I found this info regarding TLC's use of convertible debt/shares:
stockdetective.com
9. Watch out for Regulation S abuses!
Regulation S is a section of the federal law that permits publicly-traded companies to sell
unregistered securities to overseas investors. These "overseas" investors, in some cases, are
actually U.S. investors operating through offshore shell companies, often hedging their
investments by using options or short sales. That's particularly true when the issuers are risky
small-cap companies, which sometimes turn to Reg S offerings out to sheer desperation for
cash.
In the past, these Reg S securities could be issued to the "overseas" investors and then sold
back into the US market before the existing shareholders even found out it. But the SEC
realized that this was a problem and recently changed the rules. A company that issues Reg S
securities now must file a Form 8-K within 15 days of its occurrence. Because Reg S securities
are currently restricted for 40-days after they are issued, existing shareholders will be warned
about Reg S deals before the shares can be sold. However, purchasers of Reg S securities
can still short the stock before the 40 days are up, and later use the Reg S shares to cover
their short position. Therefore, existing shareholders can get hurt by Reg S offerings even
under the new rules.
The most dangerous kind of Reg S offerings for existing shareholders are convertible
securities which can be converted into common stock at a fraction of the stock price at the time
of conversion. For example, the securities might convert into common stock at 75% of the
average bid price over the previous five trading days. No matter how low the stock price falls,
the Reg S investors can still convert into common stock at a price lower than the current stock
price. And the lower the stock price falls, the more shares they get. Therefore, they benefit
from the stock price dropping and will often even short the stock to help it fall further (and lock
in higher sale prices of the stock as well.), and then cover their short position with the shares
they get from conversion. They almost can't lose! It's the existing shareholders who are the
losers. This type of Reg S offering will frequently cause a massive increase in shares
outstanding, which means that existing shareholders now own a smaller piece of the company
and hold shares that are worth much less than they were before. Watch out for all Reg S
offerings, but especially watch out for this type of Reg S!
10. Watch out for the little things -- they can add up fast!
Little things mean a lot: It's true in all walks of life, and evaluating small-cap stock opportunities
is no different. If the fundamental analysis, pie-in-the-sky promises or management resumes
are inconclusive, other seemingly inconsequential minutae buried in the prospectus can flash
as clear a warning as any.
Observe the list of market makers. Research the kinds of issues each firm underwrites, if
possible. Has the market maker engaged in a history of small-cap activity? If so, how have
those stocks performed? If the company has only one or two market makers, the stock stands
highly vulnerable to price manipulation. There more market makers exist for a given stock, the
more likely they are to bid against each other and the price will more likely move to a true
"market" price.
Note the filing date required by the SEC, posted in the company's periodic financial reports. If
the filing date is far out of whack with the report date (i.e., December 31, March 31, et. al.), this
is a delinquent filing and probably symptomatic of much deeper problems. (Companies have
45 days from the end of a quarter to file a 10-Q and 90 days from the end of the year to file a
10-K.)
Study the stock's trading history. Are there any unexplained trading suspensions? Has a
typically thinly-traded stock experienced sudden and unexplained surges in trading volume? Is
there are a sudden dilution, or history of dilution, in the number of shares outstanding? When
promoters obtain huge numbers of shares at deeply discounted prices, or for free, the
holdings of the other shareholders is immediately watered down.
Finally, don't forget to check the section covering litigation and investigations. The prospectus
will disclose all lawsuits filed against the corporation, as well as any pending government
investigations. If this section paints a dark picture, stay away from the stock.
When it comes to small-cap stocks, trust no one except yourself and your sound judgment.
You'll have no trouble finding small-cap companies that will trip over themselves highlighting
their positive points; they're not so forthcoming in revealing their negatives The truth is out
there -- but, like the conspirators in The X-Files, it is sometimes hard to find. |
