Thursday, June 4, 2009

PTF (perusing the filings) - KONA

AlphaNinja - Kona Grill (KONA) went public a few years back. A casual dining story with a tiny footprint but nice growth plans. Unfortunately, per-restaurant results kept underwhelming investors, and the company did not have the capital (or access to it) to expand at the once hoped-for rate. Then this year, the company tried stealing from its investors. Well, to be precise they tried giving management's family completely inappropriate terms in a possible financing. Mill Road Capital has been waging a bit of a 13d battle with the company, taking management to task both for poor performance and mistreatment of regular shareholders. Mill Road's average purchase price appears to be in the $4 range, so they can be none too happy.

In the absence of agreement over the financing, Mill Road offered to purchase the company on May 18th. This resulted in the resignation of CEO Marcus Jundt on the same day.

"Mill Road is therefore pleased to submit a non-binding offer to acquire all of the Company’s shares for cash in a transaction valuing Kona’s total enterprise value at $27.9 million or $4.60 per share for each of the approximately 6.5 million shares currently outstanding. This represents a 101% premium to the closing price of $2.29 as of May 15, 2009 and is 10.5x LTM EBITDA. "

Letter from April 15th:

"On Thursday March 5th, the Company issued Notes to a group of insiders that included the Chairman’s father. The terms granted to insiders were materially more favorable than the terms you offered to Mill Road and other outsiders. Specifically, the Special Committee approved a deal giving insiders a specified maturity date and transfer rights."

Today, Mill Road Capital has proposed an alternative financing to the one management had attempted - the management proposal resulting in shareholder fury at being treated as second class citizens, while offering insiders and their family members special terms.
The terms of today's proposal, which aims to protect regular shareholders:
Dear Mark:
This letter serves as a written submission of a financing proposal by Mill Road Capital L.P. (“Mill Road”) for the review of the Board of Directors of Kona Grill, Inc. (“Kona” or the “Company”). This proposal is intended as a replacement for the currently planned rights offering and would provide the same proceeds to the Company with no dilution to any shareholders. The terms of the proposal are as follows:

Securities: $3.5 million of unsecured subordinated notes provided by Mill Road
Use of Proceeds: Repayment of the March 5, 2009 unsecured subordinated notes and cash for operating purposes
Interest Rate: 12% cash interest paid monthly
Term: 1 year
Warrant Coverage: None

AlphaNinja - Best of luck to KONA shareholders, this management has been a disgrace.

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