cases to accompany the financial accounting research system (fars)

106 Pages·2007·0.37 MB·English

CHAPTER 5 – CASES TO
ACCOMPANY THE FINANCIAL
ACCOUNTING RESEARCH
SYSTEM (FARS)
OUTLINE
Case1:NewFinancing:DoCreditAgreementsPose Case6:UPS:TheTaxEnvironmentandDisclosureof
UniqueAccountingandDisclosureChallenges? Contingencies
GuntherInternational Case7:Embezzlement-RelatedDisclosures:Compliance
Case2:Microsoft:DoesIncomeStatementClassification withGuidance?
Matter? Case8:WhatConstitutesaSubsequentEvent?Related
Case3:CharitableContributionsandDebt:AComparison GainContingencyConsiderations
ofSt.JudeChildren’sResearchHospital/ALSACand Case9:ReconcilingInternationalPracticestoThoseof
UniversalHealthServices theFASB:CashFlow
Case4:ClarusCorporation:RecurringRevenue Case10:IstheAssetImpaired—orPerhapsaBigBath?
Recognition Case11:FinancialInstrumentsandHedging:
Case5:WhenWouldMarkettoBookBeLessThanOne? MeasurementChallenges
DoesAcquisitionbyStockExplainJDSUniphase Case12:EmergingIssues:TheAgendaofFASB
Corp.?
FiguresandTables
Figure5.6.-1Anumberofestimatesaredisclosed Table5.7-1ExcerptsfromResultsofOperations
inthe10-Q Table5.7-2FactorsthatMayAffectFutureResults
Table5.1-1SummaryFinancialData—IncomeStatement Table5.8-1LiabilitiesandStockholders’DeficitExcerpts
Related fromConsolidatedBalanceSheet(Unaudited)
Table5.1-2SummaryFinancialData—BalanceSheet Table5.8-2ExcerptsfromEuronetWorldwide,Inc.and
Related SubsidiariesConsolidatedStatementsofOperations
Table5.2-1ReclassifiedHistoricalIncomeStatements andComprehensiveIncome/(Loss)(Unaudited)
byYear Table5.9-1FinancialStatementTerminology
Table5.3-1FinancialComparisonsoftheNot-for-Profit Table5.9-2ConsolidatedCashFlowStatementfortheSix
Entities MonthsEnded30June2001
Table5.3-2UniversalHealthServices,Inc.’sFinancial Table5.10-1FleetBostonFinancialCorp.Consolidated
Excerpts StatementsofIncome(Unaudited)
Table5.3-3PatientRevenueMix Table5.10-2ExcerptfromFleetBostonFinancialCorp.
Table5.4-1FinancialInformation ConsolidatedBalanceSheets(Unaudited)
Table5.5-1AcquisitionsofJDSUniphaseCorp.
5-1
5-2
CASE 1
New Financing: Do Credit
Agreements Pose Unique
Accounting and Disclosure
Challenges? Gunther International
CASETOPICSOUTLINE
1. TermsofNewCreditArrangement 4. Warrants
A. Restructuring A. Valuation
B. Guarantors B. Disclosure
2. Collateral C. Context
3. Subordination 5. RightsOffering
GuntherInternationalhashadarockyroad,financially.Youjoinedthecompanyupongraduationand
recallhavingheardaboutitbeingsignificantlyrestructuredinSeptember1992.Itwasthenthattwo
shareholders assumed control of the corporation and infused additional capital. Your department
has been rocked by recent discoveries of accounting issues that have caused a delay in reported
numbers.Youassistedincraftingthelanguagethatappearedinthe8-Kfiling:
Item5.OtherEvents.
OnJune23,1998,theregistrantissuedapressreleaseannouncingthatitdoesnot
expecttoreleaseitsfinalresultsforthefourthquarterandthefullfiscalyearendedMarch
31,1998untillaterinJuly1998.Acopyofthepressreleaseisattachedheretoasan
exhibit.Duringthecourseoftheyear-endaudit,theCompany’sauditors,ArthurAndersen
LLP,identifiederrorsintheaccumulationofcontractcostsandcertainitemsofexpense
thatwerenotproperlyaccountedfor.TheCompany,withtheassistanceofitsauditors,is
continuingtoreviewthenatureandextentofthesematters,aswellastheeffectthese
mattersmayhaveontheCompany’sfinancialresults.Basedontheinformationthatis
availableatthistime,theCompanycurrentlyexpectstoreportanetlossforthefiscalyear
endedMarch31,1998ofapproximately$2.4to$3.0million.TheCompanyalsoexpects
5.1-1
5.1-2 CASESTOACCOMPANYFARSBYW.A.WALLACE
torestateitsresultsforeachofthefirstthreequartersoffiscal1998.Previouslyissued
financialstatementsfortheinterimperiodsoffiscal1998shouldnotbereliedupon.
Thenetlossesreferredtoaboveareexpectedtoresultinaviolationofcertain
financialcovenantscontainedintheCompany’sseniorcreditfacility.TheCompanyhas
informedrepresentativesofitsseniorlenderaboutthesemattersandintendstomeetwith
themtodiscussasatisfactoryresolutionofthesituation.Ifasatisfactoryresolutionisnot
reached,theCompanymaysufferaneventofdefaultunderitsseniorcreditfacilityand
theCompany’sabilitytocontinuetoborrowthereundermaybeimpaired.
TheCompanyismovingforwardatanaggressivepacetodefinitivelyannounceits
financialresultsasquicklyaspossible.TheCompanycontinuestomaintainalarge
installedbaseofcustomersusingitsproductsandbelievesthatitsproductscontinuetobe
wellreceivedinthemarketplace.TheCompanyexpectstohavearecordbacklogofsales
undercontractinexcessof$5millionasofJune30,1998.
TheCompany’sexpectationsarepreliminaryandaresubjecttothecompletionofits
year-endaudit.Theestimatedamountofloss,anticipatedreleaseoffinalresultsandthe
potentialconsequencesofthesematters,includingwithoutlimitationtheresolutionof
expectedviolationsundertheCompany’sseniorcreditfacilitydiscussedinthisreport
constituteforward-lookingstatements,andtheCompany’sactualresultscoulddifferfrom
thosediscussedabove....(Source:8-Kfiled6/23/98)
As the 8-K suggests, a good deal of uncertainty surrounds the financing arrangements of the
company going forward. The treasurer’s department has been working long hours to explore the
options.Theyrequestedfinancialnumbersundertheexisting,thoughsomewhattenuousfinancing
arrangement. While in preliminary form, assume you have access to something similar to what
eventuallyappearedastherestatedfinancialdisclosuresinTables5.1-1and5.1-2.
Table5.1-1 SummaryFinancialData—IncomeStatementRelated*
YearEnded YearEnded YearEnded
March31,1998 March31,1997 March31,1996
Sales:
Systems $8,630,103 $8,716,473 $8,458,700
Maintenance 6,454,716 4,911,794 4,022,562
TotalSales 15,084,819 13,628,267 12,481,262
CostofSales:
Systems 7,030,092 5,573,323 5,821,526
Maintenance 4,771,692 4,088,858 2,826,853
TotalCostofSales 11,801,784 9,662,181 8,648,379
GrossProfit 3,283,035 3,966,086 3,832,883
OperatingExpenses:
SellingandAdministrative 5,050,863 4,680,946 4,213,832
ResearchandDevelopment 618,735 435,404 255,243
NewFinancing: DoCreditAgreementsPoseUniqueAccountingand
DisclosureChallenges? GuntherInternational Page5.1-3
YearEnded YearEnded YearEnded
March31,1998 March31,1997 March31,1996
TotalOperatingExpenses 5,669,598 5,116,350 4,469,075
OperatingLoss (2,386,563) (1,150,264) (636,192)
OtherExpenses:
InterestExpense,Net (245,552) (184,426) (243,363)
NetLoss $(2,632,115) $(1,334,690) $(879,555)
NetLossPerShare $ (0.61) $ (0.32) $ (0.23)
*Thesummaryfinancialdatapresentedshouldbereadinconjunctionwiththeinformationsetforthinthefinancialstatementsand
notesthereto.Source:January14,199910-KSB/AfilingbyGuntherInternational.
Table5.1-2 SummaryFinancialData—BalanceSheetRelated*
1998 1997
(AsRestated) (AsRestated)
CurrentAssets $3,118,386 $3,616,493
TotalAssets 8,036,929 8,663,040
CurrentLiabilities 7,981,871 5,661,800
Long-TermDebt,lesscurrentmaturities 1,884,551 2,213,618
Stockholders’Equity(Deficit) (1,829,493) 787,622
*Thesummaryfinancialdatapresentedshouldbereadinconjunctionwiththeinformationsetforthinthe
financialstatementsandnotesthereto.Source:January14,199910-KSB/AfilingbyGuntherInternational.
Thereasonforthetenuoussituationwiththecreditorsisthereportederrorthatresultedinthe
debt covenant violations on the line of credit held by Bank of Boston. Credit agreements, often
thelifebloodofacompany,cantakeavarietyofforms,withdiversecovenantsandcommitments.
Gunther’ssolutiontothiscovenantviolationhasbeentofindnewfinancingandpayoffthelineof
creditwiththeBankofBoston.Youhaveworkedwithcolleaguesinboththecontroller’sofficeand
thetreasurer’sdepartmenttocraftthefollowinglanguageforinclusioninyetanother8-Kfiling:
GUNTHERANNOUNCESCOMPLETIONOFCOMPREHENSIVEFINANCING
TRANSACTION
NORWICH,CT(October2,1998)—GuntherInternational,Ltd.(NASDAQ:SORT)
todayannouncedithassuccessfullycompletedacomprehensive$5.7millionfinancing
transaction,theproceedsofwhichhavebeenutilizedtocompletelyrestructureand
replacetheCompany’spre-existingseniorlineofcredit,fundafullsettlementwiththe
Company’sthirdpartyserviceprovider,andprovideadditionalworkingcapitaltofundthe
Company’songoingbusinessoperations.
Underthetermsofthetransaction,anewlyformedlimitedliabilitycompany
organizedbytheTischFamilyInterestsandMr.RobertSpiegel(the“NewLender”)
loanedanaggregateof$4milliontotheCompany.Atthesametime,theCompany’s
seniorlenderreachedanagreementwiththeguarantorofaportionoftheCompany’s
seniorlineofcredit(the“Guarantor”)wherebytheGuarantorconsentedtotheliquidation
ofapproximately$1.7millionofcollateralandtheapplicationoftheproceedsofsuch
5.1-4 CASESTOACCOMPANYFARSBYW.A.WALLACE
collateraltosatisfyandrepayinfullalikeamountofindebtednessoutstandingunderthe
seniorcreditfacility.Thebalanceoftheindebtednessoutstandingundertheseniorcredit
facility,approximating$350,000,wasrepaidinfullfromtheproceedsofthenew
financing.TheCompanyexecutedanewpromissorynoteinfavoroftheGuarantor
evidencingtheCompany’sobligationtorepaytheamountofthecollateralthatwas
liquidatedbytheseniorlender.TheCompany’sobligationstotheGuarantorare
completelysubordinatedtotheCompany’sobligationstotheNewLender.Inaddition,
approximately$1.4millionofthenewfinancingwasutilizedtopaytheCompany’sthird
partyserviceproviderallamountsthatweredueandowingtotheserviceproviderfor
performingmaintenanceonCompanysystems.
ToinducetheNewLendertoenterintothefinancingtransaction,theCompany,the
NewLender,ParkInvestmentPartners,GeraldH.Newman,theestateofHaroldS.
Geneen(the“Estate”),FourPartners,andRobertSpiegelEnteredintoaseparatevoting
agreement,pursuanttowhichtheyeachagreedtovoteallsharesofGuntherstockheldby
theminfavorof(i)thatnumberofpersonsnominatedbytheNewLenderconstitutinga
majorityoftheBoardofDirectors,(ii)onepersonnominatedbytheEstateand(iii)one
personnominatedbyParkInvestmentPartners.Inaddition,theCompanygrantedtheNew
LenderastockpurchasewarrantentitlingtheNewLender,anytimeduringtheperiod
commencingonJanuary1,1999andendingonthefifthanniversaryofthetransaction,to
purchaseupto35%oftheproforma,fullydilutednumberofsharesoftheCommonStock
oftheCompany,determinedasofthedateofexercise.Theexercisepriceofthewarrantis
$1.50pershare.
Contemporaneouslywiththeconsummationofthetransaction,FrederickW.Kolling
IIIandJamesH.WhitneyresignedfromtheBoardofDirectors,andThomasSteinberg
andRobertSpiegelwereelectedtofillthevacanciescreatedbytheresignations.Another
insidedirector,AlanW.Morton,resignedfromtheBoardpriortotheconsummationof
thetransactions.
TheCompanyiscontinuingtoreviewthepreviouslyannouncedissuesregardingthe
accumulationofcontractcostsandtherecognitionofrevenuesandexpensesrelatingto
theCompany’ssystemsbusiness.TheCompanyexpectstobeinapositiontorelease
informationconcerningtheresultsofthereviewbytheendofOctober.
GuntherInternational,Ltd.isaleadingmanufacturerofintelligentdocument
finishingsystemsandinkjetprintingsolutions.(Source:8-K,filed10/7/98)
RequirementA.1:Disclosure
Assoonasthe8-Kisreleased,thecompany’sattentionisdirectedtowardtheanticipatedfilingofa
10-K,whichwillneedtoprovidefulldisclosureconcerningthisnewfinancingarrangementinac-
cordancewithgenerallyacceptedaccountingprinciples(GAAP).Youhavebeenaskedtooutlineall
associatedaccountinganddisclosureissuesthatariseasaresultofthistransaction.Theintentisthat
youroutlinewillbecomeabasisforajointpresentationwiththecontrollertotheboardofdirectors.
1. ListallrelevantFARSreferencesintheorderofrelevancetothetransaction.
2. Clearlysetforthpermissiblealternatives.
3. Draftyourrecommendation,astobothaccountingforanddisclosingofthetransaction.
NewFinancing: DoCreditAgreementsPoseUniqueAccountingand
DisclosureChallenges? GuntherInternational Page5.1-5
HintsRegardingSolution
a. Developacomprehensivelistofsearchwordsassociatedwiththetransaction.
b. Consider how the former arrangement might have been recorded in comparison to the current
transaction,includingpotentialbalancesheet,incomestatement,andcashflowimplications.
c. Considerbroaderdisclosurerequirements’associationwithparticulartransactions.
d. Contextmatterstoaccountinganddisclosuredecisions.Carefullyconsidertheinter-relationship
ofthetwopressreleases,givingparticularattentiontothevariousstakeholdersaffectedbyyour
recommendations.
RequirementA.2:InterdisciplinaryConsiderations
Theboardofdirectorsisexpectedtobeveryinterestedindetailsconcerningthetransaction,making
itimperativethatinterdisciplinaryconsiderationsbediscussedasapartofyourpresentation.
1. Whyiscorporategovernancesointerrelatedwithcreditarrangements?
2. Whyarewarrantsfrequentlyintegratedintolendingcontracts?
3. Do contracts in economic settings generally slip into default when problems with past
representationsinfinancialstatementsarise?Bespecific.
4. Whataretheconsequencesofdelayingfinancialstatementinformationforfourmonths
orlonger?
5. Describe and justify a management strategy for Gunther International, in light of these
pastevents.
RequirementB:SubsequentFilings
On January 14, 1999, Gunther International filed a 10-KSB/A (accessible at http://www.sec.gov)
thatcontainedthefollowingdisclosures:
TheundersignedregistrantherebyamendsitsAnnualReporton
Form10-KSBforthefiscalyearendedMarch31,1998toamendItems6and7ofPartII
andItem13ofPartIII,assetforthinthisamendment.
ITEM6.MANAGEMENT’SDISCUSSIONANDANALYSISORPLANOF
OPERATIONS.SUMMARYOFRECENTEVENTS...TheAuditCommittee’sreview
hassincebeencompletedandithasbeendeterminedthataccountsreceivablewere
overstatedandaccountspayableanddeferredservicerevenueswereunderstatedatMarch
31,1997andcostsandestimatedearningsinexcessofbillingsonuncompletedcontracts
wereoverstatedatMarch31,1998.Asaresult,theaccompanyingfinancialstatements
andmanagement’sdiscussionandanalysisoffinancialconditionandresultsofoperations
includerestatedresultsasofandfortheyearsendedMarch31,1997and1998.Also,
certainamountswerereclassifiedbetweensellingandadministrativeexpenses,costof
sales,andresearchanddevelopmentexpensestomoreappropriatelyreflecttheresultsof
operations.TheeffectoftherestatementfortheyearendedMarch31,1997wastoreduce
operatingresultstoanetlossof$(1,334,690),or$(0.32)pershare,fromnetincomeof
$258,889,or$0.06pershare.TheeffectoftherestatementfortheyearendedMarch31,
5.1-6 CASESTOACCOMPANYFARSBYW.A.WALLACE
1998wastodecreasethenetlossto$(2,632,115),or$(0.61)pershare,fromanetlossof
$(2,701,819),or$(0.63)pershare.
OnOctober2,1998,theCompanyenteredintoa$5.7millioncomprehensive
financingtransactionwiththeBankofBoston,Connecticut,N.A.(the“Bank”),theEstate
ofHaroldS.Geneen(the“Estate”)andGuntherPartnersLLC(the“NewLender”),the
proceedsofwhichhavebeenutilizedtorestructureandreplacetheCompany’s
pre-existingseniorlineofcredit,fundafullsettlementwiththeCompany’sthirdparty
serviceproviderandprovideadditionalworkingcapitaltofundtheCompany’songoing
businessoperations.Underthetermsofthetransaction,theNewLenderloanedan
aggregateof$4.0milliontotheCompany.Atthesametime,theBankreachedan
agreementwiththeEstate,whichhadguaranteedaportionoftheCompany’sseniorline
ofcredit,wherebytheEstateconsentedtotheliquidationofapproximately$1.7millionof
collateralandtheapplicationoftheproceedsofsuchcollateraltosatisfyandrepayinfull
alikeamountofindebtednessoutstandingundertheseniorcreditfacility.Thebalanceof
theindebtednessoutstandingundertheseniorcreditfacility,approximately$350,000,was
repaidinfullfromtheproceedsofthenewfinancing.TheCompanyexecutedanew
promissorynoteinfavoroftheEstateevidencingtheCompany’sobligationtorepaythe
amountofthecollateralthatwasliquidatedbytheBank.TheCompany’sobligationsto
theEstatearesubordinatedtotheCompany’sobligationstotheNewLender.Theprincipal
balanceofthe$4.0milliondebtistoberepaidinmonthlyinstallmentsof$100,000from
November1,1998andcontinuingtoandincludingSeptember1,1999,$400,000on
October1,1999andthebalanceshallbedueonOctober1,2003.Interestshallbepaid
quarterly,attherateof8%perannum,beginningJanuary1,1999andcontinuinguntilthe
principalandinterestdueispaidinfull.Thedebtissecuredbyafirstpriorityinterestin
alltangibleandintangiblepropertyandasecondaryinterestinpatentsandtrademarks....
ThepromissorynoteinfavoroftheEstateforapproximately$1.7millionistobe
repaidattheearlierofoneyearaftertheCompany’sobligationstotheNewLenderare
paidinfulloronOctober2,2004.Interest,at5.44%perannum,shallaccrueonprincipal
andunpaidinterest,whichisaddedtotheoutstandingbalanceandisdueatthetimeof
principalpayments.Theindebtednessissecuredbyalltangibleandintangiblepersonal
propertyoftheCompanybutissubordinatedtoallrightsoftheNewLender.(Source:
January14,1999,10-KSB/AfilingbyGuntherInternational)
1. Giventhesesubsequentdisclosures,wouldyouproposeanyadjustmentstotheaccount-
ingordisclosuresuggestionsyoupresentedpriortotheresolutionoftherestatement?
Explainthebasisforyourresponse.
2. Would you expect the new lender to make any adjustments to the current contractual
arrangementwhenthecreditarrangementisreconsideredatrenewal?
3. Whatwouldbetheaccountingordisclosureimplicationsofyourexpectations?Explain
how the following subsequent development might influence your expectations, if you
wererequestedtoupdateyourevaluationasofJuly1999.
OnJune29,1999,a10-KSBfilingstateswithintheManagement’sDiscussionandAnalysis(Item
6,SubheadLiquidityandCapitalResources):
Thecompanydidnotmakeitsrequiredpaymentsontheirrespectiveduedatesandcertain
otherinformationrequiredbytheloanagreementwasnotprovidedtotheNewLender.
NewFinancing: DoCreditAgreementsPoseUniqueAccountingand
DisclosureChallenges? GuntherInternational Page5.1-7
TheNewLenderwaivedthesedeficiencies.AsofMarch31,1999,allamountsdueonthe
debthadbeenpaid....
IntheeventtheCompanyisunabletomeetitspaymentobligationsthroughApril1,
2000,inaccordancewiththeNoteLoanandSecurityAgreement,thenewLenderwillbe
willingtorenegotiatethepaymenttermsbaseduponavailablecashflowsuchthatthe
paymenttermswouldbeacceptabletoboththeCompanyandtheLender.(Source:
10-KSBfiling6/29/99)
RequirementC:TheAftermath
AtfiscalyearendedMarch31,2001,inits10-KSB/AfiilingasofJuly3,2001,eventsassociated
withthepastfinancingarrangementsaredetailed,alongsidethefollowingdisclosure:
ThroughJune30,1999,theCompanyhadmadeprincipalpaymentstoGuntherPartners
LLCaggregating$800,000,plusinterest.InSeptember1999,theCompanyexperienceda
deficiencyinoperatingcashflowandGuntherPartnersLLCagreedtolendtheCompany
anadditional$800,000andtootherwiserestructurethepaymenttermsofthenote.As
amended,theoutstandingbalancedueGuntherPartnersLLCisdueinprincipal
installmentsof$200,000commencingonOctober1,2001throughApril1,2002;
$100,000onMay1,2002;and$2,500,000onOctober1,2003.If,atanytimepriorto
October1,2001,theaccumulateddeficitoftheCompanyimprovesby$1.0millionor
morecomparedtotheamountatJune30,1999of$14.4million(a“TriggeringEvent”),
thentheprincipalpaymentsotherwiseduefromOctober1,2001throughMay1,2002
shall...becomedueinconsecutivemonthlyinstallmentsbeginningonthefirstdayofthe
secondmonthfollowingtheTriggeringEvent.OnApril4,2000,theCompanyborrowed
anadditional$500,000fromGuntherPartnersLLC.
InJune2001,theCompanyenteredintoarecapitalizationagreement(the
“RecapitalizationAgreement”)withtheEstate,GuntherPartnersLLCandcertainother
stockholders.TheRecapitalizationAgreementprovidesthattheCompanywilleffectuate
aregisteredpublicoffering(“RightsOffering”)ofupto16,000,000sharesofitsCommon
Stock(the“OfferedShares”)toitsexistingstockholdersbysubscriptionrightona
pro-ratabasisatasubscriptionpriceof$0.50pershare.Therightstosubscribetothe
OfferedShareswillbegrantedataratiotobedeterminedbytheBoardofDirectorsofthe
Company(the“BasicSubscriptionRight”).Inaddition,theCompany’sstockholderswill
begrantedtherightto“oversubscribe”foradditionalsharesnotpurchasedbyother
stockholders,uptothetotalamountoftheOfferedShares(the“OversubscriptionRight”).
IntheeventthattheCompany’sstockholders,otherthanGuntherPartnersLLC,donot
subscribeforandpurchaseall16,000,000oftheOfferedShares,GuntherPartnersLLC
willsubscribeforandpurchasefromtheCompanyintheRightsOfferinganumberof
sharesequalto16,000,000lessthenumberofsharessubscribedforstockholdersother
thanGuntherPartnersLLC,uptoamaximumof14,000,000shares.Thenetproceedsof
theRightsOffering(aminimumof$7millionlessofferingexpenses),willbeusedto
repayinfullthenotespayabletoGuntherPartnersLLC($4.5million)andastockholder
anddirector($500,000),topurchaseallnotespayabletotheEstateforatotalof$500,000
andtopurchase919,568sharesoftheCompany’sCommonStockheldbytheEstatefor
$137,935(or$0.15pershare).ThebalanceofthenetproceedsfromtheRightsOffering
5.1-8 CASESTOACCOMPANYFARSBYW.A.WALLACE
willbeusedforgeneralworkingcapitalpurposes.(Source:GuntherInternationalLtd
10-KSB/A7/30/2001)
1. How much of the net proceeds from the rights offering will likely be available for
generalworkingcapitalpurposes?
2. Comparethetermsoftherightsofferingtothewarrantsembeddedintheearlierfinanc-
ingarrangement.Whydoyoubelievearightsofferingapproachisbeingpursuedrather
thanashelfregistrationtargetingnewshareholders?
3. Whatdisclosureswouldyourecommendbemadebythecompanyrelatedtoitsfinanc-
ing,liquidity,andcapitalresources?
DirectedSelf-Study
WhathappenedtoGuntherInternationalonDecember4,2003?[Accesssec.govfortheanswer.]
KeyTermsandGlossary
balloonpayment alargefinalpaymentonaloanthatis maturity thatdateatwhichanagreementcomestoan
repaidininstallments. end,suchasabond,reachingthatdateonwhich
collateral assetsthatagreementgivesthecreditorthe repaymentisdemandedintheabsenceofarenewal
righttorepossessand/ortoconvertintocashifthe promissorynote awrittenagreementspecifyingthe
borrowerdefaultsonthelendingarrangement;also termsofthedebt
referredtoassecurityforaloan,leadingtothe restatement adjustmentofpastreportedfinancial
terminologyofsecureddebt statements
compoundinterest distinguishedfromsimpleinterest restructuring whenappliedtodebt,referstothe
byreinvestingeachinterestpaymentinordertoearn renegotiationoftermsthatcouldincludeextensionof
moreinterest theduedateofprincipalandinterestpayments,
continuouscompounding assumescontinuous reductionintherateofinterestonexistingdebt,and/or
compoundingofinterestratherthancompoundingat forgivenessbycreditorsofaportionofprincipalor
fixedintervals accruedinterest;alsoappliedtochangesinstrategy
cumrights withrightsorrightson,distinguishedfrom andoperationsofacompany(e.g.,downsizing)
exrights rightsoffering theissueofsecuritiestocurrent
deficit arisesinretainedearningswhenthecumulation stockholdersthatissometimesreferredtoasa
ofallprioryears’netincomeorlosses,lessdividends privilegedsubscriptionissue
declared,isnegative secureddebt referstoobligationsthatifdefaulted
exrights purchaseofsharesnotentitledtotherightsto upon,leadtoafirstclaimonspecifiedassets
buysharesinthecompany’srightsissue subordination referstotherightsofapartybeing
exerciseprice thepriceatwhichtheholderofa legallysetbehindanother’s,suchassubordinationof
warrantorsimilarinstrumentispermittedtobuythe debtmeaningthatclaimswouldnotbefulfilleduntil
stockorotherinstrumenttowhichitisconvertibleor unsubordinateddebtcommitmentsweremet;
istransferable subordinateddebtisoftencalledjuniordebt,receiving
fundeddebt maturesaftermorethanoneyear paymentonlyafterseniordebthasbeenpaidinfull
guarantor thatindividualorentitypromisingtopay warrant instrumentpermittingthepurchaseofa
shouldtheborrowerdefault specifiednumberofsharesataspecifieddollar
lineofcredit acreditarrangementthatpermitsa amount
borrowertoobtainfundsuptoacertainamountwith workingcapital currentassetslesscurrentliabilities
prespecifiedterms,andanassociatedcostforthe (i.e.,networkingcapital)
unusedlineofcredit