>>From Nov. filing:
In 1998 the Company acquired 576, 923 Terayon common shares for $10,767,000 and was allocated warrants to acquire a further 3,000,000 common shares at $6.50 U.S. per share until December 31, 2003. The economic benefit attributable to 400,000 warrants was awarded, under an incentive arrangement, to the Executive Chair of the Company. In January 1999, the Company purchased these warrants at their fair market value from the Executive Chair at a cost of $22,594,800. During 1999, 384,615 shares were sold for $22,806,000, resulting in a pre-tax gain of $15,589,000 and 1,500,000 shares were acquired through the exercise of warrants.<<
Pat: The implications of this are slowly beginning to dawn on me. Let me check my math and see if I have the picture that this paints correct. TERN has given Shaw warrants at a low price to encourage Shaw to buy modems from them. The 576,923 TERN shares acquired by Shaw cost them an average of $18.66 per share. In 1998 this must have been at a premium to the market price (unless it occurred late in 1998), but the inclusion of 3,000,000 warrants to buy more at $6.50 per share would more than compensate for this. 384,615 of these shares were sold in 1999 for $22,806,000 (an average price of $59.30 per share? must have been late in the year?) resulting in a tidy profit (almost 16 million dollars) for Shaw. The Executive Chair of the Company (who is this? the CEO of Shaw?) must have also benefited nicely. The 400,000 warrants he received and sold back to his company (Shaw) netted him over 20 million bucks?
Looking forward, the warrants for 3,000,000 shares at $6.50 could be exercised and if the TERN shares were sold at $106.50 (remember TERN closed at 125 yesterday), Shaw's pre-tax capital gain is 300 MILLION DOLLARS! Am I missing something here, because this seems incredible? In this crazy market, as long as TERN's year over year revenue percentage growth remains in the triple digits, it's a fair assumption the stock price will keep going up, up, up. Imagine what Shaw's 3,000,000 shares would be worth if TERN rose to 200, or to 300, or to 400? EGADS! TERN's revenue last quarter was $38.7 million. Why wouldn't Shaw want to buy $50 million of TERN modems next quarter just to keep the ball rolling? They most likely would realize many times that amount back in capital gains on the TERN shares they have. And as you suggest, they could just stuff the modems into a warehouse.
So who benefits from this arrangement? The TERN shareholders must be happy as long as the moon-shot continues! The Executive Chair of the Company must be VERY happy. The Shaw shareholders must be happy too, as their revenues grow more rapidly augmented by nice big capital gains. Although this has a funny smell to me, I assume it's all perfectly legal (and probably far more common than I realize). I've been trying to figure who the loser is from all of this. And, it finally occurred to me as I stared at myself in the mirror while shaving this morning. The losers are the poor (e.g. me) CMTO shareholders who invested their money in the company that had the superior technology and product thinking that this is what would drive revenue growth, instead of investing in the company that had the more "creative" business model. Have I, more or less, pieced this together right? |
