On 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.

For now, let’s discuss the special dividend that existing shareholders will get if the tender offer works as intended…

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