Swine Flu: Bienvenidos a los Estados Unidos de América

In a nationally televised speech on Wednesday night, President Felipe Calderón urged his Mexican subjects to stay home. Why didn’t he just tell them instead to head Norte across the Rio Grande to the Estados Unidos? Afterall, “undocumented” workers have been sneaking across our southern border with near impunity for years.

“Atencion, Mexico City, we’ve got free health care and Tamiflu medicine for all of you. Do not speak English? No problema. We fellow citizens of the world will subsidize the hiring of a language interpreter for you! No te pongas nerviososo. Come and dump your hopeless, diseased, and uneducated on our doorstep.

I’m waiting for “Countdown” Keith Olbermann and “Hardball” Chris Matthews to lecture me—again—on the economic benefits that uneducated, low-skill immigrants contribute to U.S. society. Keith and Chris, if the two of you can take your heads out from Obama’s ass long enough, tell me how many illegals live in your neighborhoods. What’s that? They cannot afford to buy any of the houses on your streets. And I thought the two of you embraced the principle of “mi casa es su casa!”

As for me, I can’t wait for the demographics to change in this country. As a gringo—and an emerging minority—will I then qualify for equal opportunities through affirmative action programs? !Qué demasiado!

The opinions expressed herein represent only those of Editor David J Phillips. The 10Q Detective has a Full Disclosure Policy.

Traders Flock to Novavax: SELL!

Common sense will be remembered as one of the first victims of the recent swine flu outbreak in the United States. In another example of following the herd, investors have stampeded into flu vaccine maker Novavax (NVAX-$3.18), which is working on potential treatments against highly pathogenic bird and swine influenza strains. The share price is trading at more than twice Friday’s close—despite knowledge that the company's vaccine candidate is more than two years away from commercial development.

Last month, Novavax published preclinical data showing that its H1N1 virus-like particle (VLP) vaccine candidate (based on the 1918 Spanish influenza strain) protected against both the Spanish flu and an H5N1 avian influenza strain. Nonetheless, even in the midst of a pandemic threat, it is highly unlikely that the Food & Drug Administration would approve an anti-viral with limited testing in (healthy!) humans.

With a quarterly cash burn of $8 million, Novavax does not have enough monies ($34 million at December 31—actually, $27 million if you back out the portion invested in auction rates securities) to shepherd its pandemic and seasonal flu vaccine candidates through human clinical testing. In our opinion, the recent $11 million capital infusion by India’s Cadila Pharmaceutical only delays an eventual restructuring of the company (including the suspension of other R&D vaccine programs). A read of the 2008 annual report shows that $22 million in 4.75% senior convertible notes comes due on July 15 (although $11.0 million of the debt can be satisfied with the issuance of common stock).

The biggest asset on the company’s balance sheet is something called “crisis.” Back in 2005, this former distributor of soy-based lotions to prevent hot flashes in perimenopausal women repackaged itself as a (self-proclaimed) leader in the development of bird flu vaccines. We are still waiting for that SARS (severe acute respiratory syndrome) antidote, 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.

Is NY Times Ignoring Voice of the People?

Struggling to save its flagship paper, The New York Times Company (NYT-$5.25) threatens to shutter The Boston Globe unless The Boston Newspaper Guild, the Globe’s largest union, makes $20 million in concessions by May 1. Management would have NY Times shareholders believe that the Globe will lose $85 million in 2009 because of the recession and subscribers deserting to online news. However, many folks in New England will tell you that circulation is falling because the paper no longer speaks to (and for) the readers.

“The voice of the people has been said to be the voice of God; and, however generally this maxim has been quoted and believed, it is not true to fact. The people are turbulent and changing, they seldom judge or determine right.” ~ Alexander Hamilton

Looking to close a projected $3.5 billion budget shortfall, Massachusetts’ legislators are pushing for an increase in the state sales tax, from 5.0 percent to 6.25 percent. Rather than talk about fiscal responsibility or the need for spending cutbacks, the Globe voices its support for a tax hike, disingenuously opining that the “MA [existing] sales tax ranks lowest among the 45 states that have a sales tax, once adjusted for personal income [source: Michael Graham, “The Natural Truth”].”

Although there are those who argue that I, too, am guilty of manipulating the facts—"it’s the Internet stupid!"—ignoring the voice of the people is not without consequence. The Globe’s daily circulation plunged 13.7 percent to 302,638 copies and Sunday readership dropped 11.3 percent to 466,665 at March 31, according to the Audit Bureau of Circulations figures.

The opinions expressed herein represent only those of Editor David J Phillips. The 10Q Detective has a Full Disclosure Policy.

Junk Income at Citigroup

In a challenging lending environment, Citigroup (C-$3.25) posted revenues of nearly $25 billion and net income of $1.6 billion for the first quarter of 2009. "The clear message from this quarter is that our clients remain engaged,” trumpeted chief executive officer Vikram Pandit. “Despite the challenges we have faced this past year, they [our customers] remain closely engaged with us.” Might the financial service provider’s performance gains have more to do with fuzzy math? Read More….

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.

Holding General Growth Properties CEO Metz Accountable

What role did chief executive Adam Metz play in the boom-to-bust saga at mall owner General Growth Properties (GGP-$0.75)? Metz first showed up on the scene as a director on the board in November 2005, due to his prior real estate holdings/financial interest in The Rouse Company…. Read More….

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.

Where is Payday in Advance America's Business Model?

After suffering recent legislative setbacks in Oregon and New Hampshire that imposed annual rate caps on payday loans, Advance America (AEA-$3.82) could come out ahead on a ‘Payday Reform Bill’ working its way through the House of Representatives in Washington D.C., according to its critics. Consumer lending advocacy groups decry that the federal legislation being penned by Illinois Representative Luis Gutierrez will ostensibly legitimize existing fee structures of the payday loan industry.

It remains the stated position of Advance America that “any legislative or regulatory action that severely restricts or prohibits cash advance and similar services, like the Gutierrez bill, if enacted, could have a material adverse impact on the company’s prospects and forward results of operations.” To that end, the company entered into a one-year consulting arrangement with Tony S. Colletti, a member of the Board of Directors, whereby Colletti will be paid monthly consulting fees in the amount of $5,000 and $10,000 for his lobbying efforts on Advance America’s behalf in Illinois and Washington, D.C., respectively, according to the 2009 proxy regulatory filing.

Unlike pawn companies, Advance America only give loans to people that are employed. Still, as a percentage of total revenues, provision for doubtful accounts eats up about twenty cents of each dollar in gross profit, on average, at each of its 2,797 centers. However, the bulk of operating costs remain rooted in payroll and occupancy costs. Management’s claim that the company cannot survive as a going concern with a legislated ARP ceiling cap of 36 percent on cash advances, in our opinion, speaks more to an internal inability to control operating costs at the center level than to payday advances costs, such as default risk.

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.

Wexner's Dangerous Job as CEO of Limited Brands

Could someone inform the Board of Directors at Limited Brands (LTD-$10.25) that the “global war on terror” is over? Since 2005, shareholders at the specialty retailer, which operates Victoria's Secret and Bath & Body Works stores, have paid for security services provided to Chief Executive Leslie Wexner and his family. Although the 10Q Detective acknowledges the instrumental role that Wexner has played in the growth of the company he founded back in 1963, spending $1.0 million annually on protective services is absurd. In regulatory filings, the Board has said: “We require these security measures for our benefit and believe these security costs are appropriate given the risks associated with Mr. Wexner’s role and position.” [Ed. note. By comparison, DJ O'Reilly, CEO of oil giant Chevron, charged to the company $978 for home security costs in 2008.]

Leadership is an opportunity to serve. It is not a trumpet call to self-importance. ~ Spiritual leader Swami Kriyananda (born J. Donald Walters, 1926)

Enough! Is the company afraid that some of the women alleging that Victoria's Secret bras gave them rashes and other skin problems might fling sexy underwear at Wexner?

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.

The Ballad of Insider Interests and NASCAR Racing at Aaron Rents

Aaron Rents (RNT-$27.77), a leader in the sale and lease ownership of residential furniture, consumer electronics and home appliances, believes sponsorship of sporting events, such as arena football 2, NBA basketball, and various college sports, is an attractive medium by which to boost brand awareness with its low-income customers. The company's premier partnership, however, is sponsorship of professional driver Michael Waltrip's team in NASCAR racing. While the 10Q Detective concedes that the rent-to-own retailer boasts a strong record of beating earnings expectations, we wonder whether the company's patronage of motorsports has more to do with insider interests than the purported customer loyalty garnered from NASCAR-related initiatives.

To help promote its Dream Products program [think “dream” consumer durables like large-screen televisions and home-theater systems] the company established a relationship with NASCAR in 1999. The initial deal was the title sponsorship of the NASCAR Busch Grand National Car Race at the Atlanta Motor Speedway- the nationally televised "Aaron's 312,” named for Aaron's three ways to obtain merchandise and its unique 12-month plan. The following year, in 2000, the company began a limited sponsorship of driver Michael Waltrip's #99 Aaron's Dream Machine in the Busch Grand National Series.

In 2005, as a part of its NASCAR marketing program, Aaron Rents expanded its relationship with Waltrip by financially backing a driver development program implemented by Waltrip’s company. The two drivers participating in the driver development program that year—Ken Butler and Brett Butler—the sons of William Butler, the current Chief Operating Officer of Aaron Rents. He has also served as a Director of the company since 2000.

Although the company is reticent about detailing the annual advertising costs associated with its NASCAR purchasing rights and other initiatives, a review of past regulatory filings shows that stockholders footed bills totaling $890,000 in 2005 and $983,000 in 2006--so Butler’s two kids could learn to drive stock cars.

“It's because it's what you love, Ricky. It is who you were born to be. And here you sit, thinking. Well, Ricky Bobby is not a thinker. Ricky Bobby is a driver. He is a doer. And that's what you need to do. You don't need to think. You need to drive. You need speed. You need to go out there, and you need to rev your engine. You need to fire it up.” ~ Talladega Nights: The Ballad of Ricky Bobby (actress Amy Adams, “Susan”)

In 2009, the company will sponsor Ken Butler as a member of the Robert Richardson Racing team in the NASCAR Nationwide Series at an estimated cost of $1.6 million, according to the 2009 proxy filing. The 10-Q Detective did not bother to query management if they would be willing to sponsor our sports fantasy of being Ricky Bobby, handling 33 degrees of banking in the turns at the Talladega Superspeedway.

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.

Callaway Golf CEO Takes Mulligan With Exexcutive Perks

Despite stewarding a mixed financial performance at Callaway Golf Company (ELY-$7.90), Chief Executive George Fellows received compensation valued at $4.0 million in 2008, only slightly less than his 2007 take home pay, according to an analysis of the the 2009 regulatory proxy statement filed with the SEC.

Fellows also received from the company—in each year—a payment of $66,500 to assist him with travel expenses "not otherwise reimbursable under the Company’s policies." Obscuring the true nature of the payments calls into question the Board's Governance Policy. Read More….

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.

Profits at GeoEye in Decaying Orbit?

GeoEye Inc (GEOY-$24.57) said in February that its earth-imaging satellite GeoEye-1 received full operational capability certification from National Geospatial-Intelligence Agency. Launched on September 6, GeoEye-1, currently the most advanced imagery collection satellite that is commercially available, can now begin delivering images to the agency, with the company collecting a monthly revenue stream of $12.5 million. The timing of the certification was welcome news, as two of the three low-Earth orbit imaging satellites owned and operated by GeoEye are running on fumes, having outlived their designed operational lives of seven years, according to the 2008 annual report just filed with the SEC:

The IKONOS satellite was launched in September 1999. A study that was completed in August of 2008 by the IKONOS manufacturer resulted in a revised life expectancy for IKONOS to the 2010+ timeframe. Based on that study, we currently expect to continue commercial operations with IKONOS through that timeframe. However, we can offer no assurance that IKONOS will maintain its prescribed orbit or remain commercially operational..

The OrbView-2 satellite was launched in August 1997. Despite the fact that OrbView-2’s operational life has expired, we currently expect to continue commercial operations with OrbView-2 in 2009. We cannot, cannot guarantee the use of OrbView-2 throughout 2009, or beyond.

The expected operational lives of satellites are affected by a number of factors, including the quality of construction, the supply of fuel, the expected gradual environmental degradation of solar panels, the durability of various satellite components and the orbits in which the satellites are placed.

GeoEye does not presently have plans to construct and launch a replacement satellite for IKONOS or OrbView-2 if either fails prematurely. The company is developing the GeoEye-2 satellite program, but has yet to select a satellite builder. Timeline to launch is at least three to four years from commencement of actual construction.

Financing the construction of GeoEye-2, whose total costs could exceed $500 million, will strain an already levered balance sheet. Long-term debt of $246.7 million is 1.3 times shareholder equity, and comes due in 2012. The times interest earned ratio—an indicator of GeoEye’s ability to meet the interest payments on its debt—0.9 times EBIT at December 31—suggests that unless earnings expand rapidly, GeoEye could find the capital markets less than receptive to their request for additional financing. [Ed. Note. GeoEye’s ability to cover its annual interest payments would be even more suspect, but the company used a legal loophole, known as “capitalized interest” that permitted the company to defer payment of certain costs involved in the construction of GeoEye-1].

If IKRONOS and OrbView-2 lose satellite imagery capabilities before 2012, sales and profitability could end up in decaying orbits, dooming GeoEye’s plans for its GeoEye-2 satellite.

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.

Please Don't Shrink My Box of Cheerios!

Ken Powell, Chairman and Chief Executive Officer of General Mills (GIS-$50.80), said although commodity prices have climbed about 25 percent over the past five years, the company has only needed to raise its product prices just eight to 10 percent, reflecting the success of its “holistic margin management” (HMM) initiatives, which include cost-savings initiatives, marketing spending efficiencies, and profitable sales mix strategies. Why then do the cereal boxes keep shrinking in size? Read More….

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 Murren Tells MGM Employees: "Trust Me."

In a letter sent to MGM Mirage (MGM-$2.85) employees, CEO James Murren assured the staff that the management of the casino operator remained committed to avoiding insolvency and completing the troubled $8 billion CityCenter Las Vegas project:

“There is little doubt that you will continue to see and hear stories from others about what the future holds for us. I ask that you please reserve judgment on what you hear while your leadership does the vital work necessary to protect our Company’s and your interests. You can be assured that I will continue to update you as often as I can with accurate information.”

This is the same Jim Murren, who as Chief Financial Officer from January 1998 to August 2007, oversaw the more than doubling of long-term debt on the balance sheet to $12.4 billion in just four years. As MGM teeters on the verge of bankruptcy, I would less-than assured that he had my best interests in mind.

“I’m not upset that you lied to me, I’m upset that from now on I can’t believe you.” ~ German Philosopher Friedrich Nietzsche (1844 – 1900)

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.

Shorts Do Battle with PrePaid Legal Services

Similarities between PrePaid Legal Services (PPD-$30.39) and Bernie Madoff? The company, which markets prepaid legal plans, is actually nothing more than a pyramid scheme, alleges Barry Minkow’s The Fraud Discovery Institute.

PrePaid principally derives the bulk of its revenue through the multi-level marketing of membership fees and enrollment costs slapped on new sales associates. The 10Q Detective notes that key metrics slipped year-on-year, with the volume of total new membership subscriptions and the number of new sales associates recruited in 2008 falling 9.8% and 17.8 percent, respectively, to 552,327 and 122,225.

Is the company involved with a tug-of-war with short-sellers? Although retention characteristics continue to disappoint, the board authorized an additional one million share repurchase last month. PrePaid has spent more than $110 million on stock buybacks in the last two years—or about 82 percent of total cash generated from operating activities! In 2008, the company spent $44.7 million alone, retiring one-million (+) shares at an average price of $42.44 a share. Given the stock’s [three-month] average volume of 86,496 shares traded per day, it would take about 20 days to cover total shares [known] shorted.

Could a cash shortage be on the event horizon? Reggie Middleton, another well known short-seller certainly thinks so. The company must report first-quarter 2009 earnings by May 15—just in time for May option expirations….

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.

Misdirection at China Natural Gas?

Despite year-on-year revenue growth of 91 percent to $66.7 million and comparable net income gains of 67 percent in 2008, the share price of China Natural Gas (CHNG-$2.45) tumbled more than 60 percent last year. Now that crude oil prices are trending higher again, is this the time to step in and purchase stock of the owner/operator of 35 compressed natural gas (CNG) fueling stations for hybrid (natural gas/gasoline) powered vehicles in Shaanxi and Henan provinces?

Chinese Demand for Natural Gas

Currently, natural gas consumption accounts for less than three percent of total energy consumption in the People's Republic of China (PRC). Driven by environmental pressures, improvements in social infrastructure fueled by economic growth, and a stable energy supply, natural gas consumption is anticipated to grow at 15 percent annually for the next 20 years, according to China’s Ministry of Science and Technology.

The company estimates that currently there are approximately 50,000 vehicles using CNG in the Xi'an metropolitan area (where it owns 23 fueling stations), with some 6,000 buses and 20,000 taxis using CNG. The PRC government projects that current total demand for CNG as a vehicular fuel in Xi'an (capital of the Shaanxi province) is approximately 1,070,000 cubic meters per day—more than the approximately 940,500 cubic meters of CNG pumped per day. As a result, management believes that there is significant unmet demand for CNG as vehicular fuel.

Construction and Related Costs

The major market risk exposure is the pricing applicable to purchases and value-added reselling of condensed natural gas, which are regulated and fixed by the PRC central and local governments. Ergo, revenues and profitability depend substantially upon the end-user demand for natural gas. In 2008, sales of CNG increases year-over-year 82 percent to 149.4 million cubic meters, due to the addition of 11 new filling stations. Growth will likely slow in 2009 as management anticipates adding only five new fueling stations.

Average construction costs per fueling station and construction period are $900,000 - $1.0 million and two – three months, respectively. If the future is so bright—with demand allegedly outpacing supply—why is the company only building out capacity by five gas stations this year?

Could it be a looming cash shortage? The company added $42 million in long-term debt to the balance sheet in 2008, due to a liquefied natural gas terminal being constructing in Jingbian, Shaanxi province. Management opines that transportation savings from the processing plant will result in lower transportation costs and improved margins. What about the interest expenses and fixed, operational costs associated with the debt and facility servicing? The plant is expected to start operation by late 2009. Once completed, the plant has LNG processing capacity of 500,000 cubic meters per day, or approximately 150 million cubic meters on an annual basis.

Construction of the LNG facility has not helped the share price of CHNG. The company issued senior notes to Abaxis Lotus Ltd. in exchange for $40 million in funding. In connection with the purchase agreement, CHNG issued seven-year warrants exercisable for up to 2.9 million shares of the company’s common stock at an initial exercise price equal to $7.3652 per share. The exercise price was reset to $3.69 a share on January 29, 2009.

The indenture also required CHNG to pay additional interest at the rate of 3.0% per annum if the company had not obtained a listing of its common stock on the Nasdaq Global Market, the Nasdaq Capital Market or the New York Stock Exchange by January 29, 2009. To date, CHNG has not obtained a listing of its common stock on any of the markets stated in the agreement. In the opinion of the 10Q Detective, it is unlikely that CHNG will get the required stock listing. If the Company fails to get waiver from Abax, the interest rate on the debt will jump to eight percent.

Sleight of Hand

"The magician and the politician have much in common: they both have to draw our attention away from what they are really doing." ~ Nigerian writer Ben Okri

Is CNHG management practicing sleight of hand, too? In an April 2008 Investor Presentation, management said it would have 42 fueling stations in operation by January 2009 and was "working with the Thai government to evaluate opening retail CNG filling stations throughout Thailand." As of March 2009, CHNG had no CNG operations in Thailand.

The company purportedly owns property and equipment worth $76 million, up from $32 million in fiscal 2007. However, the 10Q Detective observes that at December 31, 2008, one consultant based in California served as CHNG’s accountant—she being the one engaged to prepare the financial statements! In a related concern, according to the 2008 FORM 10-K filed with the SEC:

• The Company did not have sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge and experience in the application of generally accepted accounting principles accepted in the United States of America commensurate with the Company’s financial reporting requirements, which resulted in a number of internal control deficiencies that were identified as being significant. The Company’s management believes that the number and nature of these significant deficiencies, when aggregated, was determined to be a material weakness.
  
  The Company is lacking qualified resources to perform the internal audit functions properly. In addition, the scope and effectiveness of the Company's internal audit function are yet to be developed…. due to limited qualified resources in the region, we were not able to hire sufficient internal audit resources before the end of 2008.

Give me your secrets
Bring me a sign
Give me a reason
To walk the fire – "The Unit" TV Theme Song

CHNG is not a new story for us. The 10-Q Detective owned/sold 2,000 shares of the stock for an 18 percent short-term gain in early 2007. The profitability of the LNG terminal aside, we still believe that the company’s original business model—acquiring and operating CNG fueling stations—is an attractive growth opportunity. We just need some credible reasons to believe that CHNG—with its current management—can become a leading CNG player in Shaanxi, Hunan, and other provinces in Western China.

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.

Georgia Gulf Hangs on By Polyester Thread

The fortunes of Georgia Gulf (GGC-$1.85), a plastics company whose products are used in home-building materials ranging from pipe fittings to vinyl siding, moldings and outdoor vinyl decking, collapsed in the last two years due to ongoing weakness in the North American housing market. Teetering on the edge of bankruptcy, the company won a reprieve today when its senior lenders agreed, among other things, to amend loan covenants until March 2010. Given that the company's end-markets are dependent on the level of demand for residential construction and 'do-it-yourself' home remodeling—where activity remains anemic—is 12-months' relief enough time for management to stop the bleeding?

Credit problems at Georgia Gulf were originally sewn in 2006, when management looked to diversify away from its commodity chemicals business. Eyeing the manufacturing and distribution operations of Toronto-based Royal Group, Georgia Gulf acquired the maker of vinyl building and construction products at the peak of the construction boom, paying $1.6 billion. Unfortunately, the purchase has not proven accretive to earnings; and, expected cost savings and operational efficiencies previously anticipated have not been realized, according to the 2008 annual filing with the SEC. Instead, as a result of overpaying for Royal Group—and financing more than $800 million of the purchase through debt—total indebtedness climbed five-fold in the last three-years, ending 2008 at $1.4 billion.

The latest credit amendment eases restrictive covenants for 2009, increasing the maximum leverage ratio to 8.75 (from 3.75 times) for the fourth quarter and decreasing the minimum interest coverage ratio (earnings before interest and taxes/interest expense) to 1.15 x (from 3.0 x) for the fourth quarter. At December 31, total debt was 6.4 times available working capital and the interest coverage ratio was 1.2 times interest expense of $133.2 million.

The amendment also establishes a trailing twelve-month minimum consolidated EBTIDA threshold covenant. The minimum compliance EBITDA was set at $167.0 million for the quarter-ended December 31, 2009 (slightly higher than the $165.7 million the company scratched out last year).

In the plus column, more than $1.1 billion of Georgia Gulf's debt does not mature until 2013 and beyond. However, the company is contractually obligated to make payments totaling about $2.0 billion in the next two years ($1.5 billion in raw material purchase agreements).

The company is working to slash overhead costs, from freezing its pension plan and salaries to shortening workweeks and reducing headcount in all divisions. In addition, Chief Executive Officer Paul Carrico told analysts on the fourth-quarter 2008 earnings call that the company will look to improve its liquidity profile (cash on hand of $90 million) in coming quarters through asset sales, tax refunds, and $142.9 million available under a credit facility.

Assuming continued softness in the North American housing and construction markets (especially in new home construction) combined with estimated cost-savings (totaling more than $55.0 million), Georgia Gulf is forecast to be able to generate enough cash to cover interest costs, fund normal capital expenditures, and pay down debt due in 2009, said Carrico. However, in my opinion, continued overcapacity in commodity chemicals production (chlorovinyl and phenol businesses)—and rising energy and feedstock costs—will adversely impact the company's financial performance in coming quarters, likely forcing management back to the negotiating table with its lenders before March 2010.

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.

AMEX Management Fleecing Shaeholders?

American Express (AXP-$12.92) warned yesterday that February delinquencies advanced to 8.7% from 7.3% in December, as 5.3% of its credit-card loans are now at least 30 days late, up from 4.7% in December. One might be forgiven for mistakenly concluding that this announcement contained typo errors, however, given the generous bonus payouts to senior management of the credit card provider, according to the 2008 Proxy Filing:

Chairman and Chief Executive Ken Chenault took home incentive compensation and perquisites/ other benefits totaling $6.1 million and $1.2 million; Vice-Chairman Edward Gilligan received cash bonuses and perks totaling $4.6 million and $4.3 million; and, the Board rewarded President Alfred Kelly with a $4.1 million cash bonus.

The share price of AMEX tumbled 70 percent in the past year, reflecting the deteriorating performance in the company’s credit loan portfolio. Amid this backdrop, the only line item that seems justified in the executive compensation table was the $200,898 in ‘home security’ services provided to Chenault in 2008, up from $60,716 in 2006.

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.

What is China Security & Surveillance Hiding from Stockholders?

China Security & Surveillance (CSR-$2.67) said it expects 2009 earnings of $2.16 to $2.26 per share on revenue of $600.0 million to $630.0 million. Why then, is the stock of one of the largest digital surveillance providers in China selling for less than two times earnings?

The share price of CSR has lost 80 percent in value this past year, some of which can be attibuted to the 84 percent decline in the Shanghai Composite Index. Some investors remain concerned, however, that accounts receivables due from customers rose $73.8 million year-on-year. As Days Sales Outstanding, or the average amount of time that elapses before payments are received from customers, climbed only seven days to 91 days, the increase in AR likely resulted more from rising sales than collection issues.

A bigger worry was that gross margin in the installation segment fell 160 basis points to 27.3% in 2008, as customers from larger projects demanded higher discounts. Most of CSR’s revenues derive from the installation of surveillance and safety systems [73 percent], which are generally non-recurring. Consequently, it is likely that margins will fall further in coming quarters as discounting is the cost of business necessary to ensure “Safe City” contract wins from renminbi-starved government customers looking to save monies on their surveillance and safety budgets and other commercial clients.

On the surface, the balance sheet looks clean: debt service coverage was 2.6 times annual interest payments; cash flow used in operations of $39.1 million resulted principally from increases in inventories and AR [to support sales growth]; and, working capital was a comfortable $231.9 million at December 31.

Sun Tzu wrote in The Art of War: “Even though you are competent, appear to be incompetent. Though effective, appear to be ineffective.” The reverse is also true—and that is my biggest problem with CSR—and most PRC-based companies: lack of transparency.

Chief Executive Guoshen Tu and his investment entity Whitehorse Technology Limited beneficially own 32.9% of the outstanding common stock of CSR. On January 11, 2008, Whitehorse sold $50 million in aggregate principal amount of Exchangeable Senior Notes due 2012 to “un-named” third party investors not affiliated with the company (when CSR stock traded at $20 a share). In connection with this transaction, Whitehorse and Mr. Tu pledged 14.7 million shares of their common stock in CSR. In my opinion, the precipitious decline in the value of CSR shares is directly related to a “blow-up” that occurred in this less-than transparent lending transaction:

• If the market price of the shares pledged by Whitehorse and Mr. Tu fell below $150 million, Whitehorse and Mr. Tu were obligated to pledge the number of additional shares in order to increase the aggregate value of all of the pledged shares to $150 million. As, the value of CSR fell more than 80 percent in the last year, I question whether or not Whitehorse and Mr. Tu had—and have—enough equity to meet potential margin calls. Supposedly, Tu and Whitehorse are not in default on this note, according to the 2008 annual report.

In 2007, CSR received $120 million from Chicago-based hedge fund Citadel Equity Fund, which included common stock convertible provisions. The Notes were convertible, by the holders, at any time on or prior to maturity, into common shares of CSR initially at the conversion price of $23.60 per share (equal to 9.9% of the common stock outstanding). HOWEVER, the exchange was subject to semi-annual reset of the conversion price. It is not known what the new exercise price will be—although investors should expect an adjusted reset at a significantly lower price than $23 a share (which will be dilutive, too).

The share price may look like a bargain at under $3.00 a share—until one begins to consider the stories not being told….

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.

Newsday Invites Soft Forgetfulness of NewsPrint Industry

But, soft! what light through yonder window breaks? ~ William Shakespeare ("Romeo & Juliet").

Could it be the greenish glow emitted from the LCD flat screen of some portable mobile device, as yet another "Gen Y" scrolls through their morning paper, with an occasional perfunctory sip of their Starbux coffee--blithely unaware another newspaper plant has closed....

"Our goal was and is to use our electronic network assets and subscriber relationships to transform the way news is distributed,” said Chief Operating Officer Tom Rutledge on Cablevision Systems’ (CVC-$10.35) conference call. The question going forward is what will happen to the print version of Newsday? … Read More….

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.

Dark Future for Evergreen Solar

Lux Research predicted last month that solar cell and module capacity will overshoot demand by twofold in 2009. The 10Q Detective speculates that capital-starved Evergreen Solar (ESLR-$1.05) will not survive the impending industry shakeout.

At December 31, the solar panel maker had approximately $155 million in unrestricted cash on its balance sheet. However, the first phase of its Midland factory (in Michigan)—where it plans to manufacture the unique high temperature filament used in its wafer process—and debt service interest payments will require about $120 million in cash through the 1H:09, leaving just $35 million available to fund its operations, according to its recently filed 2008 annual report with the SEC.

Chairman and Chief Executive Richard Feld told analysts on the fourth-quarter 2008 earnings call that signed customer contracts totaled 79-megawatts in 2009, 116-megawatts in 2010, and 254-megawatts in 2011. However, operating losses are expected to continue until the Deven’s (Mass) facility reaches production capacity of about 160-megawatts, according to the 10-K filing. In addition, as the plant only shipped 8.5-megawatts in the fourth-quarter of 2008, reaching total capacity this year will not happen. Obtaining the funding for factory expansions is difficult in the current credit environment. As such, expect the company to secure the use of subcontractors to make solar cells and panels using its proprietary, thin-wafer "String Ribbon" technology.

Another obstacle to success—its German manufacturing joint venture with REC and Q-cells, called Sovello, is in financial distress, being in violation of certain of its bank loan covenants. If Sovello cannot obtain an amendment with its lenders, Evergreen would be required to provide gap funding of approximately $168 million to Sovello (in the form of a loan or an equity investment).

The company has $381.3 million in contractual obligations coming due in one to three years.

At December 31, Evergreen had an accumulated deficit of $221 million and had never delivered a quarterly profit. Albeit the company has sales contracts for approximately 80-megawatts of product to be manufactured at its Devens’ facility for delivery in 2009 at an average selling price of approximately $3.20 (assuming a U.S. dollar/Euro exchange rate of 1.25)—about 10 percent less than the average selling price of $3.55 in 2008—current manufacturing costs are approximately $3.50 per watt.

Given the existing liquidity risk and uncertainty in sales visibility and profitability, investors would be prudent to avoid this solar stock.

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.

Readying for Stock Implosion at Intrepid Potash

One does not need to see wires dangling from C-4 plastic explosive attached to any of the five potash production facilities owned by Intrepid Potash (IPI-$20.07) to sense that the common stock of the largest U.S. producer of potash is heading for an implosion. My friend—and convicted felon turned fraud fighter—Barry Minkow, co-founder of the Fraud Discovery Institute (FDI), has disclosed that a background check by FDI found that Intrepid Potash’ President and Chief Operating Officer Patrick Avery did not earn at least two of three degrees claimed in the registration prospectus filed with the Securities and Exchange Commission prior to the fertilizer maker’s IPO in April 2008.

That got the 10Q Detective to wonder what other ticking bombs might be buried in the potash mines at Intrepid Potash. Like Minkow, we have unearthed additional loose wires that lead back to Intrepid Potash, too:

1. Intrepid Potash has $335 million in deferred tax assets on its books, which represent approximately 48.4% of total assets. The company must generate enough taxable income in future years—with more than a 50 percent probability of doing so—to take advantage of this intangible asset—in accounting circles known as a pre-tax payment—or else it must write down the value of that asset.

• On Dec. 18, management predicted fourth-quarter sales would be less than half of the $146.3 million it posted in the third-quarter ended September 30. Slow fertilizer demand, the global credit crisis, and growing potash inventories will likely adversely impact sales and profitable in the first-half of 2009, too. The company closed two plants for two weeks in February and one facility will temporarily close March 9. Upon re-opening, the plants will witness reduce shift hours for workers.
  
  Almost 30 percent of sales are made to oil & gas drillers in the Permian Basin and Rocky Mountain regions, who use standard potash for use in oil and gas drilling fluids. As most of the company’s domestic customers have curtailed drilling activities in 2009, the 10Q Detective anticipates year-on-year declines in industrial sales.
  
  While secondary to the impact of global demand and supply dynamics, U.S. potash prices have tended to increase when the U.S. dollar weakens because as the ruble and loonie appreciate there is upward pricing pressure from the Russian and Canadian producers to maintain their profit margins on U.S. sales. At March 3, 2009, the ruble and loonie have lost (year-over-year) 35 percent and 21 percent, respectively, to $0.02761 U.S. Dollar(s) and $0.7735 U.S. Dollar(s). This weakening in comparison to the U.S. dollar suggests that foreign competitors may choose to lower potash prices significantly to increase their sales volumes. Intrepid might be forced to lower the sales price of its own potash to maintain market share.

Given the aforementioned headwinds, we expect, stockholder value, which totaled $620 million, or $8.28 a share, to take a hit when the company reports potential losses in the first-half of 2009. Deferred tax asset write-downs will show up on the balance sheet as a negative valuation adjustment to shareholder net worth.

2. Another dangling red wire is Patrick A. Quinn, CPA, who started with the company since Intrepid Mining’s inception in 2000, and served as Interim Chief Financial Officer until March 24, 2008. Quinn also is the primary owner of the accounting firm Quinn & Associates (Q&A), which provides services—including auditing—to Intrepid Potash.

In 2007, Intrepid Potash paid Q&A $567,769 for services rendered on Intrepid’s behalf by Quinn and other employees of Q&A, $240,638 of which was attributable directly to services performed by Mr. Quinn. In 2007, payments from Intrepid Mining represented approximately 39 percent of Q&A’s annual revenue!

The average man is a conformist, accepting miseries and disasters with the stoicism of a cow standing in the rain. ~ British writer Colin Wilson

Intrepid Potash investors: Are you men, women, or cows standing in the rain?

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.