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Technology Stocks : Coyote Network Systems (CYOE), Mixing It Up, IP and ATM -- Ignore unavailable to you. Want to Upgrade?

To: TheLineMan who wrote (273)	6/4/1999 1:41:00 AM
From: Q.	Respond to of 360

BeWhere, here's the scoop on the convertibles: from the 9/98 10Q: In September 1998, the Company entered into a private placement agreement and issued 700 shares of 5% Series A Convertible Preferred Stock, par value $.01 and a stated value of $10,000 per share. The total cash received by the Company was $6,345,000 after payment of $655,000 for fees and expenses associated with the issue. The preferred stock has no voting rights and is convertible, subject to certain limitations and restrictions, into shares of common stock, after a minimum holding period of 120 days, based upon a per share common stock price that will be the lesser of the initial conversion price as defined in the contract or 87% of the average of the three lowest per share market values during the ten trading day period prior to an applicable conversion date. Okay, so let's look at what just happened. From the latest 8-k: Agreement and cross receipt between JNC Opportunity Fund Ltd. ("JNC") and Coyote Network Systems, Inc., a Delaware corporation (the "Company"). JNC hereby acknowledges receipt of $4,000,000 and a warrant (the "Warrant") for 325,000 shares of the Company's common stock and the Company hereby acknowledges receipt of the certificate for 700 shares of 5% Series A Convertible Preferred Stock (the "Series A"), of which the Company will retire 100 shares. The Company hereby agrees to promptly issue to JNC a certificate representing the 600 shares of Series A remaining after the redemption of the 100 shares referred to above. So, the co. did a deal where the co. gave $4 M cash and 325 k warrants to JNC, and JNC gave 100 preferred shares back to the co., and more importantly, it also gave up the risk-free toxic conversion price on the remaining 600 shares. The new, less attractive, conversion terms are a fixed conversion price of $6, as compared to the toxic rate that floated with the stock market price, less a 13% discount. Giving up the floating conversion price is a big deal. So it didn't reallly cost $4 M to retire 100 preferred shares. You and I should figure that much of that $4M is the value of the risk-free conversion feature, which JNC gave up. I would expect that the remaining 600 shares of preferred would be redeemed at something closer to their nominal value. So let's look at the net cash result of the 1998 sale of preferred and the 1999 redemption: The co. sold 700 shares of preferred and received $6.3 M cash. It now gave up $4 M cash, plus warrants, and it will have to give up at least $6 M to redeem the remaining 600 shares of preferred. So the total that the co. is spending to reverse the 1998 private placement is least $10 M cash plus the warrants. That means that the co. will pay $3.7 M cash plus warrants for the privilege of using JNC's money for approximately one year. Let's look at this as an interest rate: CYOE will in effect pay an interest of 59%. If CYOE redeems the remaining preferred in Sept. 99, one year after they were issued, that works out to an annual interest rate of 59%. 59% interest. Holy smokes, that is one expensive way to borrow money. What brilliant financial managers they've got at CYOE!

To: TheLineMan who wrote (273)	6/4/1999 1:48:00 AM
From: Q.	Read Replies (1) \| Respond to of 360

Another way to look at the preferred stock deal: the terms imply that JNC figures the company is so risky that its debt is worth less than 50 cents on a dollar. Here's how I figure this: As a holder of preferred stock with a fixed conversion price, JNC is now fully at risk for the co. to go bad, much like a debt holder. How risky does JNC feel this is? Consider that they now own preffered stock worth $6 M plus some warrants, and their net cost for this stock is $3 M ($7 M for the original purchase in 1998 less the $4 M recent redemption). In other words, JNC has paid, net, only half of face value for the fixed-price convertible preferred. Now think about somebody who buys debt at 50 cents on a dollar. What JNC has done is something like that, since preferred stock is like a junior form of debt. However, this preferred stock is convertible, which makes it more attractive than regular debt. So how much would debt from CYOE be worth, when you take into account risk? The assesment above says CYOE debt is worth less than 50 cents on a dollar.