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Wednesday, September 28, 2005

Fannie Mae (FNM)

Fannie Mae isn't on the pink sheets, at least not yet. But it may end up there before too long. About a year ago I had bought a small nunber of put options with a strike price of $40 expiring on Jan 20, 2006 for 80 cents each. I had almost given up on them when today the stock took a serious nose dive on some serious allegations from an unnamed source familiar with an ongoing investigation into Fannie Mae. The options ended the day over $3.00. Fannie Mae stock is getting very close to the strike price, which is where you start getting the really big swings in options prices. From here, every dollar the stock drops adds nearly a dollar to the price of the options.

My goal is $20 or more.

China Expert Technology (CXTI) comments, assessment

CXTI has some characteristics of being capital intensive, but that's really because of the small number of projects and their current state of progress. They have high margins (28% net margin in 2004). The business generates cash. The cash cycle isn't terribly long. But to grow at a fairly fast pace (which I believe is important in order to gain competitive experience, references, and economies of scale), they'll need cash: probably $10 million this year, which could add another 6 million shares or so resulting in perhaps $8 million in profits on $30 million in revenue. That would definitely be acretive to earnings and free cash flow.

One question is: How much is the "one year of maintenance" really going to cost? Will it end up being very large? We can see results for about 6 months after the first project completed. Q2 gross margin went down to 43% from 46% in 2004 (I know, GM shouldn't be affected, but we all know how people squeeze 10 pounds of excrement into all sorts of places when they only have a 5 pound bad).

And then there's the revolving door for auditors (Telford Sadovnick, PKF, BDO), the CEO resignation, the VP resignation, and the CFO replacement. This 8-K/a has some details about the prior people.

My guess is that there are issues with revenue recognition and maybe other things.

Given the long term growth rate of China, it's worth a lot to be a major player at this point in time in government IT. A successful business can do a lot of things wrong without changing that outcome just as a failure business can do a lot of things right without changing things. I think a lot of things could happen to chip away their profits both from unexpected costs after the projects and from possible issues with revenue recognition. On the surface, CTXI will have $10 million profit on $25 million shares, making them worth perhaps $6/share. The stock is selling at $2.20. Selling additional shares to raise $10 million to gain $30 million in business would only make the shares more valuable. The company seems to have a good position for the Chinese city goverment IT market.

Is it an investment? Well, I bought a few shares, but it's not a full or even a half investment. This is one of those cases where I might jump in if something looks like it's going wrong and the stock drops (like BakBone Software).

China Expert Technology (CXTI) Q2

10-Q for the 2nd Quarter ending June 30, 2005

Cash is up to $3.7 million from $3.3 million in March.
AR is up to $6 million
Costs and est earnings in excess of billing: $5.7 million (down from $9.1 million in March)
Amount due from former officer is at $1.9 million
Prepayments down a bit to $5.1 million (from $6.6 million in March)

Receipts in advance back down to $123K (from $1.9 million)
Amount due a former officer $2.5 million
Taxes payable $2 million (from $1.5 million)
Current ratio is even higher (well above 3), for what it's worth
Equity up to $18 million (from $15.5 million)
Total assets up to $24.6 million from $21.6 million

Revenue is down slightly from Q1 to $8.3 million from $8.7 million.
Gross margin down to 43%, this is due to having different margins during different parts of a project.
SG&A still steady
tax: $658K (down from $753K)
Net income $2.55 million (down from $2.9 million)

Cash flow is still ugly for H1.
Operations cash flow was zero in Q2.
Picked up $479K from former officer
Picked up $3 million payment from director

In related party stuff, you've got the rental agreement of about $11K per month, Lai sold a car to the company for $23K, loan to Chau with 5.22% interest, unsecured, due Jan 2005, paid. Other balances are interest-free, unsecured, no terms.

$12 million in billings in Q2, based on notes.

Lots more projects listed this time:
04/03 to 01/05, Jinjiang phase 1, $26 million
05/05 to 08/06, Jinjiang phase 2, $10 million
05/05 to 08/06, Jinjiang phase 3, $13 million
04/04 to 08/06, Dehua phase 1, $18 million
01/05 to 11/05, Dehua phase 2, $12 million
08/05 to 03/07, Nan'an, $14.5 million
01/06 to 07/08, Huian, $17 million
Still need an extra $10 million cash (advance and/or equity) to do these.

So they picked up $50 million in new projects so far in 2005. They predict 15% growth in revenue and profits for this year.

New FASB SFAS No. 154 "Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3". Company is assessing the impact. It kicks in next fiscal year.

China Expert Technology (CXTI) Q1

10-Q for Q1, period ending March 31, 2005

On the balance sheet, the costs and estimated earnings in excess of billings on uncompleted contracts jumped from zero to $9 million.
AR dropped by more than $4 million.
Loan to a director of $3 million was paid.
Prepayments jumped by $3 million.
Receipts in advance jumped to $1.9 million (curr liability)
Amount due a former officer increased by about $300K
Current ratio is still around 3 with enough cash to pay down half of current liabilities.
Equity is up to $15.5 million from $12.6 million
Total assets jumped by more than $4 million.

47% gross margin
SG&A still very steady
tax: $753K
Net income $2.9 million, 12 cents per share (not totally diluted)

Cash flow from operations is ugly: used $3 million. But this is known about the business model. Cash is burned up front. First milestone payment is at 6-9 months plus another 1-2 months to receive cash.
Nothing else in cash flow not mentioned above.

This investment worries me about the concentration of customers (only 2 and they're government).

Total costs incurred in contracts: $42 million
Total billings: $33 million
The remainder is the $9 billion on the balance sheet.

Still no stock options granted.

Two contracts in Fujian province: $18 million, $14.5 million
One is in the development stage, the other started in March 2005.
These will require about $10 million in cash beyond what the company has.
Cash is going to be the big issue during 2005.
I expect some dilution in 2005.

China Expert Technology (CXTI) 8-Ks

New auditors: BDO McCabe Lo & Co

The new auditors are unexpectedly dismissed! Huge red flag!
Auditors letter says nothing.
Note that the 2004 results were indeed audited by PKF (unqualified opinion).

4/26/2005 update
Contains the expected letter from previous auditors.


Projecting revenue of $8 million with $2.5 million net income for Q1.

New board member: Huang Tao
"primary duty is to oversee strategic planning and general management of the Company." Previously worked for the Bank of China from 1981 to 2004. Last position was the Deputy General Manager of Retail Banking Department of the Headquarters. Member of Marketing Committee of MasterCard International (Asia Pacific Region) and the Marketing Advisor of Visa International (Asia Pacific Region) from 1998 to 2000. 20 years experience in banking industry and has established good relations with financial institutions and provincial governments in China. Bachelor Degree for English Language from the Nanjing Normal University and a Master Degree of Business Economy from the College of Graduate Students of the Chinese Academy of Social Sciences.
PKF hired as auditors for 2004 statements.
Formally dismissed Telford Sadovnick, PLLC, of Bellingham, WA 98225

Q4 and full 2004 results (already have this from the 10-K)

Sunday, September 25, 2005

China Expert Technology (CXTI) 10-K

year ending Dec 31, 2004
incorporated in Nevada, offices in Hong Kong
24,414,679 shares outstanding Dec 31, 2004.
originally QQQ-Huntor Associates, 1995 changed domicile to TX, merged with Unimex Transnational Consultants. 1996 re-org, acquired Dakota Mining & Exploration Ltd, changed name to Canadian Northern Lites, Inc with Dakota as subsid. Voluntary registration 10-SB in 1999. 2000 merged with Leopard Capital and became a Nevada company with the name Leopard Capital Inc. (talk about changing your spots) Dec 2000 spun off Dakota to shareholders due to declining comodity prices for mining companies. No subsidiaries since Dec 31, 2003. 2001 converted 1.6 million non-voting shares to voting common becoming a subsidiary of Hudson Capital Corporation. Feb 2004, reverse merger with China Expert Network Company Ltd. an HK company. China Expert is a wholely owned subsidiary of Company, shares of China Expert are the most significant asset. Expert Network (in PRC) is China Expert's subsidiary.

Company performs IT work to governments and corporations involved in creating "e-governments". Also large-scale network infrastructure construction, public LAN construction, SW devel, website planning, etc.
The Company is the only private enterprise with the authority to provide technological achievement appraisal services for IT companies in China.
[Dollars are US dollars]
Contracts with three city governments in Fujian, PRC
Jinjiang, 4/03-1/05, $22 million (got the company going)
Dehua, 4/04-8/06, $18 million
Nan'an, 3/05-3/07, $14.5 million
These include one additional year of maintenance
Also a new 3 year contract in Jinjiang worth $3.9 million starting 1/05.
Also provides training programs to 500 officials in Jinjiang.
2/05 awarded contract worth $1.8 million for training and materials to 3,500 officials in Jinjiang.
Jinjiang was a model e-government system for 82 cities in Fujian province.

Up to 100 employees during peak operations. 50 at end of 2004, all FT.
No R&D in the past, but will do some in 2005.
Competition exists, but Expert Network has some advantages.
No legal proceedings.
Company reached profitability in 2004 after finishing development stage.

Company is paid on a milestone basis. First milestone is 6-9 months, with payment within 30 to 60 days. Company wants to grow fast and may need outside sources of cash.

Should get another 2 contracts for $30 million in 2005 and will need to raise $10 million for working capital, could be an equity placement. The net result should be a 15% growth in revenues and profits for fiscal 2005.

2004 (vs 2003)
Gross profits in 2004: 46% (down from 52%)
SG&A in 2004: 10.21% (down from 26%)
taxes: 7% (up from 5.4%)
net income: 28.95% (up from 21.36%)
all increase in revenue was due to Jinjian project
Net income: $7.77 million (up from $1.2 million)
Cash flow from ops: $6.3 million (up from $1.7 million)
Advances to officers/directors burned a lot of cash

Auditors: PKF, Hong Kong. This is changed later to BDO McCabe Lo & Co
And the CEO resigns as well.

Dec 04 balance sheet:
Total assets: $17.3 million ($12.6 million equity)
Total current assets: $14.6 million
current assets are 22% cash, 30% AR, 27% prepayments, 20% loan to director
non-current assets are nearly all prepayments
current liabilities: $4.6 million ($2.1 tax, $0.97 AP, $0.96 PRC business tax)

revenue: $26.8 million
net income: $7.77 million (details above)

operational cash flow: $6.3 million (AR=-4.4, prepay=-2.6, AP=+0.96)
capex essentially zero
finance was $3 million loan to director/officer

Company issued 1.8 million shares to contractors for payment for financial services etc. through 2009. Aone of the consultants didn't provide services and surrendered 550K shares which was then cancelled.

Furniture, fixtures, office equipment: 5 years
Computer equipment and SW: 3.3 years
cars: 3.3 years
leasehold improvements: min(3.3 years, lease term)

Prepaid expenses are the fair value of stock issued for consultant work (average price at date of issue). These are straight-line amortized over the terms of the agreements of 5 years.

This is badly explained:
Revenue from fixed price long-term contracts is recognized on the percentage of completion method for individual contracts. Revenues are recognized in the ratio that costs incurred bear to total estimated contract costs. The use of the percentage of completion method of revenue recognition requires estimates of percentage of project completion. Changes in job performance, estimated profitability and final contract settlements may result in revisions to costs and income in the year in which the revisions are determined. Provisions for any estimated losses on uncompleted contracts are made in the year in which such losses are determinable. In instances when the work performed on fixed price agreements is of relatively short duration, we use the completed contract method of accounting, whereby revenue is recognized when the work is completed, is used.
Share based payment SFAS 123R, Company is currently assessing impact.

furniture, fixtues, office equip: $207K
computer equipment, SW: $100K
cars: $74K
nearly entirely depreciated

intangible information databases $1.9 million (cost, paid in shares in 2000), depreciated down to $289K.

The amount due from an officer was from Lai Man Yuk (was paid in 2004). No interest, unsecured, no fixed terms of repayment. [where can I get one of those?]

The $360 (three hundred and sixty dollar) loan to a director (apart from the above) is to Kung Sze Chau. 5.22% interest, unsecured, due Jan 14, 2005. It was not paid off on time, but subsequently paid. There is a $730 loan from directors/shareholders, interest-free, unsecured, no terms.

Other related party stuff: received interest from Kung Sze Chau of $22K. Paid rentals to former officer Lai of $168K.

Prepayments are prepaid contract costs ($3.8 million) and rental and other deposits ($44K).

Billings at the end of 2004 were $33 million (all paid).

Deferred tax assets of $983K offset by valuation allowances of $720K.

Shares outstanding: 24.4 million. (2.9 million were issued for payments in 2004). 825K shares reserved for stock options. None had been awarded yet.

Lease obligations are max $106K per year, total $241K.

Directors and Officers
Zhu Xiao Xin, 38, President and Director since Feb 2004. Owns 7.76%. Previously executive manager for Syscan Technology (Shenzhen) and president of Shenzhen Hecheng Technology Corp. VP of Expert Network Development (Shenzhen). Qualified economist.
Kung Sze Chau, 57, CEO and Director since Feb 2004 (actually since 2000). Owns 8.64%. 20 years experience in investment/management, specializing in bio pharm and property.
Chaing Min Liang, 40, CFO since Nov 2004. Owns zero. Chinese CPA. Taught auditing and accounting for 6 years. Working in auditing/accounting with many listed companies.
Lai Man Yuk owns 10.39%
Tsang Chi Wai Eric owns 5.98%
Chan Chak Mo owns 9.28%
Li Sze Tang owns 15.2%
Wong Lap Woon owns 8.16%

A lot of the above ownership is via China Data Holdings Ltd which owns 45.18% of the company.
Also Ibroader Development which owns 16.81%.
Also China Link Investment Group Ltd which owns 10.28%
I-Mode Technology Ltd owns 9%
all (3 of them) current officers and directors own 16.4%

Audit fees: $103K
tax fees: $2K

China Expert Technology (CXTI)

China Expert Technology (website) their stock has gone the way of so many other Chinese companies this year: way up.

Based on the latest 10-K, their assets are $4m AR, $3.8 million prepayments, $3.2 million cash, $2 million non-current prepayments, a $3m loan to a director. Current liabilities are AP, and tax with some other stuff sprinkled in. Current ratio is about 3. $12.6 million equity based on $17.3 million assets.

Revenue of $26 million with $12.4 million gross profit. Expenses are less than $3 million. Net income $7.8 million or 33 cents a share. Cash flow is a bit on the weak side at $6.2 million due to big increases in AR and prepayments. The advances to directors/officers look crappy.

Looking at Q2 2005 results:
AR continued to increase to $6.1 million. Cost & est earnings in excess of billings appeared at $5.8 million, there's still $1.9 million due from a former officer. Prepayments are up even more overall ($5.1 million current, $1.8 million non-current).
$2.5 million is due to a former officer. Equity increased to $18.1 million.

Revenue for 3/6 months was $8.3 million / $17 million. Gross profit of $3.6 million / $7.7 million. Net income was $2.6 million / $5.5 million or 10.5 / 22.4 cents a share.

$3 million used in operations due to $5.8 cost & est earnings in excess of billing and AR increase and prepayment increase.

On the face of it, the company is worth $6/share. It's selling for about $2. It had been selling for about 50 cents not long ago.

Eternal Technologies (ETLT) comments etc.

The company also re-issued 10-Q statements from last year.

Q3 2004 re-issued on 8/19/2005
Q2 2003 re-issued on 8/29/2005
Q3 2003 re-issued on 8/29/2005
Q2 2003 re-issued on 8/29/2005 again

Doing a "diff" between originals and these, nearly all of the changes are cosmetic, which is really frickin odd. These people seem to have no idea how paranoid investors are about restatements. However, some of the changes are material.

In Q2 2003, the original had shown $91K sales for Q2 2003 and $119K sales for H1 2003, with no cost of sales. This was changed in the restatement to sales of zero for Q2 2003 and $28K for H1 2003. This then affects all the numbers below them. Actually, the changes below the sales and gross margins are not material based on what I read in Wiley GAAP (but the sales figures themselves are material and thus the other numbers must change also). I've seen this kind of confusion before in a Chinese reverse merger.

The second restatement of Q3 2003 was amazingly trivial
pink-sheets-prompt> diff -u Q2_03 Q2_03_again
--- Q2_03 2005-09-25 10:33:34.743945056 -0400
+++ Q2_03_again 2005-09-25 10:32:58.477458400 -0400
@@ -1,7 +1,7 @@


The filename. D'oh!

Q3 2003 has some more interesting differences from the original, such as this minor change:
-TOTAL ASSETS $ 29,322,381 $127,843,422
+TOTAL ASSETS $ 29,322,381 $ 27,843,422
Ok, so they were off by $100 million. Big deal!

Also, prepayments of $1,060,241 changed to deferred revenue of $1,151,325.

Later on, a Notes payable moves from operations cash flow to finance (duh!), again the prepayment changes to deferred revenue, etc.

The prepayment was from the sale of a sheep embryo transfer contract. The customer pre-paid 70% of the total with expected conclusion within the same fiscal year.

Other than the signature dates, here's the only remotely significant difference between the original Q3 2004 and the restated version (there were lots of tab changes, blank lines added/removed, etc.).
Item 3. Controls and Procedures
+As of the end of the period covered by this report, we have evaluated the
+effectiveness of the design and operation of our disclosure controls and
+procedures under the supervision of and with the participation of our Chief
+Executive Officer ("CEO") and our Chief Financial Officer ("CFO"). Based on this
+evaluation, our management, including our CFO and CEO, concluded that our
+disclosure controls and procedures were effective, and that there have been no
+significant changes in our internal controls or in other factors that could
+significantly affect internal controls subsequent to the evaluation.

- (a) Evaluation of disclosure controls and procedures. Our chief executive
-officer and our chief financial officer, after evaluating the effectiveness of
-the Company's "disclosure controls and procedures" (as defined in the Securities
-Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the
-"Evaluation Date") within 90 days before the filing date of this quarterly
-report, have concluded that as of the Evaluation Date, our disclosure controls
-and procedures were adequate and designed to ensure that material information
-relating to us and our consolidated subsidiaries would be made known to them by
-others within those entities.
- (b) Changes in internal controls. There were no significant changes in our
-internal controls or to our knowledge, in other factors that could significantly
-affect our disclosure controls and procedures subsequent to the Evaluation Date.
Here's a press release from Monday, Sept 19.
They hired Ms. Zheng Shen as CFO.
Ms. Shen is a graduate of Tianjin Finance and Economics University where she received a doctorate degree in 2002. Previously she had received her certification from the ACCA of the UK and her certificate as an International Certified Internal Auditor. She is an associated professor of accounting and a Chinese CPA. In joining the Company, Ms. Shen will play a significant role in the anticipated Chinese acquisition and the operations to be established in the US.
Red flag patterns
When we step back and look at all the red flags, do they form any pattern? What do they imply?
British Virgin Islands
peritoneal endoscopic technique doesn't seem to make sense [other techniques did make sense]
grazing rights on a very large farm, larger than Rhode Island, for a quarter million dollars a year [it's crappy land]
issues with grazing in Inner Mongolia [company addresses those same issues]
board of directors elected to default on some notes
tax holiday boosts apparent earnings [adjust for them]
two suppliers provide 65% of supplies, another 16% [a 53% supplier disappeared and a 35% supplier appeared in 2004, so it doesn't seem to be as dramatic as expected]
major customers: 39%, 24%, 20%, 16%, that is 99%! [a 13% customer went away and a 20% customer appeared in 2004, again, this seems less critical than expected]
two directors may have come from the same company and the statement may be hiding it
a director was supposedly installed on the board after the E-Sea acquisition which never occurred [of course this director is one of the three gone now]
why didn't the 8-K or the proxy mention the stock option plan?
auditors were dismissed
error in translation greatly exagerating revenues [I've seen similar errors in Chinese reverse mergers]
errors in re-issued quarterly reports [similar errors in Chinese reverse mergers]
three directors not up for re-election [one was the E-Sea guy above, one was an internal manager, one was a very outside director]
no audit committee ["the entire board is considered the audit committee", XingJian Ma is determined to be the audit financial expert according to 10-K]
huge increase in AR without answers [but it has jumped up and down by equivalent amounts in the past]
$6 million used in cash flow in H1 2005 [caused by huge increase in AR]

As far as a pattern goes, most of this seems to be a pattern of Chinese reverse mergers: errors in SEC docs, troubles with US stragglers after merger, auditors changing. The only red flag that sticks out in my mind is the one about the embryo procedure.

So what's the stock worth?
In 2004, they would have earned 9 cents if they paid taxes. They will begin paying taxes in Q3 2008. There's a large liquidity advantage to the tax holiday that adds some value beyond just the tax benefit, but I'll ignore that for valuation purposes. I believe it's reasonable to expect that 9 cents of earnings to increase to at least 11 cents within the next few years. Assuming a P/E of 15, the stock would be worth $1.65. I'd discount that to about $1.50 to the present. Given various uncertainties, I'd add in a margin of safety of perhaps 40 cents and assume the stock is worth $1.10. Considering that it's selling for something like 45 cents, I'd call this an acceptable investment.

I un-hid these posts before I finished buying because I'm starting to find more ideas than money to invest. It's been, what, 4 years since I've been able to say that? I have another potential investment in the pipeline and a few other possibilities to boot. But it really pissed me off that someone else found ETLT before I did and drove the price up. And the other investment in the pipeline is the same thing.

Eternal Technologies (ETLT) 2nd Quarter 10-Q

10-Q for the period ending June 30, 2005.

Balance Sheet (compared with Dec 04):
Cash dropped by $6 million to $21.3 million (shows up in cash flow)
AR jumped by an order of magnitude! to $10.5 million.
Inventories nearly doubled.
AP increased to $1.85 million from $1.53 million.
$377K due related parties.
Equity up to $40.5 million from $38.2 million.

Income Statement:
Q2 Sales more than doubled from 2004, so did H1 sales. About half is due to increase in cattle embryo transfer revenue, about a third is due to mutton sales increase, the rest due to increase in sheep sales.
Gross margins 26% down from 39% (probably same reason as mentioned in 10-K)
Gross margins for mutton sales was 24.2%, for sheep sales was 24.9%, for embryo transfers was 29.56%.
SG&A rock steady
Q2 net income $1.98 million (remember the lack of taxes till Q3 2008)

Cash Flow:
$6 million used by operations due to astronomical junp in AR.
$232K capital contributed (officers/directors sold stock and contributed the proceeds for operations)
zero investing activities.

Revenue is recognized using SAB 104, when persuasive evidence of an arrangement exists, the price is fixed or determinable, the merchandise is delivered, the title passes, and collectibility is reasonably assured. Given the increase in AR, this is important.

On Feb 1, 2005, entered into 6-month PR agreement with Empire Relations Group. 150K shares as compensation. I didn't see anything there about Eternal Technologies.

They really don't provide any answers for the alarming jump in AR.
However, I had looked at another Chinese agribusiness and saw a similar high use of receivables in sales. If this is the same thing, the company is essentially loaning money to the customer with an unknown recourse and no interest. If 20% of those receivables went bad, the company would have made zero profit. Looking at past results, AR jumps all over the place by essentially an equivalent amount.

The legal proceeding in Louisiana has been moved to Federal Court as requested by ET. The settlement was refused by Bristol, litigation continues.

Eternal Technologies (ETLT) proxy

Definitive proxy statement
Meeting held in Arlington, Virginia on August 26.

Inconsistent information in the proxy:
At the Annual Meeting, the shareholders will vote upon three proposals, the election of directors, and the ratification of the appointment of Ham Langston Brezenia LLP. as independent certifying accountants, as described further in this Proxy Statement.
Later on they describe
PROPOSAL 1 - ELECTION OF DIRECTORS (7 are up for election while there were 10 total at the end of last year)
and that's it.

During the first half of 2005:
Shang Jiaji's ownership dropped by about 1.1 million shares from 14.67% to 11.03% of the company.

Jijun Wu's ownership dropped by about 800K shares from 7.84% to 5.49% of the company.

Xingjian Ma's ownership dropped to 100 shares from 125K shares.

Tielian Liu disappeared off the radar from having 2.28% of the company.

Executives and directors dropped from owning 31.9% to 21.57% of the company.

Not up for election are:
Garfield W. Hu
Tielian Liu
Xingfa Xu
The Company has an employment contract with Zhai Rui. This contract runs from February 20, 2005 to February 19, 2006 and pays annual compensation of $60,000.
There is no audit committee and not audit financial expert, no compensation committee, or any others. But I've seen this before with Chinese companies after reverse mergers. They intend to add directors as they grow.

10 board meetings during 2004. All directors attended at least 8.

Audit fees were $111K during 2004 with only $44K additional fees ($39K were audit related, the rest taxes).

In US companies, the related party loans are usually from the company to the executives. In Chinese companies, it's usually the executives loaning money to the company (despite their far lower wages). This case is no different. The 10-K showed them, they were minor.

Saturday, September 24, 2005

Eternal Technologies (ETLT) various 8-K statements

S-8 prospectus on 2005 stock option plan
Up to 3,060,000 shares. Other information matches the 10-K as expected. Why didn't the 8/29/2005 8-K mention the stock option plan approval?

various directors elected to the board. New auditors approved.
JiJun Wu
Jiansheng Wei
Shien Zhu
Xing Jian Ma
Genchang Li
Shicheng Fu

Q2 results

Company dismisses auditors, recommended by the board of directors. The new auditors are Ham, Langston & Brezenia LLP. Oops, they mispelled the name of their auditors. It's actually Ham, Langston & Brezinia LLP. Both auditors are in Houston, TX.
HL&B is a member of the American Institute of Certified Public Accountants ("AICPA") and the Texas Society of Certified Public Accountants and its Houston Chapter. The firm is also a member of the AICPA's SEC Practice Section, which subjects the firm to very stringent Quality Control Reviews that are monitored by the AICPA.
Oops, "error in translation".
Because of a translation problem, the press release stated that "the signed contracts represent $15,974,688 in revenue year to date." The release should have stated that the contract will produce a revenue stream over the term of the contract of $15,974,688. The bulk of the revenue from the contracts will be earned during the third and fourth calendar quarters of 2005.
emphasis added

ET signed contracts for $16 million in revenue year-to-date. Income should significantly exceed all income of 2004. Wow!
As the market for sheep embryo transfers continues to get saturated in
the Peoples' Republic of China, the company is spending more time and resources in its cattle embryo transfer business. The shortage of fine breed dairy cattle in China restricts the growth of the dairy industry. In the next 7 to 10 years, the shortage of dairy cattle in China is estimated to be 10 million per year.
results for 2004 announced

Company rescinds the E-Sea acquisition.

UPDATE Jan 29, 2006: E-Sea acquisition eventually did happen.
I thought I covered this already, but I couldn't find it, so I added it here.

On Sept 30, 2005, ETLT acquired E-Sea
the Company acquired all of the issued and outstanding shares of E-"Sea Biomedical Engineering Co. International, Ltd. ("E-Sea") for 18,500,00 RMB (US$ 2,283,950) in cash and 18,500,00 RMB in restricted securities of Company (priced at US$ .40 per share, the closing price of the stock as of the date the transaction was negotiated) or 5,709,875 shares.
So the net cost was 5.7 million shares plus $2.3 million. Using ETLT stock as currency isn't the best idea, in my opinion. The stuff is worth a great deal more than 40 cents a share. I'd say the deal really cost $12 million if you fully value the shares (possibly even more than that).

E-Sea reported net earnings after taxes of US$1.8 million for the 6 months ended June 30, 2005. That would annualize to $3.6 million which, at a P/E of 15, would be worth $54 million. But with the additional business model, this $3.6 million might be higher. But I'm not sure since some of the new business could be cannibalizing the old business model (which is fine, but needs to be accounted for).

Eternal Technologies (ETLT) 10-K

Eternal Technologies (obsolete website) is...
an agricultural genetics company operating in China and focused on the development and application of advanced animal husbandry techniques to produce improved food products.
Before diving into the details, consider some amazing things about this stock. It currently sells for about 45 cents. In early August it was selling for 20 cents. In 2004, it generated about 33 cents of free cash flow. In the last 6 months they earned 6 cents a share. So let's start with the most recent 10-K, Small Business version of form (10-KSB).

Full year ending Dec 31, 2004. Incorporated in Nevada. Offices in Suite D 5/F, Block A, Innotec Tower, 235 Nanjing Rd, Heping District, Tianjin, People's Republic of China 300052. Filed all reports required during last 12 months and been required to file such reports for at least 90 days.

They are an agricultural genetics company operating in China. Focus on development and application of advanced animal husbandry, especially embryonic techniques to shorten time for animals to reach maturity. Working on breeding sheep since 2000. Began selling lamb meat in 2003. Started on cattle in Q4 2003.

Pharm ops focus on gene engineering for biological drugs. Ceased operations in Sept 2004.

Reverse merger in Dec 2002 from Waterford Sterling Corp to Eternal Group. May 2000, acquired 100% of Willsley Company Ltd, a holding company incorporated in British Virgin Islands which owns 100% of Inner Mongolia Aershan Agriculture & Husbandry Technology Ltd. They operating a breeding center for sheep and livestock in Inner Mongolia.

Jan 2003, established relationship with Beijing AnBo Embryo Biotech Center. Originally a joint venture, but failed to agree on terms, so it's just a "close partnership".

Originally imported embryos from Australia and US. Currently producing a herd of "carrier animals" to produce domestic supply of embroys, removing dependency on 3rd party foreign embryo suppliers, reducing cost. Sell pregnant animals to customers. Offspring are breeding stock or commercial stock.

Government regulations related to plowing in Inner Mongolia may cause impediments to use of the farm for grazing. Final determination is pending. The sheep farm future is uncertain and it may be sold and the Company would rely on purchasing sheep from clients to support mutton production.

Very seasonal: nearly all revenue generated in Q4. Becoming less seasonal with the sale of lamb meat and embryo transfers to dairy cattle.

After WTO entry, China gov identified improved animal husbandry and key for China growth.
The Chinese agricultural industry has historically lagged behind Western
countries in the adoption of advanced breeding techniques. As a result, by world standards, Chinese breeding rates, size, health and meat yield have all been low and growing periods have been high. These factors have made quality meat difficult to supply within China without relying on imports, resulted in higher feed costs and waste production as a result of longer growing cycles and adversely impacted the competitive position of Chinese producers.
The Chinese government is trying to bring China up to world standards which will improve the lives of Chinese people [and presumably limit the chances of violent revolution against the current dynasty]. Improving standards also minimizes environmental impact.

Despite it's low productivity, China ranks first in the world for production and consumption of mutton. 2.55 million tons in 2001. China hopes to be a leading exporter in the future.

Milk consumption is increases (we saw this in a previous investment analysis of a Chinese agricultural company). Dairy productivity is about 50% of the US levels.

In 2000, the Company imported 10,000 breeding animal embryos out of a total of 13,000 embryos permitted to be imported by the Chinese government. These embryos were utilized to produce a herd of high-quality breeding sheep and supply of embroys for sale.

Company supplies large commercial and government farms in China with breeding stock, embryos, semen, and related technology and services. This was expanded to cattle in Q4 2003.
In our dairy cattle breeding and embryo transfer operations, we purchase
relatively high yielding dairy cattle in China, produce embryo's from these
cattle with advanced biotechnology and provide commercial dairy cattle through embryo transfer. After birth, retain the offspring to serve as breeder stock and sell the "host animal" back to the original owner.
Primary methods used:
peritoneal endoscopic technique: collection of sheep embryos by peritoneal endoscopes without surgery. Can be done about 10 times. This doesn't seem to make any sense from a medical point of view. Googling for it finds only the 10-K in question.
Peritoneal endoscope technique involves the collection of sheep embryo by means of peritoneal endoscopes without surgical operations. Traditional embryo collection and transfer techniques, using surgical procedures, have generally limited to four operations after which the provider is rendered useless as a result of adhesions left by the surgical procedures. We believe that the peritoneal endoscope technique, a less invasive procedure, may be used ten or more times, increasing the utilization of providers. Additionally, we believe that use of endoscopic techniques combined with deep semen deposition and frozen semen mating can markedly increase conception rates.
vitrificational freezing technique: They claim to be able to do this at room-temperature. Nothing I googled showed anything like this. Did this company discover Kurt Vonnegut's Ice Nine?
We have developed an anti-freezing protectant that
enables the freezing process to be carried out at room temperature without a cooling system, increasing the efficiency of the process. Livestock implanted with a frozen fertilized ovum have been shown to produce increased pregnancy and farrowing rates.
embryo splitting and cleavage ball techniques: This does make sense and is used in cloning. It's illegal to embryo split humans in certain countries.

external fertilization technique: cheap but only about 20% effective in China. The company has been able to reach 40% success which is approx the world standard.

The company has 2.8 million acres of farmland in Wulagai Development Area in Inner Mongolia (purchased from Chinese government for $6 million, the rights extend through 2025), an embryo transfer center, and a reception center, also the AnBo Biotech Center in Beijing (reminds me of Jurrasic Park?). 2.8 million acres is a square 60 miles on each side. This seems very large. Here's an interesting web page that raises some red flags about grazing land ownership in Inner Mongolia. Some maps. Wulagai seems to be located around 45.6 degrees north, 118.5 degrees east, which is just below the easternmost part of Mongolia, a few hundred miles northwest of the company's headquarters in Tianjin.
The farm is equipped with a 60-kilovolt electric transmission line, telephone
and transportation facilities, including a 200 kilometer road system connecting all sub-pastures. A railway station is located 80 kilometers [50 miles] south of the farm, facilitating distribution of products throughout China.

Also located on the farm is a 35,000 square foot embryo transfer center
including operating rooms, equipment rooms, offices, conference rooms, lecture halls and guest rooms. Substantially all research and embryo transfer operations occur in our embryo transfer center.
Sandstorms have been getting worse over the years and are even approaching Beijing (see the red flag web page above). They will probably be prohibited from plowing on the farm, which would be needed to support a large number of animals. They claim the land is still valuable because it hasn't been plowed, but who would want it and for what use?

The Biotech center is in Beijing.

Wulagai Development Area
China Continental purchased water rights by buying 2.6 square kilometers of land for their bottled water business in the Wulagai Development area.

They're looking to acquire companies or facilities for feedlot, dairy processing, slaughterhouse, and meat processing. Nothing current.

Competitors: Smithfield Foods from the US is in China. Also Sumitomo Corp of Japan. They both have a size advantage and name recognition.

Company applied for 3 Chinese patents.

There are extensive government regulations with a lot not-well-defined, possibly requiring future expenditures.

26 full-time employees. HQ is about 1,000 commercial square feet in Tianjin, $964 per month. 2.9 million acre farm purchased in April 2000.

2 legal proceedings: 1) Western Securities Corp. seeking $500K on 2 promissory notes, filed in Eastern Louisiana. Company filed to have it moved somewhere relevant. 2) Bristol Investments filed in NYC for failure to have a registration effective within stated period of time. Seeking $53,000. Company will settle, offering a convertable (at 20% discount to market price) debenture, 2 year maturity, unconverted amounts paid in cash.

979K shares of stock issued in 2003 to non-US investors for $277K. Later in 2003, issued 1.7 million shares and 1.2 million warrants (expire 2008) to 7 accredited investors for $1.3 million.

They started to purchase E-Sea earlier this year, but backed out successfully because they weren't able to audit E-Sea's financials.

Increase in 2004 sales was due to increase in sales of rolled mutton of $3.4 million, dairy cattle embryo transfers of $3 million, partially offset by decreases of $669K sale of lamb meat, $4.5 million in sheep embryo transfers.

Decrease in gross margins (to 38.7%) is due to loss of higher margin sheep embryo sales (down from gross margin of 57.7% in 2003).

Depreciation costs down due to some fully depreciated equipment.

SG&A increased due to accrued penalties associated with legal issue 2 above, and costs incurred in registration, increase in salaries, decrease in marketing expense.

Audit opinion includes a qualification about the prior operations of Waterford.
Auditors are Thomas Leger & Co. LLP, Houston, TX. Opinion on May 6, 2005. Karen (Ruikun) Tao is on their Chinese audit staff, the only one listed.

Balance sheet assets:
68% cash ($27 million)
15% fixed assets, net ($8.3 million cost, $2.4 million deprec)
12% land use rights
everything else is down in the noise
current ratio is greater than 10.

Liabilities and equity:
4% AP
94% equity

Income statement:
sales ($16.8 million) up 8% over prior year.
cost of sales: $10.3 million
depreciation: $760K
expenses: $1.58 million
taxes: 0
net income: $4.2 million (14 cents per diluted share)
30.7 million shares Dec 31, 2004. They issued 1.3 million shares during 2004 for employee compensation, plus 100K-ish amounts for various purposes.
1.29 million stock options issued in 2004 (strike 40 cents). Max allowed is currently 1.3 million. A new plan allows up to 500K shares. Assume about 34 million totally diluted shares.

Cash Flow:
operations produced $10.5 million (aided by drop in inventories and receivables)
capex: 0
nothing else significant

They sold property and received $1.5 million in inventory in exchange.
Inventory depreciation schedule is normal, includes $6 million land use depreciating over 25 years.

No allowances for doubtful accounts (none deemed needed).

Livestock inventory recorded at historical cost. Estimated costs are accumulated and capitalized as inventory. Embryo inventories recorded at cost. FIFO used.

Inventory: $621K
sheep and cows: $231K (up from $76K in 2003)
sheep and cow embryos: $364K (down from $1.1 million)
other raw materials: $25K (up from zero)

Dairy cow purchase agreement: Aug 2003, entered into contract to buy 2000 dairy cows at $2,750 each, total $5.5 million. Also agreement to sell them back during 2004. The cows were used for embryo production in Q4 2003. Buy-back for at least $1,700 per cow. Was completed. Total cost allocated to embryos was $2.1 million.

Company was trying to sell reception center in Q4 2003 (held as "construction in prog"). Impairment of $300K and shifted to property held for sale during Dec 2003 snapshot of balance sheet. Sold for even less and company took an impairment loss of $53K. Terms: cash of $620K, remainder paid in livestock worth $1.5 million. All received in 2004, noncash part in accordance with APB Opinion 29.

No material US dollar amounts (of anything) held.

The restatement for 2002 was based on Waterford's negative equity at the time of reverse merger. Impact was minor.

Two notes payable:
1) $402K to Market Management LLC, due Dec 11, 2005, 8%.
2) $41K to Thomas Tedrow, due Dec 11, 2005, 8%.
Company's board of directors elected to default on the notes (see legal proceedings above).

Income tax:
US NOLs of $1.76 million expiring in 2022 which is useless and is effectively written off (probably as a contra-asset).
Dividends and capital gains are not subject to tax in British Virgin Islands.
Aershan's current operations are exempt from PRC taxes, granted by Xilingol League (local government) and central PRC gov effective July 2000. This extends through July 2008. Savings so far have been $1.7 million in 2004 and $2.3 million in 2003. This boosted net income per share by 5 cents in 2004 and 9 cents in 2003. Don't forget to account for this.

China Continental (CHCL) is a related company. One of this company's former officers, directors, and current major shareholder (Shang Jia Ji) owns more than 10% of CCI and owned this company before the reverse merger.

Stoneside Development Limited, controlled by Thomas Tedrow (former principal shareholder and former officer of this company) contracted to do investor relations for $10,000 per month starting in June 2002. This was cancelled in 2004. Now it's a legal proceeding.

There was one majority supplier in 2003 (53%) and some major suppliers. In 2004, the majority supplier is gone, but there are suppliers of 30%, 16%, and 35% of purchases.

There are some major customers: 39%, 24%, 20%, and 16%.

Jijun Wu, 68, Chairman
Was president before the reverse merger. Was Accountant General for a large state-owned electronics enterprise in PRC. Also a consultant to foreign companies entering the PRC market. CPA.

Jiansheng Wei, 52, CEO
was COO. was VP-GM of Towering Industrial Group (had interactions with this company). 30 years in animal husbandry. Ran several operations in Inner Mongolia and Hebei province. MBA from Tianhin Finance and Economics College.

XignJian Ma, 58, CFO and director
was Chief of Financial Dept of Tianjin Electronic Instrument Corp (possibly same company as Chairman was in, why hide it?)

Garfield W. Hu, 30, Secretary
was instructor at Tianjin Normal University and Nankai University and translator and advisor for largest Chinese IT website, yesky.com.

6 other directors.
One of them, Tielan Liu, was supposedly installed on the board after the E-Sea acquisition, but that never occured.

This one is interesting:
He [Shien Zhu] invented a system of freezing and preservation, not aided by a cooling frigorimeter, which is characterized by low cost, simple operation and a high embryo survival rate. In recent years, he has written more than 40 articles that were published in international and domestic periodicals. Currently, he is undertaking vital projects for China and scientific research projects under the "Ninth Five-Year Plan" period.
Some webpages related to this guy: here
And this one:
Instead of using expensive embryo freezing humor, the vitreous humor is able to complete the freezing preservation of bovine embryo in a few minutes, which changed the traditional freezing method that may take several hours to complete the process. Started from last October, they have worked on excessive ovulation of eight imported cows. Seven days after being inseminated, embryos were collected non-surgically from cows' uteri. 12 healthy embryos were selected and preserved in vitreous humor. All 12 defrozen embryos that had been kept in liquid nitrogen for 1 to 13 days have been proven usable. The embryos were then transplanted non-surgically into 9 cows with five of them getting pregnant.
Executive compensation is embarassingly low. The highest salary is $27,299.

Shang Jiaji owns 14.67% of the company.
Jijun Wu owns 7.84%
James Q. Wang owns 3.59%
Tieliang Jiu 2.28%
Jiansheng Wei 2.37%.
All officers and directors: 31.9%

Thursday, September 22, 2005

DND Technologies (DNDT)

In the 1960s it was "consolidated". In the 1970s it was "industries". In the 1980s it was "systems". In the 1990s it was ".com". In the zeros it's now "technologies": the one word all new business names must contain. And so we have DND Technologies (no website), not to be confused with Dungeons and Dragons.

This company makes semiconductor fab equipment for plasma etching and dry stripping. They sell new, refurbished equiptment, aftermarket support, spare parts, etc. In 2004, spare parts and tech support as 38% of sales. 25% of inventory purchases were from Lam Research. Lam can't be changed easily but other suppliers can. Lam owns a lot of the IP, unfortunately.

Customers: Intel, TI, ST Micro, Motorola (the Circle M Ranch), Nationnal Semiconductor, On-Semi. No 10% or more. In 2003, TI and National were 17% and 12%.

2 employees: CEO and CFO. Aspect Systems, ASI, subsidiary has 53 employees.

Revenues have gone up with the semiconductor industry lately. Revenues were $15.8 million in 2004. Gross margins were 40%. Net margins were 15.6%. They earned 5 cents a share. Q2 was worse with gross margins of 32% with a significant net loss, even with a much lower reserve for bad inventory vs last year.

Assets are license agreements or $3.2 million (presumably with Lam), inventories of $2.9 million, and AR of $2.4 million. Liabilities are AP of $3.7 million, customer deposits of $1.1 million, payables to Lam of $967K current and $3.3 million non-current. By Q2 inventories were up to $3.3 million, AR down to $1.34 million.

In 2003 they issued $1 million in stock for AP. 441K options exercised in first half 2005. Shares increased to 26 million. 4.23 million outstanding warrants and options.

Free cash flow for 2004 was about $840K ($270K for first half of 2005). They paid off a net $700K in debt. Nothing else going on with cash.

There are a lot of things unpleasant about this company. Lam has a lot of power via IP. Lam is actually a competitor (although they let DND keep this niche for now). It's a cyclical business with lots of IP issues and uncertainty. The only good thing is that the stock is selling for 12 cents a share. If their free cash flow is say $500K per year and they have 30 million diluted shares, then it would be worth 25 cents a share. But the capital expenditures have been very low, perhaps it will increase to something more normal, I don't know. Do they have a sustainable $240K of free cash flow per year? Is it certain enough?

Wednesday, September 21, 2005

Ezenia! (EZEN)

This company (website) makes web collaberation software. My first reaction was that their field is just waiting for Microsoft to come along and destroy all competitors. But they're mostly working with the military and it seems to be a high-specialization required for their customers. They're letting the legacy videoconferencing die a noble death while they focus on newer collaboration software business. Their research costs have dropped fairly dramatically, but that's due to giving up on the legacy stuff.

Most of their assets are cash. Most of their liabilities are deferred revenue (much less than total cash). Current ratio = 2.

Revenue stream tells a typical story for this time frame:
Q2 05: $3.3 million, gross margin 65%, 27% operational margin
Q1 05: $3.1 million, gross margin 63%
Q4 04: $2.8 million
Q3 04: $2.5 million, gross margin 65%
Q2 04: $2.5 million, gross margin 64%
Q1 04: $2.6 million, gross margin 60%
2003: $8.2 million
2002: $11.4 million
2001: $15 million
2000: $28 million

First half 2005: $2.6 million cash provided by operations (on earnings of $1.6 million) with only $135K capex. First half 2004 wasn't much different. 2004 free cash flow was essentially identical to earnings.

Less than 1.5 million stock options outstanding at end of 2004, ave strike is $3.94 with 6.4 years remaining. Current shares in Aug 05 is 14.6 million. Probably less than 18 million totally diluted.

During the 1990s they did a lot of classic data communications video conferencing stuff, mostly infrastructure, protocols, etc. They followed all the usual trends: ISDN, frame relay, ATM. I liked this part of the annual report mind you:
Contrary to how most videoconferencing vendors would like to indoctrinate potential customers, video—in particular talking heads as in the case of most video conferences—was and is, now more than ever, far from being the “piece de resistance” of true, meaningful real-time collaboration. Furthermore, its monolithic approach, whereby you either get a successful videoconference session or get nothing, relegates all other more critical collaboration activities second to video talking heads. Most importantly, the lack of presence awareness detection and inability to leverage the web for ease of access prevent flexible, on-demand, free-flowing collaboration sessions whereby participants can come, go, or be invited at will.
I think the real question here is going to be whether they will be a survivor or not in the long run. Like LiveWorld, they have the advantage of experience.

Customers include: US Intelligence community, U.S. Joint Forces Command, Marines, Navy, Air Force, Army. This is good. Currently in use in Afghanistan and Iraq. Focus is entirely on Defense and intelligence community worldwide (US and foreign allies). Annual subscription based revenue includes maintainence. Also sell training, installation, customization. Sales methods mirror government market matrix. Indirect sales via General Dynamics, SAIC, Northrop Grumman and others. In 2004, 60% of sales were via indirect channels. Top three customers: US Join Forces Command, Defense Intelligence Agency, US Army. Older products are sold internationally and percent of sales is dropping radically (2% 2004, 14% 2003, 24% 2002).

Unix and Windows. Server, database, app server, user directory, utilities. Encryption and accecc control PKI and X.509. Auditing, word searching, patterns. Text chat and IM, audio chat, whiteboard, app sharing, secure file sharing. Security, scalability, flexibility are priorities.

R&D is mostly software engs and contractors, many with top secret clearance. Research spending has dropped from $4.6 million in 2002, to $1.9 million 2003, to $1.1 million 2004. 24/7 hotline.

Competitors are IBM Lotus, Documentum, Groove Networks. Also similar products like WebEx, Centra SW, Oracle, Cisco, Microsoft. In videoconferencing, Polycom, RADvision, Tandberg Telecom.

Unfortunately, the price is a bit high, so it's not worth digging any further. But it's one to keep in mind. It's probably worth around $2 and change.

Sunday, September 18, 2005

Bonus America (BAWC) Q2

June 30, 2005

Amount due from related party increased, but loan from a director was mostly paid down. Amount due to related party is up roughly as much as the amount due from related party.
AR increased about 30+% from Q1.
Total equity is up about $74K.

The advertising and list rental income, $623K is down about 5% from Q1.
Cost of sales is up to $166K from $47K.
SG&A is way down to $280K from $528K in Q1.
Net income of $71K
about 20 million shares diluted.

Cash flow from ops $401K (was $346K in Q1), mostly aided by deprec ($218K), decrease in inventory ($113K). Q1 was mostly aided by decrease in AR.
Estimate of real free cash flow is around $250K in first half or about 1.25 cents per share.

Recent stock price is 10 cents. So BonusAmerica is probably worth digging into. Let's see what we find...

There's this odd warning about the previous holding company which sold off Bonus America. Strange things are associated with www.nationalrewardcenter.com
same goes for iwatchclub.com which is also associated with Stanford International Holding Company. There's another one right on the www.bonusamerica.com domain.

This one doesn't pass the smell test, especially given their line of business. In Dec 2001, I learned the hard way about investing in something that I knew was shady but would clearly be profitable nonetheless. People unscrupulous to their customers can also be unscrupulous to their investors.

Bogen Communications (BOGN) Q2 results

June 30, 2005

Changes since Dec 2005:
Cash and receivables down. Inventories up, but less than AR is down.
AP down.
Current ratio up to nearly 3.
Equity is down due to forex loss.

Q2 revenues up slightly from prior year.
COGS down somewhat.
Net income $786K in Q2, $694K for 1st half (Q1 was a loss).
Cash flow from operations is $544K, free cash flow $130K all in 1st half.
They paid off some debt.
5K restricted stock grants.
4.1 million shares.
Stock option grants: 145K restricted shares in 2002. 2.5K restricted shares in Mar 2003. 40.5K in Feb 2004. 5K in Mar 2005.
Assume about 4.2 million shares totally* diluted.

Free cash flow per share in first half 2005 was 3.1 cents per share. The stock last traded at $4.85.

* I use the term "totally diluted" to mean the estimated number of fully diluted shares whenever I sell the stock. Some companies issue huge amounts of stock options and if you hold the stock for a few years, the dilution can really destroy value.

Saturday, September 17, 2005

Emergent Group (EMGP)

This company (website) leases surgical equipment to those who can't justify the large capital expense due to low utilization. Gross margins are 30% and SG&A is 29%, so it's a crappy business unless the depreciation schedule is overly pessimistic (which is possible). Regardless, it's going to be a capital intensive business, which is bad.

Net income was $23K in 2004 and $58K in 2003. They've been shifting away from non-surgical leases, which has made margins even worse. Free cash flow has been about $400K each year (close to 10 cents a share with the stock selling at 65 cents), but this is because of the gigantic depreciation. Free cash for for the 1st half of 2005 was $600K. With 5 million shares, that's 12 cents in 6 months.

Assets are 1/3 AR, 1/3 property/equipment, and 1/3 goodwill+inventory+misc.
Liabilities are a spread out among accrued expenses, AP, capital leases, debt, etc.
Equity is $1.9 million, Total liabilities are $2.6 million.

The real question for this company is going to be correct depreciation and making sure to include the cost of capital in case it's [partially] buried in equity placements rather than debt with clearly visible interest payments at market rates.

The stock price is such that it would probably be difficult to buy many shares for under a dollar.

DAC Technologies (DAAT)

This company (website) makes firearm safety devices, gun cleaning kits, safes, car alarms, etc. They sell to Wal*Mart (I didn't find any DAC stuff online), Academy(no online shopping), Big 5 (nothing online), Cabela's (they show a DAC's item for $25 and a crappier generic item for $20, the DAC website has it for $30, and they have a DAC brass jag kit for $8, where the DAC website has it for $15, Cabela's also has a cheaper, smaller brass jag set for $2.50), G.I. Joes (these guys feature a $60 DAC cleaning kit very prominently and have other DAC stuff), K-Mart (I only found competitor stuff like Otis online), L.L. Bean (I only found competitor products online). They OEM through Savage Arms (nothing relevant online), Marlin Firearms (nothing relevant online), Kimber (nothing relevant online), Weatherby (expensive fancy cleaning kit, nothing from DAC unless that kit was repackaged), Glock (nothing relevant online), Sig (cleaning kit, can't tell if it's from DAC), Leatherman Tool (nothing online), Taurus International (nothing online), Ithaca Arms (nothing online), H&R 1871 (nothing online), Rossi (nothing online), Knight Rifles (they have some cleaning stuff that could be DAC but the jags don't match). They have go through several distributors. I checked the distributors and some show DAC, others don't, no surprises.

Otis seems like a strong gun cleaning supplies competitor.

Ok, let's take a look at their financials.
In the year ending Dec 31, 2004, their revenues went up 96%. This leveled off to 41% in Q2 2005 (68% in Q1) from the year earlier. Quarter over quarter from Q1 to Q2: Q1 had $2.26 million in sales, Q2 had nearly the same level of sales. On Sept 13, 2005, they announced August sales of $1.11 million. July sales were $740K.

There is legislation working its way through Congress to require a trigger lock or safe storage device for every handgun sold by a dealer. DAC would profit from this. Cabela's made a 6-figure order. Also Wal*Mart made low 7 figure commitments. At that point in August, the company was foreseeing $9 million to $11 million in revenues in 2nd half.

Let's follow the financials over time.
Dec 31, 2004:
cash = $168K
AR= $477K (allow of $7.5K) way up over prior year of $100K
due from factor = $1.3 million, way up over prior year of $223K
inventories = $1.9 million, more than double what it was a year earlier
AP doubled from the prior year

Sales doubled in 2004 from 2003.
Gross margins dropped from 40% in 2003 to 37% in 2004.
Selling cost percentages stayed the same.
G&A went from 15% to 9%.
Operating margins for 2004 were 17%. 12% in 2003.
Net margins for 2004 were 11%. 7% in 2003.
Share count increased mostly due to private placement.
Cash flow from operations sucked in 2004 (due from factor and inventories).

So the majority of receivables are factored. I view this as kind of ugly. Factoring fees are 0.65% to 1.8% monthly. The Company can get advances (currently charged 5.25%).

Bank debt is at 7%.

less than 400K stock options outstanding., ave strike $2.57.

They burned off $161K of NOLs in 2004.

One customer accounted for 55% of sales!
Their AR was factored.
Company purchased 98% of its products from one supplier.

What's to stop the 55% customer from going directly to the 98% supplier????

Bzzzt. I've seen enough. This company is selling for about 15 times trailing earnings. It doesn't seem very cheap to me at this point.

Friday, September 16, 2005

Dyna Group International (DGIX)

This company (website) sells worthless pewter crap: belt buckles, miniature versions of junk, key chains, you get the idea. THEY HAVE NASCAR LICENSES! I take it all back. They make wonderful stuff. Also NHL, Major Leauge Baseball, NBA, colleges and universities. Excellent. Most licenses have annual renewals.

Quickly scanning the 10-K:
They sell through direct sales force (12), independent reps (35), and disties. Mfg is mostly done in Mexico. 90%. One customer was 12% of sales in 2004. Top 10 are 41%. Not particularly competitive business. About 115 employees: 26 sales, 9 design, 78 mfg etc.

Tuttle investments (CEO Tuttle) own 46% of the company.

Solid balance sheet.
Current assets are nearly all inventory and AR. Not much else for assets.
Equity is 5/6 of assets.

Gross margins are about 34%. SG&A is about 18%. Royalty fees are less than 8% of sales. Net margin is 7%.
They earned 14 cents/share in 2004.
Share count has been decreasing from buybacks, very little stock options, if any.
They wrote off $612K of inventory.

Cash flow from ops is good. Free cash flow is $900K (12 cents per share).

They have an unconsolidated joint venture which provides 20% of net income, Promociones GAP, which is their Mexican manufacturer. However, an 8-K recently issued says they'll need to restate everything to consolidate it.

They decided to de-register based on the usual reasons. They will keep posting financial results. Year end statements will be audited (they say this in the Q2 results below).

Q2 results were just announced on Friday. 6 month revenues up 15.7%. 6 month earnings up 65%. 3 month results are also good. Earnings per share for 3 months was 5 cents diluted. No balance sheet info or cash flow info provided, so I don't have any real details.

In Q1, they had an operating loss and a net loss, mostly from the rising price of pewter. Even cash flow from ops was negative due to inventory (mostly offset by AR) and another write-off of inventory (they do this after 1 year old). Some gets sold off, some melted down. They had to draw $629K from the revolver and still burned up nearly all the cash.

The stock is currently selling for $1.07. That will probably go up after this recent Q2 announcement.

Monday, September 12, 2005


To avoid having people front-running my possible investments, I will typically keep posts in draft (not publicly posted) until I finish buying the stock. This was the case with EDAC and probably for future investments as well. My intent with these notes is to keep a record of what I'm doing for my own benefit (I have a terrible memory). Allowing other people to observe these notes makes the process* I use for making investment decisions a bit more specific/measurable/accountable (hopefully) regardless of whether anyone actually reads them or not. If other people gain from these posts either for investment ideas or whatever else, then that's fine. But I intend to buy into stocks before posting about them and selling the stocks before making that clear here. If I were writing articles for an investment magazine, it would be unethical. But these are just my notes that I happen to be posting for anyone to see.

* there are parts of that process I don't post here, such as my checklist.

Sunday, September 11, 2005

Revisiting companies

Lincoln Logs, B-fast, and some others aren't worth following, although I'm not sure why I seemed to believe LLOG was selling for 15 cents at the time (more like 30).

Ballistic Recovery (BRSI) They earned a penny in Q2, but their cash flow is terrible. In Q3, sales increased 20%. Net income stinks (due to increased R&D). Operating margins up to 38.7% from 32% (cost mgmt, labor utilization). Increased price pressure and it will continue. They amended their 10-K due to restated valuation of warrants on Cirrus Design Corp. This company is probably not worth following.

Bank of the James (BOJF) Since June, the stock has gone nowhere, $17.70. New board member. They earned 25 cents per diluted share (down from 27 cents a year earlier). I would have expected results to continue improving considering total assets are still increasing. Assets past-due are down. Net interest income is up, but provisions were increased. Unspecified non-interest expense was way up for some unknown reason.

Some other banks:
BANI, stock is up to $19 from around $18. They earned 22 cents in Q2, up from 9 cents.
SCCB, stock is down to $10.50. Losses increased in Q2.
Private Bank of the Penninsula (PBPC) #57510, losses are smaller, stock is pretty much unchanged.
First Sound Bank (FSWA) #57799, losses are slightly less. Stock is not down enough.
Stonegate Bank (SGBK) #57934, losses way down. Stock is up to $13.35 from $12.
Connecticut River Community Bank (CRCA) #57475, stock is up to $15 from $11, nothing going on with earnings, pretty much zero.

BNSIA, no significant change

Bogen Communications International (BOGN) price dropped to $4.85 from $5.05. They earned $786K in Q2. Definitely worth looking into.

BGI, Inc (BGII) stock is up from around 47 cents to around 65 cents. Revenues up 133%, net income way up at 3 cents vs 1 cent. Theoretically, the stock might be worth $1.80. Worth considering.

Billy Martin's USA
(BLYM) stock went up, stock went down. It's really a shame because I can see that this business is probably good, but without a trace of transparency, why would anyone invest in it?

Amen Properties
(AMEN) stock is down slightly, but not nearly enough to be interesting.

Bonal Technologies (BONL) no real change since the 2-bagger increase after the 4 cent dividend was announced the day after I looked at the stock. web

Bonus America (BAWC) Revenues are down, COGS down, SG&A down, $71K earnings (up). 20 million shares. This would be an annualized 1.4 cents per share per year. The stock could probably be bought for 8 cents (no trades were over 8 cents recently). I need to do some work on BAWC.

Bowlin Travel Centers (BWTL) last trade was $2.00. They earned 5 cents in Q2, excluding a gain on sale. Revenues are up. COGS increased a bit too much. Cash flow looks good. It's worth about $2.20.

Brand Partners
(BPTR) Stock is down to about 77 cents. Conference call: 12% increase in revenue in Q2. Net income down to 2 cents per diluted share. I don't trust the Chairman, Anthony Cataldo, and there are just a lot of weird things about the business.

Bulldog Technologies (BLLD) stock is at 97 cents. It's been dropping for a long time. They issued $2.1 million in convertable notes effective Aug 29. Still losing money.

Burnham Holdings (BURCA) stock has been dropping and is now $23.50. Revenues are below the record setting levels of last year. Loss for the quarter. Reduced industry demand. They still paid a 29 cent dividend for the quarter.

Butler National Corporation (BUKS) The 10-K is out now. They did very well. Revenues jumped from $10 million to $23 million. Gross profit also more than doubled. Earnings per diluted share jumped from 2 cents to 6 cents. But this is largely a one-time deal, with an upgrade to lots of planes. Cash flow isn't so good, due to greatly increased inventories and AR (the AR is about 60% offset by AP). Free cash flow is actually negative. But I don't know enough details to say exactly what's going on. Market cap was $26 million, now it's down to around $20 million. Probably still not low enough.

The Experimental Agency (XAIN) Results are still pretty crappy. Stock is down to 39 cents.

Yi Wan Group (YIWA) Food revenues are up very slightly. Hotel business is actually down from a year ago. So is entertainment. Telecom is disappearing, which is good. They lost money in Q2. AR increased. The stock is largely unchanged at 39 cents.

Schuff International (SHFK) Q2: receivables up (largely due to contracts in progress), revenues were up to $90 million from $59 million the year before. SG&A rock steady. They earned 42 cents per diluted share. Massive cash flow from ops 3X net income with only a small amount of capex. The stock is at $6.35 from $3.50 when I looked at it. I didn't think they had pricing power. They might have it now, but probably not when the tide goes out again.

Still to look at later: Solitron Devices (SODI), American Dairy (ADY), Big Apple Bagels (BABB), New York Health Care (BACL), Credit Acceptance Corp (CACC), China BAK Battery (CBBT), Caprius (CAPS), Triangle Multi Media (QBID), China Cable (CCCI), C-Chip Technologies (MANS), China Digital Media (CDGT), China Education Alliance (CEDA), China Evergreen (CEEC), COR Equity Management (CEQH), China Finance Online (CHFI), China Energy & Carbon Black Holdings (CHEY), Avalon Correctional Services (CITY), and good old Malibu Cola, Calcol (CLCL).

Saturday, September 10, 2005

Edac Technologies (EDAC) misc stuff

Founded 1946 in Hartford. Company remained private until 1985. Reorg in 1996. Acquired Apex Machine Tool (Farmington, Conn) to pick up injection mold and composite mold, also tooling. Kaisen, 6-sigma, etc. (they don't take it religiously, which is good).

Mission Statement:

Our overriding mission is to be the company of choice for our customers, shareholders, employees and community. We will achieve this stature by:

  • Being flexible and easy to work with.
  • Providing our customers with benchmark quality, service and value.
  • Providing shareholders superior return on their investment.
  • Developing a world class working environment for our employees health, safety, security and career growth.
  • Being a good corporate citizen by supporting our local community and charities.
Continuous improvement. Good behavior.
Employment portion of website seems OK. Other areas seem OK.

Joseph Lebel filed a Form 3 on Aug 5, 2005. Owns 131K shares directly. Has options on 10K shares at stike $3.75, vests 10/2/2005, expires 2015.

Proxy Statement:
The Compensation Committee, comprised of Messrs. Moses, Bayne and Raffay, held one meeting during 2004.
5 full board meetings in the year. All directors attended at least 75%. All attended last year's shareholder meeting and are encouranged to attend this one.
Audit committee report looks fine. Auditor selection does not need to be submitted to a vote, but they will anyway.

Compensation committee report is refreshingly good after seeing so many pork troughs.

Google searches all good.

Edac Technologies (EDAC) 10-Q

Quarter ending July 2, 2005

Cash is up to $800K from $549K.
AR is down to $6.1 million from $6.6 million
Inventories,net up to $4.9 million from $4.5 million

Revolver paid down
AP fairly steady at $3.3 million

Current ratio is $12.6 million / $6.8 million
Equity is up to $7.5 million

Revenues up only slightly. COGS down slightly (more sales, better mgmt). SG&A up significantly (bonus and profit sharing).
Income from ops $689K.
Huge benefit from income taxes of $787K

Excluding the benefit from taxes, net income per share would be about 12 cents.

For 6 months, cash flow from ops is only $1.9 million due to $750K gain on forgiveness of debt and $900K deferred tax offset somewhat by $969K deprec and $300K changes in working capital.

Capex was $925K for 6 months. $900K free cash flow for 6 months.

4.8 million totally diluted shares.

July 2, 2005, Company concluded it will more than likely realize all of deferred tax assets. After 2005, the tailwind goes away and the company will have normal taxes.

Non-aerospace customers: $5.1 million revenues
Aerospace customers: $3.8 million revs

Apex machine tool: $5.4 million revs, up 7.4% (demand should continue)
Precision aerospace: $2.4 million revs, down 17.4% due to a one-time deal in 2004, should increase going forward
Spindles: $1.1 million revs, up 32%, should continue

Backlog is up to $21.7 million from $18.3 millon in Jan.

I would assume a roughly $2.5 million annual free cash flow for the business going forward. So I figure the stock is worth about $7.80 per share, making it a BLAMMO investment on the Ricktor scale.

Edac Technologies (EDAC) 10-K

This company (website) designs, manufactures, and services aerospace precision tooling, fixtures, molds, jet engine components, assemblies, and machine spindles. Their focus is on design and repair of precision spindles, which requires clean room technology. This seems like a good business to be in.

Today, I'm looking at their 10-K and report to shareholders.
To Our Shareholders: “Profits, like sausages.....are esteemed most by those who know least about what goes into them”.
Alvin Toffler

Our primary objective for 2004 was to build on the prior year’s achievements and start delivering profits to our shareholders. This proved to be a more elusive goal than anticipated. While our order backlog and sales increased during the first two quarters, our operating profits did not grow proportionately. However.....we continued to change and by the fourth quarter we felt that we had finally transitioned EDAC into a better balanced and profitable business.

The result is that with the increased sales in 2004 compared to 2003, our operating profit improved by $1,559,000, from a loss of ($143,000) in 2003, to income of $1,416,000 in 2004. During the year we significantly improved our cash flow position, established a new banking relationship and in January 2005, refinanced substantially all our debt, including the addition of a $1.5 million equipment line of credit that will provide for our continued growth. Similarly our balance sheet has also shown a dramatic improvement — net working capital increased by approximately $6.4 million, the ratio of current assets to current liabilities almost doubled from 0.92 to 1.83 and net worth increased by 90% to $5.2 million

Order activity continues to remain strong in all of our product lines. Sales backlog has increased from $18.3 million at January 1, 2005 to $20.2 million at the end of February 2005.

In a little over two years, EDAC has risen from the ashes... changed to ensure survival, we continue to refine our recipe, to ensure that we remain positioned for growth and for delivering profits to our shareholders. The entire team at EDAC remains committed to maximizing the value of our Company for you, our shareholders.

Sincerely yours,

Dominick A. Pagano
President and Chief Executive Officer
Year ends Jan 1, 2005, full year report. Incorp Wisconsin. Offices in Farmington, Conn.
There was a restructuring in Q4 2002 to Q1 2003.
No patents or trademarks. Not really needed.
One single customer is 34% of sales.
One single customer is 39% of sales. Warning.
They benefit from the outsourcing trend.
They have some moat due to experience, reputation, fast turnaround.
Backlog $18.3 million vs $18.0 million end of prior year. Increased spindle orders, decreased aerospace orders.
200 employees.
Properties, all in Farmington, Conn:
47,000 sq ft, owned, mfg and design
20,800 sq ft, owned, design+mfg spindles
19,200 sq ft, owned, mfg corporate offices
44,000 sq ft, owned, mfg warehouse
All real estate is mortgaged.
No legal proceedings.

William B. Bayne, Jr., 40, joined 2003, CEO and founder of BBB Corp and 23rd Street Corp (restaurant businesses)
John Moses, 60, joined 2001, private investor
Dominick A. Pagano, 61, CEO of EDAC and CEO of Dapco Industries (ultrasonic inspection equip for steel and railroad)
Stephen J. Raffay, 77, joined 2000, retired Vice Chair of Emhart Corp (mahcinery mfg)
Ross C. Towne, 61, joined 2001, CEO of The Washington Source (precision sheet metal fab and integration)
Daniel C. Tracy, 64, joined 1999, Chairman and business consultant
Joseph Lebel, 74, since 1961, retired QC mgr for EDAC

Mr. Bayne founded BBB Corporation and 23rd Street Corporation in 1988 and 1994 respectively.
Mr. Pagano became President and Chief Executive Officer of the Company in August 2002 and also serves as President and Chief Executive Officer of Dapco Industries, Inc., a company that he founded in 1972. Mr. Pagano served as Chairman of the Board of Directors of American Environmental Technologies, Inc. from 1988 until 1999. Mr. Pagano has been a director of the Company since July 2001, provided, however, that he did not serve as a director from April 2002 to October 2002.
Mr. Raffay served as a senior executive and as a director of Emhart Corporation until his retirement as Vice Chairman in 1987. Since then he has done consulting work and serves as a member of the boards of directors of a number of companies.
Mr. Towne owned Management Partners, Inc., a management consulting firm, from 1990 to 2000, specializing in business planning, organizational restructuring and operational audits. He has served as President and Chief Financial Officer of The Washington Source, Inc. since 2000.
Mr. Tracy was employed by Arthur Andersen LLP from 1963 until his retirement in 1998, serving since 1975 as a partner. Mr. Tracy is also a director of Great Western Land and Recreation, Inc.
Mr. Lebel was the Quality Control manager for the Company from 1961 until he retired in 1995. He was a director of the Company from 2001 to 2002.

he Audit Committee is comprised of three members of the Company’s Board of Directors, Messrs. Raffay, Towne and Tracy. All independent. Tracy is the financial "expert".

non-board executive:
Glenn L. Purple, 49, CFO
Mr. Purple joined the Company in February 1982 as Controller. He served as Controller until November 2002, when he was appointed as Vice President – Finance, Chief Financial Officer and Secretary of the Company. Mr. Purple also served as Vice President – Finance and Chief Financial Officer of the Company from 1989 through 1996.

Salaries are modest: CEO makes $180K. CFO makes $108K. Very little bonus or stock compensation (15,000 shares TOTAL in 2004). Pagano has 150K shares in total options.

Pension plan frozen in 1993. Only for Purple.

Beneficial Ownership
Bayne owns 10%
Lebel owns 3%
Moses owns 12%
Pagano owns 7.5% (half as options)
Purple owns very little
Towne and Tracy each own about 2-3% (half or less as options)
All directors and officers own 34.29%

247K stock options outstanding total.

No related party transations.
Audit fees: $74.5K, auditing employee benefits: $14K by same auditors (was done outside in prior year)
In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements as of and for the years ended January 1, 2005 and January 3, 2004, taken as a whole, presents fairly, in all material respects, the information set forth therein
Carlin, Charron & Rosen, LLP, Mar 4, 2005
prior year auditors were D&T in Hartford

Allowances are spelled out in excellent detail each year going back to 2002. Wonderful! They cover doubtful AR, excess and obsolete inventory, and deferred taxes. Very conservative allowances. Very well managed.

Revenues increased 29.5% in 2004.
Aerospace customers decreased from $17.5 million to $16.9 million
"Other" customers increased from $8.2 million to $16.4 million, due to new sales to the machine tool industry.
Gross margins up from 10.7% to 12.2% due to increased sales, partially offset by higher expendable tool and repair maintenance costs.
SG&A decreased 8.3% from a drop in professional expenses.
$250K gain from forgiveness of debt.

Jan 1, 2005, decided that Company will realize $1.5 million in deferred tax assets (SFAS 109). So they reduced the valuation allowance (aka contra asset) by $1.432 million.

During 2003, sales to non-aerospace customers increased 28.3%, same reason. Aerospace decreased 10.2%, decline of jet engine market. Gross margins improved, with and without the restructuring events. Consolidation. SG&A decreased slightly due to reduced prof expenses (it decreased even more due to one-time costs in 2002).

$7.3 million gain on restructuring of debt. Chewed up some NOLs.

Excellent table on the debt. Mostly revolver and mortgages. Terms are 30-day paper index + 3.75% to 4%. Primary lender secured by AR, inventory, equipment, etc.

As of Jan 5, 2005: new refinancing. $5 million revolver (with formula limitations) plus $5 million term loan plus equipment line up to $1.5 million. All pretty much prime + 1. Equipment loan converts to a term note, 60 months, FHLBB5 + 2.5.

Cash flow 2004: operations cash earnings, increase in AP partially offset by an increase in AR. Investments were machinery to increase capacity. Finance repayment of long-term bank loan, net of borrowings on revolver.

2005 capex estimate: $1.5 million to $3 million to increase capacity

Pension frozen in 1993. Rate of return assumption is 7% (not terrible, but on the optimistic side). They beat 7% in 2004. Discount rate 6%. Decreasing the return by 0.5% would increase pension expense by $17K for 2004. $200K contributed in 2004, they expect more contributions in the future (good). Expect $300K in 2006.

Balance Sheet:
Current assets are mostly AR and inventory. Long term assets are mostly machinery and buildings. 66% depreciated. Total assets $22 million (only $5.2 million equity).

AR doubled during 2004. Inventories decreased somewhat.
Deferred income taxes $766K (up from $259K at end of 2003).

Current liabilities are mostly AP with some current debt and salaries etc. Current ratio is $12.7 million / $7.0 million.

Net income was $2.9 million with $1.83 million benefit from income taxes.

Cash flow from ops was only $990K. $250K gain on forgiveness of debt, $1.5 million deferred income taxes, $3.4 million increase in AR. Partially offset by $1.8 million deprec, $1.2 million AP, $427K other. Capex was $202K.

So they basically had $800K in free cash flow in 2004.

Changes in Equity: Glorious lack of extensive stock options.

Inventory is mostly work-in-prog, then finished goods, then raw materials. 14.4% reserves for excess and obsolete.

In 2004, the largest customer paid $1.8 million in connection to contracts that had been put on hold in 2002. Inventory was reduced by $1.0 million.

Depreciation: 3-12 years for machinery, 25 years for buildings.

All kinds of stuff happened in 2002 and 2003. Humorous example of screwyness of accounting: the Company decides to sell a building, an auction was held, it went for more than book value, Company changed their mind about selling it, then realized a gain of $177K.

Total share count including all potentially dilutive shares: 4.7 million

37% of AR is from one company. It was far higher in prior years (54%). 32% is from another company. This one has increased over the years.

Pension obligation: $6.3 million, $424K paid in 2004, $393 paid in 2003. Return on assets was $446K in 2004, $553K in 2003. Assets at end of year $4.6 million.

Deferred tax assets are mostly goodwill writeoffs and NOL. Deferred tax liabilities are essentially all PP&E.

Lease commitments are not an issue.

Thanks to JB.

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