On Death Spiral Convertible Debentures:
WSi Interactive Corp WIZ
Shares issued 50,679,745 Nov 3 close $0.35
Fri 3 Nov 2000 Street Wire
Also Canadian Venture Exchange (CDNX)
Also (U:SWEB)
CDNX'S ROMANZIN DUBIOUS ABOUT DEATH SPIRALS
by Stockwatch Business Reporter
If Gerald Romanzin's common sense prevails, WSi Interactive may not get
approval from the Canadian Venture Exchange to proceed with a $500,000
floorless convertible, or death-spiral, financing.
"I think we are seriously considering the need to establish a floor on any
transaction of this nature," says Mr. Romanzin, CDNX executive
vice-president. "I think that our general position on convertibles is that
the conversion price should be based on a discount of market the date we
receive the application. So to allow a formula that would in effect allow a
repricing at a future date down to a nominal or floorless level ... I don't
think will work for us."
Mr. Romanzin stresses that the exchange has not yet come across an
application for such a financing and it will prompt a policy decision one
way or another. He adds, however, "Frankly, my current thinking is the
conversion price will be fixed at market at the time we receive the
application."
The CDNX official also says that establishing a floor on all convertibles
has the added beneficial effect of rendering useless the possibility that
insiders may also be the undisclosed lenders -- perhaps using offshore
accounts to hide their identities.
WSi announced on Thursday that it had entered into an interest-bearing loan
agreement, subject to CDNX approval, under which "the lender has the right
at any time prior to repayment of the loan, to convert all or part of the
outstanding principal amount of the loan into common shares of WSi."
The deemed price per share for conversion would be the lesser of 33 cents
or the market price at the time of conversion. Interest accrued on the loan
would be converted into common shares of WSi at the market price at the
time of conversion. The loan would be due and payable on April 29, 2001.
As security for repayment of the loan, WSi agreed to give the unnamed
lender first call on the assets of WSi.
The move comes only two months after Stockgroup Holdings.com founder,
chairman and chief executive officer, Marcus New, was named to WSi's board.
Mr. New, together with president Les Landes, secured for Vancouver-based --
but U.S.-traded -- Stockgroup a similar financing that totalled $3-million,
in April. That particular floorless convertible was arranged and led by
Minnesota-based Deephaven Financial LLP.
As with Stockgroup's April financing, the devilish terms of the WSi
financing place the borrower at the mercy of the lender. The key element of
the financing is that if the borrower cannot repay the loan in cash, then
the lender can demand to be repaid in shares at the current market price.
The upshot is that the cheaper the price, the more shares the borrower
gets. For example, the borrower will collect twice as many shares if the
stock is trading at 25 cents than if it were trading at 50 cents. With that
kind of incentive, it is not surprising that some of these suicide
financings are converted in the low pennies. Such share inflation can mean
that the current management is diluted to a minority position, while a new
group takes over the company for a song.
When a death-spiral hangs over a company's shares, any future financings
are practically impossible.
That is the position in which Stockgroup now finds itself. Stockgroup
partially repaid its Deephaven loan in August (four months after the
financing) on the lenders' demand; nearly $900,000 (U.S.) in principal,
interest and on-time "penalties" was paid back. Stockgroup's finances were
a concern even before it paid back the nearly $900,000 (U.S.) first
installment payment it owed Deephaven. On June 30, 2000, its working
capital position was a negative $238,000 (U.S.).
WSi's finances look healthier than Stockgroup's, at least on the surface.
Its most recent financials, for the year ending June 30, indicate the
company had $2,561,529 in working capital. It lost $1,810,783 during the
year, which means WSi was losing about $150,000 a month. Such a spending
pattern, if it continued in the second half of the calendar year, should
not leave it in a difficult financial position at this time. Since then,
however, the company may have increased its spending dramatically,
prompting the desperation financing.
In July, WSi acquired an initial 50.1 per cent of iaNett.com Internet
Technologies Ltd., a developer of "extreme performance" Internet
business-to-business products. WSi president Theo Sanidas claims that
iaNett's search technology is capable of searching more than a billion
documents in less than one second; in September, iaNett launched its
so-called theme-based search engine.
While investors heard a lot about what a good deal it was for WSi, terms
have not yet been released, but it could require both acquisition and
development money. WSi's financial officer, John York, did not return
calls.
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