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would not normally do business with a supplier as small as
petitioner. As a result, petitioner sells to 10 of the top 20
accounts in the nation for its industry.
During petitioner's early days, Herold undertook major
financial risks to provide funding for petitioner. When
petitioner hit a slump in 1984, Herold withdrew funds from a
qualified retirement plan, paying income tax on the withdrawal as
well as a 10-percent penalty, to obtain funds needed to keep
petitioner going. As part of the three-pronged strategy
described above, Herold aggressively sought a relationship with
Houston Instruments, seeking to market its Computer Aided Design
(CAD) product line. To cement that relationship and meet Houston
Instrument's concerns as to petitioner's financial stability,
Herold mortgaged his house to secure a $75,000 letter of credit.
Herold has also lent substantial personal funds to petitioner and
personally guaranteed credit lines of $4 to $5 million with Sony
Corp. and Mitsubishi Corp. These guaranties were still in effect
during the subject years.
By contrast with his willingness to place his personal
assets at risk, Herold maintains a conservative financial
strategy with respect to petitioner. He insists that petitioner
maintain substantial cash reserves, refusing his financial
adviser's suggestions that petitioner "play the float". This
builds petitioner's credibility with suppliers and customers and
enables it to take full advantage of vendors' early payment
discounts. By following this strategy, petitioner has incurred
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Last modified: May 25, 2011