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Saturday, December 31, 2005

A look at Sherb & Company, auditors

Let's take a look at some of the companies audited by Sherb & Co. and their predecessor, Feldman Sherb. I'd like to know if these guys are crooked, or incompetant, or misunderstood, or simply wonderful.

Samaritan Pharmaceuticals Inc
These guys are still around. Their 10-K was filed late (because they did not obtain all information prior to the filing date and the attorney and accountant could not complete Mgmt's Discussion in time) on April 14, 2005.

Sherb actually had a pretty much unqualified opinion here. The 10-K includes financial information from Sept 1994 through Dec 2004, but they only audited 2003 and 2004.

In this 10-K, the balance sheet appears fairly strong in that about half the assets are cash (plus there's lots of marketable securities) and there are almost no liabilities. However total assets are only $5.2 million. In the income statement, revenues are $300K while expenses are... ready for this?... $28 million. In other words, at their current rate, they would burn through all of their assets in far less than a single quarter and Sherb & Co. has no doubts about them as a going concern.

Ok, so the cash flow from ops burn rate is only $13 million so it theoretically might take more than a quarter to burn up all their assets.

Here's the ProNetLink 10-K for 2000.
Feldman Sherb gave them an unqualified opinion on Sept 28, 2000. Looking at the balance sheet, ProNetLink had a current ratio of 1/6! Their revenues were $81K while their expenses were over $4 million. Yes, they were a development stage company, but there were already running a shareholder deficit (i.e. they burned through all $7.6 million of their money).

It seems insane for Sherb & Co to give them an unqualified audit opinion. However, before the 10-K came out, ProNetLink announced funding commitments of $3 million (from Collardeau himself, I don't know what the rule is for related party loans and going concern qualifications).

But later they did announce a $10 million equity line of credit with Corpfin.com (these guys must be idiots). Another announcement for $5 million from Waveland Capital.

Anyone reading the 10-Q released on May 21, 2001 would have seen that revenues were only seventy dollars (vs $24K in the prior year). Total current assets dropped to $41K. Total assets sank to $343K despite a large infusion of capital from Collardeau.

They announced bankruptcy on July 2, 2001.

ProNetLink lawsuit
The individual defendants told the public that the Company still had access to a $5 million line of credit and other capital resources at its disposal. These statements were blatantly false, as shown by the testimony of the Company’s Chief Operating Officer, David Walker, taken in connection with the Company’s bankruptcy proceeding in this District.
7. Nevertheless, the Company’s outside auditor, Feldman Sherb & Co., P.C. and its
successors named as defendants herein (collectively referred to herein as “Feldman Sherb”), together with non-defendant Philip Weiner (a partner of Feldman Sherb), issued an unqualified audit opinion, dated September 28, 2000 on ProNetLink’s financial statements that was contained in the Company’s annual report on SEC Form 10-K for fiscal year ending June 30, 2000. Feldman Sherb also authorized the Company’s use of this unqualified audit opinion in a Registration Statement the
Company filed with the SEC on May 4, 2001. Feldman Sherb, however, knew or recklessly disregarded numerous red flags showing that the Company had inadequate resources to sustain operations for 12 months, and accordingly should have at least given ProNetLink a “going concern” opinion, rather than an unqualified opinion on its financial statements. For example, according to the Collardeau Indictment, on March 16, 2000, defendant Collardeau sent instructions to American Stock Transfer to reissue 1,500,000 shares of Pro Net Link stock previously issued in the name of one individual (Eric Niger) and reissued in the name of another (Muriel Prochasson). Feldman Sherb ignored this red flag which should have alerted them to the defendants’ securities fraud scheme. Although securities fraud was rife at Pro Net Link -- as the Collardeau Indictment readily shows -- Feldman Sherb either knew of the fraud or recklessly ignored it.
and in case you think Feldman was the defendent and not Sherb...
Defendant Sherb & Co., LLP broke off from Feldman Sherb at some time at or after the Grassi merger.
According to the complaint, ProNetLink was formed by defendent Jean Pierre Collardeau in July 1997 (he eventually pled guilty to fraud worth $20 million). It did a reverse merger with Prevention Productions Inc. a Nevada corp.

ABF Energy Corp
Their last filing was an NT 10-K which says they'll be late filing the 10-K. The reason was "Important information needed for the filing is not yet available." That was March 31, 2003. We're still waiting. In the section where they're supposed to indicate whether or not it is anticipated that any significant change in results of operations from the corresponding peroid for the last fiscal year, they said no.

They filed an 8-K before this indicating the company would issue "23,242,200 to Dreamwind LLC". 23,242,200 what? Magic beans? Of course they mean shares of stock because later they say it will results in Dreamwind owning 34 million shares due to having acquire blah blah... there's a terribly complex ownership structure that leads back to the CEO.

They exchanged 23 million shares of stock for $1.7 million worth of Dino Babies animation cels. I'm sorry, but I don't believe such a thing could exist: finding 1.7 million people to buy 1 cel each for $1 or finding 170,000 people to buy $10 worth of cels or whatever.

In the last 10-K [2001] issued by the company, Feldman Sherb was the auditor with an unqualified opinion on the company. The current ratio is around 2. 2/3 of the assets are real estate investments. The gross profits are $337K while the costs and expenses are $3.6 million. But revenues increased from $84K in the prior year to $922K. The company lost $3.2 million which is half of the remaining assets of the business. But cash flows from ops only lost $300K of cash while they borrowed $712K.

Kronos Advanced Technologies
These guys are still around. Their latest 10-K was filed on Sept 28, 2005. Sherb & Co signed Sept 27, 2005. OMG! They actually gave these guys a "going concern" qualifier. But all it says is...
The Company has incurred significant losses and has a working capital deficiency

Let's see what it takes to get one from Sherb.

Assets are $4 million. $1.6 million in cash. $2.1 million intangibles.
Current ratio is 1/3.
The shareholder deficit is almost as large as the total assets.

Revenues are $430K (down from $533K). Gross profits are $55K. Expenses are $2.8 million. There's a $3.9 million loss on debt restructure. Net loss is $7 million.

Operations ate up $1.8 million in cash. They invested $279K in "patent protection". They borrowed at net $3.6 million, pushing $1.1 million in short-term debt into long-term debt.

Sherb's wording seems a bit weak, but it's better than nothing.

Torpedo Sports USA, Interactive Games
10-K/Amended They just engaged Sherb & Co on June 14, 2005. I just noticed their audit fees are only $17,500. Sherb gave these guys a "going concern" qualifier, which is not surprising.
the Company had a net loss of $428,592 for the year ended July 31, 2005. This raises substantial doubt about its ability to continue as a going concern.

Total assets: $48K
Total CURRENT liabilities: $4 million
So current liabilities are nearly 100 times larger than all assets combined.
They have a gigantic shareholder deficit.
Sherb is certainly correct about the loss.
prior amended 10-K still has the going concern qualifier
The original 10-K seems to have no auditor opinion. The prior auditors also only had a going concern qualifier.

They withdrew this SB-2 statement. No explanation. Feldman Sherb & Co. was the auditor for 2000 and 2001. The principal accountants left that company to start Sherb & Co. On May 11, 2002, they dismissed Grassi (who acquired the other part of Feldman Sherb & Co) and hired Sherb & Co. for 2002 and beyond. However, in that SB-2 prospectus, Sherb invokes the "going concern" qualifier and mentions that 2003 had been restated.
During the fourth quarter of 2004, the Company re-evaluated its prior accounting treatment for the acquisition of Airport Network Solutions, Inc. with regard to the convertible note issued at closing. As a result, the Company recorded a beneficial conversion of $200,000 on this loan which resulted in a reduction to "Common stock to be issued for settlements" and a corresponding increase to "Additional paid-in capital".
The current liability about common stock to be issued for settlements shrank by $200K along with the shareholders' deficit. I can't tell if it's fishy or not.

They amended the SB-2 with updated financial info. The thing is totally different so I can't really diff it.

They acquired Wise Technologies, also from Warwick, Rhode Island, for $2 million in stock, but get this: Sherb & Co was their auditor, too. Sherb gave Wise a "going concern" qualifier. The total assets of Wise was only $236K. Revenues were only $345K and gross margins were practically zero. So why did ICOA pay 10 times book value, and nearly 6 times sales for Wise?

Traffic Logic, Infosearch Media
These guys just reached profitability in the latest quarter and gave up a bunch of stock to the participants in celebration, presumably. But cash flow from ops is terrible and burned up $1.26 million on revenues of $2.7 million in the 3rd quarter.

In the amended 10-K, Sherb's audit fees actually decreased from $36K in 2003 to $26K in 2004. Sherb gave them a "going concern" qualifier. They lost $4.3 million on $2.8 million in revenue with $5.3 million in assets and a $3.4 million deficit.

Light Management Group, Triton
These guys also got a "going concern" qualifier in the last 10-K back in 2002. But this one has a lawsuit associated with it.
The Complaint alleges that the Independent Auditor Defendants, Slayton (auditor for fiscal 1999) and Feldman Sherb (auditor for fiscal 2000) falsely represented that year-end results had been presented in compliance with generally accepted accounting principles (“GAAP”) established from an audit that was supposedly operated pursuant to generally accepted auditing standards (“GAAS”). Moreover, it is further alleged that LMG falsely stated that it had received commitments for outside funding. Additionally, LMG deceptively represented that backlog orders for its outdoor media projection systems had increased by $20 million.
Some more detail:
(a) booking sales that later had to be reversed; (b) failing to account for escalating costs and non-salary based compensation; ( c) misclassifying inventory as capital equipment; (d) failing to account for expenses incurred by LMG which were paid by related entities in the period incurred; (e) failing to book expenses due to the settlement of debt with related parties; and (f) substantially understating interest expenses.
But the claims were dismissed with prejudice.
On May 7, 2004, all claims in plaintiffs' consolidated amended complaint were dismissed as against defendant Feldman, Sherb & Co., P.C., with prejudice, which plaintiffs moved to appeal.
Here's the actual claim. Feldman Sherb became auditors on Dec 2000.

At some point, LMG claimed backlog orders had increased by $20 million. In the next two years, revenues never even came close. LMG eventually disclosed that all that backlog was from a single company, Amplified Light Technologies which was controlled by the CEO's brother, which relationship was not disclosed.

The fiscal year 1999's net income was overstated by 500% according to restated financials. Expenses were understated by 250%. Q1 2000 sales were overstated by 49%. SG&A was understated by 295%. This continued on during 2000. Feldman Sherb was the auditor for 2000's results.

I got this from this page on Siliconinvestor.com
The second auditor, Feldman Sherb, successfully applied to have the case against it dismissed. In a December, 2003, decision, U.S. District Judge Richard Owen wrote that while Feldman Sherb could have been more thorough in its audits during the three months it acted for Light Management, the auditor's conduct was not "highly unreasonable" to the point where a class-action lawsuit was in order.
Perhaps you get what you pay for. What this tells me is what I already know: you must pay very close attention to red flags in these obscure investments.

Natural Health Trends
Here's the most recent 10-K. These guys are still going. BDO Seidman were the auditors for years 2003 and 2004. Sherb was for 2002. Sherb notes that the 2002 statements have been restated. Sherb raised substantial going concern doubts in the 2001 statement.

During Q3 and Q4 of 2003, the company re-evaluated its statements for 2001 and 2002. Uh oh. Sherb was dismissed on Dec 17, 2003 and BDO Seidman was selected. It seems to me that BDO was the one who found the problems and caused the re-statements. The company had BDO look over the tax returns of 1997-2000, prepare the 2001 and 2002 tax returns, and consult with management on the tax provision for Q3 2003. I suspsect BDO found the issues and brought them forward, then the company probably decided to throw out Sherb.

The fact that they brought BDO in probably means that they already had issues with Sherb or were suspicious.

Sherb was consulted about the issues and agreed.

The proxy statement says audit fees for 2001 were $55K (page 7). But 2 months later this changed to $57K (page 6). Look at page 33 of this proxy statement for 2003. You'll see a very telling table of audit fees. While Sherb is still doing audit work of $72K in 2003 and $12K in 2004, BDO's audit fees are huge. $351K in 2003 plus $137K in audit related fees, $207K in tax fees, for a total of $695K in 2003 and $586K in 2004 (as they probably got into their groove).

The data here seems to suggest that Sherb are cheap accountants who are not particularly very good. This case doesn't seem to be at all sinister, just damn cheap-ass accountants, which is merely an opinion and not fact. This matches Judge Richard Owen's decision regarding Light Management above.

Sherb started auditing these guys in 2004, taking over from Daszkal Bolton LLP on Feb 13, 2004. This 8-K actually gives a reason for the switch: cost.
The Company engaged Sherb & Co., LLP ("Sherb") as its new independent accountants as of February 13, 2004 as the Company's Board of Directors determined that it would be more cost effective and efficient using the services of Sherb.
I swear I didn't cheat and look ahead to this before writing the stuff above. Daszkal Bolton had no disagreement.

Audit fees [page 29] for 2003 were $29K, for 2002 it was $19K (and that was too much???).

Audit fees [page 36] for 2004 were $29.6K, which is even larger than what Daszkal Bolton charged. But fees everywhere were going up even more. This would make sense since they had audited related fees in 2004 of $18K (none in 2003). As a check, Daszkal Bolton audited 99 Cent Stuff (sec) and the audit fees [page 11] were $55K for 2004, $51K for 2003. Audit related fees were $23K for 2004 and $21K for 2003.

The business is still going. In the latest 10-K, Sherb gave them a "going concern" qualifier.

Here's their most recent 10-K. Audit fees for 2005 were $32K paid to Sherb. Radin Glass & Co. audited 2004 for $27K. Tax fees for both years were $4K to each company. Both auditors gave unqualified opinions. Results improved in 2005 and the company had both profits and positive cash flow from operations after capex or depreciation. 2004 had profits but small negative cash flow from ops.

The CEO issued a very good note to shareholders type press release.
One question that Shareholders often ask is "how much sales and income growth will occur, and when?" Unfortunately, this is not easy to answer for a business like ours. We have gone beyond selling mainly smaller nozzle systems in the $5-$10K range, to selling large systems in the $40-$250k range as well, so having one or more of these large sales in a given quarter can have a large impact on the results, and the apparent quarter-to-quarter growth of our business. Shareholders have come to expect corporations to issue guidance on sales and income for upcoming quarters, with the implicit goal of seeing a smooth and constant growth forecast for each quarter. Yet this practice can lead to a short-term focus to "make the numbers", as opposed to a healthier longer-term focus on growing the business.
This was weird. They kept doing a registration, then withdrawing it (here) from 1998 to 2002. The first time didn't have any audit opinon. The second one had Feldman Sherb giving an unqualified opinion, which makes no sense. The company lost $10.8K in 1998 and $12.6K in 1997. They only had $3K in assets (pretty much all cash and all equity). They had NO REVENUES. Cash flow was only the $10K loss, nothing else was going on. They were claiming to be a development stage company, but I don't think that matters for a "going concern" qualification, no?

When CasinoBuilders attempted yet another registration, Sherb audited the results of 1998 and 1999. This time they added the "going concern" qualifier.

Alloy Steel
They just released their 10-K three days ago on Dec 28, 2005. The auditors are Rothstein, Kass, & Co. Audit fees were $48K in 2005, $21K in 2004.

They were the auditors in 2004 also, and 2003 and 2002 and 2001. The 2003 fee was $23K.

Ok, they dismissed Feldman Sherb on Aug 14, 2001. This caused them to be late in filing their 10-Q.
The Company is in the process of changing its independent certified
public accountants. As such, the Company hereby requests additional time to prepare its financial statements for the quarter ended June 30, 2001. Further, the Company hereby requests additional time for its new independent certified public accountants to review the Company's financial statements as required by Item 310 of Regulation S-B.
This was their first 10-Q. They had done a registration in June 2001. Their original prospectus had to be amended 1, 2, 3, final/4 times, the earlier ones were known to be preliminary.

Feldman Sherb audited the prospectus financial statements with an unqualified opinion. The assets were almost entirely construction in progress. Almost no liabilities. They had no revenues and costs of $20K. They only had $8.7K of cash and current assets. But the offering would be raising cash.

It looks to me like Feldman Sherb was found to be incompetant or unfit for some reason when it was time to do the first financial statement so the company replaced them, causing a delay in the financial statements.

Celexx Corp
The last thing we heard from these people in 2002 was that they'd be late in filing their 10-K.
The registrant cannot, without unreasonable effort and expense, file its 2002 Form 10-KSB within the prescribed time period because the registrant and its accountants are pending additional financial information necessary for finalizing its financial statements that will be included in the registrant's Form 10-KSB.

Additionally, the registrant currently has insufficient operating capital to fund completion of its Annual Report on Form 10-KSB. The Registrant is currently seeking additional financing. Accordingly, the registrant requires an extension for filing the Annual Report with the Commission.
We stand silently over the accident scene wondering, how did things get to this point? What happened?

The latest 10-Q shows a balance sheet with current ratio approaching 1/10, net losses consistently greater than revenues, but yet a strongly positive cash flow from ops. The estate of a former principal officers filed suit accelerating payment of a note due.

Let's go back to the most recent 10-K. Feldman Sherb gave the company a "going concern" qualifier.
..the Company incurred losses of approximately $5,712,000 and $3,195,000 for the year ended June 30, 2001 and for the six months ended June 30, 2000, respectively. Additionally, the Company had a working capital deficiency of approximately $1,125,000 at June 30, 2001. These conditions raise substantial doubt about the Company's ability to continue as a going concern....
 In the prior year, for results of 2000, they gave an unqualified opinion. In that year, the current ratio was close to 1. But the net loss was $3.2 million. The comprehensive loss was $4.8 million, while remaining equity was only $4.4 million and total assets were $8 million. However, they almost had a positive cash flow from operations due to using common stock for services (ah, the glory days of the stock bubble!). They sold $3.1 million in preferred stock and overall they had a net increase in cash.

I suppose they can get away with this one.

An australian company filing 20-F statements. Feldman Sherb were the auditors up to 2002. A BDO auditor took over in 2003 and 2004. CityView switched to Sherb & Co, so you can't blame anything on Feldman here.

The 2002 20-F. BDO Chartered Accountants are the auditors for Australian results while Sherb & Co do the US obligations. Sherb gave them an unqualified opinion. They lost $9.3 million on $595K of revenues due to writedowns and provisions. They had lost $4 million in the prior year and $5.5 million in the year before that. The balance sheet had been ok, but deteriorated as nearly half the equity disappeared.

The 2003 20-F. BDO were the auditors. Their opinion said...
Without qualification to the opinion expressed above, attention is drawn to the following matter:

As disclosed in Note 10, the ultimate recovery of the loans amounting to
$7,952,187 from Medco Madura Pty Ltd and Medco Simenggaris Pty Ltd are dependent upon the future development and successful exploitation or possible sale of the underlying areas of interest.
In that year, they lost a lot less money (only $1 million) and things seem to have stabilized. Maybe Sherb's unqualified opinion wasn't so bad?

ConsultAmerica, VirtualScopics
Most & Co are their auditors now, with a going concern qualifier in the latest 10-K. They had $3K in cash and $29K in somewhat depreciated PP&E. But they also had $63K in accrued liabilities and a $31K shareholder deficit while losing $66K for the year. They did have positive cash flow from ops, but had to pay back an officer $7.9K.

The most surprising thing is that this plane crash type situation was less than a year after going public (apparently not raising money but dumping shares on an unsuspecting public).

Sherb audited the prospectus. Was it Motley Fool who said "prospectus" is Latin for "open you mouth and close your eyes"? To Sherb's credit, they gave the opinion a "going concern" qualifier.
As discussed in Note 3 to the financial statements, the Company had been inactive for several years and restarted operations in early 2004. It has no significant revenue producing engagements which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

IBX Group
Here's something you don't see every day: Form RW-WD, Withdrawal of Registration Withdrawal Request. So they want to withdraw their request to withdraw their registration request.
Such Form RW referenced an incorrect registration statement number. A corrected Form RW is being filed with the Commission today.
Thankfully, the registration request that they incorrectly referenced in their withdrawal request which itself was withdrawn, was not audited by Sherb. No, they were the auditors who replaced Sherb a long time ago, probably because they were more competant than Sherb.

Here's the last 10-K audited by Sherb. Sherb gave them a "going concern" qualfier.
...the Company's need to generate cash from operations and obtain additional financing raises substantial doubt about its ability to continue as a going concern. Additionally, during April 2001, the Company expects to lose its major customer that accounts for approximately 80% of the Company's revenues. Management's plans as to these matters are discussed in Note 1.
Note 1: "Run awaaaayyyyyy!!!!"

...which means doing a reverse merger.

From what I see (and I didn't look that closely), Sherb seems ok.

Global Gold Corp
Grassi, who acquired Feldman Sherb, audited the results for 2002. Feldman Sherb audited the results for 2001.

Genesis Technology Group
The last thing they filed was a late filing notice for their 10-K three days ago, saying they need more time to extract financial information from their overseas operations.

The prior 10-K (which was also late for unspecific reasons) was audited by Sherb & Co. with a "going concern" qualifier.
...the Company has an a accumulated deficit of $15,662,992 and has net losses and cash used in operations of $1,591,002 and $940,600, respectively, for the year ended September 30, 2004. This raises substantial doubt about its ability to continue as a going concern.

DCI Telecommunications
Their last 10-K was for 2001, audited by Feldman Sherb with a "going concern" qualifier.
the Company has a stockholder deficit and negative working capital of $4,313,064 at March 31, 2001, and has incurred significant recurring operating losses which raise substantial doubt about its ability to continue as a going concern without the raising of additional debt and/or equity financing to fund operations.
These guys were pathological serial acquirers.

There was an SEC investigation starting May 7, 1999 and they halted trading in the stock. At that time, Schnitzer & Kondub were the auditors. I don't see much at all in the 8-K statements about it, which seems very odd.

Lecstar Corp
Feldman Sherb were the auditors for the last 10-K for 2001. They had a "going concern" qualifier.
The Company has incurred significant losses and as more fully described in Note 1Q, the Company anticipates that additional funding will be necessary to sustain the Company's operations through the fiscal year ending December 31, 2002. These conditions raise substantial doubt about the Company's ability to continue as a going
That last 10-K was amended later on. There was a big change in the equity statement starting with Dec 31, 1999. 1.2 million shares of preferred stock appears out of nowhere. Common shares decrease from 20 million to 237K. It's totally different.

Then there was a bizarre change of auditors. Feldman Sherb was dismissed on April 24, 2001. E&Y came on board. Jan 23, 2002 they dismiss E&Y and go back to Feldman Sherb. In May 2002, Grassi acquires Feldman and Sherb (accountants who had been doing the auditing) goes to Sherb & Co. The company switches to Sherb.

The CEO and CFO resigned as well as a director, then another director. And that was the last SEC filing, back in Dec 2002. But at that point, the latest 10-Q had shown a current ratio of close to 1/10 and a net loss of $13 million with $4 million assets and a shareholder deficit of $7 million.

Vermont Pure Holdings
Toilette and Douche were the auditors for the most recent 10-K. Before that, it was Grassi in for 2002 and Feldman Sherb for 2001. I'm not so concerned about anything that went from Feldman Sherb to Grassi, so I'll leave it at that.

Sherb & Co seem like cheap accountants that have been willing to OK situations that are truly horrifying. Call it the "Homer Simpson Safety Inspector Syndrome". I say: Don't trust these guys. Perhaps they screw up things more than usual, but it doesn't seem like they're particularly shady, perhaps just terribly negligent. You get what you pay for. However, they do seem to have gotten better over the last few years.

An important question to ask is: How much better is it to have Sherb & Co as an auditor vs having no auditor at all?

It seems dangerous to deal with obscure small public companies that are in financial trouble or even close to being in financial trouble. Objects in mirror can be worse than they appear, so I'd say Ben Graham's margin of safety is very important (always has been, always will be).

UPDATE mid-Feb 2006: I've seen two different people find this post based on searching for anything about Sherb and company. Take that for whatever it's worth.

UPDATE May 13, 2007: I'm not now, nor have I ever been a Canadian, eh? Now let me get back to running my shady hedge fund.

I had never heard of Optionable until about 10 minutes ago. I may look at it soon to see if it's all smoke and no fire (although that seems unlikely).

UPDATE May 13, 2007 later that day: I've looked through some details of Optionable and I must say I was surprised. I expect to post the results on Monday or later. If I owned the stock right now, I wouldn't panic.

Tuesday, December 27, 2005

Another two companies

USNU (sec), operates stereostatic radiosurgery centers, utilizing the Leksell Gamma Knife technology. This is for brain tumors and other brain malformations requiring surgery. Kansas City (1994), NYU (1997).

Revenues have held fairly steady at about $2.5 million, but there has been a decrease in the last two years (they were down for a month in 2003). Net income has been declining due to slowly increasing G&A offset somewhat by decreasing interest expense. This interest expense will go up again due to a big capex replacement. 2004 had a significantly higher net income.

CEO owns 14.5% of the common stock.

Balance sheet is ok. Current ratio is slightly better than 1. The big Gamma Knives equipment is very heavily depreciated ($1 million left out of $8 million).

We might expect net income to be around $90K on average with 7.7 million diluted shares (1.1 cents). Cash flow from ops is amazingly weak when backing out depreciation. For the last 3 years, they've provided no cash from operations if you set aside the depreciation. After buying the big monster machine upgrade, they've been losing money outright during 2005.

The stock is selling for 15 cents, which I guess makes sense based on earnings. But this seems far too capital intensive and not nearly profitable enough. If you give me $7 million, I can easily get more than $90K in free cash flow per year without buying some gigantic piece of machinery that could become obsolete or break.

Times have changed since the heyday of the industrial revolution. In the glory days, if you could create or buy a miracle machine, you'd get a tremendous return on your investment. Nowadays, you'd be better off with US Government bonds. Yep, times have changed, indeed.
not interested

USOO (sec), interstate trucking holding company. Normally uses independent agents arranging with independent truckers. Revenues have grown strongly over the years since 2000, but operating income peaked in 2002 and has dropped since then. They had a $1.7 million litigation judgement (car accident) in 2004 which destroyed the entire year's earnings. Normal earnings would be around $1.5 million. But net margins have decreased over the years. NOLs are running out so assume about $1 million in earnings in the future. Assume about 8.3 cents earnings per share.

Net margins with NOLs are around 1.2%, declining from 1.4% in 2003 and 2.2% in 2002.

Assets are essentially all AR. Current ratio is a bit over 1.
Assets $26 million. $3.6 million equity. $143 million revenues.
12,018,224 shares outstanding on Nov 9, 2005.

Cash flow from ops was low due to AR. Historically over 3 years it's a bit low, although capex has been lower than depreciation, so free cash flow was probably fairly close to earnings.

Q3 2005: Geez, AR just keeps climbing. PP&E is almost entirely depreciated. Equity is up by $3.5 million.

Revenues are up in 2005 by about 18%. It looks like they got that $1.7 million litigation payment back. Taxes are starting to kick in. Earnings for 9 months (without the $1.7 million) are about $2 million or about 16.5 cents per share.

Cash flow from ops ($1.2 million) in 2005 is terrible due to AR again! They had to borrow $1.1 million during 2005 because of it.

The results of 2005 make it difficult to value the stock and very unlikely to be selling cheap. I'm going to assume about 9 cents earnings and figure the stock is worth $1.35. It's selling for... drum roll... $1.35 on the ask. I swear I don't cheat when I do that.
worth following

Two more companies

UMCI (sec), medical billing and collecting. Revenues have increased every year since 2000. 8.2% net margins (normally around 7.5%). Net income has done well, but has scaled slower than revenues. Net income was $338K, but has been closer to $260K in past years.

58% of revenue was from 3 customers (hospitals), this percentage has been dropping over the years. The number 3 customer just dropped their relationship to do it in-house starting April 15, 2005. They lost a key customer in 2003 and another one in 2002.

CEO owns 9.9% of the stock. Mercury Asset Management owns 26.3% of the stock.

Assets are mostly AR, PP&E, and cash. Current ratio is 2. About 1/2 equity. Some of the AR is factored.

31 million shares. At least 2.3 million warrants and options. Assume about 34 million totally diluted shares (no warrants/options issued in 2004). Earned about 10 cents in 2004, but generally only about 7.6 cents in years prior.

Cash flow from ops is consistently lower than earnings due to AR, prepaid stuff, factor reserve, PEDC incentives. Real free cash flow average for the last 3 years is probably around $100K or less. So real free cash flow is perhaps 1/3 of a cent.

Looking at Q3 2005:
Share count is the same. Current assets dropped, so did current liabilities. Current ratio about the same. Equity dropped to $818K from $924K (treasury stock is unchanged). Net loss for quarter and for the year due to lower revenues (probably that big lost customer). Free cash flow actually matches earnings in 2005, which is good (had been crappy) and capex is close to depreciation.

One customer is 80% of AR! And that customer has cash flow problems! But they are supposedly improving. Another customer had 7% of AR and that was all written off.

The stock is probably worth at least 5 cents. It's selling for 4.5 cents.
worth following

UNFY (sec), process automation software for insurance and transportation. No customer concentration. Revenues have declined slightly every year since 2001. Every year the bottom line gets worse. They started losing money in 2004 and it got worse in 2005. And share count has been dramatically increasing.

Assets are mostly cash, AR, and goodwill. Current ratio slightly better than 1. Not much equity. Free cash flow is a bit worse than earnings.

Q2 ending Halloween 2005: Lost money in Q1, barely above break-even in Q2. Cash flow from ops is terrible due to deferred revenue, other accrued liabilities, and AP.

This business "doesn't have enough freeboard" to use a sailing term.
not interested

Level 3 Communications (LVLT)

yahoo, sec, website

Ah yes, Level 3. The disappointment of many investors who wait patiently quarter after quarter for the eventual end of the fiber glut and hopefully the final death of the zombie telecoms before that. I see they've been trying to replace debt due in 2008 with notes due in 2010 to buy two more years of time. They got $690 million in early participation.

Other big news is that they bought WilTel for $370 million in cash, but a $100 million cash obligation, plus 115 million newly minted shares of Level 3, with some wiggle room to change the cash/stock ratio.

But the problem can be seen in their latest Q3 report. Communications revenue is still dropping. They lost $204 million in the quarter. They still have $893 million in cash and securities plus $408 million in long term securities (no idea what that is at this time). Cash flow from operations lost $30 million in 9 months and capex is another $241 million (9 months). Net borrowing produced $813 million.

They have about $1.3 billion in debt due in 2008. They've already pushed over half of that forward to 2010 (these guys have always been good at tap dancing to stay alive).
continue following

Teltronics, Inc (TELT) quarterlies

First Quarter 2005
Share count: 7,874,539

Balance Sheet
Cash decreased almost in half
AR held steady
Inventories went up moderately
Other current assets increased

Current ratio is 0.79
Shareholder deficit is $6.5 million
Total assets are $16.9 million

Income Statement
Sales decreased to $6.6 million from $8.8 million
The decrease [in sales] resulted primarily from a sales lag on a product enhancement introduced in late 2004 and a shift of $500[K] from the first quarter to the second quarter of 2005 as the result of a particular government contract put on hold. This order was reinstated in May 2005.
Gross margins at 43.0% (down from 44.8%, due to sales mix)
SG&A down (but mostly due to a $205K decrease in provision for doubtful accounts due to specific collections made)
There was a $129K increase in compensation.
R&D up by 17% due to new staff at the Atlanta location.

Small loss from operations, greater than the loss in Q1 2004.
Gain on sale of abandoned technology (no details) larger than the operational loss.
Interest payments were enough to make net earnings negative (but were down due to decrease in interest rate to Harris, the patent guys).

Net loss of ($237K) vs loss of ($67K) in Q1 2004.
Dividends to Preferred Series B and C shareholders: $159K

Net loss to common shareholders: ($363K) vs ($220K) in Q1 2004.
also small foreign currency loss of $24K

Cash Flow Statement
Cash flow from ops was ($424K) no details
Cash flow from investing was $353K (which means capex was about $142K)
Paid down $605K of [related party] debt.

1.7 million anti-dilutive options (apparently this is all of them)
1.2 million anti-dilutive warrants (apparently this is all of them)
So assume a fully diluted share count of 10.8 million shares.

All categories of inventory are up.

Credit facility amended, matures Mar 31, 2006, prime plus 2% or 3% depending on results, secured by all assets. Limit is based on formulas. Limit was now only $95K (had been $5.5 million).

Still in arrears on the preferred stock (B and C).
Still in arrears on note payable to Tri-Link of $1,080.

Second Quarter 2005
Share count: unchanged from Q1

Balance Sheet
Cash is way up
AR is also up
Inventories up a bit
Other current assets up a bit

Current ratio is down to 0.63
Shareholder deficit is down to ($5.4 million)
Total assets are $20 million

Income Statement
Revenues are actually slightly higher than the prior year... but this is because a lot of revenue from Q1 was pushed into Q2.
The three month increase is primarily the result of a shift in customer demands from the first quarter to the second quarter. The decrease in sales for the six months ending June 30, 2005 is primarily attributable to the ongoing downturn in the Intelligent Systems Management market as customers switch from the Time Division Multiplexing technology to the Internet Protocol technology.
The Q3 report shows more of this same thing. This is a company fighting against what is probably a long term trend. TCP/IP is not something new, it's a long term trend. I was hoping to find some business operations within this company that would benefit greatly from ongoing trends, but I don't see it. Maybe it will emerge in the future, so it's worth following. But for now, I'm stopping.
worth following

Teltronics, Inc (TELT) 10-K

Teltronics (website, sec) is a telecom equipment maker [pause to let the horror of that sink in] whose stock price jumped but is now deflating as telecom stocks tend to do. The ask is 48 cents right now.

10-K for the period ending Dec 31, 2004
Incorporated in Delaware. Offices in Sarasota, FL.
8,636,539 shares of stock as of Nov 14, 2005. 803K options outstanding. 870K more can be issued.
Executives and Directors own 40.7% of the stock. The largest shareholder is actually Sr VP of Business Development and not the CEO.

Three reporting segments: Teltronics, Teltronics Ltd of UK ("UK"), and Mexico.

TELC has defaulted on Note Payable to Tri-Link Technologies (a composite products mfger) going back to Nov 2003! Submitted to arbitration. Tri-Link is demanding $426K and 1.35 million shares of TELC stock. Teltronics issued a $750K letter of credit to Tri-Link and postponed arbitration until Sept 2005.

A mezzanine financier sold 12,625 shares of TELC preferred B stock (with unconditional right to elect a director at any time, which Finova didn't exercize) to FGC Holdings (actually just Peter Friedmann) and Teltronics refused to register the transfer (legal complaint), arguing that TELC already has 5 members on the board of directors and can't make any changes until the shareholders' meeting. In 2004 (before TELC was informed about the transfer), TELC mailed out a proxy nominating 5 directors, but didn't mention anything about the right of Series B stockholders. Looks like Teltronics management lost.

TELC is looking for additional capital.

In the 1980s, Teltronics created "Intelligent Systems Management", which was a network management system for voice. Now it's been adapted for voice and data. ISM consists of remote agents and an MIS (this is not rocket science, it's very much like SNMP which is probably fairly mature at this point). TELC "Site Event Buffer-II" has been working for 10 years, 100,000 units installed. Q4 2002 FCS of a new update, Site Event Buffer Enterprise Agent (added SNMP). Recently added NET-PATH. The big competitor is Ion Network, Inc. which is a public company, IONN, on OTC BB (sec).

The customers are: Verizon, NextiraOne (Williams), Sprint, MCI, BellSouth. TELT maintains dedicated sales force for these major customers. About a 1 year sales cycle more or less for product integration.

Also, created a digital switching system, 20-20 Switching Systems (June 2000 acquisition). A variant is used by FAA in ground-air, ground-ground communications. Homologated in 60 countries. Supports SS7 and ISDN signalling.

Sales are strong outside the US.

VoIP softswitch switching system (Linux based, just like the computer I'm using to type this) for medium-size enterprises: both legacy PSTN interface and IP network interface. I worked in product development in this area about 15 years ago. I believe this is a bad business for these people to be in due to eventual consolidation and the inevitable driving down of margins.

Teltronics supports the usual PBX type features plus some other fancy stuff.

Here's the good stuff: Teltronics has a complete E911 solution for VoIP systems, including businesses with PBXs. Installations in over 900 PSAPs around the US. Based on the recent FCC ruling requiring E911 for VoIP, this is important, but only if they drive it aggressively in the marketplace to avoid getting overtaken by others.

They have a sufficient number of bargaining chips, I mean patents, in the digital switching area. They also have 5 US patents for Emergency 911 call station identification.

Also OmniWorks (acquired with 20-20) for telemarketers. Seems well featured, but this whole area is of dubious customer value, in my opinion. Maybe it will take-off worldwide in place like India/China? For now, it has zero value.

Manufacturing in Sarasota, FL. R&D expenses have slowly decreased from 2002 (downsizing). 245 employees.

Ewen R. Cameron: CEO since 1993. 32 years of industry experience. SRH plc (Euro telecom, can't find anything about it). Owns 9.7% of the common stock.

Russel R. Lee III: CFO since 2004. Formerly CFO of SinoFresh HealthCare, resperatory business. Also CFO of Gencor Industries (GNCI, sec). Joined Gencor in 1990. But there were accounting irregularities in 1999 in the UK subsidiary. Russel R. Lee III was treasurer at that point.

Peter G. Tuckerman, VP Product Management. Joined in 1977. Owns 1% of the common stock.

Robert B. Ramey: VP Manufacturing. Owns 2% of the common stock.

Compensation is not insanely high.

Norman R. Dobiesz owns 19.4% of the business, but has controlling voting interest via 100% of the Preferred Series A stock. Sr. VP of Business Development.

Directors and executives own 40.7% of the business.

Consolidated Business
Big customers:
Also the NY Dept of Corrections and Federal Bureau of Prisons.

2001: $64 million
2002: $54 million
2003: $47 million
2004: $46 million
Based on the first 9 months, 2005 is looking to be down to $40 million. Gross profit is running about the same as 2004. Operational income in 9 months of 2005 is $919K vs $1.2 million. But non-operating gains is way up and interest costs are down. But I'm getting ahead of myself here.
The decrease in net sales for the year ended December 31, 2004 was primarily the results of; (1) the lingering slow down of the domestic telecommunications market which resulted in Teltronics net sales decreasing by $2.6 million, and (2) an increase of $1.8 million in net sales from our newly acquired UK Subsidiary. The decrease in net sales for the year ended December 31, 2003 was primarily attributable to a slowdown in the telecommunications market as evidenced by a decrease in net sales to our four largest customers of approximately $4.6 million or 16.6%.
In 2004, gross margins were about 40%, up from 39% in 2003, 36% in 2002.

Operating expenses were 37.6% of sales in 2004 vs 42.4% in 2003 and 41.5% in 2002.

Operating income:
2001: ($4.6 million)
2002: ($3.0 million)
2003: ($1.6 million)
2004: $951K
So far in 2005, it's $919K for 9 months (but it was a $226K LOSS in most recent quarter)

They would have a net loss in 2004 if not for a $1.2 million gain on sale of patents.
The gain on sale of patents of $1.2 million was related to the sale of 20-20™ patents previously acquired from Harris Corporation in 2000 that were sold back to Harris in August 2004 in exchange for past due principal and interest on the Company's debt owed to Harris.
Share count:
2001: 4.9 million
2002: 5.5 million
2003: 7.3 million
2004: 7.8 million
November 14, 2005: 8.6 million

Revenue recognition is normal, but some of the revenue is based on turnkey contracts (revenue recognized as customer accepts deliverables). For customers with only final acceptance criteria, revenue is recognized under either completed contract method or percentage-of-completion method depending on the right to progress payments and to approve services performed to-date based on contract requirements.

Maintenance revenue is recognized ratably over the maintenance period. The unrecognized part is deferred revenue. Costs are recognized on the earlier of 1) when costs are incurred, 2) when the related revenue is recognized.

Multi-deliverable revenue (product, installation, and training) is based on EITF 00-21 (also here, but this is better). The relevant determination is whether the stand-alone deliverables have value to the customer (and none are software). There must be some rational method for determining stand-alone value. Also, the [required] right of return of various parts puts a limit on how much revenue can be recognized at the intermediate milestones. Based on what I read, this doesn't seem to be a great fit for EITF 00-21 or SOP 81-1. But I'm not sure, it's fairly complicated.

The audit opinion has a going concern qualifier.

The balance sheet has a $6 million shareholder deficit on $16 million in assets (reality is probably closer to $15 million in assets and an $7 million deficit). The current ratio is less than 1.

Net income (without the gain on sale of patents) would be ($688K) loss. Plus there's a required $624K dividends on preferred stock.

Cash flow from ops is $1.6 million (with $2 million depreciation). Capex was $255K. Operations has pretty much provided cash every year back to 2002. Much of the preferred dividends were not paid ($469K in 2004, $401K in 2003).

Capitalized software is depreciated over 5 years.

Warranties are 3 months to 18 months depending on product. Payments made:
2002: $339K
2003: $137K
2004: $135K
Balance at the end of 2004 was $192K.

AR allowance was $290K (of $5.8 million) in 2004, $266K (of $3.8 million) in 2003. It's not surprising that the percentage dropped in 2004.

Costs and estimated earnings table for 2004 looks sane. The numbers are fairly low. 2003 looks ok from what I can tell.

Inventory reserves were $880K on $3.9 million of overall inventory. The writeoffs have been fairly large in prior years, but never significantly more than the reserve balance at the beginning of the year (was slightly more in 2002). Writeoffs have been in the $1 million range.

$18 million in PP&E, depreciated down to $3.7 million.

customer list: $202K (5 year life)
patents: $178K (14.6 year life) (sold $42K book value of patents for a $2.1 million gain)
customer contracts and relationships: $432K (7 years)
Amortization: $329K

due 2005: $4.8 million
due 2006: $7.8 million
due 2007: $67K
due 2008: $8K

They've been fairly pathetic in paying off debt, swapping a lot of stuff for equity/warrants pushing stuff out into the future.

Preferred Series A stock: owned by director and Sr VP of Business Development, giving voting control of the business. Limited rights of transfer.

Preferred Series B stock: $16 per share annual dividend increasing to $18 per share in 2004 and $20 per share in 2005. The 12,625 shares can be converted to 721K shares of common. Company can redeem at face value plus accrued unpaid dividends. Total of $170K unpaid in arrears.

Preferred Series C convertable: $10 per share annual dividend, increasing to $20 in 2007. The 40K shares can be converted to 1.45 million shares of common. Total of $700K unpaid in arrears.

Common stock: 7,874,539 shares on March 28, 2005

Warrants: 1.2 million shares at $1.00.

Options: 1.6 million at 88 cents with 6.4 years left on ave.

I would assume some serious dilution in the future of about 2 million shares.

NOLs of $7.5 million remaining.

During 2004, an entity controlled by a Director loaned the company $350K (short term). Yeah, I saw that in cash flows from financing. Later on, a director loaned the company $750K at 15% interest.

Almost all of the revenues are from Teltronics, with a small amount from the "UK" subsidiary and even less from the Mexico subsidiary. Other stuff seems allocated rationally (finance, assets, capex, etc).

The UK and Mexico subsidiaries make a respectable profit.

E&Y auditors. 2003: $231K audit fees. $7.6K other fees.
Kirkland, Russ, Murphy & Tapp, P.A. were the independent public accountants for 2004. $90K fee. Clearwater, FL. Reptron Electronics (RPRN, sec) just selected them. They don't have any important legal proceedings in their 10-K.

Monday, December 26, 2005

Ultimate Franchise Systems, Inc.

This one deserves its own entry:

UFSM (sec), 585 franchised restaurants and 40 weight loss clinics in the US. The only one I recognize is Piccadilly Restaurants and these guys only own 1% of it.
How about this for the fastest loss of money. They bought Obee's on June 16, 2004 for $610K plus $912K of assumed liabilities resulting in $1.3 million in goodwill. I might consider buying Nathan's Hot Dogs or some other rock solid brand for that kind of goodwill ratio, but who the hell is Obee's? They're a sub shop. Not Subway, not Quizno's. Obee's own website says "No Experience Necessary" to open a franchise. Their "About Us" web page has nothing but an "under construction" animated gif. So does the store locator. What a joke. Ok anyway, so how long did it take for all that goodwill to become worthless?

14 days!

That's right, fourteen days. The 10-K says, "The goodwill associated with this transaction was deemed to be impaired and was expensed during the quarter ended June 30, 2004."

How could anyone invest in a business where they pay $610,377 to buy a business for $1,319,154 more than its [negative] book value only to declare the value as worthless 14 days later?
not interested

Hookah Diving and Union Dentists... both bad

UCPJ (sec), "hookah" diving, yacht based SCUBA air compressor and Nitrox generation systems. Brownie's Third Lung, Brownie's Tankfill (fill the SCUBA tanks right onboard the boat), Brownie's Public Safety (floatation devices, rescue stuff).

2004: Assets are mostly inventory. Very weak balance sheet. Large shareholder deficit nearly twice the size of assets. Revenues increased in 2004. 32% gross margins. Large SG&A. Very large loss. Interest expense is horrible. Cash flow is about what I'd expect.

Q3 2005: Current ratio deteriorated even more. Balance sheet still horrifying. Still losing money.
not interested

UDHI (sec), one of those companies that goes through all sorts of transformations over a short number of years trying to figure out what to do. They ended up acquiring "all of the assets (except the patient list) of George D. Green D.D.S." for $1 million promissory note over 10 years with 5% interest. Dental services for union members.

Green owns 60.6% of the company, yet grants himself huge quantities of stock options (1.7 million shares with about 30 million shares outstanding). He also holds 1 million shares of preferred stock with 10-to-1 voting rights. Salary of over $500K in 2002 and 2003 (when revenues were only $2 million), dropped down to $118K in 2004 (you just know the balance sheet is going to be crap and he had to stop bleeding the company, probably forced by a bank).

Balance sheet is very weak. Current ratio is less than 1/2. The company has notes payable to a bank, which is probably why Green's salary dropped. Get this: $1.4 million deficit with only $447K assets, which are mostly AR.

Revenues are about $2 million. Salaries $692K, but G&A is over $1 million. Net income of $5K. Cash flow from ops is $12K and capex is $12K.

Q3 2005: Some cash and PP&E appeared on the balance sheet. Assets jumped up to $1 million. Current ratio is 1/2. Deficit is $1.3 million. Lost money in 2005. Cash flow statement looks terrible. Ok, I give up, what is the stock price? 9 cents on 31 million shares. It's way overpriced.
Dr. Green commented, "The loss is attributed to some one time costs associated with the Dental Visions acquisition and some other one time costs associated with the issuance of our convertible debentures and $5.0 million Equity Line of Credit funding which took place during the last quarter." Dr. Green added, "The funding in question will play a large part in helping us to prepare the Company for expansion on a national level. We aim to begin with the communications industry and then plan to propose our business model to other unions on a national basis."
and also...
UDHI has been providing a Dental Network for the Communications Workers of America (CWA) Local Unions in Florida since UDHI's inception and has expanded the concept and Dental Network throughout District 3
This makes no sense to me. Why have special dentists for the union? That's just asking for graft, inefficiencies, corruption, and who knows what else?
not interested

True Religion (TRLG) high fashion jeans

How about a $286.00 pair of jeans? or maybe a $359.00 pair of corduroys?

...and God said, Let there be supermodels

True Religion brand jeans, TRLG (sec, website), high fashion jeans and other apparel. They sell to upscale department stores like Neiman Marcus and Nordstrom, also lots of boutique stores. Also in Japan, UK, and Ireland.

They factored some receivables. Balance sheet is ok. 2004 revenues were 10 times more than 2003. High margins. Earned 20 cents per diluted share in 2004. Earned 33 cents per diluted share in Q3 2005, but the share count is going up fast. Only about half the earnings show up in cash flow. More factoring of receivables.

Fast forward to Q3 2005: There's now a huge amount of cash on the balance sheet. Receivables and inventories are up. Q3 revenues are 5 times prior year. Same high margins.

They moved to NASDAQ. The stock price is $16.29. The stock has wide visibility at this point. This just seems like too much of a fad for me. I invested in Hot Topic years ago because it was obvious they were cheap, because they had a durable brand, because they had a superb marketing machine, and they were faster than anyone else at getting new ideas into the stores.

Right now, as far as I can tell, this jeans business is a one-trick fashion pony. They might be more than that, I have no idea.

...and there must be something wrong with their website: the jean sizes only go up to 27. Oh wait, no, the men's sizes go all the way up to 38.

worth following, if only for the photos

more companies

UAMA (sec), Voice over IP mobile phone. 9 employees. Assets are almost entirely telecom equipment. NO CASH. Low liabilities, mostly equity. New operations in 2004, expenses are 30% higher than revenues. Issued 26 million shares of stock for equipment (total of 44 million shares afterward). Cash flow from ops is slightly less than zero. The equity is now gone, $896K deficit.

Q3 2005: $241K cash. $293K loan to some jackass director. Losing money badly, very negative cash flow.
not interested

UCIA (sec), non-medical management of extended-hour "doc-in-the-box" medical clinics in South Carolina and Knoxville TN. Revenues have increased every year since 2001 (they went bankrupt in 2001). Lost money in 2001, but have made increasing amounts of money each year since (14 cents, 25 cents, 33 cents, 76 cents in 2005 diluted). Blue Cross of SC owns 69% of the stock. Not much stock option dilution. Balance sheet is strong, lots of cash. Cash flow from ops is weak in 2005 due to AR and deferred taxes. Free cash flow tends to be around $2 million (was only $1.3 million in 2005). So about 13 cents of free cash flow fully diluted in 2005 (closer to 20 cents in prior years). So the stock might be worth between $2 and $3. It's selling for $3.40.
worth following

UCNN (sec), telecom business: call mgmt, long distance, toll-free, data. Lots of acquisitions. Balance sheet is ok. Revenues increasing each year. Operational income is negative in 2004 (positive in 2003 and 2002). Cash flow from ops is worse.

Balance sheet deteriorates during 2005. They continue to lose money. Cash flow from ops isn't quite as bad, but...
not interested

Saturday, December 24, 2005

More companies, ho ho ho

WCSTF (sec), Canadian auto industry business (exhaust manifolds, stuff like that) that I looked at years ago, but haven't looked at any details lately. They just went dark this year. Typically they earn over C$4.00 per share (actually around US$3.50), but last year they earned C$2.67 (US$2.32). They're trading for $17.

But I have a real problem with this company. They're always making acquisitions and those acquisitions don't have a good track record. The long term stock price reflects the lack of any sustained business progress. What this company should do is stick to what it does well, and pay the excess cash back to shareholders.
not interested

ALGOF (sec), Ontario steel company. Historically crappy.
not interested

AMHI (sec), recent bankruptcy. Texas health clinics (2 medical, 9 chiropractor). Losing money.
not interested

AMLH (sec), travel services, develops "luxury vacation home ownership and destination properties". Mentioned the word synergies (blech). Serial acquirer. Absolutely horrible balance sheet.
not interested

AMLJ (sec), RF and microwave power amplifiers, mostly for defense work. 45% gross margins, 10.4% operating margins, 10.8% net margins (tax benefit). Prior year was even better. Balance sheet is rock solid, but PP&E is almost entirely depreciated (fast schedule). Earned $935K ($1 million prior year). 10 million shares, 2 million options (at $1... geez, is this some finance professor's exam question?). Issued 2 million shares for acquisition (got $1 million cash along with it). Free cash flow is much less than earnings due to AR, was almost OK in prior year.

Q2 2005: Earned $507K in 6 months (half in Q1, half in Q2). Cash flow from ops is good, but capex is high (paid for with line of credit). Low taxes.

Stock might be worth 80 cents. Selling for $1.17.
worth following

AMLS (sec), Chinese reverse merger, Hubei Pharm Co., but then acquired licenses and another Chinese pharm, then sold off some part of the business.

Looking at Q1 05, we're talking about a very small business. Total assets are $364K, $220K of which are an investment in an offsheet subsidiary. Current ratio is less than 1/3... oops, they've discontinued operations.
not interested

AMRU (sec), video on demand streaming over broadband channels in Singapore (reverse merger). 7 full-time employees, all in Singapore. Balance sheet is strong, but assets are mostly licenses. $4 million revenue in 2004, but only $931K gross margin. $512K net income. 27 million shares, unknown options (doesn't seem to be much, if any). Lots of shares issued for cash and services. CEO owns 21% of the business. 1.9 cents per share earned in 2004. Cash flow is terrible and horribly suspect due to "acquisition of license in exchange for account receivable" in both 2004 and 2003 of over $1 million. Plus big capex in 2004. This all funded by shares issued for cash.

Jump ahead to Q3 2005: Lots of cash showed up on the balance sheet (I'll bet it's not from operations). PP&E jumped from $520K to $3.7 million. License assets (net) jumped from $2.4 million to $7.6 million. Revenues jumped due to "Digit and on-line games" of $8.4 million (which is now the vast majority of revenues). But gross margins are only 14%. SG&A went up... they made less in 2005 than 2004: $64K net income in 9 months (vs $334K). It was a loss in Q3 proper. Share count is now 30 million. Cash flow from ops is essentially zero. The acquisition of equipment ($3.3 million) and licenses ($5.3 million) are very large. They raised $10 million from stock, so I was right. They have 5 customers.
Licensing and content syndication revenue is recognized when the license period begins, and the contents are available for exploitation by customer, pursuant to the terms of the license agreement.
not interested

AMST (sec), rock quarries. Both dimensional stone for architecture and construction stone for road base and back fill. They produce "Berea Sandstone" which has been used in: Bill Gates' house, The Hancock Building in Boston, Parliament Building in Ottawa, Buffalo City Hall, Oberlin College campus, NHL Hall of Fame, UP, and some others (these range from 1885 to 2004). Their own headquarters building was built in 1900. Balance sheet is not far from rock solid, but it was somewhat weak in 2003, 2002, 2001. 28% gross margins. 9% operating margins (operating loss in 2003, 2002, 2001, 1999). Earned $153K in 2004 (lost a bit more in 2003). 2 million shares. 130K options. Earned 7 cents in 2004. Free cash flow is weak due to payables and accrued liability changes. For whatever reason, the stock is selling for $9.00. This is an interesting business, but unfortunately I doubt it will ever be an investment possibility.
not interested

Torotel Products Inc. (TTLO)

sec website yahoo pinksheets

Toroltel makes precision magnetic components: transformers, inductors, reactors, etc. These typically go into aircraft navigation equipment, medical equipment, avionics, missle guidance, and other applications. They've focused on this one area and eliminated other ones. 36% gross margins. 3.6% net margins. Lost a huge amount of money in 2004. Lost a small amount in 2005.

The Caloyeras Family now has voting control of the company with 51% and is replacing directors and to fire the CEO and CFO. This is the big issue with this stock.

Now on to the 10-K...
Fiscal year ending April 30, 2005. Incorporated in Missouri. Offices in Olathe Kansas. 5,111,590 shares of stock on July 22, 2005.

Two subsidiaries: Torotel Products and Electronika (nearly empty website). Electronika (acquired 2002) sells ballast transformers to the airline industry (activate and control the lights in airplane cockpits and passenger compartments on DC-8, DC-9, DC-10, MD-80, and MD-88). Also a 15.27% equity interest in Apex Innovations, but this has been written down to zero since they keep losing money.

The Caloyeras family owned only 7.4% of Torotel, but seem to have owned nearly all of Electronika. Torotel issued 2.3 million shares to acquire Electronika (they had only 2.8 million shares outstanding before the deal). Afterward, the Caloyeras family owned 49% of Torotel. So the fear is that the Caloyeras family got Torotel to buy their business in order to gain control of Torotel. If Torotel was a much better business than Electronika, then the deal stinks to high hell. Watch out if there is no segment reporting.

Electronika outsources a huge amount of the work for their ballast transformers to Magnetika, which unsurprisingly is owned by the Caloyeras family. Magnetika provides raw materials, labor, testing, packaging, and related services. Electronika is required to go through Magnetika. Electronika owns the IP. Magnetika receives 40% of the net sales price of all ballast transformers sold by Electronika, plus a $2,500 per month management fee (this agreement extends to 2012)!

The Caloyeras family loaned Torotel $750K to buy 15% of Apex (which is now worthless). The loan interest rate is 7%. I'd be curious to know if the Caloyeras family has any dealings with Apex.

I'm trying to get a sense for the value of Torotel proper vs Electronika (related to red flag above).

In 2005:
The net sales of Torotel Products increased 12% from $3,759,000 to $4,207,000. This increase was attributable to higher demand from Torotel’s military markets. The net sales of Electronika decreased nearly 23% from $261,000 to $202,000. While Electronika’s sales have been impacted by the soft conditions in the aerospace market, the bigger impact going forward will be the decline in the number of active DC-8 and DC-9 aircraft.
In 2004:
Net sales decreased nearly 6%. The net sales of Torotel Products increased nearly 5% from $3,599,000 to $3,759,000. This increase was attributable to higher demand from Torotel’s military markets. The net sales of Electronika decreased 60% from $654,000 to $261,000. This decrease is attributable to the soft conditions in the aerospace market and the decline in the number of active DC-8 and DC-9 aircraft.
I also found this:
On April 19, 1999, Torotel, Inc. sold substantially all of the assets
of East Coast Holdings, Inc. ("ECH"), a wholly-owned subsidiary formerly named OPT Industries, Inc., to Shared Information Group Management Associates, LLC ("SIGMA"), an investor group led by Peter B. Caloyeras, for approximately $2.7 million....
not interested

Wednesday, December 21, 2005

uranium prices

Once again, uranium spot prices are up, hitting US$36.25. And Strathmore prices are up slightly, but not as much as Cameco. There's USEC which was the IPO of US national stockpiles of uranium, which I can't speak for, but they reported good results, of course. Denison Mines hasn't done too well.

Tuesday, December 20, 2005

Voyage of the Beagle

Time for a short break. In Chapter 3 of uncopyrighted Voyage of the Beagle, we find Charles Darwin off the eastern coast of South America.

In our passage to the Plata, we saw nothing particular, excepting on one day a great shoal of porpoises, many hundreds in number. The whole sea was in places furrowed by them; and a most extraordinary spectacle was presented, as hundreds, proceeding together by jumps, in which their whole bodies were exposed, thus cut the water. When the ship was running nine knots an hour, these animals could cross and recross the bows with the greatest of ease, and then dash away right ahead. As soon as we entered the estuary of the Plata, the weather was very unsettled. One dark night we were surrounded by numerous seals and penguins, which made such strange noises, that the officer on watch reported he could hear the cattle bellowing on shore. On a second night we witnessed a splendid scene of natural fireworks; the mast-head and yard-arm-ends shone with St. Elmo's light; and the form of the vane could almost be traced, as if it had been rubbed with phosphorus. The sea was so highly luminous, that the tracks of the penguins were marked by a fiery wake, and the darkness of the sky was momentarily illuminated by the most vivid lightning.

When within the mouth of the river, I was interested by observing how slowly the waters of the sea and river mixed. The latter, muddy and discoloured, from its less specific gravity, floated on the surface of the salt water. This was curiously exhibited in the wake of the vessel, where a line of blue water was seen mingling in little eddies, with the adjoining fluid.
And I find this interesting:

In every house I was asked to show the compass, and by its aid, together with a map, to point out the direction of various places. It excited the liveliest admiration that I, a perfect stranger, should know the road (for direction and road are synonymous in this open country) to places where I had never been. At one house a young woman, who was ill in bed, sent to entreat me to come and show her the compass. If their surprise was great, mine was greater, to find such ignorance among people who possessed their thousands of cattle, and "estancias" of great extent. It can only be accounted for by the circumstance that this retired part of the country is seldom visited by foreigners. I was asked whether the earth or sun moved; whether it was hotter or colder to the north; where Spain was, and many other such questions. The greater number of the inhabitants had an indistinct idea that England, London, and North America, were different names for the same place; but the better informed well knew that London and North America were separate countries close together, and that England was a large town in London!
Keep in mind these were not indigenous people, but from European civilization. People will one day look on everyone from our era (at least those who grew up without the Internet) as amazingly ignorant in many ways.

During our stay at Maldonado I collected several quadrupeds, eighty kinds of birds, and many reptiles, including nine species of snakes. Of the indigenous mammalia, the only one now left of any size, which is common, is the Cervus campestris. This deer is exceedingly abundant, often in small herds, throughout the countries bordering the Plata and in Northern Patagonia. If a person crawling close along the ground, slowly advances towards a herd, the deer frequently, out of curiosity, approach to reconnoitre him. I have by this means, killed from one spot, three out of the same herd. Although so tame and inquisitive, yet when approached on horseback, they are exceedingly wary. In this country nobody goes on foot, and the deer knows man as its enemy only when he is mounted and armed with the bolas. At Bahia Blanca, a recent establishment in Northern Patagonia, I was surprised to find how little the deer cared for the noise of a gun: one day I fired ten times from within eighty yards at one animal; and it was much more startled at the ball cutting up the ground than at the report of the rifle. My powder being exhausted, I was obliged to get up (to my shame as a sportsman be it spoken, though well able to kill birds on the wing) and halloo till the deer ran away.
Darwin then goes on to describe a large number of Patagonian animals in amazing detail.

And then there are fulgurites:

In a broad band of sand-hillocks which separate the Laguna del Potrero from the shores of the Plata, at the distance of a few miles from Maldonado, I found a group of those vitrified, siliceous tubes, which are formed by lightning entering loose sand. These tubes resemble in every particular those from Drigg in Cumberland, described in the Geological Transactions. [10] The sand-hillocks of Maldonado not being protected by vegetation, are constantly changing their position. From this cause the tubes projected above the surface, and numerous fragments lying near, showed that they had formerly been buried to a greater depth. Four sets entered the sand perpendicularly: by working with my hands I traced one of them two feet deep.... A small fragment examined under the microscope appeared, from the number of minute entangled air or perhaps steam bubbles, like an assay fused before the blowpipe. The sand is entirely, or in greater part, siliceous; but some points are of a black colour, and from their glossy surface possess a metallic lustre. The thickness of the wall of the tube varies from a thirtieth to a twentieth of an inch, and occasionally even equals a tenth. On the outside the grains of sand are rounded, and have a slightly glazed appearance: I could not distinguish any signs of crystallization. In a similar manner to that described in the Geological Transactions, the tubes are generally compressed, and have deep longitudinal furrows, so as closely to resemble a shrivelled vegetable stalk, or the bark of the elm or cork tree. Their circumference is about two inches, but in some fragments, which are cylindrical and without any furrows, it is as much as four inches. The compression from the surrounding loose sand, acting while the tube was still softened from the effects of the intense heat, has evidently caused the creases or furrows. Judging from the uncompressed fragments, the measure or bore of the lightning (if such a term may be used) must have been about one inch and a quarter. At Paris, M. Hachette and M. Beudant [11] succeeded in making tubes, in most respects similar to these fulgurites, by passing very strong shocks of galvanism through finely-powdered glass: when salt was added, so as to increase its fusibility, the tubes were larger in every dimension....
[10] Geolog. Transact. vol. ii. p. 528. In the Philosoph. Transact. (1790, p. 294) Dr. Priestly has described some imperfect siliceous tubes and a melted pebble of quartz, found in digging into the ground, under a tree, where a man had been killed by lightning.

[11] Annals de Chimie et de Physique, tom. xxxvii. p. 319.

If Darwin was alive today, would he be able to get published in any academic journals or would his methods be considered too subjective and sentimental?

Of course you can't be a scientific pioneer without considering a lot of hypotheses that turn out to be wrong:

I am inclined to suspect that thunderstorms are very common near the mouths of great rivers. Is it not possible that the mixture of large bodies of fresh and salt water may disturb the electrical equilibrium?

The mouths of great rivers are often in regions with great rainfall and the weather of those regions often include lots of thunderstorms.

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