PH, the AND convert is interesting. Here's the paragraph from the proxy:
The Notes were issued on June 10, 1998 in the outstanding principal
amount of $10,753,000, and bear interest from the date of issuance at a rate of 6% per annum. With respect to any portion of the Notes converted prior to their maturity, accrued interest is payable on such portion at the time of conversion, otherwise accrued interest is payable at the maturity of the Notes. At the option of the Company, interest is payable in the form of cash or shares of Common Stock at the conversion price then in effect. The conversion price for the Notes is the average of the two lowest closing prices of the Common Stock during the 30 trading days preceding any date of conversion, subject to a maximum conversion price of $16.125 per share. The maximum number of shares issuable upon conversion is 2,100,000 shares. If this maximum number of shares were to be issued and thereafter there is any remaining unconverted principal amount of the Notes,
the interest rate on such remaining principal amount would be increased to 17% per annum. The Company will use the proceeds from the issuance of the Notes primarily for working capital requirements. While any conversion of the Notes would increase the number of outstanding shares of Common Stock of the Company, management believes that this dilutive impact would be outweighed by the long-term benefits of this financing.
It appears that, while the conversion price is floorless, should it drop below $5.12 ($10,753,000/2,100,000), some of the notes would no longer be convertible. For example, if the price dropped to $4.00 before any conversions occurred, only $8.4 million of the notes could be converted to common at that price (2.1 million shares x $4). The remaining $2.353 million of notes could not be converted and would become 17% straight debt. It seems that they have at least limited the potential dilution. With 11.1 million shares out now (per Yahoo profile), the convert can only increase it to a max of 13.2 million. Of course, should the stock go into the pennies (and I'm not predicting anything), they could end up with 2.1 mil shares of dilution plus a high seven figure debt with a 17% coupon. Not cheap, but far from usury.
I don't see how you come up with 30% effective interest, BTW. Also, the note holders, as far as I can tell, have no warrants they can exercise and dump to start a death spiral, so they'd have to go out and borrow shares like anyone else if they want to short it. IMO, it's gonna be tough for the note holders to drive it down. OTOH, for all I know it could be a flea ridden dog on its way to the pennies anyway. If that's the case, short away, floorless or not.
Regards,
Bob
PS: PH, don't get me wrong. I'm not defending the company or attacking your idea. It's just interesting to dig into the strange deals some companies get themselves into. Lot's of bad deals get done because trusted advisors ignore their fiduciary duties in order to line their own pockets. Nevertheless, this deal does not look quite so bad when you get into it. JMO. |
