This excerpt taken from the CNLG DEF 14A filed Jan 9, 2009.
PROPOSAL NO. 3 REVERSE STOCK SPLIT OF THE COMMON STOCK OF THE COMPANY
The Board of Directors is recommending that the Companys shareholders approve a proposed amendment to the Certificate of Incorporation to implement a reverse stock split of the Companys common stock, par value $.01 per share, at a ratio not less than two-for-two and not greater than six-for-one, with the exact ratio to be set within such range in the discretion of the Board of Directors, without further approval or authorization of the Companys shareholders, provided that the Board of Directors determines to effect the reverse stock split and such amendment is filed with the Delaware Secretary of State no later than July 1, 2009 (the Reverse Split).
The shares of Common Stock of the Company have traded at very low prices for some time. In addition, NASDAQ Marketplace Rule 4310(c)(4) requires that in order for Common Stock to continue to be eligible for quotation on the NASDAQ Capital Market, it must have a minimum bid price per share of $1.00 for a period in excess of ten consecutive business days, as well as meeting certain other requirements. On August 26, 2008, the Company received correspondence from NASDAQ stating that for the last 30 consecutive business days, the bid price of the Companys Common Stock has closed below the minimum $1.00 per share requirement for continued inclusion under Marketplace Rule 4310(c)(4). The Company has until May 29, 2009 to regain compliance with NASDAQs bid price rule in accordance with Marketplace Rule 4310(c)(8)(D). If the Company cannot demonstrate compliance with this rule by May 29, 2009, NASDAQ will determine whether the Company meets the initial listing criteria for the NASDAQ Capital Market under Marketplace Rule 4310(c), except for the bid price requirement. If at any time before May 29, 2009, the bid price of the Companys Common Stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, it will be provided written notification that it complies with the rule. Otherwise, the Company will receive notification that its securities will be delisted. We believe that in order to maintain the Companys NASDAQ Capital Market listing, the implementation of the Reverse Split is in the best interest of the Company and its stockholders.
A delisting of the Companys Common Stock may materially and adversely affect a holders ability to dispose of, or to obtain accurate quotations as to the market value, of, the Common Stock. In addition, any delisting may cause the common stock to be subject to penny stock regulations promulgated by the Securities and Exchange Commission. Under such regulations, broker-dealers are required to, among other things, comply with disclosure and special suitability determinations prior to the sale of shares of Common Stock. If the Common Stock becomes subject to these regulations, the market price of the common stock and the liquidity thereof could be materially and adversely affected. The Board of Directors would authorize the Reverse Split to reduce the number of outstanding shares with the expectation that each shares will trade at a higher price.
Shareholders should recognize that once the Reverse Split is effected, they will own a fewer number of shares than they currently own (a number equal to the number of shares owned immediately prior to the Reverse Split divided by a number between two and six). While we expect that the Reverse Split will result in an increase in the per share price of our Common Stock, the Reverse Split may not increase the per share price of our Common Stock in proportion to the reduction in the number of shares of our Common Stock outstanding. It also may not result in a permanent increase in the per share price, which depends on many factors, including our performance, prospects and other factors that may be unrelated to the number of shares outstanding. The history of similar reverse splits for companies in similar circumstances is varied. Furthermore, the liquidity of our Common Stock could be adversely affected by the reduced number of shares that would be outstanding after the Reverse Split. Consequently, there can be no assurance that the Reverse Split will achieve the desired results that have been outlined above.
In addition, the Reverse Split will likely increase the number of shareholders who own odd lots (stockholdings in amounts of less than 100 shares). Shareholders who hold odd lots typically will experience an increase in the cost of selling their shares, as well as possible greater difficulty in effecting such sales. Any reduction in brokerage commissions resulting from the Reverse Split may be offset, in whole or in part, by increased brokerage commissions required to be paid by shareholders selling odd lots created by the split.
The Reverse Split will be realized simultaneously and in the same ratio for all shares of the Common Stock. All holders of Common Stock will be affected uniformly by the Reverse Split, which will have no effect on the proportionate holdings of any of our shareholders, except for possible changes due to the treatment of fractional shares resulting from the Reverse Split. In lieu of issuing fractional shares, the Company will round up in the event a shareholder would be entitled to receive less than one share of Common Stock. In addition, the split will not affect any holder of Common Stocks proportionate voting power (subject to the treatment of fractional shares), and all shares of Common Stock will remain fully paid and non-assessable. The Reverse Split is a transaction rather than the first step in a series of transactions and will not cause the Companys common stock to be held of record by less than 300 persons.
The authorized capital stock of the Company consists of 30,000,000 shares of Common Stock, having a par value of $.01 per share and 2,000,000 shares of Preferred Stock having a par value of $.50 per share. There will be no change in the number of authorized capital stock or the par value of the Common or Preferred Stock as a result of the Reverse Split. As of January 6, 2009, the Company had 2,868,714 shares of Common Stock issued and outstanding (not including treasury shares).
Based on the number of shares currently issued and outstanding, immediately following the Reverse Split the Company would have approximately 1,434,357 shares of Common Stock issued and outstanding (without giving effect to rounding for fractional shares) if the ratio for the Reverse Split is 2-for-1, and 478,119 shares of Common Stock issued and outstanding (without giving effect to rounding for fractional shares) if the ratio for the Reverse Split is 6-for-1. Any other ratio selected within such range would result in a number of shares of Common Stock issued and outstanding following the transaction between 1,434,357 and 478,119 shares.
The Board of Directors will determine the exact ratio of the Reverse Split and the actual time of filing of the Certificate of Amendment, provided that such amendment is filed no later than July 1, 2009. The Reverse Split will be effective upon the filing of a Certificate of Amendment to the Certificate of Incorporation with the Secretary of State of the State of Delaware.
The Board reserves the right, notwithstanding shareholder approval and without further action by shareholders, to elect not to proceed with the Reverse Split if the Board determines that the Reverse Split is no longer in the best interests of the Company and its shareholders.
If the Reverse Split proposal is approved by the Companys stockholders, and if the Board of Directors in its discretion still believes at that time the Reverse Split is in the best interests of the Company and its stockholders after the Board of Directors votes in favor of effecting the Reverse Split, the Reverse Split will be implemented by filing a Certificate of Amendment to the Companys Certificate of Incorporation with the Secretary of State of the State of Delaware, in the form of Appendix C hereto, and the Reverse Split will become effective on the date of the filing (the Effective Date). We will obtain a new CUSIP number for the new Common Stock effective at the time of the Reverse Split. Stockholders who held shares of the Companys common stock as of the close of business on the Effective Date (Record Holders) will be notified as soon as practicable after the Effective Date that the Reverse Split has been effected. The Companys transfer agent will act as its exchange agent (the Exchange Agent) to act for the Record Holders in implementing the exchange of their certificates. As soon as practicable after the Effective Date, Record Holders will be notified and requested to surrender their certificates representing shares of pre-split common stock (Old Common Stock) to the Exchange Agent in exchange for certificates representing post-split common stock (New Common Stock). Any fractional shares resulting from the Reverse Split will be rounded up to nearest whole number. At the Effective Date, each lot of between 2 and 6 shares of Old Common Stock issued and outstanding immediately prior to the effective time will, automatically and without any further action on the part of our shareholders, be combined into and become one share of New Common Stock, subject to the treatment for fractional shares described above, and each certificate which, immediately prior to the effective time represented Old Common Stock, will be deemed cancelled and, for all corporate purposes, will be deemed to evidence ownership of New Common Stock.
As soon as practicable after the Effective Date, a letter of transmittal will be sent to shareholders of record as of the Effective Date for purposes of surrendering to the transfer agent certificates representing Old Common Stock in exchange for certificates representing New Common Stock shares in accordance with the procedures set forth in the letter of transmittal. No new certificates will be issued to a shareholder until such shareholder has surrendered such shareholders outstanding certificate(s), together with the properly completed and executed letter of transmittal, to the Exchange Agent. From and after the Effective Date, any certificates representing Old Common Stock which are submitted for transfer, whether pursuant to a sale, other disposition or otherwise, will be exchanged for certificates representing New Common Stock. SHAREHOLDERS SHOULD NOT DESTROY ANY STOCK CERTIFICATE(S) AND SHOULD NOT SUBMIT ANY CERTIFICATE(S) UNTIL REQUESTED TO DO SO.
The number of shares which will result in fractional interests cannot be precisely predicted as the Company cannot determine in advance the number of stockholders whose total holdings are not evenly divisible by the exchange ratio. It is not anticipated that a substantial number of shares will be required to be issued.