I think that if you examine this a little closer you might find that using warrants as a sales tool might not be as crazy as it seems at first glance. It all depends on who you're offering them to.
Are you aware that Qlogic (QLGC), through their Ancor Communications purchase, are offering a similar deal to Sun? Sun is authorized to purchase warrants based on the amount of equipment they buy up to 100 million dollars. The price of the warrants is $13.84 a share but the effect on the balance sheet is complicated because it is based on the price of QLGC's stock. Obviously, the higher the stock price (QLGC's) the more the warrants are worth. QLGC records the difference between the stock price at the end of the quarter and the warrant price as a non-cash sales discount using the Black-Scholes accounting method.
The bottom line is that in order to earn the warrants, Sun has to buy product. QLGC gets the revenue (100 million)plus the purchase price of the stock (11 million). Sun gets the product and an ownership position in their vendor. The net effect is that additional shares of QLGC are issued causing a slight dilution in the float (less than one percent). This whole non-cash sales discount thing seems like a bogus number anyway since it is hard to really assign a value to the warrants until such time as Sun sells the stock.
The jury is still out as to whether this is an effective sales tool or not but it looks like a creative way to sweeten the pot as well as bind your customer to you.
This is from QLGC's last earnings report.
For the first nine months of fiscal 2001, gross revenues expanded 72% to $262.2 million, compared to $152.1 million for the same period a year ago. Pro forma net income for the first nine months of fiscal 2001 rose 91% to $70.3 million, or $0.74 per share on a diluted basis, compared to the $36.8 million, or $0.40 per share recorded on a pro forma basis for the same period a year ago.
Actual net revenues for the quarter ending December 31, 2000 were $95.1 million. These actual net revenues include a $2.1 million sales discount for an adjustment in the value of warrants to Sun Microsystems (See Note (1) to the accompanying condensed consolidated financial statements). Actual net revenues for the nine months of fiscal 2001 amounted to $257.9 million, with $4.4 million in sales discounts related to the Sun warrant agreement. Taking into effect these discounts the company's actual earnings per share in the third quarter are $0.26 on a diluted basis, compared to $0.15 in the prior year.
(1) As part of an agreement with Sun, the Company granted a warrant to Sun to purchase up to 791,250 shares of the Company's common stock at an exercise price of $13.84 per share. In each period in which the warrant shares are earned, a non-cash sales discount is recorded. |
