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Technology Stocks : ocom breakthrough technology -- Ignore unavailable to you. Want to Upgrade?

To: tonto who wrote (514)	7/17/1998 2:06:00 PM
From: Steve Patterson	Read Replies (3) \| Respond to of 994

I would call this a "Cinderella Convertible". On October 6, OCOM turns into a pumpkin. At least this is how I read it. On October 6, the "Institutional Investors" with the $2.5 million are free from all restrictions, including shorting. Since the convertible is floorless, this sets the stage for the well-known "death spiral", in which the stock falls, so they have to issue more shares to cover the warrants, so dilution increases, so the stock falls, ... lather, rinse, repeat. And since the warrant holders (including the company directors!) can short at that time, driving down the price which gives them more free shares to cover the short, pain is guaranteed for shareholders. So OCOM has to come up with at least $2.5 million in PROFITS (not sales) by October 6. The desperate terms and small size of this deal indicates that they probably can't get another financing deal, so it will effectively be lights out if they miss this date (OCOM must lay off most employees and becomes a shell company). I don't put much stock in the idea that "the directors believe enough in the company to put their own money behind it". Note that the clause naming them also names "and other investors", and the total amount is about, what, $625K? Since it doesn't list individual amounts, each of the directors could be in for a buck each, with the "other investors" just people (or institutions) dumb enough to not read the fine print and notice that they're second in line. However, note that they _still_ get the benefit of the floorless convertible (they just have to wait longer), so even if the directors are in for a meaningful amount the only people who can get screwed in the end are the shareholders. I have worked for engineering companies. Once layoffs start, productivity goes down to nothing as people start floating resumes and talking to recruiters. Had the financing happened before the layoffs I'd imagine they had a chance; since it happened afterwards I'd imagine that this financing mostly pays for employees to hunt for jobs while they shut the doors and try to get cash for any patents they may have. Disclaimer: I am short OCOM because of this news and believe that anyone who reads the fine print would bail out...but that's just my opinion. If I have misread the terms of this deal, someone please let me know. Steve