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Technology Stocks : The New QLogic (ANCR) -- Ignore unavailable to you. Want to Upgrade?

To: iceburg who wrote (23791)	8/17/1999 11:44:00 PM
From: Greg Hull	Read Replies (1) \| Respond to of 29386

Steve, <<When Sun exersizes their warrants it will appear as a one time charge - A NON CASH charge.>> My understanding is a little different from this. From the 8-K (page 2) filed 7/16/99: Our revenue will be materially reduced as a result of the warrant we granted to Sun Microsystems. As part of our agreement with Sun, we granted a warrant to Sun to purchase up to 1.5 million shares of our common stock at an exercise price of $7.30 per share. In order for the warrant shares to vest, Sun must purchase products from us. The warrant shares are earned at the rate of one share for each $67.00 of revenue we receive from Sun through September 30, 2002. In each period in which the warrant shares are earned, a non-cash sales discount will be recorded. The amount of the non-cash sales discount will be the fair value of the warrant shares which are earned in the period. Fair value of the warrant shares will be calculated by using the Black-Scholes option pricing model. The primary component in the Black-Scholes calculation is the value of our common stock at that time. The value of the warrant shares, and the corresponding sales discount, increases as our stock price increases. Conversely, the value of the warrant shares, and the corresponding sales discount, decreases as our stock price decreases. Since the value of our stock cannot be estimated, it is not possible to estimate the amount of the non-cash sales discount that could be recorded, but it could be significant. For example, if our share price is $28.81, the value of a warrant share would be $27.06 based on the Black Scholes option pricing model. This means that for each $67.00 in gross revenue to Sun, we would record a non-cash sales discount of $27.06. Depending on our stock price, this sales discount could cause us to report a negative gross margin on sales to Sun. In addition to the impact of newly earned warrant shares, revenue in any quarter will also be affected by a change in the value of the warrant shares that were earned in prior periods but not yet exercised. For example, if some warrant shares are earned in the first quarter of 2000, we would record a non-cash sales discount based on the fair market value of those warrant shares as of the end of that quarter. If Sun does not exercise these warrant shares by the end of the second quarter of 2000, we would either record an additional non-cash sales discount or a non-cash sales credit depending on the change in the value of those warrant shares from the end of the first quarter to the end of the second quarter. If Sun exercises the warrant shares in the third quarter, we would record a final non-cash sales discount or a non-cash sales credit based on the change in the value of the warrant shares from the end of the second quarter to the date Sun exercises the warrant shares. We cannot predict the impact on our revenue because it is dependent on the number of warrant shares Sun holds and the change in our stock price. <<I also do not believe Sun is going to clobber Ancor with this every quarter. It will most likely occur in one lump 5-6 quarters from now. >> Unless I am misreading this information, the Sun warrant effect will not be an isolated one-time event, but an every-quarter event from the time Sun begins buying product until they exercise the last vested warrant. <<I can also assure you that any "smart" money knows how important that deal is knows why it was structured that way.>> I suspect that the Fidelities and other smart money know full-well the impact of the non-cash charges and the negative margins they create. What I'm not sure of is whether this creates a cap on share price, above which ANCR is not attractive. If discounted cash flow is the metric used we are probably OK. Greg