Now why can't we see articles about these things when they are just starting to tailspin? Six months ago, no one knew (or let on) what was going on. Now everyone knows about death spirals.
J, as to your statement:
let the preferreds scream to their lawyers about all the money they can't recover.
I suggest you read the bold print below.
Best regards from an ex-CMYN long.
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From: thestreet.com
Wall Street Whistleblower: Techniclone Circling the Drain in a Death Spiral
By Gregg Wirth
Staff Reporter
3/31/98 11:19 AM ET
Techniclone (TCLN:Nasdaq), a biotech company focused on cancer treatment, may be headed for the terminal ward thanks to a financing scam that preys on cash-strapped companies and their investors: The death-spiral convertible.
The Tustin, Calif.-based company announced last Friday it plans to hold a meeting April 23 to ask shareholders to approve a doubling of the number of authorized shares, from 60 million to 120 million. Authorized shares are the number approved for possible public issuance, and include those already in the public market.
The reason for this, the company's release explains, is to give the company enough shares so it can live up to an agreement made last year when it raised $12 million through the private placement of convertible notes. The notes, according to the release, are convertible into an "indeterminate number of shares of common stock."
The "indeterminate number" of shares could balloon the company's number of public outstanding shares to more than 70 million, said Jennifer Gianola, director of corporate communications for Techniclone. That's a whopping 150% increase over the company's reported 27.7 million outstanding shares in mid-March. Already, the swirling outer rings of the spiraling convertible have pushed the outstanding shares up to 41 million as of last Friday, said Gianola.
Currently, Techniclone's stock remains at 75 cents per share. The stock has plummeted about 88% since a high 5 5/8 reached a year ago, and volume has climbed within the last two months, likely because of short sellers as well as others converting the stock.
Welcome to the death spiral -- an often-fatal and all-consuming financial snare that companies desperate for financing unfortunately can fall into, usually taking most of their shareholders down with them. This happens when a cash-poor company will agree to a quick financing of a convertible security in which convertible holders get stock in a progressively aggressive ratio to the share price. If the stock price rises, there's no problem. However, if the company isn't out of the financial woods by conversion time, disaster ensues. Simply put, as the stock price falls, the number of shares given over in the conversion jumps. It's an accelerating process that doesn't stop until the company's financial structure collapses into itself out of sheer dilution.
"A number of companies have done this, and they have destroyed themselves," said Stanford Fingerhood, an analyst for Dirks & Co. For example, Reddi Brake Supply (OTC BB:REDI), a Ventura, Calif.-based auto parts retailer, was driven into bankruptcy last year after running afoul of a death spiral convertible, he noted. "Management that agrees to these structures are acting out of desperation or naivete -- or both."
Last April, hungry for cash to keep operations going, Techniclone agreed to sell 12,000 class-C preferred shares for $1,000 each to a group of 11 private investors. "This deal included things that were not the best of terms," Gianola admits now. The convertible, which became exercisable in September, was placed by Cappello & Laffer Capital, a private equity firm based in Los Angeles.
Shortly after Techniclone entered into this financing agreement, Dirks sold its small stake in the $3 range, and advised clients to do the same, Fingerhood said. Dirks, one of the few firms that followed Techniclone, ended its active coverage of the company shortly after that.
It should be no surprise that short sellers love these death spirals, and in fact often are the holders of these convertibles or are acting in concert with the convert holders. "The holders of these things make money as the stock goes down, so if you have friends in the business -- the stock will go down," Fingerhood explained. Short activity surged in the stock since January, reaching a daily average of 1.4 million shares this month.
Cappello & Laffer have placed other death spiral convertibles at other companies, most recently, at Casmyn (CMYN:Nasdaq), a Nevada-based gold-mining company. The stock, which traded as high as 21 3/4 in 1995, is worth less than a dime now as the company tries to find a way out of the death spiral.
Coincidentally, the firm also recently placed a convertible issue for Koo Koo Roo (KKRO:Nasdaq), a restaurant chain that yesterday named Lee Iaccoca as its chairman.
Ken Merek, an associate at Cappello & Laffer, denied his firm was to blame for any of the death spiral situations. The firm, which calls the securities "future-priced" convertibles, insists on strict restrictions against shorting and hedging in order to protect the common stock holders, Merek explained.
Other companies have fought back against the death spiral. Earlier this month, Champion Financial (OTC BB:CPFC) sued a Canadian brokerage firm and other investors, claiming the company's stock had been manipulated in a similar convertible spiral technique.
Techniclone's Gianola said she thinks the company will stabilized the death spiral threat if shareholders agree to increase the authorized shares. "We're cognizant about the stock's dilution," she said. "But I think most shareholders should understand the risk factors involved in biotech companies. We're just very dependent on financing."
Unfortunately, shareholders may not have too much choice but to approve the share increase. The company's release goes on to explain that without the ability to increase the number of authorized shares, the company will be unable "to prevent a redemption event or conversion default from occurring." Translation: Approve this or we're sunk.
The company has scrambled to show shareholders it is addressing the issue. The company's president and CEO, Lon Stone, resigned earlier this month, citing the stock's poor performance and the need to restore investor confidence. In the months preceding his departure, Stone twice sold his shares, at prices of $2.16 and $1.60, according to data tracker Baseline.
Two weeks later, the company announced third-quarter results, including an earnings loss twice that of the previous year, then began a massive restructuring, dismissing 18 of its 58 workers, and reshuffling top management.
While the immediate losers in this scheme are Techniclone and its common stock holders, the timing of this financial sinkhole is especially poignant. Techniclone just yesterday announced it would begin enrolling patients in its Phase II/III investigation of Oncolym, a tumor-fighting agent. Although Federal Drug Administration approval could be more than a year off, if Techniclone goes belly-up before that time, those patients who could have benefited by the company's product -- if it's successful -- are the real losers here.
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