Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Microcap & Penny Stocks : LifeOne, Inc. (LONE) -- Ignore unavailable to you. Want to Upgrade?

To: Bobb who wrote (1812)	9/16/2000 10:49:09 AM
From: Puck	Respond to of 1834

For the record, LifeOne sold convertible debentures with a floating conversion price, not regular stock per se, also known as a floorless convertible or toxic convertible. The conversion price varied directly with the stock price below a certain preset ceiling so that as the price of the common stock declined so did the conversion price, thus forcing LifeOne to issue potentially more and more shares. As the share price approaches zero, the number of shares the company has to issue approaches infinity. Cute, eh? Ostensibly this variable conversion feature is meant to be an inducement to investors to purchase the convertibles because it is insurance against a decline in the price of the common stock after the debentures are issued and before they are converted. As is obvious now, however, this feature is easily and readily abused by short selling strategies. For an excellent discussion of this topic, I recommend that you read the first five or ten posts on the "Floorless Preferred Stock/Debenture " thread. The answer to your question is important because the company was never really open about what the proceeds from the sale of these convertibles was used for. Management said publicly that the convertible debentures were to be used to finance their acquisitions, as you know. What they didn't make clear to the shareholders at the time the debentures were issued is that much of the proceeds were going to be used to settle the Classert class action suit. This was a skeleton buried in LifeOne's past that Brent Chapel and his management team missed finding during their due diligence of National Affiliated before they consummated its purchase, and this particular skeleton was fatal and doomed the company before Mr. Chapel even had a chance to get his business plan off the ground. They were served notice of this suit during May or June of 1997, bymy estimation, several months after I purchased my shares in the company and a full year after Mr. Chapel had begun his due diligence and six months after he consumated the Southern Groups controlling interest in it. The suit related to illegal sales practices at National Affiliated during the early and mid-eighties. National Affiliated had become an essentially dormant company by the early nineties during which time it had been taken over by the state. When Mr. Chapel infused it with capital in his takeover and essentially brought back Natinal Affiliated from the dead, I guess some class action attorneys who had known there was a case against the company for a number of years but hadn't bothered to pursue it because there essentially nothing to take from the company were stimulated to pursue the suit finally because there was finally some equity worth taking. They must have been both stunned and licking their chops when in late '96 they learned that some northerners were purchasing control of National Affiliated and injecting it with $7 mil. or $8 mil. in cash. With this suit hanging over National Affiliated's head, Brent was unable to raise money for his acquisition targets in a timely manner and was forced to issue the convertible debentures. Their primary purpose appears to have been to keep the company afloat but the shareholders were only really informed of their purpose as funding acquisitions. These floorless convertible debentures are the funding of last resort because you essentially sell your sole to the devil in return for your life. I was surprised and a bit suspicious when I learned what the terms of the debenture were. I hd never come across any kind of debenture like them and had only a vague feeling of anxiety mixed with dread when I attempted to puzzle out their significance for us shareholders. I had no idea how they could be a license for their holders to wreck the company's price and decided to live with them because I thought that Brent woudn't have issued them if it weren't in the best interests of the shareholders, of which he was the biggest. These debentures were terrible for shareholders because in issuing them you are essentially giving the company away but without having issued them National Affiliated would have been forced to declare bankruptcy two years earlier than it did. In retrospect this would have been in everyone's interest and saved a number of people from investing in a hopeless company because of their belief in Brent's infectious optimism that all of the obstacles he faced could be overcome. One moral of this story is stay away from companies issuing floorless convertibles. If you hear of one, you may choose to short sell it quite profitably however. EToys and MicroStrategy issued floorless convertibles early this summer--in May I think. I really doubt their CFO's knew what they were getting into. Their shareholders should have bolted immediately and considereed taking a short position if they were so predisposed. From Lifeone's example, I know have a rather comprehensive index of things that can go wrong with a company and its business plan which I use to my benefit in the future when evaluating other companys as investments. Here's to a Better Tommorrow-- Puck