World Surveillance Group Inc (fka WSGI)

[pokestake]

Found this old article from Intervoice-Brite's (mentioned in the PR of yesterday) past. Also mentions Promethean (doesn't Sanswire/Globetel have experience with them?) with death spiral financing explained very well. They all sound so naive back then:

http://www.thestreet.com/p/pf/markets/dumbest/10029476.html

The Five Dumbest Things on Wall Street This Week
By George Mannes
Senior Writer

4. Promethean Unbound

Certain companies are like tow trucks: If they're in the neighborhood, chances are good there's a car wreck close at hand.

That came to mind once we took a look at one of the latest deals involving Promethean Asset Management, one-time lender to such well-known clunkers as eToys, Excite@Home and the sub-dollar MicroStrategy (MSTR:Nasdaq - news - commentary) .

Wheezing and sputtering in the breakdown lane this time around is InterVoice-Brite (INTV:Nasdaq - news - commentary) , which sells voice-recognition systems and other services to telcos.

Late last month, InterVoice-Brite issued a press release saying it had successfully restructured its debt, in part through $10 million in convertible notes it issued in a private placement. "I'm pleased with these transactions," the CEO said in a statement.

What the company didn't say (although investors might have figured it out from an SEC filing to which the release alluded) is that the convertible notes, issued to Promethean, look an awful lot like what cynical Wall Street types call a toxic convertible or death-spiral convertible.

In such convertibles, the underlying company shares have a floating price. In a worst-case scenario, a company's share price falls after it issues the convert, causing an increase in the number of shares that will be issued upon conversion of the debt. That threat of dilution causes shares to fall further, starting the downward cycle all over again and leading to the death-spiral characterization.

In this particular case, the conversion price is fixed. But what isn't fixed is how many shares InterVoice-Brite might have to issue as it pays off the loan.

See, starting in September, InterVoice-Brite will have pay Promethean about $1 million a month to repay the debt. If it chooses, it can pay in cash. But if it doesn't or can't, InterVoice-Brite will have to issue common stock to make the payment. The lower the stock falls, the more stock InterVoice-Brite will have to issue, and -- well, you get the idea.

The burning question, of course, is whether InterVoice-Brite will have enough cash on hand to make the payments. Chief Financial Officer Rob-Roy Graham says the company believes it can, based on its cash on hand and expected cash flows.

But some short-sellers are betting against it, pointing to factors such as the anemic telco market and the company's $807,000 in negative cash flow from operations, reported Monday, for the three months ended May 31. They also point out that Promethean itself, as discussed in the relevant SEC filing, is able to short the stock.

So far, the short bet on InterVoice-Brite has been a good one. Since May 29, the night before the Promethean deal was announced, the stock has fallen from $3.11 to $1.75, or 44%.

For his part, Jamie O'Brien, managing member of Promethean, doesn't agree with the toxic and death-spiral characterizations of the deal. "They [InterVoice-Brite] are in complete control whether they're going to use cash, or whether they want, periodically, to use stock," says O'Brien. "We hope the company repays in cash, and the company has publicly stated they expect to repay in cash. It's a very boring instrument, hopefully."

For InterVoice-Brite's sake, let's hope so.