re: EA's convertibles and prospects for returning to profitability, I called the CFO today. He was quite straightforward in answering my questions. Recall the EA is a contract electronics manufacturer with several convertibles.
He summarized all the outstanding convertible instruments as:
6% convertible notes:
(these are the ones registered in the April 3 SB-2a, with $4.8 M principal representing a significant fraction of the market cap of $41 M.) The CFO said:
* The registration was deemed effective April 7.
* So far, 25% of the notes have converted to common ($1.2 M principal of the original $4.8 M).
* He doesn't know for sure what the remaining 75% will do (he doesn't know the people or have experience with them), but he speculates that they may be inclined to hope for stock price appreciation in order to make more money than just what is possible on the spread. This is because, as he pointed out, the conversion terms (lesser of $3.395 or 76.5% of market price) give the holder a fixed spread if the stock price is below $4.43, but above that level there is a fixed conversion price that gives them a better return. He speculated that the holders who just wanted to capture the spread as fast as possible have already done so, and the remainders will hope for price appreciation to improve their returns.)
series A preferred and GFL notes:
these are held by the former chairman. Shareholders last month approved a change in the conversion terms on the notes in what amounted to a take-away from the former chairman (I got the feeling from talking to the CFO that the present mgmt isn't extremely friendly with the former chairman). The common shares aren't registered yet, and the co. has no fixed timetable to do so, but expects to do it eventually. When they do, the amount of shares involved will be substantial. Bottom line is these are not a near-term factor for short sellers.
Series B convertible preferred:
There was $1 M of principal, and half of that converted in recent weeks. This one appears to be in play right now.
Ayden 9% convertible notes:
expired earlier this month, so the few remaining notes are no longer a factor.
prospect for 1998:
They expect continued losses for first half of 1998. They have signed up quite a few new customers, and they feel sure the second half of 1998 will show a revenue increase. How substantial depends on how successful the customers products are. Apparently they are new products. (recall that EA is a contract manufacturer of electronics products, especially for communications). There is some possibility of returning to profitability in the second half of 1998. The auditors gave the going concern warning based upon the projection of losses in the first half of 1998, not giving much weight to the company's projection of revenue increases in the second half. The CFO said he had been with the co. for 7 months, and the auditors for many years, during which they have seen 'lots of bad stuff,' the latter referring I suppose to what went on with the previous management.
My comment on this:
If the CFO is right (and he isn't sure) about the remaining 3/4 holders of the 6% notes waiting for stock price appreciation before converting, then they will not apply any more short term pressure on the stock price, but merely apply some selling pressure if the stock goes up. If he is wrong, the stock price will continue to grind down hard. (It's been an impressive decline so far.) The series B convertibles appear to be applying some pressure right now too. The other convertibles are really of no interest to us because there is no immediate prospect of their conversion. |
