Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor by Jeremy C. Miller

Author:Jeremy C. Miller [Miller, Jeremy C.]
Language: eng
Format: epub, mobi
Publisher: HarperCollins
Published: 2016-04-26T06:00:00+00:00

A Letter to the Stockholders of Dempster Mill (Not Included in the Partnership Letters)12

JULY 20, 1963

Enclosed is the notice of a special meeting of the stockholders, to be held in Beatrice on Wed, July 31, 1963, at 7 P.M. This letter is written so that you will be in a position to give advance consideration to the matters that will be voted on at this meeting.

Attached are financial statements showing the unaudited earnings for the first seven months of the fiscal year as well as a balance sheet showing the financial condition of the company on June 30, 1963. It is apparent that the fine job Harry Bottle started as president last year has been continued this year. There is a very substantial seasonal element to our business, so that operations at about break-even are expected during the balance of the year. Nevertheless, it appears that operations for the full year will result in one of the best years in recent history.

This dramatic improvement in operating results has been produced by eliminating unprofitable lines, closing unprofitable branch locations, eliminating unneeded overhead, adjusting prices where warranted, etc. In addition to restoring the Company to profitable operations, these actions have substantially reduced the capital needs of the business. Accordingly, on June 30, we owned $1,772,000 of marketable securities with a market value on that date of $2,028,000. It appears that the company will soon be in a position where only about 60% of its asset will be utilized in the manufacturing business. This over-capitalization presents important problems to the management in its efforts to produce a satisfactory return on the total capital committed to the corporation.

The management has given consideration to many alternative methods of employing this capital in the business as well as explored possibilities whereby these excess funds might be made directly available to shareholders without the imposition of very substantial ordinary income taxes. It appears to be impossible to make any prorate distribution without such a distribution being taxable as an ordinary dividend. Our legal advisors have recommended that the most effective way to placing this capital in the hands of Dempster stockholders would be through sale of the operating assets of the Company as a going concern, to be followed by the liquidation of the corporation. This does not mean a liquidation of the operating business, for it will have been previously sold as a going concern. Then all funds may be distributed pro rata to stockholders subject only to a capital gains tax on the excess amount received over each stockholder’s tax basis of his stock. It is particularly recommended that this action be taken promptly since the Company has about exhausted the tax carry-forward as computed by our auditors and henceforth our operating profits will be subject to 52% Federal income taxes.

As it is now conducted, the Board of Directors unanimously believes the business of Dempster Mill has a value as a going business in excess of the mere liquidation value of its assets. Therefore, we

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