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

To: Larry Brubaker who wrote (9610)	3/20/1999 7:47:00 PM
From: kolo55	Respond to of 27311

Share counts. Larry, I took a break for lunch. I'm back now, and ready to go again. There are three different share counts under discussion. 1. Share count on the income statement. I've arguing that this share count is a weighted average share count, and should include converted preferred and in-the-money warrants and options. I've thought this through at lunch, and I think I may be wrong on this. This would certainly be true if Valence was a profitable company. However since they are reporting losses, larger share counts on the income statement would decrease the loss per share. I believe the SEC asks companies in this situation, not to use converted equivalents and outstanding in the money warrants and options in the share count. But as soon as the company goes profitable, the share count increases again. I went to the SEC filings for Valence and dug this out. Some detail from the latest 10Q: The following is a reconciliation of the numerator (net loss) and denominator (number of shares) used in the basic and diluted EPS calculation: <TABLE> <CAPTION> Three Months Ended Nine Months Ended December 27, 1998 December 28, 1997 December 27, 1998 December 28, 1997 ----------------- ----------------- ----------------- ----------------- <S> <C> <C> <C> <C> Loss per share: Net loss available to common stockholders $(11,360) $(4,963) $(20,677) $(16,298) Weighted average shares outstanding 25,931 23,406 25,601 22,644 Earnings per share, basic and diluted $(0.44) $(0.21) $(0.81) $(0.72) </TABLE> Shares excluded from the calculation of diluted EPS as their effect was anti-dilutive were 6,707 and 6,798 for the three and nine months ended December 27, 1998 and December 28, 1997, respectively. Next post will discuss the share count on the balance sheet. You may want to wait on responding until you read it. Paul

To: Larry Brubaker who wrote (9610)	3/20/1999 7:50:00 PM
From: kolo55	Read Replies (1) \| Respond to of 27311

Balance sheet share count. 2. Share count on the balance sheet. Since the preferred shares are listed as a separate liability on the balance sheet, they are not included in the common share count. You and Zeev are confused about the face value of the preferred shares shown on the balance sheet. I believe your confusion is due to the fact that you think that they sold 7500 preferred shares each time for $7.5M. Actually they sold 7500 preferred shares plus 447,761 warrants each time for $7.5M less expenses. The total of 895,522 warrants sold to CC, plus the 175,000 warrants issued to Gemini Capital, should show up in the common share count on the balance sheet. Some of the original proceeds of $7.5M (reduced by Gemini's fee) for the units should be allocated to the warrants. These warrants are included on the balance sheet as a component of common stock (essentially Valance has set aside common shares to fulfill the eventual warrant exercise requirements). This is explained in the DecQ SEC filing: 5. PREFERRED STOCK In July 1998, the Company completed private financing arrangements of up to $25 million. The Company issued 7,500 shares of Series A convertible preferred stock and warrants at $1,000 per share of Series A convertible preferred stock, raising gross proceeds of $7.5 million, with transaction costs of $425,000. In December 1998, the Company completed the equity portion of the financing arrangements, issuing 7,500 shares of Series B convertible preferred stock and warrants at $1,000 per share of Series B convertible preferred stock, raising gross proceeds of $7.5 million, with transaction costs of $375,000. The Series A convertible preferred stock and Series B convertible preferred stock accrete at an annual rate of 6% per year, and are convertible into common stock based upon defined conversion formulas. The remaining $10 million of the financing arrangements is in the form of a line of credit arrangement (Note 6). In connection with the equity financing, the Company issued warrants to purchase 895,522 shares of common stock to the Series A and B investor. The warrants are exercisable at a purchase price of $6.78 per share and expire in July 2003. In addition, the Company issued warrants to purchase 175,000 shares of common stock to the placement agent. The warrants are exercisable at a price of $4.94 per share and also expire in July 2003. The warrants have a fair value of $3.2 million using the Black Scholes valuation method and were recorded as a component of common stock. My comments: It appears that Valence allocated about $3.2M to the warrants (this figure should include about a 20% of Gemini's transaction fees), and thus ended up carrying the Series A preferred on the books at about $6.0M and the Series B on the books at about $5.4M. The number of common shares shown on the balance sheet increased by the number of warrants out, offset by other changes such as employee or ex-employee option exercises or forfeitures. I don't see an obvious inconsistency in the share counts with what the company says in the filings. And … This is all consistent with the statements in the filings, that Castle Creek still held all 7500 shares of the Series A shares and all 7500 shares of the Series B shares as of February 10.

To: Larry Brubaker who wrote (9610)	3/20/1999 8:11:00 PM
From: kolo55	Read Replies (3) \| Respond to of 27311

Now we are ready for another recap. Some of the readers on the thread are probably wondering what all this is about. I think this is about the intent of Castle Creek in investing in Valence. Larry, you've been telling us Castle Creek can't lose, even if Valence collapses. Over the last 5-6 months, you've constructed an elaborate conspiracy theory where CC had converted some preferred shares, and has shorted enough shares to hedge their remaining Series A preferred shares. You say they will use the variable conversion privilege on the B shares to avoid losses if Valence falls. In summary, you say that Castle Creek did not invest in Valence expecting them to succeed, and they plan to make money whether Valence succeeds or fails. But now the SEC filings and short interest reports aren't quite matching up with your theory. Today you refused to believe that Castle Creek had not converted any preferred shares, although it was said repeatedly in the filings. You couldn't "see it" because it didn't fit with the theories you have espoused on this thread. Although it is still uncertain whether Castle Creek has shorted shares and if so how many shares they have shorted, it is apparent that they still have a substantial amount of money "at risk". I believe that Castle Creek has shorted less than 300,000 shares as a hedge, if any, and thus the bulk of the $15M they have invested in Valence is still at risk. We will find out more when the next short interest report is released. If your theory, and Zeev's assertion today that they may already shorted to hedge half the preferred B position, are correct, then the next short interest report should show an increase in open short position of over 600,000 shares. Your theories are starting to unravel. Paul