STEVE-The Treasury Shares Aren't Enough:A "Big Gun" Demands More..
Lets assume it will cost CCEE $10 million more than it has, and more than the first stage payment BT would pay for CCEE to start the first phase of the assumed BT contract. If you had $10 million and were a professional financier, would you be likely to give it in a lump sum to CCEE for 30 million shares of yet-to-be registered common stock now in the treasury, which stock would, upon registration, have no greater rights than the 112 million shares of common stock already trading?
Of course you wouldn't.
The fact is, for the new ten million dollars you would put into CCEE to fund the part of the BT contract CCEE cannot self-fund, you would not be willing to pay 30 cents a share. Why? Because as recently as July 1997, CCEE traded as low as 30 cents, and if the market continues to be soft (as it has been during the last few days), the stock could end up being traded as low as 10 cents---even though the company is worth the same as it was in October when the price of the stock hit 90 cents.
Rather, you would want preferred stock that gave you, perhaps, some dibs on the BT receivable, as well as a first shot at the other assets if the company sank. You also would insist on conversion rights if the stock price shot up.
Keep in mind that preferred stock does not dilute the share price of the common (or theoretically should not) on a one-to-one basis, while newly registered and issued treasury (common) stock should--(theoretically)-- have that effect.
I presume you and all of the other shareholders would agree that doing the BT deal appears at this juncture at least, to be a good thing for CCEE.
As a consequence of the dynamics of the alternative forms CCEE has available to fund the portion of the performance/start up costs of the BT contract that BT's down payment may not cover (assuming any alternative forms of funding actually exist), if we can be assured that the requested preferred stock authorization is indeed for the purpose of helping to fund the BT deal, management of CCEE would appear to be acting intelligently.
In short, the treasury (common) stock of 30 million shares is not even close to being worth $10 million dollars to an investor who has such a significant sum available for investment, and the treasury stock is therefore best left in the treasury since once it is released and registered for trading, it will dilute, and hence depress the common stock that we hold.
Again I must reiterate, the proposed new authorization could be just as well for a crooked or stupid purpose; and I have no basis other than my optimism and what I think would be logical to believe my scenario of management's good faith is accurate. |
