Aetrium Safeguards Tax Benefits Of Carrying Over Losses

The semiconductor equipment manufacturer recently adopted a shareholder rights plan in an attempt to pay lower income taxes by “carrying over” its $76 million in losses.

The board of North St. Paul-based Aetrium is asking its shareholders to adopt a “tax benefit preservation plan,” which is meant to limit the amount of its stock that investors might purchase. The move is meant to ensure Aetrium retains certain tax benefits.
 
The tax benefit plan, also known as a “shareholder rights plan,” is intended to deter individuals from acquiring more than 5 percent of the company’s stock, and also to prevent those that already own more than 5 percent from acquiring additional shares.
 
Aetrium makes equipment used by the semiconductor industry—and it claims that demand for its products is driven largely by end-user demand for electronics, which has waned in recent years. According to the company, the plan is meant to protect its net operating losses (NOLs) in order to preserve the value they can bring in future deferred tax benefits.
 
Companies may “carry forward” their net operating losses in certain circumstances in order to offset current or future taxable profits—up to 20 years in the future—according to the IRS. For example, if a company lost $200,000 in 2011 but earned $850,000 in 2014, it can “carry forward” its losses so that it will only be liable for taxes on $200,000 of its profits in 2014.
 
Aetrium estimates its net operating losses to be about $76 million, as of December 31, 2012.

 
The agreement comes into play because Aetrium’s right to “carry forward” its losses can be limited—or even lost altogether—if the carry over takes place in any single year that follows the company undergoing an “ownership change.”
 
An ownership change occurs when a company shareholder, who owns at least 5 percent stock in the company, increases his or her holdings by 50 percentage points more than the lowest percentage of shares he or she has owned in the last three years.
 
In order to prevent an ownership change, Aetrium’s plan will give other shareholders the right to buy stock at a discount price if one shareholder acquires more than 5 percent of the company’s stock. That way, the discounted purchases will dilute the holdings of the individual or group that acquired more than 5 percent, thereby preventing an ownership change.
 
“The company has a significant asset in its NOLs and the board took this prudent step to protect this asset,” Chairman Jeff Eberwein said in a statement. “We hope to generate net income in the future and we want to be able to utilize this valuable NOL-related tax asset to offset the tax liabilities that will be created from that net income. The plan is the latest in a series of strategic initiatives that are designed to maximize value to all our stockholders.”
 
Aetrium’s shareholder dispute case

Throughout the end of 2012 and into 2013, Aetrium butted heads with a shareholders activist group that was trying to overthrow the board so it could replace all six of the company’s board members, saying at the time that a change in leadership was necessary due to the board’s “inability to halt the steep share price decline, poor financial performance, excessive compensation, failed succession planning, and poor corporate governance.”
 
After months of heated arguments, which included a lawsuit in December, the two groups settled on an agreement last February to temporarily boost the company’s board to 11 members so that five members of the investor group could join and, in partnership with the existing board, agree on a slate of directors moving forward.
 
Aetrium announced in March that the 11 members had decided on the six that would remain, three of which were incumbent directors and three that were chosen by the activist group. The terms of the agreement also called for President and CEO Joseph Levesque and board members Darnell Boehm and Douglas Hemer to resign after the sale of “both of the company’s product lines.”
 
Later in February of last year, Aetrium said it would be exploring “strategic alternatives” after it reported dismal fourth quarter financial results. At the time, Levesque told Twin Cities Business that those alternatives could mean the sale of some of its product groups or a possible private takeover or merger.
 
In August, the company sold its Reliability Test Products business to Oregon-based Cascade Microtech, Inc., for $1.9 million in cash, with contingent consideration of an additional $1.5 million over the nine to 18 months following the deal.
 
A few months after that sale, Levesque, Hemer, and Boehm resigned and were replaced.

Aetrium is coming off a recent fiscal quarter in which it reported a net loss of $792,000, compared with a loss of $623,000 the year before. Revenue for its latest quarter totaled $1.29 million, down 32 percent from $1.89 million the year before.
 
Shares of Aetrium’s stock were trading about flat at $6.53 Tuesday morning.