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Non-Tech : Versatech (VITC) -- Ignore unavailable to you. Want to Upgrade?

To: NicktheGreek who wrote (339)	10/23/1998 1:29:00 PM
From: Sid Turtlman	Read Replies (2) \| Respond to of 435

NickTG: Most convertibles are converted at a fixed price. For example, a company might sell $1 million dollars of a convertible preferred, convertible at $10 per share. If the stock goes up, the holders eventually hand in their preferred and receive, collectively, 100,000 shares ($1,000,000 divided by $10) of stock. If the stock goes down, they don't convert. A toxic convertible is different in that the conversion price is listed as a fraction of whatever the stock is selling for at the time of conversion. This guarantees the holder a profit, in that he can sell stock at $6 and immediately convert at $5. It is called "toxic" or "death spiral" because the more the stock drops, the more shares the holder will be allowed to sell (e.g., at $5 per share conversion price the $1,000,000 of preferred can be converted into 200,000 shares of common, at $2 it will require 500,000 shares of common, etc.) What tends to happen is the holder starts selling, knocking the stock down, then he converts some more, knocking it down some more, etc., and each time he converts the same dollar amount into more and more shares, putting more and more pressure on the stock. The only companies who use this form of financing are ones totally desperate for cash who can't get it any other way. That is certainly the case with DHMG. If you want to see how this works from the point of view of the firm buying the preferred from the company, here is a link explaining the technique from the outfit that did the deal with DHMG: naemedia.com As I understand it, the death spiral won't start until the SEC approves the filing that I linked to in the previous note, allowing the investors to start selling. Given that DHMG's books were completely and obviously cooked over the last few years (see my posts on this thread starting in July 1997), there is a some chance that the SEC will not approve the filing. If that happens, then the investors in the toxic convertible have the right to demand their money back. So that is the choice ahead: If the SEC approves the filing, the death spiral begins; if it doesn't, DHMG has to give the money back, almost certainly throwing it into bankruptcy. The next few months should be interesting.