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Technology Stocks : ITRA INTRAWARE -- Ignore unavailable to you. Want to Upgrade?

To: Mark Oliver who wrote (877)	7/1/2000 4:17:49 AM
From: Carl R.	Read Replies (1) \| Respond to of 937

It's not a terrible financing, but it's no great bargain, either. Companies like ITRA that are burning cash and losing more money the more they grow are finding increasingly less favorable terms when they have to go back to the well. Here is how I see the deal: As I understand it, the deal is a pretty sweet deal for the convertible preferred buyer. Let's say that the average price over the next 30 days is $15. In that case the preferred converts at $18. Thus the $25 million is convertible into 1.389 million shares. Let's say that the buyer wants no risk, so he shorts 1.667 million shares at $15. That way he raises all $25 million. He is thus out no cash, and is entitled to $2.25 million in dividends for the next 2 years. He is short 1.667 million shares, but can buy 1.389 million shares with his preferred. Thus he is net short 278k shares. If the stock rises, to get the rest of his shares to cover the short he can exercise the warrants, which entitle him to buy an additional 556k shares at $18, but if the stock falls he just buys the shares back. Thus in two years his return will be: Stock Gain/loss Gain/loss Total Price Dividends short Warrants Profit 10 $4.5 $1.4 $0.0 $5.9 15 $4.5 $0.0 $0.0 4.5 18 $4.5 ($0.8) $0.0 3.7 20 $4.5 ($1.4) $1.1 4.2 25 $4.5 ($2.8) $3.9 5.6 Thus in this example the convertible preferred buyer is out not one penny of cash, and always makes at least $3.7 million in profit. This is just one strategy the buyer of the preferred could take, of course. He could short more stock up to the full amount of his warrants. This would make is profit larger if the price falls, and fixed if it rises. Or he could short less (or even not at all), giving him a vested interest in the performance of the company. The point here is that unless the preferred buyer wants to take a risk, he doesn't have to. I would expect to see some significant shorting in the next 30 days. Also expect to see the underwriters try to support the stock at $12.50. The net effect is to sell stock into the market at the market price, and to raise $25 million, but doing it this way is safer for the underwriters than trying to do a secondary because they don't have to support the stock price, and besides, the underwriters make an extra $5 million in profit. Other than the initial impact of 1.5-2 million shares being dumped on the market over the next month, and the impact of the required $2.25 million a year in preferred dividends, the long term effect of the transaction should be minimal. It isn't a terrible deal, and it will allow them to continue to operate for another 3 quarters or so, which they couldn't have done without it. Carl