Ed, from a technical standpoint, your bottom fishing of CHT may prove profitable. CHT may have bottomed and may be a good short-term buy. However, I see too many red flags to consider it a long-term hold.
Management has not only re-priced options, but they repeat the practice year after year. Check out their 99 and 98 proxy info circulars on SEDAR. For prior years, search the VSE notices. Pick an early batch of options and follow the bouncing ball to see if you can keep track of its pricing history.
I don't think these guys have any respect whatsoever for the retail shareholders. After repeatedly requesting an investor's info package (and making it clear that I wanted their most recently available proxy info circular to be included), months later I finally received what amounted to a couple of glossy advertising pages that didn't even include info on the number of shares outstanding.
Management of companies that re-price their options can sometimes be quite creative in trying to justify their actions. However, to cut to the chase, re-pricing is simply a (risk free) way for insiders to try to line their own pockets at the expense of the shareholder. The retail shareholder can't go to the regulatory authorities and ask for his money back if the share price drops. No, he's stuck. In the meantime, re-priced options can create an undertow that makes it difficult for Joe Retail to ever get out even. Yes, I know the practice is legal. But, it is also morally and ethically repugnant. The securities regulators are basically pimps to allow such a practice. (Now, I know this statement may seem to have gone too far; however, I've seen hundreds of original insider trading reports and know what wink-wink, nudge-nudge organizations they are.)
I forget what comedian it was that said the way to make money in the stock market is to only buy those shares that are going to go up. If they don't go up, don't buy them. Unfortunately, that plan is a bit difficult to implement for the retail shareholder because it is dependent on hindsight. However, it is a piece of cake for insiders. All they have to do is grant themselves options (risk free) and then use hindsight to exercise those in the money. Even particularly bad management can be rewarded. If they don't get it right the first time or if they're so incompetent that they drive the share price through the floor, all they have to do is re-price.
Before leaving the topic of re-pricing, it should also be noted that most companies are allowed to allocate an amount up to 10% of the number of shares outstanding for options. CHT has previously managed to UP THIS AMOUNT TO 20%. If that isn't bad enough, they habitually re-price. Look at their 99 proxy form. Three of the six items to be voted on concern options. Where are their priorities? In item #5 they're basically asking for a blank cheque to continue their addiction to re-pricing. Do these guys have any shame at all?
The new release of June 28, 1999 glowingly talks about an increase in sales and revenue for their first quarter of 99. It states that the net profit was up 368% over the same quarter in the previous year. They just didn't happen to mention that the number of shares outstanding went up roughly 212% (308% on a fully diluted basis). Using an O/S of 11,533,522 at Mar 31/99 for the stated earnings of $59,500.00, their 99 Q1 EPS was roughly 1/2 a cent a share. (On a fully diluted basis, this value gets cut roughly in half.)
The Summary Compensation Table on page five of the 99 proxy info circular indicates that Thornton's salary in 98 was CDN $120,000. The Employment Agreement section on page seven describes a lucrative GOLDEN HANDSHAKE contract and states that "Additionally, in the event that Mr. Thornton is required to relocate to the United States, all references to the Annual Base Salary are to be considered in US currency". The Management Report For the Year ended December 31, 1998 states, "The Company's President, Robert Thornton, has relocated to Los Angeles to direct the US operations and to continue with the Company's objective to grow the company's operation through both internal growth and continuance of the successful acquisition program". In other words, Thornton is probably being paid in US funds. If so, does that mean the CDN $120,000 now becomes roughly CDN $174,000? And, if so, why doesn't the 99 proxy info circular CLEARLY STATE UP FRONT if there has been a change subsequent to the year end? Is this another great example of integrity?
According to the Buy Low, Sell High write up in March 1999, management was projecting earnings of $1.27 million in 1999. Your number of $750,000 (which I assume also came from management at the AGM) is only 59% of the previous projection.
As I indicated earlier, if this thing has bottomed, it may be a good short-term buy (particularly if the analysts/brokers start promoting it.) Just don't forget where the fire exits are located.
All the best,
Ben |
