Monday, May 23, 2005
May 31, 2005 update: I've filled out the checklist for this company and I'll continue to do additional groundwork.
Red flags: They repriced stock options twice. They were big-time spend thrifts during the bubble years (yeah I know, who wasn't?). They hand out stock options like free candy. Changed accountants in 2002. Jennifer "Jenna" Woodul had a $100,000 related party loan oustanding before going dark.
Green flags: Senior management salary cuts, removal of D&O insurance, and good flexible adaptation during lean times. Very favorable impression of a senior VP and family. Solid customer base and lots of renewals. [NOTE: add some of the other stuff I sent to Mike here]
Issues still unresolved:
1) Not sure of the loss being carried forward. Probably fairly large. Minor issue.
2) Don't know the current credit facility limit, interest rate, expiration, covenants, and balance. Minor issue.
UPDATE: I'm buying. It's an investment.
UPDATE: GAMBJIM says, "The loss carry forward is approximately 125 mil."
I agree options are an issue. A potentially, big issue. We are trying to sort out the tax liability that one incurs when an individual exercise options. That so far is a gray area and may be one-reason options have not been exercised in mass. If the option price/value is 2 cents and the stock worth is 50 cents at the time it is exercised is there a Capital Gain tax that has to be paid and/or would the 48 cent have to be declared as income for that tax year? Then the stock can’t be sold for a year. At which time there could would be another tax event.
Yes, I don't believe there's any debt, however this is from the 2002 10-K:
"In May 1998, we obtained an equipment line of credit with a financial institution in the amount of $2.0 million. This line of credit is secured by our fixed assets and has a four-year term that expires in April 2002. As of December 31, 2001, the amount outstanding under this line of credit was $21,000. The company has no present plans to renew the line of credit."
There are a few lines on my checklist about the details of lines of credit. The interest rate says a lot about what a bank thinks about their riskiness. Of course this was a totally different company in 1998. And it's possible they never got another line of credit.
"If the option price/value is 2 cents and the stock worth is 50 cents at the time it is exercised is there a Capital Gain tax that has to be paid and/or would the 48 cent have to be declared as income for that tax year? Then the stock can’t be sold for a year. At which time there could would be another tax event."
If the strike price is 2 cents and it is exercized at 48 cents, then I believe it depends on whether it is a "qualified" incentive stock option or a "nonqual" option. With one of them, the difference between strike price and exercise price is taxed as normal income while any capital gains beyond that are treated as regular capital gains would be.
My point about the loss carry forward is about how much income can they make in the future without being taxed on it.
Anyway, thanks for commenting. You're the first one to leave a comment. Congratulations!