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Strategies & Market Trends : Floorless Preferred Stock/Debenture -- Ignore unavailable to you. Want to Upgrade?

To: Ignite44 who wrote (87)	10/1/1998 8:50:00 PM
From: jerryriti	Respond to of 1438

I am trying to fully understand the implications of these toxic instruments. I hold a now small position in Orbital Engine (OE) which has in place such an issue, but with certain protections built in (as they are an ADR we have only the info they provide)...would invite opinions on whether they are in fact protected after the issue goes floorless (20 % premium required to convert during first 6 months. Have had mixed responses regarding the protection offered and I am posting in the hope that others will be able to clarify whether or not here is sufficient protection: FINANCING STRUCTURE(management's response to concern raised by investors) ASX Code: "OEC" NYSE Code: "OE" This memorandum is to address concerns that have been expressed on the internet regarding the recently announced raising of US$20 million by way of a convertible debenture, and to clarify safeguards against potential dilution of existin shareholders. The following are the main points which achieve this: Conversion rate is fixed at a 20% premium to the current market price for the first 6 months. After the initial 6 months the conversion price is at market prices, but is fixed at the 14th and 20th month. In the event of a drop in the stock price, at each and every conversion of the debenture, a calculation is done to see what the total number of shares issued would be if the total debenture was converted at that time. If this calculatio shows that the conversion of the total debenture at that stock price, including conversions already made, would resul in an increase of more than 15% in issued share capital, then a shareholder meeting must be called to approve this possibility. If not approved then the balance of the debenture representing the amoun above 15% must be repaid with a small premium. The maximum dilution that can therefore happen without shareholder approval is 15%. If this calculation shows that the 15% rule is not breached, or shareholders approve the breach, conversions of up to 100% of the debenture can be made in the first 6 months whilst the conversion price is fixed, but only up to 15% of the debenture per month can be converted after the first 6 months. Once converted, th investor is restricted as to the volume of shares that he can sell on a daily basis, based on normal levels of trading in the company's stock. The placement is with a single investor and is therefore less likely to be the subject of short term decisions based on temporary fluctuations in the company's stock price. The contract states that the investor will not at any time hold more than 4.9% of the company's stock. Therefore, in the event of a significant fall in the stock price and being allowed to convert shareholders, it is still impossible for the investor to build up a significant stake in the company. In the unlikely situation that the company suspects stock manipulation, or decides that the continued conversion of the debenture is not in the best interests of shareholders, then the company has the right to redeem the balance o the debenture in full at any time by paying a small premium. This redemption right is only at the discretion of the company, as the investor has no redemption right. The contract contains clauses that the investor will not manipulate stock prices. The rules of the New York Stock Exchange and the Australian Stock Exchange contain rules that prohibit stock manipulation. The sole investor for this placement is RGC International Investors,LDC (RGC). RGC is a private investment fund dedicated to providing private capital to publicly traded companies. RGC's investment focus is on growth companies primarily in the technology and healthcare industries. RGC's investor base includes prominent private and institutional investors. Would appreciate opinions, insights and relevant questions. Had this posted on Death Spiral thread with no response. Trying this thread. Thanks in advance for any help! ------ Terms of Use

To: Ignite44 who wrote (87)	10/4/1998 3:33:00 PM
From: Mama Bear	Read Replies (2) \| Respond to of 1438

thomas, sorry to take so long to get back to you. "You assume that the investor would be able to find a substantial amount of shares to short...this is a stock with almost no shares available and most held in strong hands." How do you know that? I have seen many stocks that were allegedly held by 'stong' hands dump. I'm not sure how these folks find their shares, but they do. Some suggest that they have arrangements with market makers and the shares are sold naked. Some suggest that it is done off shore, out of the purview of the SEC. Shorting naked would not be as risky as it seems, since the share creation to cover a short is guaranteed. "from what I have learned that this is a typical method of financing for bio-techs without established revenue streams." It is a typical method of financing by companies with relatively small chances of success. If success were guaranteed, or even well within a reasonable risk vs reward such terms would not be accepted. " North American Vaccine NVX for example is raising 25M thru this method and their stock has not collapsed. " NVX has gone from 30 to 10 in the last year. I'd call that collapsing. I have noticed that when people get it into their heads that their particular small cap is the next MSFT, or perhaps AMGN in this case, they will excuse every sort of red flag that pops up. Don't get me wrong, I've made the mistake myself. I learned about the destructive nature of these types of deals by being involved with FIBR. My, that management talked a good game. They were at 24 or so when I first got involved with them in Nov 1996. I think they're trading around 3 or 3 1/2 now. The most recent floorless they put on was in May of '98. The long holders argued what a great thing it was because it was written by Credit Suisse First Boston. The stock was 10 or 11 back then. Good luck, maybe IDBEF will be the first stock to use this type of financing and succeed of which I will be aware. But the odds are really stacked against it, assuming that the financing is in fact a floorless convert. Why isn't it filed with the SEC? The lack of filings on Edgar is another serious red flag about this company. I really don't need to look any further to know I don't want to be long IDBEF. Since it's under 5, there is really no point in looking to see if I want to short it. Barb