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uWink LogoOn Friday December 5th, 2008, uWink (NASDAQ: UWKI.OB) made an “odd lot” tender offer to purchase all shares of its common stock held by persons owning 99 shares or fewer on the close of business as of December 1, 2008. The offer is valid until 5:00 p.m. Eastern Time on Thursday, January 15, 2009.

This offer is designed to reduce the number of total shareholders of uWink’s stock to under 500, whereby uWink would then deregister their stock from the OTC/Bulletin board and spin off their technology licensing business as a dividend to existing stockholders.

As I just wrote about last week, uWink has serious liquidity issues and is taking an unprecedented step to take themselves out of the stock market, and make the company look more attractive for possible investment for the two separate entities that they will become: one a restaurant company, and one a software and licensing company.

As a result of this tender offer and the uncertainty surrounding the company and our investment, I am downgrading uWink to a HOLD. I’ll break down my reasons within this post and explain in more detail what exactly is going on.

New to the uWink story?

uWink is an entertainment and hospitality software development company that develops casual, interactive, social games, in addition to licensing the rights to those games and their proprietary touch-screen ordering and gaming interface to restaurants, entertainment venues and the hospitality industry.

uWink also owns and operates three restaurants under the uWink brand name that utilize this technology.

uWink’s CEO is Nolan Bushnell, who also founded Atari Inc. (OTC: ATAR.PK) and Chuck E. Cheese’s, now known as CEC Entertainment (NYSE: CEC).

Want More?

  • Start: with my initial buy recommendation and company overview here.
  • OR: read about uWink’s latest deal to test their terminals at a Chili’s Too Margarita Grill, and possible expansion plans to other Chili’s restaurants here.
  • OR: Read my last post regarding uWink’s future as a stand alone company here.

Let’s Start With the Basics

uWink looking to decrease number of shareholders

In plain English, the purpose of this offer is to reduce the number of persons owning shares of uWink’s common stock.

Why?

uWink claims that this will save them money in the long run from having to be a public company and have to provide regular filings with the SEC.

I personally think it is because at this point it is much easier to go “private” than try and sustain a public company status and try and get additional funding in the current environment with the stock price hovering around a dime.

The way this will work is that any shareholders out there with 99 or fewer shares will be tendered an offer for their shares of $.50 per share, plus an additional $20 reimbursement of the estimated annual servicing costs (transfer agent, proxy statements, etc.) for each stockholder of record.

If uWink is successful at reducing the number of shareholders below 500, they then intend to deregister the company’s common stock under the Securities Exchange Act of 1934 and become a non-reporting company.

What does “non-reporting” company mean?

Well, it means uWink won’t have to report their earnings, sales, file 10-Q’s, 10-K’s, 8-K’s, or any other requirement for a publicly traded company that is in compliance with the SEC.

For us it means we will have little to no transparency on what’s going on with uWink behind the scenes because they will not be required to tell us as shareholders anything of substance because they are no longer a publicly traded company.

My sinking suspicion is that more than to save costs, uWink is taking this step because they don’t want the intense scrutiny that investors have them under, as well as their inability to raise funds as a public company.

This essentially gets uWink off the hook in terms of having to answer questions about declining sales, what they are doing, and when their pilot projects are going to be coming online in the future, etc.

Private investors will have an easier time because of liquidity constraints, in getting shares of uWink or investing in the company than they ever would on the public markets.

uWink said the following in their 13E3 filing:

The expense of administering accounts of small stockholders is disproportionate to their ownership interest in the Company. As of the record date, we estimate that we had approximately 360 stockholders of record that held 99 or and fewer shares and 445 stockholders who beneficially owned 99 or fewer shares (of those 360 record shareholders we estimate that approximately 230 own fewer than 10 shares). These eligible record and beneficial stockholders hold an approximate aggregate of 23,000 shares of our common stock. As a result, these odd-lot owners hold approximately 0.2% of all of our common stock. A disproportionate amount of our administrative expense relating to stockholder accounts and reporting requirements are attributable to those stockholders holding less than 0.2% of our issued and outstanding stock. Even if the record stockholder base does not fall below 500, we believe that every tender by a qualified odd-lot stockholder will reduce our expenses going forward….

…We calculate that if approximately 15% or more of our eligible record holders participate in the Offer, there will be less than 500 record stockholders…

…Also, if all eligible stockholders participate in this Offer, we expect to pay approximately $27,600 in the aggregate to purchase these shares, including the $20.00 payment to each stockholder to reimburse our annual servicing cost. As a result, we do not believe the completion of this Offer will have any material affect on our financial condition or results of operations.

Finally, uWink’s stock may be quoted in the Pink Sheets Electronic Quotation System once the shares are deregistered.

uWink stated in their filing that they cannot predict whether or when this will occur or that an active trading market will exist for their common stock after they deregister.

As a result, it may be more difficult for remaining stockholders to sell their shares.

What this does is essentially lock in shareholders now who might want to sell uWink’s stock in the future.

If this offer does not result in a reduction of the number of stockholders necessary for the uWink to deregister with the SEC, the Board of Directors may consider additional alternatives to achieve that result if the Board continues to believe that deregistration remains in uWink’s best interests.

Some of these alternatives include another tender offer (either to all holders or odd-lot holders only), a reverse stock split or other transaction.

I’ll go over later in this post how you should respond to this and what you should do.

Special Dividend for Existing Shareholders

1-1 stock dividend of uWink’s software licensing business

Once uWink becomes a non-reporting company, they intend to spin-off their Technology Licensing business via a stock dividend to shareholders as a separate non-reporting company.

Current shareholders will receive one share of the new company for each share of uWink that they currently own.

From uWink’s 13E3 filing:

We are still in the early stages of the development of each of our operating businesses and our Board of Directors believes that spinning off our Technology Licensing business, and eliminating the costs associated with being a reporting company for each of our operating businesses, will improve the prospects for raising growth capital (because technology companies and restaurant companies appeal to different sets of investors and because our overall cost structure for each of our operating businesses will be lower once we eliminate the costs of being a reporting company), as well as allow each of our operating businesses to compete more effectively in its markets.

Most of our competitors in the interactive hospitality software market are non-reporting companies and thus are not subject to the expenses and other burdens of being a public reporting company. Of those few that are reporting companies, virtually all have much larger revenue bases and are thus better able to bear the expenses and other burdens of being a public reporting company.

Similarly, most of our restaurant competitors are either reporting companies with much larger revenue bases or non-reporting companies that operate free of public reporting company costs.

As part of the spin-off, uWink intends on changing the legal and trade names of the spin-off company to something other than “uWink”.

In addition, uWink’s current President/COO, Peter Wilkniss, will become the CEO (with responsibility for all financial and accounting matters) of the spin-off company, while Nolan Bushnell will remain as Chairman, but only be CEO for the restaurant business.

For the spin-off company, uWink expects that their operating cash needs will be approximately $1.4 million for calendar 2009.

The funds for this new company are not yet in place, and as a result of the spin-off, uWink believes that they will be able to secure funding because investors will view the stand-alone software licensing business more favorably than the restaurant side of the business, and thus the the thought process is that they will receive higher multiples for the business while giving up less equity to those investors.

At the same time uWink does not anticipate needing any additional capital for their restaurant side of the business and will not be seeking additional capital.

Don’t buy uWink’s shares, hold if you already own

This is all crazy stuff, and certainly nothing that I have ever experienced as a shareholder in any company that I have ever owned.

Essentially, this comes with the territory, and is one of the many risk factors involved when dealing with a company like uWink, and one that is precariously close to running out of funding, at least in its current form.

So what should you do if you own uWink right now?

Let’s break it down into the two scenarios:

–> 99 shares or less: If you own 99 shares or less, you will be receiving this tender offer in the mail any day now. The $.50 per share represents a significant premium over the stock’s closing price on Friday of about $.10 per share, plus the $20 that you will receive to cover all costs make it perhaps well worth your while to just get rid of the shares and be done with it.

If you own 99 shares (and most in the odd lot tender own less than that) you would receive about $49.50 for your shares ($.50 x 99 shares) and then an additional $20 on top of that, for a whopping total of $69.50.

If you tried to sell your shares on the open market at $.10 per share, you would only receive $9.90, and if you subtracted brokerage fees to that, you are left essentially with $0.

If this tender offer succeeds, you are more than likely going to get less than $.10 per share on the pink sheets and never be able to get rid of your shares, making them essentially worthless.

If I were you, I would sell the shares, and go out for a nice dinner with the proceeds, and never look back.

–> 100 shares or more: If you own 100 shares or more, at this point in time, I would hold on to the shares, and hope that the tender offer succeeds because then you would be granted additional shares in the new software and licensing spin-off.

What does this mean for capital appreciation in the future?

It means that you are more than likely going to be stuck with shares of the new uWink company, whatever it will be called, for possibly many years to come before you see any return on that investment, if ever.

Taking the company private means one of three things for your money and shares in the new company:

1) The company will go out of business: Net result = you lose your entire investment

2) The company gets bought out: Net result = you either get some dollar amount per share, or you get shares in the new company, thus potentially perpetuating your ownership stake

3) The company decides to come public again: Net result = you gain a large premium on your shares because if the company attempts to come public in the future, you can bet it will be in a much better economic environment and financial position.

Because shares of uWink are virtually worthless no matter how many shares you own, it behooves you and I at this point, to simply maintain our stake, and see how this tender offer plays out, and get our shares in the new company and root like hell for “the new uWink” to succeed and expand their business.

All that being said, remember that this is a very personal decision. If you want to cash out now, and get what you can, pennies on the dollar, and be done with it, please do so.

I am not offering investment advice per se, just merely suggesting possible angles for someone like myself, and the many readers of this column, to help make an informed decision.

Bottom Line

uWink no longer exists

I know that’s a little harsh, but it’s the truth.

uWink no longer exists in its original form.

Do you honestly think that if uWink had some large deal right around the corner that was about to be announced, they would be doing this offering? I certainly don’t.

The very nature of a large deal would be enough to, if not secure financing, get the stock price much higher quickly.

This tender offer puts those deals very much into doubt in my mind, or at the very least, their revenue generating capabilities in the near term.

Our original investment thesis still stands in terms of uWink’s software and licensing business, but at this point, no longer in the form that I had originally intended, or invested in.

Make no bones about it, uWink is doing this because there is no hope of them every recovering their stock price at these levels, or getting funding as a result.

Their only hope, and because their success largely hinges on their software and licensing business succeeding, is to take the company semi-private, get financing with a higher valuation, and try and either make a comeback via another IPO, or just simply get bought out by another company once they have proof of concept and more traction, and get an even higher premium on their shares.

For a very small portion of your portfolio, I have always advocated uWink for a VERY risky dalliance, and to never play with money that you could not afford to lose.

Well, as is classic with these types of stories, we are now at that juncture where you could very well be looking at your whole investment going up in smoke, albeit temporarily if “the new uWink” comes back sometime in the future and gives us a return on our investment.

The bottom line now is to stay away from shares of uWink if you don’t already own them, tender your shares if you own less then 100, and hold your shares if you own more than 100 unless you want to forget this bad dream ever happened, and you could care less about getting the one thing that the whole investment thesis was predicated upon: namely, getting shares in a software/licensing company that would one day excel with their best-of-breed technology.

The choice is entirely up to you, but my decision is to hold onto my shares since they are basically worthless now anyway, in the hopes that the spin-off company will one day yield me something for my time and patience.

I wouldn’t hold my breath on that though!

Additional Reading:

  • Great article by MetroActive about Nolan Bushnell and uWink and the automation of the restaurant industry

New to the uWink story?

  • Start: with my initial buy recommendation and company overview here.
  • OR: read about uWink’s latest deal to test their terminals at a Chili’s Too Margarita Grill, and possible expansion plans to other Chili’s restaurants here.
  • OR: Read my last post regarding uWink’s future as a stand alone company here.
Source: uWink's Tender Offer Reduces Possible ROI