Cleverrox, I'll take a stab at explaining the VPHM tax situation. This issue always comes up when companies that have huge NOLs from prior years start earning money again.
Looking at VPHM's 10K, they had HUGE nols from prior years:
<snip>
12. Income Taxes
As of December 31, 2004, the Company has approximately $155.0 million of Federal and $149.0 million of state net operating loss carry forwards available to offset future taxable income. In addition, the Company has approximately $7.8 million of Federal research and development credits available to offset future taxable income. The federal and state net operating loss carry forwards as well as the federal research and development credits will begin expiring in 2009, 2005 and 2009, respectively, if not utilized. In addition, the utilization of the state net operating loss carry forwards is subject to a $2.0 million annual limitation. Also, based on a preliminary analysis of the “change in ownership” provisions of the Tax Reform Act of 1986, net operating loss carry forwards will be subject to annual limitations that will reduce the Company’s ability to utilize these carry forwards in the future.
Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2004 and 2003 are shown below. Due to the uncertainty of the Company’s ability to realize the benefit of the deferred tax assets, the net deferred tax assets are fully offset by a valuation allowance at December 31, 2004 and 2003. The change in the valuation allowance for 2004 and 2003 was an increase of approximately $5.8 million and $7.8 million, respectively. Additionally, at December 31, 2004, approximately $1.9 million of gross deferred tax assets will increase equity to the extent such assets are realized.
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That part that I put in bold is the key statement IMHO.
Look at VPHM's full balance sheet from Q1. Where do you see the deferred tax asset?? Its not there because the company has elected to say that based upon recent history, it probably won't get to use the full tax benefits. The "valuation allowance" gives companies the ability to keep deferred tax assets OFF the balance sheet, and not show a full tax rate on their income statement. Now, looking at the projections for this year and next, where pretax income *could* exceed 100MM during that period, how much longer can they continue to use that valuation allowance shield??
They (or their accountants) could just as easily have said, "We believe that there is a very strong chance we will get to use all those operating losses, so let's bring it on the balance sheet (as a deferred tax asset) and recognize a big tax credit on the income statement. " Thereafter, they would be paying full statutory tax rates on the income statement but still pay minimal taxes on a cash basis.
This is the key point I'm trying to make. I don't think that many investors are aware that taxes shown as being paid on the income statement can sometimes have no relation to what they actually pay to the govt.
I'm not an accountant, so I don't know what is considered conservative treatment.....is it more conservative to keep a tax benefit OFF the balance sheet? Or more conservative to show a truer tax rate on the income statement? That's up to investors to decide I guess.....
AI
