From Briefing.com:
8:55 ET ******
EGGHEAD SOFTWARE (EGGS) 20 1/4. It does ultimately matter when companies lose money every quarter, even if they are Internet companies. Before the open Monday, Internet software retailer Egghead Software (EGGS) announced that it has filed to sell 4.8 million shares in a secondary offering. This is a direct result of the need to finance ongoing losses in the company. EGGS has lost a lot of money lately. In fact, it has been years since they had a profitable quarter, and they lost over $5.20 per share in 1997 and 1998 combined, and they are looking at a loss of about $1.20 per share for 1998. Altogether, that comes to about $160 million down the tubes. The stock has gone up sharply since EGGS moved from being an old-fashioned brick and mortar store to being an Internet retailer. It was hovering between 4 and 6 in early 1997, but has moved to as high as 40 since then. The idea, of course, is the ultimately, EGGS will make a lot of money selling software on the Internet. Until then, it apparently will lose a lot of money. So, along comes the need to raise more hard cash to pay the bills. When that happens, companies often issue more stock in a secondary offering. When a company does a secondary to raise funds to launch a new product or initiative, it is one thing. When they do so to get the cash to fund ongoing operations, it is another. And EGGS needs to do this to have cash to fund existing operations and to shore up their balance sheet. This has the negative effect on existing shareholders of diluting their current ownership. It increases float for trading, and the number of shares outstanding. Thus, when EGGS does ultimately make a profit, that profit will be divided among a larger number of shares, producing a lower per-share profit figure. Another way the companies can raise cash when they continue to lose money is to issue debt. Amazon.com recently took this route. (They actually are doing a convertible debt issue, but we will leave that aside for the time being). When this occurs, the company has a higher interest cost to pay each quarter that directly reduces operating profits. So, even though the market is more concerned with Internet companies gaining market share with the goal of maximizing long-term profits, short-term profits also matter. As Internet companies such as EGGS continue to lose impressive amount of money, look for more companies to have to either sell more stock, or issue more debt. Neither is in itself good for the existing shareholders. |
