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Technology Stocks : Legacy Storage Systems Inter. Inc-VAST 1500 Gig
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To: Neil Leckett who wrote (24)9/13/1996 9:56:00 AM
From: Frederic Borgatta   of 64
 
Thank you for your insights. WRT the options, I believe the reduction in the exercise price is for existing rights. As you'll see from the handout, it is fairly complicated. The important point 'though, is that Killins holds 13% of the shares but no stock options. The options are for the other members of the management team. While salaries appear reasonable, I would've liked to have seen the options at least over a $1.50. If investors have to be patient so then ought the management team; indeed, the latter should work at increasing shareholder value. Having said that however, I suspect that as sales increase (there is a formula for releasing shares based on sales targets), the exercise price may go up. In the meantime, it would've been good public relations (albeit an esoteric one as far as most investors are concerned) had management stuck to their original exercise price.
There are other issues. If you look at current assets, accounts receivable has jumped approx. 368%; they account for 46% of current assets (as compared to 22% in fiscal 95). Do you have any insight about this? The writedown wrt goodwill was related to a reduction in the useful life of the Legacy acquisition from 15 to 9 years. Ignoring the writedown however, the net loss per share rose from $.02 to $.07. (The proportion of sales due to cost of goods sold rose from 88% to 93% and thus gross margin fell from 12% to 7%.) Management paid itself a generous bonus for the Rexon acquisition and general and admin. expense rose 129% over fiscal 95 (representing 13% of sales. What I don't know is whether the proportion of sales due to cost of goods sold remains fixed or indeed increases. If so, the only place where the bottom line will improve is through expenses, and they appear to be increasing.
So while your point about putting things in place is well taken, I'm afraid that I must remain skeptical (subject to any misunderstanding about how these things work on my part) about management's interest in increasing shareholder value. Looking forward to reading your comments. Cheers.
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