Hey Shadow, haven't seen you around in a long time. Regarding the alleged $10M in financing, as usual ADOT does not supply any verifiable information. In light of their usual lack of information many investors must speculate on the nature and circumstances of "company news". Here is my speculation on the alleged financing, taken from Jim Cramer's article on death spiral financing:
============================================================
In February, Log On entered into a deal with a couple of firms to raise money
through a convertible preferred according to a "floating" conversion rate that was
meant to offer some downside protection to the holders. Thus the lower the stock
at the time of conversion, the greater number of common shares to be received
by the holders. (Hence , the floorless nomenclature.)
(I tried to get a list of the companies that had done these from the NASD
but they didn't have one. I am trying to compile one by going through
filings but it is taking forever, my apologies. Remember, it is not like they
title the document "Toxic" and burnish a big skull and cross bones on it. It
looks like any financing for convertibles -- many of which are fine
instruments that I have owned from time to time.)
What is so awful about that? For one, a floorless convertible presents, as the
brief from the Log On suit says, "a tempting opportunity for market manipulation."
To use the formula provided: (The document has dozens of little snippets about
how bad these are, which makes me say to myself, hey jokers at Log On, if it
was so easy to find out what poison these are, what they heck were you
thinking? A simple search on the web would have stopped this financing in its
tracks. I am hoping other cfos will see this and know better but they keep doing
them. If the Journal wrote this up, they wouldn't, but there is nothing I can do
about that.)
[The holder of the security] can short sell the company's stock at a
price of "X" per share. A high volume of short selling pushes the
share price down to X-1 or even X-2. The preferred shareholder's
conversion price is then reset to a discounted percentage of X-2.
The preferred shareholder then converts at that lower conversion
price to cover the shares it sold at X, delivers the shares necessary
to cover the short sales and has a large number of shares left over,
which it can then sell at X-2. ... Further, the more the preferred
shareholder can push down the market price, the more profit it
makes on each conversion. If the preferred shareholder short sells
at X per share, it will make much more if it can convert its shares to
cover at X-4, then it will make by covering at X-2. Thus the more the
preferred shareholder can drive the market price down, the more
money it will make per share and the more shares it will receive.
(You have to get this picture of an instrument that gives you more and
more shares the lower the stock goes.)
Hence the term "toxic," or the more colorful "death spiral convertible." The lower
the stock gets driven the more in the driver's seat the convert holders are. In Log
On's case they have hijacked the whole car! Log On alleges in its brief that the
convert holders have driven the stock down so far through massive short sales
that they would now own 8,000,000 shares as every peg down entitled them to
more and more shares. How much is eight million shares? Heck, there are only
8,800,000 shares outstanding!!! Management only owns 3 million shares. (In the
document the whole thing seemed ridiculous. How could this kind of
Trojan Horse be legal? Who checked off on this? What lawyers would not
have seen that this company could lose control of the company if the
stock plummeted? How could they not have seen this coming? I know I
did two years ago and I have told everybody I know about it, and I know
a lot of people. Someone did NO homework here. None. )
Game over! Toxic convert holders 1, everybody else, zilch-mo!! (Remember, it is
the common stock holders I care about. That would be you and me.)
============================================================
thestreet.com
============================================================
It really is too bad that ADOT refuses to put out hard, verifiable facts with any news release. It just leaves everybody to speculate???????
Tom B. |
