Wednesday, October 05, 2005

Desperate Times & Screwed Shareholders

This post updates where we last left off with JWL... back when I said 1.38 might have been a good investment because liquidating it would give us a value approximately 34% of that. Lo and behold, it didn't work out that way, much like I predicted--instead of liquidating the company, the board and managers have decided to screw the current shareholders, continue running the company, and came up with a re-financing plan that takes all the value out of the company. Boy, am I glad I didn't buy! :D

Infact, what they did to the current shareholders should even be considered illegal. It completely dilutes the value of existing shares, in favor of the company simply "surviving". Just as I thought! After looking at the situation with our beloved Krish (the AllStar PM), we can pretty much summarize the whole investment situation for you:

Whitehall ran into some liquidity problems and was short on cash. They couldn't pay the interest on the $85m dollars debt they had and one of their lenders called default on them. Now Whitehall is refinancing the company, and the terms are:

- 30m Bridge Loan due Dec. 31 2005, on 18% interest
- 1,970,000 warrants, exercisable at $.75
- 50m Convertible debt, on 12% interest, at conversion price of .75 a share

The last two financing options is what completely screws the shareholders over. This dilutes the market capitalization rate so brutally, that there is absolutely no hope of recovering shareholder value again on this company--at least not for the next decade or so. The 50m convertible notes are used to pay down the 30m Bridge loan by the end of the year to save interest... and the rest of the cash will be used to finance their last round of jewelry purchasing and interest payments to make them barely survive past this year. This leaves about 20m more debt on their balance sheets, increasing the figure to roughly 100m. But that's not the killer... noo... the killer is this:

1,970,000 warrants, exercisable at $0.75, and 50m of convertible debt, exercisable at $0.75

Usually, the convertible rate on convertible notes are at least market value to make it fair to the current shareholders that their ownership would not be diluted. But this company issued $50m worth of both ownership of the company and debt, practically at a 35% discount (more if the share prices go up, in the bizarre and twisted event that it actually does go up). It's like Whitehall issued 68 millions shares of stock practically for free--plus they pay a 12% interest on $50 million dollars worth of those stocks. And when the interest is sucked dry, debt holders are sure to convert and realize the rest of the gains on the market.

And I'm not even going to mention the warrants. The warrants were FREE. Period--a thank you gift, rather... to the hedge fund that completely preyed on this company's shareholders.

Now, I re-iterate. At a market capitalization rate of around $20 million Management and the Board could have decided to liquidate the company, and Shareholders would have at least been able to realize 40% more of the stock's value.

This is now a debt-holder's company. Shareholders of Whitehall should sue this action! I just can't seem to get it through my head how wrong it is to deprive shareholders' value this way. Liquidating the company would have made much more economic, as well as moral & ethical sense.

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