Saturday, March 22, 2008

Initial DDE Plan for discussion

Initial Plan for DDE:

I am proposing a multi-phased approach to winding down DDE operations and providing shareholders with the opportunity to choose from among a number of options to cash out of DDE. These plans basically involve a buyback strategy and there would be no expectations of additional dividends from DDE, with the ultimate goal of my acquiring total ownership of all DDE assets. However, there is still the possibility of a liquidation and one-time payment for shareholders, as outlined below.

First, a bit of background.

DDE was formed in April 2006, with the purchase of my first sim in Second Life. It operated privately for almost a year. DDE went public in march 2007 with an initial public offering of 1,000,001 shares - of which 500,000 were offered for sale at 1L per share. Anyone lucky enough to have bought shares at that time would have made an equal amount in dividends per share, plus 10% - DDE disbursed 1.1L per share in 12 months, which represents over 3,000,000L in dividends alone. Subsequently, DDE made two secondary offers. the first, of 1,000,000 shares in June 2007 at a price of 2.50L per share, and the second of 2,000,000 shares in November of 2007, at a price of 2.75L per share. Finally - DDE acquired Delicious Skins in December, 2007, and all shares of DSE were rolled into DDE at a conversion rate of 3:1, leaving DDE with a total of 4,432,439 shares.

The DDE share price has moved between 1.75 and 4L per share during the history of its trading, with a NAV of between 2L and 6L per share - depending on the month and the value of land in SL at the time, and the number of shares outstanding. The overall average price of DDE trades is in the neighbourhood of 2.75L per share.

My foremost aim in all of this is to be fair, and i need my shareholders' feedback about what is the fairest way to deal with the delisting of DDE and the subsequent winding down of the public operations of the company. I have always posted financial reports of assets based on the purchase price of estates, and the prevailing price of mainland. Financial reports were not posted as liquidation value. In order to provide shareholders with a fair liquidation value of DDE - i provide the following:

Shares outstanding: 4,432,439
Estates owned: 23 (19 regular and 4 low-prim sims)
Liquidation value per sim: $1300 USD per regular, $350 per low-prim sim
Cost of island transfer: 100x21 = 2100 USD
Total estimated liquidation value: $24,000 USD = approx 6.500,000L
Mainland owned: 94,412m
Estimate value on disposition: 850,000L

Other assets held in trust, but not liquid:
WSE assets: approx 500,000L in cash and HCL & WTF shares

Available cash on hand - 0L - current cash balance (662,000L) must be used kept in reserve and used to pay tier and transfer fees on estates and mainland during a possible liquidation - if I default on tier payments - everybody loses ;-)

Total liquidation value of DDE: 7,350,000L
Total liquidation value per share: 1.66L per share.

This assumes rapid liquidation of all assets at a lower price than normal in order to expedite sale, and may be slightly higher or slightly lower depending on how the sale of assets proceeds.

In terms of operations, in broad strokes, DDE takes in approximately 2.5 - 3.0 million Lindens per month in revenue and has costs of approximately 2m Lindens per month - for an estimated monthly profit of between 500,000L and 1,000,000L per month.

So, I guess the first question to ask is - should DDE liquidate and provide the maximum possible to shareholders in the short term (within a month in all likelihood). This would not be my preferred approach - selling what i have built over two years in a fire-sale is not an appealing prospect to me. But if the majority of shareholder votes want this option then I will consider it seriously.

My preferred approach would be to offer shareholders two options to cash out of DDE. For those that wanted to cash out immediately - i would sell off some parts of my holdings in order to provide a buy-out of 1L per share within the next two weeks, if at all possible - of course it depends on the number that want to take this option - but at any rate as quickly as possible. Although this is less than the liquidation value - it is not much less, and would provide any investors that need to cash out quickly at least an option. For those that wish to remain shareholders in order to receive a higher value for their shares, I would propose to use most of my operating profits to buy back shares at 3L per share as cash becomes available. I would expect this to take about 12 months – but it would provide shareholders with ongoing payments over that time. It is all dependent, of course, on the continued cooperation of Linden Research in not changing land policies dramatically.

This would also provide shareholders that bought shares in the initial or a secondary offer at either 1.00L per share or 2.50L per share or 2.75L per share the chance to make a profit on the shares, in addition to the dividends that they have already received. It is also higher than the last market price of DDE (2.84L per share on January 6th, 2008, when the WSE closed)

Shares would be bought back in proportion to the number of shares owned. For example, in a fictional company with 5 shareholders holding 500,000 shares, and a monthly profit of 120,000L:

Fictional Unlisted Company (FUC - lol): total shares: 500,000
Shareholders
A 250,000 shares: 50%
B 150,000 shares: 30%
C 50,000 shares: 10%
D 40,000 shares: 8%
E 10,000 shares: 2%
Total: 500,000 shares: 100%

Profit for buyback: 120,000L at 3L per share
shares would be bought back as follows:
A 20,000 shares bought, 60,000L received
B 12,000 shares bought, 36,000L received
C 4,000 shares bought, 12,000L received
D 3,200 shares bought, 9,600L received
E 800 shares bought, 2,400L received
Total: 40,000 shares bought, 120,000L received

New share totals:
A 138,000 shares: 30%
B 46,000 shares: 10%
C 230,000 shares: 50%
D 9,200 shares: 2%
E 36,800 shares: 8%
Total: 460,000 shares: 100%

It may be possible during the approximately 12 months to make "one-time" offers to buy back shares at somewhere between 1L per share and 3L per share depending on when the buyout would be requested, but I cannot promise this. I would also prefer to buyout all small shareholders (<1,000 shares first) simply to keep managing the books easier. There are a total of 309 DDE shareholders, of which 200 hold fewer than 1,000 shares. It would be far easier for me if I could buy out all of these shareholders first, at a total cost of under 100,000L at 3L per share.

I am open to other models - but this is the one I am proposing now as a way to ensure that shareholders receive a decent return, and I am not forced to lose everything i have built during the two years i have been building DDE. Hopefully shareholders think this is a fair offer.

Other possible options include a graduated buyout. I have not thought this through entirely, and would need to model the numbers more exactly – but I want the idea out there for discussion:
Tier 1, immediate: 1L per share
Tier 2, within 3 months: 1.50L per share
Tier 3, within 6 months: 2.0L per share
Tier 4, within 9 months: 2.50L per share
Tier 5, within 12 months: 3L per share

In addition, I might consider retaining a SMALL number of large investors in DDE moving forward (fewer than 10 would be ideal). If anyone is interested in this – please let me know – but I would expect each to have no less than 200,000 shares, and it would have to predicated on a plan that allows for me to control at least 50% +1 of DDE shares.

I would like to keep everything transparent and open by posting details of all transactions - I am considering options for creating a web page to do that - but i am not very technical - lol - so we will see what i come up with. I will need all investors that are participating in this to join the Delicious Demar
Enterprises group - since this will be the only inworld method of communication. Details will also be posted on the blog - and possibly on the new web page mentioned above.

So... hang on to your hats, people, it's going to be a fun ride - I really want to provide you all with fair value for your trust in me, and am happy to answer any questions of concerns that you might have. Please feel free to IM me inworld, or leave a comment on my blog at http://deliciousdemar.blogspot.com . This is also listed on my profile. It may take me a little while to answer – I have been, and expect to be, a little swamped with messages.

I will be calling a few shareholder meetings – but since they are typically very poorly attended, i think we will have to rely on email, offlines messages, etc.. to do this.

17 comments:

Anonymous said...

But in the total shares are you considering also your ones?

Besides: is it possible to liquidate all minor shareholders (<200,000 shares)with 2L$ within 1-2 months?

Delicious Demar said...

Yes, that includes my shares - thanks for reminding me - lol.

I have 1,016,251 shares right now.

And it might be possible to buy out small investors for 2L per share, but only if i sold a significant amount of assets. I will crunch the numbers on that.

Oh, and please tell me who you are at the bottom of a comment if you are Anonymous - I may want to follow up with you inworld to discuss your ideas...

dd

Anonymous said...

In this way i think (it's an HP) you should spend "only" 3,500,00 L$ within 1-2 month, reducing your activity but not closing it.

Alessandrocr Albatros said...

I don't understand very well this point:
"Other possible options include a graduated buyout. I have not thought this through entirely, and would need to model the numbers more exactly – but I want the idea out there for discussion:
Tier 1, immediate: 1L per share
Tier 2, within 3 months: 1.50L per share
Tier 3, within 6 months: 2.0L per share
Tier 4, within 9 months: 2.50L per share
Tier 5, within 12 months: 3L per share"

Does It mean that immediately we will receive 1L$/share, after 3 months other 0,5L$/share...etc etc? If it is not, you can see also this possibility... ;=)

Delicious Demar said...

i see what you mean Alessandrocr. I am working the numbers now to see if that is possible.

I am looking to see how i can increase my cash in the short term to buyout investors that want to cash out immediately - but we may be able to do a graduated payment like you are suggesting.

keep the suggestions coming!

dd

Tomac Sewell said...

i´m sad to see DDE leave WSE, but i do understand your reasons for leaving WSE.

#So, I guess the first question to ask is - should DDE liquidate and provide the maximum possible to shareholders in the short term (within a month in all likelihood).#

My answer to that is a big NO.

I´m a major shareholder (350.475 shares), but it is not about the money.I had a great time being part of you building probably the best company in sl, i would really hate to se it end with a liquidation.
so i do prefer your second option or should i say your third option, i would gladly stay on in a new slim version of DDE.
so let us talk a little about that option, if you move on with 10 or less shareholders, the buy back from the other shareholders would be possible in something like 5-6 month. (paying 3L per share)

what you need to get 50%+ is 1,2million share at 3L = 3,6million, if we look at the current profit, and assume that approx. 700K ca be used for the bye back each month it will take 5,14 month for you to get the 50%+ of the shares.
the remaining shares up to 2,2mil.(including their present holding of shares) will be bought by the "new" investors at the same price 3L.
the buy back will start with the smallest shareholders,and if anyone want to sell their shares faster and cheaper, and DDE are able to buy them,the profit will go to DDE to buy back more shares.
i think a time frame of 5 month, and everybody making a profit, isn't that bad a deal, and this way DDE doesn't have to sell out of its assets.

Delicious Demar said...

thanks Tomac - I see some real possibilities there.

Pablo pointed out to me that it might not be fair for me to use company profits to buy shares for myself... not a bad point actually.

He also suggested that what I might consider is paying myself a salary with part of the profits (never done that so far...), and I thought maybe paying some dividends as well - and then with my portion of the dividends, and my salary, buying up shares for myself...

too many good ideas. but keep em coming and i will sort them all out and then present a revised document with some more tangible options to choose from.

dd

Tomac Sewell said...

under normal circumstances i would agree with you, and pablo, but this is not normal, we have a situation here that we need to fix.
Letting the company buy you 1,2 mill. shares, is in my view, just paying you for the time you have worked for free, this would equal something like paying you 200k a month, which is not that much considering how much work you have put into DDE....not a bad point either actually. :D

Of course i cant speak for the other future shareholders, but i have a feeling they will agree.

Alessandrocr Albatros said...

Hi tomac... personally I think that we schould divide the problem in two parts: major shareholders (>200,000 shares, >= 5%), minor shareholders (<200,000 shares, <5%). All that becuase major shareholders, probably, want to stay in DDE: their investement is moved not only from a speculative aim...

So to refund minorshareholder DDE can pay them 2L$/share immediately and stop (3,500,000 L$?)or refund them with three 1L$/share instalments every 6 weeks... These are only examples...but this is my thought! :=)

Tomac Sewell said...

Hi Alessandrocr.

i don't agree that we have 2 separate problems here, major and minor shareholders are linked so tight together that you cant split them into 2 separate issues.

if she was to follow your plan without some agreement with the 10 major shareholders, he would either have to pay everyone 2L/share = 6,4 million, or pay out 3,2 million every six week.
that is simply not possible.
even if we say that the major shareholders say okay, we can wait, Del would have to pay 2.4 million or 1.2 million every six week. still not possible. She would have to sell half the company and that would for sure make the big shareholders, say no thank you.
I can only see 3 options here.
1. Total fast liquidation
2. the plan i put forward, or similar
3. DDE keep going business as usual, and some kind off broker office is set up to trade shares , making Del able to buy up shares.

that is how i see it, i know of course there are other solutions, and i hope people will keep suggesting solutions.

Alessandrocr Albatros said...

Are you sure about your calculations? Because my ones told me a different result! However only DD has precise data, so we can only suggest her solutions, but not plans because we haven't information enough (also in my precedent suggestion numbers aren't sure)!

Anonymous said...

Hi everybody,

first of all I'd like to take my hat off to Del for the professionalism and fairness she's handling the situation with.
Further, I'd also like to emphasize that - although being a very small investor myself - I'd like best to stay invested in DDE and would hate nothing more than a fast unprofitable liquidation.

That said, I just want to point out that paying out the small investors first may be picked up as a sort of disadvantage by the bigger investors. I think in general no differences should be made between 'small' and 'big' investors - every offer that might be put forth in the future should always be available to all investors as a matter of principle. Let me explain what I mean with one example: For instance, to 'clean up' the amount of accounts to track (a very understandable objective), an offer could be made to everybody to once sell a non-splittable chunk of 1000 shares for 3L - take it or leave it. This way, lots of small investors wouldn't have to be tracked any more without having to worry about where exactly to draw the line between 'small' and 'big' investors, thus not alienating shareholders living close to that line (from which side ever) and actually preferring to dwell on the other side (for whatever reason)... ;)

So - my advice: every offer should in principal be open to all investors as long as they can affort it.

Best regards,

Positron Sands

Anonymous said...

Positron, and for who wants sell his asset within 3 month?

Anonymous said...

Dear Del and DDE shareholders,

I own 5% of DDE and, if Del is willing to continue her amazing job, I’m against any fast liquidation of DDE assets.

However, I understand that some people may wish to sell their shares and get out of the company.

My suggestion to Del is to calculate how many shareholders are looking to leave and the cost of it (the sooner they want to be out, the less they get).

Then, instead of selling positive assets of the company, which generates profits, ask to the remaining investors a new capitalization aimed to acquire those available shares. This plan should include a buy back programme from Del with a reasonable profit for those investors willing to participate.

I’m positive that Del has enough credibility to get the cash she needs for this initial and delicate phase. Of course, I’m ready to step in.

Best regards,

Eliale Morigi

Alessandrocr Sands said...

I agree totally with Eliale Morigi. DD schould value how many shareholders want to leave DDE...and, after it, value how much cash she needs for that.

Saethan Zwiers said...

I have <1% but still don't want to see a fast liquidation.. I never bought DDE shares intending to see a quick return. Some sort of tiered payout or payout over time sounds good.

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