When David S. Oros, the founder of Aether Systems, came by for lunch with editors and reporters six years ago, he was one of the rock stars of Washington business.
Aether had just pulled off a jaw-dropping initial public offering. Its stock price tripled from $16 to $48 a share on the first day of trading in 1999 and kept climbing until it hit $315 less than six months later.
Asked to explain what his company did, Oros pushed his chair back from his salad, turned to a whiteboard and spent 10 minutes filling it with lists, acronyms, arrows and circles.
By the time Oros was done, everyone in the room was sitting with an empty plate and a look to match -- that befuddled glaze that you'd get listening to R. Buckminster Fuller or Marshall McLuhan. They must be geniuses, you'd figure, because you couldn't understand a word they were saying.
Certainly no one understood that Oros's scratchings were a formula for losing more than $1 billion of investors' money.
There was no clue that his multimedia dream of delivering information over Palm Pilots, cell phones, pagers and whatever other medium came along would end up as little more than a cache of cash from selling off its assets and a treasure chest of tax write-offs.
Giving up on Oros's dream, Aether last year sold the last of its operations and began investing in mortgage-backed securities.
Now the communicationsrevolutionary-turned-mortgage-lender has done another strange transformation -- one that gives Oros, a mathematician who once wrote software for military radar systems, a seemingly secure job running a company that has no operations.
Last week, Aether stockholders approved a paper restructuring of the company. Aether Systems became a subsidiary of a new entity called Aether Holdings. Investors who own Aether Systems stock will receive an identical number of shares of Aether Holdings, which will continue to trade on the Nasdaq Stock Market under the same symbol, AETH.
The key change: The corporate charter for Aether Holdings includes a provision that prohibits any new shareholder from acquiring more than 5 percent of the company's stock without the permission of the board of directors.
The provision is needed, Aether told shareholders, to protect the more than $1 billion worth of accumulated losses, which can be used as tax deductions against future earnings.
"Because we consider these loss carryforwards to be important assets that can provide our company with substantial value in the future, we feel it is important to protect our ability to use them," the company said in a letter urging approval of the plan.
Under federal tax laws, the losses can't be used as tax deductions if Aether is sold. Congress passed that provision to close a loophole in which corporations could buy a bankrupt business for a pittance and use its previous losses as tax write-offs.
Scott P. Sutherland of Wedbush Morgan Securities, who was the last analyst following the company before Aether became a mortgage investor, says those tax losses are the most valuable thing Aether has to show for its failed wireless ventures.
The company raised $1.8 billion by selling stocks and bonds before the tech bubble burst in 2001, but after paying its debts and selling its operations, only $100 million was left, he said. "They have huge net operating losses and are willing to jump through hoops to protect them."
In letters to investors and documents asking shareholders to approve the limitation on stock ownership, Aether repeatedly described the restructuring as a way to "protect the value" of the company's losses.
"The purpose of the transfer restriction is solely to help preserve the long-term value to Aether and our stockholders" of the tax losses, the prospectus noted on page 25.
But just one paragraph later, the company acknowledged that there was more to it.
"The transfer restrictions may have anti-takeover effects," the company said, although it assured shareholders that this "indirect 'anti-takeover' effect" was not the primary consideration.
Still, the restriction effectively gives permanent control of the company to Oros -- who owns about 12 percent of the company stock -- and three investment firms whose stakes total about 30 percent.
No one else can ever buy more than 5 percent of the stock, but Oros and the other investors who already own bigger stakes in the company are free to sell their shares at any time, so long as they don't sell a 5 percent stake to one buyer.
David C. Reymann, Aether's chief financial officer, said Friday that protecting ownership of the firm is essential to protecting the net operating losses, or NOLs. "If anybody would have tried to take us over before we did this restructuring, we would have lost the NOLs."
He said the restructuring was done in reaction to recent IRS rulings and concern that acquisition of large blocks of Aether stock by outside investors might inadvertently result in what the IRS would consider a change in control of the company that would restrict use of the tax write-offs.
"It's all about shareholder value," he said. Converting the company into a mortgage investor and limiting changes of control, he said, both were intended to boost the value of Aether's stock, which closed Friday at $3.40 a share.
Since selling its operations, Aether has moved out of its headquarters in Owings Mills and into an office building in downtown Baltimore. The company now has just seven employees, Reymann said.
Management of the mortgage securities in which Aether invests has been farmed out to Friedman, Billings, Ramsey Group, the Arlington investment banking firm. FBR, an early investor in Aether, came up with the idea of abandoning the failed wireless communications business and turning the company into a mortgage investment pool.
FBR is a serious player in the mortgage paper business, annually trading billions of dollars worth of securities that are backed by government-guaranteed home mortgages.
Aether, on the other hand, is a small fish by mortgage investor standards. As of March 31, it had invested or committed to invest $443 million in mortgage-backed securities. Aether says it plans to leverage its cash with borrowings to finance a much larger portfolio of interest-earning mortgage paper.
While Aether is little more than a shell company, Oros and Reymann are paid like executives running a real business, the company's SEC filings show. Oros collects $200,000 a year, plus a performance bonus of up to $100,000 a year, plus "additional bonuses based on annual revenue targets." Reymann is guaranteed $150,000 a year, plus an unspecified bonus.
Reymann said the Aether executives spend their time overseeing the mortgage investments and looking for other opportunities to invest the company's cash and use the tax write-offs.
If Aether can make money on mortgages, it will be tax-free. The company ran up operating losses of $778 million that can be deducted from any profits. In addition, it has $245 million in capital losses, which can be used to offset capital gains. The company has 20 years to use the net operating losses but only five years to use the capital losses, Reymann said.
Profits aren't guaranteed, however. Investors in mortgage securities can lose money when interest rates go up, which makes the value of their holdings go down. That's already happened to Aether. Its first-quarter financial report showed the company had accumulated losses of $2 million on its mortgage investments.