Here's the story with the warrants:
Essentially, warrants are like very long-term options. Each warrant gives you the right to buy 1 share of the stock. There are two very important aspects of the warrants: the exercise price and the expiration date. The exercise price (the price you would pay for the stock when you convert the warrants to stock) is $5.75/share I believe. So, if you pay 3/4 for the warrants, essentially, you are paying 5.75 + .75 = 6.50 for the stock. That may not seem like such a good deal considering the stock is at $4 right now. But the other aspect of the warrants are the expiration date, which represents how long the warrants are good for. The expiration date on these is in August....2002! So, you have four years until these are no good. In the meantime, if the stock goes to $10, your warrants will be worth 10 - 5.75 = 4.25. Based on a cost of .75, your return would be 467%! If you bought the stock at $3.75 however, your return would "only" be 166%.
Now, if the stock went to $25, you can see how owning the warrants could pay back in a big way. The reality however is that the company has the right to "call" the warrants early if the stock remains above $5.75 by a certain amount for a certain period of time. That means they would MAKE you convert your warrants into stock well before the stock got to $25. But even at $10, your upside is much greater with the warrants since you can leverage the upside of 5X as many shares as if you bought shares outright now. And they would not force warrantholders to convert unless the stock was far enough above that breakeven point of $5.75 so that warrantholders wouldn't be in jeopardy of giving it all back right away. Remember, they are going to receive $5.75 from warrant holders who may have paid less than $1 for the warrants. And we are not about to throw in that extra investment unless we feel comfortable that the stock will stay up for a while. In reality, you'd probably want to sell most of your warrants for that large return and maybe only convert a few if you still believe in the company's potential from there.
The only downside is that in four years, if this investment hasn't worked out, your warrants will be worthless, but the shares may still have value. But given your potential upside and all the time you have to work with, the warrants are a better bet.
Hope this explanation was clear enough. Turs |
