The Akron Beacon Journal from Akron, Ohio • Page 110

-Akron Beacon Journal- Business Report -Sunday, July 23, 1978- Hedge-hunters need to be wary of traps carter randall STREET1 68 percent of any increase in the stock price. Incidentally, tax considerations are not included in the calculations. OF COURSE, RCA is not the only company that has convertible bonds and or preferred stocks outstanding, and the facts and figures are different for every issue and every company. But virtually all outstanding convertible issues are selling at prices in excess of their value both intrinsically and on the basis of the conversion. Exceptions to this are bonds or preferred stocks selling at high premiums to their redemption or maturity values.

But rates or return from such securities are very low. Why do such issues sell so high? Many holders, particularly institutional investors, would rather hold convertible issues than no equity interest at all. Many of them are either loathe to own stocks or are prohibited by regulation from owning them. This means that if interest rates in general should rise andor stock values decline, there is considerable downside risk in the prices of most convertible issues. On the reward side, the potential is not so good.

There would have to be a quantum increase in the price of the underlying stocks before any profit can be realized by the owner of convertible issues. TO ILLUSTRATE, take the case of RCA, which has both convertible bonds and convertible preferred stock available. RCA Convertible 4 percent bonds, due in 1992, recently traded at a price of approximately 72 ($720 per $1,000 bond). The current yield is about 6.3 percent, and the yield to maturity (income plus appreciation per -year to 1992) is about eight percent. This compares with a current yield (and yield to maturity) on comparable bonds (A-rated) of approximately 9 percent.

The common stock was selling at a price of about $26 per share and each bond is convertible into 16.95 shares of stock. The stock would have to rise in price to $42 per share (an increase of 68 OF COURSE, the very notion of some individuals that convertibles are a hedge has prompted them to own such securities. In addition, convertible issues sometimes can be used for more favorable collateral on loans. There are exceptions and there may be opportunities to acquire convertible issues that are not overpriced. Never buy a convertible issue if it: Is selling at more than 20 percent above its intrinsic value.

Is selling at more than 20 percent above its conversion value. Is convertible into a stock that cannot or should not be held. Is not currently yielding considerably more than the stock into which it can be converted. Is susceptible to being redeemed, thereby either forcing conversion or sale. Fearing a further decline in the market, some investors are hesitant to buy stocks.

And many investors are reluctant to own bonds because of a lack of capital appreciation potential or future income improvement. So many investors believe that perhaps the proper course of action is to invest in convertible bonds andor preferred stocks. These are securities that pay a rate of return higher than do the equivalent common stocks and yet give the holder a "call" on the common stocks. Many consider them a hedge against both the bond market and the stock market. They point out that there is a limited downside risk, an unlimited upside potential and a reasonable rate of income return in the meantime.

UNFORTUNATELY, it's just not that easy. First, virtually all convertible securities yield a rate of return much less than a comparable straight (non-convertible) bond or preferred stock yields. And secondly, almost all of them sell at a high premium to their conversion value. percent) before the bond would be selling on a parity with the stock into which it is convertible. TO PUT IT another way, the bond is selling at about 10 percent above its value as a true money market bond and 68 percent above its value for conversion purposes.

The investor is getting less of a return than he could receive on a straight bond. And since the stock is paying a dividend of $1.40 per share or a rate of return to the stockholder of about 5.6 percent, the bondholder is receiving in current income only 710 of one percent more than is available from the stock. That's certainly not worth losing the first Latest fad in hot market New vistas open up in little computers their TRS 80, complete with keyboard, video screen and cassette recorder (for saving programs) at $599 is a sellout. Olson Electronic stores have waiting lists for the Commodore PET at $795 with twice the built-in memory (for handling more complex programs) of the bottom-line Radio Shack number. And they sell two models from Ohio Scientific, the Aurora firm, at $598 and $825.

Ohio Scientific, in the industrial park south of town, grew from a garage operation in Hudson started by Charity Cheiky, the president, and her husband, Mike, the research director. MRS. CHEIKY was a Western Reserve Academy teacher of math and computer science who thought there might be a market for electronic aids to education. With her husband and Dr. Dale Dreisbach, retired chemistry department chairman from Hiram College, she started the firm.

"We did awful," says Mike. "The education aids market wasn't there." It was a time for deciding whether to throw over a fledgling failure or make a new attempt. Another couple might have been discouraged. "Well, microprocessors (heart of By PETER GEIGER Beacon Journal Staff Writer A microcomputer revolution seems to have reached the Akron area. Some evidence: A firm in Aurora, started by a man and wife just three years ago in their garage, is grossing $10 million a year making the little boxes which teach children, balance checkbooks, figure payrolls and play games.

Drivers of a new kind of Cadillac Seville with a computer are seeing displayed on their dash-panels their time of arrival, miles per gallon, range of travel left in i the gas tanks and other data. Children in Fairlawn are giving up their vacation hours to hang around a store which sells the small computers and are learning how to operate them. A Tallmadge church purchased one of the typewriter-size devices, programmed it for language translation and sent it to a missionary in the Ivory Coast, Africa, who is compiling a Bible in the native tongue. The machines genuine computers in subminiature size are the latest fad in the hot market for consumer electronics. What's made them possible is the space program-related development of large scale integrated circuits: The manufacture on a small chip of what would previously have taken thousands of transistors and hundreds of thousands of dollars.

BUT WHAT has made them popular? Cost, for one thing. An adroit computer for home, school or small business can be had for less than $1,000. But there's a charisma to the computers as well. "Listen. Artists and musicians get rewards for their intellectual creativity," says Peter Selden, manager of the Basic Computer Beacon Journal photos by Ron Kuner Charity and Mike Cheiky with one of their microcomputers In aftermath of California tax vote Municipal owners worried the tiny computers) were new on the market and making a small computer seemed like a possibility." Mike was engineering director at Ohio Nuclear of Solon, makers of industrial X-ray equipment.

He was in the vanguard of engineers who saw that the new integrated circuits would make possible tiny computers as capable as the first-generation machines which occupied entire, air-conditioned rooms. "WE STARTED making the products and it took off like a skyrocket," Cheiky says. The firm moved to a Hiram storefront. By June of 1976 it was grossing $1 million per year. Last January it moved to the Aurora site, the former Custom Beverage factory, with 35 employes.

Now there are 100 workers whose average age is 25. The Cheikys are 26. "We have 17 models of computers," Mike says. Most are business-oriented, but a $350 "Superboard II" model for home use will be introduced next month to compete in the "personal computer" market. AS A BUSINESS tool, microcomputers can be attractive to small firms, according to David Roth, 21, Ohio Scientific customer service representative.

"We offer an advantage to the business with 40 to 50 employes which pays perhaps $2,000 per month for computer time-sharing," Roth says. "For the equivalent of one month's rent, such a firm can own its own computer. "You can see what a revolution this business has brought." Selden at the Basic Computer Shop echoes his words. "UMTL NOW, a full-scale business system cost up to $40,000. We had a customer who bought a computer to use as a word processor (automatic typewriter) for $5,000.

So, for the price of a word processor he got a computer as well." Selden says customers combine pleasure with business on the small devices, writing or buying programs to take home which teach mathematics or spelling, play games or analyze their investment portfolios. There's even a published program for filing federal income tax returns. One of Selden's customers was the Fundamental Baptist Church of Tallmadge, which bought a computer for Bible translation. Keith Johnson, son of Pastor Albert E. Johnson, is a Babcock and Wilcox programmer and set up the translation program for missionary Allen Fisher.

But not all of Selden's customers have such exotic needs. Some are just shoppers, in fact school-age children who frequent his store in business off-hours. THAT MIGHT BE the measure by which anyone interested in microcomputers could examine his need. As game machines, the devices "are just glorified video games," in the words of Ian McCleod, president of the Goodyear computer club and systems engineer at Goodyear Aerospace. "But as educational and business devices even around the home they can be very beneficial," he adds.

One way to learn the variety of uses to which a microcomputer can be put might be to attend a club meeting. The next one will be at 8 p.m. Tuesday at Room 350 in Goodyear Hall. The club, a year old, has 90 members; "all computer freaks," as McCleod puts it. Market Four basic parts make it happen What does a microcomputer look like? There are four basic parts, though some may be combined.

The keyboard looks like that of an ordinary electric typewriter and is used for giving the computer instructions or responding to its questions. The "mainframe," the electronic heart of the system, contains the microprocessor chip and other essential parts such as the memory chips. A display screen, like a television set, shows the words and diagrams produced by the keyboard or by the computer. In fact, an ordinary TV may be used with a minor modification. An ordinary casette recorder is used for storing the programs on which the operator has worked so hard.

This is important because the computer loses its memory when the power is turned off. But that which is stored can be retrieved from the recorder. Some systems, such as for business use, also employ printers and high-speed recorders. Those things add to the cost of a system. Place By KOBKRT METZ Hem York Times Service Shop in Fairlawn Plaza.

His is the only store to date in the Akron area exclusively selling computers. "But the rest of us don't normally get such rewards," he says. "Those who've bought or built computers, on the other hand (there are Heathkit and other build-your-own microcomputers on the market), have found in programming them an outlet for that creativity. "WE SELL computers to blue-collar workers who, perhaps more than others, need that outlet for their creativity. You can't imagine the thrill of creating a program (set of instructions) for a computer, refining it, then seeing it run." There are others who sell the microcomputers.

Radio Shack managers of Akron area stores say IT IS CLEAR to everyone by this time that the tax revolt is a national phenomenon and owners of municipal bonds in other states have expressed concern about the future of their holdings. In most states, however, the approach is different from California. Rather than roll back property taxes, voter campaigns have aimed at freezing or limiting state or local government expenditures. This has happened in Colorado, Indiana, Iowa, Minnesota, New Mexico and Tennessee. Moves are under way toward the same end this year in Arizona, Maine, Massachusetts, Nebraska and Washington State.

In Michigan, voters are expected to face a November choice between two amendments. The Headlee amendment sets moderate limits on state spending and employment among other things. The Tisch amendment is a Proposition 13 type that would cut property assessments by 50 percent. It is estimated that the Tisch amendment, if approved, would slash state revenues by $1.75 billion. HUEGLIN SAYS that if both Michigan amendments pass, as some expect, the one with the highest total vote will go into effect.

But where do we go from here? Hueglin said that in Michigan it was entirely likely that any lost real estate revenues would be replaced by a variety of taxes, including business, user charges, sales and, possibly, hefty increases in income levies. California's new law puts stringent limitations on the enactment of new taxes apart from new sales See MUNICIPAL, page II NEW YORK Ever since California voters overwhelmingly approved Proposition 13 and thus reduced local real estate tax revenues from $12 billion to $5 billion annually, owners of municipal bonds everywhere have worried about direct and ripple effects on their holdings. In effect this tax rollback limits local property taxes to one percent of full or assessed value from an average of 2.7 percent The effect on two classes of California bonds was dramatic. Two months before the June 6 California vote, Standard Poors and Moody's both suspended ratings on most of that state's Redevelopment Agency and some California lease rental revenue bonds pending the outcome of the referendum. PROJECTS so financed are leased to municipalities and the rental charges pay the interest.

By this device the municipality manages to circumvent debt listing. Propostion 13 prohibits the large increases in property assessments necessary to pay off California Redevelopment Agency bonds. Lease rental revenue bonds, meanwhile, are payable from general budget monies and Proposition 13 will reduce municipal receipts enough in a few cases to jeopardize the payment of debt service on these bonds. The ratings were never restored and after the vote the bonds continued to sell at tax-exempt yields of eight percent plus. That put them down 150 basis points from early 1978 levels.

In February, for example, 20-year Redevelopment Agency bonds were yielding just 6 per- r.T.Mi i 1 1 1 1 tiM iwiTuWiTi -in in i cent. This 150-point setback compares with a general fixed-income market retreat of 50 basis points. But these two classes of bonds took the full brunt of Proposition 13. DESPITE investor concern as expressed by telephone calls to bond houses, California general obligation bonds and other municipal revenue bonds have suffered no adverse effects. Steven Hueglin of Stoever, Glass municipal bond dealers and underwriters, says that many of these better grade securities have actually traded up in relation to the general market because fewer new issues are now anticipated.

"The Jarvis-Gann initiative," he said, referring to Proposition 13, "puts a cap on the issuance of new general obligation bonds, thus creating scarcity value for bonds already issued." Revenue bonds, meanwhile, are payable out of specific user charges such as water, sewer or electric revenues. Obviously, Hueglin said, they are unaffected, but they cannot be expected to benefit from scarcity value because revenue financing will become more common. 1 HUntwiMIIIK A game played on a microcompter.