"Example: On 9/25/98 a Series C preferred share was worth 10,160 shares of common
stock. The closing price on that day was $2 1/8, which was not the high for the day.
The market was offering the preferred shareholder $21,591 for their $10,000 preferred
share. The easiest way to make the transaction is to sell short 10,160 shares. The
preferred shareholder bought this preferred share in 2/98 and now "sold" this share in
9/98 for an annualized return of 223%, with absolutely no market risk."
Greg,
My take on your example, is that the easiest way to realize the return is just to sell the converted shares long and if you think the price will go down, borrow shares and go short at that position also. This is the quickest way to realize the profit and hedge against decreasing share price - which you know something about because you are in effect creating 2 sources of downward pressure on the stock the short sale and the long sale.
"The question that puzzles me is "why would they ever cover?" I think the answer is that
their broker is obligated to make sure that the preferred shareholders don't sell more
common shares than the Prospectus specifies that they can deliver. The amount they
can deliver is proportional to the number of preferred shares they still own and inversely
proportional to the conversion price."
They need to cover because that is the nature of short sales - the shorted stock at the higher price is borrowed and sold with the hope of buying it back at a lower price later.
With regard to the Series B - I thought it was no longer a factor.
I think the Death Spiral theorists seem to be telling us that convertible preferred holders can adversely affect the price of a particular stock by shorting it and dramatically increasing the dilution. It seems to me that Ancor has structured the deal to try to limit this by capping the total shares that each fund can own. I think it is also interesting to consider the short position and what will happen if it needs to be covered. If you go to the short interest page you will notice the rate per month actually decreased over the past month. If they need to cover this position we should see the rate decrease again this month. If it doesn't we could be in for a lower price and more dilution.
The page is located at:
viwes.com
Type in ANCR and look at the slope of the lines on the graphic of short position.
As I was thinking about it this afternoon and your last post on the conversion price, the last lot of short shares will need to be covered with converted shares (at $1.13) or shares purchased at market price. If there is no bad news, the risk of this short position increases as the preferred shares diminish.
One final thought, the idea you brought up yesterday about using the prospectus to cover shares sold short. This is essentially the way a margin account works. In a margin account there is usually a rule like a 50% cash equivalent for the margin value of the stock borrowed and sold. Does this mean the preferred shares can be used to cover twice as many shares borrowed and sold short?
I hope someone nails this down in the conference call - because all of the above is my best guess.
George D.
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