Tuesday, February 27, 2007

Can Carl Icahn Successfully Predict Motorola's Future?

In June 2006, Business 2.0 Magazine assembled a list of 50 prominent people, identified not on the basis of pecuniary notability, but on their ability to change the world we live in today—“ by inventing important new technologies, exploiting emerging opportunities, or throwing their weight around in ways that are sure to make everyone else take notice.”

In assembling this list, the editorial staff emphasized one key question: What have you done for us lately? They also considered its important corollary:
What will you do for us tomorrow?

Ranked high on this list was
Ed Zander, CEO, Motorola, Inc. (MOT-$19.25): “In the span of less than three years, Zander has pulled off the most dramatic tech turnaround since Steve Jobs revived Apple. Motorola was moribund and starved for a consumer hit when the former Sun Microsystems exec took over as CEO in 2004; Zander put the ultrathin Razr phone on the R&D fast track…. with the slimmed-down handsets leading the charge, Motorola looks stronger than ever.”

In fiscal year 2006, Motorola had few new products that cell phone companies wanted to offer; ergo, it artificially propped sales demand for tens of millions of Razrs and their offshoots, such as the KRZR, by slashing prices. One month ago, the Company disclosed its weakest quarterly results since 2004.

"It is very difficult to make an accurate prediction, especially about the future." – Niels Bohr, Danish physicist (1885 - 1962).

On February 21, 2007, the Company said the
1H:07 would be “rocky,” and that the earliest the cell-phone maker would return to double-digit operating margins would be in the third quarter of FY 2007.

Motorola's stock has tumbled about 26% from a 52-week high in October, and hit a 52-week low of $17.90 on January 12.

As Apple, Inc. (AAPL-$88.65) gears up to attack the $250-plus phone(s) market segment with its
iPhone, due out in June, financier Carl Icahn—who beneficially owns, in the aggregate, 33.53 million shares, or about 1.39% of the Company—and other Motorola shareholder’s are probably asking: “Ed Zander, what will you do for us tomorrow?”

History is awash with bold predictions gone awry.

"There is no reason anyone would want a computer in their home." -- Ken Olson, president, chairman and founder of Digital Equipment Corp., 1977.

The editors at Business 2.0 Magazine might want to rethink their top fifty list.

Editor David J Phillips does not hold financial interests in any of the companies mentioned in this posting. The 10Q Detective has a Full Disclosure policy.

Thursday, February 22, 2007

Bridgford Foods--Too Many Cooks in the Kitchen


* $100 invested on 11/2/01 in stock or on 10/31/01 in index-including reinvestment of dividends. Index calculated on month-end basis.

How many people does it take to run a board meeting? No, this is not a trick question. At most publicly traded concerns, the CEO usually wears the Chairman hat, too. In the rare case—when a founder will not go “quietly into the night,”--the answer might be two, for the founder will stick around, holding an honorary title, such as Chairman emeritus.

We stumbled on a rarity—three persons holding the title of Chairman of the Board of Directors—simultaneously!

A triumvirate sits at the head of the Director’s table at Anaheim-based Bridgford Foods Corp (BRID-$7.44). According to the recently filed Proxy statement with the SEC, Alan L. Bridgford, 71, Hugh W Bridgford, 75, and William L. Bridgford, 52, held the position of Senior Chairman, VP and Chairman, and Chairman, respectively.

Hugh Wm. Bridgford and Allan L. Bridgford are brothers. William L. Bridgford was elected to the Board of Directors on August 9, 2004, and he is the son of Hugh Wm. Bridgford.

In fiscal year 2006, Alan, Hugh, and William received a salary of $210,914, 241,460, and $198,750, respectively.

Allan L. Bridgford and Hugh Wm. Bridgford also draw annual defined benefits and SERP benefits of $67,761 and $48,771, respectively, and, $51,528 and $61,080, respectively.

Repeated operating losses and eroding sales—two good reasons why investors long ago fled the stock of this distributor of frozen, refrigerated and snack food products. The share price has shed 42.2% in value in the last four years.

The old adage about too many cooks in the kitchen fits very well at Bridgford, for how much worse might the Company’s performance—stock and financial—have been if there were only one Bridgford at the helm?

Editor David J Phillips does not hold financial interests in any of the companies mentioned in this posting. The 10Q Detective has a Full Disclosure policy.

Tuesday, February 20, 2007

Applied Materials: Connect-the-Dots of CEO Splinter's Pay Package

As an inducement to jump ship, it is now standard for a company looking for new talent to indemnify their just recruited CEO with guaranteed performance compensation for the first twelve-months of service. Never mind any probationary period, for this guaranteed portion of the CEO’s compensation package is grounded in expected performance, rather than upon their actual performance.

CEOs inveigle, too, the goodwill of their victorious ‘March on Rome’ with the payment of an additional sign-on bonus (cash & restricted stock), ‘no-reduction’ in base pay and ‘separation’ clauses, and one added fillip—a final paragraph—or two—detailing how the employer will reimburse the hire for any legal costs.

As for the consequences of failure, forget about it. How often is an executive’s contract voided ‘for cause?’ Unless they’ve been caught in bed—videotaped or with photographs—spending stockholders’ monies on hooker(s), discharge from the so-named company is usually accompanied by the “personal health/spend more time with family” rhetorical release(s).

Proponents of golden glove contracts for CEOs postulate (a) the new hire must receive recompense to mitigate the loss of substantial compensation forfeited by leaving their former employer and/or (b) a qualified candidate represents an investment in ‘human capital’ to the company, such as leadership/knowledge skillsets and social/professional connections, that will ultimately reward all stakeholders with exponential growth—incremental profits—and (predictably) a higher market valuation.

Unfortunately, no academics—to date—can show a casual relationship that higher CEO pay equals superior—to the previous baseline—growth (in terms of financial and stock price performance).

A new twist is the “failure effect.” A recent Booz Allen study found that more than one-third of CEO turnover was performance related. That is, a CEO is vulnerable to ouster if his stock price has lagged behind the S&P 500 by an average of 2 percent since he took the top job. Ergo, a new boss can no longer promulgate his vision of change through new investments in R&D [with a future value payday years down the road].

Granted, it is difficult for a CEO to walk the tightrope, balancing the short-term pressures of Street sales/EPS expectations with what is truly in the long-term best interest of the company. Meeting quarter-quarter guidance through sleight of hand—delaying R&D investment, cutting headcount, or reducing reserves—will only work for so long.

This argument that premium compensation packages are now necessitated by the probability risks of being a CEO ‘has-been’ statistic is flawed in one constituent element: accountability. Chief executives ought to be paid for shepherding their company to organic growth, not because of the risk associated with failing to restart the company. If that means premium pay—in the form of long-term stock options (at staggered higher strike prices than current stock price)—so be it (but not grants at one-cent per share, etc.)

According to its recent proxy filing with the Securities and Exchange Commission last Wednesday, semiconductor equipment maker Applied Materials Inc.'s (AMAT-$19.02) CEO Michael R. Splinter made about $11.4 million (cash/bonus/long-term incentive comp) in 2006. That in of itself is of little interest to us, but it is the connecting of all the dots—in this and Proxy Statements in recent years past—that reveal the hidden costs associated with hiring a chief executive officer.

As his come-on to join AMAT as President and Chief Executive Officer, on April 21, 2003, the Company entered into an agreement with Michael R. Splinter that provided for the following in Mr. Splinter’s first year of employment:

  1. a base salary of $900,000;
  2. a target bonus of 175% of the base salary based on the achievement of certain performance measures (actual cash bonus paid was $5.0 million, or about 555.6% of his 2004 base salary); and,
  3. stock option to purchase 1,200,000 shares (at an exercise price of $15.72 per share);
  4. the 10Q Detective unearthed, too, his “Make Whole” compensation rider. To wit:

    "[The] Company recognizes that you would be foregoing a substantial amount of unvested "in the money" stock option value by leaving your present employer to join Applied Materials. This amount is estimated to be approximately $3,000,000. In an effort to address this issue we will provide you with a Restricted Stock Grant of 300,000 shares of the Company's Common Stock vesting 50% on October 1, 2003 and 50% on October 1, 2004."

Actually, this restricted grant on May 20, 2003, was worth an estimated $4.2 Million (based on the price of AMAT’s stock on that date ($13.76), less the one cent per share Mr. Splinter paid for the shares). Unless we are mistaken the $1.2 million difference between $3.0 million and $4.2 million is worth much more than an ‘approximate.’

“Finish each day and be done with it. You have done what you could. Some blunders and absurdities no doubt crept in, forget them as soon as you can. Tomorrow is a new day, you shall begin it well and serenely...” – Ralph Waldo Emerson (American Poet & Essayist, 1803 – 1882)

If Applied had terminated Mr. Splinter’s employment without cause on in fiscal 2006, Mr. Splinter would have received the following severance benefits under his employment agreement:

  1. a lump sum payment of $2,362,500, consisting of a combination of his annual base salary for fiscal 2006 of $945,000 and 100% of his target bonus for fiscal 2006 of $1,417,500, and
  2. acceleration of the vesting of stock options to purchase an aggregate of 1,101,250 shares of common stock. Based on the difference between the weighted average exercise price of the options and $17.26, the closing price of AMAT’s common stock on October 27, 2006, the net value of these options would be $462,000.

Another lesser-known—but common—perquisite granted to new hires joining the ranks of top management, too, is a ‘home sales assistance’ benefit—which guarantees that the executives will be insulated from the vagaries of real estate valuation cycles.

Pursuant to the terms of his employment contract, Splinter, 56, a twenty-year veteran of Intel, also had written into his contract certain relocation benefits. Specifically, Splinter made the required efforts [undefined] to sell his former residence but could not secure an outside buyer within the 60-day period specified in AMAT’s relocation policy. After this period, Applied purchased Mr. Splinter’s residence for $1,775,000 in November 2005. Four months later, AMAT sold Mr. Splinter’s former residence for $1.5 million and retained all proceeds from the transaction (including the capital loss, too).

What do real estate prices and the performance of semiconductor stocks have in common? Granted, real estate markets exhibit larger amplitude cycles (of 10 – 20 years), but historically, both markets exhibit a cyclic behavior profile, facing predictable booms and busts (inventory gluts) in demand for their respective products.

We bet that investors who paid $25.00 per share for AMAT stock back in November 2003 wish that they could invoke a ‘sales assistance’ clause, too.

Editor David J Phillips does not hold financial interests in any of the companies mentioned in this posting. The 10Q Detective has a Full Disclosure policy.

Wednesday, February 14, 2007

Startech Environmental -- More Hot Air than Profit

Startech Environmental (STHK-$2.95) is a “waste to energy” company commercializing its proprietary plasma processing technology, the Plasma Converter system.

The Plasma Converter System achieves closed-loop elemental recycling that irreversibly destroys hazardous and non-hazardous waste and industrial by-products while converting them into useful commercial products. This “green” waste management alternative uses the extreme high temperature created by a plasma arc—the arc in the plasma plume within the vessel can be as high as 30,000 degrees Fahrenheit, or three times hotter than the surface of the Sun—to break down (molecular dissociation) any proportion or combination of solid or liquid waste (including sludge).

The two principal byproducts of the Plasma Converter are a synthesis fuel gas called PCG and an obsidian-like stone, which is non-toxic and non-leachable. Both are commodity products that offer the customer revenue potential. The PCG can be directly used for plant heating or cooling, to make electricity, or to desalinate water, as well as other uses. Additionally, the PCG can be used to make hydrogen or methanol. The obsidian-like stone can be sold to the construction and abrasives industries.

In June 2002, the Company submitted an application for a patent to the United States Patent and Trademark Office. The patent involved a torch positioning apparatus designed and developed by Startech engineers. Management believes it more prudent to treat its other proprietary intellectual property as trade secrets, for applying for patents would expose the Company to unauthorized use of its proprietary information.

Company Background

The Company's activities during the four fiscal years, November 1, 1992 to October 31, 1995, consisted primarily of the research and development of the Plasma Converter. In November 1995, Kapalua Acquisitions, Inc., completed the acquisition of Startech Corporation.

On November 18, 1995, the board of directors of the Company unanimously approved a change of the business purpose of Kapalua Acquisitions, Inc. from one seeking an acquisition candidate to one engaged in the business of manufacturing and selling the Plasma Converter system to recover, recycle, reduce and remediate hazardous and non-hazardous waste materials. From that time to date, the Company has maintained this goal as its principal focus.

In 2003, recognizing the increasing importance of alternative energy and power sources in general, and hydrogen in particular, the Company expanded its product-line to include StarCell, a hydrogen separation technology that extracts hydrogen from PCG. Working in conjunction with the Plasma Converter, management says that StarCell provides an environmentally friendly renewable source of hydrogen power (only byproduct is water vapors).

Startech is a licensee of one patent critical to enhancing the commercial capability of its core plasma system for certain applications, like hydrogen power. The patent relates to a Hydrogen-Selective Ceramic Membrane that was developed by Media and Process Technology, Inc. and its predecessor, ALCOA Corporation. This technology provides for the high temperature dehydrogenation of PCG and forms the basis of the StarCell system.

Key drivers of growth for the Plasma Converter include the need for customers to:
  • Reduce the disposal costs associated with increases in waste, and in particular hazardous wastes, due to consumer/industrial consumption and population growth in most nations;
  • Comply with present and anticipated new environmental regulations landfills and incineration in a socially and cost-effective manner;
  • Meet the demand for critical resources such as power and water to sustain local economies; and,
  • Find alternatives to fossil fuels.

Fuel from Waste

Startech believes that its core plasma technology addresses these waste and resource issues by offering remediation solutions that are integrated with a range of equipment solutions and services. In addition, these products will (allegedly) add value to potential customers’ business so they can now realize revenue streams from disposal or processing fees, a reduction in material disposal costs, as well as from the sale of resulting commodity products and services.

The problem, too, with some “green” alternative energy, such ethanol from corn, is that the economic costs (e.g. capital, environmental, etc.) are often higher than the economic benefits. Simply put, the transport of energy used is greater than the amount of energy produced. [For those without a science background, see the refresh link on Laws of thermodynamics].

Carbon is abundantly present in the products and wastes of the industrial world. Such materials are inherently rich in latent chemical energy such as is found in fuel. The Company claims that when carbonaceous waste, such as infectious medical and pharmaceutical waste, municipal solid waste, shipboard waste, and such are processed, the Plasma Converter system will consume only one unit of electrical energy while producing about four units of energy residing in the Plasma Converted Gas (a synthesis gas recovered from the recycling system, or PCG). Further, with improved efficiencies of electrical generating units, the four units of energy can be used to create two units of electrical energy.

The units of energy recovered, however, is dependent on the type of waste being recycled.

Materials such as scrap tires, plastics, and solvents, for example, are so rich in energy, they will produce a relatively large amount of PCG with a high-energy content that will result in approximately 6-8 units of recovered PCG energy for each unit of electrical energy used in the process.

Not all wastes produce PCG. For example, processing contaminated soil will produce no appreciable amount of PCG.

The costs of hazardous waste treatment and disposal methods continue to rise, and now range approximately from $900 to more than $2,000 per ton. This does not include the additional processing, handling, packaging, insurance and management costs sustained by the hazardous waste generator within its facility prior to final disposal.

The Company believes that in some applications, the Plasma Converter will allow its customers to produce enough energy for their own needs, and produce a surplus that can be sold to the local electrical grid, or used in a customer's facility to reduce the need for purchased power or purchased fuel—the profitable means to generate a valuable product while at the same time using a zero cost basis, or revenue generating source of raw material (waste).

The 10Q Detective notes, however, that such applications would require a h-u-g-e initial capital outlay—pipelines to carry the surplus, (time-consuming) manufacturing footprint that complies with regulatory statutes, including emission standards, storage, handling and transportation of regulated materials, etc.

Sales Potential

Startech expects a secondary benefit of the Plasma Converter system to be the salability of the recovered products: most of the PCG can be used as a fuel gas (such as hydrogen by use of the StarCell system) and, to a lesser degree, as a chemical feed stock; silicate materials recovered will be used in the ceramics, abrasives or the construction industries; the metallic components can be used or made readily available for sale with little or no additional processing.

In May 2006, the Company announced it had successfully completed Phase One of a two-phase DOE Program that has as its focus the production of Plasma Converted Gas (PCG) from processing coal and municipal solid waste in the Plasma Converter for the production of hydrogen. Phase Two, now in progress, is focused on the separation of hydrogen from the PCG synthesis gas mixture using the Company's StarCell system.

In our view, potential investors should not rely on a recurring revenue stream—at present—from hydrogen fuel. In the U.S., car manufacturers take their cue from Washington—and the politicians are talking up ethanol—not hydrogen as the fuel of the future.


Startech views the future of its business as divided into three key market segments: power/energy, waste remediation, and engineering services. Projects are generally categorized according to the specific or stated objective of the customer, waste remediation or power generation:

  1. A customer may have a need to remediate a particularly onerous waste such as PCBs but has no need to produce commodity products. The goal is to simply get rid of waste. That would be considered a waste remediation project.
  2. Conversely, a customer in an area with limited or high cost power may want to select a waste stream to give the greatest amount of Plasma Converted Gas with which to produce power to run his system or for other power uses. The production of power is the desired benefit and the feedstock (waste material) selected is chosen for the highest quality commodity product produced, in this case electric power.

The market for the Plasma Converter System is for on-site use by industrial, institutional and government facilities, and also for commercial facilities that process waste under contract.

Financial Overview

The Company recognizes revenue on the sale of its manufactured products at the date of shipment. Revenue earned from consulting and design services are recognized when the services are completed. For distributorship agreements, revenue is recognized for services and training upon completion and the distribution rights are amortized over a three-year period.

To date, however, educational and informational efforts have met with varying degrees of resistance. Startech has generated limited revenues from the sale of its products and does not expect to generate significant revenues until it sells a larger number of its products.

For the fiscal year ended October 31, 2006, total revenues were a paltry $948,794. The bulk of sales were attributable to three elements:

  1. The amortization of distributorship agreements delivered about 28% of sales. The distributors signed were Plasteck Solutions Limited, representing Australia and New Zealand, Plasmatech Caribbean Corporation representing Puerto Rico, and Materiales Renovados, Sl representing Spain;
  2. The initiation of engineering specs for the Liaoning GlobalTech Hazardous Waste Processing project—which will process 20,000-lb. per day of industrial waste , including PCBs—in Northern China delivered about 10%, or 100,000 in revenue; and,
  3. The sale and installation of manufactured parts to Mihama in Japan generated more than 50% of this total.

Installation of the industrial waste system in Hiemji, Japan was completed back in January 2006, and the PCB (polychlorinated byphenyls) testing was completed in October 2006. Preliminary results indicated complete destruction of the PCB's in the Plasma Converter System. Pending the final test report, Mihama can apply for its operator certification.

Ideally, as the Company's Japan distributor, Mihama can then use this system to support its Startech sales and marketing operations and be able to demonstrate a workable Plasma Converter System in a commercial operation to its other customers.

As of October 31, 2006, Startech had an accumulated deficit of more than $30.8 million.

The Company has historically satisfied its capital needs primarily by the sale of equity securities.

“The Company has no significant revenue, has suffered significant recurring operating losses and needs to raise additional capital in order to be able to accomplish its business plan objectives. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.” – [Startech 2006 10-K]

Latest Developments

“The initial contracts signed in Poland are still pending project funding and remain in the financial development stage. Discussions continue on project scope and configuration.” – November 2006

  • “On March 15, 2006, the Company announced that it and Future Fuels, Inc. (FFI), a subsidiary of Nuclear Solutions, Inc. (OTCBB: NSOL) of Washington, D.C., had received a Letter Of Intent from FFI for FFI's purchase of a 100 ton-per-day Startech Plasma Converter System (PCS) for installation in a StarTech waste-to-ethanol facility in Toms River, New Jersey scheduled to go on-line in late 2007.” – June 20, 2006.

As of January 4, 2007, FFI was still waiting on funding—a planned tax-exempt bond offering, totaling $84 million for the construction of the plant.

“You made me promises, promises
You knew you'd never keep
Promises, promises
Why do I believe
All of your promises
You knew you'd never keep
Promises, promises
Why do I believe?”
-- recorded by Eighties British synthpop duo Naked Eyes [Album – Everything And More, 1983]

In recent months, too, Startech has announced contract signings for the sale of three 200-tonne-per-day plasma converters to be installed In Panama and for one (to process industrial hazardous waste, including PCBs). The Panama plant is expected to be operational in 2008.

“He who is born a fool is never cured.” – Proverb

Startech’s business model needs to be modified to include the following defined variables:

  1. Demonstrated technologies have never been utilized on a large-scale commercial basis. Critics claim the largest model has not been demonstrated to safely handle 200 tons of trash per day (as claimed). [Startech has yet to provide evidence supporting its position that emissions will likely be less than from a standard natural-gas power plant];
  2. Care will be required during storage and handling of the Plasma Converted Gas (which may represent an explosion hazard) and during handling of the molten metal and slag produced by the process; and,
  3. The failure to achieve market acceptance of the Plasma Converter within the United States (given alternative “green” fuels and demonstrated, lower—initial cost waste-management options, such as landfill dumping and incineration).

“The only source of knowledge is experience.” – Albert Einstein (1879 – 1955)


In our view, a background check of Startech’s management and board raises doubt as to whether the Company has the right team in place to successfully execute on the economics of waste-to-energy burns. To wit:

The board consists of CEO/Chairman Joseph F. Longo and four outside directors:

  1. L. Scott Barnard, age 63, is currently the owner and Managing Partner of Programmix, LLC, a sales and marketing firm based in Norwalk, CT;
  2. Joseph A. Equale, CPA, age 60, active in the accounting profession, where he served as President and is a member of the Board of Governors of the 6,500 member Connecticut Society of CPAs (CSCPA);
  3. John J. Fitzpatrick, age 66, is an independent management consultant, having retired in 1995 from the “old” Dun & Bradstreet Corporation as an executive officer and Senior Vice President-Global Human Resources, where he was employed since 1983; and,
  4. Chase P. Withrow III, age 62, is a former manager at Advest. His claim-to-fame being that his brokerage office set records for gross commission production as well as gross sales production per broker!

Aside from CEO Longo, whose background is in waste-management, not one director has knowledge of refuse-to-fuel technology. Granted, the company burns more cash than it produces—ergo, it helps to have two directors with Wall Street connections.

Just as unsettling to us is that of the five senior executives, again—only—Joseph Longo brings industry experience to the table:

  1. The Company is dependent on the global marketplace for most of its contracts. Peter J. Scanlon, age 57, who serves as Vice President, Chief Financial Officer, Treasurer and Secretary, brings a prodigious three-years of international experience to Startech (having once served on assignment for IBM in London, England);
  2. Talk about breaking a cardinal rule in business management—the Company’s Vice President of Sales and Marketing, Stephen J. Landa, age 42, was previously a financial news talk show host; and,
  3. A dearth of management with any science background (esp. in thermodynamics!). Karl N. Hale, age 41, serves as Vice President of Engineering. Mr. Hale is a chemist by training and is a recognized expert in the field of explosives industry Safety, Health and Environment. “He has invented several novel processes for treatment of explosives industry waste materials.” A good man to have at the helm—if a waste plant is in danger of blowing up!

Startech brags that founder Joseph E. Longo, 73, with more than 25 years of waste-management industry experience, has been awarded many waste industry equipment patents, all of which have been successfully commercialized. An extensive Google search turned up patents in his name for, among other uses, a refuse compactor slide bearings, a household garbage compaction unit, and the hydraulics for a self-powered bucket bowls—but no patents with any relevance to refuse-to-fuel technology.

“Lying is done with words and also with silence.” – American poet and essayist, Adrienne Rich

Startech makes claims, too, on its website that the Plasma Converter process can irreversibly destroy hazardous contaminants including anthrax, mad cow disease, and foot and mouth disease.

The Company alleges, too, that its technology is relative to Homeland Defense: “Truck-mounted mobile Plasma Converter systems could be rapidly deployed to process and destroy hazardously contaminated materials at ground zero.”

In 1999, the Department of Defense initiated a program called the Assembled Chemical Weapons Assessment (ACWA) program. In accordance with the wishes of Congress, the DOD looked to identify and demonstrate at least two non-incineration chemical weapons disposal technologies.

Contrary to the aforementioned claims, Startech’s plasma arc system was eliminated from consideration. In ACWA’s 30 September 1999 Report to Congress, among other issues, the DOD noted:

  • Creation of hazardous by-products"Demonstration data shows that the following hazardous substances were characterized during demonstration: formaldehyde; carbonyl sulfide; cyanide; and dioxins/furans.”
  • Lacking Process Maturity—The ACWA determined, too, that while “the PWC components represent a mature technology...the ACWA demonstration indicates that the proposed PWC configurations are not as mature as or comparable to their industrial counterparts.”

A Call to Startech’s management seeking comment was not returned.

"In the year 2525, If man is still alive,
If woman can survive, They may find
In the year 3535
Ain’t gonna need to tell the truth, tell no lie..."
-- Hit song from 1969, Zager and Evans

The 10Q Detective, at present, is skeptical that Plasma arc technology and hydrogen gas as a fuel alternative will be sufficiently utilized in the conditions and sold in the sales volumes necessary for Startech Environmental to become a profitable enterprise and to continue as a going concern.

Trash to fuel profits— not in this decade.

Editor David J Phillips does not hold a financial interest in any waste-to-energy stocks. The 10Q Detective has a Full Disclosure policy.

Sunday, February 11, 2007

10Q Detective Featured in BusinessWeek

The term "weblog" was coined by Jorn Barger on December 17, 1997. The short form, "blog," was coined by Peter Merholz, who jokingly broke the word weblog into the phrase we blog in the sidebar of his blog Peterme.com in April or May of 1999.This was quickly adopted as both a noun and verb ("to blog," meaning "to edit one's weblog or to post to one's weblog").

On the World Live Web, blog search engine Technorati is currently tracking nearly 66.6 million blogs (of which it believes around 55% are "active" and updated at least every three months). And, according to Technorati data, there are over 175,000 new blogs created every day.

On the citizen marketing front, short of conducting a viral ad campaign, standing out amidst all the ‘noise’ means writing informative, timely, and useful content that readers will want to read-and come back to visit—and read again!

And, of course, writing fresh, relevant content—corporate governance issues, for the 10Q Detective—means investing endless hours in researching and digging through hundreds of SEC filings—six days a week.

Private passions tire and exhaust themselves, public ones never.” – Alphonse Marie Louis de Lamartine [1790–1869, French poet, novelist, and statesman]

Last week, BusinessWeek [February 12, 2007 issue] singled out 10Q Detective as its “Must-Read” Blog.

Here is a transcript of the article:

FEBRUARY 12, 2007

BLOGSPOTTING [login required]

Number Crunch

To read SEC filings with a guide, go to this blog run by David Phillips, an investment newsletter publisher. He focuses on financial-statement "soft spots," such as restructurings, and also takes on issues like executive pay, recently analyzing the actual compensation of $1-a-year ceos like Yahoo!'s (YHOO ) Terry Semel and Apple's (AAPL ) Steve Jobs. Phillips delves into the data and lets others handle the witty asides, sprinkling in lines from movies and songs. On the payoff to shareholders from Semel's low official salary, he paraphrases Tom Waits: "The big print giveth and the small print taketh away."

The 10Q Detective is honored by this accolade and welcomes continued reader suggestions on companies that might be guilty of corporate malfeasance—or, investment ideas worthy of due diligence.

The 10Q Detective has a Full Disclosure policy.

Thursday, February 08, 2007

For Whom the Bells Toll: Perchance for a Home-Builder?

"No man is an island, entire of itself; every man is a piece of the continent, a part of the main…. Perchance he for whom this bell tolls, may be so ill, as that he knows not it tolls for him; and perchance I may think myself so much better than I am, as that they who are about me...may have caused it to toll for me...and therefore never send to know for whom the bell tolls; it tolls for thee." – Renaissance author John Donne (1572 - 1631), "Meditation XVII."

Citing a slowdown in new contracts signed, luxury homebuilder Toll Brothers, Inc. (TOL-$34.43) reported a 14.7% drop in profit to $687.2 million in FY ended October 31, 2006, or share-net of $4.17 per share, on revenue of $6.1 billion.

Sagging consumer confidence, an overall softening of demand for new homes, and an oversupply of homes available for sale—all these factors continue to drive cancellation rates higher. In the fourth quarter 2006, Toll Brothers wrote-down $115.0 million, which was $15 million higher than the top of management’s previous range.

The Company recognized $152.0 million in FY 2006, compared with $5.2 million in FY 2005. The write-offs in FY 2006 were attributable to land deposit refunds, the write-off associated with the costs of land optioned for future communities primarily in California and Florida, and the write-down of the carrying cost of several communities primarily located in California and Michigan.

Given continued uncertainty, Toll Brothers estimates (pre-tax) land-related write-downs of $60.0 million in fiscal 2007.

Due to the decline in backlog at October 31, 2006, and the number of agreements the Company expects to sign in the first half of FY 2007, Toll Brothers expects to deliver in FY 2007 between 6,300 and 7,300 homes at an average delivered price of between $660,000 and $670,000, earn net income of between $260.0 million and $340.0 million, and achieve diluted earnings of between $1.58 and $2.08 per share.

The Company expects to report guidance around 2:00 PM on Thursday for the 1Q:07. High-low estimates for earnings and share-net fall in the range of between $108.0 million to- $85.0 and 66 cents to- 52 cents, respectively.

Robert I. Toll, chairman and chief executive, has repeatedly said that the current
“housing downturn seems to be driven by oversupply and a pullback in buyer confidence as speculators exit markets….not by high interest rates, a weak economy, job losses or other macroeconomic factors."

In addition, CEO Toll believes that the market will rebound once it works its way through excess inventory. Fundamentals are solid and interest rates are still historically low, he said [in December 2006]. “We may be seeing a floor in some markets where deposits and traffic, although erratic from week to week, seem to be dancing on the bottom or slightly above.”

Anticipating a rebound in demand for
home sites by midyear, shareholders have been furiously buying building stocks on the premise that Wall Street is overly pessimistic on the industry’s fundamentals. The Philadelphia Housing Sector Index (HGX) and the share price of Toll Brothers have climbed almost 22 percent and 20 percent, respectively, in the last three months.

Despite a lack of earnings’ visibility, as previously mentioned, the share price of Toll Brothers is responding to an uncertain turnaround in the housing sector. For investors looking to buy Toll Brothers, we suggest a wait-and-see approach.

For traders, we see the Street reacting to the Company’s guidance for the critical spring selling months ahead.

In its Proxy recently filed with the SEC, Toll Brothers reported that Robert Toll took home approximately $18.9 million in salary and bonus (combination of cash/stock) in 2006, down from $28.6 million in 2005 and $31.7 million in 2004. [These dollars do not include millions more received per annum in (long-term) stock-option grants.]

In 2006, Toll's bonus should have been $21.5 million, but in December 2005, the executive compensation committee and Messer. Toll amended his Cash Bonus Plan, tying it more closely to the share price of the Common Stock on October 31, 2006. Given the closing price of Toll Brothers’ share price was less than $36.91 on that date [actual closing price: $28.91], Messer. Toll and the company's executive compensation committee agreed to a $4 million reduction in his cash bonus.

“Given the slowing of the economy for homebuilding, he and the board felt it was appropriate,” CFO Joel Rassman told the Associated Press.

Lest our readers commend Robert Toll for this symbolic gesture, read on:

  • During fiscal 2006, the Company sold a home to a daughter of Robert I. Toll and her husband, an employee of the Company, for a price of $1,582,186, which reflects a discount of $48,934 from the normal purchase price. Purportedly, “the discount is consistent with the Company’s policy of providing home purchase discounts to immediate family members of Company employees.”

[Ed. note. Toll Brothers employs more than 5,500 people. We doubt that this discount policy applies to ALL employees. A call to management seeking comment was not returned.]

  • The Company is building and selling a home to a son of Robert I. Toll, too, for a price of approximately $2,098,550, which reflects a discount of $87,440 from the normal purchase price.
  • The Company is building and selling a home to a daughter of Vice Chairman Bruce E. Toll and her husband, for a price of approximately $2,468,075, which reflects a discount of $105,925 from the normal purchase price. Bruce Toll, the brother of Robert Toll, serves as Vice Chairman of the Board.

Bruce E. Toll was President until April 1998 and Chief Operating Officer until November 1998. He is the founder and president of BET Investments, a commercial real estate company, and the owner of several car dealerships. Mr. Toll is also the Chairman of Philadelphia Media Holdings, L.L.C., which is the parent company of the Philadelphia Inquirer and the Philadelphia Daily News.

  • Even though Messer. Toll is involved in the aforementioned activities, the Board still felt it worthy to effect an “Advisory and Non-Competition Agreement” with Bruce Toll back in November 2004. The Advisory Agreement provides, among other things, that (a) the Company will retain Mr. Bruce E. Toll as “Special Advisor to the Chairman” for a period of three years at compensation of $675,000 per year, (b) he will be paid $675,000 for each of the three years following the term (or termination) of the Advisory Agreement, too (so long as he does not violate certain non-competition and other provisions—Ha! Ha!), and (c) he will be entitled to group health insurance of the type and amount currently being provided to Company executives.
  • In addition, Mr. Bruce E. Toll was designated a participant in the Company’s Supplemental Executive Retirement Plan, which provides an annual benefit of $230,000 for 20 years.
  • During fiscal 2006, the Company provided Bruce E. Toll with additional perquisites with an estimated value of approximately $22,665. Such perquisites include group health insurance and contributions to the Company’s 401(k) plan. It is expected that the provision of perquisites like these will continue in fiscal 2007. [Ed. note. If he is no longer involved in the day-to-day affairs of Toll Brothers, why is the Company still making 401(k) contributions on his behalf? (Rhetorical) Might it be his last name is Toll?]
  • The Audit Committee, concerned with “the safety and security of Company executives while traveling on Company business” and the extensive amount of time lost due to such travel, approved the chartering, from time to time, for business purposes, of an aircraft that is owned and operated by Grey Falcon, LLC and Grey Falcon Management, L.P., companies solely owned by Robert I. Toll and an affiliate of Robert I. Toll (surprise!). In fiscal 2006, Mr. Toll’s companies have received or are entitled to receive fees for chartering the aircraft of approximately $323,505 from the Company.
  • As if the senior executives do not make enough monies--in fiscal 2004, the Company adopted an unfunded SERP. The SERP provides for annual benefits of $500,000 for Robert I. Toll, $260,000 for COO Zvi Barzilay, and $250,000 for CFO Joel H. Rassman.

Management anticipates that SG&A as a percentage of total revenues for 2007 will rise about 200 basis points, coming in between 11.2% and 11.7% of total revenues. The Company blames an anticipated reduction in revenues, the expenses associated with opening new communities, and advertising expenditures to help promote sales. Add to this list, unnecessary perquisites to the Toll Brothers, too.

Editor David J Phillips does not hold a financial interest in any home-building companies. The 10Q Detective has a Full Disclosure policy.

Tuesday, February 06, 2007

Follow the Leader at PC Maker (Michael) Dell

In a memo to Dell Inc. (DELL-$23.80) employees, days after returning as chief executive officer, Michael Dell wrote,” We had great efforts, but not great results. This is disappointing and unacceptable."

Consequently, Dell said the struggling computer maker is halting staff bonuses for 2006 and reducing — to 12 from more than 20 — the number of people reporting directly to the CEO (to help cut costs).

Details of the shake-up came after Michael Dell replaced Kevin Rollins as CEO on Wednesday, returning to the helm of one of the world's largest PC manufacturers, founded by Dell in 1984. The change came as Dell tries to fix mounting problems that include disappointing earnings reports, eroding market share and an ongoing federal accounting probe.

Speaking of cost reductions, we cannot help but wonder if the newfound frugality will apply to Messer. Dell, too?

The Company spent more than $990,000, $880,000, and $$650,000 in FY 2006, 2005, and 2004, respectively, on Dell’s personal and residential security.

Initially, Dell took his egress in March 2004, but retained his title as Chairman of the Board. In this titular role, the PC maker paid to him cash/bonus of $2.8 million and $3.2 million in FY 2006 and 2005, respectively.

In the last 2 ½ years, the share price of Dell lost about 27.5% in value. That is “disappointing and unacceptable,” too!

Upon his return, Messer. Dell said the Company was “halting staff bonuses” for 2006.

Shareholders might ask if the definition of ‘halt’ includes ‘other’ types of compensation, such as restricted stock awards (RSUs).

The granting of RSUs is a ruse often employed by crafty companies (with ‘no-bonus’ policies) to compensate key executives. For example, Jay S. Sidhu, the $900,000 Chairman and CEO of Sovereign Bancorp (SOV-$25.61) was not eligible for, and did not receive, a Tier I bonus of $750,000 in cash (as stated in his employment agreement) because the bank “did not meet the predetermined target of $1.93 in operating earnings per share for 2005.” Nonetheless, Sovereign granted to Messer. Sidhu stock units valued at $1.81 million and $1.41 million for FY 2006 and 2005, respectively.

“We have a tough couple of quarters ahead," said Dell in his memo. "We didn't get here overnight and we won't fix things overnight either."

If history is a guide, the ‘tough couple of quarters’ will not apply to Dell himself.

Editor David J Phillips holds no financial interest in any of the stocks mentioned in this article.

This posting was reprinted with the expressed permission of Investor-Advantage: a new website dedicated to providing an educational forum for investment ideas.

As a freelance journalist, David pens two columns a week for Investor-Advantage: (1) Monday—a blog on all things ‘naughty’ about corporate insiders (corporate governance); and (2) Sunday—a three page newsletter with its finger on the market pulse: news and commentary, Wall Street rumors, and SEC filings.

Saturday, February 03, 2007

Greenhouse Gases Good for Wall Street

On Friday, the Intergovernmental Panel on Climate Change (IPCC) — a group of hundreds of scientists and representatives of 113 governments—issued a bleak report on climate change, indicating that it was ‘likely’ man-made.

[Source: This image shows the instrumental record of global average temperatures as compiled by the Climatic Research Unit of the University of East Anglia and the Hadley Centre of the UK Meteorological Office]

The panel predicted that this climate change would result in temperature rises of 2-11.5 degrees Fahrenheit by the year 2100.

On sea levels, the report projects rises of 7-23 inches by the end of the century. An additional 3.9-7.8 inches are possible if recent, surprising melting of polar ice sheets continues. [Press Conference Webcast]

The conclusions came after a three-year review of hundreds of studies of clues illuminating past climate shifts, observations of retreating ice, warming and rising seas, and other shifts around the planet, and a greatly expanded suite of supercomputer simulations used to test how earth will respond to a building blanket of gases that hold heat in the atmosphere.

“People experience the harshest effects of global warming through extreme weather — heat waves, droughts, floods, and hurricanes,” said study co-author Philip Jones of Britain's University of East Anglia. Those [events] have increased significantly in the past decade and will get even worse in the future.”

Given all the dire predictions, why is the 10Q Detective optimistic?

Looking at the trading history of the market (re-constructed into a yearly logarithmic chart), we see that good times for investors—when the DJIA trends higher—seem to correlate with spikes in global temperatures. The warmer the air temperature variations—the better the performance in the DJIA!

Ergo, greenhouse gases are good for Wall Street. If scientists at the IPCC are correct, this bull market still has legs.

Thursday, February 01, 2007

Retired CEO of NCI Building Systems Stays for a "Rich" Journey

Back on January 19, our friend, Michelle Leder, did a nice job in highlighting the absurd severance package for NCI Building Systems’ (NCS-$57.93) retiring CEO Albert R. Ginn, Jr. Michelle penned on her blog, footnoted.org: "Ginn, who stepped down at the end of 2006, is getting a ten-year consulting agreement that will pay him an annual salary of $200,000 for each of 2008 and 2009 and of $100,000 for 2010 through December 2017."

A.J. Ginn’s separation and consulting agreement with this Houston-based supplier of metal products to commercial builders stipulates that he need only work—up to a maximum—of 240 hours per year through 2009; During years 3-10 of the Advisory Period, Messer. Ginn agreed to perform the consulting services up to a maximum time commitment of
120 hours per year.

“We are confident that the future will hold many new accomplishments for NCI. Please join us on our journey to success.” –A.R. Ginn

The 10Q Detective had to dig through several other 8-K filings to unearth the specifics of A.J. Ginn’s change-in-control agreement.

“There is only one step from the sublime to the ridiculous.” – Napoleon Bonaparte
  1. Ginn is not be obligated to perform such services at times or places when they would interfere with the Employee’s pursuit of other personal and business interests;
  2. From July 1, 2007 through the Transition Date, the Company may provide to Ginn an office as the Company (at its discretion). In addition, the Company shall make available to the Employee an administrative assistant through the Transition Date;
  3. The Company will utilize the services of Ginn as a pilot for one or more of its corporate aircraft on an as needed basis! [Ed. note. In all our years, we have NEVER been witness to a consultancy agreement containing this particular clause.];
  4. At the recommendation of the Board, Ginn will continue to be eligible for awards of restricted stock of the Company.

Mr. A.R. Ginn’s supplemental retirement benefits existing on December 31, 2006 vested in full upon his retirement as CEO. The annual benefit payable to Messer Ginn is $200,000 per year for ten years.

Mr. Ginn is the beneficial owner of 357,947 shares, or 1.78%, of the Common Stock outstanding of NCI, worth an estimated $20.7 million.

NCI will record an expense in the fourth fiscal quarter of approximately $503,000 after-tax, or approximately $0.03 per diluted share, for the net present value of consulting fees to be paid to Mr. Ginn under the Agreement during such period.

The Board believes that retaining “Mr. A.R. Ginn’s expertise based on his more than 40 years of experience in the industry is of significant value to the Company.” Does that include his services as a pilot, too?

Editor David J Phillips does not hold a financial interest in NCI Building Systems, Inc. The 10Q Detective has a Full Disclosure policy.