Joe, here's another story about convertible financing coming back to
haunt a stock (from today's WSJ):
May 19, 1998
Heard on the Street
PHP's Health-Care Dispute
May Be Harmful for Holders
By LESLIE SCISM
Staff Reporter of THE WALL STREET JOURNAL
PHP Healthcare could benefit from some triage itself, and until it solves its most pressing problems, shareholders may find the situation hazardous to their health.
The most immediate woe: a fight with convertible-preferred-stock holders over whether the operator of physician networks and primary-care health clinics must make default payments of $2.1 million a month. At 15 cents a share, that isn't exactly small change for a company that posted a loss of 37 cents a share for the fiscal quarter ended Jan. 31. It is expected to earn about 50 cents for the full fiscal year.
------------------------------------------------------------------------
PHP Healthcare
Business: Health-care network management
Nine Months
Ended Jan. 31
ÿÿÿÿÿÿÿÿ1998
ÿÿÿÿÿÿÿÿ1997 Revenue (millions) ÿÿÿÿÿÿ$250.9 ÿÿÿÿÿÿ$162.3 Earnings (millions) ÿÿÿÿÿÿÿ-$2.2 ÿÿÿÿÿÿÿÿ-$5.1 Diluted share earnings ÿÿÿÿÿÿ-$0.15 ÿÿÿÿÿÿ-$0.47
LATEST QUARTER (JAN. 31, 1998):
ÿÿDiluted share earnings: -$0.30 vs. -$0.90
ÿÿAverage daily volume: 119,777 shares
ÿÿShares outstanding: 11.5 million
Trailing P/E: 35ÿÿÿÿÿÿÿÿÿÿDividend yield: N.A.
------------------------------------------------------------------------
The spat is related to a delay the company faces in getting millions of new common shares registered for issuance to the convertible-preferred-stock holders under terms of their nearly four-month-old investment pact. The glitch: The Securities and Exchange Commission is seeking more information on an accounting matter. PHP downplays the significance of the delay, maintaining the matter in question isn't big enough to materially affect its balance sheet, and the company defends its accounting practices as proper.
But the delay comes on the heels of criticism by at least one accounting expert of allegedly aggressive revenue recognition and other accounting practices at PHP that already had made it a target of short sellers, investors who sell borrowed shares in hopes of replacing them later with cheaper ones.
The company's shares have plummeted 39% since May 7, when the feud with convertible-preferred holders was revealed. PHP shares fell 2 5/8, or 21%, to 9 7/8 Monday on the New York Stock Exchange.
The preferred-stock deal itself is controversial with some investors. Through a private placement, the preferred-stock holders provided $70 million to the company late in December, but only after obtaining unusually generous investment terms.
How generous? The price at which their preferred is converted into common shares drops as the price of the common stock falls, and the actual conversion price can be as little as nine-tenths of the price of the common at its low point over a given number of trading days.
In other words, as PHP's stock plummets, the preferred stock converts into greater and greater amounts of common, potentially giving the converting preferred stockholders a far bigger stake in the company than that held by owners of the 11.5 million common shares that were outstanding as of Jan. 31.
PHP, based in Reston, Va., arranged the preferred to replace bank borrowings initially used to pay for an $80 million acquisition in October of 18 health-care clinics intended to beef up its managed-care networks in New Jersey. But PHP's current plight is a cautionary tale about acquisition fever at a time of rapid consolidation in health care, financial services and other industries.
It also is a lesson in the perils of adjustable-convertible preferreds, known by some investors as "exploding puts" because the number of shares that the company must issue to the holders can explode if the stock price declines. A put is an option entitling a holder to sell stock at a given price, or in this case a formula instead of a fixed price.
Why did the company agree to such onerous terms? It needed to fund the acquisition, which was agreed to in July. But it didn't secure financing until after debacles at companies such as Oxford Health Plans cast a pall over health-care industry fundamentals.
The possible penalty comes in because PHP promised the preferred stockholders the new shares would be registered by April 1. The matter is taking on urgency because the investors can begin to convert them on June 1 at rates reflecting the stock's weakened condition. In its May 7 filing, the company said it "intends to challenge any attempt to enforce" a fine. The company believes the fine "could be void" before June 1 because it hasn't been in investors' interest to convert so far and, as a result, investors have suffered no harm, says Jack Mazur, PHP's president.
PHP hopes to defuse the threat by repurchasing some or all of the preferred shares, and has $65 million in a bank credit line that can be used for that purpose, Mr. Mazur says.
Mr. Mazur also maintains that the "company is continuing to progress," its revenue line boosted substantially by the July acquisition. But Michael Kaplan, a Standard & Poor's Ratings Group director, says "it's not clear that they have improved" the operations.
|
