Bankruptcy in Smithfield Food's Future -- Can Pigs Fly?

The share price of Smithfield Foods (SFD-$21.27) has rebounded about 26 percent in the last month, as investors anticipate that forward operating margins at the world's largest pork producer and processor will benefit from recent pullbacks in corn and energy prices.

"Investors with a two-year horizon might start looking at this stock again as a deep value play,” said a food analyst last month about Smithfield.

Unlike the pusillanimous poltroons who call themselves Wall Street analysts, the 10Q Detective will avoid pulling a 'Henry Blodget'; we do not worry about potentially losing millions in investment banking business (and being locked out of six-figure bonuses) if we disenfranchise management by saying "pigs will fly."

The reality is that the fundamentals are deteriorating rapidly at Smithfield and hog prices are not expected to stabilize until the second half of calendar 2009. The 10Q Detective bluntly states that chances are good that if recent Asian investments fail to revitalize the company’s profits, Smithfield could go belly up within two to three years.

Talking Points

1. There is too much debt on the balance sheet, with $3.47 billion in total debt as of April 27;
2. The company would have been in violation of debt covenants had it not received approval for a reduction in the interest coverage ratio from 3.0:1 to 2.0:1 (good until the end of fiscal 2009);
3. Total debt-to-stockholder equity of 114 percent excludes an additional $1.19 billion and $408.9 million due in one to three years, respectively, for hog purchase agreements and hog farmer service contracts;
4. Smithfield guarantees up to $95.5 million for the financial obligations of certain unconsolidated joint ventures and hog farmers; and,
5. The pension and retirement benefit plans are underfunded by about $178.6 million, which included "assumed gains" of $61.5 million in fiscal 2008.

Operating Metrics

An aggressive vertical acquisition schedule in recent years—aimed at providing a stable supply of raw material to its pork segment and providing a boost to the bottom-line from value added processed meats—is proving to be more disruptive than profitable. This business strategy has failed miserably, with the operating margin falling two hundred basis points over the last two years to 1.9% for the fiscal year ended April 27, 2008.

In addition, weighted average cost of capital of 6.5% exceeds trailing twelve-month return on assets by 470 basis points.

Corporate Governance

Named Executive Officers are the only hogs making money at the company.

A review of the Annual Proxy Statement filed last Friday indicates that Joseph W. Luter III, Non-Executive Chairman of the Board, and C. Larry Pope, Chief Executive Officer, are shamelessly slopping at the bonus trough, even in lean years.

Luter, who served as CEO until August 2006, received a monthly salary of $83,300 plus an annual bonus of $4.2 million in fiscal 2008 for providing consulting advice to Smithfield "on major acquisitions and the execution of the company’s commodity hedging strategy."

The Board rewards Pope the equivalent of 1.5 to 2 percent of Smithfield's net profit exceeding $100 million, the proxy said. He took in $4.89 million during fiscal 2008, of which $1.10 million and $2.43 million were for salary and cash bonus, respectively.

The 10Q Detective has already commented on the worth of Luter's advice and Pope's stewardship—take a look at the aforementioned operating metrics.

Intrinsic Value

Contrary to the stated tangible book value of $13.30 per share, the 10Q Detective calculates the intrinsic value left available to stockholders if the company fails to be nil.

Inventory and property, plant and equipment comprise about 26 cents and 33 cents of each dollar in assets, respectively. In any reorganization plan, assets would be auctioned at a significant discount to actual value. And, as investors know, bondholders get paid before stockholders.

You will not fly today.
You will not fly tomorrow.
You will never fly! ~ Children’s writer Mo Willems (Today I Will Fly!)

Risks to our target price include increased accessibility to Asian markets, lower feedstock costs, and a visible turnaround in supply/demand hog imbalances.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Better To Sink Napster Than Sell It -- Ask Management

Almost 90 percent of the market valuation of Napster Inc (NAPS-$1.41) evaporated since 2004 as investors fled the digital music company, tiring of management’s inability to wrestle away any market share from rival Apple Inc or Internet piracy.

Three shareholders, who beneficially hold 1.7 percent of the company stock, are waging a proxy battle for seats on the board.

Shareholders Perry H. Rod, Thomas Sailors and Kavan P. Singh said that Napster shares would be worth at least $1.79 in liquidation—and probably $6.47 a share based on comparable valuation benchmarks in the digital music space.

A buyout of the company, however, may depend on how the company's 2008 proxy statement is voted on come September.

One of the proposals brought forth this year is to not remove any extensions of the company's shareholder rights plan. As company policy stands right now, stated in the current proxy: "no provision exists in the Company's Bylaws requiring management to solicit proxies on behalf of challengers to the incumbent board."

Management believes it serves the best interest of all shareholders to maintain the status quo, noting that "takeover attempts frequently include coercive tactics, such as partial or two-tier tender offers that do not treat all stockholders equally."

The Board previously approved the Rights Plan in order to deter tactics that unfairly pressure stockholders, squeeze them out of their investment without giving them any real choice, depriving them of the full value of their shares.

Management wants to throw up obstacles, making it more difficult to take out the company; whereas, shareholders on the other side of the proposal would like to make it even easier for the company to be taken over.

In order to have better insight into the rational behind each side of the proposal, it makes sense to understand the incentives driving each party’s behavior, whether to sell or not to sell the firm.

CEO William Gorog and President Bradford Duea beneficially own approximately $4.43 million and $688,576, respectively, in company stock.

Gorag currently owns approximately 1.95 million shares (fully vested) in outstanding equity awards exercisable between $3.87 a share and $15.25 a share.

Duea is sitting on about 235,000 equity options (fully vested) exercisable between $3.87 a share and $15.25 a share, too.

If a change in control of Napster occurs, and his employment was terminated without cause, all of his outstanding stock option and restricted stock awards would immediately become fully vested—although worthless!—and Gorog would be entitled to severance of $1.87 million (with no tax “gross up”).

Under Mr. Duea’s employment agreement, he would receive an estimated $300,00 in cash payments upon severance for good reason after a change in control.

I'm sticking with you'
Cos I'm made out of glue
Anything that you might do
I'm gonna do too ~ Velvet Underground “I’m Sticking With You” YouTube video

Named Executive Officers have nothing to gain by selling the company—even for twice the current market cap of $67.87 million.

In the meantime, the company is struggling to turn a profit, shareholders want out, and the vulture funds are circling.

Editor David J Phillips and Columnist Eric I. Schleien do not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Can Diogenes Find an Honest Man at CommVault?

N. Robert Hammer, Chairman, President and Chief Executive Officer of CommVault Systems (CVLT-$15.31), takes telecommuting to the extreme. He resides in Florida, but is compensated by the storage and data company to travel to and from headquarters in New Jersey.

In the last three fiscal years, CommVault reimbursed Hammer more than $232,000 for travel and lodging, which included a leased apartment in New Jersey, according to annual proxy filings.

Hammer beneficially owns 3.97 million shares, or 9.1 percent, of the common stock outstanding.

Hammer’s out-of-state residency does not adversely affect his performance or decision-making ability, according to the Board of Directors. The 10Q Detective notes that four of the seven Board members, including Hammer, previously worked together at Credit Suisse Securities.

All speech is vain and empty unless it be accompanied by action. ~ Athenian orator Demosthenes (384 BC – 322 BC)

In addition, CommVault’s compensation philosophy and programs are purportedly designed to foster a performance-oriented culture that aligns executive officers’ interests with those of its shareholders

Comparative Stock Performance

The stock, which went public in late September 2006 at $14.50 a share, remains range-bound.

Even recent news that management upped its fiscal 2009 adjusted earnings forecast to between 70 cents and 72 cents per share on revenue of about $245 million, did little to hold investors’ excitement for too long. Analysts, whose estimates generally exclude special items, had expected a profit of 70 cents on $239.9 million in revenue.

Estimated Payments and Benefits upon Termination

According to his employment agreement, in cases of involuntary termination without cause—such as actually being required to move to New Jersey - or a change in control (requiring a similar demand), he could retire to his beach chair in Florida and collect a respective $819,969 or $2.9 million.

Sadly, the test for constructive discharge as measured by a reasonable persons standard—where the employer's deliberate actions rendered the employee's work conditions so intolerable as to compel resignation—does not apply to Hammer (or most of his peers in the executive offices at publicly traded companies.)

Then again, who ever said the litmus test for a reasonable persons employment standard ever included CEOs?

Weekend Beach Reading: July 21, 2008

Canadian Solar (CSIQ-$31.31) said Monday that it shipped about 47 megawatts of solar module products during the second-quarter ended June 30, up from its previous forecast of 45 megawatts. A strong demand equation, however, requires additional funding to finance expansion capacity, which will pressure operating margins.

Continental Resources (CLR-$69.40) reported that its second Bakken shale well in a promising area of North Dakota flowed at an average rate of 1,095 barrels of crude oil equivalent per day (boepd), or about 58 percent higher than the first hole did in its initial week of production in May. Continental, which is the largest leaseholder in this emerging shale play with about 487,000 acres, has been reticent about whether or not it has the water rights needed to develop its potential reserves.

Bermuda-based Frontline (FRO-$62.23), the leading oil tanker in vessels capable of carrying between 120,000 and 320,000 in deadweight tons, wants to talk with the management of Overseas Shipholding Group (OSG-$80.58) about a possible deal. As control of supply slips further from the grasp of OPEC-member nations, could a Gulf oil-producing nation look to acquire an oil tanker company?

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Accelrys Looking to Fool Shareholders -- All of the Time

1. Accelrys (ACCL-$5.01), a maker of scientific business intelligence software, recently filed a preliminary proxy to revise their 2004 stock incentive plan. After incurring losses for the last two quarters, the research software firm is looking to remove Award Limits to Named Executive Officers.
   
   As of now, the cap on awards per individual is as follows:
   
   1) 50,000 shares of common stock;
   2) 300,000 shares as stock options ;
   3) 100,000 shares in other stock appreciation rights ;
   4) 50,000 shares as restricted stock ; and,
   5) $500,000 cash

The current market valuation of Accelrys would equate to $3.0 million in awards per participant in the plan. Regardless of price, the current cap on awards is also equivalent to almost 2 percent of the outstanding shares in the company.

In the preliminary proxy filing, the company states they want "…to remove the Award Limits in order to provide greater flexibility in awarding equity interests in the Company to key personnel. The Board believes the elimination of the Award Limits under the 2004 Plan will allow the Company to offer more meaningful incentives for retaining and motivating existing employees, directors and consultants and will provide an important tool for recruiting new talent."

If employees, directors, or consultants are being paid more money, than Accelrys would supposedly be able to keep people longer and recruit more employees. I am not convinced, however, that this would have any effect on the company’s ability to increase shareholder value. In the last 10 years, the company has increased their shares outstanding from 19.9 million shares in October 1999 to 26.8 million shares as of the end of the 2007 fiscal year.

During the same time stockholders, equity went from 72.8 million to 75.2 million. The 3.3% increase in stockholders equity over that time has underperformed risk free treasury bonds. Increasing salaries at the company and proposing to essentially increase dilution of the shares does little to address the company’s abysmal performance. Without any radical change in the company, an increase in awards only lends more hurt to shareholders.

The company says in their proxy that the plan "will remain virtually identical to the 2004 Plan as it currently exists...." As noted, the one listed exception is the elimination of award limits on compensation.

You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time. ~ Abe Lincoln

Removing compensation award limits in an incentive plan—and then say the new plan with no compensation limits will remain virtually identical—is misleading. There is nothing necessarily wrong with this plan nor am I questioning the legality of it. I am just simply making the basic point that the company wants to give more money to their employees, directors, and consultants while shareholders do not made a dime.

Columnist Eric I. Schleien does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

'World of Hurt' Not Over at First Horizon National

Shares in First Horizon National Corp (FHN-$5.85), the largest bank in Tennessee, rebounded almost 17 percent, or 85 cents a share, after the regional bank said today its full-year 2008 charge-off outlook remains within a previously communicated range of $385 million to $485 million.

Investors also cheered the news that current CFO, D. Bryan Jordan, will succeed caretaker CEO Jerry Baker, 65.

The 10Q Detective opines, however, that far from receiving credit, Jordan is part and parcel of helping create existing credit issues in the company’s portfolio.

What? How can you make such a blanket statement? Jordan, 45, just arrived on the scene one year-ago.

Jordan resigned as the chief financial officer of Regions Financial Corp (RF-$7.00), the largest bank in Alabama, one-year after the Birmingham-based bank merged with cross-town rival AmSouth. Might he have left Regions after receipt of signals that he would be denied the slam-dunk to the corner CEO office? One can only speculate.

Nonetheless, a dusting of old fingerprints would find his thumbprint still fresh on a similar credit mess at Regions, which is struggling under the weight of its own bad loans.

Jordan and his management team will be executing from a playbook already drawn by Baker, with business repositioned on regional banking and capital markets.

Capital Markets Growth Fallacy

Albeit First Horizon is divesting its mortgage segment, we do not understand how volatility will be reduced—or shareholder returns rebound—by building out a full-service broker-dealer platform, especially during a bear market in stocks and bonds (with an impending implosion in many commodities, too).

The investment community is like sheep, following the flock as one. Lauding improved capital ratios—resulting from common stock issuance and balance sheet reductions—not one analyst has voiced concern that First Horizon’s Fixed Income growth could hit some bumps in the wake of the Federal Reserve reversing its monetary policies.

Executive Severance

Jerry Baker will have a more comfortable retirement than the 20 percent of employees pink-slipped at First Horizon in 2007; the present value of his pension and deferred compensation are worth $1.19 million and $1.69 million, respectively.

The 10Q Detective acknowledges, however, that for a rich dude, Baker will feel some pain. The aforementioned retirement plans were calculated on a closing date of December 31, 2007, when First Horizon’s common stock was $17.94 a share.

He is also sitting on 162,500 stock options (granted with an exercise price of $39.66 a share) when promoted to CEO in January 2007—now worthless.

What's it worth? if I die.
What's the reason? they all cry.
I have no feelings, too much the same,
Not my problem, I feel no blame.

First Horizon provided Jordan with a hiring bonus to replace equity compensation forfeited as a result of leaving his former employer (261, 250 shares of Region’s common stock granted at a strike price of $39.43 a share).

Hurt!!!
Paints my world of hurt.
Paints my world, in my world of!
In my world of hurt!!! ~ thrash rock group Urge Overkill, "World of Hurt" YouTube video

His 2007 hiring bonus was paid in a combination of cash and equity. The cash portion of the bonus was $100,000, and the equity portion was deemed to have a total value of approximately $2.4 million—like the forfeited Region common stock, now deep out-of-the money. In hindsight, he should have asked for more upfront cash!

Jordan is feeling another world of hurt, having opted to receive part of his guaranteed 2007 bonus in the form of 50,000 stock options (having a 7-year term), priced at $25 per share.

Far from being a pointless exercise, we included Jordan’s stock information to remind readers that if there is one time that an executive’s interests were aligned with shareholders, this is it!

Other Investment Considerations

The ratio of allowance to total loans increased to 2.59 percent from 2.20 percent in the prior quarter. Management’s optimism aside, we believe the company is still under-reserved and its allowance for future charge-offs does not accurately address portfolio stress from declining economic conditions, especially given exposure to both commercial and residential construction and home equity loans.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Weekend Beach Reading: July 14, 2008

Haynesville Shale is the modern equivalent of a Klondike gold rush, with Plains Exploration and Production (PXP-$73.35) paying approximately $30,000 per leasehold-acre for a 20 percent stake in Chesapeake Energy's (CHK-$63.52) emerging natural gas play .

In its interim update for the second-quarter, Chevron Corp. (CVX-$92.25), the second-largest U.S. oil company behind Exxon Mobil (XOM-$85.48) reported that upstream (exploration and production) earnings would benefit from an increase in prices for crude oil and natural gas.

Solarfun Power Holdings (SOLF-$14.22), a vertically integrated manufacturer of silicon ingots and photovoltaic modules in Shanghai, reports that GCL Silicon Technology (Zhongneng) will supply enough virgin polysilicon sufficient to produce approximately 1.2-gigawatts of solar modules in aggregate over eight years. However, the supply contract looks disturbingly like a restatement of an existing — and unfulfilled — contract.

Yonghua Lu, the founder of Solarfun Power Holdings (SOLF-$14.22), profits from financing and other arrangements with the solar module maker through a Byzantine maze of companies. But Lu's interests may not be aligned with those of other shareholders.

Current accounting rules limit disclosure to only proved and probable oil and gas reserves. New regulations being proposed by the SEC, would allow Suncor Energy (SU-$60.17) to classify previously excluded unconventional resources, such as tar sands, as oil and gas reserves, doubling its asset base overnight.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Say 'Thank You' to Consolidated Graphics CEO Davis!

The Board of Consolidated Graphics (CGX-$49.46) approved a new severance package for Chief Executive Joe R Davis that ups his lump sum salary payment in a change-in-control scenario at the national provider of commercial printing services from an amount which previously provided for recompense equal to three times annual base salary to a new agreement calling for payment of ten times base salary of $750,000, which works out to $7.5 million! In essence, Mr. Davis, 65, who founded the printing company in 1985, is being rewarded with a ten-year employment contract, according to the Proxy Statement filed on July 3 with the SEC.

In addition, if Davis resigns without good reason—spend more time with the family excuse—he would still be entitled to payment of his annual base salary through May 22, 2018.

Imma definitely do my best to reach out (to the kids).
Homies on the block,(citizens)
Hustlers on lock,(what it is)
The music biz won't stop or change me.

For the year ended March 31, 2008, the company reported record sales and share-net of $1.1 billion and $4.63, respectively. Some might argue that Davis is due his just desserts—growing through acquisitions over 23 years a sizeable commercial printing operation supporting 70 shops, with a geographic footprint located in 27 states.

In our view, Davis’ 9.9% investment stake, worth about $60 million, already addresses any outstanding 'thank you' owed to him.

East coast (I want to thank you).
West coast, uh huh (I want to thank you).
(I owe it all to ya'll).
Dirty south I want to thank you(oh)
Midwest (stay up cuz i just wanna thank all yall)
(yeahy yeahy) ~ U.S. R&B singer Chris Brown, "Thank You" YouTube video

Davis is also sitting on more than $3.1 million in incentive equity compensation owed to him that he has yet to exercise.

The Board further believes that additional change in control benefits eliminate, or at least would reduce, their [executive officers] reluctance to pursue potential solicitation offers that would be in the best interests of common stockholders. The 10Q Detective does not debate the merits of certain ancillary severance benefits, such as assurance of bonuses owed or interim health and life insurance benefits following separation from the company.

The revised change in control agreement with Davis, however, provides him with an estimated $3.5 million tax gross-up. Unless the Board plans on paying the capital gains taxes owed by all shareholders—tell us again how this clause aligns the interests of Davis with other shareholders?

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Timeshare Operator Silverleaf Resorts to Interest Income for Profitability

Homebuilders may be grabbing the headlines, but the economic slowdown and recent deterioration of the sub-prime mortgage markets has adversely impacted the operating outlook of timeshare operators, too. Texas-based Silverleaf Resorts (SVLF-$2.17), which offers annual one-week vacation ownership with certain exchange privileges, is resorting to novelty accounting to boost sales.

The company reported a 13.4% increase in net income for the first-quarter ended March 31, on Vacation Interval sales increase of 22 percent to $65.1 million.

Sharon K. Brayfield, President, said, "Our product remains well received despite the slowdown in the economy. The growth in net income for the quarter translates into a business that is fundamentally healthy."

The 10Q Detective begs to differ—net income being more akin to phantom profits.

The business model of Silverleaf is dependent on collecting interest income from aspiring vacation homebuyers for its alleged profitability. Net income of $7.45 million rests on a foundation of $14.5 million in interest income.

Upgrades to existing owners comprised 58.5% of aggregate sales, up from 56.4% last year.

Vacation Interval sales to new customers increased 16.2% to $27.0 million.

Customer Financing

Management looks to be reaching out to more buyers with marginal credit histories, for approximately 22.7% of closings in the first-quarter were made to customers with FICO Credit Bureau scores below 600 (up from 21.2% last year).

Silverleaf provides financing of up to 90 percent of the purchase price of the Vacation Intervals, which are collateralized by the interest in the said property rentals. As testimony to the higher credit risk in dealing with timeshare buyers, the average yield on outstanding notes receivable at March 31, 2008, was 16.4 percent (with a weighted average maturity of seven years).

The company considers accounts more than 60 days past due to be delinquent. As of March 31, 2008, $4.2 million, or 1.4% of notes receivable, net of accounts charged off, were considered delinquent. However, the delinquency rate climbs to 9.9% when one includes payment concessions and extensions to certain customers. Of note—a deliquency rate (over 30-day) greater than 10 percent would violate minimum loan delinquency covenants with lenders.

Estimated notes deemed uncollectible as a percentage of Vacation Interval sales increased to 22 percent, up from 16 percent during the same period of 2007.

In addition, certain states have laws that limit the company’s ability to recover personal judgments against customers who have defaulted on their loans. Accordingly, Silverleaf rarely pursues this remedy.

Deferred Taxes

Is the company counting its proverbial chickens before they hatch? Liability for deferred taxes (owed on previously reported installment income sales) was $100.7 million at December 31, 2007. Should foreclosed properties trigger tax payments—and the company not be able to fully recover the value of said properties—cash flow may not be adequate to cover accelerated tax payments.

Corporate Governance

In addition to a salary of $750,000, Silverleaf rewarded its Chairman and Chief Executive, Robert E. Meade (who beneficially owns 24.6% of the outstanding stock), with a cash bonus of $2.9 million, according to a pre-tax incentive bonus structure outlined in its Proxy Statement filed on July 3 with the SEC. Were it not for interest income of $53 million, Meade would have earned nil for a cash bonus for his 2007 performance!

The share price of Silverleaf lost about 6.9% in market value last year, closing at $4.16 a share on December 31—what was that argument about aligning the chief executive’s compensation with the interests of shareholders?

Outlook

The Company forecasts 2008 net income and EPS guidance of approximately $28 million and $0.70, respectively.

To borrow from Shakespeare:

"The quality of earnings is thus strained;
It droppeth as gentle interest income from unsuspecting buyers
Upon the income statement;
It is twice blest;
It blesseth Silverleaf that gives and CEO Meade who takes."

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Weekend Beach Reading: July 06, 2008

BioFuel Energy (BIOF-$2.60) started commercial operations at its two 115 million gallons per year ethanol plants in Wood River, Neb., and Fairmont, Minn. Surging corn costs suggest that the debt-riddled ethanol producer will be struggling just to keep the two plants online.

A recent fight between Moscow and British Petroleum plc (BP-$66.34) over expatriates at its Russian-affiliate is more than a minor dispute over extending foreigners’work visas. From Bolivia to Venezuela to Kazakhstan to Russia, a trend of energy nationalization and putting domestic companies first, threatens the access of international rivals to lucrative oil & gas deposits.

China Sunergy (CSUN-$7.17) entered into a $400 million purchase agreement with Norwegian-based Renewable Energy, the world’s largest producer of silicon wafers to the solar industry, for the supply of 156-millimeter monocrystalline wafers for the seven years from 2009 through 2015. The company does not operate any of its own polysilicon manufacturing facilities. Access to secure supplies reduces the company’s historic reliance on the spot market for its feedstock needs and could address the adverse affect of rising raw material costs on its margins.

Alexey Miller, chairman of Gazprom OAO’s (OGZPY-$55.05) management committee, told the Financial Times in a recent interview that OPEC doesn’t have any real influence on the global oil market nowadays, and that the Russian energy giant will be the most influential energy firm in the world in coming years. Gazprom is years away from reaching peak extraction capacity for its oil and gas reserves; and, production problems and domestic demand could interfere with its ambitious plans for global domination.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Five-Past Midnight at The Dow Chemical Company

High raw material costs recently forced Dow Chemical (DOW-$33.92) to move ahead with plans to temporarily idle or reduce production at a number of manufacturing plants. Ethylene commodity-like sales cycle, an economic downturn in the U.S. (about 40 percent of sales), and a second round of price hikes being passed along to its customers—as if the world’s second largest diversified chemical company did not have enough rotting food on its plastic plate, now it has an image problem to digest, too.

I will hold the candle
'til it burns up my arm
oh I'll keep takin' punches
'til their will grows tired
oh I will stare the sun down
until my eyes go blind hey,
I won't change direction
and I won't change my mind

Bhopal Toxic Cloud

In August 1999, Dow paid $11.9 billion to purchase what was left of Union Carbide, best known for the devastating toxic gas leak that occurred in December 1984 at its now closed pesticide plant in the central Indian City of Bhopal. Although the chemical giant had nothing to do with the industrial accident, Bhopal survivors and some people—both in India and abroad—believe Dow should clean up the site, where toxins have leaked into groundwater, and be held accountable for unresolved indictments against Union Carbide and its former executives, according to Manjeet Kripalani, Bureau Chief in India, BusinessWeek magazine.

how much difference does it make
how much difference does it make ~ Alternative Rock group, Pearl Jam ("Indifference" lyrics, 1993) _ You Tube video

In addition, a group of shareholders has complained to the SEC that Dow has failed to disclose that up to $1.0 billion of proposed investments in India are subject to risk, due to its Union Carbide exposure. Sanford Lewis, attorney for the complainant, said on May 14: "Dow has stated repeatedly it has no liability for remediation of the Bhopal site, yet [the] document released by the Indian government tells a different story."

Dow repurchased 10.8 million shares in the first-quarter ended March 31 – the most shares bought back in one quarter in a decade. Unless management is feigning indifference, the $2.5 billion spent on share buybacks of 61 million shares in the past eight quarter suggests the Bhopal legacy is immaterial to forward guidance.

Given the company's solid financials—working capital of $6.7 billion and debt-to-capitalization ratio of 32 percent—and trailing-twelve month cash flow of $4.4 billion, the truth be told is immaterial.

Five-Past Midnight

Image-makers opine the best way for any company to avoid public relations nightmares is to stay ahead of the curve—present the facts, state a plan for correcting the problem, and take responsibility.

"Never Mislead—while you do not have to reveal information that may be harmful, always tell the truth," says Kelly Denny, Director of Public Relations at Brabender Cox. "If you play it loose and fancy free with the truth, you stand to have your key audience find out you lied and lose all faith in you. If you lose credibility, you have lost the battle no matter what the outcome."

Best-selling French author, Dominique Lapierre, Five Past Midnight in Bhopal, a retelling of the Bhopal tragedy, argues that the lessons of Bhopal were never learned.

Charges of hiding the (alleged) health risks of silicone-gel breast implants; claims that the manufacture and use of pesticides containing dibromochloropropane (DBCP) causes personal injury and property damage, including contamination of groundwater; $322 million in accrued obligations for environmental remediation and restoration costs, not withstanding ongoing run-ins with the EPA; alleged anticompetitive behavior in synthetic rubber businesses—Dow Chemical is tenured when it comes to public relation nightmares.

Bisphenol-A Storm Brewing

A U.S. government agency recently acknowledged "some concern" over the common plastic ingredient bisphenol A (BPA)—used to make the polycarbonate and epoxy resins in everything from DVDs to baby bottles. Studies have linked exposure to the chemical —which can rapidly leach out of plastic bottles when they are exposed to a hot liquid—to damage in developing brains and tissues as well as a heightened risk of cancer later in life.

The U.S. government’s National Toxicology Program said in April there is "some concern" about BPA from experiments on rats that linked the chemical to changes in behavior and the brain, early puberty and possibly pre-cancerous changes in the prostate and breast.

As momentum builds to remove BPA from products, The Dow Chemical Company, which is the number two U.S. producer of BPA is battling back. PR wheels spinning, the company counters that the American Chemistry Council (a trade group representing chemical makers) has repeatedly said that "at the levels to which consumers are exposed, BPA base materials do not pose a risk to consumers."

Wal-Mart, the nation’s largest discount retailer, said last month that it is taking steps to remove products that contain BPA from its shelves.

Although the stock of Dow Chemical is drifting near its 52-week low of $33.01 a share—and fetches about 1.5 times book—we believe the depressed price only discounts higher raw material costs and the economic slowdown. The impact of its BPA footprint, potential product withdrawals, and potential litigation could further depress the share price.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Running on Empty with Werner Enterprises

Werner Enterprises (WERN-$18.37), one of the nation's largest truckload carriers, is being hammered by rising fuel prices and a slowing economy. And, with oil trading near $140 a barrel, earnings are decelerating.

The trucking company principally serves the consumer and non-durable goods segments (such as retail and groceries). Freight demand softness in the housing and automotive sectors, however, is increasing fleet capacity as truckers shift hauling schedules, targeting Werner’s freight markets.

The trucking operator has historically been successful in mitigating its exposure risk to fuel price increases by collecting additional surcharges from its customers. These revenues increased 58.6% to $95.7 million in the first-quarter ended March 31, due to higher collections.

Rising Diesel Costs Affect Margins

In the past, Werner negotiated higher rates with customers to recover the fuel expense shortfall in base rates per mile. Surcharge recompense is becoming more difficult in the current operating environment, for either the customers are unwilling to cough up the differential and/or day-to-day pricing volatility of diesel is making it more difficult to shorten the timing lag of the billing-payment cycle.

Due to an ongoing driver shortage, wages remain the most significant operating cost, eating 27.9 cents of each dollar in sales (down 1.9 cents per dollar of sales from March 2006), but fuel-costs soared to 24.1% of net sales, up from 17.6% last year, attributed to higher average diesel fuel prices.

The 10Q Detective notes a remarkable unwillingness by management to travel the risk management road. The company has no plans to contract derivative financial instruments intended to reduce its exposure to fuel price fluctuations and offset surcharge recovery issues.

Ongoing initiatives, such as reducing truck idle time and lowering non-billable miles, will not compensate for rocketing fuel costs, which increased 16.6 cents per total mile for the 1Q:08. This trend is expected to continue in coming quarter. In the month of April 2008, diesel fuel prices increases an averaged $1.22 per gallon compared to April 2007, to more than $4.00 a gallon.

For the week ended June 23, on-highway diesel prices averaged $4.65 per gallon, up $1.81 from one-year ago, according to the Energy Information Administration.

Rail Transport Competition

Even though on-time delivery service percentages are generally higher for truckload shipments than rail intermodal means of transport, the higher price of diesel fuel impacts truckload carrier costs and rates more significantly than it does intermodal providers. As a result, Werner believes that some price-sensitive shippers have been shifting a greater portion of their long-haul freight from truckload to truck-rail conveyance in recent months—-exacerbating already weak freight demand in its longer haul routes.

In fiscal 2007, responding to this mode shift, management cut fixed costs by eliminating more than 750 vehicles in its Van fleet, its long hauler subsidiary.

Corporate Governance

Net income in fiscal 2007 fell 23.6% to $75.35 million, as higher fuel costs and weaker freight demand depressed rates. Nonetheless, the Board awarded Chairman Clarence L Werner, (son) Vice-chairman Gary L Werner, and (son) Chief Executive Gregory L Werner, the same cash bonuses received in fiscal 2007: $350,000, $230,000, and $350,000, respectively.

• The company employs Scott Robertson, Clarence’s son-in-law, as its "Director-Aviation," which means he pilots the company jet. In 2007, Werner paid to him $167,734 (which included company car expenses, too).
• Daniel Matthew, son Gary’s brother-in-law, is gainfully employed with the company’s Fleet Division, earning $142,700 in 2007.
• During 2007, the Company paid $7.5 million to Pegasus Enterprises, owned by Clarence’s brother, Vern Werner, and sister-in-law. During that time, the Company paid $424,614 to WinRow Farms, which is owned by Vern Werner, too. Pegasus Enterprises and WinRow Farms lease tractors and drivers to the company as owner-operators.
• Although the company leases a hunting & fishing lodge, which includes a sporting clay range, from Clarence Werner for only one-dollar per annum, it has made approximately $6.1 million in "lease-hold improvements" in the past decade.

Would it be expecting too much of the company to hire a non-Werner with knowledge of oil hedges, swaps and collars?

We can do anything that we want
We can, We can, We can
We can do anything that we want ~ British singer Piper Billie, "Because We Want To" lyrics (Summer 1998)

The Werner family beneficially owns 41.9% of the stock outstanding.

Investment Outlook

The company’s balance sheet is strong, with no long-term debt, contractual obligations to property and equipment of about $63.6 million, and a book value of $8.25 a share.

The stock price has rebounded some 20 percent from January lows (intra-day bottom of $15.26 a share on January 9), as investors positively respond to Werner’s operational metrics—which continue to outperform other truckload long-haulers.

In our opinion, the bulls are breathing in too much diesel fumes, for the 4.3% year-over-year gain in average revenues per truck per week and the 0.9% decline in average empty load tonnage for the first-quarter ended March 31, better reflect a reduction of 720 trucks on the road—not improvements in utilization and pricing.

Although we are neutral on the company, those with one eye on the horizon may want to get back on the road again with Werner. The company is one of the few truckers paying a dividend, with a nominal 1.10% yield ($0.20 per share).

In addition, as freight rate costs become prohibitive to smaller trucking operators (including independent contractors), we look for more going 'out-of-business' signs, which should position Werner for greater truckload volumes and modest pricing power improvements.

However, given worsening truckload tonnage, spiraling diesel prices, and tough weather, such as Midwest flooding—-the visibility of improving freight demand near-term remains cloudy.

An earnings miss in coming quarters increases the likelihood, too, that the stock price of Werner will revisit its January lows (intra-day low of $15.26 a share on January 9).

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Former Brown-Forman CFO in Fine Spirits

Phoebe A. Wood retired from her position as chief financial officer of Brown-Forman (BF.B-$75.96) at the end of the distiller’s fiscal year (April 30, 2008). In connection with her departure, Wood signed a one-year consulting agreement with the maker of Jack Daniel's, Southern Comfort and Korbel Champagne, whereby she would be available for up to eight-hours a week to assist incoming Donald Berg with his new duties as CFO.

Sounds harmless enough. What the press release blithely ignores is that Wood is afforded the opportunity to earn an additional year of salary ($625,000)—for just being available twenty percent of working time—to help Berg, 19-year veteran of the company (who already has tenure in corporate finance, treasury, and tax matters), during the alleged transition period .

"It’s just egregious!" When one reads an article on excessive exit packages for top executives in any of a number of leading publications—BusinessWeek, Forbes, or The Wall Street Journal—prominent chief executives oft-mentioned include Home Depot’s Robert Nardelli, Pfizer’s Hank McKinnell, and ExxonMobil’s Lee Raymond, who took home a respective $225 million, $200 million, and $357 million in severance.

Activist shareholders who traditionally have advocated for more curbs on executive pay might want to sharpen their 'say-on-pay' pencils to include those little-noticed compensatory good-bye packages awarded to hundreds of departing top executives like Phoebe Woods, too.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Weekend Beach Reading: June 28, 2008

American Superconductor (AMSC-$37.00) won a $450 million order for core electrical components from Beijing’s Sinovel Wind. The parts will be used in Sinovel’s 1.5-megawatt and three megawatt wind turbines, totaling approximately 10 gigawatts of wind power capacity, according to Greg Yurek, American’s founder and CEO. Nonetheless, this purchase order does not change the company’s weak operating dynamics.

Atwood Oceanics ($ATW-$120.03) announced a new contract for its moored semisubmersible rig "Atwood Hunter," which can operate at water depths up to 5,000 feet and drill down to approximately 28,000 feet, commencing in Sept. 2008, for a four-year term with Kosmos Energy and Noble Energy to pursue deepwater drilling opportunities offshore West Africa. Given record prices in the contract of $511,000 to $545,000, Atwood will likely exercise an option with Jurong Shipyard to begin construction on a $590 million floater before a looming June 30 deadline.

Flooding in the Midwest and rising corn costs adversely impact the profitability at Aventine Renewable Energy Holdings (AVR-$4.74), a leading distributor and producer of fuel-grade ethanol.

Will financial irregularities-topple wind turbine and tower maker BroadWing Energy (BWEN-$21.60).

Clean Energy Fuels (CLNE-$11.00), the largest provider of compressed and liquefied natural gas for alternative-fuel vehicles in North America, is an attractive alternative to ethanol as a renewable energy resource.

Do as I say, not as I do at Credo Petroleum (CRED-$13.63).

A balance sheet overburdened by debt constrains the ability of power merchant Dynegy (DYN-$8.44) to expand its expansion strategy.

Will expansion of world tanker fleet capacity expose General Maritime’s (GMR-$26.44) to significant decline in day-rate pricing when Lukoil’s charter contracts begin to expire come 2010?

Occidental Petroleum (OXY-$88.02) is acquiring 15 percent of the multibillion-dollar Joslyn oil sands project in northern Alberta. But the move may not be a prudent means of adding to its slowing oil/gas reserves growth rates. Despite the current price of oil, are the economics sufficiently more attractive now to warrant Occidental’s return to an area it abandoned in 2000?

At seismic driller OMNI Energy (OMNI-$6.46), it's all in the numbers.

SunPower (SPWR-$75.71) frequently negotiates solar services agreements that allow customers to limit the purchase to just the electricity generated — not the solar-power systems themselves. Shifting financing obligations may accelerate sales of its solar-electric systems, but is the company digging deeper into financial uncertainty?

Synthesis Energy Systems (SYMX-$9.17), which operates integrated coal-to-methanol gasification plants, completed a $93 million equity offering to finance its 50 percent joint interest in the Golden Concord project, a 100-megawatt gasification plant under construction in Inner Mongolia, which the company expects to come online in the first half of 2010. How attractive are the potential returns from capital invested in these facilities?

Zoltek Companies (ZOLT-$24.81), a producer of parts for wind turbines, faces an investigation into accounting irregularities that could have serious implications for its business.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Gazprom and Gasification with The Jewish Autonomous Region

In a swampy, remote region in the Soviet Far East bordering China, on the banks of the Amur River, Joseph Stalin and his Russian Federation established the Jewish Autonomous Oblast in 1928. The idea was to create a new "Soviet Zion," in a socialist framework. The Stalin answer to settle the "Jewish Question."

The name was somewhat misleading, for the Jewish population never reached more than 25 percent to 30 percent of the population. Today, despite Stalin’s attempt at national engineering, the Jewish population is about two percent of the 190,000 locals.

Gazprom OAO ($56.45), the Russian natural gas giant, noted in its 2007 Annual Report that the company had signed contracts on "Gasification" with the Jewish Autonomous Region. Stalin’s two purges to stamp out Yiddish culture, the Holocaust, and rising anti-Semitism—whoever dreamed up the gasification name might want to rethink the global wisdom of using that label to describe Gazprom’s natural gas projects.

When translating its filing into English, it's a good thing Gazprom knew the difference between the prepositions 'with' and 'of.'

Cracks Widening in Homebuilder Hovnanian Enterprises' Foundation

While Hovnanian Enterprises’ (HOV-$6.14) balance sheet is improving, the operating environment in general for the industry remains bleak in an ongoing recession-like environment.

The US housing industry has been hit hard in the past two years, a decline which will take longer than usual to correct (as depicted in the image below)-- exacerbated by rising unemployment and food & energy prices.

Although the homebuilder’s cancellation rate is improving, from38 percent to 29 percent, backlog is down 54 percent-- or $1.2 billion—and its last quarter metrics remains abysmal, alongside its comparable rating amongst BZH (Ba1), TOL (Baa3), DHI (Ba1) and CTX with a Caa1.

As if the inflationary environment is not enough, HOV has a real possibility of going insolvent because the money it raised from stock and debt issuance ($126 and 600 mn, respectively) went towards working capital needs and paying back revolver drawings. In addition, the company has limited access to its revolving credit facility. Latest EPS loss was almost 2x as high as Street expectations, coming in at -$5.29 vs. -$2.65 a share.

Cash on hand has been rising at most homebuilders (sales of subsidiaries, stock and debt issuances—TOL recorded $1.23 bn, CTX $775 mn, BZH $277.3 mn and DHI $519 mn). HOV management expects to be cash flow positive by year- end. , The Company has $500 mn in cash and expects to have $800 mn by year- end.

However, given the continued declines in housing starts (dropped 3.3% in May, the lowest level since '91 with single and multi-family homes declining 1% and 8%, respectively) and NAHM sentiment index dropping to 18 in June from 19 in May, there is no telling how bad it's going to keep getting –continuing increase in foreclosures and bankruptcies (i.e. LandSource, a significant joint-venture of LEN filing for bankruptcy).

Contributor Yaser Anwar does not hold a financial position in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure policy.

Is CEO of Rubicon Tech Coming or Going?

Raja M. Parvez, has served as chief executive officer of Rubicon Technology Inc (RBCN-$21.77), a provider of sapphire substrates and products to the high-brightness Light-Emitting Diodes (LED), Semiconductor, and Optical (blue laser diodes) industries, since August 2006. Yet, the electronics material supplier is still reimbursing him to commute from his home in Pennsylvania to executive offices in Franklin Park, Illinois.

"Pending his relocation," Parvez received $114,049 in the aggregate for fiscal 2006 and 2007, according to the company’s proxy filing on July 20, 2008.

Perhaps Parvez is too busy traveling to put roots down in the Prairie State, for more than 70% of sales are made to customers in Asia, principally to Taiwan-based Crystalwise Technology, a wafer fabricator, and Japanese-based Shinkosha Co, an optical communication device-maker.

Business Strategy

A shift away from incandescent to more energy-efficient LED lighting positions Rubicon for aggressive growth. However, Rubicon is highly dependent on increased market acceptance of solid state lighting, with approximately 62% of revenue derived from sales of components for use in the manufacture of LED products, ranging from mobile appliances (cell phones, digital cameras), flat panel televisions, signage (for very large advertising and stadium displays), and headlights for the automotive industries.

One key end-use application driving high demand is LED-backlighting units for notebook computers. "LED backlight units are being adopted by notebook manufacturers at an increasing rate and the penetration rate may now reach over 10% in 2008," said CEO Parviz on the company’s 1Q:08 earnings call on April 30.

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Competition

Albeit sapphire is currently the preferred substrate material for high brightness (HB) white, blue and green LED applications, silicon carbide, aluminum nitride, zinc oxide and bulk gallium nitride are other substrates being investigated and used in research and development for certain LED applications. Ergo, as technology progresses and sapphire is displaced as the substrate of choice for certain LED applications, Rubicon’s operating performance could flameout like an energy-inefficient, tungsten-filament light bulb.

In our view, Rubicon must leverage the growing demand for sapphire wafers in the LED markets by executing strategies for increasing and diversifying revenues to other applications. For example, larger diameter (6” to 8”) sapphire wafers are increasingly used for high performance Silicon-on-Sapphire Radio Frequency Integrated Circuits (RFIC) chips used in cell phones and base stations, wafer carriers for other substrates and as optical windows in the aerospace, medical device and sensor markets. These new applications are turning to sapphire for its high-performance and affordability.

Outlook

Rubicon now has larger furnaces operational, producing larger, high quality, sapphire crystals to better serve the 6 and 8-inch markets, according to Parviz.

Addressing the potential for larger diameter sapphire in other industry applications suggests continued high growth for the Company. However, management is not raising top end of its guidance estimates until they are sure capacity can continue to come online ahead of schedule. Rubicon anticipates revenue for 2008 of between $47 million and $49 million and share-net of between $0.45 and $0.47.

What do you say, Mr. Parvez, is it time to "Cross the Rubicon?"

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

CEO of HomeFed Homesteading on Wrong Coast

Paul J. Borden, has served as a director and President of HomeFed Corp (HOFD-$47.00), a developer of residential real estate projects in Southern California, specifically in the San Diego area, since May 1998. Although executive offices are in Carlsbad, California, located thirty miles north of San Diego, Borden maintains his primary residence in New Jersey.

In 1998, Borden, then a Vice-President of Leucadia National Corp (LUK-$48.43), signed an Administrative Services Agreement to steward the San Elijo Hills project, a master-planned community in San Diego County, California, of approximately 3,400 homes and apartments as well as commercial properties.

Leucadia, a holding company with interests in a broad range of businesses, from gaming entertainment to timber, plastics and prepaid calling services, owns 29.9% of HomeFed.

HomeFed and Leucadia are developing a 700-acre non-adjoining acres of land located within the larger 22,900 acre Otay Ranch master-planned community south of San Diego, California, too.

All my bags are packed,
I'm ready to go
I'm standing here outside your door
I hate to wake you up to say goodbye
But the dawn is breakin, its early morn
The taxis waiting, hes blowin his horn
Already Im so lonesome I could cry.

HomeFed maintains a "temporary residence" in California and reimburses Borden for airfare to and from his primary residence, according the Company’s annual proxy filing. Albeit the definition of temporary is "lasting or existing only for a short time," the real-estate concern arranged this temporary allowance starting in 2002—first detailing the remuneration in its 2005 proxy statement.

So kiss me and smile for me
Tell me that youll wait for me
Hold me like youll never let me go.
I'm leavin on a jet plane
I don't know when Ill be back again
Oh, babe, I hate to go. ~ Folk singers Peter, Paul & Mary

For 2007, Borden received $29,838, $43,787, and $62,579, respectively for his housing allowance, airfare to and from his primary residence in New Jersey, and tax-gross-ups.

Unlike the lyrics in the song, Borden knew when he’d be back home again—more times than he left!

HomeFed is not immune to the turmoil in the mortgage markets. The Company estimated that total home sales (both new and re-sales) at the San Elijo Hills project were approximately 227 in 2007 and 300 in 2006, as compared to 470 in 2005 and 860 in 2004. In addition, HomeFed has not sold any new residential lot sales at the San Elijo Hills project or Otay Ranch since June 2006.

As business is non-existent these days, why even bother flying Borden back and forth from New Jersey?

Given Borden’s past history with Leucadia, the 10Q Detective can understand the disingenuous housing allowance perquisite. The $307, 000 paid to Borden in cash bonuses for each of fiscal 2006 and 2007—now that’s a blatant disregard for shareholder common interests.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Sinking Ship at Blockbuster?

While Blockbuster, Inc (BBI-$2.79) currently has sufficient liquidity to meet its cash obligations, the company is at risk of potential covenant violations in 2009, according to Moody's analysts.

"Companies with weak business models—like Blockbuster—face pressure on both revenue and on operating margins - calling cash-flow generation, or even survival, into question," Moody's analysts wrote in a report on 102 U.S. retailers.

Like the remake of the Poseidon Adventure, the original version is often better.

Regular readers of the 10Q Detective know that we scooped Moody's on BBI's outlook, warning investors of the video retailer’s liquidity crisis back in early May. Unlike Moody’s, we do not charge for our advice.

Pyrrhic Victory for Raser Tech Bulls: 10Q Detective Banned from Yahoo!

It’s official: Yahoo! officially banned 10Q Detective from posting comments on its Message Boards.

Before the investors of Raser Technologies—who flooded Yahoo! with alleged complaints of our biases—revel in their victory, remember the ghosts of erstwhile investors in thinkorswim Group, Force Protection, Brooke Corp, Heelys, Inc, USANA Health, and a plethora of other former highfliers –who gloated that we were third-rate hacks, too. Ask them how many years it will take them to write-down their capital losses.

Censoring freedom of expression and search-engine results that powerful entities find objectionable is nothing new at Yahoo. Just ask Wang Xiaoning and Shi Tao, two Chinese journalist currently serving 10-year prison sentences in China because of information Yahoo! provided to the Chinese government.

We can never be sure that the opinion we are endeavoring to stifle is a false opinion; and if we were sure, stifling it would be an evil still. ~ Philosopher John Stuart Mill, On Liberty, 1859

Yahoo's own recent failure(s) to execute on new search engine initiatives speaks volumes about its own incompetence, too.

A special thank you to Fat Pitch Financials for standing behind our search for the truth.