consider whether an issuance is designed to rescue a company in financial distress.
 
The exceptions are subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities in the Amendment, a letter describing the Amendment and alerting them to its omission to seek the shareholder approval that would otherwise be required; (ii) the letter must indicate that the audit committee, or a comparable body of the board of directors, has expressly approved reliance on the exceptions; and (iii) the company must also make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
 
 
Publication Date*: 7/31/2012 Mailto Link Identification Number: 723
material_search_footer*The Publication Date reflects the date of first inclusion in the Reference Library, which was launched on July 31, 2012, or a subsequent update to the material. Material may have been previously available on a different Nasdaq web site.
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