Electronic Arts Defaults on Lease Covenants

Electronic Arts (ERTS-$23.13), home to some of the most popular PC games of all time, including the blockbuster Sims, Madden football, and Rock Band franchises, reported a loss of $1.08 billion for fiscal 2009 ended March, hurt by weaker-than-expected holiday sales and an admitted failure to score enough big sellers on the most popular game console system, Nintendo’s Wii. The video game publisher can weather the current downturn in consumer spending, as it sits on more than $2.1 billion in cash, according to its annual regulatory filing with the SEC. Curiously, as Wall Street analysts argue amongst themselves about the merits of EA driving growth by staying on roads well-traveled—reliance on churning out sequels to pre-existing hits and producing big, expensive Hollywood-style games (think the oft delayed Harry Potter and the Half-Blood Prince)—not one analyst bothered to voice any concerns on information buried deep in the body of the regulatory filing—the fact that the video game maker almost defaulted on real-estate loan covenants!

Electronic Arts leases certain of its current facilities, furniture, and equipment under non-cancelable operating lease agreements (recorded as off-balance sheet commitments). In February 1995, the company entered into a build-to-suit lease for its headquarters in Redwood City, California. This facility comprises a total of approximately 350,000 square feet and provides space for sales, marketing, administration and research and development functions. The lease expires in January 2039.

On February 2, 2009, the lease was amended to modify the Fixed Charge Coverage Ratio, the Quick Ratio and the Consolidated EBIDTA definitions used in the covenants. In the event that the company had not entered into this amendment, which covered the quarter ended December 31, 2008, as well as future quarters, Electronic Arts would have been unable to meet the Fixed Charge Coverage Ratio for the December quarter—default!

In December 2000, the company also entered into a second build-to-suit lease to expand the Redwood City headquarters facilities by an additional 310,000 square feet. Development of the adjacent property was completed in June 2002. Similar to the 1995 lease, had the company not modified the Fixed Charge Coverage Ratio, it would have been in non-compliance of that lease, too.

The two lease agreements are with KeyBank National Association. The following table sets forth the amended financial covenants as of February 2, 2009 (all of which EA is currently in compliance with as of March 31, 2009):

Are the financial covenant issues more an annoyance than an omen of future balance sheet concerns? Afterall, EA could purchase both properties for $247 million, according to related arrangements disclosed in the 10-K filing.

Fixed charge coverage rato indicates a firm’s ability to satisfy fixed charge obligations (such as bond interest and lease payments). As previously mentioned, EA is sitting on more than $2.0 billion in cash—more than enough to meet its fixed charge obligations. In singularity, the lease issues are irrelevant. However, if EA keeps churning out recyled versions of “in-the-box” units for PC-platform games while ignoring the explosion of software apps being written for iPhone, Facebook, and 3-D Second Life virtual gaming communities—EA could find its cash hoard being eaten faster than the tape of an eight-track cartridge.

Even scarier is the rise of free games. As presciently opined by Dean Takahashi last month in VentureBeat: What happens when the user decides that free is best? This is the same problem that newspapers, movies, music, and other producers of content are facing as the Internet undercuts the traditional barriers that have kept prices high.

As EA grapples with a weak consumer spending environment and the changing dynamics of interactive entertainment, fissures are opening up on the balance sheet: cash generated from operations plummeted 96 percent to $12 million and shareholder equity fell 28 percent to $3.1 billion. Nonetheless, chief executive John Riccitiello remains cautiously optimistic on the sales outlook for 2010, telling analysts on the earnings call that a strong lineup of titles on EA’s core platforms (PS3, Xbox 360, and Nintendo Wii), including The Sims 3, Tiger Woods PGA Tour 10, and Harry Potter should drive sales and profitability.

In my opinion, EA’s wireless, digital service initiatives will define the financial health of the company in the years ahead. The digital business is currently scaled at over $400 million and is growing north of 20 percent per annum. Although wireless sales will contribute only about 10 percent of anticipated revenue of $3.7 billion to $3.85 billion in fiscal 2010, EA remains committed to being the number one publisher in wireless in North America and Europe combined, said Riccitiello.

EA’s global publishing footprint has long been a strategic advantage for the company. Setting the investment stage in wireless and making their games more accessible to a broader audience, including social networking (such as Pogo on Twitter!) will, in my opinion, strengthen further its balance sheet in coming years, too. Or, as Oliver Wendell Holmes said: “it is not so much where we stand, as in what direction we are going.”

However, with management providing 2010 guidance of additional losses in the range of $0.85 to $1.45 per share, EA could find itself amending lease - loan covenants once again.

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.

Nothing for GM Common Stockholders

To no one’s surprise, General Motors Corp. filed for Chapter 11 bankruptcy on Monday. According to published reports, the largest U.S. automaker will issue new stock to the company’s retiree health care trust, the Voluntary Employees' Beneficiary Association (VEBA), totaling 17.5 percent of the equity in the new GM (and warrants to purchase another 2.5 percent). GM also has agreed to give the governments of Canada and Ontario a stake of about 12 percent. The U.S. Treasury and current bondholders will own around 60 percent and 10 percent, respectively. Add the equity shares up and it equals zero for existing common shareholders. Why is the stock selling for 75 cents a share? “Hope springs eternal in the human breast,” said the English poet Alexander Pope.

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.

LOFTy Fashion Changes at Ann Taylor Stores

Same-store sales in the first-quarter fell 30.7 percent at Ann Taylor Stores (ANN-$7.79), reflecting the disproportionate impact the current recession is having on the women’s apparel sector—particularly the spending pullback by professional, working women. Chief executive Kay Krill told analysts on the first-quarter earnings call, that the retailer believes it can rejuvenate flagging sales by offering shoppers more exciting fashions—starting with its fall lines. Given a history of inconsistent execution, however, will the introduction of new designs at its flagship stores and the more causal LOFT stores chain be sufficient to revive sales?

Net revenue decreased 27.9% during the quarter-ended May 2, 2009, driven by lower traffic and a 14 percent drop in average dollars per transaction. Management attributed the 42.7 percent plunge in comparable store sales at the Ann Taylor chain to a combination of the recession and a dearth of unexciting merchandise on the racks, according to the 10-Q regulatory filing:

In terms of overall performance, as expected, Ann Taylor experienced a very difficult quarter. We continued to work through assortments that were too serious and not as compelling, modern or versatile as needed to meet the more fashionable and stylish apparel needs our clients now demand.

The company had better success in reducing its cost structure, with gross margin improving 230 basis points to 55.5 percent, driven by smaller inventories (down 16 percent per square foot) and a 50 percent decline in mark-down activity. In addition, only nine new stores opened in the quarter, down from 25 in the year-ago period.

A recently hosted fall fashion preview for the fashion community—for both Ann Taylor and LOFT—was well received, said Krill. I am not convinced, however, that Ann Taylor’s reliance on “taste” will be enough to stop shoppers from looking elsewhere, especially if consumer spending trends do not improve and competitors—such as New York & Co., Nordstrom, and Saks—actively promote discounting to offset sluggish sales.

Krill also remarked on the conference call that in a continuing effort to watch its margins, the company will continue its conservative inventory control practices for fall merchandise as it “tests and learns [the] way to a more robust performance.” This strategy of investing behind success rather than ahead of it could backfire on the company, however, if customers perceive the store shelves to be empty of fashionable items. Either way, the company is betting that most women are weary of their old clothes, and unlike the late comedian Gilda Radner, do not base their fashion sense “on what doesn’t itch!”

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.

Do You Like the Way Men’s Wearhouse Looks?

Neill Davis, chief financial officer of The Men’s Wearhouse (MW-$16.16), told analysts on the fourth-quarter 2008 earnings call that “promotional posture is resonating with customers—both new and existing—and is positively impacting gross profit dollars, due in large part to effective marketing and merchandising initiatives.” Despite management’s attempt to put a positive spin on ‘buy one – get one free’ promotions and other markdown sales, Davis’ corporate-speak cannot sweeten the hit to profitability caused by the apparel retailer’s discounting practices.

Total store sales for the year-ended January 31 slumped 6.6 percent to $1.97 billion, due to declining store traffic and deteriorating average net sales per square foot (8.2% at Men’s Wearhouse locations and 16.4% at K&G locations) caused by the recession.

Gross margin declined 280 basis points to 43.1 percent, resulting from increased occupancy costs [from higher rental rates for new and renewed leases] and the failure—Neill’s remarks not withstanding—of merchandising discounts to influence buying patterns of apparel shoppers.

Expectations are that difficult economic conditions will continue into 2010. As the company cannot predict when the economy will recover, senior management plans to stimulate sales with even deeper clothing discounts and to implement additional operation cost controls, such as reductions in inventory purchases and fewer store openings.

Due primarily to the lack of forward visibility as to macro economic conditions, management will only provide financial guidance for the first half: earnings per share in a range of $0.45 to $0.65; comparable store sales of its retail apparel business are anticipated to decline in a range of six percent to 10 percent and comparable store sales of its tuxedo rental revenues are expected to increase between seven percent and nine percent.

Several retail analysts have upgraded their ratings, too, opining that Men’s Wearhouse could deliver better-than expected 2009 operating results, driven by significant cost-savings and higher tuxedo rental bookings and clothing sales (from additional discounting). The 10Q Detective disagrees, predicting that a growing dependence on deep discounts will serve only to further pressure merchandising margins. In addition, although tuxedo rentals remain an area of growth, even a nine percent sales gain will do little to offset falling sales (as tuxedo rental sales represented only 7.5% of total apparel sales in the fourth quarter of 2008).

Because an appeal makes logical sense is no guarantee that it will work. ~ NYC ad genius William Bernbach (1911 – 1982)

Chief executive and founder, George Zimmer also serves as the face of the company in television commercials, simply extolling: “you’re gonna’ like the way you look! I guarantee it.” Unfortunately, the apparel retailer’s discounting practices might not be a comfortable fit with actual earnings results in coming quarters.

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 Build-A-Bear Fad finally Over?

Faced with a slowing economy, Build-A-Bear Workshop (BBW-$4.51) has moved away from featuring its $18 and $20 stuffed toys in ad campaigns, going instead with $10 and $12 price points to attract walk-in traffic. Although management said it saw success in attracting new customers, the mall-based specialty retailer posted an $(826,000) loss in the first-quarter (compared to earnings of $6.4 million a year earlier) on a 25.5 percent decline in retail sales to $96.3 million. Can management find the right balance of merchandise across the range of price points to deliver operating profits—or has the “build-your-own” furry friends fad finally peaked? 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.

Auto Dealer Closures a Negative for DealerTrack

Mark O’Neil, chairman and chief executive of DealerTrack Holdings (TRAK-$13.54), said on the first-quarter earnings call he expected the provider of sales and finance on-demand software for the automotive retail industry to post a net loss of between $(7.0) million and $(5.5) million in 2009 on revenue of between $232 million and $238 million. The reality of accelerated dealership closures in the U.S. announced by Chrysler and Generals Motors, in our opinion, will lead to a revised downward guidance in sales and corresponding income, as cost containment initiatives are unlikely to offset subscription cancellations.

Transaction services revenue fell 37 percent to $24.0 million, primarily due to a decline in auto loan applications. Subscription services revenue increased 25 percent to $27.9 million, helped by a seven percent increase in member dealers (to 14,646) and a 16 percent climb in average monthly spend per subscriber (to $635).

At the end of first quarter, DealerTrack had 736 financing sources in its network, a net gain of three members from year-end. Despite the slow pace of enrollment, O’Neil said on the call that he still believes the company could add some 100 new lenders in 2009. Stability in the credit markets and an increase in the number of lender-members should boost transaction volumes. However, alternative financing sources, such as RouteOne and Open Dealer Exchange [a joint venture from ADP and Reynolds & Reynolds] could present competitive headwinds in the loan origination business.

The company has yet to quantify the effect Chrysler’s shut down of 25 percent of its 3,200 U.S. dealers and GM’s closure of about 2,600 of its 6,200 domestic dealerships will have on subscription sales [including the percent contribution from recurring fees]. At March 31, more than 55 percent of Chrysler dealers and 52 percent of GM dealers had subscriptions for one or more DealerTrack products.

Although the number of active dealers on the network impacts the number of lender –to- dealer relationships, O’Neil insists that transaction volume will not necessarily be impacted by a decline in the number of lenders, declaring: “Our data shows that while consumers may shop at more than one dealership for a car, they generally apply for credit at only one.”

Until a definitive picture emerges on the financial impact resulting from subscription cancellations, we prefer to avoid the purchase of DealerTrack shares.

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.

More 'Aaugh' Moments at Affymetrix

Affymetrix (AFFX-$4.44) reported a 12 percent drop in product gross margin to 47 percent of sales for the March quarter, due to costs associated with the closing of its West Sacramento plant and average selling price declines in RNA consumables. Nonetheless, chief executive Kevin King told analysts on the earnings call that the genotype instrument maker continued to make steady progress against corporate goals of expanding its GeneChip ® technology platform into new markets and improving operating leverage. The 10Q Detective is less sanguine about the company’s ability to deliver sustainable profitability and generate growth in markets that are downstream from genome-wide analysis, such as pharmacogenomics.

Expanding into new markets

Looking to expand the diversity of its customer base beyond the cytogenetics market, Affymetrix purchased Panomics in November 2008. The acquisition will complement the company’s recently acquired liquid array technology, enabling the company to address low to mid-plex genetic analysis requirements more effectively in the future, according to Rob Lipshutz, Affymetrix’s senior VP, corporate development. Although Affymetrix now offers a scalable, cost-effective platform with applications in fields from copy number research to drug metabolism solutions (identifying chromosome abnormalities that impair metabolism), investors should remember that business depends on the research and development spending of customers, specifically in the life sciences. As companies in the pharmaceutical industry continue to cut their own costs because of the economic downturn and lost sales to generics (as blockbuster drugs lose patent protection), further reduction in demand for Affymetrix’s products is likely in coming quarters.

Another restructuring

In recent years, Affymetrix has engaged in numerous initiatives to reduce costs across its operations and generate sustainable profitability. The latest restructuring plan to “optimize production capacity and cost structure,” started in February 2008 and involves moving probe array manufacturing from Sacramento to Singapore, consolidating reagent manufacturing to the Cleveland facility, and outsourcing the instrument manufacturing operations. At December 31, the accumulated deficit stood at $416.4 million.

Relocation Assistance

On the conference call, King projected a $20 to $25 million reduction in annual operating expenses as a result of the ongoing steps, with realization of these savings beginning in the second half of 2009. Of subtle interest, King has yet to buy a home in California—two years after being hired by the company. Does this suggest a dearth of confidence in his rhetoric? In 2008, Affymetrix reimbursed $138,996 to King for his “temporary” housing expenses, according to the 2009 proxy filed on Monday.

Should I stay or should I go now?
Should I stay or should I go now?
If I go there will be trouble
An if I stay it will be double
So come on and let me know ~ The Clash

King joined the company as president in 2007 and took over the top job from Affymetrix founder Stephen Fodor on January 1, 2009. As part of the December 2006 offer letter to King, the board also agreed to absolve him of any potential loss in the sale of his primary residence in New Jersey. As a result of market conditions, the company recognized a loss of approximately $400,000 upon the resale of the house in April 2008.

In aggregate, stockholders are on the hook for more than $419,000 in relocation expenses (plus a $100,000 signing bonus). Given continued softness in customer demand and falling prices per data point for genotyping over the last two years, we remain unconvinced that Affymetrix will realize the expected benefits from recent restructurings and new hires, including that of King.

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.

Arbitron Downplays Nielsen Threat

Arbitron Inc. (ARB-$20.34) confirmed in its first-quarter earnings report that the defection of key radio broadcasters to Nielsen for diary-based ratings services in certain small to mid-sized markets will adversely impact revenue by about $10 million per year starting in 2010. Will the country’s leading supplier of radio ratings data be able to supplant any additional contract losses in the sticker-diary business and invigorate organic growth with the national rollout of its electronic portable people meter (PPM)?

…. 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.

Share Price of BJ Services Gushes Higher – Despite Limited Rig Visibility!

Are rising energy prices an upbeat sign that demand for oil and natural gas services, from construction of rigging to actual drilling, will show a pickup in activity in coming months? Investors think so, having driven the share price of BJ Services Company (BJS-$16.80) up more than 60 percent in less than a month. However, the earnings report filed for the quarter ended March 31 by this leading provider of pressure pumping (and other oilfield services to the petroleum industry worldwide) suggests the market valuation may be getting frothy, for more doom and gloom could lay ahead for the company and its peers in the oilfield services industry... 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.

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.