Pink Sheets

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

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.

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.

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...


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.

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.

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!!!

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.



Starting with a balance sheet like this:

Assets

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.

Assets
cash                **********
AR                  ***************
inventories         ************
Current Assets      *************************************

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

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

Liabilities
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.



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.



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

Operations
net income        ***
depreciation         *
increase in AR      --

Investing
capex             ---
acquisition          ----------

Finance
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.

EPLN (sec, website)

2005 10-K
Q3
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.

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


Notes:
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)

EPLN (sec, website)

10-K
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:
$45K
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    ********

Liabilities
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                                         +++

Investing
capex               ----
life insur policy       --

Financing
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

2005
US: 84% of revenues
Asia: 13% of revenues
Europe: 5% of revenues

2004
US: 90% of revenues
Asia: 6% of revenues
Europe: 4% of revenues

Max lease obligation per year is $97K.

This is just a quick look at KEYN, so I could easily miss something.
yahoo sec
Q1
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 1
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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
Enough!
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.

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.

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?

Yes.

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

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 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):


BALANCE SHEET:
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).


INCOME STATEMENT:
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 STATEMENT:
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).


NOTES:
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:

Project	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	8.6Million
Dehua (1st Phase)	April 2004	August 2006	18 Million	0.35 Million
Dehua (2nd Phase)	January 2005	November 2005	12 Million	2.2 Million
Nan’an	August 2005	March 2007	14.5 Million	14.5 Million
Huian	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.

Strathmore issued a press release saying they are...

...pleased to update shareholders that the permit application process on its Church Rock uranium property is progressing on schedule and under budget.

Strathmore's Church Rock property comprises two sections of unpatented mining claims on land owned by the United States Federal Government. It is administered by the Federal Bureau of Land Management. The property is located south of the Navajo Reservation boundary. The land does not constitute a dependent Indian community, under either U.S.C. 1151 or by the test case outlined in the United States Supreme Court decision of "Alaska vs Native Village of Venetie Tribal Government," 522 U.S. 520 (1998).

Strathmore's Church Rock property is located adjacent to HRI's proposed Crownpoint uranium extraction project. In January 2006, the Atomic Safety and Licensing Board (ASLB) concurred with the Federal Environmental Impact Statement, further demonstrating that HRI's proposed uranium extraction operations are within regulatory limits and do not pose a health and safety hazard. This significant decision has positive implications for Strathmore's Church Rock permit application.

Strathmore continues to be committed to a coordinated development process that will work closely with all levels of government, regulatory agencies and the public as we proceed with our mine development plans. Strathmore currently plans to develop its mineral resource at Church Rock using environmentally friendly in-situ extraction, or sodium bicarbonate solution mining, techniques that have been globally proven over the past three decades to minimize impacts to human health and the environment.

So they plan to poison the noble Native American land with baking soda! If you're not familiar with in-situ mining techniques, it's really interesting stuff. Very environmentally friendly compared to the alternatives.

UPDATE same day:
Pat pointed out to me that this is a really just a distress release. He's correct.

chart, yahoo headlines, sec
I've been invested in CVU since late March 2005. It was a ValueInvestorsClub writeup. It's listed on AMEX. My cost basis is slightly below (UPDATE: way below) where it's selling right now. I don't expect to do a big writeup on it here.

Q4 2005 Results
director resigns
meaningless attaboy, June 28, 2006
CVU gets some business
CVU snags another win, Sept 14, 2006
C-5 contract addition, Sept 2, 2006
more business, Sept 27, 2006
CVU is on a roll, Oct 4, 2006
Q4 results, March 29, 2007
2007 10-K, March 29, 2008 (yeah, it's been a year since it posted details about this stock)

LiveWorld released their Q4 and full year results today. The LVWD entry on the sidebar is gone. It's no longer an investment.

Back in Q3, I had said:

Here's the important part: they hit a brick wall in terms of revenues. They sort-of hit the wall last quarter, but at that point, it wasn't clear enough. Now it's right there. Brick wall. Why, it's not entirely clear, but they claim the earnings are down due to working on a new product which could make sense. Normally this would be capitalized and amortized over time and show up as a shift in assets on the balance sheet.... With a small team, a new product development could be taking focus away from growth in the current market segment (just letting it run on autopilot). I don't know.

At that time, I had dumped "about a third of my investment" and I was surprised to not take a loss. I had sold the last of my stock today (along with some earlier) and was going to take LVWD off the list of current investments. The reason: unhappiness with google searches lately as well as finding another investment that will show up here soon.

In Q3 they had really hit the wall. In Q4, they were sliding down the side of the wall. Comparing Q4 to Q3:

Revenues were down about 1.6%. Net income was also down slightly. Fully diluted share count is 46.98 million, up slightly from 46.88 million. Net profit for the full year was $1.26 million or about 2.68 cents per fully diluted share, so it's selling for about a P/E of 15 at 40 cents.

As far as management goes, they've been honest and up-front about everything. I have no complaints.

Nationmaster.com has an oustanding database of information for countries of the world. I have no idea about the accuracy of it, but let's see what the data tells us...

economic freedom is mostly where you'd expect. But spendthrift governments are topped by Palistinians, the various tiny colonies that live on a rock in the middle of the ocean, and the socialist countries.

Most of our imports are from Canada. But China has surpassed Japan (and maybe even Mexico by now).

If you compare GDP per capita at different times, it tells quite a story. 1820, 1900, 1950, 1973, 2005. US not shown is #2 with 40,100. #1 Luxembourg is sometimes called a very large bank with its own airport.

But a better economic measure is purchasing power, like the average number of hours worked to buy a TV, or a chicken.

Someone was saying recently how the informal economy of a country is not very productive, but pays no taxes. So when the tax rate and reglations of a country are very high, the cost differential between formal and informal businesses causes the much more highly productive formal businesses to never get a foothold. Thus, the country remains unproductive and the economy never takes off.

Brits and their offshoots like amphetimines, while the Irish and Germans like their beer, and the Australians and New Zealanders smoke pot. Scandanavians drink coffee, Western Europeans drink bottled water, but of course Italians and French like wine. English like tea, and Americans just like Coke and Pepsi. All of Western Europe drinks a lot of alcohol.

Russia is by far the abortion capital of the world, followed distantly by the US, India, Japan, and Western Europe. People in the US die from car crashes and teenage girls get pregnant 10 times more often than in Japan.

The Americans and Irish are proud of their nationality. The Japanese and Germans are not (along with a lot of Western Europe). But when you look at the politically far right, the the right wing conspiracy is in Vietnam, Bangladesh, Mexico, etc. The far left are in Africa and Israel. Scanidavians don't trust people. In Western Europe they demonstrate a lot. But it's the Americans/Australians/English/Swedes who sign petitions. And the Australians/Americans join charities and the Americans are active in political parties. Of course the top four countries that are willing to fight for their country are in Europe.. ok, Scandanavia. I can just imagine the Swedish chef on the battlefield. The French are delusional.

What kind of neighbors do people dislike? Americans/Irish/Japanese don't like criminals but the French and Swiss like them. Japanese and Americans especially don't like drug addicts. The French and Swiss do. The Japanese especially don't like emotionally unstable people. The French and Swiss do. Who hates immigrants? Belgium, Austria, Japan, Norway, and finally we found someone the French don't like. And who are the racists? Belgium, Finland, Italy, Japan, Norway, and... France! And the Swiss don't like people with AIDS. The Japanese really don't like homosexuals. But then neither does Austria or Italy. The Japanese also don't like political extremists.

So if you're an emotionally unstable, homosexual, political extremist, drug addict, don't move to Japan. But smoking is ok.

Indians and Americans attend movies, but only Indians read newspapers. Chinese watch television and have cellphones, but Russia has more broadcast TV stations. Public funding of TV broadcasting is mostly in the "nanny states"

More than 1/3 of the adults in Botswana have AIDS.

Americans [not shown anymore] are fat (Japanese are not, except maybe sumo wrestlers).

Surprise, the most murderous country is Colombia. And also South Africa. But Jamaica? The US isn't shown, but would be #2 with 0.4. And, yes of course we believe you, Saudi Arabia, with zero. Life expectancy is no surprise: Only the sub-saharan Africans and Afghanistanis die young.

When it comes to happiness, I think Venezuela and Nigeria are lying. Eastern Europe is the unhappiness capital. They have the suicides to back it up. But Western Europe wasn't very happy either.

New citizenships are overwhelmingly in the US, but Canada accepts the largest percentage.
Total tax per single worker shows the "nanny states" which typically overtax their poor people who end up with the least choices. Of course the really poor countries are the screwed up places of the world. And then there's corruption.
The percentage of 20 year olds in college shows us where the educated people will be in the future (why Greece?) vs where they are now.

Where the catholics are and catholic density is no surprise, especially in China where they really try to stamp it out.
Church attendence puts Nigeria as #1, which doesn't surprise me all that much. The US and Ireland are confident in their churches.
The Jews are mostly in the US and Israel. The Chinese (outside of China) are all over Southeast Asia and the US/Canda.
See where the kids are Gaza strip is like Lord of the Flies. Subsaharan Africa has a lot of kids because the adults die off.
The Japanese are confident in the press. The US numbers may seem high, but this was in the 1990s.

Misc:
age of first marriage for women
divorce rate birth rate death rate
percent rural population
armed forces personnel
arms imports
weapons
military expenditures, percentage of GDP (check out North Korea)

...and Iraq has a lot of oil. If they were to use the oil revenue to bootstrap their economy, given the huge number of educated professionals in the country, they could become an economic powerhouse. Here's a suggestion: use the money to create a tax rate of zero and bake that into the constitution (taxes shall remain at zero until the oil runs out). No taxes for anyone, including businesses. If this were adopted along with strong rule of law, strong property rights, and the necessary amount of regulation to ensure a fair playing field, they could become a gigantic financial and industrial center, and a beacon to all the people suffering under two-bit dictatorships in the region.

UPDATE next day:
Now how about stupid data. If you look at child poverty, you'll see the US is very high on the list. I knew that was totally wrong, so I looked at the definition. It's defined as "the share of the children [in that country] living in the households with income below 50% of the national median."

Think about that for a second. By this definition, any child born into a family with income in the lower half of that country is automatically in poverty. So what they're saying is that only the richest half of the people in any country should be having children. They also assume that half the people in every country are poor regardless of whether you're in Luxembourg or Haiti. And, in my opinion, poverty has a lot more to do with behavior and habits than money.

In all the activity of investing, it's always good to remember the goal: making a lot of money. A guy named Kevin just started MarketMoneyLetter and gave a good introduction.

I believe in making money. That might sound silly, but many people don't care. They want to be "socially responsible" or they want to "“stick to what they know"”. That might work, but that'’s not for me. I like to extrapolate any opportunity I can from the market, and I find it's a lot harder when I limit myself to investing,” “trading, “options,” “growth,” or “value”. Instead, I believe all of these strategies have merit and are potentially profitable.

As far as "sticking to what you know" goes, I've found it very useful and often profitable to learn new things: when you run into something you don't know, take some time to learn it. For instance, when I was looking at investing in Washington Mutual years ago, I realized that I knew very little about banks. I read the book The Bank Director's Handbook which was a great overview of how a bank works and what can go wrong. I also spent a lot of time on the FDIC database. The knowledge I got has helped in understanding a lot more than just banks. The FDIC has a list of red flags for banks which is contained in the fraud section of their Manual of Examination Policies. I found that to be extremely helpful in understanding how fraud works (the tricks, the methods of hiding it, the ways in which it shows). The fraud section of The Bank Director's Handbook is a great companion to this.

If I hadn't stopped and taken the time to attempt to expand my circle of competence, I never would have learned that stuff.

But anyway, it's easy to lose sight of the goal of making money. I see a lot of people on the Berkshire board on Motley Fool who seem more interested in being associated with Berkshire and with clinging to dogma than with making money.

Let me just explain something about what's wrong with dogma. The way I understand this is via the game of Go (which provides me with a lot of knowledge that I find very difficult to translate into language). People who study the game often study joseki, which are standard sequences of moves in very small parts of the board. The funny thing is that joseki involve standard moves by both competing players and they are considered the best possible moves in the absence of anything else happening on the board. Sometimes you'll find players getting angry because their opponent doesn't follow the joseki sequence, which by itself is pretty humorous. But studying joseki is fairly useless unless you study why those are the optimum moves. If someone plays a non-joseki move, you should know why that move is bad and how to take advantage of it. But in reality, there are often situations on other parts of the board which make the joseki move bad. People who simply memorize joseki moves are essentially practicing dogma.

And in the real world, dogma is bad for the same reason. Without being able to derive why a particular behavior leads to making less money, you aren't able to recognize situations where the dogma is flat wrong. And it often is wrong. I'm very enthusiastic about game theory and how it will improve the world in the future. The reason is that it essentially derives the reasons why what we think of as common sense is more effective than what we think of as, well, stupidity. As I put in my Motley Fool profile quote, I expect game theory to eventually prove the validity of the behavior of successful cultures and show the self-defeating nature of the behavior of unsuccessful cultures. And all the re-distribution of wealth and power won't change that.

So I welcome a fellow investor who is interested in making money into the blogosphere. I argue that we make money when we're making the market more efficient: either softening the highs and lows or making prices reach value faster. That's good for the markets and good for the economy. So let's go out there and make a lot of money and not feel bad about it.

revisiting companies 1
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DYHP (sec) Stock is down to 48 cents (from 70 cents). Q3 results: They're sitting on derivatives (a liability on the balance sheet). Revenues jumped into gear vs 2004, but are down from Q2. Less than 10% gross margins. Negative cash flow from ops, losing money and would have been losing more if not for the decrease in the derivatives.
stop following

DTGLF (sec) Stock is down to 17 cents. Assets are goodwill, AR, PP&E, and inventories. Balance sheet is fair. Losing money, large fixed expenses. Negative cash flow from ops.
stop following

FAME (sec website) Stock is at $4.70. They sell flame-retardant coatings and sealants. Flamemaster. They went dark. Most recent SEC results are for Q1 2005. Their website has full year results: For the year ending Sept 30, 2005, revenues and earnings are up over prior year. They apparently earned 51 cents diluted for the year. Prior year was 43 cents.

CITY (sec website) Stock is about the same at $1.85. Going dark. Q3 financial report. AR increased. Current ratio still strong at 2. Way too leveraged. Operating margin 4.2%. Gain from discontinued operations. I'd put normal diluted earnings for Q3 at around 9 cents. Nine month earnings are about 18 cents. Let's say full year earnings might be 25 cents. At a P/E of 15, the stock would be $3.75. Cash flow looks good. Normal operating free cash flow is above net income.
stop following

BGII (website)
Looking at the Q3 results, lots more cash on the balance sheet. Very good current ratio. Earned 3 cents diluted in Q3. Free cash flow is way above earnings. The problem is that they're no longer a reporting company and they've chosen not to have audited results.
stop following

GACF (sec) Stock is at $1.53. They dismissed the auditor and hired another. They're in the airplane repair business. Balance sheet is fair. Operational margins are 22%. Net margin is 4%. They [really] earned 1.5 cents per diluted share in Q3 but the share count has grown quite a bit. Cash flow from ops is crappy due to inventories and a non-cash gain from renegotiation (the 1.5 cents per share doesn't include it). So perhaps the stock is worth 90 cents.

GBEL (sec) Stuggling recycle business has too much SG&A costs to support it. Loses money too often.
stop following

GARM (sec) Stock is under 4 cents. They spun-off Scrap China. Q3: Not much equity, but the balance sheet isn't all that bad. Horrible margins.
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DAAT (sec) In this press release, they announce an annual 45% increase in sales, but with some bad news about re-orders from Wal*Mart due to a glitch. This is the gun cleaning kit business. Praetorian Capital Management bought more shares and now owns 11% of the stock.

Q3 results: Balance sheet is a bit ugly with too much inventory.

9 Months: Sales were up 51% at this time. Gross profit up 41%. Operating income up 61%. Net income up 27% to 10 cents a diluted share. 3 month net income was 5 cents.

Cash flow from ops was terrible due to inventories (for both 3 and 9 months).

Stock isn't cheap.

DAOU (sec) Merged into Proxicom, Inc.
stop following

DDSI (sec) I had flagged it as no good before and Q3 is no better.
stop following

DEWY (sec) Stock is up to $4.75. Strong balance sheet. Revenues down slightly. Cost of revenues up slightly. Operating loss. Net loss. Last year's Q3 was earning 4 cents, now they're losing 4 cents. Cash flow from ops is worse due to AP. No definitive reason (lower production efforts towards various orders for replacement parts, also less profitable product mix). The backlog is down quite a bit.

They were in the process of selling 68 unused acres of seemingly industrial land near an Interstate exchange in Bergen, NJ. This fell through. They'll continue to look for a buyer.

Government defense generator orders have declined (the US Army has enough of them and so purchasing is slowing down to replacement rates). There's also a competitor with a quieter and larger generator, but it is largely in another market. Other stuff increased, but not enough. They have some R&D contracts from 2003 and 2004.

Overall, it seems like somewhat of a hard scrabble business.

DFNS (sec) Stock is largely unchaged at 37 cents. Body armor, car armor, etc. They have a prospectus out for 3.9 million shares. Q3: Balance sheet is ok, but lots of AR and inventories. About half equity. Revenues way down over prior year. Profit down to only 1/3. Operating loss for the quarter. Cash flow from ops is good, but huge capex wipes it all out.

The recently discovered problems with Zylon based bullet proof vests are probably beneficial to DFNS since they don't use it. But their sales dropped along with general industry declines.

Revenues:          2005     2004
Civilian           $907K    $655K
Israeli military   $580K    $359K
Export military    $505K    $2,167K

The export military revenues going forward are difficult to predict. Gross margins are likely to drop even more due to raw material costs going up.

The company had some operations in Gaza that were abandoned. Cost was $217K. They will probably be reimbursed (would be a gain). No doubt, the honest and hard working Palistinians will make productive use of the building for creating great economic wealth. Jimmy Carter said so.

25 million shares on Nov 14, 2005. Another 1.8 million shares are waiting to be distributed. It's difficult to value the business right now.

DNII (sec) Stock's last sale was 5 shares for a penny. The company went dark in March 2005. Can't seem to find the company (the correct one, at least).
stop following

DSCI (sec) Stock is up to about 60 cents. Bandages, wound closure, fasteners, skin care. They accelerated the vesting of stock options to avoid having to expense them, and they even admit it blatantly.

Q3:
Assets are mostly inventories and PP&E. Current ratio is 2. About 2/3 equity.

35% gross margins. Slightly positive operating margins (but improved over losses). Cash flow is about 11% of revenues due to huge provisions for bad debt and rebates. Also a large decline in inventories. Low capex. Paid off some debt.

12.3 million shares on Sept 30, 2005. Without looking closely, seems like about 6 million options and warrants to be fully diluted, so assume 18 million fully diluted shares for now. A rough guess is that the stock is selling at full value.

DYNR The stock last traded in Nov 2005 at around 24 cents. Gold mining stock. No SEC filings since 2000. Last audited results were 2001. They registered with the SEC (here and here) in April and May of 2000. But when the SEC told them they needed to file additional audited disclosures, they withdrew their registration. Seems a bit too suspicious, especially for a mine ("hole in the ground owned by a liar"). But let's look at what they've got just out of curiousity.

Their website has annual financials.

2004: Balance sheet is very strong. $368K PP&E, with $100K depreciation. Gross margins are over 50%. Net margins are 33%. Revenues $2.2 million. Net income $726K. 6.8 million shares on Dec 31, 2004 (typo in document). 983K options and 80K warrants. 7.88 million totally diluted shares. 2004 net income is 9.2 cents totally diluted.

2004 equity per totally diluted share: 79 cents
2004 net cash + AR + inventory per totally diluted share: 14 cents (all inventory was sold off in Q1 2005)

2003: Net income was only $69K
2002: Net loss of $407K
2001: Net loss of $305K

This post in memory of Wu Xianghu of Taizhou, China

Strathmore Minerals issued a press release which announces

...that the Company has completed the staking of 249 lode mining claims in the Powder River Basin, of northeastern Wyoming. The Powder River Basin is home to two "in-situ leach" uranium extraction facilities and other known occurrences that may be amenable to recovery by ISL.... The Company now controls over 12,000 acres (450 mining claims and 5 State Mineral Leases) of lands in this area of the Powder River Basin. The properties are underlain with known and potential uranium mineralization consisting of tens of miles of uranium roll-front deposits which may be amenable to the "in-situ" leach (ISL) uranium recovery method.

They previously had 3,200 acres in the Powder River basin. The claims they already had were next to both Cameco and Cogema's properties. These new properties are contiguous or nearby the existing properties.

This announcement does not have any measurable impact on my estimate of extractable pounds per share of U3O8. I had guessed half a million pounds at Powder River. I suppose I might increase that to 1 or even 1.5 million pounds. With my estimate of 70 million totally diluted shares (I should revisit that estimate again), an extra million pounds is down in the noise.

Some organization trying to hype the stock issued this press release.

Strathmore Minerals (TSX: STM; Other OTC: STHJF) President David Miller told StockInterview's Market Outlook, "The President's timing for expanding the U.S. nuclear energy program could spurn spot world uranium prices to record highs." Miller was referring to U.S. President George W. Bush's State of the Union Address on Tuesday evening in which it has been widely reported Bush will focus on expanding his country's nuclear energy program to reduce dependence upon foreign oil. Miller added, "World inventories are at a 20-year low with a possible deficit in 2006 of 70 million pounds of uranium oxide. Demand is outstripping supply nearly two to one."

Apparently, there's a lot of talk about a takeover of Strathmore. I'm totally against it as it would force shareholders to exit the stock at a price that I'd consider too low.

Journal editor, James Finch, reported, "Mr. Randhawa told the Mergers & Acquisitions Report he would consider a sale of the company's U.S. assets if the price was right. Strathmore's CEO, who is also chairman of the board and founder of the uranium company, confirmed there was outside interest in his company, which led to hiring National Bank Financial." In the report, Randhawa said, "I thought we needed to have the best advisors in the industry help us evaluate the alternatives available to us."

We'd better be talking about a lot of money for the US properties. The newsletter thing they link to has some interesting stuff in it. The Feb 6, 2006 entry talks about how the 2005 spot price jump was largely due to speculators and that the price could level off [fine with me]. I'd have to agree that speculators have a lot to do with the fast jump.

The Feb 2, 2006 entry has some stuff from David Miller, Strathmore's president who

...told a Dow Jones reporter that the possible reprocessing of spent nuclear fuel won’t tame the spot uranium market. Miller said the market was “going nuts” and forecast in the published wire service report that he expected the spot uranium price to double again over the next 18 months.

Later the newsletter mentions talk about studies that show that uranium could go as high as $500 per pound before the cost becomes prohibitive and kills the cost of nuclear power. In other words, the demand is pretty much inelastic up to that point. This tells us nothing about whether the price would actually go that high. It just looks at what might be a very high upper bound.

Yet people are talking about a buyout price of only CANADIAN$4.29 for Strathmore. That seems too low.

If uranium oxide doubled in price to $75, Strathmore stock would be worth a great deal of money, perhaps $50/share. Would it sell for that much? I have no idea.

This week, however, uranium oxide spot prices remained at $37.50, the same as last week. The news is more of the same stuff about expanding demand.

The U. S. Dept of Energy had a release this past week. It covers 7 important points.

1. Building of a new generation of nuclear power plants in the United States. [possibly pebblebed, but there are apparently other new and much safer methods as well]
   
2. Developing and deploying new nuclear recycling technologies.
3. Working to effectively manage and eventually store spent nuclear fuel in the United States.
4. Designing Advance Burner Reactors that would produce energy from recycled nuclear fuel.
5. Establishing a fuel services program that would allow developing nations to acquire and use nuclear energy economically while minimizing the risk of nuclear proliferation.
6. Developing and constructing small scale reactors designed for the needs of developing countries.
7. Improving nuclear safeguards to enhance the proliferation-resistance and safety of expanded nuclear power.

The Moscow Times reports that Sergei Kiriyenko, head of the Federal Atomic Energy Agency, claims that Russia needs 40 new nuclear reactors. Starting in 2012, they need to build 2 reactors per year in order to meet Russia's goals.

G&A went up 30%! due to officer salaries and an employment agreement in the 10-K
Why do they have loans at prime plus 6% and nothing on the prime plus 1%?? (it got fixed)
CEO owns 56.5% of the stock
Father/Son related party on the board (after hearing the son speak about the business, I'm less concerned)
Richard Maglio resigned from the board (this is a big red flag)
They fired two auditors in a fairly short time (one was late with info, don't know about the other)

Philip Luizzo owns 56.53% of the shares, all executives and directors own 57.1%. In the last 10-K, Interwest Transfer Agency owned 36.28% of the shares. This represents 93.38% of the shares. So the float is only 444K shares which represents $222K. Richard Maglio owns 63K shares, so that total drops to $190K. (this is more than a red flag, it's a major limitation)



The share count has been steady at 6.7 million shares for years. The company did a registration for 280K options back in 2002 (after the original stock plan expired), but that never seemed to amount to anything. The board terminated the stock purchase plan (for details of all this, see the 10-K for 2002, Item 10) after only 67K shares were issued (these are counted in the 6.7 million) bringing in only about 8 cents per share (see 10-K for 2003)! For valuation, I'm going to use 6.8 million shares.

The company basically breaks even, at best, during Q4 of each year. The number of employees has been steadily dropping and recurring SG&A is also dropping (although I expected it to drop more than it did).

Ok, so the real issue here is how much profit the CEO (who has controlling interest) will allow to flow through to shareholders. It doesn't look good. The guy gives himself a $125K bonus when the total profits of the company are around $330K, plus he cranks his salary up by over $100K. The CEO holding controlling interest would be a showstopper in China or somewhere like that. I didn't consider it a showstopper until I got all the way through the process and took a step back. I think the best thing the CEO could do for the company would be to sell about 1/3 of his shares.

In my opinion, the company is likely to earn roughly $375K per year going forward, with that number increasing at some reasonable rate each year. Without the excessive compensation to the CEO, I'd say the stock would be worth about 83 cents per share. The best ask is at 49 cents.

But I think it's very likely that a large portion of the future increases in profits will somehow end up directly in the CEO's pocket without going to all the shareholders.

So I have to say "no" to this as an investment.

Intelius
FAQ
A national criminal check costs $50.
A background check provides

• criminal check
• bankruptcies
• small claims
• property info
• neighbors
• tax liens
• judgements
• licenses
• 20 year address history
• mortgage
• and "much more!"

They offer an employee screening service. Overall, it doesn't look as good as AccuFacts.

SentryLink
They do a national criminal background check for $20. For $5, they'll throw in an SSN trace.
They have a $12 employment screen.

VerifiedPerson
They have a healthcare specific employee screener.

ESR Check.com
They charge $100 to $150 for the full package.

Informus.com
Their a la carte menu shows the same kind of stuff at the same kind of higher-end prices.

Choice Point is a public company (CPS NYSE) sec, but they also offer home and auto insurance data services and vital records stuff, but it's close enough. Business services is 40% of revenues, but they're discontinuing some of it: sale of info with social security and driver's license numbers apparently due to a fraud problem (Sept 2004 in LA, Nigerian citizen [figures] faked accounts and got customer info). Their 10-K (also here) shows they're a real serial acquirer. Their operating margins are 26%, up from 23% in 2003, 25% in 2002, 17% in 2001, and less in 2000.

InfoLinkScreening
They have their own security expert, Barry Nadell. They don't list prices, which is not surprising.

American Data Bank.com
They don't seem so great.

EasyBackgrounds.com
They have an a la carte menu with normal prices.

Yahoo has a list of them. A LOT of them.

After going through these websites, I went into the AccuFacts website. I'd say it compares favorably.



You can hear the CEO here from 2004 [last name is pronounced lou-WEE-zoh]. 24-48 hour turnaround. The Maglio acquisition was mainly to expand their services outside of just criminal records and SSN data (existing NY business) and into employment and education verification. In 1999, they revamped everything to tie both computer systems together (SQL and Oracle). Allowed them to shrink the employees from 70 down to about 40 (it's now only 18). Now there are various resellers who resell AccuFacts' information. AccuFacts gives them the technology to go out and sell with their own brand names (this is great!).

They plan to enter into psychological exams, automated educational employment info (allowing AccuFacts to upload information and being a data warehouse), exit interviews (why employees are leaving), using MS Outlook add-on to work with employment hiring websites, possibly doing the employment check and working directly with the applicant so they can walk into a business with a verified/certified background check already done.

They're looking at 10% to 15% growth rates per year in this new stuff.

I have to say that this guy is talking about things that make a lot of sense. He's talking about the big picture correctly, in my view.



I always think it's funny to find stuff like this: developers going on the web for help when working on a project in the company I'm looking at. This was back in 1997.

Anthony J. Luizzo
This guy is the real driving force behind this company. His son is now the CEO and that could work out fine because the requirements for running a business are not as severe as for creating one.

Anothony offers continuing education classes at The College of Staten Island: "Security is a State of Mind: Personal Safety Awareness" (6 sessions) and "Identity Theft: Fantasy, Fiction, and Facts" (one session). Both of these seem very interesting and I might even go there for the one session class. (also listed here)

On that same site, we see that Anthony is Co-President of the New York 10-13 Association, Brooklyn and Staten Island, Inc. along with Harold Carlin (who's listed as one of the Knights of Pythias and was part of a police union action to stop the parole of a cop killer back in 2004). Also Academic Advisor.

Anthony is CEO of L.C. Consultants with services of deposition review, trial preparation site, inspections, expert testimony.

Dr. Anthony J. Luizzo, Ph.D., CFE, CST has over 38 years of law enforcement and corporate security management experience and often testifies in litigation involving premises liability and related security / safety management and deficient background screening litigation.

He's also active as a guest lecturer.

Here's an article Anthony wrote in The CPA Journal Online. This is relevant to the investing work I do! It talks about SAS 53 and the auditor's responsibility to detect and report errors and irregularities. I added it to my reading list.

Some various other links here and here and here and here and so forth.

“You should guard your social security and date of birth information with your life,” (said Anthony J. Luizzo, a retired . New York Police Department detective, who teaches security and identity theft courses at the College of Staten Island.

You can see a picture of Dr. Luizzo here on the extreme right. Like they say, a picture is worth a thousand words.

Here's a link where Anthony J. Luizzo along with Frank A. Luizzo and Philip F. Luizzo (who is now CEO) offered a security seminar for casino management back in 1996. Here's the article on Amazon.

Another Amazon article, 8 pages: Investigating in a new environment
Another Amazon article, 7 pages: Delving deeper to decypher fraud

A blog entry which links to one of the things I mentioned above.


Philip Luizzo
He wrote an article with his father, Anthony, in 1999 here which is typical for a business: write up educational articles to demonstrate credibility.

Here's a quote in Hotel Interactive (yeah, it's really just a glorified press release).

“In a hotel atmosphere, management is always looking for the guest to return and stay away from the competition. If a guest has a bad experience, they will tell 10 people,” said Philip Luizzo, Chairman and CEO of Accufacts. “If anything is missing from the room, even if it is $5 on the counter, that guest will leave the hotel and tell people of even the slightest misstep.”

The director of security at the Plaza Hotel has some quotes that interleave. He's apparently a customer of Accufacts.

Luizzo said that Accufacts can uncover felony, misdemeanor, and traffic offenses because of their ability to obtain records in every county (about 3,000) in the United States and as well as detecting if the applicant is really who they claim to be. Further, most reports can be turned around in 24 to 48 hours, so it doesn’t bog down the hiring process.

“Most of our clients have a 7% to 10% hit ratio on all applicants. That means when looking at an applicant pool across the board, seven to 10 out of a 100 will have problems. They could have otherwise been hired,” said Luizzo.

Lastly, Accufacts will help to design policies for corporations and has helped HR directors negotiate the legalities of this process to make sure every search that’s done is legitimate.

“We educate our clients and help them design a policy and application to ensure the necessary releases are included,” Luizzo said.

Apparently, Philip Luizzo spun off on the front stretch at the Smyna NASCAR speedway. Oops, wrong guy. :-)


John Svedese

Didn't find anything of any substance.


Richard Maglio
This is the Maglio, Inc that was merged with Accufacts, no? This site shows it has the same address as Accufacts. It might be that Maglio, Inc was re-created. That would explain the $5,313 non-competition 3-year covenant listed in the 10-K for 2004 and 10-K for 2003.

This article on Recruiter.com talks about red flags and the "Chainsaw Al" situation at Sunbeam (note, the book about Chainsaw Al is in my reading list). Al Dunlap was fired twice before joining Sunbeam. But that's really not applicable because he was a CEO star at that point.

Richard Maglio, the Vice-President and COO of Accufacts, a background checking service says, "To me it's beyond the liability. It's a reflection on my business as a recruiter in terms of serving and maintaining a client. I would be mortified if I provided a candidate who I had screened in the mind of my client and then have that individual turn out to have falsified information. I would assume that my client relationship would be over."

The article has not date on it.

Maglio, Inc has some IP addresses
208.6.222.192 - 208.6.222.223 MAGLIO INC. (NETBLK-MGCN-MAGLIO-1 )

There's also NetList, Inc. with a contact name of Rocco Maglio located in Spring Hill, Florida.



Another big question is stock options outstanding. This SEC filing from 2002 shows 280K shares offered for consulting to James E. Patterson as stock options with half having strike price of 35 cents and half at 50 cents. This was covered in the 10-K for 2002.

They also registered for a stock purchase plan for 200K shares at 18 cents. This was also covered by the 10-K for 2002 above.

James Patterson (shown above) was a director of the company in 2001. He owned 2.1% of the stock via the 140K options.

Mr. Patterson has over 25 years of experience as a management consultant. He is President and CEO of Vector Gp., an international consulting firm since 1997. He has served as a Director of Applied Management Corporation and is Chairman of the Board of the Theater at Holy Cross, a non-profit New York City theater organization specializing on new artists. He holds B.S and M.S. degrees in Economics and has earned Ph.D. credits in Economics.

A lot of this was covered when I looked at the 10-K.

2004: Tedder James Worder & Assoc.
2003: same
2002: same, but the text notes a change in goodwill accounting (which occured around that time)

On Dec 8, 2000, they changed auditors from Marcum & Kliegman and switched to Meeks, Dorman and Co which then merged with Cuthill & Eddy LLP. I'm sure this late filing notice had something to do with AccuFact's displeasure. It's for the period ending June 30, 2000.

Registrant was delayed in filing this report due to a delay in receiving
information from the Compan's [sic] outside accountants.

Marcum & Kliegman gave AccuFacts an unqualified audit opinion for 1999. But even that 10-K was late.

In October 1999, the Registrant acquired all of the operating assets of
Maglio, Inc., a pre-employment screening services company based in Longwood, Florida, by merging Maglio, Inc. with and into Maglio-Accufacts Pre-Employment Screening, Inc., a Delaware corporation and wholly-owned subsidiary of the Registrant. As a result of the foregoing activities, the Registrant requires additional time to provide appropriate disclosures about the transaction in the financial statements as required by Registrant S-X and generally accepted accounted principles.

On July 17, 2002, they dismissed Cuthill & Eddy and hired Tedder etc. who had given them an unqualified opinion for 2001.

10-Q document for the period ending Sept 30, 2005.
Same address, still incorporated in Delaware
Exact same number of shares

Comparisons below are from Dec 31, 2005
Balance Sheet:
Cash increased by 22%
AR increased by 24%
Current Assets increased by 28%

Net PP&E decreased by 14%
Non-goodwill intangibles dropped almost in half
Total assets increased slightly

AP increased 10%
Accrued expenses doubled

The majority of the increase in accrued expense balances relates to the increase in the sales tax payable account of approximately $238,000 related to the accrual of the settlement and payment of a prior year sales tax liability that was negotiated and paid in October 2005.

Deferred taxes doubled

Current ratio decreased to 3.0 from 3.2
Net cash increased to $757K or 11 cents/share from $676K.
Equity increased to $1.89 million or 28 cents/share from $1.65 million.
Equity increased by $240K.
no off-balance sheet arrangements

Income Statement:
Revenue decreased by 2% for Q3 (increased slightly for 9 months)
Gross profit decreased by 17% for Q3 to a level expected by the company (decreased slightly for 9 months)
G&A doubled for Q3 (increased 40% for 9 months) This was due to a tax settlement* they mentioned in the 10-K as a subsequent event. I didn't capture it in my 10-K write up because I knew I'd catch it here.

The company had a $43K operating loss for Q3 (9 month operating profit cut in half)
Net loss $21K for Q3 (Net profit dropped to $240K from $423K for 9 months)

Cash Flow Statement:
3 month operating cash flow was $231K due to favorable asset/liability changes
3 month free cash flow was $220K

9 month operating cash flow was $331K which wasn't much more than net income plus depreciation
9 month free cash flow was $297K

There was pretty much no other cash activities.

They now have $0 on the overdraft line of credit (which has an interest rate of prime + 6%). There was also $0 on the $400K line of credit (with interest rate of prime + 1%). It expires May 31, 2006.

* Tax settlement details
From the 10-K subsequent events (Note 7).

During March 2005, the Company paid approximately $61,000 to the New York State Department of Taxation and Finance for settlement of their sales tax audit. The Company had originally accrued approximately $26,000 in a prior year, and as a result of the settlement, approximately $35,000 was charged to expense during the fourth quarter of 2004.

And this is from the 10-Q for Q3:

This increase is directly attributable to the settlement in the amount of $298,200 paid in October 2005 to the New York State Department of Taxation and Finance related to a sales tax audit of our Florida subsidiary. Absent this issue, general and administrative expenses have decreased for the quarter in comparison to the same period last year due to efficiencies realized in the financial reporting and administrative areas of the Company.

They also issued an 8-K about it.


I need to take a quick look at the Q2 2005 results.
The balance sheet looks ok.

Six month revenues were up very slightly. Gross profit was up more. G&A was also up slightly.
Six month operating income: $414K (vs $380K in prior year)
Six month net income was $261K or 3.88 cents/share (vs $234K in prior year)

Six month cash flow from ops was only $100K for 6 months, with capex of $23K. It was fine for 3 months, which means Q1 stunk in terms of cash from ops.

The only other significant cash flow item was a $7K of repayment on a capital lease obligation.

APES (sec website)

10-K: filed 3/31/05 for the period ending Dec 31, 2004.
Incorporated in Delaware in 1994, reverse merger into Southern Cargo Co. a public shell in 1998.
Offices in an unnamed city in Florida [Longwood]. Here's a map. On Microsoft's LiveLocal bird's eye view (which I can't link directly into), the office is within one of 4 fairly ugly office buildings (looking from both the north and from the south).
6.7 million shares on March 31, 2005. 700 holders of record.

In 1999, acquired all the operating assets of Maglio Inc. which is now a wholly owned subsidiary.

...is primarily engaged in researching and providing decision support information to our clients, generally Human Resources (HR) departments of corporations. These services typically include pre-employment background checks and screenings of new hire candidates and/or employees. The background information products and services currently provided by Accufacts include:

• Criminal history checks (32 states direct, and all 3,300 counties in the US)
  
• Credit reports (from one of the reporters, customized for employment)
  
• Social Security number verifications (deceased, aliases, maiden names, prior addresses)
  
• Driving record histories (via a 3rd party outside the company)
  
• Previous employer verifications (all or just the most recent 3)
  
• Education verifications
• Professional reference verifications
• Professional license verifications
• Federal criminal/civil searches
• Substance testing
• Exit interviews

850 clients. Revenues generated in all 50 states. Expanded international efforts in 2003 and 2004. No customer concentration of over 5% in the last 3 years.

Proprietary decision support software (free distribution) or online access to a 24/7 network. Price ranges from a few dollars to $75.

Network consists of PCs running Windows NT (yikes!) with SQL databases.

Company is subject to the Fair Credit Reporting Act (FCRA) as amended by the Consumer Credit Reporting Reform Act of 1996 and is regulated by the FTC.

Competition is fairly fragmented, often regional. APES is an intermediary for only 2 of it's products: credit reports and motor vehicles.

18 full-time employees. 2 in marketing, 1 in finance, 10 in data research, 1 in programming, 2 in customer service, 2 in management. No unions. 4K sq ft office.

No material lawsuits.

Operations:
Revenues were up 12% over 2003 due to ongoing business development but also due to higher billing levels from certain state court fee cost increases. Cost of services went up 9.4%. G&A went up 30%! due to officer salaries and an employment agreement. Also a $125K bonus to the president for meeting milestones.

$400K line of credit, matures May 1, 2005. Zero dollars outstanding. Interest rate is prime plus 1%, secured by all the assets and personally guaranteed by the president / controlling shareholder. Also overdraft protection of $22K with $3.4K outstanding, prime plus 6%, secured by all the assets. Why do they have loans at prime plus 6% and nothing on the prime plus 1%??

Philip Luizzo, 39, CEO, director since 1998. $300K salary, $125K bonus, $11K car allowance. Owns 56.5% of the stock.

Mr. Luizzo earned an undergraduate degree in finance from The University of Nevada, Las Vegas and has authored a number of articles on background screening for major magazines and professional journals including Security Management Magazine and The Internal Auditing Alert. Mr. Luizzo has lectured to numerous companies and professional organizations on aspects of conducting background investigations for prospective employees.

John C. Svedese, VP, director since 1998.

...has over 12 years experience as a senior investigative auditor for the New York City District Council of Carpenters. Mr. Svedese has been with Accufacts and its predecessor since 1994

Anthony J. Luizzo, 63, director since 1998.

has been an owner and principal employee of L.C. Consulting Group, Inc. for more than five years. Mr. Luizzo has over 35 years of law enforcement and security management experience as a former detective with the New York City Police Department and as a senior security administrator with the New York City Mayor's Office of Economic Development and Business Services and the NYC Health & Hospitals Corporation. Anthony Luizzo earned a graduate degree in criminology and undergraduate degree in security management from Pacific Western University and held adjunct faculty positions at John Jay College of Criminal Justice Studies and New York University. Mr. Luizzo is presently an adjunct faculty member at Long Island University. Mr. Luizzo is a certified fraud examiner, certified security trainer, certified police instructor, and a board certified forensic examiner. He has written over 25 articles addressing aspects of security and loss prevention management for a wide variety of magazines and professional trade journals including The CPA Journal, Security Management Magazine, The Journal of Health Care Protection Management, and The White Paper. He is the author of "Play it Safe," a retail fraud prevention brochure, and coauthor of Fraud Auditing: A Complete Guide, a workbook for accountants and auditors on conducting fraud audits and investigations published by the Foundation for Accounting Education [also Fraud Prevention Jackpot from 1996 and Delving Deeper to Decipher Fraud from 1994]. Mr. Luizzo has lectured on security management issues to corporations, municipal agencies and professional organizations nationwide. He has conducted over 5,000 security surveys for corporations, hospitals, commercial, institutional and residential complexes, and often testifies as a security expert in litigation involving deficient security. Mr. Luizzo is the President of the New York Chapter of Certified Fraud Examiners. He serves or has served on the Board of Directors of The Associated Licensed Detectives of New York State, The Society of Professional Investigators, and The Academy of Security Educators and Trainers.

Ok, so it's fairly clear what's going on here. Anthony Luizzo is the one who really drove this stuff. He's currently 63 years old, so I figure he'll probably have influence over the business for another 10 years or so. His son is the CEO.

On Dec 31, 2004, Richard Maglio resigned from the board according to this 8-K. In the prior year's 10-K, it shows:
Richard J. Maglio, 58

Richard J. Maglio, a Director of Maglio-Accufacts since October 1999, served as the President of Maglio, Inc., a business engaged in providing employment background screening services to client companies throughout the United States, since its inception in 1986 until it was merged into Maglio-Accufacts in October 1999. Previously, Mr. Maglio served as Vice President, Human Resources, for a major division of General Mills. He has served on numerous HR industry boards and is a member of the Board of Directors for the Central Chapter of the Society for Human Resources Management. Mr. Maglio earned an undergraduate degree in Human Resources Management from the University of Wisconsin-Oshkosh in 1968.

Audit fees were $33K in 2004. Additional fees (for tax work) was $3K. 2003 wasn't much different.

Auditors were Tedder James Worden & Assoc. in Orlando, FL.
Tedder has a reasonable background.
James is local royalty who returned to his homeland after the Arthur Anderson smackdown (this guy worked in their Houston office, but in taxes). He "enjoys hunting, fishing, running, working out, golf, and watching the Gators." Well, that's all I need to know.
Worden is a fairly young looking auditor from KPMG, pretty much a local guy.
Bob Morrison is another local guy with pretty good credentials.
Jim Lane is another local with lots of experience.
Charlie Puckett inherited a chocolate factory from... oh wait a second. He comes from various local accounting companies, including the latest one which had local government clients.
Jack Cadden seems to be a non-local and seems fairly impressive.
Robert Heidt is a local with reasonable credentials.
They have 81 "professionals" (presumably all or nearly all accountants).

Unqualified audit opinion. Audit covers 2004 and 2003.


Tedder James Worden also audited...

Aerosonic Corporation (AIM) sec
They replaced PriceWaterhouseCoopers in Dec 2003 which had a disagreement with AIM. Unqualified opinion in 2005 which seems justified. In 2004, they pointed out significant maturities of debt. Bravo!

Spectrum Sciences & Software Holdings Corp (SPSC) sec
Unqualified opinion in 2005. Balance sheet is ok, income statement is horrible, but it's because of a huge charge from stock options for consulting services that totally whacked the financial statements. It's a non-cash charge and doesn't affect the viability as a going concern. But it's good to see it stated rather than hidden somehow. They had to delay the 10-K.

Spectrum’s 2004 year-end cash, cash equivalents and short-term investments grew to $24,462,053 from $696,959 for year-end 2003. The company will also report that it is virtually debt-free, having paid down approximately $3,000,000 of various debts during the year. The Registrant further expects to report operating expenses of $40,564,140, a net operating loss of $40,618,033 and a net loss of $40,328,343 for the twelve month period ended December 31, 2004. The change in the results of operations is due primarily to the recording of non-cash consulting expenses in the amount of $32,944,900 related to the issuance of stock options to a non-employee stockholder and certain other expenses in the approximate amount of $4,853,947 incurred during fiscal 2004 which are anticipated to be non-recurring.

Nobility Homes (NOBH) sec
Like Aerosonic, they replace PWC with Tedder etc. Unqualified opinion in 2006 which is a no-brainer.

Cycle Country Accessories (ATC) sec
Tedder was dismissed and replaced with Henjes, Conner, Williams, and Grimsley. The financial statements look ok at a glance. 2004 they gave an unqualified opinion, which seems fine (strong balance sheet, positive income and cash flow from ops).

Ultrastrip Systems, Inc. (USTP) sec
Tedder gave them a "going concern" qualfier in 2005, which is not surprising since their current liabilities are almost 10 times larger than their current assets, they have a shareholder deficit, losing money, with negative cash flow from ops. And also in 2004.

Zeppelin Energy Inc.

Alico Inc. (ALCO) sec
They did the controls thing for Alico and gave them the ok. I have no way to assess this.


visual display
Balance Sheet

       Assets
Cash                 | *************
AR                   | *****
Current Assets       | ******************

PP&E, net            | **
Goodwill             | *
Intangibles          | *
Total Assets         | **********************

Liabilities and Equity
AP                   | **
Accrued Expenses     | **
Deferred Taxes       | *
Current Liabilities  | ******
Total Liabilities    | ******
Equity               | ****************

Net Cash             | *******     $676K, 10 cents/share

Compared to 2003, cash increased quite a bit. AR decreased somewhat, net PP&E held steady, non-goodwill intangible appeared. Total assets increased somewhat. Equity increased by net income of 2004.

Income Statement:

Revenue           | *************************
Cost of Services  |         *****************
Gross Profit      | ********
G&A               |    *****
Operating Income  | ***
Taxes             |   *
Net Income        | **     $328K, 5 cents per diluted share

Net Income / Non-current Assets = 81%
Net Income / Non-depreciated PP&E = 40%
Net Margin = 6.39%
Net Margin in 2003 = 7.22%
Net Margin in 2002 = 6.38%

Revenues have increased noticably in 2003 and 2004. G&A in 2002 was in-between the low 2003 number and the higher 2004 number.

Net income:
2004: $328K
2003: $330K
2002: $260K
2001: $30K
2000: ($367K) due to high G&A
This is all on modestly increasing revenue

Cash Flow Statement:

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

Operations
Net Income      | +++++++++++++++++++++++++++++++++
Depreciation    |                                  +++++++++++
AR              |                                            -
Prepaid         |                                            +++++++
AP              |                                                   ++++++++
Taxes           |                                                           ++++++++

Investing
Capex           | --------
Customer List   |         -------

Finance
Repayments      | --

Net Increase    | ************************************************

Equity statement shows almost no dilution during 2003 and 2004 and going back to the beginning of 2000 (when they had 6,627,471 shares).

Straight-line depreciation
Revenue recorded when services are performed
Exceeding FDIC limits at a bank (I wish they'd give the FDIC number so I could check out the bank's finances).
They're not saying much at all about stock options. I can't tell how many are outstanding.

Depreciation/amortization schedules:

• Furniture and fixtures: $60K, 7 years
• Computer equipment: $133K, 5 years
• Telephone equipment: $50K, 5 years
• Other office equipment: $10K, 5 years
• Software: $566K, 3 years
• Customer lists: $158K, 3-5 years
• Non-compete covenant: $5K, 3 years
  

If anything, the depreciation is faster than what I'd expect for actual replacement.

Capital lease obligations are $29K for computer equipment and $47K for telephone equipment with accumulated depreciation of $50K. Total minimum lease payments in future years is $63K.

In keeping up with uranium demand for Strathmore Minerals...
This Newsweek article talks about China's nuclear power plant building spree.

China developed a method of wrapping the uranium fuel in layers of silicon carbide, ceramic material, and graphite, which makes it physically impossible for the reactor to explode or melt down.

She went on to explain how the design requires only a fraction of the control-room staff a more conventional reactor would need. Snead, apparently impressed, exclaimed that this newfangled Chinese technology may be the key to assuaging the nuclear fears of Americans. He wants to go back and sell the idea to Texas A&M University or another school willing to back a research center. "I think the Americans will be buying nuclear plants from China within five years," he said.

This technology originated in Germany decades ago, but the US never got the chance to pursue it because we halted nuclear power development a long time ago.

In the past few years, Beijing has embarked on the boldest nuclear-energy plan since the one orchestrated by the United States in the 1970s. Chinese leaders recognize that their reliance on fossil fuels—about 80 percent of China's energy comes from coal—is unsustainable. Nuclear power has thus become an essential part of their plan to prevent an energy and environmental crisis. China intends to increase its output of nuclear power at least fourfold by 2020, from 8,700 to 36,000 megawatts. That will require building up to three reactors a year until then.

I guess I was wrong when I claimed they were going to build 2 reactors per year.

10-K and proxy

1. Period covered for 10-K
   
2. When was 10-K filed?
3. Where are they incorporated?
4. Location of headquarters
5. People check (executives and directors)
6. Customer concentration
   
7. Supplier concentration
   
8. Legal proceedings
9. Acquisition check
10. Employee details (including unions)
11. Related party check
12. Allowances and writeoffs
13. Depreciation schedules
14. Interest rate sensitivity
15. Seaonality
16. Inventory accounting
17. Significant land owned
18. Hazzardous chemicals?
19. Asbestos?
20. NOLs etc.
21. Any expected tax rate change?
22. Capital lease obligations
23. Credit facility: limit, expiration, amount drawn, interest rate, covenants
    
24. Other loan interest rates, terms
    
25. Derivatives
    
26. Stock options and warrants issued
27. Capital structure check
    
28. Auditor check
    
29. Changes in auditor
30. Audit text check from prior year
31. Major shareholders
32. Operational leverage
33. Return on assets
34. Age of oldest board member
35. Which board members are serious stakeholders?
36. Audit committee check
37. Director attendance record
38. Compensation check
39. Audit fee
40. Any other services by the same firm?

Misc

1. Top competitor
2. Competitor check
3. Margins of top competitor
4. Customer check
5. Website check
   
6. Vulnerability to comodity price changes
7. Vulnerability to property rights issues
8. Red flag analysis
9. Moat analysis
10. What is the company's biggest weakness?
11. Could this business be twice as large?
12. Could this business be 5x as large?
13. Where are they in the food chain?
14. Impact of long term trends
    
15. Google check
16. Usenet check
17. Technorati check
    

I still don't have a full portfolio of investments. I have ETLT, Strathmore, CXTI, CVU, LVWD, and some cash. LVWD is less than a half-investment. CXTI is rapidly approaching full value. I'm going to need at least one more investment.

The method I'm using to revisit companies seems slow and cumbersome and the timing is random. I fear that I'm missing opportunity. I also don't have a good method for organizing the list of companies and every possible method has big problems.

I've shifted a lot of the work from the final analysis phase to an intermediate phase where companies can get revisited over and over until there's some trigger to do a detailed analysis. I've dropped the checklist all together, which is not a good idea.

It's difficult to go back and find any given company in the previous posts.

The companies I'm following are not necessarily good businesses. If I could go back and do it all again, I'd keep only the ones that seem solid.

What's the most productive thing I can be doing now? What's the biggest move on the Go board?

The last question is the most important: What's the best move to make right now? Finding investments? Fixing my methods of revisiting companies? Bringing back the checklist? Making it easier to find past writeups? Weeding crap out of the companies being followed?


Weeding out crappy companies is happening as I revisit them. In fact what I'm doing now is probably the most cost effective way to weed them out.

Bring back the checklist, remove portions that are not needed, put it in the blog. Add new stuff over time. Keep the current checklist maintained in a separate post which is linked on the side.

Everything other than "finding investments" is part of the evolutionary process that I normally go through. Revisiting companies will get easier when the crappier companies are removed.

Priorities:
1) Do the backlog of investigation work.
2) Process the rest of the "raw sewage".
3) Continue revisiting companies.

10-K document
Full year ending Dec 31, 2004. Incorporated in Delaware.
NO. 1169 Yumeng Rd
Ruian Economic Development District
Ruian City (city website), Zhejian Province
PRC
86-21-6440-1678

a not very interesting blurb on SORL.

Here's a competitor (VW and Lada) with less than 100 employees, 11-20 in R&D, US$5 million to US$10 million in sales, 90% exported established in 1997.

13.3 million shares of stock as of March 18, 2005.

Yet another Chinese reverse merger effective May 7, 2004. Previously The Enchanted Village. Acquired 100% of Fairford Holdings Ltd, a Hong Kong LLC. Fairford became The Enchanted Village on May 10, 2004, which became SORL Auto Parts, Inc in July 2004. The Series A convertable preferred stock was converted into common and there was a one-for-fifteen reverse stock split (which is common for reverse mergers).

The Company (through Fairford) owns 90% of Ruili Group Ruian Auto Parts Co., Ltd. through a sino-joint venture (so this is not a wholely owned foreign enterprise). Ruili Group was established in PRC in 1987 and specializes in auto parts. The joint venture was established on March 4, 2004. Fairford contributed 90%, Riuli Group 10% of the $7.1 million contributed capital.

NOTE: Don't confuse the Ruili Group Ruian Auto Parts operating company with the Riuli Group, Co. which owns 10% of the operating company (Fairford owns 90%).

42 customers, including all the truck manufacturers in China. Largest 3 customers were 31% of sales in 2004.
FAW Qingdao Automobile Works 18.83% (one of the top 5 carmakers in China)
First Auto Group Purchase Dept 6.96%
Liuzhou Special Auto Mfg Co 5.48%

April 2002, two shareholders essentially took over the prior company (which was apparently dormant and revived). They dealt with Keating Reverse Merger Fund LLC. The company sold 500K shares of common stock to the Keating fund. This article mentions SORL and Keating.

SORL has a market cap of $80 million. It had $33 million in sales last year and expects $46 million this year. Keating and its Chinese partner charged it $400,000 in fees and also got 4.5 percent of the newly merged company. The money for the shell, Enchanted Village Inc., came from Keating Reverse Merger Fund LLC, which was formed to invest in shells and also in private companies planning to reverse merge into the shells.

and this is encouraging:

Dennis Depenbusch, CEO and chairman of Fort Worth, Texas-based Catalyst Lighting Group Inc. (OTC BB: CYSL), said he probably researched more than 100 firms before selecting Keating to help with its reverse merger.

He picked Keating partly because of the registration of its employees with the NASD and because of their experience. "Keating was the only one that has good, pedigreed professionals that have registered with the NASD," he said. "You really need to do your homework, because the reverse-merger world has a bad reputation."

Keating's references checked out, and Depenbusch also liked its turnkey approach. "I have not run across a shop of integrated professionals like Keating. He's unique in that way," Depenbusch said.

They did a standard reverse merger with Xiao Ping Zhang, Xiao Feng Zhang, and Shuping Chi who owned Fairford Holdings Ltd, a HK LLC. Fairford acquired Riuli Group's assets and liabilities for $6.4 million, the price set by Ruian Ruiyang Assets Valuation Co., Ltd. which is a PRC valuation firm (can't find via Google). Fairford transferred all this to the Ruili Group Ruian Auto Parts Co., Ltd. joint venture.

There are 3 directors in the Joint Venture board. Fairford designates 2 of them and selects the Chairman. Ruili Group designates 1. The joint venture expires in 2019. What happens then??

SORL manufactures and distributes air brake valves and hydraulic brake valves in China for use in vehicles over 3 tons: trucks, vans, buses. There are 36 catagories of valves and 800+ specifications (which helps make it more of a niche, but possibly with lower margins). They believe they are the largest manufacturer of brake valves in China.

ISO 9001/QS 9000/VDA 6.1 certified. Passed ISO/TS 16949 certification. Company provides a 50,000 to 60,000 kilometer warranty. "Warranty expense has historically been immaterial."

3 markets:

1. OEM manufacturers in China. 47% of revenues
   
2. Aftermarket distributors. 26% of revenues
   
3. International customers. 27% of revenues
   

Long term relationships with most of the OEM customers. Three largest customers represented 31% of revenues. This includes First Auto Group, which is one of the top 5 car makers in China.

Here's an interesting article about business in China and the political strife going on. It seems like it's from around 2000.

The government is trying to buy time for a select few companies deemed too important to flounder. First Auto Group, the single biggest employer in Jilin province, is really a city: a population of 250,000 workers and dependents, 23 schools, a general hospital and a TV station beaming the latest company news to the world's most inefficient autoworkers. An average employee produces just two-and-a-half cars a year; a General Motors worker makes nearly 10 times as many. First Auto could easily cut seven of every 10 workers, estimates U.S. management consultancy A.T. Kearney. But the company muddles along through government subsidies, policy loans and profits from a joint venture with Volkswagen. So far, layoffs have hit only one in 10. "We at First Auto must be responsible to our staff," contends Wo Zongsheng, its deputy director of corporate strategy. These days First Auto is an exception. Beijing is running out of resources and can no longer maintain life support for its relics.

FAW Qingdao Automobile Works: 19% of revenue
First Auto Group Purchase Dept: 7% of revenue
Liuzhou Special Auto Mfg Co. Ltd.: 5.48% of revenue

19 sales employees.

SORL rents warehouse space from customers to provide on-site storage of finished products. The space is generally enough to store one week of inventory. Ruili Group has an R&D center in Shanghai under construction. There's also access to Ruili Group's three-year cooperation agreement with Tongji University, a leading university in auto engineering (their website shows an automobile engineering dept in the mechanical engineering college). They have access to 92 technical people on a negotiated basis. They also have access to consulting at Zhejiang University and Northern Communications University.

One patent: expires 2012, covers "an automotive clutch empower device."

Oops, I just saw that Officers and Directors as a group own 75% of the stock. Xiao Ping Zhang owns 68%. For that reason, I'm putting this on hold for now. I don't expect to ever be invested in SORL.

NOTE: Everything you see here is based on the total work I've done in looking at ETLT as an investment. The stuff below can't stand on its own because there isn't enough supporting details.

The first 9 months of 2005 had ETLT earning $3 million. It's likely for them to earn another million in Q4 for a total of $4 million. But more importantly, their current legacy business (i.e. not including E-Sea and not including the returns on their future $37 million new venture) is likely to earn around $4 million per year, with that number likely increasing each year at some reasonable rate.

E-Sea's earnings for 2004 were $649K. Their earnings for the first 6 months of 2005 included $1,445,783 of "other income". This would be a real headscratcher until you get to the cash flow statement. First of all, the cash flow statement shows a net loss of $227,275 and not a net income of $1.87 million! Second, the cash flow from financing activities shows $1,445,783 of capital contributed, which exactly matches the "other income" line in the income statement. In other words, they treated a capital contribution as income!

Let's back that out, since it's not income. Now the net income is $422,200. In the equity statement, they distributed $649,475 (i.e. the earnings from 2004), presumably to the shareholders as a dividend. If we subtract this from the net income of the first six months of 2005, we end up with a "net loss" of $227,275, which just happens to be the exact amount of the net loss they claimed on their cash flow statement.

WARNING: E-Sea can't "account" their way out of a paper bag with a sharp knife!

Putting on my smoking jacket and deftly lighting my pipe, pausing by the clock on the fireplace mantle for dramatic effect... Here's the real story of E-Sea in the first half of 2005. They started the year with $1.1 million in cash. They then proceeded to earn $384K of cash (plus $38K added to AR) in the first half, which compares quite favorably to 2004's full year earnings of $649K (being a non-seasonal business). They distributed the $649K of cash to shareholders and took in $1.4 million of contributed cash. $578K went to prepayments and deposits, $506K went to a construction project, $361K went to acquire investment assets, $61K went to additional inventories. If you back out the $231K of depreciation, you're left with roughly the $925K they ended up with on the night of June 30.

So their real net income for the first 6 months of 2005 is around $422K. But revenues and incomes have been rising at a fast pace. I'm hoping all this investing activity they're doing is going to pay off. I'm setting my estimate of their annual earnings to $1 million.

E-Sea's new business model that I mentioned here and here will have something like 5 of these stations set up. In thinking about this more, I'm wondering if assuming $2.5 million in revenues is too much? It could be that the rate slows down after the initial few months. They claim that these stations run "at very little cost" (their current business has net margin of 45%) so perhaps it's safe to assume they'll add $1 million of net income total per year (I've gone back through their statements and it seems fairly clear that this is all sustainable annual revenue).

Finally, there's the anticipated return on the $37 million new investment. According to the news item IX on their website, the net return will be $2 million per year, reaching maturity by year 5 and ROI in year 7 (do they mean reaching $2 million/year by year 7?) The income will be tax free. This is actually less than a 5.4% return. I'm not sure if they're counting the interest in the loans (see below). This seems like a fairly low return.

2/3 of the investment ($24.7 million) will be cash on hand. The rest ($12.3 million) will be in loans (half from Chinese banks after phase 1 is completed with 2,000 dairy cattle produced). The US dollars needed will be not more than $2.5 million.

So if we take these numbers and add them up, we get 4+1+1+2 or $8 million per year. With 40 million shares total (note that there's no dilution from the $37 million investment), we get 20 cents per share of net income. If we slap a P/E of 15 onto that, we get $3.00 per share while the shares are trading at 55 cents.