Document Security Systems
(AMEX:DMC) recently announced a new credit arrangement that has many
investors and activist groups questioning the motives of the company’s
management and board. A recent proxy statement by the company revealed
a $3 million loan inked with Fagenson & Co’s Robert Fagenson, who
owns 7.4% of the company and also happens to be on the board of
directors.
Despite DMC’s $88 million market cap with no outstanding debt, the
company decided to forego traditional financing and instead take a loan
from its largest shareholder. Interestingly, the loan was
collateralized with DMC’s largest subsidiary, Plastic Printing
Professionals Inc., which is also the company’s only profitable
division producing a product. Asensio and other large activist groups
and shareholders have since questioned the motives behind such
arrangements.
The arrangement will allow Fagenson to either profit from DMC’s rise
or become the new owner of Plastic Printing Professionals if the loan
doesn’t get paid back – either way, he’s a winner. However, the outlook
is not so great for DMC’s other shareholders who stand to lose the most
profitable division of their company with financing that was
unnecessarily collateralized when alternative financing was available…
they will be forced into court in order to recover any money they lose.
So, is Robert Fagenson setting himself up to obtain the company’s
most valuable asset by using it as collateral for a small $3 million
loan that could have easily been obtained elsewhere? Well, even the
possibility of such a disastrous move should be enough to frighten some
shareholders. DMC is also involved in some questionable dealings – the
firm is currently engaged in a stock-financed legal battle against the
European Central Bank over its patented anti-counterfeiting technology.
The move comes after the company tried to sue the U.S. Treasury
Department for infringements when the new $100 bill was release (which
was rejected).
In the end, investors may want to stay away from this company while
its most valuable asset is put at risk for a small $3 million loan. A
loss of this division would be devastating while shareholders continue
to face significant dilution as a result of frivolous lawsuits against
central banks. While a court victory would almost certainly provide a
massive boost to the share price, it is a probability that seems minute
at this point.
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