Rick, the warrants represent an opportunity cost to the company. As of Sept 30, 1996 the company has issued nearly 12 million of its 20 million authorized shares. That means that it only has a bit more than 8 million shares left for fundraising and deal making. If they want to buy East West Herbs they will have to pay $780,000 in cash and $2.4 million in stock plus provide them with a $300,000 loan. Let us assume for argument's sake that the company decides to raise this cash by selling stock and the price of the stock is is $3 on the open market. If that is the case it would have to sell about 1 million shares on the market and hand over 800,000 shares to the folks at EWH to acquire them. This would leave them with only about 6.2 million shares for any future financing. Acording to form 10 KSB which they filed with the SEC last December, they originally issued 2.3 million warrants, of which a bit under .3 million warrants have already been exercised. That means there are over 2 million warrants still outstanding. The company can't sell 2 million of the remaining 6.2 million shares because they need to keep them for possible warrant redemption. That leaves them with only 4.2 million shares to play with. Of these 4.2 million shares, almost 2.2 million can not be sold on the open market because the company gave over 1.8 million warrants to Travellers and the other two institiutional investors and sold 350,000 warrants with a strike price of $5.25 to an investor for 10 cents a piece. (God, I wish I were that investor! This was major industrial stupidity on PRLN's part, IMHO). So really, After the EWH deal and all the stock that must be kept in reserve for the excercise of options, the company only will have about 2 million shares left to raise cash. (The warrants issued to Travellers and the lucky investor expire well after the warrants now traded on the open market. They will still be good long after our warrants expire.)
Now, suppose the stock price shoots above the strike price before the warrants expire. In that situation it won't make much difference whether PRLN extends the warrants or not because they will be able to raise $6.5 million in cash either way.
(2 million warrants x $3.25 strike price.)
However, let's suppose the stock does not go above the strike price by Sept 7 and then goes to $5 on Sept. 8th. By letting the warrants expire the company has the opportunity to sell the 2 million shares on the market or through a private placement for $10 million dollars. In other words, in this scenario they will have raised an additional $3.5 million by letting the warrants expire.
Robin
|
