e.Digital Corporation (fka EDIG)

[Cassandra]

Mary: That clause actually says that they CAN short EDIG. The restriction is that they can only short the number of shares to which they have current conversion rights or warrants. That number is 5,837,778 (2,837,778 conversion shares and 3,000,000 warrants) until 2/19/04. After that, as the PPS drops, the number of shares to which they have conversion rights will increase.

That's why this is called a "toxic" convertible. Each CP share is worth $100 and the number of common shares to which each CP share can be converted is based on 85% of the average share price over the previous 10 trading days. They CP shareholders are free to short the stock. The lower the share price goes, the more shares they get upon conversion. They can then use some of their conversion shares to close out their short position.

The Series E financiers make money in 2 ways. First through 8% dividends payable in cash or stock. Second in the spread between their sales and below market covers.

These kind of convertibles are also called "death spirals" because the repeated short and below market covering almost always drives the price down. This is the most desperate kind of financing a company can get.

Traditional (non-toxic) convertible preferred shares are convertible to a fixed number of common shares per CP share.

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