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Strategies & Market Trends : Shorting stocks: Broken stocks - Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Ken Brown who wrote (866)	2/9/1998 11:32:00 AM
From: Ken Brown	Read Replies (1) \| Respond to of 2506

Re: IDMC John said go ahead, so here's his writeup from 12/21/97: ###################################### Some comments on Puck's find: IDMC - a discounted convert: The co. indeed looks pretty poor. The discounted convert will also favor shorts -- it is not of monumental proportions, but it is big enough to have an effect. The $3 M of discounted converts, if they convert at $2.75, will create 1.1 million shares. Considering that there are 14 M shares out, with a float of 13 M, the 2.7 M new shares would add about 8% to the float, which is a little below average for discounted converts. However, the warrants to purchase 2.6 M shares will double the dilution. The volume is high, at 370 k shares per day. So the market might be able to absorb the new shares fairly quickly. That makes me wonder whether the conversion has already started, or even finished by now. Many discounted convert deals have warrants that act in a way to reduce the damage to the stock price. Here this does not appear to be the case. The exercise price is not fixed, but can diminish with the stock's market price. So there is apparently no incentive for the offshore boys to avoid bashing the stock price: <<The Convertible Notes are convertible into Common Stock at the lesser of (i) $2.75 per share or (ii) 75% of the average closing bid price of the Common Stock during the five trading days prior to conversion. The Three Year Warrants are exercisable for a three year period at the lesser of $3.00 per share or the lowest conversion price of the Convertible Notes.>> =========================== It IPO'd in 1994. The underwriter was Stratton Oakmont (unfamiliar to me). The auditors are not among the big six. During the 7 months ending 9/30/97, they had negative cashflow from operations of $7 M. In the latest 10Q, they said they expect cashflow to become positive: <<Since 1994, the Company has consistently generated negative operating cash flows. The primary reason for this was due to the Company's policy of successfully bidding new work at lower than normal margins in order to penetrate strategic markets serviced by the Company's newly opened regional offices. Now that the Company is established in these markets, the Company has been bidding work at normal margins. Management of the Company believes, based on the current backlog of work and expected work to be awarded based on bids outstanding, that future operating cash flows will be positive.>> I assume the above is a risk factor for shorts: if cashflow improves, earnings probably will too, so there is a risk of favorable news in future earnings reports. ============================== Insider transactions this year: two sales of shares generated by options exercises by the CFO and a director. Share ownership is 10% insiders, and apparently zero percent institutions (according to MarketGuide, which might be wrong). ANyway, that means that almost all the shares out are in the float, so it might be a reasonably easy borrow, and one that is relatively safe from short-squeezes driven by insiders moving their shares about. ============================== The revenue and earnings record looks pretty erratic. Note the negative revenue recorded in the June quarter -- I assume this is related to the overstated revenues in the March quarter. I'm not sure how this record of revenues and earnings is consistent with an $80 M market cap. HISTORICAL QUARTERLY RESULTS REVENUE (Thousands of U.S. Dollars) 1994 1995 1996 1997 1st Qtr MAR 3,646 6,009 7,482 8,265 2nd Qtr JUN 2,555 12,576 3,750 -442 3rd Qtr SEP 13,142 14,230 4,021 5,369 4th Qtr DEC 9,190 6,589 3,578 EARNINGS PER SHARE (U.S. Dollars per share) 1st Qtr MAR 0.010 -0.140 0.130 0.120 2nd Qtr JUN -0.180 0.040 -0.590 -0.550 3rd Qtr SEP 0.120 0.000 -0.270 -0.160 4th Qtr DEC 0.080 -0.570 -0.850