Friday, December 30, 2005

Raser Technologies--Press the DELETE key.

Raser Technologies, Inc. (RSTG.OB - $9.40), a company that develops and licenses advanced electric motor, electric motor drive and related technologies, first came to the 10Q Detective's attention through one of those unsolicited press releases dropped in our e-mail box. Due diligence has unearthed that Raser is a stock-promoter's dream--hyped PR with no content.

According to corporate literature, Raser offers an innovative, proprietary platform of electromagnetic technology for both electricity-to-motion and motion-to-electricity applications. Purportedly, the Company has developed several innovations in electric motors and controllers that increase torque, power and efficiency. Raser calls its technology developments "Symetron" and label motors enhanced by the technology as "Symetron" enhanced motors.

Management believes that its technology will have an impact in several transportation, industrial and power generation markets. Targeted transportation markets include rapidly emerging hybrid-electric vehicles, public transportation vehicles on wheels and rails, and recreational vehicle markets. Early targets for industrial market applications include heating, ventilation and air conditioning, fluid pumps and fan motors.

Formed in 2001, Raser has a market capitalization of approximately $465 million, yet year-to-date, has delivered less than $200,000 in sales!
Management, has had a busy 2005--raising money! This past April 2005, the Company netted proceeds of approximately $18.4 million by selling 20,000 shares of preferred stock designated as Series C Convertible Preferred Stock to a group of investors.

Management states in 10Q filings that they "are heavily involved in research and development." Yet, in the first six-months of this year, cash flows from investment activities indicate a $20.7 million spend on investable securities and a whopping $304,438 expense for patents, trademarks, and new equipment. Research and development expenses were $415,718 in the second quarter of 2005. This increase of $221,992 from the prior year primarily reflects increased staffing and salary expenses!

The Company has been occupied with stock-based compensation. During the six months ended June 30, 2005, Raser granted options to purchase an aggregate of 282,000 shares to employees, directors and service providers. Not that management seems to care, but...the total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects was approximately $1.9 million!

In 2004, the Total Cash Contribution (TCC) paid out to Kraig T. Higginson, CEO, was $180,000. William Dwyer, VP & CFO, made TCC and long-term incentives [ read stock options] totaling $993,403.
Management expects to derive the large majority of future revenue from sales of technology licenses and collection of licensing royalties.

According to the Company, licenses of the technology to potential customers will typically result from the entry of the potential customer into Raser's "Test Demonstration Program." This Test Demonstration Program involves four phases, inclusive of, computer modeling capabilities; specific demonstration of the Symetron advanced motor technology into a motor of the customer's choosing; specific installation of the technology into the customer's product; and, a license agreement, whereby the customer will acquire specified rights to manufacture or use the Symetron advanced motor technology.

Management alleges that "many customers have joined the program, most of which are in early stages of Phase 1 or Phase 2 development." In other words, the Company still has nothing material in the way of contracts to show its shareholders.

Lest the 10Q Detective be accused of deriding the Company of not doing much: management did travel to Monaco to participate in an Electric Vehicle Symposium.
The Bottom-line--Raser Technologies, Inc. is touting this breakthrough motor technology that will increase both the performance and efficiency of engines/motors, yet the Company has no tangible sales--and spends more money on perks than on R&D. If you get an unsolicited e-mail that aggressively promotes Raser as the 'next-best' the DELETE key!

Tuesday, December 27, 2005

Sirius Satellite: Beware of this DOG.

Satellite radio provider Sirius Satellite Radio Inc.(SIRI - $6.99) said today that it recently topped more than 3 million subscribers to its service and expects a strong finish for the year. The Company currently offers more than 120 channels-65 channels of commercial-free music and over 55 channels of sports, news, talk, entertainment, traffic and weather programming for a monthly subscription fee of $12.95.

Helping to grow the Company's subscriber base, Sirius recently launched a Martha Stewart channel and agreed to a multimillion deal with radio shock jock host, Howard Stern.

Sirius' primary source of revenue is subscription fees. The Company also derives revenues from activation fees, the sale of advertising on its non-music channels and the direct sale of SIRIUS radios and accessories. Currently Sirius receives an average of approximately nine months of prepaid revenue per subscriber upon activation.

The increase in average revenue per user, ARPU, which consists of subscriber revenue and subscriber net advertising revenue, rose to $11.15 for the three months ended September 30, 2005, from $10.84 for the prior year period. Management said that this gain was primarily attributable to the effects of improvement in its Hertz program (Sirius radios in rent-a-cars) and increased advertising revenue and promotional activity, offset by the dilutive effects of mail-in rebates and the timing of commencement of revenue recognition for prepaid subscriptions.

The Company reported subscriber acquisition costs (SAC) per gross subscriber addition of $149 for the third quarter of 2005, a 35% improvement over SAC of $229 in the year-ago quarter. Management continues to project SAC per gross subscriber addition of under $145 for the year. These declines are attributable to the reduction in manufacturing and chip set costs.

However, the 10Q Detective suspects that total SAC costs could increase in the future as the Company rolls-out next-generation products and continues to offer subsidies, commissions and other incentives to acquire subscribers.

Sirius reported a net loss of ($180.4) million, or ($0.14) per share, for the third quarter of 2005 compared with a net loss of ($169.4) million, or ($0.14) per share, for last year.

According to Thomson/First Call, sixteen out of thirty Wall Street research firms either have a current buy or strong buy on Sirius Satellite Radio common stock. Catalysts include the rationale that the Company should benefit from auto partnerships with the likes of Ford Motor and DaimlerChrysler unit Chrysler, an exclusive NFL deal, next-generation retail products, Howard Stern subscribers, and the idea that free cash flow will either be neutral or positive in 2007.

The 10Q Detective believes that the market evaluations for Sirius are overblown, similar to Internet start-ups in 2000. For starters, this is a company carrying a total debt-equity load of 191% and has never turned a profit. In addition, Sirius has a market capitalization of more than $9 billion! And do not overlook, acquiring subscriber costs continue to run higher than subscriber revenues, and there is the threat of higher churn-rates because of continued competition from the other satellite radio provider, XM Satellite (XMSR), as well as alternative entertainment/music forums, such as Apple's iPod.

The company believes high costs of entry in the radio space (Sirius has accumulated a $1.9 blllion deficit) coupled with the difficulties of dealing with the Federal Communications Commission will make it harder for new competitors or technologies to challenge Sirius. What management has failed to tell shareholders (unless you read the fine print of 10Qs), is how expensive (and possibly dilutive) all of their carnival acts to attract--and retain--subscribers are to the bottom-line.

Sirius currently has 1.3 billion shares outstanding, but is authorized to issue 2,500,000,000 shares of its common stock! Entertainment does not come cheap:

  • In January 2004, Sirius signed a seven-year agreement with the NFL. The Company delivered to the NFL 15,173,070 shares of its common stock valued at $40.9 million upon. Management recognized expense associated with these shares of $3.5 million and $1.9 million during the nine months ended September 30, 2005 and 2004, respectively.

  • In June 2004, Sirius issued DaimlerChrysler AG warrants to purchase up to 21,500,000 shares of common stock at an exercise price of $1.04 per share. These warrants vest based on the achievement of various performance milestones, including the volume thresholds contained in an agreement with DaimlerChrysler.

  • In February 2004, Sirius announced an agreement with RadioShack Corporation to distribute, market and sell SIRIUS radios. In connection with this agreement, management issued RadioShack warrants to purchase up to 10 million shares of common stock. These warrants have an exercise price of $5.00 per share and vest and become exercisable if RadioShack achieves activation targets during the five-year term of the agreement.

  • In January 2004, Sirius signed an agreement with Penske Automotive Group, Inc., United Auto Group, Inc., Penske Truck Leasing Co. L.P. and Penske Corporation (collectively, the “Penske companies”). In connection with this agreement, we agreed to issue the Penske companies warrants to purchase up to 38 million shares of common stock at an exercise price of $2.392 per share. Two million of these warrants vested upon issuance. The balance of these warrants vest over time and upon achievement of certain milestones by the Penske companies.

  • In January 2004, Sirius issued the NFL warrants to purchase 50 million shares of common stock at an exercise price of $2.50 per share. Of these warrants, 16.7 million vest upon the delivery to the Company of media assets by the NFL and its member clubs, and 33.3 million of these warrants will be earned by the NFL or its member clubs as Sirius acquires subscribers which are directly trackable through their efforts.

In Greek mythology, there are varied stories about the hunter, Orion, who believed himself to be the best, and once boasted that he was able to kill anything the earth produced. It was then that Gaia (Earth), angered at this boast, sent a scorpion that killed him. Mourned by Artemis (Goddess of hunters), he was made immortal by being placed among the stars in the sky. It was then told that to prevent him being alone in the sky, the dog (Canis Major) was later added to the stars to keep Orion company in his hunting.

In astronomy, Sirius is the brightest star in the nighttime sky, and is situated in the constellation Canis Major. Its name comes from the Greek (seirios, "glowing"). Since it sits in eye of the greater dog Canis Major, it is known as the 'Dog Star.'

These Greek mythology and astronomy classes were presented to readers so that you can be forewarned: As Sirius Satellite's star starts to fade, remember that caution: Beware of DOG!

Saturday, December 24, 2005

Nobility Homes--Less-than Noble Growth?

Nobility Homes, Inc. (NOBH - $26.80), is a Florida-based company that makes pre-manufactured dwellings that can sell for anywhere from $20,000 to $80,000. The Company sells a broad line of manufactured homes through its wholly-owned Prestige Home Centers. In addition, Nobility also sells its houses on a wholesale basis to independent manufactured home retail dealers and manufactured home communities.

Despite rising interest rates and construction material cost increases, Nobility recently reported record sales and earnings results for its fiscal year ended November 5, 2005. Sales for fiscal year 2005 increased 13% to $56,710,925 and operating income increased 35% year-over-year to $8,342,410. Diluted earnings per share for fiscal year 2005 increased 32% to $1.49 per share, compared to $1.13 per share last year.
Citing an improved economy, lower unemployment claims, and the specific demand from building replacement homes due to the hurricanes, management expects the demand for its homes to grow in fiscal year 2006. Nonetheless, the 10Q Detective has uncovered some problematic concerns in SEC filings that may compromise forward-looking growth:
  • Affiliated Entities. Terry Trexler, President and Chairman of the Board of Directors, and Thomas Trexler, the Executive Vice President and CFO, each own 50% of the stock of TLT, Inc. TLT, Inc. is the general partner of limited partnerships which are developing manufactured housing communities in Central Florida (the "TLT Communities"). The President owns between a 24.75% and a 49.5% direct and indirect interests in each of these limited partnerships. The Executive Vice President owns between a 49.5% and a 57.75% direct and indirect interests in each of these limited partnerships. The TLT Communities have purchased manufactured homes exclusively from the Company since 1990. 10Q Detective is not alleging any misdoing; nonetheless, 'stuffing the distribution channel' is always a concern. [ed. note. Nobility, with a market capitalization of only $108.7 million, is a small enough company that such close-ties fly under the radar.]

  • Concentration of Revenue Risk. The Company's customers are concentrated in the State of Florida. One customer, a multi-park owner, accounted for over 13%, of the Company's sales during the past fiscal year. In addition, he Company had an exposed credit risk of approximate $1,771,000 receivable balance with this customer.

  • Excess retail inventory. Consisting primarily of finished homes, pre-owned manufactured homes and model home furniture, inventory has risen to $9.5 million from $6.9 million in the prior fiscal year. Of concern, how can demand be accelerating when inventory turnover has risen to 89 days, from 66 days in the prior 12-month period?

Performance metrics are bullish: Direct competitor comparisons, including the likes of Fleetwood Homes (FLE), Skyline Corp. (SKY), and Champion Enterprises (CHB), reflect bullish performance metrics: consistent operating margins of 14% vs. an industry average of 5.7%; Return-on-Equity of 17.8% vs. Industry 4.4% average, and a forward P/E ratio selling at a 35% discount to an Industry P/E of 25.

Granted, damage from hurricanes in the state of Florida should provide visible earnings growth for Nobility in the near-term. Longer-term growth, however, in the manufactured housing environment--with rising interest rates and raw material costs--looks less-than noble. The 10Q Detective is neutral on this stock.

Thursday, December 22, 2005

TASER: Stunning Gains?

Stun-gun maker, Taser International, Inc. (TASR - $7.20) shares have risen about 15 percent in trading over the last two days after the Company said that it no longer faced delisting from Nasdaq after filing its third-quarter report with securities regulators, and a wrongful death suit against the Company in its homestate of Arizona was dismissed.
It is the eighth wrongful death or injury lawsuit against Taser that has been dropped over the last 18 months. Nonetheless, this won't free the company from potential litigation in the future. In fact, management noted in its latest 10Q filing that the Company is currently named as a defendant in 43 lawsuits in which the plaintiffs alleged either wrongful death or personal injury in situations in which the TASER device was used (or present) by law enforcement officers or during training exercises. Taser does carry product liability insurance to help defray the costs associated with these claims, but the bottom-line will continue to be pressured by increased legal costs and higher insurance premiums.
After some initial fumbles, to management's credit, they have also been on a PR offensive. In December alone, the Company has released the following positive press: (i) "Police Use TASER Device to Save Suicidal Man from Slitting Wrists ." (ii) "TASER Ends Child-Hostage Crisis in Euclid, Ohio." And, (iii) "Armed Gunman Subdued with a TASER."
In July 2005, the Company filed a lawsuit against Gannett Co., Inc., parent company of the USA Today Newspaper and the Arizona Republic, for libel, alleging [among other legal issues] that the defendants published an article in the USA Today Newspaper on June 3, 2005 which was grossly incorrect and completely misrepresented the facts by overstating the electrical output of the TASER X26 by a factor of 1 million. The complaint also asserts that the defendants engaged in the ongoing publication of misleading articles related to the safety of TASER products, resulting in substantial economic damages to Taser International, its customers and its shareholders. The case is in the discovery phase and no trial date has been set.
Not to throw down a yellow flag when play looks great on the field, but....filed under Related Transactions: The Company charters aircraft for business travel from Four Futures Corporation and Thundervolt, LLC., which are wholly-owned by Thomas P. Smith, President of the Company, and Patrick W. Smith, Chief Executive Officer of the Company and Phillips W. Smith, Chairman of the Company’s Board, respectively. For the nine months ended September 30, 2005, the Company incurred charter expenses two both airlines of approximately $340,000 and $335,000, respectively. The Company, notes, however, that any personal use(s) of the aircraft(s) by the Mr. Smiths are billed to their respective airline charters for reimbursement. Further NO expenses were billed to Four Futures Corporation for personal use of the aircraft by Thomas Smith; and, approximately $293,000 was billed to Thundervolt, LLC, on behalf of Patrick W. Smith, Phillips W. Smith and Thomas P. Smith, for personal use of the aircraft. As of October 2005, a $36,000 in outstanding receivable was still owed from Patrick W. Smith and Thomas P. Smith. Still--one wonders how 'personal' and 'business travel' are so-defined.
As a result of on-going negative press coverage and increased litigation concerning the Company’s products and their use, the Company has experienced a 38% and 98% decline in sales and profits, respectively, for the nine months ended September 30, 2005, compared to the prior year. In particular, these events have resulted in longer sales cycles and delays in orders from prospective customers. Too, management seems to be extending credit terms to induce sales, for days-of-sales outstanding jumped 21 days (year-over-year) to 56 days for the period ended October 30, 2005.
As expected, the Company has also experienced significant increases in SG&A expenses for the nine months ended September 30, 2005 compared to the prior year, as additional resources have been devoted to legal, public relations and consulting activities.
10Q Detective noticed assets of $26.7 million, classified as deferred tax assets. The deferred tax asset reflects primarily the benefit of $26.0 million in loss carryforwards. This is of interest because management seems upbeat about the Company's future. Dusted off in Note No. 7 of the most recent 10Q filing:
  • SFAS No. 109 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of all available evidence, it is more likely than not that some or all of the deferred tax asset may not be realized. The Company has determined that no such valuation allowance is necessary.
  • Federal loss carryforwards expire in 2024 and state loss carryforwards expire in 2009. Realization of these loss carryforwards is dependent on the Company’s ability to generate sufficient taxable income to utilize the loss carryforwards. Although realization is not assured, management believes that the deferred tax asset will be utilized.
To the contrarian, the share price looks attractive, off some 78% from $33.45 per share, the 52-week high. Taser International has developed a 'less-than lethal' device with a brand name that is synonymous with the technology. In fact, though the Company vigorously defends its tradename, management should smile, for when a potential user thinks "stun-gun"--TASER comes to mind.
At present, the Company faces little threat from wannabees like Stinger Systems' (STIY.PK) projectile stun-darts and Law Enforcement Associates' (AID) MP1- stun pistol.
In December 1999, Taser introduced the ADVANCED TASER device for sale in the law enforcement market. Analysts estimate that Taser has only penetrated 12% -to- 15% of the potential domestic market.
In 2004, the Company introduced its new TASER X26 C Citizen Defense System, targeted to the private citizen self-defense market. Management believes that private citizen sales could become a more meaningful portion of revenues going forward depending on the success of the X26 C product and legislation relating to the purchase of TASER products by private citizens in each state. The TASER X26 product is currently banned for use by private citizens in at least seven states, including red states like Massachusetts and NewYork.
The Military, private security firms, guard services, correctional facilities, and U.S. commercial airlines--all represent legitimate markets for the TASER product(s). International markets are still in the nascent stage, accounting for less than 4% of annual sales.
In this tort-society, as Taser systems are deployed around the country, it is expected that litigation against the Company will always be a part of any 10Q filing. The catalyst(s) for a sustainable upward move in the share price will come when investors' perceive that management has regained control of its cost structure and that personal injury, misuse and other litigous claims no longer blunt sales opportunities.

Brookdale Senior Living: Ka-Choo!

Brookdale Senior Living, Inc. (BKD - $31.00) is the third largest operator of senior living facilities in the United States, based on total capacity with over 380 facilities in 32 states and the ability to serve over 30,000 residents. Housing alternatives for seniors include a broad spectrum of senior living service and care options, including independent living, assisted living, memory care and skilled nursing care. However, facilities are predominantly concentrated in the independent and assisted living portion of the senior housing market(s). As of June 30, 2005, facilities were on average 88.1% occupied.

Brookdale is a recent IPO. On November 22, the stock first started trading, and closed at $25.43 on the New York Stock Exchange, up 34 percent from its IPO price of $19 a share.

The Bulls behind Brookdale give lip-service to the demographic trends that the Company has going for it: The U.S. population is aging and living longer, providing demand for independent and assisted living communities; coupled with the decreasing ability of relatives to, or choice by relatives not to, provide care for the elderly in the home. And, according to the Company's prospectus, construction of new senior citizen-focused units has slowed since a surge in the late 1990s, reducing capacity.

Nonetheless, despite a 1.5% increase in occupancy rates and an increase of $68 in average monthly revenue per unit/bed for the six-month period ended June 30, 2005, Brookdale hasn't had an easy time translating these positive industry metrics into profits: The Company has incurred losses of approximately $13.2 million for the six months ended June 30, 2005, and approximately $21.9 million for the year-ended December 31, 2004, as its lease and facilities operating expenses [and debt-service expenses] outpaced revenue gains.

Management has outlined a growth strategy predicated on organic growth in its existing operations coupled with the strategic acquisitions of other senior living companies within its geographic footprint. Facilities located in California, Illinois, and Florida accounted for approximately 9%, 9%, and 13% of corporate revenue, respectively.

In the Company's S-1 Registration Filing, management believes that leveraging geographic acquisitions and centralizing its infrastructure will provide the Company with a significant cost advantage over local and regional operators of senior living facilities. Ergot, management expects to be able to achieve economies of scale with respect to the goods and services it purchases. Contrary to management's cheerleading attititude, the Company has a history of losses and one of its operating subsidiaries, Alterra Healthcare Corporation, emerged from Chapter 11 bankruptcy reorganization in December 2003.

Brookdale's profit strategy also contemplates improving operating efficiencies. As Alterra Healthcare [in its former life] could testify to: competition for or a shortage of skilled personnel [such as nurses] will likely increase staffing and labor costs, which would have an adverse effect on Brookdale's profitability.

Management might want to consider a plan to dispose of selected under-performing assets. For example, the Company operates 7 living centers in Pennsylvania with 541 aggregate beds/unit running at only 76.0% of capacity.

Finally, despite all this talk about growth through acquisitions, Brookdale is a company seriously in need of assisted living itself. At June 30, 2005, Brooksdale had approximately $639.6 million of outstanding indebtedness, and total debt-to-equity stood at 97 percent! And talking about liquidity concerns, the most recent quarterly numbers reflect a times-interest earned ratio of about 0.17. In other words, there is very little earned income available even to cover interest expenses. If Brookdale becomes unable to generate sufficient cash flow to cover required interest and long-term operating lease payments, this would result in defaults of its related debt or operating leases and cross-defaults under other debt or operating leases, which would adversely affect the Company's ability to continue as a going concern.

Anyone looking to invest in Brookdale might want to read the young-readers' "Because a Little Bug Went Ka-Choo."
One fine summer morning...
a little bug sneezed: Ka-Choo!
Because of that sneeze, a little seed dropped....
Because that seed dropped,
a worm got mad.
Because he got mad, he kicked a tree....
...the bucket came hit Farmer Brown....
Because...just because...
a small bug went Ka-Choo!

The meteoric rise in Brookdale's stock price leaves management with little 'wiggle-room.' One bad quarter and Ka-Choo!

Tuesday, December 20, 2005

INDEVUS: Not Just A Man's Buy!

Indevus Pharmaceutical, Inc. (IDEV - $4.54) has a stated goal to become a manly man's company. This biopharmaceutical company is focused on urology, gynecology and men's health. Management is looking to acquiring strategic products and product candidates with differentiating features and defined specialty markets within its core focus area.

In order to increase its odds of commercial success', Indevus either licenses the U.S. rights to FDA-approved compounds or shepherds the development of compounds through research, pre-clinical development, clinical testing and regulatory review activities with the goal towards commercialization. Depending on the products' developmental and marketing costs, Indevus follows a familiar biotech pattern of top-line currency collection, including royalty payments, profit-splitting arrangements, or sales-back volume discounts.

For the fiscal year ended September 30, 2005, revenue surged 78% to $33.3 million, compared with last year's $18.7 million. The Company's net loss decreased $15.0 millionto $(53.2) million, or $(1.13) per share in fiscal 2005 from $(68.2) million, or $(1.43) per share in the prior year. This reduced loss was primarily the result of increased revenues from Sanctura and decreased sales and marketing expenses, partially offset by increased research and development expenses.

The Company's lead product, Sanctura, for use in overactive bladder treatment, had about 300,000 prescriptions written in fiscal 2005, and the product's sales to pharmacies totaled $23 million. In July, Indevus received U.S. rights to Nebido, an injectable testosterone preparation for the treatment of male hypogonadism--a lack or reduced amount of hormones in the sex glands, or gonads.

Indevus also is closing the deal on another another testosterone drug, Delatestry, from Savient Pharmaceuticals Inc., to increase its revenue base and to leverage sales force utilization. According to management, Indevus' internal sales force is already positioned to effectively promote Delatestryl. The acquisition of Delatestryl is expected to increase the Company's revenue base by about $3.5 million in 2006, without development or significant promotional costs.

The key drivers to biotech valuation eventually come down to time and cost. What are the developmental costs and marketing odds of success? And what are the risk-adjusted future revenue projections, discounted to present day?

Indevus has an interesting future, with six products in various stages of development. The balance sheet is clean, with cash and equivalents totaling $101 million, and a current ratio of 3.2.
The Company has $2.15 per share in cash. Delatestryl is valued at $36 million [3.6x potential annual revenue of $10 million], Sanctura has patent/market exclusivity in the U.S. through May, 2009, and we suspect that top-line growth of this product could exceed 30% per annum. A current valuation is pegged at $168 million (or 6x 12-month forward sales estimates of $28 million).

Sanctura XR, the once-daily formulation, is valued at $95 million, the aggregate of milestone payments for FDA approval, and other related development efforts. The Company anticipates filing an NDA for Nebido in the first quarter of calendar 2007. We currently value this product at $42.5 million [ existing costs of milestone agreements to Schering], and the remaining early-stage programs at $100 million. In addition to the current 47.8 million shares of common stock outstanding, there is potential dilution in the next year of an additional 28.6 million shares, reserved for various issuances. Despite this dilutive concern, Indevus' assets are still worth share-net of $7.10--or a premium of 56.4% above the existing stock price.

A major risk in buying Indevus shares is that the Company derives substantially all of its revenue from a third-party under a Sanctura licensing agreement. As Sanctura is Indevus' only FDA-approved product, the loss of Sanctura would have a negative material affect on the Company.

One important milestone event upcoming over the next year that could enhance investor visibility is the FDA-approval of an extended-release version of Sanctura. Given the aforementioned share-net discount, Indevus looks like a cheap, speculative buy for biotech bulls.

Monday, December 19, 2005

H&R Block: Tax Write-off?

H&R Block Inc. (HRB - $24.22), the largest U.S. tax preparation company, restated fiscal second-quarter results last Monday, saying estimated losses from Hurricanes Katrina and Rita helped make the quarter worse than first reported.

The Company said it lost $86.3 million, or 26 cents a share, in the fiscal second quarter, well above the $72.2 million, or 22 cents-a-share, loss it originally reported in mid-November.

H&R Block's earnings are highly seasonal because of the surge in tax work between January and April and it is not unusual for the company to report losses in its first and second quarters. Management is still talking profits for full-year FY '06, and said it expects HRB to earn between $1.90 and $2.15 a share for the fiscal year.

Better known for its tax-preparation and tax-consulting services, HRB is of investing interest because approximately 50 cents of every dollar in revenue is generated by mortgage services. This operating segment is engaged in the origination of non-prime mortgage loans through an independent broker network, the sale and securitization of mortgage loans, and the servicing of non-prime loans. [ed. note. non-prime means "sub-prime," which means "high-risk."] Of the $12.6 billion in loans generated in the quarter-ended October 31, 2005, approximately 96.6% of this volume originated in sub-prime lending. Rising interest rates are pressuring margins. The Company's recently filed 10Q noted that despite increases in loan origination volume, gains on sales of mortgage loans decreased $120.2 million, primarily as a result of rapidly rising two-year swap rates, additional credit enhancement requirements by rating agencies and moderating demand by loan buyers. Net margins fell to (0.20)% from 1.14% last year.
HRB is counting on its mortgage origination unit to be a continuing strong driver of top-line growth. For the second half of fiscal year 2006, management believes that the Company can achieve funding volumes consistent with first-quarter levels of $10 billion to $11 billion per quarter resulting in full year origination growth of approximately 40 percent. HRB's mortgage-centric reliance on the subprime mortgage market will be its EPS albatross: tighter credit requirements and higher borrowing rates will lead to smaller interest rate spreads on loan originations, lower average gains on whole loan sales, and reduced net margins on its loan portfolio. To the extent that competitors will permit flexibility in pricing power--the ability to put margin costs back in the price of the loans--HRB's 'guidance' on FY '06 share-net of $1.90 is subject.
If management guides EPS lower, the bears on Wall Street will roar loudly that HRB should be revalued in-line with the likes of Accredited Home Lenders Co. (LEND), New Century Financial (NEW), and other publicly-traded mortgage lending companies. Repricing HRB with a forward P/E of 8.20 leads to a share-net valuation of $15.58. If you are shopping for losses for your 2006 tax return, buying HRB common stock might just give you those write-offs!

Saturday, December 17, 2005

SMUCKER'S: Snack on a Crustable.

J.M. Smucker Co. (SJM - $44.26), the U.S. packaged-food company, provides value in the food aisle for the patient investor. The Company said that in the 2Q ended October 31, 2005, it earned $46.4 million, or 79 cents a share, up from $40.7 million, or 69 cents a share, in the year-ago period. Sales rose an expected 3% to $606.3 million.
Although a great peanut butter and jelly sandwich is a nice treat, it is most important that the bread not be stale. One might argue that the quality of Smucker's recently reported EPS is flat. Note A. of Smuckers recently filed 10Q points out that operating results for the three-month and six-month periods ended October 31, 2005, include an increase of approximately $6.7 million to net sales, or approximately $4.3 million after-tax to net income and $0.07 per share, reflecting a change in estimates of the expected liability for trade merchandising programs. Management did not bury this pronouncement, but put this accounting issue right up front in its filing.

Although the Company remains committed to a long-term growth rate of 8%, management did say that higher energy and petroleum costs would lead to higher input costs like resin, freight and natural gas. Given these margin pressures, Smucker guided bottom-line expectations lower, saying it expects earnings per share growth of 5 percent to 8 percent for the year. Analysts, on average, forecast earnings of $2.79 a share for the year, up 7.3 percent from $2.60 last year, according to Reuters Estimates.
Discounting present news, Smuckers has solid brand value and good cash flow. U.S. market sales were driven by key growth contributors like the Smucker's, Jif, Crisco and Uncrustables brands. During the first six months of fiscal year 2006, cash provided by operating activities was approximately $59.2 million.
Steady top-line growth and improving margins should provide the necessary catalyst for an upward move in Smucker's common stock. Until investors witness the latter, snack on the 2.4% dividend yield ($1.06 dividend) and a Crustable sandwich!

Friday, December 16, 2005

BAMM: Turn the Page

Books-A-Million (BAMM - $9.05) is a leading book retailer principally operating in the southeastern United States. The Company operates both superstores and traditional bookstores.

For the nine months ended this past October 29, the Company reported net income of $1.9 million, or 11 cents per diluted share, compared with $1 million, or 6 cents a share, in the prior year period. Net sales increased 5.4 percent to $343.1 million in the most recent nine-month reporting period, compared with sales of $325.5 million in the year-earlier period. Comparable store sales increased 2.9 percent in the first nine months of the company's current fiscal year.

On December 13th, Books-A-Million filed its most-recent 10Q, and a read-through uncovered some discernible 'soft-spots'. Why, if the Company is profitable, did operating activities use cash of $6.8 million? Given that cash flow from operations is the Company's principal source of liquidity, management must find some way to improve its operations (margins) if the Company is going to be able to cover recurring cash uses in the coming quarters.

Investors might also note that back of the hand calculations show that books rotate in-and-out of inventory every 280 days-or-so. So what? Slow moving product means that management is more dependent on working capital to pay bills--like employee salaries, heat and electricity. But guess what, a little number crunching uncovers that working capital, excluding inventory and pre-paid expenses, is $(126.5) million...oops! Now where are those annoying credit-card solicitations when you need them most!

If you want to see one big happy family, let's talk about related party transactions:

  • Current family roster: Clyde B. Anderson-Executive Chair & Terrence C. Anderson-Director of Books-A Million.

  • The Company purchases a substantial portion of its magazines as well as certain of their seasonal music and newspapers from Anderson Media Corporation. During the thirty-nine weeks ended October 29, 2005, purchases of these items from Anderson Media totaled $25,425,000, compared to $24,645,000 during the same period last year.

  • The Company also purchases certain of its collectibles and books from Anderson Press, Inc. an affiliate through common ownership. During the thirty-nine weeks ended October 29, 2005, such purchases from Anderson Press totaled $1,162,000, compared to $580,000 during the prior year period.

  • The Company also purchases certain of its greeting cards and gift products from a C.R. Gibson, Inc., another affiliate through common ownership. According to the Nashville Business Journal and The City Paper, C.R. Gibson was sold in 2001 for $35 million to CRG Acquisition Corp. CRG is comprised of private investors closely associated with Atlanta-based Treat Entertainment and media distributor Anderson News Corp. Harold Anderson is the chairman and CEO of Treat Entertainment. Is this getting old yet?

  • The Company purchases certain magazine subscriptions from, a privately held corporation based in Franklin, TN, just outside of Nashville. Launched in 1996, its website is And guess what: Its investors include Meredith Corp. (publisher of titles like Better Homes & Gardens and LadiesÂ’ Home Journal), Time Inc. (publisher of top titles like People and Sports Illustrated), and Anderson Media.

  • Best of all...Books-A-Million pays product, import sourcing and consolidation service fees to Anco Far East Importers, LTD. The total paid to Anco Far East was $1,768,000 during the thirty-nine weeks ended October 29, 2005, compared to $905,000 during the same period last year. Anco Far East is better known as one of the largest exporters of fireworks from China. According to a University of Alabama Alumni news bulletin, Anco Far East was started in1962, when Charles Caine Anderson (former member of the Board), together with Chan Fu Yu formed A. Yu Far East Co. in Hong Kong. [ed. note. books, fireworks--must be some other connection.)

  • Coming in behind publicized sales forecasts....not to worry. The Company sold books to (received returns from) Anderson Media in the amount of $239,000 during the thirty-nine weeks ended October 29, 2005, compared to ($78,000) last year. Any 'material' wiggle-room in this related transaction?

  • Lest we forget that Books-A-Million is a publicly-owned company--management leases its principal executive offices from a trust, beneficiaries of which are the grandchildren of Mr. Charles C. Anderson. The lease extends to January 31, 2006....and....Anderson & Anderson LLC, also leases three buildings to the Company.

  • The Company also subleases certain property to Hibbett Sporting Goods, Inc., a sporting goods retailer in the southeastern United States. The Company's Executive Chairman, Clyde B. Anderson, is a member of Hibbett's Board of Directors. Care to play a variation of Six Degrees of Kevin Bacon? In this blog called: Six Degrees of The Anderson Family? In 1980, The Anderson Family purchased the 14-store Hibbett Sporting Goods chain, which began a rapid growth that culminated in the company going public on Oct. 16, 1996.
  • And let it not be forgotten: The Company shares ownership of a plane, which the Company [purportedly] uses in the operation of its business, with an affiliated company. [ed. note. Would flying to an Anderson family picnic on the Company plane be considered business?] And guess what? The Company also occasionally rents a plane from Anderson & Anderson LLC as well.

Time to turn the page and close the book on BAMM.

Wednesday, December 14, 2005

Beware of the Hemosense Solution....

Hemosense, Inc. (HEM - $7.65) manufactures and sells handheld blood coagulation monitoring systems for use by patients and healthcare professionals in the management of warfarin medication. The Company's product, the INRatio System, measures the patient's blood clotting time to ensure that patients with a propensity to form clots are maintained within the therapeutic range with the proper dosage of oral anticoagulant therapy.
The Company anticipates fiscal 2006 total revenue to be between $16.0 million and $17.5 million, representing growth of 82% to 100% compared with fiscal 2005 total revenue. Given increased investment in SG&A, as well as in R&D, management anticipates a fiscal 2006 net loss of $10.5 million to $11.5 million. This is similar to the $11.7 million loss reported in fiscal year 2005. The net loss per common share is expected to be $0.96 to $1.05 based on 11.0 million average common shares assumed to be outstanding.
The market for PT/INR patient self-testing and point-of-care diagnostics is intensely competitive, subject to rapid changes and new product introductions. Two companies, Roche Diagnostics and International Technidyne Corporation, a division of Thoratec, currently account for over 90% of the worldwide sales of PT/INR point-of-care and patient self-testing devices. In addition, both of these competitors enjoy many competitive advantages, including: greater name recognition; established relationships with healthcare professionals, patients and third-party payors; established distribution networks; and [most-important] additional product lines and the ability to offer rebates or bundle products to offer higher discounts and incentives to gain a competitive advantage.
To gain acceptance and market share, a small capitalized company like Hemosense [market capitalization - $87.8 million] has to open up the spending spigot. Being a one-pony Company, with an annual burn-rate of $12 million and only $12.8 million in working capital, look for management to tap the capital markets in 2006.
If one is predisposed to Hemosense and believes that Hemosense can march successfully forward to profitability, consider these other tidbits lifted from the Company's recent 10K filing:
  1. Sales Operations are Dependent on Few and Concentrated Distribution Channels. Hemosense is dependent upon three distributors for a substantial portion of itsrevenue, and the loss of any of these key distributors would have a material adverse effect on its business. Its distributors, Quality Assured Services, Medline and Cardinal Health accounted for approximately 24%, 19% and 13%, respectively, of total revenue in fiscal 2005.
  2. Emerging Oral Anticoagulation Therapies. A number of pharmaceutical companies are working on the development of a new class of oral direct thrombin inhibitors, or DTIs, to replace older anticoagulants such as warfarin. In theory, these new oral DTIs should have very few drug/non-drug interactions and should not require the same level of monitoring that warfarin requires. One goal of current research in this area is the elimination of the need for PT/INR testing, which if successful could render the INRation System obsolete. In fairness to Hemosense, however, as of yet, it is unknown whether oral DTIs will be approved in the United States or perform as well as warfarin, especially for the chronic user.
  3. FDA Oversight. The FDA enforces the quality system regulations, or QSRs, through scheduled and through unannounced inspections. In May of this calendar year, Hemosense underwent an inspection at its San Jose manufacturing site, and was cited by the visting inspector for the following: (i) Failure to timely file Medical Device Reports, or MDRs, for six of seven complaints the inspector reviewed. (ii) The FDA’s second observation was that the Company had not properly defined the statistical techniques for calibration of its PT/INR test strips. Subsequently, management did submit further written response to the FDA, which [they believe] addresses FDA concern(s). Nonetheless, the Company is now filing an increasing number of MDRs, which could harm market adoption of the INRatio System. MDRs are publicly available, and competitors could use this information in an attempt to paint the product as suspect, disrupting Hemosense's customer and potential customer relationships.
  4. A principal stockholder owns a significant percentage of Hemosense stock. MPM Capital and its affiliates own approximately 32% of the common stock. This significant concentration of share ownership may adversely affect the trading price for the common stock because investors [might] perceive disadvantages in owning Hemosense. For example, MPM Capital has the ability to exert substantial influence over all matters requiring approval by stockholders and could dictate the management of Hemosense's business and affairs. (Not to mention what would happen to the price of the common stock should MPM Capital file to sell part of its stake.)
  5. Related Party Transactions. Now here are some red flags blowing in the wind....During the year ended September 30, 2003, the Company paid Innovative Medical Products GmbH (IMed Pro), a services company in Germany affiliated with Gregory Ayers, a Board member, $436,000 for clinical trials consulting and distribution services. During the year ended September 30, 2004, the Company paid IMed Pro for distribution services of $560,000. The agreements between the Company and IMed Pro were terminated effective January 1, 2005. [STILL] Since January 2005 I-Med-Partner GmbH (“IMedPartner”) has served as a distributor in Germany and purchased $416,000 of product. IMed Pro is a shareholder of IMedPartner.

    Edward Brennan, Ph.D., one of the Company’s directors, has provided consulting services to the Company not directly related to his service as a board member. During the past three fiscal years, payments were made to Dr. Brennan of $23,000 in 2005, $58,750 in 2004 and $15,000 in 2003 for these consulting services.

    The Company paid Dade Behring Inc., a stockholder which had a representative on the Company’s Board of Directors, $8,000 and $102,000 of license royalties for the years ended September 30, 2003 and 2004, respectively. Also, in May 2003 the Company issued 787,919 shares of preferred stock valued at $1,245,000 to Dade Behring Inc. to extend an existing Supply and License agreement, and in June 2004, the Company issued 357,570 shares of preferred stock valued at $565,000 to Dade Behring Inc. for the prepayment of $1.0 million of future license royalties.

    These actions beg the question: In whose interest are these Directors working on behalf of--Management or Shareholders?

The Hemosense, Inc. solution rests on providing patient-friendly, fast and easy-to-use meter and test strips. This may-or-may not be true, but after reading this blog, ask yourself--how investor-friendly is Hemosense stock?

Tuesday, December 13, 2005

Coinstair: Watch Your Quarters!

Coinstar, Inc. (CSTR - $23.90) is a leading owner and operator of self-service coin-counting machines and amusement vending services for retailers. Offerings include skill-crane machines, bulk vending, kiddie rides and video games.

What parent has not seen [and dreaded] those skill-crane machines that dispense plush toys and other novelties for $0.50 a turn. Try walking by one of those machines with change in your pocket and a six-year-old at your side. If you do not want the child to cry on the drive home in the car, say good-bye to all your change--and then some.

Do not underestimate the power of a child's whine. Coinstar disclosed in their most recent 10Q filing that total revenue during the three months ended September 30, 2005 was $118.7 million, driven primarily from skill-crane machines, which contributed $41.8 million, or 35.2% of this total. Now that's a lot of quarters! Before investors run out to load up on Coinstar shares, however, we thought it prudent to disclose two salient risks:
  1. Retail partner relationships are highly concentrated. For the nine-month period ended September 30, 2005, Wal-Mart, Inc. kicked in 27.5 cents of every dollar in consolidated sales, compared to 16.4% in the prior year. "[continued] success depends on our ability to continue to pay our retail partners a service fee that allows us to operate the units profitably. We have faced and are currently facing ongoing pricing pressure from our current retail partners to increase the service fee we pay or to make other financial concessions to win or retain business." In other words, in coming earnings' periods, Coinstar will probably suffer from ongoing pricing pressures [i.e. lower operating margins], in order to retain its distribution channels with the likes of Wal-Mart, Inc. and The Kroger Company.
  2. Coinstar's credit agreement restricts the Company from taking certain actions that could be beneficial to its business. On July 7, 2004, Coinstar acquired ACMI, another entertainment service vendor for $235.0 million in cash. To finance this acquisition, the Company borrowed money from a syndicate of lenders led by JPMorgan Chase Bank and Lehman Brothers Inc. Since this acquisition, Coinstar has repaid $43.7 million of the debt outstanding. Excluding goodwill of $152 million and prepaid expenses of $12 million, leaves the Company with approximately $401 million in total assets. This debt financing, therefore, swallows about 48% of total assets. In other words, servicing this debt may affect the Company's ability to effect future financings. Management has to step up and now show that it can leverage the acquisition of ACMI and grow revenues and EPS organically--instead of through buying other companies.

Hold on to your quarters!