Carl, yes, I'm being patient with EA.
For those who don't know, EA is a contract electronics manufacturer that has a tremendous number of below-market convertibles outstanding. These include 1.3 M shares recently registered in an S-3 that we found in our SEC Search Club after it was filed Jan. 26. That filing was for shares associated with a private placement in 1996. I hadn't noticed before, but taking a quick look I see that there was another S-3/a filing January 9 for yet another 1.4 M shares associated with a discounted convert private placement in April 1997.
I doubt if selling has begun yet for the shares being created by the discounted converts for the Jan. 26 filing, but it is possible that it might have begun for those associated with the Jan. 9 filing. To find out for sure, if anybody wants to generate some really useful info, then phone the co. and ask (1) whether either registration has been deemed effective and (2) whether any conversions have been made yet.
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Below is an excerpt from the *Jan. 9* filing:
(3) Represents 1,418,262 shares of the Company's Common Stock into which
certain 6% Convertible Notes due April 30, 1999 in the aggregate principal
amount of $4,815,000 (the "6% Convertible Notes"), issued by the Company in
April 1997 to certain of the Selling Securityholders, are convertible. For
purposes of determining the number of shares of the Company's Common Stock
issuable upon conversion of the 6% Convertible Notes to include in this
registration statement, the Company assumed a conversion price of $3.395
per share. The actual number of shares of Common Stock to be issued upon
the conversion of the 6% Convertible Notes will be equal to: the principal
amount of the 6% Convertible Notes converted divided by a conversion price
per share equal to the lesser of (i) seventy-six and one-half percent
(76.5%) of the average of the volume weighed average per share of the
Company's Common Stock (as reported by Bloomberg Business Services in its
Volume at Price Service) for the five days immediately preceding the date
of notice of conversion to the Company, or (ii) $3.395.
And here are the selling shareholders:
Number of Common
Number of Shares Shares Owned Stock Owned
Name of Selling Relationship to Owned Prior to Number of Shares After After
Securityholder Company(1) Offering(2)(3) Offered(2)(3) Offering(2) Offering
--------------- --------------- ---------------- ---------------- ------------- -------------
Broadway Partners 8,000 8,000 -0- -0-
Ace Foundation, Inc. 50,000(4) 50,000(4) -0- -0-
Lawrence Poster 28,917(5) 28,917(5) -0- -0-
Leonard Adams 44,183(6) 44,183(6) -0- -0-
Birdsall Corp. N.V. 147,275(6) 147,275(6) -0- -0-
Congregation Ahavas Tzdokah 132,548(6) 132,548(6) -0- -0-
Jules Nordlicht 250,368(6) 250,368(6) -0- -0-
Mueller & Company 92,784(6) 92,784(6) -0- -0-
Mark Nordlicht 117,820(6) 117,820(6) -0- -0-
Priority Investments, Inc. 73,638(6) 73,638(6) -0- -0-
Richcourt $ Strategies,
Inc. 73,638(6) 73,638(6) -0- -0-
Wayne Saker 44,183(6) 44,183(6) -0- -0-
Warburg, Pincus Small
Company Fund 441,826(6) 441,826(6) -0- -0-
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Next is part of an email re. the *Jan. 26* filing, which I sent to club members a month ago, when the stock was at about 6 1/4 and the market was about 6% lower.
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The company has awful financials, and it has been that way for the
decade. The stock has a large overhang of shares waiting to be sold,
including a significant no. of shares shares to be created by a discountedconvert with a 20% discount.
The latest S-3 is to register shares for several types of sellers, including the discounted converts and shares issued in an acquisition.
If you read the S-3, you might get confused because there are so many
different convertible financings the co. has done in recent years. So I'll simplify it for everyone here. This S-3 registers shares for only one of those convertibles.
The discounted converts involved in this S-3 were issued in May
and June 1996. Take a look at the chart, and you will see these killed the stock in the second half of 1996, falling from 15 to the low single digits, so the co. re-negotiated the terms of the discounted converts that hadn't flipped yet, making the convert owners hold off on further conversions. The present S-3 includes the shares for the remaining converts, so that the flipping can resume. New terms are that the notes convert at a discount of 20% or more. To be precise, the convertible notes are redeemed into common stock at a price that is the lesser of 80% of the market price of the common stock, or $1.50. Since the stock price has lately been about $6, it seems the $1.50 price will apply, and the $1.93 M of principal will buy 1.3 M shares of common. This is quite a lot in comparison to the float of 5.9 M. There appear to be no restrictions on how soon the shares can be sold (no tranche requirements, no warrants that vest later), so presumably the flipping can begin as soon as the S-3
registration is deemed effective, which could happen as soon as a couple of weeks from now.
Moreover, more shares are being registered, since the co. took over another co. using shares to pay for the purchase. So there are a whole slug of sellers waiting to sell their 2.3 M shares for this purchase.
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The total number of shares that will be available to trade on the open market appears to be 3.6 M. This is 61% of float and 38% of outstanding, which is nice and big. It also represents 60 days of trading, which is nice and long.
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Short interest has been climbing, and is now 16% of float and
12 days to cover. So we aren't the first to discover this situation.
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Signs of a really lousy company:
Total turnover of the executive suite in the last year.
Use of many different discounted converts in recent years.
Reverse split last December.
Failure to make a profit since 1990.
Warnings from NYSE that the co. doesn't meet net tangible asset requirement
for continued listing. (I wouldn't bet on a delisting happening, though.)
Reliance on only 3 main customers.
A small co. in a highly competitive business.
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Valuation:
You can only value this co. on PSR, since p/e and p/book are meaningless.
(Book value is small, and could go negative within a year.) The PSR is 0.7. Compare that to the large competitors in the electronics assembly business:
SCI has a PSR of 0.42 and is always profitable
SLR has a PSR of 1.1 and is always profitable
JBIL has a PSR of 1.3 and is always profitable.
So I think that EA's valuation is too high, considering that they have never made a profit.
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To answer CYLees question about the recent news release on restructuring of a convertible note: that news applies to a different financing. The shares
being registered in the present S-3 are not affected.
There is a large overhang of shares for this co. In addition to the 3.6 M shares being registered here, there are 2.4 M options that are in the money, and 1.8 M warrants, some of which are in the money. |
