Warrant and preferred stock

12 Months Ended

Dec. 28, 2012

Warrant and preferred stock [Abstract]

Warrant and preferred stock

(7)           Warrant and preferred stock

In accordance with the Investment Agreement with Oaktree dated November 7, 2012 ("Investment Agreement"), we issued to Oaktree a warrant to purchase 19.9% of the common stock of a wholly-owned subsidiary of the Company.  The warrant was issued pending shareholder approval of an amendment to the Company's Articles of Incorporation to authorize the issuance of Series A preferred stock ("preferred stock").  Upon approval of the amendment at a special shareholder meeting on January 21, 2013, the warrant was terminated and 1,000 shares of preferred stock were issued to Oaktree in accordance with the Investment Agreement.

The preferred stock, which has no par value, ranks, with respect to any matter including any dividend, distribution rights or redemption rights, equally in priority and preference to all of our common stock, except that (i) in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the preferred stock are entitled to be paid out of the assets available for distribution to our shareholders, before any payment is made to the holders of our common stock, in an amount per share equal to 10 cents, and (ii) the holders of the preferred stock have limited voting rights with respect to matters affecting the rights of the preferred stock.

In accordance with the Investment Agreement, the preferred stock will convert into common stock at such time that the $22.3 million of senior convertible notes has been discharged or conversion of the preferred stock would not otherwise constitute a "change in control" under the terms of the senior convertible notes.  As of December 28, 2012, in accordance with the Investment Agreement, the preferred stock will automatically convert into such number of shares of our common stock that would result in Oaktree having received 64.38% of our total common stock on a pro forma fully diluted basis (as defined in the Investment Agreement).  The number of shares of common stock into which the preferred stock will be converted is dependent upon the number of common shares outstanding at the date of conversion.  The number of shares of common stock outstanding may change significantly depending upon the outcome of an Exchange Offer that we expect to commence no later than June 30, 2013 in accordance with the Investment Agreement.  Under the Exchange Offer, we expect to offer the convertible bondholders the option to receive (i) new Term B Loan debt in exchange for its senior convertible notes in a principal amount equaling up to 80% of the principal amount of such holder's senior convertible notes and (ii) shares of common stock.

We allocated $16.4 million of proceeds from the Oaktree term loans to the warrant liability at the issuance date in November 2012. The fair value of the warrant liability was determined to be equal to the estimated incremental equity value of the Company to be transferred to Oaktree upon the issuance of the preferred stock and termination of the subsidiary warrant. This estimated incremental equity value represents the value associated with the increase in Oaktree's ownership from 49.0% to 64.38% of our total common stock on a pro forma fully diluted basis (as defined in the Investment Agreement). We determined the equity value using the fully diluted common shares outstanding as of November 20, 2012 and then derived the estimated incremental equity value attributed to the preferred stock.  In addition, we calculated our business enterprise value using both an income approach and a market approach in order to validate that the estimated business enterprise value implied in our warrant liability valuation was reasonable. The income approach calculation was based on the discounted cash flow method and utilized Level 3 inputs, including our revenue and expense projections, a weighted average cost of capital, and a long-term growth rate. The market approach calculations utilized Level 3 inputs, including our revenue and expense projections, EBITDA multiples determined by current trading market multiples of earnings for companies operating in businesses similar to us, revenue multiples related to recent acquisitions of companies operating in businesses similar to us, and a control premium. The warrant liability is subject to a fair value mark-to-market adjustment each period.

At December 28, 2012, we recorded a fair value mark-to-market adjustment of $4.2 million to adjust the warrant liability to its fair value of $12.2 million. The $4.2 million unrealized gain is recorded in other income (expense), net. The change in the fair value of the warrant liability is primarily driven by the change in the trading price of the Company's common stock.

As discussed in Note 6, Debt, the preferred stock conversion ratio was adjusted in March 2013 from 64.38% to 67.9% of total common stock on a pro forma fully diluted basis (as defined in the Investment Agreement) in connection with a forbearance and additional commitment letter with Oaktree.