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Technology Stocks : The New QLogic (ANCR)
QLGC 16.070.0%Aug 24 5:00 PM EST
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To: Pigboy who wrote (23761)8/15/1999 9:02:00 PM
From: Greg Hull  Read Replies (2) of 29386
 
To all:

Here's another topic I understand poorly, and perhaps someone can get me pointed in the right direction. This has to do with the warrants Sun has been issued and its effect on Ancor's reported profitability.

Scenario A. Let's say Sun buys $100M worth of product from Ancor in 2000, and that the share prices rises to $100. As I understand it, Sun's warrants will be worth something in the vicinity of $140M. Ancor adds a similar amount to its cost of sales, resulting in a negative gross profit for the year (assuming no other sales). Ancor would pay no tax to the IRS because they had no profit. Sun would pay tax on the common shares after the warrants have been exercised and shares sold. Ancor ends the year with another $20M in the bank ($100 revenue minus $55M for Pemstar minus $25M SG&A), yet reports a loss.

Scenario B. Sun purchases warrants in 6/99 for 1.5M shares that vest in December 2000, independent of purchases by Sun. Sun purchases $100M worth of product from Ancor in 2000 and the share price rises to $100. Ancor's operating profit for 2000 is $20M and Ancor would pay the IRS several million dollars (ignoring tax loss carryforward). Sun would pay tax on the common shares when sold.

Both scenarios result in Sun paying $100M for product, but in Scenario A, the IRS gets no cut of it.

Question: Why would the IRS allow a sales contract to shelter millions of dollars from them, or how is my understanding screwed up?

Thank you for the help,
Greg
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