Interesting. I missed that when I read those reports. I saw that the convertible preferred had to be redeemed starting in 2001, but missed that the redeemable preferred had to be redeemed starting in June. They can pay in cash, but have declared their intention to pay in stock. Thus the holders can aggressively short the stock in anticipation of getting their shares. Nevertheless, this is not a floorless convertible, which is a very, very bad thing, something that can and has destroyed many companies.
There are three limits on this issue. First of all, only a small amount is to be converted in any quarter. Secondly Ampex has the option of paying in cash, and a cash payment combined with a strong stock price would foil any systematic shorting. And thirdly the price of the stock is the higher of the fair market value or $2.50, so these holders can't drive the stock below $2.50. Zeev is the resident expert in floorless convertibles. Perhaps he will step in with an opinion.
My suggestion to Ed is to in future quarters indicate that he intends to pay in cash, but may elect to pay in stock. This would help to keep the holders off guard and prevent them from shorting (though not from selling after the close of the quarter). Better yet, just pay in cash thus allowing the stock to rise.
The best defense would be a rising stock price which makes the number of shares to be issued inconsequential. The other thing I would strongly urge would be to raise sufficient cash so that these can be redeemed in cash. With the price at 4 these holders are entitled to sell 5,000 shares every trading day for the next 10 years, which will slow the rate of increase of the stock. If the price falls to $2.50, they can sell 8,000 shares a day, but at $8 they can only sell 2,500 a day, and at $20 only 1,000 per day. Thus to me the best plan would be to redeem in cash for a year or so to allow the stock to rise from here.
Carl
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