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Archive for May, 2009

The Official Activist Investing Blog has published its list of activist investments for April:

Ticker Company Investor
ABTL Autobytel Inc Trilogy Enterprises
AMLN Amylin Pharmaceuticals Carl Icahn
ASPM Aspect Medical Systems First Manhattan Co
ASUR Asure Software Inc Red Oak Partners
BASI Bioanalytical Systems Peter Kissinger
BBEP BreitBurn Energy Partners, L.P. Baupost Group
BCSB BCSB Bancorp Inc. Financial Edge Fund
CHE Chemed Corp [Download an In-Depth Analysis from Catalyst Investment Research]
MMI Investors
CHG CH Energy Group Inc GAMCO Investors
CHIC Charlotte Russe Holding Inc KarpReilly Capital Management
CLHI.PK CLST Holdings Red Oak Partners
COHM.PK Coachmen Industries Gamco Investors
CPY CPI Corp Ramius Capital
CWLZ Cowlitz Bancorporation Crescent Capital
DAVE Famous Daves of America Vicuna Advisors
DCS Dreman/Claymore Dividend & Income Fund Bulldog Investors
DFZ R.G. Barry Mill Road Capital
ENTU Entrust Inc. Empire Capital
ENZN Enzon Pharmaceuticals Inc. DellaCamera Capital Management
FACT Facet Biotech Corporation Baupost Group
FBSS Fauquier Bankshares, Inc. William Sudduth
FPU Florida Public Utilities Companyu Energy West
FSS Federal Signal Warren Kanders
GAIA Gaiam Inc Mill Road Capital
GEYH.OB Global Employment Holdings Victory Park Capital
GSIG GSI Group Stephen Bershad
GSLA GS Financial Corp Riggs Qualified Partners
HAR Harman International Industries Relational Investors
IPAS iPass Inc Foxhill Capital
IPAS iPass Inc Ramius Capital
KFS Kingsway Financial Services Inc Joseph Stilwell
KONA Kona Grill Mill Road Capital
MCGC MCG Capital Springbok Capital Management
MEG Media General GAMCO Investors
MLVF Malvern Federal Bancorp Joseph Stillwell
NDD Neuberger Berman Dividend Advantage Fund Bulldog Investor
NMTI NMT Medical Glenhill Advisors
NTN NTN Buzztime, Inc. Trinad Capital Master Fund
OFIX Orthofix International Ramius Capital
OICO OI Corp Mustang Capital Management
OPTV OpenTV Discovery Group
PIF Insured Municipal Income Fund Inc Bulldog Investors
PLCE The Childrens Place Retail Stores, Inc. Ezra Dabah
PWER Power One Bel Fuse
ROY International Royalty Corp Coordinates Capital Corp
RPT Ramco-Gershenson Properties Trust Equity One
SAH Sonic Automotive Paul Rusnak
SLRY Salary.com Kinderhook Partners
STRM Streamline Health Solutions Eric Lombardo
SUMT SumTotal Systems Vista Equity Partners
SUMT SumTotal Systems Discovery Capital
TDS Telephone & Data Systems GAMCO Investors
TDS Telephone & Data Systems Southeastern Asset Management
TLGD Tollgrade Communications Inc Ramius Capital Group
TMENE.OB Thermoenergy Corp Quercus Trust
TMI TM Entertainment & Media Inc Bulldog Investors
TTSP TransTech Services Partners Bulldog Investors
ULU Uluru Inc. Brencourt Advisors
VSNT Versant Corp Discovery Capital
WOC Wilshire Enterprises Bulldog Investors
WOLF Great Wolf Resorts Hovde Capital Advisors
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Gretchen Morgenson of The NYTimes reports in Elect a Dissident, and You May Win a Prize that a new study of 120 “hybrid” boards (those formed when activist shareholders won one or more director seats) from 2005 through 2008 found that, on average, these companies’ shares outperformed their peers in both the short and long-term. The study was conducted by the Investor Responsibility Research Center Institute, a nonprofit organization, and Proxy Governance, a proxy advisory firm.

The results are compelling:

From the beginning of the contest period for a board seat through the first year of a hybrid board’s existence, companies’ total returns were 19.1 percent, or 16.6 percentage points better than peers’. And total share price performance through the three-year anniversary of the hybrid boards averaged 21.5 percent, almost 18 percentage points more than their peers.

According to Morgenson, much of the excess return occurs shortly after an activist announces his or her intention to seek board seats:

Investors, taking their cue that the company may be undervalued, typically bid up its shares in the three months leading up to the formation of a hybrid board. Keep in mind, too, that averages mask both exceptional and disastrous outcomes.

The size of the stake held by the dissident shareholder affects results: The bigger the shareholding, the bigger the gains:

At companies at which dissidents held 5 to 10 percent of shares, for instance, results over the following 15 months moderately exceeded those of their peer groups. But for companies in which the dissidents owned 10 percent to one-quarter of the stock, price appreciation significantly outshone peers, averaging almost 68 percentage points higher over the ensuing 15 months.

Performance at the companies where dissidents held less than 5 percent of shares was only in line with peers, on average.

Says Jon Lukomnik, director of the Investor Responsibility Research Center:

I think what it says is there is some value to owners being able to challenge existing management and that there are also some limits to that value.

The study is timely, coinciding with the Securities and Exchange Commission’s consideration of steps to make it easier for investors to nominate alternative directors to corporate boards.

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Lamassu Holdings LLC has nominated two director candidates for election to the Ditech Networks Inc (NASDAQ:DITC) board of directors at the DITC annual meeting.

We’ve been following DITC (see our archive here) because it is trading below its net cash value with an investor, Lamassu Holdings LLC, disclosing a 9.4% holding in November last year. Lamassu has previously offered to acquire DITC for $1.25 per share in cash. Lamassu says that it “anticipates its due diligence requirement will take no more than two weeks and there is no financing contingency.” Lamassu has now nominated two candidates for election to the board “who are committed to enhancing shareholder value through a review of the Company’s business and strategic direction.” The stock is up 16.8% from $0.89 to close yesterday at $1.04, giving the company a market capitalization of $27.3M. We last estimated the net cash value to be $34.3M or $1.31 per share.

Here’s the announcement from Lamassu Holdings:

Lamassu Holdings L.L.C. Discloses Nomination of Two Highly Qualified Director Candidates for Election to the Ditech Networks Board of Directors at the 2009 Annual Meeting

NEWPORT BEACH, Calif.–(BUSINESS WIRE)–Lamassu Holdings L.L.C. (“Lamassu”) announced today that it has nominated two highly qualified director nominees for election to the Board of Directors (the “Board”) of Ditech Networks, Inc. (the “Company” or “DITC”) (Nasdaq:DITC) to replace two directors whose terms are up for election at the Company’s 2009 Annual Meeting of Stockholders (the “Annual Meeting”). Lamassu, which beneficially owns an aggregate of 2,399,845 shares, or approximately 9.1% of the outstanding shares of common stock of the Company, delivered written notice today of its nominations to the Corporate Secretary of the Company in accordance with the Company’s bylaws.

Tim Leehealey, managing member of Lamassu and one of Lamassu’s director nominees, stated, “After repeated attempts to engage in a constructive dialogue were ignored by the incumbent Board and AccessData’s interest in purchasing the Company at a significant premium was rejected without any discussions with the potential bidder, we have come to the conclusion that new leadership on the Board is needed to maximize stockholder value, which we believe has suffered significant deterioration at the hands of the current Board.”

Mr. Leehealey continued, “We believe the current regime has a strong track record of failure in allocating the Company’s capital. Whether embarking on organic product development or growth through acquisition, this Board has failed to diversify outside of its core echo cancellation product line. We believe all significant efforts to diversify, including its Titanium systems, the Packet Voice Processor platform and acquisition of Jasomi Networks, Inc., have cost the company well over $100 million in capital and, quite possibly, closer to $200 million, even as the Company generated significant cash from its core echo business. Now the Company is faced with reinventing its business and it appears the current Board, which has failed miserably in its prior attempts to do so, believes that stockholders want a course of action that includes internally pursing another high-risk product strategy as well as pursuing acquisition opportunities.”

Mr. Leehealey concluded, “We are fearful that stockholder equity will continue to erode at the Company unless substantial changes are made. To this end we are nominating two highly qualified directors who are committed to enhancing shareholder value through a review of the Company’s business and strategic direction. If elected, our nominees intend to work constructively with the remaining Board members, as well as with the Company’s management team, to determine the best course of action for stockholders. Our nominees intend to conduct a strategic review of all options for the Company, including a possible sale or liquidation, that will improve stockholder value without taking undo risk that could jeopardize the remaining value inherent in the Company’s balance sheet, something we believe this Board has failed to accomplish.”

Stockholders can refer to Lamassu’s previous SEC filings for additional information.

The Company currently has a total of seven directors. Lamassu is seeking to replace two incumbent directors whose terms of office expire at the Annual Meeting.

Lamassu’s two independent director nominees will bring substantial business leadership and corporate governance expertise to the Company’s Board. The nominees are:

* Tim Leehealey. Mr. Leehealey is the co-founder and managing member of Lamassu Holdings L.L.C., a holding company specializing in taking an active role in small technology and alternative energy investments. In addition to his position with Lamassu, Mr. Leehealey is CEO of AccessData, a Lamassu company and provider of investigative software focused in the areas of forensics, eDiscovery, and incident response. Mr. Leehealey joined AccessData in August of 2007 and under his leadership has more than doubled the size of the company and established it as one of the leading providers in its market. Prior to joining AccessData, Mr. Leehealey was with Guidance Software for four years, as the Vice President of Corporate Development, and played a key role in taking that company public in 2006. In addition to his work at Guidance Software and AccessData, Mr Leehealey spent approximately 10 years working as an equity analyst covering security and networking companies. Mr. Leehealey holds a degree in computer science and economics from Stanford University.

* Frank J. Sansone. Mr. Sansone has over 15 years of financial management and technology experience with a focus on managing all the financial elements of small fast growing public and private technology companies. Most recently Mr. Sansone served as CFO for LiveOffice, a rapidly growing SAAS email archiving software & services company with annual revenues of approximately $25 million with 96% annual bookings growth and 100+ employees. Prior to his involvement with LiveOffice Mr. Sansone served as the CFO of Guidance Software were he not only was instrumental in helping to deliver over 5 years of 40%+ growth but he also oversaw all the key financial aspects associated with taking the company public. Before joining Guidance Software Mr. Sansone accumulated approximately 10 years of financial experience including working for five years as a Audit Manager at PricewaterhouseCoopers. Mr. Sansone is a CPA in good standing with both the California Society of Certified Public Accountants as well as the American Institute of Certified Public Accountants.

[Full Disclosure:  We do not have a holding in DITC. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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The shareholders of Northstar Neuroscience Inc (NASDAQ:NSTR) have approved the complete liquidation of NSTR at a special meeting of shareholders.

We started following NSTR because it was a net cash stock that has announced that it plans to liquidate. NSTR closed Friday at $1.97, giving it a market capitalization of $48.4M. We originally estimated the final pay out figure in the liquidation to be around $59M or $2.26 per share, which presents an upside of around 25%. The company estimates a slightly lower pay out figure of between $1.90 and $2.10 “assuming we are unable to sell our non-cash assets” and expects to make an initial distribution within approximately 45 days after the Effective Date (which is to be announced) of approximately $1.80 per share.

The company’s announcement is as follows:

On May 14, 2009, Northstar Neuroscience, Inc. (the “Company”) held a special meeting of shareholders, at which the shareholders of the Company approved the voluntary dissolution and liquidation of the Company pursuant to a Plan of Complete Liquidation and Dissolution (the “Plan”). Pursuant to the Plan, the Company intends to file articles of dissolution (the “Articles”) with the Secretary of State of the State of Washington as soon as reasonably practicable after resolution of the audit of the Company’s State of Washington tax obligations and receipt of the required revenue clearance certificate from the Department of Revenue of the State of Washington. The Company will be dissolved upon the effective date of the Articles (the “Effective Date”), which may be the date on which the Articles are filed or a later date specified in the Articles. The Company intends to make a public announcement in advance of the anticipated Effective Date and to delist its Common Stock from the Nasdaq Global Market as of the Effective Date.

Pursuant to the Plan, the Company is also authorized to dispose of its remaining non-cash assets, on such terms and at such prices as the Company’s board of directors, without further shareholder approval, may determine to be in the best interests of the Company and its shareholders, to pay or make reasonable provision to pay all claims against and obligations of the Company, to make such provisions as will be reasonably likely to be sufficient to provide compensation for any claim against the Company which is the subject of a pending action, suit or proceeding to which the Company is a party, to distribute on a pro rata basis to the shareholders of the Company the remaining assets of the Company, and, subject to statutory limitations, to take all other actions necessary to wind up and liquidate the Company’s business and affairs.

[Full Disclosure:  We do not have a holding in NSTR. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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Memorial Day

We’re taking a break for the Memorial Day holiday. Have a great long weekend.

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Avigen Inc (NASDAQ:AVGN) has been granted a United States Patent for the treatment of neuropathic pain with its AV411 (ibudilast) compound.

We started following AVGN in December last year (see archived posts here) because it was a net cash stock (i.e. it was trading at less than the value of its cash after deducting all liabilities), albeit a cash burning net cash stock, and specialist biotechnology investor Biotechnology Value Fund (BVF) was pushing it to liquidate and return its cash to shareholders. Despite BVF’s failure to remove the board, we continued to maintain our position in AVGN because BVF won a number of important concessions from the board that made AVGN a much more attractive stock than it was when we started following it. The stock price reflects this: AVGN is up 94% from $0.65 when we initiated the position to close yesterday at $1.26. We’ve reduced our estimate of the net cash slightly to $34M or $1.14 per share. We believe that the there is a good chance that AVGN will yield considerably more than its net cash value. The net cash estimate does not take into account AVGN’s AV411 assets and program or near term payments from Genzyme, which could be worth as much as $6M to $25M or between $0.18 or $0.75 per share more.

The announcement from the company is as follows:

Avigen Granted AV411 Patent for Neuropathic Pain

ALAMEDA, Calif., May 20, 2009 (GLOBE NEWSWIRE) — Avigen, Inc. (Nasdaq:AVGN) a biopharmaceutical company, announced today that it has been granted United States Patent No. 7,534,806, entitled “Method for Treating Neuropathic Pain and Associated Syndromes.” The patent covers the treatment of neuropathic pain with therapeutic doses of AV411 (ibudilast), including syndromes like diabetic neuropathy, post-herpetic neuralgia, and fibromyalgia, and neuropathic pain associated with stroke or accompanying cancer chemotherapy. Avigen anticipates additional patents will be issued covering indications that include addiction, delirium, and psychotic disorders, as well as composition of matter claims on AV411 analogs. AV411 is marketed in Japan but not approved for any indication in the United States.

“This patent is a critical first step to securing broad exclusivity for AV411 and analogs in the key markets of neuropathic pain and addiction,” commented Andrew Sauter, Avigen’s Chief Executive Officer, President and Chief Financial Officer. “We are currently seeking to monetize our AV411 drug development portfolio and believe the issuance of this patent, along with our active U.S. IND and Phase 2-staged data package, enhances the value proposition to potential buyers.”

“This is a significant accomplishment that reflects Avigen’s strategic efforts to identify novel mechanisms to treat neurologic disorders and to protect the know-how and intellectual property of our scientific discoveries,” stated Kirk Johnson, Ph.D., Vice President of Research and Development at Avigen. “Our intellectual property portfolio is advancing in parallel with our AV411 development efforts for pain states and certain drug addiction conditions, thus creating a cohesive program.”

Avigen discovered the utility of AV411 through its internal program to develop innovative and targeted approaches to reducing nervous system dysfunction caused by glial cell activation. Avigen was issued the new patent after demonstrating that AV411 effectively and safely treated neuropathic pain in well-recognized, standard preclinical animal models. The claims broadly cover the treatment of neuropathic pain, and make specific reference to using AV411 to treat many forms of neuropathic pain including diabetic neuropathy, postherpetic neuralgia, trigeminal neuralgia, HIV, stroke, fibromyalgia, reflex sympathetic dystrophy, complex regional pain syndrome, spinal cord injury, sciatica, phantom limb pain, and cancer chemotherapeutic-induced neuropathic pain.

AVGN’s board is developing a plan of liquidation, which should put a floor on AVGN’s stock at around its net cash value of $34M or $1.14 per share less wind down costs. There exists a good chance that AVGN will yield considerably more than its net cash value. The net cash estimate does not take into account AVGN’s AV411 technology or near term payments from Genzyme, which could be worth as much as $6M to $25M or between $0.18 or $0.75 per share more. With the downside protected, and a good chance at a substantial $0.75 per share upside from here, we think AVGN still represents good value, and we’re going to maintain our position accordingly.

[Full Disclosure: We have a holding in AVGN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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MathStar Inc’s (OTC:MATH) board has rejected the $1.04 per share cash merger offer from PureChoice, Inc. because “the $1.04 per share price is less than the liquidation value of MathStar, including the value from any technology sale, and, in the Merger, MathStar’s shareholders would derive no value from MathStar’s net operating loss carryforwards.”

We’ve been following MATH since December last year (see our post archive here) when it was trading at $0.68. We initiated the position because MATH was trading below its net cash value and had two substantial stockholders lobbying management to liquidate. The stock is up 48.5% to $1.01 yesterday, giving it a market capitalization of $9.3M. We estimate MATH’s liquidation value to be around $12.0M or $1.31 per share. That value is predominantly cash and short term investments and doesn’t take into account any further value that the sale of the FPOA technology and intellectual property may yield. The two activist investors, Mr. Zachary McAdoo of The Zanett Group and Mr. Salvatore Muoio of S. Muoio & Co., have been urging MATH’s board to consider liquidation rather than a merger. MATH’s board seems to agree, twice rejecting PureChoice, Inc’s previous unsolicited merger proposals and now rejecting PureChoice, Inc for a third time, suspending the company’s operations and exploring “strategic alternatives, which could include merger, acquisition, increasing operations in another structure or liquidation.”

The press release from MATH is below:

On May 11, 2009, MathStar, Inc. received a letter containing an unsolicited proposal by PureChoice, Inc. (“PCI”) to enter into a merger transaction with MathStar (the “Merger”). As proposed by PCI, MathStar’s stockholders would receive cash consideration of $1.04 per share in the Merger for all of their MathStar shares.

MathStar’s Board considered and analyzed PCI’s Merger proposal. It concluded that PCI’s proposal was not acceptable because, among other reasons, the $1.04 per share price is less than the liquidation value of MathStar, including the value from any technology sale, and, in the Merger, MathStar’s shareholders would derive no value from MathStar’s net operating loss carryforwards. Thus, the Board rejected PCI’s Merger proposal as not being in the best interests of MathStar’s stockholders. The Board will continue to pursue strategic alternatives.

We said on the filing of the letter to MATH that we thought that, to be successful, any merger offer would, at the minimum, need to be pitched at MATH’s liquidation value (which we estimated at $12.0M or $1.31 per share). Hopefully PureChoice, Inc. will return with a genuine bid that reflects this value.

[Full Disclosure:  We do not have a holding in MATH. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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Trilogy, Inc’s $0.35 per share tender offer for Autobytel Inc (NASDAQ:ABTL) expired yesterday without Trilogy purchasing any shares. Trilogy has sent a letter to the board saying that it will “continue to evaluate [ABTL's] business, its cash position, and its operating performance” and has called on the board to communicate to its shareholders the break-up value of Autobytel, such that shareholders can determine if that is the best course to maximize value.”

We started following ABTL (see our post archive here) because it was trading at a substantial discount to its liquidation and net cash values and Trilogy had filed a 13D notice disclosing a 7.4% holding. Trilogy had also launched a tender offer for ABTL at $0.35 per share, which was at our estimate of ABTL’s $15.4M or $0.34 per share net cash value, but at a substantial discount to our estimate of ABTL’s $24.3M or $0.54 per share liquidation value. When Trilogy launched its offer, we wrote that we believed that $0.35 per share was only the opening salvo and a higher price was possible if the board terminated the rights plan poison pill. The board rejected the offer out of hand and Trilogy did not make a further offer before the initial offer expired.  The stock closed yesterday at $0.46, which is at a substantial premium to Trilogy’s offer price and suggests the market may be anticipating a second offer. The stock is up 6.8% since we started following it in December.

Trilogy’s letter to the board of ABTL on the expiry of the offer is set out below:

May 19, 2009

Autobytel Inc.

18872 MacArthur Boulevard, Suite 200

Irvine, California 92612-1400

Attention: Mr. Jeffrey H. Coats, President and Chief Executive Officer

Ladies and Gentlemen:

We have reviewed Autobytel’s response to our recently expired tender offer. We are disappointed in Autobytel’s categorical refusal to engage us in discussions that may result in improving shareholder value. You have made it clear that you are not willing to negotiate. Given that, we elected not to increase our tender offer price and allowed the tender offer to expire unchanged.

In addition, we find Autobytel’s accusation that we have used confidential information in conjunction with our tender offer to be wholly irresponsible and baseless. It is difficult to comprehend Autobytel’s objective in making such an accusation.

We have noted that the Board believes the break-up value of Autobytel is “substantially in excess of the offers made…during the sale process”. We ask that the Board communicate to its shareholders the break-up value of Autobytel, such that shareholders can determine if that is the best course to maximize value.

We further note that Autobytel’s stock traded approximately 7 million shares during the tender offer. This is significantly in excess of normal trading volumes and provides evidence that shareholders do want liquidity.

We will continue to evaluate your business, its cash position, and its operating performance. We have noted your views regarding your cash position. We do agree that maintaining and growing cash from operations is important.

The automotive business continues to announce bad news daily. Dealerships are consolidating and the viability of key manufacturers is uncertain. We believe that now is the time for Autobytel to preserve as much shareholder value as possible. We cannot negotiate if the Board is unwilling. Accordingly, we elected not to extend our offer.

Regards,

Trilogy Enterprises, Inc.

Sean Fallon

Senior Vice President

[Full Disclosure:  We do not have a holding in ABTL. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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Audiovox Corporation (NASDAQ:VOXX) has filed its 10K for the fiscal year ended February 28, 2009.

The stock has risen strongly over recent weeks to close yesterday at $5.93, which gives VOXX a market capitalization of $135.6M. We’ve had an opportunity to review the 10K, and we’ve now slightly reduced our estimate of VOXX’s liquidation value to $117.3M or $5.13 per share. With the stock trading at a premium to our estimate of liquidation value, we’ve decided to exit. We opened the position at $3.73, and the stock closed yesterday at $5.93, which means we’re up 59.0% on an absolute basis. The S&P500 Index closed at 789.17 on the day we opened the position in VOXX and closed yesterday at 909.71, which means we’re up 43.7% on a relative basis.

Post mortem

We started following VOXX (see the post archive here) because it was a profitable, undervalued asset play. When we opened the position, we estimated VOXX’s liquidation value to be around $128.4M or $5.60 per share against a share price of $3.73 and a market capitalization of $85.3M. Howson Tattersal had filed a 13D notice in September last year disclosing a 7.3% holding. We noted that, while VOXX was a perennial inclusion on lists of net-net stocks, we thought it hard to ignore at $3.73. Fast forward to today. The stock is up 59% to $5.93 and the liquidation value is down slightly to $5.13 per share. The updated balance sheet is set out below (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

VOXX Summary 2009 2 28Balance sheet adjustments

  • Cash generation: The company generated $30.0M in operating cash flow in the last year.
  • Off-balance sheet arrangements and contractual obligations: According to its most recent 10K, VOXX does not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon its financial condition or results of operations.VOXX has around $43.4M in contractual cash obligations (including $11M in capital lease obligations and $32M in operating leases), around half of which falls due in the next 5 years and $24.0M falling due after 5 years. VOXX also has another $62M in unconditional purchase obligations falling due in the next 12 months.

Conclusion

We are again reasonably happy with the outcome in VOXX. While Howson Tattersall’s campaign has not been run to its conclusion, we feel that with the stock trading at a premium to VOXX’s liquidation value, and with VOXX’s liquidation value reducing over the last quarter, it is an opportune time to exit.

[Full Disclosure:  We do not have a holding in VOXX. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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CuraGen Corporation (NASDAQ:CRGN) has filed its 10Q for the period ended March 31, 2009. CRGN’s stock has risen strongly over the last few months, and is now trading at $1.02, giving it a market capitalization slightly higher than our estimate of its liquidation value. Accordingly, we’re going to take this opportunity to exit. The stock was at $0.67 when we started following it and closed Friday at $1.02, which means we’re up 52.2% on an absolute basis. The S&P500 Index closed on the day we opened the position at 850.12 and closed Friday at 882.88, which means we’re up 48.4% on a relative basis.

Post mortem

We started following CRGN on January 20, 2009 (see our post archive here) because it was a net cash stock with an investor, DellaCamera Capital Management, pushing the company to seek “alternative deployment of [its] capital.” DellaCamera Capital Management increased its stake from 5.6% to 6.5% and nominated two candidates to the board. We last estimated CRGN’s net cash value to be around $59.9M or $1.05 per share. After reviewing the 10Q, we slightly reduced our valuation to $56.9M or $1.00 per share. We exited because the stock is trading at a premium to that estimated value.

The company is not generating any operating cash flow, so was a pure undervalued asset play. The major change to the balance sheet since we opened the position was CRGN’s February repurchase of $4.8M of its 4% convertible subordinated debentures due February 2011, for an aggregate purchase price of $3.8M, which reflected an aggregate discount from the face value of such 2011 notes of approximately 21%. We’ve updated the summary balance sheet below (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

CRGN Summary 2009 3 31CRGN’s $79.8M in cash and short term investments consists of $45.6M in cash and equivalents, $18.0M in short-term investments and $16.1M in marketable securities.

Balance sheet adjustments

In reaching our estimate, we made the following adjustments to the balance sheet estimates above:

  • Cash burn: The company used $4.0M in cash in operations in the first quarter. We have included cash burn of $3M in our estimate for the remainder of the quarter.
  • Off-balance sheet arrangements and contractual obligations: According to CRGN’s 10Q, it has no off-balance sheet arrangements. Its contractual obligations (excluding the convertible notes, which we’ve included in the summary balance sheet above) are $3.7M in total.

Deducting the $6.7M from the $63.6M in net assets leaves around $56.9M in liquidation value or $1.00 per share.

Conclusion

We are reasonably happy with the outcome in CRGN. While DellaCamera Capital Management’s campaign has not been run to its conclusion, we feel that with the stock trading at around CRGN’s liquidation value, it is an opportune time to exit. CRGN has announced a plan to undertake a review of strategic alternatives that it says could enhance shareholder value, which might range from selling or licensing CR011, to acquiring additional assets or business lines, to selling the company. While these alternatives might offer more value from here, there is no assurance that the process will result in any specific action or transaction, and CRGN will continue to burn cash as it funds its operations and develops CR011-vcMMAE. For these reasons, we’ve taken our chips off the table.

[Full Disclosure:  We do not have a holding in CRGN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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