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Technology Stocks : VALENCE TECHNOLOGY (VLNC) -- Ignore unavailable to you. Want to Upgrade?

To: Sig who wrote (6283)	12/25/1998 11:44:00 PM
From: Zeev Hed	Read Replies (1) \| Respond to of 27311

Sig, I'll try to translate these excerpt. The first citation I gave simply indicates to me that under the right conditions for Castle Creek, (namely, delays takes the company beyond the first half to get into the selling business, and thus more cash is required then currently planned for) they can push the stock down a death spiral with impunity. The company recognized that this is a definite possibility, they have "declared" that they know excessive dilution could result from this form of financing. The second citation further recognize the possible need for additional convertible financing, and Castle Creek reserves the right to convert its preferred at the most beneficial rate granted to any other subsequent investor in convertible securities. That means that if the company runs out of cash before the production line gets into positive cash flow, or in the event that additional working capital is required (for each increase of $1 dollar in sales, you have to assume an increase of $.3 in working capital (year over year) which typically cannot be fully provided from profits since initially the line's profitability will be low due to traditional learning curve problems), the company may have to get additional financing on terms less beneficial then the terms granted by CC. If that is the case, CC's terms are at once converted to those new terms, presumably, less beneficial to the company. Of course, this is a worst case scenario, but VLNC has shown a propensity to be behind in the past, and I see no reason for that habit to be broken soon, at least not from all the warnings language in the S-3 documents. The third citation indicates to me that CC is preparing itself (and the company) for the eventuality that their ownership through the floorless will exceed 20%, and stockholders will have to agree to remove the limitation on "selling shares" at discount to market of more then 20% (a NASDAQ limitation that share holders only can remove with a simple majority vote). I do not know how much cash they have on hand right now, but if you assume that they will not have any receipt for at least 9 months (six months to first major order, and assuming 90 days before they get paid), they need $18 MM to stay afloat until they turn positive cash flow (hopefully) in 9 months. This because their current "burn rate" is $6 MM/quarter (and could be larger now that they have some 270 employees). I have not taken into account any additional capital expenditure funding required, but if their CFO is smart, he can probably find a way to lease such additional equipment from the manufacturer. I should mention that if they ship $4 MM, they suddenly have access to at least part of the $40 MM in grants and debt(?) from the IDB and add to that another $15 MM from the preferred B and the balance of the Bacharat (sp?) loan. Thus, if the $40 MM from IDB is the typical type (tied to sales), it can take care of the working capital up to sales of about $120 MM (not bad at all) and the other $15 MM will carry them over the hump for the first nine months or a little more, assuming their cash balance before the current injection of $7.5 MM was at least $3 MM (I hope they have a little more then $3 MM before the last injection, but I know not). What does all that mean? VLNC must execute from here absolutely flawlessly, or else, they will run out of money again, and the stock could then plunge to values near its net book value (ain't much). What is positive? The Preferred A is no longer a floorless (I assume that CC already shorted against it and is now in the process of covering that either with conversions or with money they got from shorting). Zeev