newsI don't know if anyone posted this or not. If they have I apologize.
Digital Gem a Web site in the rough
Digital Gem Corp GEM
Shares issued 142,308,683 May 11 close $0.58
Thu 11 May 2000 Street Wire
by Will Purcell
Shareholders await the long-touted launch of Digital Gem Corporation's
on-line trading Web site with increasing impatience. The on-line trading
site was originally slated to be unveiled late last year, but the date has
been bumped forward on a number of occasions, first to January, then to the
end of March, and now to +soon.+ A successful launch will not come any too
soon for investors, who have seen Digital Gem's share price sag while
number of shares outstanding and the published short position surged.
A successful launch, and an end to development costs, will come as a
welcome relief for the company's accountants as well, who have been using
ever-increasing amounts of red ink of late. Digital Gem reported a
quarterly net loss of $322,914 to June 30, a further $1.12-million to the
end of September, and last quarter, the loss grew to $2.32-million,
bringing the nine-month total to a hefty $3.84-million. The mounting losses
are primarily due to steady increases in Web site development costs, which
now total $1.2-million for the year to date, and general and administrative
charges, which also increased exponentially through the year and now stand
at $1.52-million for the nine months to date, as the company has added to
its roster of high-priced help during the year.
There has recently been a defection from the ranks of that high-priced
help. Bill Cameron, vice-president of communications, announced he was
leaving at the end of this month to +seek new challenges.+ Mr. Cameron
arrived just last July, after a career as a reporter and talking head for a
number of prominent Canadian Broadcasting Corporation news programs, and at
one time he had even been touted as the next anchor for that company's
national evening news. That promotion never came to pass, and the offer of
an annual salary of $150,000 and membership in the Digital Gem option club
may have been enough to entice him to give Digital Gem a try, at least. Mr.
Cameron was just a minor appointment in a series of high-priced additions
to the management of Digital Gem, and its option club, whose members
boasted just under 20 million unexercised options outstanding at the end of
February, and an additional 10 million warrants.
The number of shares and warrants outstanding will continue to grow
substantially, thanks to a rights offering in progress. Investors will
receive one right for each share owned, and six rights will allow them to
buy one unit for 50 cents. Each unit consists of one share and one-half
warrant, with each warrant exercisable at 75 cents per share before June,
2001. The management of the company will purchase up to 14 million units
not bought by shareholders, ensuring that the issue will be fully
subscribed, and increasing management's grip on the company.
That grip has been strengthening steadily, and for the most part, quite
cheaply, in recent times. Just three years ago, then known as American Gem,
the company was facing bankruptcy as a money-losing miner of sapphires in
the United States, under the control of former Minnesota state senator,
Gregory Dahl. American Gem did succeed in mining sapphires, but found that
selling them was a far more challenging task, and the company racked up
losses. American Gem shares traded above $5 in 1994, but steadily declined
as those losses grew. By the summer of 1997, a share could be had for a
mere five cents, and the company was in serious financial trouble. Mr. Dahl
was forced aside, and the remaining directors called upon Yorkton
Securities to help save the company.
Enter Victor Alboini. Mr. Alboini, once a securities lawyer and a partner
with McCarthy & McCarthy, was then executive vice-president and head of
mergers and acquisitions with Yorkton. He quickly put together a
restructuring plan that would see $11-million in debentures converted into
common shares, and creditors paid off in cash at 20 cents on the dollar. A
number of the debenture holders subsequently unloaded their holdings and a
sweeter conversion rate was ultimately set. Of the 58 million shares issued
through the conversion, 39 million went to an investor group that had been
buying up the debentures, including Mr. Alboini, who acquired 5.6 million
Gem shares through the process.
With Mr. Alboini directing things, the Gem board soon added Doug Harris and
Alexander Wylie. The three directors did not have to look far to find each
other. Mr. Harris was associate director of mergers and acquisitions at
Yorkton, under Mr. Alboini, and Mr. Wylie was a senior associate of the
same department. Mr. Harris and Mr. Wylie also acquired a significant
number of shares through the purchase, and subsequent conversion, of the
debentures.
Mr. Alboini bought an additional two million shares, at four cents per
share, and left Yorkton Securities for good in November, 1998, taking
charge at American Gem on a full-time basis. Exactly what prompted Mr.
Alboini to leave a career at Yorkton for a company which had a market
capitalization of about $3-million is not known, although rumours persist
that Mr. Alboini put together a review committee to examine a sizable
Yorkton investment, which subsequently went sour. Whether Mr. Alboini
soured on Yorkton, or the other way around, the departure paid off for him
in the months to follow.
The two directors still employed by Yorkton promptly left Gem, and Mr.
Alboini brought in new blood, in the form of Wayne Beach and Ian Bradley.
Mr. Beach was a tax lawyer who was now involved in financing resource
projects, and taking them public, but of far greater importance as it would
turn out, he was a one-third owner of Northern Securities Inc., a small
correspondent brokerage with about $1-million in annual revenues.
On the outside at least, Gem was showing few signs of life. In March, 1999,
the company mused about leaving mining and simply marketing its existing
stock of sapphires on the Web. Another private placement, needed to retire
debt, was completed at the unmercifully low price of 2.25 cents per share.
Things looked bleak indeed.
The mood changed three weeks later when the company announced it was
thinking of buying a brokerage to facilitate its entry into the potentially
lucrative world of on-line trading. The news caught investors by surprise.
American Gem shares jumped from 4.5 cents to a high of $1 just three days
later, with nearly 100 million shares trading in two days. A week later,
American Gem put a name to the brokerage when it revealed that it was
purchasing none other than Mr. Beach's Northern Securities, for
$1.5-million in cash and eight million share purchase warrants. Mr.
Alboini's stock position continued to grow as well, as he had graciously
participated in the 2.25-cent private placement, acquiring over 4.4 million
shares as a result. As well, he received 5.24 million shares through the
exercise of options, and a further 500,000 shares as salary.
Through all of the transactions, Mr. Alboini had added over 10 million
shares to his portfolio, at a total cost of approximately $350,000. He now
held 20.87 million shares of American Gem, which were valued at in excess
of $23-million at one point in the spring of 1999. It was a profitable time
for Mr. Beach and Mr. Bradley as well, as they exercised cheap options to
purchase 1,437,500 shares each.
Early last May, Nadir Desai and Wesley Roitman had joined American Gem. The
announcement caught the attention of investors, and Gem stock peaked at
$1.13 following the news. Mr. Desai had been head of the Canadian
subsidiary of PSINet Inc., and just weeks earlier he had been promoted to
senior vice-president of PSINet Inc. itself. Wherever Mr. Desai goes, Mr.
Roitman seems to tag along as his chief financial officer. Mr. Roitman had
earlier served under Mr. Desai, at NICNAD Enterprises Ltd., an active-wear
manufacturer and retailer. When Mr. Desai jumped to PSINet at the end of
1995, Mr. Roitman followed. As a result, it was no big surprise when the
pair made the leap in unison once again, although it was a curious series
of leaps as the pair moved from sportswear, to the Internet, to stocks.
The latest leap was made more pleasant by the terms of the deal. Mr. Desai
and Mr. Roitman owned Digital Fluid Ltd., which apparently held technology
for developing e-commerce businesses and also held the employment contracts
of the pair. Gem took over Digital, and the two new recruits received about
10 million shares each. Mr. Desai became the president and chief executive
officer, at an annual salary of $300,000, while Mr. Roitman became
executive vice-president and chief operating officer, worth an annual
$175,000. Mr. Alboini stepped down to become chairman and chief executive
officer of Northern Securities Inc., now a wholly owned subsidiary, for an
annual draw of $175,000, while Mr. Beach, his work apparently complete,
stepped aside completely and went on to new projects.
The company continued to add high-priced help to its payroll. In addition
to Mr. Cameron, Digital Gem also signed AnneMarie Ryan, as vice-president
in charge of on-line trading, for $150,000 per year, plus options. Ms. Ryan
had once been a senior vice-president with CT Securities, in charge of
business development. With the move to Gem, Ms. Ryan now has the chance to
compete with her former employer, if she can just get the Web site up and
running. As an additional enticement, some of Ms. Ryan's options were tied
to the on-line trading launch date, and they may be in jeopardy as a result
of the delays.
The option train picked up steam through the year. For the second year in a
row, shareholders were asked to approve a new stock incentive plan that
allowed the company to significantly increase the number of options that
might be granted. With approval in hand, the company announced its
intention to grant Mr. Desai and Mr. Roitman 6.5 million options each, and
a further 6.1 million to Mr. Alboini. The options vest in equal
installments over a 40-month period.
Digital Gem managed to cut its Web site development teeth last summer, with
its on-line sapphire marketing venture. The company reported nine-month
sales of just under $800,000, roughly double the operating costs, but it
has a finite number of gems and no plans to mine more. The brokerage,
meanwhile, has not fared so well. First quarter revenues were a modest
$160,277, and a mere $20,639 in the following quarter. The most recent
quarter offered an improvement, with $342,465 in revenues, although
expenses continued to grow faster than income.
Some further improvement is likely in the last quarter of the fiscal year,
as eNorthern has been much more active in underwriting new issues. The
company has recently been a co-underwriter for Hemosol Inc. and SR Telecom
Inc. public offerings, and was the lead underwriter for a 701.com public
offering. As well, eNorthern was the sole underwriter for a Stroud
Resources Ltd. rights offering, and an Admiral Inc. private placement.
Nevertheless, there are likely no profits in store for Digital Gem in the
immediate future, although officials are not offering many predictions.
Earlier this year the on-line trading vice-president, Ms. Ryan, fudged, +In
terms of breakeven, we probably estimate that we would break even in two to
three years.+
Digital Gem, still developing its Web site, closed down two cents Friday,
at 56 cents.