I looked at the S-3 from 9/26, and the one from 10/14, and here's my take on the story:
The company issued convertible debentures last year, which could be converted to common at 26. When they needed additional financing this April and September, their stock had exhibited a lot of recent volatility, and rather than being able to set a firm conversion price, the buyers (this time of convertible preferred stock) insisted that the conversion price be based on whatever range the stock was trading in when they wanted to convert it.
The S-3 dated 9/26 relates to 2,580 of the 5,000 Pfd. B shares issued in April. (I don't know why all of them weren't shown.) The S-3 dated 10/14 relates to all 5,000 of the Pfd. B shares issued in September. To call this a sale or the owners "selling shareholders" is a legal term that does not reflect what is happening. These companies are not abandoning their investments in Cityscape! Note the box that is checked at the top of the S-3's for "date of sale": this is a delayed or continuous sale. In other words, when the holders of the pfd. B shares hold them long enough to convert to common, they may do so if they choose, and then they can sell the common whenever they feel like it.
When the first S-3 came out, Sankar recognized the conversion as a bullish sign, but when the second one came out, he for some reason thought that all the institutions were pulling out. Maybe he was thinking, "they want to convert to common now at 6/share and then immediately sell at 6/share to get out of this investment." However, I'm still thinking, "they want to convert as soon as possible, especially if it's at 6/share, then hold on until it returns to 20 or 30." I still think the overall situation is bullish, though the negative press, the plunge of the stock, and the dillution that will occur by conversion at these low levels is bearish for us little guys.
I do not understand the reason for the S-3 dated 10/14 being issued at this time. Both S-3's read: the Series B Preferred Stock is convertible into shares of Common Stock subject to the following restrictions: each holder is entitled to convert up to 33% of its Series B Preferred Stock after 180 days following the date of issuance; up to 67% (on a cumulative basis) after 210 days; and up to 100% after 240 days ...
I understand that the S-3 dated 9/26 needed to be released now, because now a third of the pfd shares issued in April can be converted, and another 1/3 in November, and the remaining third in December. (Again, I don't know why only 2,580 of the 5,000 pfd. B shares were listed.)
HOWEVER, I don't understand why the S-3 dated 10/14 was released now. Unless I'm missing something, the 5,000 pfd. B shares issued in September can't be converted into common before next March through May. I'd like to hear the company's explanation for this! The S-3 says: Upon the occurrence of certain events, the conversion restrictions will be lifted, the Series B Conversion Period will be increased to 15 consecutive trading days and the conversion discount will be increased to 10%. One example that is mentioned is Change of Control, and I'm sure that if someone is buying the company that would have been announced to everyone, so that's not it. I don't know what other "certain events" are considered, or if they have happened. This is important to us, because we suffer more dillution if the pfd. B holders convert now at 6 than we would if they convert next March through May, by which time the stock will hopefully have rebounded. Furthermore, according to the analysts in the American Banker article that Sankar posted, the very issuance of the S-3 of 10/14 played a part in the stock's dive -- so why was it issued now and not next March?
As far as the April buyers of the pfd. B who can now convert 33% of their shares to common, the question they have to ask themselves is: would it be better to keep the 6% dividend, or forego it and convert to common, and hope for a future capital gain. Obviously, since I thought the stock was a buy at 10, I think it's an even better buy at 6, so if I were them, I'd convert now. Then I'd hold it until it appreciated and I was satisfied with my gain. |
