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The questions I have for you deals with conversion of preferred shares, that will most likely happen later in 2011 and will add 40-50M shares to the total count. As far as I can tell, based on your numbers these extra 40-50M shares are unaccounted for, so to reach your $16 share target, FCF expectations would have to be not as gloomy... Have you considered implications of these extra shares and if not, given the extra 40-50M shares added to the count would you still have bought the stock?

Hi Max,

I'm not seeing where there are convertible preferred shares that can be converted as early as this year. Further, I'm not seeing where you came up with 40 million to 50 million possible share dilution from the preferreds being converted. Do you have a link that describes these in greater detail than what's in the 10-K?

Here's what I see:

According to the last 10-K (Note 12, pg F-26,, there were 23.625 million shares of redeemable convertible preferred stock outstanding. They are convertible at owner's request five years after issuance (so beginning 4/23/2014) and annually thereafter. Beginning on the same date, the company can redeem these shares for cash. Beginning 2.5 years after issuance (10/23/2011), at the company's discretion, it can force the conversion if the company's share price is $4.05 or higher (300% of the conversion price of $1.35), but that's not mandatory. As far as I can tell, the conversion ratio is 1:1. If the company doesn't convert the shares, the dividend payable begins to climb.

Given the recent stock prices and the cash flow for the company, I actually would expect the company to not force the conversion and to start redeeming them as soon as possible to minimize the aforementioned dividend increases, rather than accept the dilution.

There are also warrants issued on 4/23/2009 which can be used to purchase up to 8.7 million shares beginning 15 months after issuance (7/23/2011). These have a seven year lifetime. Given that there are over 106 million shares outstanding, I'm not particularly concerned about dilution from these warrants.

So, absent any other sources or descriptions of these preferred shares, I don't think there's much dilution to worry about.

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