Wednesday, November 29, 2006

Board of Directors -- Foxes in the Henhouse?

A corporation’s Board of Directors is elected by its shareholders and empowered to carry out certain fiduciary tasks—like appointing executive management and declaring dividends—spelled out in the company’s charter.

Under most companies’ Corporate Governance Guidelines, each director is expected to dedicate sufficient time, energy and attention to ensure the diligent performance of his or her duties, including by regularly attending meetings of the Board and committees of which he or she is a member.

These Codes of Conduct expressly proscribe, too, that directors must avoid conflicts of interest. Essentially, directors should not use their corporate positions for individual personal advantages.

While the Codes do not attempt to describe all possible conflicts of interest that could develop, the following are examples of conflicts of interest:

  1. Company Loans – receiving loans or guarantees of obligations as a result of one's position as a Director;
  2. Third Party Relationships – engaging in conduct or activity that improperly interferes with the Company's existing or prospective business relations with a third party;
  3. Personal Gains – accepting bribes, kickbacks or any other improper payments for services relating to the conduct of the business of the Company;
  4. Gifts and/or Gratuities – accepting, or having a member of a Director's immediate family accept, a gift from persons or entities that deal with the Company, in cases where the gift is being made in order to influence the Directors' actions as a member of the Board, or where acceptance of the gift could otherwise reasonably create the appearance of a conflict of interest; and
  5. Personal Use of Corporate Assets – using Company assets, labor or information for personal use except as approved by the Chairman of the Governance and Nominating Committee, or as part of a compensation or expense reimbursement program available to all Directors.

The 10Q Detective has found one conflict of interest that is remarkable in its absence from Corporate Governance policies that we have examined—that of time. Granted, most Codes spell out or infer that “self-dealing,” in which public and private interests collide, is to be avoided; but aside from looking at ‘time’ as a quantifiable measure (by regular attendance at board or subcommittee meetings), few corporations bother to exercise vigilance in declaring any apparent or real personal conflict in a director’s time when he or she is serving on the boards of many a company (save for direct competitors) and/or have private interests, too.

How can these ‘policy managers’—whatever their breadth of experience or prior industry successes—be expected to exercise, in the performance of their duties, the degree of care, diligence and skill necessary to be effective stewards of stockholders’ interests?

On August 1, 2006, Starwood Hotels & Resorts Worldwide, Inc. (HOT-$63.11), one of the world's largest hotel and leisure companies, announced the election of
Adam M. Aron, 51, the former Chairman and CEO of Vail Resorts (MTN-$41.71) to its Board of Directors.

"There's not a more innovative leader in this industry than Adam," said Steven J. Heyer, Starwood's Chief Executive Officer. "As we continue to transform our company, unlocking the substantial power of our brands and implementing an exciting strategy that pushes traditional boundaries, Adam's insight and instinct will be invaluable."

The 10Q Detective is not questioning Aron’s competence. “Adam is an icon in the travel industry, well respected and admired by those who have worked with him during his 27 years in the industry," said Bruce Duncan, Chairman of Starwood's Board. "Credited with many industry 'firsts' including helping to create airline and hotel frequency programs, Adam is a formidable addition to our board."

And looking at Aron’s recent compensation and severance packages from Vail Resorts, from which he retired in June 2006, he certainly is not in need of disposable income:

  • As of April 2005, Mr. Aron owned more than $11.0 million in Vail-related real-estate holdings;
  • As part of his Separation Agreement, Mr. Aron was granted more than $2.65 million in accrued severance; and,
  • In his ten years at the helm of Vail Resorts, Aron accumulated more than 210,000 shares of company stock, worth an estimated $8.82 million. Also, he retains an additional 600,000 (+) in-the-money vested options, worth an estimated $25.2 million.

Mr. Aron epitomizes our time conflict argument; he is an obviously successful businessman with too little time to commit to all of his interests.

Are shareholders best served when—in addition to serving on the Board at Starwood’s Hotel—he is currently Vice Chairman of the Travel Industry Association of America and is expected to be its Chairman in 2008?

We doubt that he accepted the board position at Starwood for the 250,000 Starwood Preferred Guest Points and eighteen free nights per year in the Company’s hotels given annually to each director.

Did we mention, too, that Mr. Aron serves on the Board of Directors of the floral provider FTD Group (FTD-$17.48) and Rewards Network (IRN-$5.45), a leading provider of marketing services and loyalty programs to the restaurant industry?

If any of our readers need more telling attestation, consider this fact: Mr. Aron just founded Miami-based World Leisure Partners (in the spring of 2006) to serve as a personal consultancy on issues related to leisure-related and/or luxury products and services, including real estate, as well as consumer marketing issues. Potential clients will need to know that he has more than just a titular role to play if this venture is to succeed.

Doing a GOOGLE search, we uncovered 1.16 million articles referencing ‘CEO/ PAY/ EXCESSES.’ As Boards of directors are responsible for setting CEO pay, we wonder how many times directors have awarded compensation packages that go well beyond what is required to attract and retain qualified executives because the directors were too busy with other projects?

Given that executive pay excesses often come at the expense of shareholder value, stockholders ought to be asking just one question: When is Mr. Aron going to find the time to exercise the ski privileges for the 2006/2007 ski season (that he had written into his Severance Agreement)?

Editor David J. Phillips holds no financial interest in any of the stocks mentioned in this article. The 10Q Detective has a full disclosure policy.

Friday, November 24, 2006

Is CVS the Prescription Fix for CareMark?

On November 9, 2006, shareholders upset over the planned merger of prescription benefits manager (PBM) Caremark Rx, Inc. (CMX) with CVS Corp. (CVS) filed suit in Nashville federal court, claiming the business combination was merely a cover for a takeover by the drugstore chain and wasn’t fair to investors.

In its lawsuit, the Iron Workers of Western Pennsylvania Pension Plan argued that the stated “merger of equals” was actually a buyout of Caremark by the pharmacy chain CVS—without a takeover premium being paid to Caremark stockholders.

Under the terms of the agreement, which is a stock for stock transaction, Caremark shareholders will receive 1.67 shares of CVS for each share of Caremark. The exchange ratio approximates the 90-day average ratio of the two companies’ closing stock prices (prior to November 1, 2006).

The new company will be called CVS/Caremark Corp. and will be headquartered in Woonsocket, Rhode Island. The pharmacy services business will remain based in Nashville.

The combined company’s ordinary shares will trade on the NYSE under the symbol “CVS”.

Caremark's stock closed Wednesday at $45.90 a share. CVS closed at $28.00. Based on that, its offer for Caremark would be worth about $46.76 a share, for a premium of 86 cents a share. On a pro forma basis, CVS stockholders will own 54.5% of the combined company and Caremark stockholders will own 45.5 percent.

The lawsuit also accused Caremark executives, including Chairman and CEO Edwin "Mac" Crawford, of "breaching their fiduciary duties" (given the negligible price premium involved in the merger).

The 10Q Detective will present a case that questions the critical suppositions underlying the Iron Workers’ accusations:

  1. Did Caremark management fail to maximize shareholder value by negotiating a drug deal that included no premium for its stock price?
  2. Was the deal a “merger of equals” or a “bargain buyout” of Caremark by CVS?

The Iron Workers were puzzled as to why management negotiated the deal when the price of its common stock was so low? Caremark was selling at $49.00 at the time of the announcement, more than 20% below where it was valued less than two months earlier.

Adding to the Iron Workers suspicions, too, was that during the third quarter ended September 30, 2006, management approved open market purchases of 1.85 million shares of its common stock (under a previously announced repurchase program begun back in 2002) at an average price of approximately $55.35 per share.

Instead of griping about the dearth of a price premium in the $21.5 billion deal, the Iron Workers (and other dissatisfied investors) should question why the stock price was falling? [Ed. note. Before ridiculing the recent stock buybacks, investors should note that the average price paid for all repurchases made under the program from its inception through September 30, 2006, was $41.07 per share.]

In our view, investors were dumping Caremark stock because of recent events clouding future earnings’ visibility—including, but not limited to: (i) the timing and launch of generic pharmaceutical products by Wal-Mart into the marketplace, which will add incremental pressure to (already) weakening margins by decreasing the generic margin lifecycle; speculation that Democratic party gains in Congress will lead to an overhaul of the Medicare Part D prescription drug program, leading to lower average revenue per claim; and (iii) competition by other PBMs for managed-care providers’ prescription-drug plan contracts will continue to pressure margins.

Ergo, there was no price premium to the deal because CareMark’s current business model is dependent on the questionable ability of the Company to operate independently (and profitably) in a changing healthcare landscape.

In our view, the Iron Workers were correct in saying that deal was not “a merger of equals,” but the buyout of a PBM by a drugstore titan. Vertically integrating one of the biggest PBMs with the largest U.S. drugstore chain “as a deal of equals” in the best of times would be difficult. CVS’s $2.9 billion purchase of 700 standalone Sav-on and Osco drug stores (from Albertsons in January 2006), placating its own unhappy shareholders (given the recent drop in its own stock price), and executing on potential scale (and an expected $400 million in annual cost savings)—all these potential distractions will require dictatorial management—not management by consensus.

We predict that CVS will swallow the operations of CareMark into its own $3 billion wholly owned PBM (PharmaCare Management Services, the fourth-largest full-service PBM in the nation).

Both companies have said “the board of directors of the new company will be split evenly between Caremark and CVS. Mac Crawford will become Chairman of CVS/Caremark and Tom Ryan will become President and Chief Executive Officer. CVS Chief Financial Officer David Rickard will be Chief Financial Officer of CVS/Caremark and Caremark Senior Executive Vice President and Chief Operating Officer Howard McLure will become President of Caremark pharmacy services business.” [It is a given that administrative cuts will be made to realize the promulgated ‘cost-savings.’ The litmus test for this purported equal business combination will be twelve-to-eighteen months down the road—when investors see how many current Caremark executive and directors are still hanging around.]

Corporate Governance Issues

We would not go as far (as the Iron Workers) in saying that CareMark senior executives have “breached their fiduciary responsibilities”; still, a recent read of CareMark’s April 2006 Proxy Statement illustrates that top executives will profit handsomely ((once again) if this deal proves to be accretive to CVS’s profitability (and the price of CVS’s common stock retraces recent declines):

CEO & Chairman Edward M. Crawford beneficially owns 4.11 million shares of CareMark common stock, excluding an additional 5.76 million unexercised (in-the-money) stock options worth about $248.7 million (when the stock sold for $51.79 per share). Mr. Crawford is also entitled to certain “gross up” payments related to any excise tax that may be imposed when he elects to exercise the aforementioned shares.

Mr. Crawford earned a base salary of $1.6 million and a cash bonus of $3.2 million in 2005.

General counsel Edward L. Hardin has an employment agreement that states: “in no event will his annual base salary be reduced below $450,000 in any calendar year.” As an ‘inducement’ to sign the agreement, Mr. Hardin received an option to purchase 400,000 shares of common stock at an exercise price of $3.25 per share!

Mr. Hardin earned a base salary of $540,000 and a cash bonus of $1.35 million in 2005.

COO Howard A. McClure earned salary/cash bonus of $2.18 million in 2005, and is sitting on about 724,000 in unexercised options worth $14.88 million (at year-end 2005).

In late 2003, when CareMark relocated its corporate headquarters from Birmingham, Alabama to Nashville, Tennessee, certain executive officers—can you guess who—participated in the Company’s relocation services program, which included any net losses from resale of the houses, real estate commissions and other seller closing costs as a result of their transfers. To date, the Company (i.e. shareholders) has incurred aggregate costs of about $2.45 million. In addition, the Company currently has an aggregate outstanding equity advance totaling $2.90 million for Mr. Crawford, whose house has not yet been sold.

"Fear not, dear friend, but freely live your days…. Step, without trouble, down the sunlit ways" – Robert Louis Stevenson

If CareMark’s senior executives do not survive the impending management shakeout after the ‘Change in Control,’ each of them is entitled to lump sum payments (of salary/bonus).

Investment Risks and Considerations

In the last month, the stock price of CVS has dropped about 10 percent, as investors fear that retailer Wal-Mart’s $4.00 prescription drug plan—which has been expanded to include popular drugs (like the cholesterol drug Pravachol) exiting their 180 Day Generic Drug Exclusivity Period—will adversely impact the drugstores generic margins and decrease store traffic (and non-prescription sales).

Given that cash prescriptions account for a small percentage of CVS’s prescription volume/ profits, we view the sell-off as an irrational over-reaction.

Excluding the CareMark acquisition, CVS is selling for about 14.8 times FY 2007 consensus estimates of $1.89 per share. If CVS management can successfully execute on the opportunities of scale presented by the CareMark deal—in terms of EPS and incremental new customer traffic—the current price of its common stock could prove to be attractive to patient investors.

Risks to our assessment include potential dilution of additional CVS shares issued in the CareMark merger offsetting expected accretion to EPS from scale and administrative savings; government overhaul of existing reimbursement rates of the Medicare Part D prescription drug benefits program; higher than anticipated integration expenses from recent acquisitions; and, continued margin erosions in lower-priced generic drugs.

Editor David J. Phillips holds a financial interest in the common stock of the drug maker Bristol-Myers Squibb, the manufacturer of the brand-name Pravachol. He is considering the purchase, too, of shares in CVS Corp. The 10Q Detective has a Full Disclosure policy.

Sunday, November 19, 2006

Former Homestore CEO Stuart Wolff "Coulda Been a Contender."

Back in March 2001, in an online interview with BusinessWeek, the then founder and CEO of online real estate listings company Homestore Inc., Stuart Wolff, credited the ability of his company to survive the meltdown to its ‘unique’ business plan: “The companies that had models that showed there was a new way of doing business are the ones that have gone by the wayside (like and Webvan). Our model was always to partner with our industry. It was our intent to use technology to help make realtors more efficient, not to put them out of business.”

History has shown, however, that there was nothing singular about Homestore’s business model. Instead, like many other erstwhile Wall Street highfliers, Wolff and his Company's success was grounded in
accounting fraud. Wolff and a dozen or so other executives—motivated by greed—schemed to artificially inflate revenues through a ‘circular flow’ of money (by way of more than $67.0 million in sham online advertising—Homestore booked its own cash as sales).

As of December 31, 2000, Wolff held about 550,000 “in-the-money” stock options worth an estimated $5.56 million (at the fair market value of $20.13 per share).

In the prior two years, too, Wolff had exercised options to acquire some 2.35 million shares of common stock in exchange for a promissory note of about $3.24 million (at an interest rate of between 5.21 percent – 5.49 percent).

Indicted in April 2005, a federal court jury returned a guilty verdict against Wolff in his criminal trial (in June 2006) on 18 counts, including conspiracy, insider trading, filing false reports with the SEC, falsifying corporate records, and lying to the auditors.

On Oct. 12, 2006, prior to sentencing, Judge Percy Anderson said, “There comes a time when you have to accept responsibility…. Your failure to do that compels me to impose a substantial sentence.” Wolff was sentenced to 15 years in federal prison (of which at least twelve-years must be served before he is eligible for parole) and ordered to pay $8.64 million in restitution and a $5 million fine.

“You had marketable skills, you had money,” scolded Judge Anderson,
"there was no excuse for this.”

“You don’t understand! I coulda had class. I coulda been a contender. I could’ve been somebody, instead of a bum, which is what I am.” – Terry Malloy (Marlon Brando—actor,
On the Waterfront – Directed by Elia Kazan)

Wolff, 43, who holds a doctorate in electrical engineering from Princeton University (with research experience at AT&T Bell Labs and IBM), headed Homestore from 1997 until he resigned in January 2002 (amid an
internal probe of the Company’s finances). His salary/cash bonus totaled $487,115, $447,308, and $285,538 in fiscal year 2000,1999, and 1998, respectively.

The Company, which provides real estate listings and related services on the Internet, has since changed its name to
Move, Inc. (MOVE-$5.45).

Wolff’s attorneys (who had sought a sentence of two-to-six-years) said that an appeal is expected.

Editor David J. Phillips holds no financial interest in any of the stocks mentioned in this article. The 10Q Detective has a full disclosure policy.

Thursday, November 16, 2006

The Vultures are Circling above Bodisen Biotech

As predicted, the window of class action lawsuits has opened against organic fertilizer maker Bodisen Biotech (BBC-$5.29).

Earlier today, in their ongoing attempt to “champion the rights of investors nationwide,” New York-based Rosen Law firm filed a class action against Bodisen Biotech and certain of its officers and directors, as well as Benjamin Way and New York Global Group for violations of federal securities laws. The Complaint alleges that the Company failed to disclose that it was paying New York Global to issue positive research reports on the Company. As a result of the alleged fraud, Rosen charges that the value of the Bodisen’s stock has declined and damaged investors.

Committed to you—the investor—the Law Offices of Howard G. Smith announced that it has filed a securities class action lawsuit (on behalf of shareholders who purchased the common stock of Bodisen Biotech, too).

Their complaint alleges that defendants violated federal securities laws by issuing a series of material misrepresentations to the market during the Class Period (between August 26, 2005 and November 14, 2006) concerning the Company's business, prospects and financial performance, thereby artificially inflating the price of Bodisen securities.

The 10Q Detective spotted this joke online the other day: What's the difference between a lawyer and a vulture? The lawyer gets frequent flyer miles.

And the self-professed “champion for victims of corporate wrongdoing,” Kahn Gauthier Swick, LLC (KGS), announced that it has commenced an investigation into Bodisen Biotech to determine whether it has violated federal securities laws by issuing false and misleading statements to its shareholders.

According to KGS’ website, one of its founders was Wendell Gauthier (1943 – 2001), a nationally prominent lawyer most responsible for the national tobacco settlements in excess of $200 billion, and numerous other recoveries for thousands of plaintiffs in excess of $3 billion.

It is no joke – the vultures are already flying over Bodisen’s body, which is not even dead yet!

Long Positions in'10Q_Detective' sorted by Bought in Ascending order
Bodisen Biotech, Inc. (BBC)
SymbolPositionBoughtOpen PriceValueCostNet%Change

The 10Q Detective has a full disclosure policy.

Wednesday, November 15, 2006

How to Perform the Three-card Monte? Ask the Management of Bodisen Biotech, Inc.

Bodisen Biotech (BBC-$5.90) is spreading more than nontoxic soil conditioner around these days.

Last month, the China-based maker of organic fertilizers said that it expected ‘strong’ growth in revenue and profit for the third quarter ended September 30, 2006. Shares of Bodisen have tumbled about 45 percent in two days, reflecting investor disappointment in the Company’s
posted net income of $3.2 million, or 17 cents a share, for the three months ended Sept. 30, compared to a profit of $2.9 million, or 18 cents a share, in the year-ago equivalent period.

And today management disclosed that its prior financial filings “may have to be corrected or amended due to incomplete, misleading or inaccurate disclosures.”

Easy-lending credit policies, negative operating cash flow, and a questionable prior relationship with advisor Benjamin Wey and his
New York Global Group—the 10Q Detective saw red flags waving in the wind when we first posted on Bodisen Biotech. On October 2, 2006, we wrote: “albeit red flags do exist, in our view, we can shrug them off (for now) because the Company does have a strong balance sheet without any long-term debts.” Instead we chose to marvel at the Company’s strong (Chinese) agricultural product distribution network and upbeat comments by management.

Our favorite financier, statesman, and presidential adviser Bernard Baruch said: “Never pay the slightest attention to what a company president ever says about his stock.”

We wish we had listened—or at least paid heed--to the warning of
Dow Jones columnist Herb Greenberg when he rhetorically asked (of Bodisen’s management): “If the company can't answer that question (regarding their investment in China Natural Gas), or offer a good explanation, I would wonder what else might be exaggerated or not quite right?”

We are more than pissed off, for we feel like the mark in a game of
three-card Monte. That said, in our view, management is not finished with their sleight of hand card tricks. CEO Wang has already hinted at a sequential slowing of sales growth in the coming quarter, saying: ``While the fourth quarter, which represents the end of the harvest season, typically is our slowest period of the year, we expect to continue to achieve year-over-year revenue and earnings growth in the last quarter of the year.'' [Ed. note. Forget the hyperbole and read between the lines!]

In addition, we suspect that [more than one] class-action litigation is around the corner. [Ed. note. We can only hope, too, that the Company’s product ingredients really do not contain manure or other waste products.]

“If you get all the facts, your judgment can be right; if you don't get all the facts, it can't be right.” –Bernard Baruch.

Given the blatant discrepancies between management’s public comments and disclosures (in SEC filings), we have lost faith in this Company. Contrary to our concern(s)—and hoping to flip the “money card”—we are disclosing that we did do speculative buying in the Common Stock of Bodisen near the close of trading today—trusting that there is truth to the Wall Street saying that “even a dead cat will bounce if it is dropped from high enough.”

Editor David J Phillips is long shares of Bodisen Biotech and China Natural Gas. The 10Q Detective has a full disclosure policy.

Tuesday, November 14, 2006

Precision Drilling Trust--Spudding Dry Holes for Investors?


"I am looking to diversify my portfolio and am looking at oil/energy stocks. I read your nice review on
Precision Drilling Trust and decided to buy the stock. Unfortunately, this was the day before the plunge happened after Flaherty's comments. I bought at $28 and got out at $25 during the panic. But the only reason why I sold was because of the overall sell-off - I was trying to be disciplined about selling when the loss got past 8-10% (an IBD strategy). Now the stock is down to $23 and I am considering getting back in, especially given the "watered down" context of Flaherty's comments. I like the dividend and I think the stock has hit a bottom - one accentuated by politics. The dividend realized is actually 15% less than the proclaimed yield, however, as the Canadian govt. takes a 15% cut as a foreign tax - my own experience from holding Canadian Imperial Bank shares. So, do you still support the stock and do you feel that this is a nice opportunity to get back in?”

Ed. Note: We expect the dividend payout ratio (about 92.0%) to be cut substantially, for (i) the current dividend payout is built-on the existing premise of a corporate [expense deduction] pass-through to unit trust holders and (ii) the Company will need to reconcile its dividend distributions and expected capital spending expenditures with the final income trust tax bill.

The Common Stock of Precision Drilling Trust (PDS--$22.42), Canada's largest oilfield services company, has plunged about 27.8% since November 1, when Jim Flaherty, Canadian Finance Minister, stunned investors on Bay Street to Wall Street with news that the Canadian government was planning to tax dividends on income trusts.

Royalty (income) trust have become increasingly popular in our Neighbor to the North, for the trust structure avoids the double taxation that came from combining corporate income tax with shareholders' dividend tax. By passing through the earnings—in the form of both cash dividends and a pro-rata share of return-of-capital, the trust structure reduced—or eliminated—its income tax liability, thereby increasing the amount of cash available for distribution to unitholders and for future capital expenditures.

Anticipating that increasing cash distributions to unitholders would provide an attractive rate of return without impairing Precision’s ability to finance maintenance and expansion capital expenditures, the Company (on November 7, 2005) converted to a trust structure through a plan of reorganization.The Trust, through its wholly-owned subsidiaries, now operates the Company’s contract drilling services to the Canadian oil and natural gas industry.

When Canadian telecom giants
Bell Canada Enterprises (BCE-$23.99) and Telus Corp. (TU-$47.98) announced plans to convert to income trusts, the Tory-led government feared a domino effect would occur in other sectors of the economy (allegedly among financial institutions and other energy concerns). According to Flaherty, “$70 billion of new trust conversions had been announced so far this year — and (this) converting was solely to avoid paying corporate taxes.”

Flaherty imposed this punitive tax on income trusts to “stem the growing number of companies” that were converting to trusts—and broke a central election promise. The Tories promised in their platform book to preserve income trusts by not imposing any new taxes on them (after accusing the Liberals of attacking retirement savings). Acknowledging the broken election platform, the Tories still countered that income-trust acceleration would have meant the loss of billions in the tax base provided by corporations. “Increasingly, individuals and families in Canada would shoulder the burden,” Mr. Flaherty said.

It is estimated that foreigners only hold about 20 percent of all (Canadian) income trust units. This means that Canadians—with many being retirees dependent on the distributions from these trusts to meet monthly expenses—(despite proposed tax relief) will eventually feel the impact of less income (in addition to the loss in savings/assets from the drop in market value of all the affected trusts).

The Tory-led government will be under pressure, too, from Canadian oil & gas executives, as foreign investors look away to more attractive markets.

American investors ought to note that the Conservatives have—at best—a tenuous hold on power. In the 2006 Canadian federal election, held on January 23, 2006, the Conservative Party of Canada won a plurality of seats in Parliament: 40.3% of seats, or 124 out of 308—but mathematically, the numbers resulted in a minority government led by the Conservative Party with
Stephen Harper (becoming the 22nd Prime Minister of Canada).

On September 25, 2006, the Conservative government announced that within the fiscal year, there would be a $13.2 billion-dollar surplus (that will be used to pay down the country's debt). This statement supports a modification of the income-trust tax proposal.

Even if Harper’s Tories stand together, tax reform will still require support of either the New Democratic (NDP) or Bloc Québécois parties for passage of the Trust Tax. [Ed. note. Taxes are the only politics that the Conservatives have in common with the New Democratic party (with 29 members in the House), for the NDP’s ideology is more to the left—and liberal—to that of the Tories. The Bloc Québécois party has 50 seats in the House of Commons.]

Although the new tax (estimated to be 34 percent) is not slated to take full effect until 2011, we must assume the core advantage of being an income trust has been mortally wounded.

Absent final clarification by the Harper-led gang on Parliament Hill in Ottawa, uncertainty will continue to shadow all income trusts, including our Precision Drilling holding, for all affected companies need to know what tax reform bill it is that they need to adjust to (reconcile dividend distributions with capital spending needs)?

Granted, we just said last week that
cheap can get cheaper, but with the price of Precision Drilling Trust off about 41 percent from its April 2006 high (of $38.30 per share), the contraire in us loves the uncertainty, and we bought more shares of the Common Stock (which has a book value of $8.46 per share and little in long-term debt, only 14.1% of equity).

Long Positions in'10Q_Detective' sorted by Bought in Ascending order
PrecisionDrilling Trust (PDS)
SymbolPositionBoughtOpen PriceValueCostNet%Change

Editor David J Phillips is long shares of Precision Drilling Trust but has no financial interest in any other company mentioned in this posting. The 10Q Detective has a full disclosure policy.

Saturday, November 11, 2006

Adobe CFO Furr Resigns--Window into His Universe

On May 18, 2006, Adobe Systems (ADBE-$39.41), which makes a number of popular software applications, including PhotoShop and Acrobat, introduced Randy Furr as its new Chief Financial Officer. Pursuant to his employment agreement, Mr. Furr’s was to receive (i) an annual base salary of $500,000; (ii) a bonus of up to 75% of his annual base salary; (iii) a sign-on bonus of $100,000; (iv) eligibility to participate in the Adobe profit sharing plan and an executive “Performance Shares” program (with a targeted grant of 20,000 shares in FY 2007); and, (v) an option grant—which vested over four years—to purchase 300,000 shares of Adobe common stock at an exercise price of $28.78 per share (which was equal to the closing price of the Company’s common stock on June 19, 2006).

CEO Bruce Chizen lauded Furr's move to Adobe, saying: “Randy, welcome to the Adobe team. We are proud of the company we have built and are confident you will soon discover why it’s simply better at Adobe. We look forward to your contributions to Adobe’s ongoing success.”

Yesterday, after just six months on the job, Adobe Systems announced
the resignation of CFO Randy Furr. The Company said, “Furr's departure had nothing to do with his job performance. In addition, no issues had been raised regarding the integrity of the company's financial statements.”

The 10Q Detective called the Company seeking additional clarification and was told that Furr left of his own accord, for “personal reasons.”

A salary/cash bonus potential of about $875,000 per annum and the forfeiture of (up to) 300,000 share options more than $10.00 (per share) ‘in-the-money’—we had to pinch ourselves. Human nature—we speculated—who would pass up such a sweet compensation package? Did Furr leave voluntarily, without prompting or coercion, or was the “personal reason” more rhetoric than fact?

Before arriving at Adobe, Furr spent thirteen years at the integrated electronics parts manufacturer Sanmina-SCI (SANM-$4.17), serving as President and COO from 1996 to 2005, and as CFO from 1992 to 1996.

Some analysts
pondering the mystery of Randy Furr believe that he resigned from Adobe because of his possible involvement in a stock option scandal announced by a Special Board Committee at Sanmina on October 12, 2006.

Sanmina said last month that its internal inquiry found that most stock option grants to executives and other employees between 1997 and 2006 were not correctly dated or accounted for and would require that the Company restate its historical financial results and record non-cash compensation charges. In addition, two former senior level executives employed during this time period had been implicated in the backdating option scandal.

In a conversation with Sanmina spokeswoman, Paige Bombino, she declined to identify the two executives who helped to engineer the option scheme, confirming to us only that it was not the company's [current] chief executive officer or chief financial officer.

Similar to his stated reason for leaving Adobe, Furr left this other San Jose-based technology firm (and a $500,000 –plus- annual salary) in October 2005, citing “
personal circumstances and family reasons that required his immediate attention.”

Sadly, the 10Q Detective has since learned that Furr was telling the truth, for his wife, Karen, was fighting (a losing) battle with cancer.

When talking about
quantum mechanics, Albert Einstein said: “The theory yields a lot, but it hardly brings us any closer to the secret of the Old One. In any case I am convinced that He [God] doesn't play dice.”

As to whether or not the hint of scandal shadows Furr’s resignation from Adobe, the 10Q Detective prefers not to roll the dice, for we are convinced that only Furr, God, and the SEC know for certain.

Editor David J Phillips does not own any of the stocks mentioned in this article. The 10Q Detective has a full disclosure policy.

Wednesday, November 08, 2006

Delphi Corp. Bankruptcy: How Wise the Oracle?

Increasing competition from foreign suppliers; a reduced number of motor vehicles being produced by General Motors; U.S. labor legacy liabilities and noncompetitive wage and benefit levels; restrictive collectively bargained labor agreement provisions; and, increasing commodity prices, most notably steel, petroleum-based resin products and copper —all these variables compounded an already deteriorating financial picture at Delphi Corporation, the U.S. largest auto-parts maker. In October 2005, Delphi (and certain of its U.S. subsidiaries) threw in the proverbial towel, filing voluntary petitions for reorganization relief under chapter 11 of the Bankruptcy Code.

On October 11, 2005, the New York Stock Exchange (NYSE) announced the suspension of trading of Delphi’s common stock. The NYSE subsequently determined to suspend trading based on the trading price for the common stock, which closed at $0.33 on October 10, 2005, and completed de-listing procedures on November 11, 2005.

The Common Stock of Delphi (DPHAQ-$2.25) currently trades on the Pink Sheets, a quotation service for over the counter (OTC) securities, and is no longer subject to the regulations and controls imposed by the NYSE. Unlike securities traded on a stock exchange, such as the NYSE, issuers of securities traded on the Pink Sheets do not have to meet any specific quantitative and qualitative listing and maintenance standards.

“A speculator is a man who observes the future, and acts before it occurs.” –Bernard Baruch.

The share price of Delphi has gained an amazing 582 percent in value in the last year, as investors speculate that there will be material value left for shareholders when a solvent Delphi emerges from bankruptcy proceedings.
Scottish writer Thomas Carlyle (1795-1888) said, “Conviction is worthless unless it is converted into conduct. “ Given Delphi’s current obligations, the 10Q Detective does not subscribe to the optimistic conviction and believes that the Company’s course of conduct will prove the Common Stock to be declared worthless.

The plan of reorganization has a human face—
’early’ retirement for hourly workers and modified retiree benefits. Still, the Delphi bankruptcy remains a balance sheet event. Ultimately, it was the Company’s inability to effectively respond to a magnitude of financial challenges, including its U.S. legacy liabilities (such as debt-service levels, fixed labor costs, and prior pension and health care funding obligations) and dependence on GM for top-line growth (about 48% of 2005 net sales) that pushed the Company over the edge:
  • As of June 30, 2006, Delphi had total assets of $15.06 billion (less inventories and goodwill) and total liabilities of about $25.3 billion. Additionally, the Company owes about $1.27 billion in other financial contracts and obligations (such as IT purchase commitments and capital/operating leases) that come due in the next four years.
  • Management believes that the average rates at which it currently compensates its hourly workers, including employee and retiree benefits, is nearly three times the average hourly labor rates paid by its U.S. peer companies. Specifically, Delphi’s U.S. hourly pension and other post retirement benefits (OPEB)—mainly health and life insurance—exposed Delphi to approximately $10.7 billion in unfunded liabilities at December 31, 2005, of which approximately $2.3 billion was attributable to unfunded pension obligations and $8.4 billion was attributable to OPEB obligations. [Ed. note.The Company is only allowed to defer these contributions until it emerges from Chapter 11. As such, the projected future cash outflows for hourly pension contributions and OPEB payments will increase as Delphi’s U.S. workforce continues to age and the ratio of retirees to active employees increases.]
  • Delphi is currently operating as “debtors-in-possession” (DIP). Specifically, DIP is unique from other financing methods in that it provides the lenders with (a first lien) priority over existing obligations, including debt and equity (current shareholders are considered unsecured claimants).

J.P. MORGAN SECURITIES INC. and Citigroup Global Markets, Inc arranged the DIP. As of December 31, 2005, Delphi had $250 million in term loans and $7 million of letters of credit outstanding under its DIP credit facility. However, Delphi has the ability to borrow up to $2.0 billion from its lenders. [Ed. Note. Again—each additional dollar borrowed means one less potential dollar for shareholders.]

  • The Chapter 11 Filings triggered defaults on substantially all debt obligations, including 10.0 million shares of trust preferred securities [collectively known as Delphi Trust I and Delphi Trust II]. The property trustee of each Trust is in the process of liquidating each Trust’s assets and it is expected that the holders of the trust preferred securities will receive in exchange for their securities a pro rata share of the Trusts respective junior subordinated notes issued by Delphi (which leaves even less of the money pie for Common Stock holders).

As of June 30, 2006, Delphi had a total stockholder deficit of $(7.93) billion [understated!], or about $(14.12) per share.

Albeit Delphi will probably emerge from bankruptcy as a viable entity, the math suggests that it is the creditors and bondholders who will become the Company’s new owners—not the stockholders.

Despite the empirical evidence to the contrary—conventional wisdom—and the efficient market hypothesis—do little to explain why investors would invest $2.00 in a stock that is seemingly worthless. In our view, mob psychology might help to define why individual investors tend to ignore responsible judgment. Being part of a group—(in this stock example) the plethora of message boards (and related threads)—makes investors absorb the behavior of the collective (while also being able to mask their actual identities). Ergo, as the price [of Delphi] started to rise from pennies to quarters, the message boards started buzzing that the price was headed much higher.

"Friends, Romans, countrymen, lend me your ears;
I come to bury Cæsar, not to praise him.
The evil that men do lives after them;
The good is oft interred with their bones."
–And in his stirring speech, Marc Antony incited the gathering mob to drive Julius Caesar’s assassins from the city of Rome. [William Shakespeare’s Julius Caesar.]

Editor David J Phillips does not own any of the stocks mentioned in this article. The 10Q Detective has a full disclosure policy.

Tuesday, November 07, 2006

Red Tag Sale with Renovis Inc.'s Common Stock?

The mission statement at biotech Renovis Inc. (RNVS) is "renew, restore, repair." These days the Company is in desperate need of some renewal and repair for itself.

On October 26, 2006, shareholders abandoned Renovis Inc. after the Company announced that its novel free radical trapping neuroprotectant, NXY-059, did not meet efficacy endpoints in a pivotal Phase III Trial for Acute Ischemic Stroke. As NXY-059 was the Company’s most advanced product candidate, news of the setback sent the price of the Common Stock plummeting 75.8% in active trading (to close at $3.43).

At the time, some investors (and equity analysts) thought the loss in market valuation excessive. The Company was in reasonably sound financial health with $104.73 million, or $3.57 per share, in cash and cash equivalents (as of June 30, 2006).

Renovis has an active
pain and inflammatory diseases research program. Its most advanced drug discovery program is focused on small molecule compounds that inhibit a molecular gateway to the pain pathway, called the vanilloid receptor, VR1, with the objective of developing a new class of treatment for inflammatory pain, neuropathic pain, and other neurological disorders.

In May 2005, Renovis entered into a two-year agreement with Pfizer to combine respective drug discovery efforts surrounding VR1. Pfizer has the option to extend the agreements for up to two additional years (subject to specific progress of the VR1 collaboration and additional funding requirements).

In addition to its VR1 Antagonist Program, Renovis is also pursuing novel molecules called
purinergic receptor inhibitors (which have potential as broad-spectrum analgesics and anti-inflammatories). The Company, however, has no product candidate currently beyond the initial research stage.

Today, the share price of Renovis closed at $3.10—showing us that cheap can get cheaper.

Editor David J Phillips does not own any of the stocks mentioned in this article. The 10Q Detective has a full disclosure policy.

Friday, November 03, 2006

Nothing to Smile About At Concord Camera

Concord Camera Corp. 10086.46117.9755.9321.1910.85
Nasdaq Stock Market – U.S. Index10070.3478.1098.5899.24105.85
Peer Group Index10085.3195.06111.08111.61145.80

In its Report on Executive Pay, the Compensation Committee of photographic equipment maker Concord Camera (LENS-$0.51) stated that it “sought to ensure that the Company’s compensation policies were designed and implemented to promote the goal of enhancing long-term shareholder value.”

According to the Company’s recently filed
DEF 14A with the SEC, $100.00 invested in the Common Stock of Concord Camera on June 1, 2001, was worth $10.85 per share (as of June 1, 2006).

Despite an abysmal stock performance—an 89.2% loss in shareholder value in the last five-years—Ira B. Lampert, who has been Chairman and CEO since 1994, seems to be immune from the Company’s purported compensation policies. In the last three fiscal years, Mr. Lampert earned $2.78 million in salary and $9.54 million in “other compensation.” [Ed. note. At a time when most working families are looking at shrinking retirement nest eggs, 78.3% of the $9.54 million in other compensation, or $7.47 million, was a FY 2006 distribution from his Supplemental Executive Retirement Plan (SERP).]

The Pay Committee believes that the key to enhancing shareholder value is to “attract, retain and motivate qualified and experienced executive officers through forms of compensation that encourage and reward long-term service to the Company, and enable those who succeed in building shareholder value to share in the value they have helped to create.”

However, their actions seem to contradict their intent. Until last year, Lampert’s employment agreement required that the Company make a $500,000 annual contribution to a SERP adopted for his benefit—independent of corporate performance.

Other annual benefits received by Lampert included auto allowance and costs, partial housing costs and reimbursement of taxes, respectively, of $30,000, $48,000 and $62,452 for fiscal 2006; $30,000, $48,000 and $76,694 for fiscal 2005; and $30,000, $48,000 and $105,114 for fiscal 2004.

Despite restructuring initiatives begun in 2004, net sales for fiscal year ended 2006 were $137.5 million, a decrease of $36.8 million, or 21%, as compared to net sales for fiscal 2005. The decrease in net sales was due to the cessation of a design and manufacturing services contract for single-use camera sales to Eastman Kodak (EK-$25.01) and a decrease in digital and 35mm traditional film camera sales in European and Asian markets.

Concord Camera remains highly dependent on two retail customers for net sales: Wal-Mart Stores, Inc. (WMT-$48.29) and Walgreen Co. (WAG-$42.21) represented 33.8% and 15.2% of total net sales in FY 2006, respectively.

The Compensation Committee engages the services of outside consultants to obtain advise them on competitive levels of compensation used by public companies of comparable size. [Ed. note. What good does this analysis do if one advocates that the peer (comparable) firms were also headed by CEOs who were paid too much?]

In our view, Lampert’s pay package is just another case where a CEO’s pay has nothing to do with his performance (or any quantifiable effect on shareholder value). In addition, Concord Camera reinforces the argument that a CEO may not make all that much of a difference in whether the company is a success or a failure.

Concord Camera has received a
Notice of Delisting because of its failure to maintain a minimum $1.00 bid price requirement. If the bid price of the Company's common stock does not close at $1.00 per share or more for a minimum of 10 consecutive business days before December 26, 2006, the Company will (probably) be delisted from the NASDAQ Global Market.

The employment agreement of Ira Lampert, 61, does not expire until July 1, 2009.
Editor David J Phillips does not own any of the stocks mentioned in this article. The 10Q Detective has a full disclosure policy.