| |
Re: KNIC's "little dip" today
I've copied and pasted this post here for all remotely involved in KNIC. Please read this article and realize what is going on with KNIC and other stocks in a similar situation.....some of which even you all may be holding, and not know it.
Here goes:
Subject: LL Knickerbocker(KNIC)/Pure Energy Corp
| Previous | ------ | Respond |
To: +M.Hicks (137 )
From: +Juan Dominguez
Jan 23 1997 1:30PM EST
Reply #143 of 143
Pirate's Play --THE OFF-SHORE GAME
Hey Mike, thanks for the re-cap. For new or old KNIC investors that want to know
what happened to KNIC when it came down from 12 to 5.50, here is the article that
put the SEC on notice for KNIC and other stocks, hence the reason for KNIC
suspending the conversions> Here is is the BARRON's article as seen on the January
4th issue:
Pirates' Play?
Offshore dealsters have found a new way to beat U.S. investors
Jaye Scholl
he offshore dealsters are at it again, and it looks like they've been reaping
tidy profits at the expense of unsuspecting U.S. investors. In three deals that
Barron's has learned about, offshore investors have been getting cheap shares of
U.S. companies through special convertible debenture offerings. As the charts
below show, the share prices of the companies involved have a mysterious habit of
dipping just before the debentures are converted, giving the offshore buyers that
much more of a bargain.
The convertible debentures involved are cousins to securities sold under Regulation
S, the controversial 1990 amendment to the federal securities laws that allows U.S.
companies to sell unregistered stock to foreigners, usually at big discounts to the
prevailing market price. After 40 days, foreign investors can sell these securities
back into American stock markets. The flood of new shares often results in much
lower stock prices (Barron's, April 29).
If anything, the Reg S convertible debentures can hurt existing shareholders even
more than Reg S stock sales because of the greater potential for massive dilution.
Editek, a North Carolina company that sells diagnostic kits to test on-site for drug
abuse and for toxins in agricultural products, actually ran out of shares during a
convertible debenture conversion in April. The process sent Editek's stock reeling,
and the company, with 18 million shares outstanding, was faced with having to issue
a further 32 million shares.
Thanks to new SEC disclosure requirements that took effect in November,
shareholders can find out if a company has sold Reg S convertible debentures. If it
has, watch out, because, based on the evidence so far, a plummeting stock price is
likely to follow.
Offshore investors have been converting their
debentures into common stock at just the right
moment: when the common's price is depressed. A
mere coincidence? Don't bet on it.
Reg S convertible debentures work the
opposite way from your garden variety
convertibles. Most investors buy convertible
bonds expecting to receive interest payments
while waiting for the stock price to
appreciate. They convert after the stock price
has risen above the agreed-upon conversion
price. But in Reg S convertible debentures,
the conversion price is typically set by taking the average price of the stock over
the five days leading up to the conversion date. For a kicker, the company gives
investors a further discount from that final conversion price. Obviously, the lower
the price of the stock, the better the deal for the convertible debenture investors.
As the charts show, at Editek, Chantal Pharmaceutical and Ponders Industries
steep dips occurred in the days leading up to conversion, and trading volume
soared as sellers unloaded the stock.
Last January, Editek, which trades on the American Stock Exchange under the
symbol EDI, relied on Reg S convertibles to raise $20 million for its acquisition of
Medtox, a St. Paul, Minn., company that makes medical diagnostic kits. Editek's
stock began a long descent in January, falling from $3 a share to around 53 cents in
April, the point at which the conversion took place.
Too Many Shares
At that bargain-basement price, investors were able to convert their holdings into
millions more shares than the company was authorized to issue, and the company
stopped converting. Investors sued Editek for the additional shares. Editek's
management, at least one of whom had participated in a Reg S convertible
debenture deal at another company, resigned. New management says it intends to
honor the conversions to those investors whose trading records prove they weren't
part of an organized effort to drive down Editek's stock price in the days before the
conversion.
Another player in the new Reg S convertible debenture game is Chantal
Pharmaceutical, a name familiar to Barron's readers (Jan. 8, 1996). This cosmetics
manufacturer claimed it had sold $10 million worth of an anti-aging cream from July
through September 1995. But investors reacted negatively when they learned that
one entity, Chantal's distributor, was virtually the company's only customer.
Moreover, the distributor had the right to sell his entire company - lock, stock and
$10 million worth of unsold Chantal inventory - back to Chantal, an exit strategy
that made the sales data highly questionable.
Chantal subsequently restated its financial results, revealing a substantial loss. The
stock, which had traded as high as 28 1/8 a share in Dec. 1995, fell in subsequent
months. It hit a new yearly low of 2 1/2 in August when its auditors resigned.
Now Chantal has disclosed in its most recent financial statements that it raised $5.2
million in a Reg S convertible debentures deal that took place Oct. 30. The terms
called for conversion of one-third of the debentures into common stock shares 45
days later, on Dec. 14. The price set in October was to be the lesser of $3.91 a
share or 80% of the average closing price in the five days immediately preceding
the conversion date.
Lo and behold, Chantal's stock sank to new lows in the days leading up to
conversion, averaging 1 7/8 a share between Dec. 9 and 13. With the 20%
discount, the December conversion appears to have resulted in an additional 1.1
million shares outstanding.
Another case in point is Ponder Industries, an oilfield-service company. It halted
conversion of its 8% Reg S convertible debentures in July. That's when its stock,
which had traded at $6 a share in April, slid to 1 1/2 - just before requests to
convert came pouring in.
A debenture holder sued Ponder in the U.S. District Court for the Western District
of New York for failing to honor the conversion agreement. Ponder has filed a
counterclaim in the same district court against the debenture holders. The suspicion
is that the purchasers of the convertible debentures shorted Ponder shares,
expecting to cover their shorts with cheap stock they received from the conversion.
Ponder Chief Executive Larry Armstrong says he received guarantees from the
dealmaker involved that Ponder's stock price would be protected from a bear raid.
The guarantee fell apart, he says, which is why Ponder halted the conversion.
So far, the SEC has not commented on Reg S convertible debenture deals. But
based on a review of filings with the SEC, the incidence of these deals is on the
rise. And, no surprise, the companies relying on them aren't portraits of financial
health.
Solv-Ex, for example, has a $13 million Reg S convertible debenture deal under
way. As Barron's readers may recall, federal authorities are reportedly investigating
trading in Solv-Ex stock to determine whether convicted stock swindlers Arnold
Kimmes and Thomas Quinn are involved. The Albuquerque company, which claims
to have a method of extracting oil and other minerals from oil sands in Canada, has
denied knowledge of an investigation.
Why were Reg S debentures invented? They appeal to offshore dealsters because
they can be converted into common stock quickly and that stock can be sold in the
U.S. market almost immediately. This eliminates some of the risk associated with
traditional Reg S common shares, which must be held offshore for at least 40 days.
Ironically, by forcing companies to disclose traditional Reg S deals within 15 days,
the SEC may have promoted the increased use of these rapid-fire Reg S
debentures. Close a door, they crawl through a window.
| Previous | ------ | Respond |
| Return to Miscellaneous (General) | View SubjectMarks | Bookmark this Subject |
Send questions and feedback to webmaster@techstocks.com |
|
