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Tuesday, February 28, 2006

Overheated uranium

Once again, the weekly spot price of uranium ratchets up a notch to $38.50. I don't think the spot price has gone down in any given week for years.

And once again, all the news shows increasing demand. Power hungry China underrates demand. They'll probably need 40 new reactors by 2020.

Germany wants to continue operation of a nuclear plant beyond the scheduled 2008 shutdown. Russia plans to build 2 reactors every year.

Ok, so here's some bad news: China is looking for nuclear designs that use less uranium.

And totally off-topic: MANIFESTO: Together facing the new totalitarianism

Monday, February 27, 2006

Strathmore emphasizes the badness of bad news

Strathmore Minerals issued this press release today where they announced that they purchased a piece of land the size of Rhode Island (over 1,000 square miles) up in Southern Alberta for, what, 200,000 shares of stock? That's something like 40 cents per acre. Reading the press release carefully, it could be that the price includes unstated amounts of cash or who knows what else.

I've drawn on a satellite map of the area to attempt to highlight what I believe is the property they're talking about. The map is here with a closer map of Ft McLeod here. You'll see a red dot in the lower right showing Fort McLeod. The red rectangle seems to be the area. I'm no geologist, but based on their description, the valuable part of the property is probably the eastern edge with is next to Willow Creek which runs just to the west of the string of towns Granam, Claresholm, Stavely, and Nanton.

After 7 paragraphs of wonderful glowing rambling statements, they end it by mumbling something very quick about the joint venture deal with North American Gem, Inc. being called off after the letter of intent on August 18, 2005.
Separately, the Company announces that the letter of intent signed with North American Gem Inc. on August 18, 2005 did not proceed.
Do they really think this works? By making such an obvious ploy, they're actually emphasizing that it's bad news. If it was good news, they would have said how they terminated the deal because the terms weren't very good and that they'll hold out for something better, which would be believable with the price of uranium continuing to go up. The price went up another 75 cents last week to $38.25 (by the way, UXC has a great article about how the price increase of U3O8 was more than just speculation). Portraying this as bad news makes it seem even worse.

I wasn't particularly happy with the NAG deal.
To earn its 50 per cent interest in the Hall Lake Project, NAG must make an initial cash payment of $150,000 to STRATHMORE. Furthermore, NAG must also advance $400,000 for property exploration costs before October 15, 2005 and an additional $600,000 before September 15, 2006. Upon completion of the second year expenditures, the companies will form a joint venture to continue the exploration of the project. STRATHMORE may buy back a 1 per cent interest in the project by issuing 25,000 shares to NAG.
If NAG can get 50% ownership of Hall Lake for a total of $1.15 million, does this mean the whole Hall Lake property is only worth $2.3 million?

And then Duddridge Lake:
To earn its 50 per cent interest in the Duddridge Lake Project, NAG must make an initial cash payment of $150,000 to Strathmore. Furthermore, NAG must also advance $250,000 for property exploration costs before April 30, 2006 and an additional $450,000 before April 30, 2007. Upon completion of the second year expenditures, the companies will form a joint venture to continue the exploration of the project. STRATHMORE may buy back a 1 per cent interest in the project by issuing 25,000 shares to NAG.
So Duddridge Lake is worth $1.7 million? Of course the acquisition cost was 200,000 shares total which would be less than US$400K. Needless to say, if they monetized all of their properties at this rate, it wouldn't be so good.

Sunday, February 26, 2006

What's Next?

So after an 8 month mad dash to go through about 7,000 stocks it's time to pick a direction to go next. I stumbled into a Motley Fool area with actual job offers. It seems like just yesterday when they were shedding people as fast as possible after the bubble burst. For a moment I thought about the idea of focusing on educating other investors and learning at the same time in a more formal environment. I think Motley Fool should consider itself as the modern day university (maybe they do, I don't know). For one thing, the real universities are almost all a joke at this point. But I find the idea intriguing: do everything possible to advance* the field of capital allocation in a manner that can be packaged up and taught as a field of study and in such a direction that maximizes the value of the parent organization. It's like a big move on the Go board that advances the battles on all four corners of the board.

What Would Darwin Do?
Our Voyage having come to an end, I will take a short retrospect of the advantages and disadvantages, the pains and pleasures, of our circumnavigation of the world. If a person asked my advice, before undertaking a long voyage, my answer would depend upon his possessing a decided taste for some branch of knowledge, which could by this means be advanced. No doubt it is a high satisfaction to behold various countries and the many races of mankind, but the pleasures gained at the time do not counterbalance the evils. It is necessary to look forward to a harvest, however distant that may be, when some fruit will be reaped, some good effected.

Many of the losses which must be experienced are obvious.... Other losses, although not at first felt, tell heavily after a period: these are the want of room, of seclusion, of rest; the jading feeling of constant hurry; the privation of small luxuries, the loss of domestic society and even of music and the other pleasures of imagination....
Well, I think for now the best course of action is to...

Hit the reset button!
Fire up the semi-automated scripts!
Load up another huge batch of companies!
...and do it all again!

I expect to have about 1,800 more companies/stocks/ADRs/warrants to look at. Since I'm already fully invested, I don't see a need to expidite the process and hire child laborers again. Things will probably go more slowly. And I might decide to change direction in the middle of it all. Who knows where it all leads?

* I honestly chose the word "advance" and even used it twice before I went to fetch the Darwin quote which happened to use the same word.

UPDATE later that day: Well, things are progressing very well. I haven't been banned from any websites this time. Everything should be finished overnight. Here's a sample.

ISCR, type, INSTACARE CORP., website, sec, yahoo, pink

ISEC, type, ISECURETRAC CORP., website, sec, yahoo, pink
Don't even try to click on the first two links. They won't work.

Saturday, February 25, 2006

Paper Money

I've always been interested in paper money. I own paper money notes from over 170 countries, most in uncirculated condition. I own large handmade Tibetan notes, Tzarist Russian banknotes, notes from the French Revolution, notes issued by US banks in the 1800s, and Buddhist hell money to be burned for dead ancestors. But perhaps the most interesting is J.S.G. Boggs paper money artwork:
full size version
Here's some advice: If some guy named J.S.G. Boggs offers to pay for something using drawings of money instead of money, take the offer. I heard a story about some paper money dealers who went to lunch with Boggs. He offered the reluctant waitress the choice of accepting cash or drawings of cash. The paper money dealers sat there squirming, wishing they could shout out, "Take it! I'll buy it from you for 10 times as much!" They were wealthy and could easily buy just about any banknote that interested them, except for Boggs notes. I know that those dealers mentioned would have been willing to pay perhaps a thousand dollars or more for a single Boggs note at that time and place.

Ten years ago, I considered all the stories about how Boggs challenges people's understanding of money as being overblown. Today, I find it to be a very important issue. The question about the future of the US dollar vs other currencies is key right now.

I talked recently to someone who returned from Shanghai. He mentioned how he knew someone who went through convoluted steps in order to convert Chinese renmindi into US dollars. This seems odd because we're told that people should be trying to go the other way. Why does so much of the world seem to want to hold stuff denominated in dollars? That's one of those questions that could generate a lot of interesting knowledge while applying the scientific method to determing the answer.

Wednesday, February 22, 2006

Eternal Technologies (ETLT) Wal*Mart Mangoes

ETLT thinks about selling mangoes to Wal*Mart...

...and the crowd goes wild!!

Yeah, I know. The jump in the stock price today looks like someone jumping into the pool and making a splash. It probably had nothing to do with MANGOES TO WAL*MART!!!

Tuesday, February 21, 2006

Visual Display of Financial Statements

Humans have spent at least a million years processing image information and only a few thousand years (at most) handling numbers. We're far better at interpreting pictures than numbers. It's easier and faster for me to see financial statements visually than in numeric format.

B A L A N C E - S H E E T

Starting with a balance sheet like this:

cash: $10 million
AR: $15 million
inventories: $12 million
Total Current Assets: $37 million

PP&E gross: $25 million
total accumulated depreciation: $15 million
Total Assets: $52 million
Liabilities and Equity:
accounts payable: $5 million
accrued expenses: $7 million
Total Current Liabilities: $12 million

long term debt: $8 million

equity: $32 million
Total Liabilities and Equity: $52 million

We end up with a chart that looks like this, where the length of each line represents the amount of each category. I just now changed my mind about handling contra-assets like depreciation by using "-" instead of "*" for the amount of offset.
cash **********
AR ***************
inventories ************
Current Assets *************************************

PP&E (less deprec) **********---------------

Total Assets ****************************************************

AP *****
accrued expenses *******
Total Current Liab ************

long term debt ********

equity ********************************
I try to scale the lengths of lines to something reasonable. If there is net cash on the balance sheet (i.e. cash minus total liabilities is greater than zero), then I'll add a line for "Net Cash" above the "cash" line and make it bold to stand out.

I N C O M E - S T A T E M E N T

Here I show the revenue as the first line with costs, expenses, net income as components of that line. There are always special cases so I try to best represent what's really there so I won't be misled when I come back an hour later and try to figure out what I was doing.

Revenue: $20 million
Cost of good sold: $10 million
Sales, General, and Admin Expenses: $5 million
Taxes: $2 million
Net income: $3 million
Revenue       ********************
COGS **********
SG&A *****
Tax **
Net income ***
I'll usually add key ratios (whatever makes sense for that particular type of business) here as well.

C A S H - F L O W - S T A T E M E N T

For operating cash flow, I show net income as the first line. Then each entry is shown as increasing ("+") or decreasing ("-") the line. Wherever the cursor ends up on the last entry is cash flow from operations.

Investing usually uses cash, I often use just minus signs ("-") and treat it as the inverse of cash generated. Sometimes I improvise. I haven't settled on a solid set of rules for doing this.

net income: $3 million
depreciation: $1 million
increase in AR: ($2 million)
cash flow from operations: $2 million

capital expenditures: ($3 million)
acquisition of business: ($10 million)
cash flow used in investing: ($11 million)

payment of revolving line of credit: ($2 million)
stock issued: $5 million
cash flow from finance: $3 million
net income ***
depreciation *
increase in AR --

capex ---
acquisition ----------

stock issued *****
revolver paydown --
At the end, I usually figure out what I consider to be free cash flow (which is often cash flow from ops minus capex, but there's no substitute for thinking about how much true free cash they generated and what investment/finance is needed for sustaining the same level of business). I'll add a line for free cash flow, typically above the "net income" line and make it bold so it stands out.

Epolin Inc. (EPLN) Links

EPLN (sec, website)

2005 10-K
2 cent dividend policy, April 6, 2006
2006 10-K
Q1 results, July 22, 2006
Q2 results, Oct 17, 2006
Chairman's pay cut, Nov 2, 2006
Q3 results, Jan 25, 2007... sold the stock

It's a small investment and a very small company. I spent a while buying shares here and there.

Epolin Inc. (EPLN) Q3 Results

Q3 SEC filing
Covers the period ending Nov 30, 2005
11.8 million shares (unchanged)

Revenues for 3 months increased 37.4% (to $966K)
Revenues for 9 months increased 31.1% (to $2.63 million)
The increase was primarily due to increased sales in Asia, especially Japan, Korea, and Taiwan. Also increased orders for the newer inks and coatings. During Q1 there were more orders from regular customers of older products. New technical service has allowed them to sell traditional dye products to customers who might not have known how to best use the products. New customers.

Traditional dyes were flat from 2002 through 2005.

3 Month Results
Gross margins: 71.6% (vs 62.5% prior year)
Net margins: 25.8% (vs 15.6% prior year)
Taxes: $145K (vs $103K)

9 Month Results
Gross margins: 63.5% (vs 64.8%) due to increased material and overhead costs
Net margins: 19.2% (vs 20.5%)
Taxes: $301K (vs $288K)

SG&A increased due to officer salary increases and employee benefit increases and higher commission expenses.

The 2.5K sq ft of office space is now being leased out to a new non-related party. The rent dropped from $36K to $18K.

Marketing costs have gone up, as expected and with clearly good results. They did pay a dividend in August 2005 of 2 cents after stopping dividends to pay for the expanded effort.

During the 9 months, the new products (security inks, new visible and infrared dyes and forward integration of the dyes into formulated pellets) had revenue increases of $496K over the prior year and are now 34% of revenues (up from 21%).

There are causes for a potential slowdown in the traditional markets: consolidation, moving offshore where eye protection is not as valued.

Greg Amato has been in the company since Nov 2004, VP of sales and marketing since Jan 2005 [and is now CEO].

Herve A. Meillat, 49, was appointed to the board of directors. He was with Bacou-Dalloz Group, manufacturing and selling personal protection equipment. Sr. VP of eye and face business unit from 2001 to 2004, president of Dalloz Safety Inc from 1996 to 2001, COO of Christian Dalloz in France from 1989 to 1995 which was founded by Dalloz in 1957 and was an injection-molded plastic parts company. By 1989, they were mostly a protective eyewear business. The 1999 report shows Meillat in charge of Sun Protection in 1999 and also in charge of improving the efficiency of manufacturing and moving the group onto the Internet, but this link connects the two together. Bacou-Dalloz Group now has a business called Lase-R Shield, Inc which sells laser eyewear.

I get the sense that this new director is good, but not a real star in the business, which makes sense, given that Epolin is a very small company.

No off-balance sheet arrangements. No material legal proceedings.

June 2005: company granted 50K stock options to each of 4 directors (200K options total). Strike price of 54 cents.

The Q3 results are audited by Weismann Associates.

Share Count
11.8 million shares on Nov 30, 2005.
522K options from the 1998 stock option plan outstanding (all far in the money)
200K options from employee agreement
258 options for future grants
12.78 million totally diluted shares.

Balance Sheet:
cash is up slightly.
AR is up quite a bit.
inventories are down slightly.
Current ratio is roughly the same.
Capex related items are up in all categories except leasehold improvements. Roughly $200K increase in PP&E (gross).
Equity increased by over $330K.

Income Statement:
(mostly covered above)

3 months:
net income / total assets would annualize to 25%, which is extremely good.
net income / equity would annualize to 33%, which is amazing
net income per totally diluted share: 1.94 cents for 3 months (annualizes to 7.79 cents)

9 months:
net income / total assets would annualize to 17%, still extremely good.
net income per totally diluted share: 3.96 cents for 9 months (annualizes to 5.28 cents)

Cash Flow Statement:
Cash flow from ops: $484K (vs $506K net income)
Capex: $153K
Free cash flow: $331K
The only other significant cash flow are dividends paid of $236K

44.5% of AR is to a single customer
There's an allowance for doubful accounts in AR, but they don't state what it is
Some cash in banks is above the FDIC guarantee rate (again, they check the bank financials)
Depreciation schedules haven't changed
$17.6K in regulations costs for 9 months
Advertising costs actually decreased to $18.0K (from $18.6K)
Inventory mix is roughly the same: 59% finished goods, 34% work in progress, 7% raw materials

Customer concentration for 9 months: 42% of revenues from 4 customers (big improvement over the prior full year 50% from 3 customers). 28% from 2 customers (big improvement over 44%)

Again, sublease rent is $18K per year (down from $36K) with non-related party starting Sept 1, 2005 ending Halloween 2007.

9 months of 2006:
US: 71% of revenues (down from 84% in 2005 which is down from 90% in 2004)
Asia: 17% of revenues (up from 13% in 2005 and 6% in 2004)
Europe: 12% of revenues (up from 5% in 2005 and 4% in 2004)
This is all going very nicely.

Accrued expenses are still almost entirely the employment agreement.
Lease obligations are about the same.

R&D expenses increased to $325K (from 302K in prior year)

Epolin Inc. (EPLN) 10-K

EPLN (sec, website)

For the full year ending Feb 28, 2005.
Incorporated in NJ, 1984, went public in 1989.

11.8 million shares on May 10, 2005

358-364 Adams St
Newark, NJ 07105

They manufacture, market, research, develop dyes and dye formulations, mostly near infra-red and laser absorbing dyes. They started out in specialty organic chemical products, but focused on near infrared dyes since 1991. They still do other specialty products on a custom basis (additives for plastics, thermochromic materials for paints), but this business will not grow over time.
To management's knowledge, and based upon its review of the web sites of the Company's known competition, management believes that the Company has one of the most extensive assortment of near infrared ("NIR") dyes in the world by offering the customer a varied assortment of dyes absorbing in the NIR region of the spectrum (from 700 to 1600NM). Nevertheless, the Company is not aware of any statistical evidence available to support its belief regarding its position in the industry.
Epolin Holding Corp, incorp in NJ as a real estate holding company, become wholely owned in 1998. This holding company owns the 19.5K sq ft of manufacturing and warehouse and admin space in NJ.

Applications for infrared dyes:
The dyes are used in protective goggles against laser light. An early product was a dye to absorb neodynium-YAG laser light, typically used in military range finders. This extended to other customers. The dyes are also used in welding goggles.

Some competitors would only sell dyes if the customer also bought resin from them as well. New welding specifications require shields to absorb specific levels of infrared (based on recent studies of eye damage and early cataracts). EPLN now offers a line of dyes whic absorb the entire range of welding radiation. Management expects the welding market to grow significantly due to the new specifications and the use of lasers in welding.

Security inks. This is a new business for the company. These inks absorb very little visible light and thus seem invisible in low concentrations. But a mechanical reader can detect them. Useful for authenticating food and drug labels, documents, credit cards. So far the main use has been for credit cards.

Specialty filters. This is a potential new market for instrument makers who use glass filters currently containing rare earth oxides. These are brittle. EPLN is looking into a cheap plastic filter to do the same thing.

Dyes for sun protection. This market isn't very active and the company doesn't expect much.

Dyes for heat shields. These would block much of the solar heat, but still allow visibility. The company is doing R&D in this area. It needs to last 7 years before deteriorating from the sunlight, results are "elusive".

Dyes for interlayer and laminates. Similar to heat shields plus they're shatterproof for auto applications. Needs to last even longer than 7 years.

Look, why are you guys telling me about all these wannabe applications??? Stick to the here and now.

Specialty chemical products (mentioned above). Custom products for companies that sell into the adhesives, plastics, aerospace, pharm, flavor, and fragrance industries. Typically these are intermediate products. Small quantities make it inefficient for customers to do it themselves. Not more than 10% of profits or losses.

Lots of government regulation in this business. The New Jersey Industrial Site Recovery Act requires EPLN to get approval before relocating or changing control of the company. The property is subject to inspection for compliance. EPLN registers all new and proprietary products with the Toxic Substances Control Agency (oddly enough, can't really find it on the web). In 2004 and 2005, compliance with environmental laws cost $18,000 [this is why a country must be either wealthy or unpopulated in order to have a clean environment].

Raw materials come from several large chemical manufacturers. EPLN only uses a few of them, but potential suppliers is large. No problems in getting materials in 2005.

R&D. New applications under development: credit card heat blocking films, laser eye protection related to night vision for military, document verification for the military, welding and laser eye protection, medical devices, tagants, hot melt additives. These are usually done for a specific customer to lower the risk. R&D costs were $374K in 2004 and $408K in 2005.

Competition. Other dye companies do not seem to have the broad range of products that EPLN has nor the level of technical service and customer support. Competition is limited.

The IR dyes of the major part of the companies revenues haven't changed since 1976 (which is good), but there is always a lot of activity.

No patents.

Customer concentration: 50% of sales were to 3 customers (which is actually down from 65% in 2004). Two customers were 44% of sales (up from 42%). One customer was 24% (14% for near infrared dyes, 10% for security inks). One customer was 20%, all for near infrared dyes.

Only 10 full-time employees (8 in 2004). No unions. There's a lot of reliance on Dr. Murray S. Cohen who is Chairman (and stepped down as CEO to allow the new marketing guy to run the business, which I view as a very good move).

The company has been subleasing 2K sq ft of space ($36K/year) to a non-related party to operate an optics and security inks lab.

No material legal proceedings. Legal settlement caused a net expense of $86K in 2005, lawsuit by a former director and also a former employee.
In December 2000, two individuals (each a former director and former employee of the Company) instituted suit... alleging claims pursuant to their past employment as well as a derivative claim.... included breach of contract, civil rights, age discrimination, wrongful termination, infliction of emotional distress and a shareholder derivative claim. In June 2003, the Company... settled the lawsuit.... a lump sum payment... of $312,000. In addition, the Company agreed to buy back 126,500 shares... for... $69,575 ($0.55 per share).... During the quarter ended November 30, 2003, the Company was reimbursed a portion of the settlement payments from its insurance company in the amount of $118,560.
Only 282 stockholders of record, meaning they could go dark.

They had been paying dividends in 2002, 2003, and 2004, but stopped in 2005 to expand.

Stock option grants:
2003: 25K
2004: 162K
2005: 100K

Gross margins:
Q3 2006: 71.6%
[Q3 2005: 62.5%]
2005: 60%
2004: 66%

Operating margins:
Q3 2006: 39.5%
[Q3 2005: 28.6%] probably low due to lawsuit
2005: 28.2%, low due to lawsuit settlement of $86K (see above)
2004: 33.5%

Net margins:
Q3 2006: 25.8%
[Q3 2005: 15.6%] probably low due to lawsuit
2005: 17.5%, low due to the lawsuit (see above)
2004: 21.7%

Revenues increased 5.3% in 2005 (to an all-time record) due to inceased sales of dyes for security inks, partly offset by a decrease in traditional markets.

My favorite section (which I'm taking from the Q3 2006 release, which may differ from the 10-K version) is:
We are currently going through a period of reassessing our direction in order to increase value for our shareholders. Our business, though reasonably healthy, has not recently grown to the degree management anticipated.... Based upon these observations, we tried to learn what could be done to stimulate growth and recapture the promise of our early years. Our first task was to draw up a business plan. We believe this highlighted our one major weakness and that was in sales and marketing. For years we felt it to be unnecessary to go out and reach our customers. We believed that our web site was sufficiently explicit to attract anyone interested in near infrared light management to come to us because we were the "only game in town". We now realize that the customer has alternatives which do not include the use of Epolin dyes. We believe the business plan made clear the necessity of hiring a Sales/Marketing executive (which was accomplished with the hiring of Greg Amato) along with back up technical service help (which has also been accomplished). In order to cover the cost of these additional personnel and place a greater emphasis on company growth, we suspended in fiscal 2005 the cash dividends program which we had been in place during fiscal 2002, 2003 and 2004. We believed that it was in the long term best interest of the shareholders for us to reinvest profits for future growth. However, as a result of our current cash position, we declared and paid a $0.02 cash dividend in August 2005. Although there can be no assurance, we currently anticipate declaring another dividend in the early part of the new upcoming fiscal year which will begin March 1, 2006.
They also talk about the importance of management succession. Murray S. Cohen agreed to step down as CEO (but remaining Chairman). This happened in January 2006 and Greg Amato (the marketing guy) became CEO. This is a great move. It give Amato a chance to run things while Cohen is still Chairman and can take over again, if needed.

This letter from October 20, 2005 goes into more detail.
The facility we occupy dates back to the early decade of last century. It is in a building that let us get started as a public company but one that seriously needed rehabilitation. When we purchased the property in 1999, we began to make improvements to the property. Such investments in its upgrade have accelerated in the last few years which have in itself impacted company profitability.The business we are in is fundamentally a high-tech business. Our early efforts to manufacture and sell near infrared dyes required support of sophisticated analytical equipment in order to produce quality products. For example, our first spectrophotometer, leased in 1996, reached the end of its dependable life and was replaced by a new machine this year. Our other instrumentation was also replaced. However, the major expenditures made since then has been the direct result of our new business plan
It talks about how sales growth will come at a price of reduced profitability. They believe higher profits will be seen by the end of fiscal 2007. They needed closer ties with outside companies to create the full formulated resin (not just dyes) and they now have these business arrangements.

FIFO used for inventory. Straight line depreciation for inventory. Asset and liability for taxes. Revenue recognition is standard. They repurchased 50K shares at 59.5 cents per share in 2005 (they've always repurchased a small amount each year since 2002). No off-balance sheet arrangements.

Murray S. Cohen, 79, Chairman and CEO, director since 1984, $266K salary, $40K bonus, owns 16% of the stock
Cohen was Director of Research from Jan 1978 through May 1983. VP and Technical Director of Borg-Warner Chemicals 1973-1978. BS from U of Missouri in 1949, PhD in Organic Chemistry from Missouri in 1953.

James Ivchenko, 65, President and Director, director since 1993, $246K salary, $35K bonus, owns 12.4% of the stock
Worked at Ungerer & Co. as Plant Manager for the Totowa, NJ and Bethleham, PA plants from 1988 to 1991. 30 years experience in the flavor, fragrance, and pharm intermediate industry. BA, MS, and MBA from Fairleigh Dickinson University in NJ.

Morris Dunkel, 76, Director since 1984, owns 2.1% of the stock
VP and Technical Director of Elan Chemical Inc. Worked at Tenneco Chemicals 1976-1983. BS 1950 Long Island U. MS Brooklyn College 1954. PhD in Organic Chem from U of Arkansas 1956.

James R. Torpey, Jr., 55 [the spring chicken of the group], Director since 2001
President of Madison Energy Consultants. 1995-2002 Director of Technology Initiatives at First Energy/GPU, Chairman of Solar Electric Power Assoc, President and board member of GPU Solar. Member of US Dept of Energy Solar Industry Advisor Board. MBA Rutgers 1991.

Greg Amato, 48, started with the company in 2004 as VP Sales and Marketing.
1993-2004 worked at Elementis, PLC, a specialty chemical mfgr, as VP Specialty Markets of Elementis in Hightstown, NJ in 2000-2004. BE Georgia Tech 1978.

Claire Bluestein (former director) owns 8.4% of the stock. She was president and sole shareholder of Captan Associates, developing materials for commercial applications of radiation curing technology. BA from UP in '47. MS and PhD in Organic from U of Illinois.

From 1996 10-K:
Abdelhamid A.H. Ramadan, now 66, was manager of research, process development and QA since 1993. Before that he was production manager at Celgene Corp and senior chemist and chemical hygene officer. Also a production dept. head at Tenneco. BS Chem 1963 from Ain Shams University in Cairo. In 1998 he owned 3% of the stock. He left the company in 2000. and he owned 3.5% of the stock in 2001. He disappeared (no mention why) as a director in 2002 replaced by Peter Kenny.

Peter Kenny started as a director in 2001. He was senior VP at Independence Community Bank (ICBC, sec, FDIC #16018) (he was in a bank acquired by them, he doesn't show up in ICBC sec docs). Looking at the FDIC database, back in 2001, the bank had 1,213 employees, $7.6 million in assets (now $18 million). They were performing very well back then (and now). In 2005, he was gone. It says in the 2004 10-K that he resigned after the end of fiscal 2004 for personal reasons.

No audit committee, no audit expert (not a listed company so they can get away with it).

Of the people listed, only Cohen and Ivchenko have options. Total of 90K options.

Amato has 100K restricted shares after 1 year.

Ivchenko and Cohen have a substantial employment contract including 1.5% and 2% of gross revenues (limited at $3 million) and that increases by 0.25% each year for 10 years.

Executives and Directors own 30.7% of the stock. Another 12% is owned by Santa Monica Partners and also Sandra Lifschitz. The directors' stock contains rights of refusal.

Chester C. Swasey, 53, was VP of sales and marketing back in 1996. He came from Fairmount Chemical Company and Union Carbide. He came from Fairleigh Dickenson University (same school as Ivchenko).

Weismann Associates LLC of Livingston, NJ. No website, but they're listed on the PCAOB list.

Audit fees:
no other audit related fees
$3K tax fees

Weismann Associates also audited:

Boonton Electronics (sec) although that was Polakoff Weismann Leen LLC of Livingston, NJ back in Jan 2000. Boonton's net loss for 1999 was almost as large as their entire equity. PWL didn't give them a "going concern" qualifier. But then Boonton was acquired by Wireless Telecom Group.

It looks like that's about it.

Weismann Associates gave EPLN an unqualified audit for 2005 and 2004 in this document.

On August 16, 2001, they dismissed Polokoff Weismann Leen and engaged IWA Financial Consulting LLC (which was a brand new accounting firm). IWA had no qualification in 2003.

Here they claim to have audited the financial statements for 2002 and 2003. But in the next year, they claim to have only reviewed 2002 and 2003. Later on, they issue a 10-K/A that has been audited.

In 2005, they switched to Weismann Associates with no warning or explanation that I can find.

visual display
Balance Sheet:
Net Cash        ************** $696K (nearly 6 cents/share)

Cash ************************
AR ***********
Inventories ***************
prepaid *
Current assets ****************************************************

PP&E (gross) ****************************
Depreciation ---------------
tax assets ****
life insur ****
other assets ********

accrued expens ***** (mostly employment agreement)
Current liab *****
Deferred comp *****
Total Liabil. **********
Equity **************************************************************

Income Statement:
Revenue            *****************************
Cost of sales ************
SG&A *********
taxes ***.
net income ***** $504K (3.94 cents/share)

net income / non-current assets = 48%
net income / non-depreciated PP&E = 36%
net margin = 17.5% (low due to legal settlement)
net margin in 2004 = 21.7%

Cash Flow Statement:

Free Cash Flow ***********************************

Net Income *************************
depreciation ++
deferred tax ++
deferred comp oblig +
AR +++++
prepaid tax ++++
accrued expenses +++

capex ----
life insur policy --

treasury stock pur -

Net increase **********************************

They had $1.1 million in one bank (or brokerage) and $448K in another (way beyond FDIC guarantees). They claim to evaluate the stability of the financial institutions periodically. I wish they'd include the FDIC numbers of banks so I could check for msyelf.

Epolin: assets=$3.6 million, revenues=$2.9 million, net income=$394K
Epolin holding company: assets=$834K, revenues=$134K, net income=$109K

All straight-line depreciation
building: 39 years
machinery and equipment: 5-7 years
furniture and fixtures: 7 years
leasehold improvements: 10-39 years

Major work is capitalized, repairs and maintenance are expensed.

Revenue recognition seems fairly standard.

322K options from the 1998 stock option plan were outstanding, ave strike price 30 cents.
458K options could be granted in the future.
200K shares are associated with specific compensation plans (see above).

Fully diluted shares = 12.3 million shares
Totally diluted shares = 12.78 million shares

US: 84% of revenues
Asia: 13% of revenues
Europe: 5% of revenues

US: 90% of revenues
Asia: 6% of revenues
Europe: 4% of revenues

Max lease obligation per year is $97K.

Monday, February 20, 2006

Keynote Systems (KEYN) quick look

This is just a quick look at KEYN, so I could easily miss something.
yahoo sec
19 million shares on Feb 10, 2006. 6 million stock options outstanding on Dec 31, 2005.

Assets are current-short-term investments, cash, PP&E, goodwill. Very low liabilities, almost all equity. Extremely liquid. Hardly any change from prior year.

Revenues are flat from prior year.
Operating margin is only 1.5% (based on their table). Prior year was even worse at 1.1%. Operating income is dwarfed by interest income from all that cash!
Net margin is more than twice operating margin (even worse in prior year).
Earned 3 cents per diluted share.
3 month cash flow from ops is much higher than net income due to stock based compensation (which is still an expense seen by the shareholder via dilution), AP, deferred tax assets, and depreciation. Capex is about half of depreciation.

They acquired a business for $2.5 million. They shifted $20 million between different short-term investments. Stock options were exercised and less stock was repurchased.

There's an IPO allocation related lawsuit outstanding.

I read this investor presentation pointed out by Kevin at MarketMoneyLetter and I wasn't impressed. It just seems like the area where they do business is a real slugfest and not conducive to long term big earnings. It looks surprisingly like LiveWorld. They even hit a wall at about the same time as LiveWorld. While you could argue that the jury is still out on LiveWorld, that itself is a good reason not to invest in it. That's more like speculation. I have nothing against having something which may or may not pan out, but only when it's part of an otherwise valid investment. Even if the net cash was equal to the market cap, I'd be hesitant to invest because the underlying business itself isn't clearly solid. I passed on Liquid Audio around the same time as I invested in ValueClick because, unlike ValueClick, they weren't going to be a reasonably good business on their own. Both were selling for significantly less than their net cash.

Looking back at KEYN's 10-K, They had $38 million in revenues in 2003 and $48 million in expenses. They probably strived very hard for profitability and in 2004 revenues grew to $42 million while expenses were slashed to $40 million. In 2005, revenues increased again to $54 million but expenses climbed to $52 million. Either the business doesn't scale well, or they manage to find ways to burn any extra earnings that happen to occur. The profitable part of their business is buying and selling short term investments, but are they really doing well at that? They're getting interest income of roughly $2 million per year while sitting on roughly $130 million in cash and short term investments. That's only a 1.5% return.

This is a great example of Warren Buffett's "sitting on a savings account" type of business. All those millions of stock options are being propped up by passive-rate levels of returns on shareholder cash with no dividends. The employees can essentially do nothing while the cash builds up from plain old savings account rates of return.

Here's an alternative: hand me $130 million and I'll use it to buy 1-year retail bank CDs and get a much higher return while I stand outside the bank doing performance art for change from passersby while drawing hundreds of thousands of dollars in salary. Overall, you'll be better off. I won't even give myself those 6 million stock options.

Anyway, since these guys don't make any money with their razor thin margins (and thankfully they aren't losing money... right now), I figure the business is worth the net cash (plus short term investments) on the balance sheet, which is $128 million. That works out to about $4.72 per fully diluted share. Since the stock is selling for $11.73, I think I'll pass.

was that too harsh?

UPDATE 3/26/06: I've been informed that I missed some things (like I said above, it's a quick look, so I could easily miss something). In the 10-K from 2002, they bought a 188K sq ft building in San Mateo, California.
We purchased the building from our lessor on September 30, 2002, before the expiration of the synthetic lease arrangement in 2005.
And there's this as well:
After we entered into the lease in July 2000, real estate market conditions worsened, including a significant increase in available space for lease and significant declines in corresponding lease rates for commercial property. Accordingly, a loss on termination of this lease was recognized in connection with the purchase of the building. The loss was calculated by comparing the purchase price of the building to its fair value. To determine the fair value of the building, we had an independent real estate appraisal conducted, which indicated that the fair value of the property was approximately $25.0 million. The calculated loss of approximately $60.7 million was recorded in the fourth quarter of fiscal 2002. The $60.7 million loss on termination was adjusted for the reversal of the remaining excess facility charge accrual and costs associated with the acquisition of the building, resulting in a net charge to the consolidated statements of operations of approximately $52.0 million.
It doesn't give me a warm-fuzzy feeling when management makes an $85 million decision in July 2000 and then ends up with a $60.7 million overall loss two years later. But they're not in the real estate business, I suppose. And I'm told rather firmly that this building might be worth $40-43 million today, which would place it as worth perhaps $17 million more than the stated value on the books.

So let's be generous and add $22 million to the valuation of the business bringing it up to $150 million. Using 25 million fully diluted shares, that would put the value at $6 per share. I suppose you would then add the value of the business on top of that, which is probably worth more than zero, despite my own views.

It was kind of KEYN to amend their stock option plan to require shareholder approval before lowering the exercise price of outstanding options. How nice of them.

Ok, so now let's look at KEYN's operations apart from their savings account-like earnings. They generated $211K in the last 3 months of 2005. Now is there anything in the cash flow statement that would lead me to believe that free cash flow from operations is any more than this? Well, we should add back in the $796K of stock-based compensation if we're going to assume a totally diluted share count (i.e. total number of shares they'll probably have when I sell the stock... but even that is underestimated the share count because someone else needs to buy the stock and will want to view their own totally diluted share count). Since capex is about $350K less than depreciation, can we assume that this represents permanent free cash flow? Probably not, but we'll do it anyway. So then we would assume about $1.3 million per three months of free cash flow. We'll assume about 21 cents of free cash flow per share, making the business worth about $3.15

So then the stock would be worth $6 plus $3.15, which is $9.15. Since the stock is selling for over $10, I think I'll still pass.

NOTE: It's entirely possible for there to be something that I don't see or can't see which makes the company more valuable. Your own estimate of the value may differ because of that.

revisiting companies 10 (finished the cycle)

revisiting companies 1
revisiting companies 2
revisiting companies 3
revisiting companies 4
revisiting companies 5
revisiting companies 6
revisiting companies 7
revisiting companies 8
revisiting companies 9

DRUG (sec) Stock is at 67 cents. Dragon Pharm. Q3: 63 million shares on Sept 30, 2005. Current ratio improved to slightly less than 1 (but same as last quarter). AR and inventories fairly steady. Assets are mostly PP&E. About 1/3 equity.

Revenues nearly doubled over prior year to $13.3 million, up 17% over Q2. 23% gross margins (down from 27% in Q2). Sizable net loss (more than Q2). For 9 months they have a net income of $1 million. Free cash flow is $1.4 million due to AR. Capex is greater than depreciation (both are very large at $6 million and $4 million). They paid down a related party loan. The stock might be worth... who knows? probably more than 30 cents.

ERIF (sec) Stock is down to around $28.50. Erie Family Life Insurance Company. 94% of their revenues are life insurance. Only 25% of the company is owned by public shareholders. 5 million shares (53.5%) owned by Erie Insurance Exchange, 2 million shares (21.6%) owned by Erie Indemnity Company. Net income per share has been over $3.00 in 2003 and 2004. 1.83% owned by executives and directors. 9.5 million shares on Halloween 2005.

Q3 results: Keep in mind that 82% of their assets are stated at "fair value".
82% of assets are fixed maturity securities and equities.
14.6% equity
put this one in the "too difficult" pile.
stop following

SMID (sec) Stock is around $3.15. Pre-cast concrete products used in construction, utilities, and farming. Q3 results: Assets are mostly AR, PP&E, and inventory. Both AR and inventories are increasing. Balance sheet is reasonably strong. About 40% equity.

Gross margins are 24%. Operating margin is 7.4%. Net margin is 3.7%. 4.6 million shares on Nov 10, 2005. 500K options at end of Sept. Use 5 million fully diluted shares. 4.6 cents per fully diluted share. 23 cents for 9 months.

$854K cash flow from ops (vs 1.2 million net income, 9 months). $645K capex. $68K cash repaid in financing.
return on assets (12.5%) and equity (31%) is good.
stock is probably worth around $4.60.

SPOP (sec) gone in a merger
stop following

SOTK (sec) Stock is at $1.60. New partnership with Sono-Tek nozzles.
Q3 results: period ends Nov 30, 2005.
14.3 million shares on Jan 3, 2006. Up to 1.5 million options. Assume 16 million totally diluted shares.
Assets are inventories, AR, and cash. Current ratio is around 5. $243K net cash.
Revenues unchanged (up for 9 months). Gross margins down to 49%. SG&A down. Operating income of 13%. Zero income tax. Net income of $280K with no tax. Assume about 1.2 cents taxed per totally diluted share for 3 months. Nine month income was roughly in line with this.

Cash flow from ops is half of net income. Capex is 2x depreciation. Repaid line of credit. Got cash from stock options and issue of stock.

An employee embezzled $250K via unauthorized check writing over 3 years.

They sold their first MediSonic patented (mousetrap?) polymer vacuum deposition process thingeemabob. See how sales go in the future.

TBV (sec) Stock is around $4.50.
Q3 results: 71 million shares on Nov 11, 2005.
Very strong balance sheet. Net cash is $30.6 million on total assets of $113 million.

Revenues up a bit to $19 million in 3 months ($50.7 million in 9 months). 73% gross margins. 43% net margin. Only paying 7.7% tax on operating income. Big foreign currency translation gain. Net income (without foreign currency gain) is $8.2 million.

Share count has been rock solid since Dec 2003. Retained earnings has been rising fast.

Cash flow from ops is $5 million lower than net income pretty much due to a $9.8 million not receivable from related party, also $4.5 million in inventory increases. The note receivable is almost certainly payment of revenues. Large $5.2 million capex (deprec is only $1.2 million). Small repayment in financing. Free cash flow of $11 million (was $20 million in prior year). Net cash increase was $10.7 million. Currency translation added $2 million.

Tiens was incorporated in 1990 as Super Shops, then changed names a few times. August 2003, a Chinese reverse merger. Tianshi International was incorporated in Mar 2003, British Virgin Islands. June 2003, Tianshi International acquired 80% of Tainjin Tianshi Biological Development Co. ("Biologicial"). Biological is a Chinese foreign equity joint venture company. Original partners were Tianshi Hong Kong International Development ("THK") which owned 80% of Biological, and Tianshi Engineering ("T-Eng") which owned 20% of Biological. THK is 100% owned by Li Jinyuan. T-Eng is 49% owned by Ms. Li Baolan and 51% owned by Tianshi Group. June 2003, T-Eng transferred it's 20% interest in Biological to Tianshi Pharm. Tianshi International acquired the 80% of Biological from THK (same owner, Li Jinyuan).

So now, Tianshi International is 100% owned by the Tiens. Biological is 80% owned as a subsidiary of the Tiens. Tiens is now 4.91% owned by public shareholders, 2.8% owned by officers, 92.29% owned by Li Jinyuan.

Once again, I'm not comfortable with a company that is controlled by an individual in China despite the fact that it's probably worth over $8.
stop following

TLF (sec) Stock is around $6.50. Tandy Leather Factory.
Q3 results: 10.7 million shares on Nov 10, 2005. Assume about 700K options and warrants. Assume about 12 million totally diluted shares.
Assets are mostly inventory (which is mostly finished goods), with a bit of AR and cash and PP&E. Balance sheet seems reasonably strong. 74% equity.

Revenues up somewhat. 57% gross margins. 7.6% operating margins. 6% net margins. About 10% return on assets. About 5.8 cents per totally diluted share for 3 months.

Zero cash flow from operations due mostly to inventory (which is now 15% over their internal plan). Capex is about 2/3 of depreciation. $505K paid down revolver. $101K paid capital lease obligations. $174K from issuing stock. Everything ate cash.

The 10-K has lots of great financial ratios for the last 3 years.

DXPE (sec) Stock is around $20.
Q3 results: 4.7 million shares on Oct 26, 2005
Assets are mostly AR and inventories. Current ratio is about 2. About 30% equity.

Revenues are flat. 26% gross margins. 2.3% net margin.

Cash flow from ops is weak due to AR. Capex is less than depreciation.

Acquired a business for $2.4 million. Sold $932K in property. Shifted approx $125K from debt to pay down the revolver.

They paid $4 million of employee taxes related to exercising stock options! It isn't enough to give away big chunks of the business, but paying the taxes for the employees is adding insult to injury.
stop following

GDVI (sec) Stock is at 6.3 cents.
Q3 results: period ending Halloween 2005. 149 million shares on Dec 15, 2005. 7 million options and warrants. Assume 175 million shares totally diluted.
Assets are mostly inventories, AR, and PP&E with some IP intangibles. Balance sheet is reasonable. More than half equity.

Revenues are 3x prior year due to three major contracts with So Cal schools (using designs acquired via another company's bankruptcy). 24% gross margin. 4.7% operating margin. Interest expense ate up nearly all the profits.

Cash flow from ops is killed by $1 million increase in inventory. $294K capex with $101K depreciation. $106K repayment of notes payable. $50K from sale of stock.

They had to restate the income statement, reducing revenues and COGS. Gross profit is unchanged.

$11 million totally diluted market cap. A company at full value would be generating $735K per year in free cash flow (or $184K per quarter).

Keep watch on this

USOO (sec) Stock is at $1.32.
Q3 results: 12 million shares on Nov 9, 2005
Assets are almost entirely AR. Weak balance sheet.

Revenues are up. Margins are very low because, although they're a transportation company, they had to purchase a huge amount of transportation. They earned $600K for the quarter. $1.9 million for 9 months.

Cash flow from ops is heavily negative due to [drum roll please] AR! They sold assets for a net gain beyond capex. Borrowed $1.4 million.
stop following

UMCI (sec) Stock is at 6 cents.
They lost a big contract. It was 40% of the company's revenues for 2005 (16% for 2004). The auditors quit before that. They were already losing money or else barely squeaking by.
stop following

LVLT (sec) Ahh, Level 3. The Great Pumpkin.
The plan seems to be progressing as it should. They've seen bandwidth usage double in the last year across the Atlantic and they're adding bandwidth. I think I already covered their Q4 results which were disappointing.

AORGB (sec) Stock is around $56. They're going dark. This is the church organ company I looked at here.
10-K is out. Net income is $4.7 million on increased revenues of $80 million. $4.06 per diluted share. The stock is selling for about what it's worth. Good company, though.

APYM (sec) Stock is around 30 cents.
Q3 results: 35 million shares on Halloween 2005.
Assets are mostly investment in joint venture and "other receivable".
Very weak balance sheet. Huge net loss with almost no revenues (ramping up). Why was I following this?
stop following

ARKN (sec) Stock is around 70 cents. Everything is all screwed up and must be re-stated due to inadequate documentation about how interquarter allocation decisions are made (SOX type stuff).

AMNF (sec) Stock is around 61 cents. Went dark. Nothing new since July 2005. Last looked at it on Jan 8, 2006.

ARTNB (sec) Stock is around $31. Water works. 82K of stock options granted in Dec 2005.
Q3 results: About 4 million shares oustanding on Nov 4, 2005 (class A and B).
Assets are almost entirely the utility plant. About 1/4 equity.

Revenues are up slightly to $11.3 million. 28% operating margins. Interest charges are big. 15% net margins. 41 cents per diluted share for 3 months.

Huge depreciation almost as large as net income. Capex is 5 times higher than the already gigantic depreciation for this year and even more in the prior year! Lots of financing activity: borrowed $10 million to pay a $9 million line of credit. Got advances of $6.6 million for construction. Looks like a lot of expansion going on.

VSYS (sec) Stock is around 47 cents. Auditor resigned.
Q3 results: 16 million shares on Oct 17, 2005.
Assets are nearly all AR and inventory with some cash, intangibles, and PP&E. Current ratio is about 2. Roughly half equity.

Revenues up slightly. 56% gross margin. Almost zero operating margin due to SG&A. Asset changes ate up any cash flow.
stop following

USTG was USTI (sec, website) Went dark. No new financial statements. Wait and see.

SUWN (sec) Stock is around 75 cents. They have a forecast for 2006 and 2007. They expect to get revenues up to $14 to $20 million with net profit increasing to 16% (from 10%). That would mean net profit of about $2.4 million or something approaching 5 cents per share. They're predicting earnings in the range of 6 to 8 cents per share in 1-2 years. So perhaps the stock might end up worth a dollar. It's currently selling for 75 cents. Continue following it.

...and a German newspaper says they don't know what this means!

Sunday, February 19, 2006

cash flow three card monte, CF3CM

3 card monte is scam card trick involving 3 cards where after mixing the cards around the sucker is made to believe a queen is in one place when it's either not, or else they're fooled into thinking it's not.

Question: How many legs does a dog have if you count the tail as a leg.
Answer: Four, a tail isn't a leg.

Jack Ciesielski at the Accounting Observer ("AAO") Weblog posted this entry about an Atari restatement. He calls this phenomenon "cash flow arbitrage", although that term seems to be associated with GSEs like Fannie Mae and securitized debt obligations.

Jack links to Professor Charles Mulford's Financial Reporting and Analysis Lab which issued this report in 2004 about this phenomenon which led the SEC to crack down on the problem and the FRAL issued another report about it in 2005 (see below).

In cash flow three card monte (or "CF3CM"), a company sells something and instead of accepting a trade receivable, they accept a note receivable. But instead of associating the note receivable with operations, they shift it into investments. Then, when computing the cash flow statement, they place changes in this notes receivable account in cash flows from investing rather than cash flows from operations. That last step is the real trick.

The effect of this is to make it look like they received cash from the revenues and then turned around and invested that cash in a note receivable. Now that I think about it, I wonder if they ever try to get away with putting notes receivable with a duration of less than 3 months into the cash and cash equivalents account???

Apparently, companies had been doing this because SFAS 95 didn't specifically mention notes receivable.

The AAO weblog had an earlier article about floor plan financing falling into this category. I had seen a restatement of this type back when I was looking at HCAR. I didn't realize the significance at the time.

Categories to look for: long-term receivables, notes receivable, floor-plan notes, leases receivable, franchise receivables.

Note that lease receivables must fulfill any of these 4 criteria
  1. legal ownership of the asset transfers to the lessee at the end of the lease
  2. lease contains a bargain purchase option
  3. lease term is equal to or greater than 75% of the asset's estimated economic life
  4. present value of minimum lease payments is equal to or greater than 90% of the asset's fair market value
Three more mandatory criteria
  1. lessor can predict whether or not minimum lease payments will be collected
  2. additional costs to the lessor can be reasonably predicted
  3. the lessor's cost must be significantly greater than the fair market value of the asset (actually, the real criteria is the presence of a manufacturer/dealer profit from the deal)
Selling durable equipment in wholesale financing of a dealer's inventory: the report mentions that many of these have separate subsidiaries for financing. They mention Harley Davidson (HDI) which puts both wholesale and retail financing in the investing part of cash flows. When you look at the table of companies shown in the report and the effects of CF3CM on the cash flow statement, it's definitely material. In 2003, if GM had not done a CF3CM, their cash flows from operations would drop by more than 50%!

In the franchise receivables category, the examples in the report (7-Eleven, Applebees, Elmers, Emerging Vision, IHOP, Outback Steakhouse, Roma) didn't have as much of an impact on cash flows. It was still material.

What really impressed me about the Financial Reporting and Analysis Lab is that they went back after the companies they had identified were forced to restate their financials and determined how accurate their initial prediction was. But they didn't make it all that easy to see the accuracy.

First, they noted how huge the changes turned out to be. Catepillar went from providing $2.2 billion in 2003 to burning $5.6 billion in operations!!!

The difference between the predicted changes and the actual changes were large and varied. They were right on the money with Ford. They way overestimated the impact on GE. They greatly underestimated the impact on Harley Davidson. For Paccar, it looks like they had the years wrong. Textron was way off.

Saturday, February 18, 2006



1. What is this blog?

It's my own personal notes regarding investments and potential investments. I have a terrible memory and I find the blog format fits with what I'm doing.

Keep in mind this disclosure.

2. Is it associated with Pink Sheets® LLC

No, I use the Pink Sheets as an investor. They're a very old (1904) information services company that, in my opinion, is currently doing a lot of really great things lately. They're working hard to improve the quality and value of what they provide to issuers (i.e. public companies), broker/dealers, and investors.

2. Why make it public?

1) I find that helps me stay focused and honest

2) My hope is to be a source of "wholesale" investment information for people who deal with extremely small cap stocks

3) I may need to find a job at some time doing this stuff and having a public record might help

4) Other people might also do this and create a sort of mini-industry that creates improvement for all its members by "cooperative competition"

5) Hopefully people might notice mistakes that I'm making and point them out.

3. Can I recommend a stock to you?

4. Will you look at it?
Probably not. Sometimes if I've had too many beers, I'll take someone's stock recommendation and quickly check it out, but really, do you trust a drunk investor in a hurry?

5. Do you manage a fund of some sort?
No, but a lot of people I know buy/sell whatever I'm buying/selling.

6. Is this a pump-and-dump scheme?
Technically yes, although it's intended to be over a long time period and the stocks I pick are intended to actually be good investments. If I can accelerate the process of the stock reaching full price by emphasizing important publicly available information, then why not?

7. Do you have a problem with people stealing your ideas? What if they take your investment ideas and present them to a wider audience as their own?
That's really the whole intent here. Consider me a wholesaler.

8. Can I put a link to your blog on my blogroll?

Sure, why not. My intent is to get regular visitors from hedge funds, brokerages, and influential investors. I've been known to "whore" for certain investor trade publications (the examples are obvious) to get lots of traffic which might bring in one or two more of these types of regular visitors.

9. Why is there no advertising?

What's that saying, "whose bread I eat, his song I sing" or something like that? The key purpose of this blog is not to get a lot of traffic (despite what I just wrote above), it's to capture my notes and propagate good investment ideas. I'd rather minimize any motivation to simply increase the traffic for its own sake. Also, the gain that I'd get from cash is way more than offset by the impact on my target audience: I'll get maybe $20 and visitors overall might lose $100 in degraded quality. That cost would come back around to me somehow, perhaps losing good regular visitors.

So with that out of the way, here's the blog

Thursday, February 16, 2006

investment blogs to avoid ("pink sheets are crisp in June")

The Hunter of Stirling
The Hunter is always looking for investment opportunities and tips on how to the beat the market. He might even share his own tips from time to time.
So he writes two posts: one at five minutes till noon about shorting PFGC stock, then five minutes later, he writes a short blurb about golf, all of this on May 10 back in 2004. The stock dropped a bit after May 10, but not all that much.

Two days later, a real estate broker in Florida starts a blog that ends up with only half as many posts as The Hunter. It's amazing how many one-post blogs there are .

But the blog that really takes the prize is this one. Yes, because some teenage girl says "Pink sheets are crisp in June" and writes a few blog entries nearly 3 years ago, my blog ends up being pink-sheets and not pinksheets. Sigh.
we went to pizza hut after our game and i was so stuffed. i ate so much, it was delish. after my game i took a very long nap and woke up around 7 o'clock. then i chilled at brets with jt marisa and jordan. we watched the slam dunk/3 point contest.
You go, girl!

CXTI press release... and Q3 results

CXTI issued another press release.
has been awarded two e-government contracts respectively worth $679,000 and $664,000 for Jinjiang City and Dehua City, Fujian province to construct their 1st phase Unified Command System.
We sorta already knew about these. Even in the press release, they said that the Jinjiang City project started in December. My notes show 3 phases for Jinjiang City, all of them started before June 2005. So maybe this is new. The Dehua phase 1 started in 2004 and was slated to end in Aug 2006 (phase 2 should be done already). All of these projects are for far more money than the ones listed in the press release.

I suppose that this counts as a distress release.

However, I did discover something interesting. I closed out the investment around Nov 11, 2005 but then jumped back in not much later. In the meantime, CXTI issued their Q3 results on Nov 16, which I never looked at. Oops. I looked at the results today and I'm happy with them. Here's the highlights (vs Q2):

The current ratio is up to 4.4
Cash is way up to $5.8 million (from $3.8 million). This is important because they need cash for any new contracts.
AR is down to $3.5 million (from $6.1 million) That's a relief
Cost and estimated earnings in excess of billings is way up to $11 million (from $5.8 million)
Former officer paid down only a slight amount of their debt.
Prepayments are down to $3.4 million from $5 million.
Total assets increased to $27 million from $24 million.

Income taxes payable dropped to $857K (from $2.5 million).
Equity is up to $21.6 million (from $18.1 million).

Revenue is up by 9% (which doesn't mean all that much) to $9.03 million.
Gross margin is 45% (up from 43% in Q2 and 41% in Q3 of prior year)
SG&A jumped up to $1.2 million (from $298K), due to a commission of $624K paid to an independent consultant for sourcing an e-Government contract with Huian County in Fujian Province.
Income tax expense is down to $335K (from $658K)
Net income is $2.5 million (down slightly from $2.6 million)
Comprehensive income includes $422K benefit from foreign currency translations. Ahhhh, the icing on the cake (but that's for 9 months).

23.6 million shares outstanding on Sept 30, 2005.
3 month net income is 10.6 cents per diluted share.

Cash flow from ops is terrible (used $1.7 million) due to $11 million increase in costs and estimated earnings in excess of billings. We knew about this, that cash flow is late in the cycle on these projects, that adding big new projects would kill their cash flow, and it's why they raised all the money late last year, which the market hated, which allowed me to buy shares for 85 cents and sell them two weeks later for over $1.80. :-b

Incorrectly placed in the cash flows from investing is a repayment from director of $3 million (it should be in financing, I believe).

They issued 634K shares of stock for consulting services.

Costs and estimated earnings to date: $61.9 million
Billings: $50.6 million
remaining: the $11 million mentioned in cash flow

Company issued 1.06 million shares in July 2005 for compensation for consulting, causing $624K of recognized expense. The company cancelled 1.88 million shares.

Ongoing projects:


Tentative Commencement Date

Target Completion Date

Contract value

Outstanding contract value

Jinjiang (2nd Phase)

May 2005

August 2006

10 Million

5 Million

Jinjiang (3rd Phase)

May 2005

August 2006

13 Million


Dehua (1st Phase)

April 2004

August 2006

18 Million

0.35 Million

Dehua (2nd Phase)

January 2005

November 2005

12 Million

2.2 Million


August 2005

March 2007

14.5 Million

14.5 Million


January 2006

July 2008

17 Million

17 Million

Based on this, it looks like revenues will be about $10.4 million per quarter going forward (revenue in Q3 2005 was $9.03 million). They'll need to add projects as these wind down starting in Q3 of this year. But the good news is that they'll have lots of cash at that point to fund new projects.

UPDATE Feb 19, 2006: "ms" pointed out the Licheng announcement that I had forgotten to include in the above estimate of revenues. It's in Fujian province, starts Nov 2006, revenues are expected at $35 million total, and lasts 3 years.

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