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Strategies & Market Trends : Anthony @ Equity Investigations, Dear Anthony, -- Ignore unavailable to you. Want to Upgrade?

To: xcr600 who wrote (4687)	1/17/1999 1:12:00 PM
From: Brooks Jackson	Read Replies (3) \| Respond to of 122087

IMON -- Preferred stockholders have incentive to dump now. xcr: IMO the conversion terms you highlight have nothing to do with benefiting the company. The company already has all the money it is ever going to get from selling $2m in preferred, on very favorable terms. But IMO the terms -- combined with Friday's spike in price -- mean the preferred holders have a big incentive to convert to common stock now and dump it quick before the price collapses. I'm just an amateur here -- so show me what I may be missing -- but here's how I figure it. Shaar Fund (holds about half the preferred) put $1.05 million into IMON for 1,050 shares of preferred (drawing 4%). The preferred can be converted to common stock, at a 35% discount to the AVERAGE price for the FIVE DAYS before conversion. So if the stock trades $1/shr and never changes, Shaar can convert at any time and get 1.6 million shares of common worth $1.6 million -- not a bad return. But let's say the stock has been trading at $2/shr and suddenly runs up to $5 on a single day. On that day Shaar fund could (if my math is right) convert to 807,692 shares of common, which could be sold that day for $4 million plus. A killing. But let's say Shaar is not so nimble, and waits to see what happens next. Let's further suppose that the stock just levels off at $5. At the end of the week, the average price is $5 and Shaar can only convert to 1.6 million shares of common worth $1.6 million -- right back to where they were before. Hesitation has cost $2.4 million. Now, I submit that $2.4 million is a big incentive for Shaar fund to have dumped the shares on Friday, and to dump whatever they couldn't unload then on Tuesday before the sucker rally fizzles. This is just my back-of-the-envelope calculation. Feel free to plug in the actual closing prices and come up with more refined numbers. But this should serve to illustrate the principle at work. Anyone who figures it differently -- please show me where I'm wrong.