Optimistic Enterprises, Inc. (OEI) has developed and patented a product for the home entertainment industry. Some industry
Question:
Optimistic Enterprises, Inc. (OEI) has developed and patented a product for the home entertainment industry. Some industry experts predict that in two to five years the market for this technology could grow to $200 million in annual sales. Unfortunately, due to a series of mistakes by management, the product has failed to gain traction in the marketplace. OEI is also being sued for patent infringement by its chief competitor. OEI has operated at a loss, and its current expenses exceed revenues by $250,000 on a quarterly basis. OEI has a revolving line of credit with BankOne; the credit facility is secured by a lien against all of the company’s assets. OEI’s balance sheet is as follows:
Asset
Cash .......................................... $1,000,000
Accounts receivable ...................5,000,000
Inventory .....................................2,000,000
Equipment ..................................1,000,000
Total assets ..............................$9,000,000
Liabilities and Equity
Accounts payable ....................$5,000,000
Note payable to BankOne ........1,000,000
Other liabilities ..........................1,000,000
Total liabilities ........................ $7,000,000
Shareholders’ equity .................2,000,000
Total liabilities and equity.......$9,000,000
OEI has exhausted all efforts to cut its operating expenses, including two rounds of employee layoffs. The company has stretched its accounts payables to ninety days or longer, except for key suppliers, and resorted to making partial rent payments for its manufacturing facility. Included within OEI’s “other” liabilities are accrued, but unpaid, employee withholding taxes in the amount of $250,000. Antonio Pardelli, a significant shareholder and director of OEI, has formed Pardelli Acquisitions Corporation (PAC) to acquire OEI’s technology, inventory, and manufacturing equipment. He has presented OEI’s board with PAC’s offer to buy these assets for $3 million in cash. As part of the offer, PAC will acquire OEI’s key engineers and attempt to renegotiate the lease to continue operating at the same location. PAC has also agreed to fund separate severance packages for OEI’s senior executives upon closing of the sale. PAC will not assume any of OEI’s debts. OEI will retain its cash and accounts receivables. PAC has waived any due diligence or other contingencies to the sale, provided that the sale closes in ten days. Is OEI in the zone of insolvency? Should the OEI board accept PAC’s offer? What actions, if any, should OEI’s board undertake before considering or accepting the offer? What actions, if any, could creditors take to challenge or threaten the sale? Should OEI consider filing for bankruptcy?
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Line of Credit
A line of credit (LOC) is a preset borrowing limit that can be used at any time. The borrower can take money out as needed until the limit is reached, and as money is repaid, it can be borrowed again in the case of an open line of credit. A LOC is...
Step by Step Answer:
a OEI is not insolvent yet but it is most likely in the zone of insolvency There is no test or definition for the zone of insolvency but case law suggests that a company may enter the zone when 1 Ther...View the full answer
Managers and the Legal Environment Strategies for the 21st Century
ISBN: 978-0324582048
6th Edition
Authors: Constance E Bagley, Diane W Savage
