VALENCE TECHNOLOGY (VLNC) Message Board

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Technology Stocks : VALENCE TECHNOLOGY (VLNC)

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To: John Curtis who wrote (3589)	8/6/1998 10:38:00 PM
From: Mark Johnson	Read Replies (2) of 27311

I've been discussing the pros and cons with other investors of the financing deal. Here is another point of view on the financing. I've been thinking about the terms of the preferred financing and have come to the conclusion that there is very low probability that the financiers would short the stock at current levels. Under the terms of the agreement one of the Milestone clauses specifies that the common must not trade below $3. There should be solid support by the principal shareholders and/or the company to prevent any attempt to drive the stock below this level. So there is very little upside potential in a short at the current price level (4 13/16 - 5) and a lot of downside risk and/or opportunity cost if the financier were to short at this level. Considering that the preferred shares convert at a 20% premium to the market price, a short sale at the bid only has 1 3/16 points maximum upside potential and unlimited downside under this scenario. I think Valence actually worked out a good agreement with the financiers in that the paltry 6% dividend accrues but does not have to be paid out of cash flow or working capital. If the company is successful with the ramp up and transition to volume production, the financiers will be in the difficult position of trying to ascertain how high and how quickly the stock will move up. If there is rapid appreciation, the preferred shares will convert into fewer shares of common. If I understand the terms correctly, the first opportunity to convert does not come until six months from the date of the agreement. If the financiers short too soon they could leave a lot of money on the table. They also must try to gauge how many common shares their preferred will convert into before deciding how many shares to short. If they short more shares than they can ultimately convert into, they could have to cover in the open market and might get squeezed. The financier's interest are actually aligned with ours in the sense that they will benefit from a higher stock price once the conversion has been completed. If they attempt to manipulate the stock price downward before conversion, it will be from a much higher level than at today's price.

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