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Microcap & Penny Stocks : FRANKLIN TELECOM (FTEL) -- Ignore unavailable to you. Want to Upgrade?

To: David D. who wrote (37918)	9/23/1998 11:01:00 AM
From: William Harvey	Respond to of 41046

David, Well, it may beat where we are when the conversion is forced to take place. What do those guys know? WH

To: David D. who wrote (37918)	9/23/1998 11:38:00 AM
From: VALUESPEC	Read Replies (3) \| Respond to of 41046

<<Valuespec, it would seem that if I can convert my shares for $1 and then turn around and sell them, I'd want the stock price as HIGH as possible. Isn't that true? Therefore, what's to be gained by converting the shares at this low $$ level? David D.>> The convertibles Series C shares work this way: For every X dollars of Series C they have, let's say $ 1000, they get shares based on $1,000 divided by the price of FTEL stock. The lower the stock, the more shares they get. However, there is a floor on the conversion price of $1.00. This means that the most shares of FTEL which they can get for the $ 1000 Series C is 1,000 ($1000/$1). Once in a while you will get a Convertible with no floor. In that case the holders of the convertibles would own literally zillions of shares if the price went low enough (what is $ 1000/.0000000000000000001)? The limit of $1000/an infinitely small number is infinity ! Some times, a company actually issued a convertible with no floor ! The lower the floor, the more desperate the company. I may be getting too complicated now so I'll get back to the question. The convertibles were started to be converted months ago. However, as you alluded to, if FTEL is only $ 1.00 then how can they make money? Hopefully, they converted enough shares at a higher price to lock in a profit for themselves. As they converted at higher prices they then had to sell to lock in the profit. The more they converted and sold, the lower the price of FTEL went. They could also have been shorting the stock at higher prices knowing that they could cover their short position by converting the convertibles and giving them to the person who they placed the short with. Any shares they are just converting now, and just selling now, are going to be the least profitable for the convertion holders. Even worse for them would be if they did not short, or convert and sell them, when the price of FTEL was $1.00 or more. If this is the case, then they definitely want the price higher now as you suggested. If they were smart, they started shorting a long time ago. If the price dropped faster than they thought, without them short or without them converting and then selling, then they might lose money. In any case, the bottom line is that convertibles on thinly traded stocks usually drive the price of the stock WAY down until all the convertibles are converted AND sold. It is possible that they converted more shares into stock than they sold. In this case, more bad news. The selling could continue way into 1999 as the previous convertible holders sell the stock they acquired but don't want to hold. Ideally, however, they will convert and then immediately sell, or short and then cover later with the shares they will get. I hope this helps. It is confusing, but if you are going to invest in these small companies, you should one day understand these principles. When I first started investing in these small caps, I was caught by surprise, like many usually are, by the conversion of the private placements and what they do to the stock price. Often you can find out about the convertibles by calling the CFO and asking him how many their are and what the term are. I have found CFO's to be a good starting place find out about convertibles(after reading the 10K and 10Q's), but certainly not the final place to look. The CFO of one company told me a loan document was not important which I asked for a copy of. Within a month I found that the loan document contained a provision for 5% of the outstanding shares to be issued to the lender because someone purchased more than X % of the company. Guess who purchased more than X percent of the company? A close affiliate of the lender ! The stock (JBOH) had many problems of which that was one. I felt misled by the CFO who later said he was not aware of that provision. I made a big deal out of that document, so I was very displeased when it contained such bad info. My point is: Know about the convertibles of the company you own, especially if you have a lot of your money in it. Learn about the convertibles by reading the 10K and 10Q's. Call the CFO to make sure you didn't miss anything (you probably did). Keep in mind that you can't win with a corrupt company. Even doing what I said, you could still miss something as I did with JBOH. FTEL: .84 VALUESPEC