Archive for December, 2008

Tandy Brands Accessories Inc (NASDAQ:TBAC) presents an interesting conundrum: an undervalued asset situation with a current asset value that has deteriorated significantly over the last year and an activist investor with little track record pushing for change. TBAC last traded at $1.88, giving it a market capitalization of just $13.3M. Our estimate for its liquidating value is some two-thirds higher at $3.16 per share or $22.3M in toto. We note that its liquidating value has deteriorated by more than half over the course of the year from a high of $8.38 per share in the same quarter last year to its present $3.16 per share value. TBAC needs urgent, heroic, life-saving surgery, but we don’t think the current board are the ones to crack open TBAC’s chest and massage its heart. Seeking to fill the role of ER doctor is neophyte activist shop NSL Capital Management, which its website says is run by “N. Southwick Levis, Chief Equity Strategist,” who has “well over 7 years of professional investment, transactional M&A, and finance experience.” We don’t want to damn Nick Levis as TBAC’s undertaker, but we don’t see him in the role of its dashing young doctor either.

About TBAC

TBAC is a designer and marketer of branded men’s, women’s and children’s accessories, including belts, small leather goods, and gift accessories. Its product line includes handbags and sporting goods. Its merchandise is marketed under a portfolio of brand names, including Dockers, Levi’s, Levi Strauss Signature, Totes, Rolfs, Woolrich, Canterbury, Prince Gardner, Princess Gardner, Amity, Coletta, Stagg, Accessory Design Group, Tiger, Eton, Surplus, Eileen West, Goodyear, Geno D’lucca, Dr. Martens, and Dr. Martens Airwair, as well as private brands for major retail customers. Its investor relations website is available here.

The value proposition

According to its most recent 10Q, TBAC’s earnings and operating cash flow performance has been chequered, but mostly negative. In the last quarter the company made a loss of only $1.3M but managed to burn through $14.3M in cash as working capital blew out. The working capital hole was filled by $15M in new debt. At present, there is some vestige of value on the balance sheet (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):


TBAC’s value is carried in its inventory, to the tune of $48.5M or $6.88 per share. We value that inventory on a liquidating basis at two-thirds of its carrying value, which is $32.5M or $4.61 per share. The other source of value on TBAC’s balance sheet is its receivables, carried at $26.4M or $3.75 per share and written down by a fifth to $21.1M or $3.00 per share. Our concerns with TBAC are its $15.4M in debt, which appears due this year and which we cannot see being met by cash flow. TBAC has other substantial liabilities, which, including the debt, come to $38.7M or $5.49 per share. Subtracting TBAC’s liabilities from its written down assets, we estimate TBAC’s liquidating value at around $22.3M or $3.16 per share. We note that the same valuation undertaken in the same quarter 12 months ago would have yielded a liquidating value of around $8.38 per share, which means that TBAC has managed to tear up more than half its value in a year.

The Catalyst

NSL Capital Management and the Quark Fund filed an initial 13D on February 1, 2007 disclosing a 5.76% holding in TBAC. The latest 13D filing dated December 2, 2008 disclosed a “<5%” holding for the purpose of “nominating Nick Levis and Evan Kagan to the board of directors of Tandy Brands Accessories.” Mr. Levis took a run at TBAC’s board in October this year but was unsuccessful in his bid to unseat two directors. Mr. Levis’ letters to TBAC’s stockholders in the proxy fight are reproduced below. His first letter to TBAC filed October 14, 2008 is a classic (it’s not often you see the advantages of the unlicensed-firearm-DUI slate over the shareholder-value-destruction slate) and is reproduced below:

Dear Tandy Brands Shareholder;

Tandy Brands Management recently brought up the matter of a big mistake I made in 2004, for which I have paid the price. Although I regret not licensing my firearm, I am not embarrassed by my firm belief in the Second Amendment to the U.S. Constitution or in the Due Process of Law provided all American citizens.

I received a misdemeanor involving my firearm in the case the company has mentioned. It is my assertion that Tandy is guilty of sins far worse than DUI or similar misdemeanors. When a case is set aside in Arizona, it means that the judgment of guilt is dismissed – I am therefore not guilty of the charges the company has mentioned.

Can the company say the same thing about the charge of DESTROYING TBAC’S SHAREHOLDER VALUE – in my opinion the WORST SIN our trusted management team and board of directors at Tandy Brands could commit? The company argues that given this “recent” indiscretion in my personal life, I am unqualified to represent the beleaguered shareholders of Tandy Brands Accessories.

I have never been accused of mismanaging a public company and would never receive a large pay-out for poor performance. Management has also pointed to my experience… I can tell you this; my experience does not include rapidly destroying the value of a publicly traded corporation while receiving a large salary.

It is my argument that a CEO who loses fifty percent of a company’s market value in three quarters and a board of directors who fail to control the risks involved with running a public company should not be rewarded with excessive (or any) compensation – I think their errors in judgment are very relevant to this proxy contest. Tandy Brands Accessories shareholders have lost almost everything with Britt Jenkins in my opinion. Why should we continue to suffer so that insiders enjoy the trappings of high society life on our dime?

Could it be that the directors and the ex-CEO do not want you, the shareholders, to focus on their own recent indiscretions? What about the millions of dollars they collectively receive from shareholders yearly as the company’s value decreases? The data is in plain view for all to see in the company’s sec filings. The CEO alone has received around $1 million on average for the past ten or more years as we shareholders have lost almost everything (the stock has dropped from $13 per share to under $4 per share in the last year and a half). Britt’s son, Clay Jenkins, receives $150,000 yearly. Jane Batts received $250,000 this year but where is the justification for this hefty pay in the financial statements? Where is the return on investment for the TBAC shareholders? Where is the accountability that most major corporations have to their shareholders?

David Lawhon and his son collectively receive around $300,000 yearly. Craig Mackey, the only person in upper management receiving a fair paycheck in my opinion, makes $250,000. The Board of Directors is costing around $800,000 plus in fees and expenses yearly. If we add my estimate of the company’s convention and travel budget of $2 million plus, and the $500,000 spent yearly to rent a show room in the Empire State Building (I have heard that only 3-5 people work in the NY showroom), and the $500,000 in rent expense for offices in Dallas, we are at $6,000,000 in yearly overhead that needs to be reduced to $1,000,000 or less immediately in my opinion. I’d say that The CEO and the Board of Directors are desperate to distract your attention from the fact that they have lost $50MM in the last 3 quarters while raking in millions for themselves.

More performance accountability to shareholders is needed. My figures might be approximate, but as I see it, shareholders are paying nearly $6-8 million dollars yearly in overhead to an exclusive small group of people who want to keep it that way. Hiring a new CEO has allowed the gravy train to continue in my opinion. Although highly qualified, we feel the new CEO is not going to have the power to cut SG&A enough to make Tandy as profitable as it could be without changes to the board. Tandy leadership in my opinion wants you, the shareholder, kept in the dark while this small cadre receives 20% of the value of the company EACH YEAR as we the shareholders receive negative ROI on our investments.

NSL Capital owns 5.29% of Tandy Brands Accessories. Mr. Jenkins owns 5% but gets paid $1,000,000 yearly. Let us all keep in mind, that much of his stock was handed to him in the form of grants and awards, and not by way of making purchases with cold hard cash as we, the shareholders of Tandy Brands Accessories, have done. It’s time for shareholders to do a better job of minding the store in our opinion.

If elected to the Board I will:

1. Not accept any form of compensation from the Company other than the appreciation of my 5% ownership interest in the TBAC common stock and a 25,000 fee for expenses related to meetings.

2. Align the interests of all Company insiders with those of the outside shareholders.

3. Drastically reduce SG&A expenses including the 6-8 million provided to a select few who own little stock.

4. Set up a system of awards that focus on the creation of tangible shareholder equity per share.

5. Use a metric pay scale based for all company executives based on the percentage gain or loss in tangible equity per share per year.

6. Reward top performers and regain the trust of the Company’s best employees.

7. Focus on the bottom line, growing liquidation value (not shrinking it as Britt Jenkins has done.) by focusing on the company’s profitable niche businesses and private label markets while bringing costs in line to sales volumes and gross margins.

8. We believe that their attempt to find a new CEO will not lower the $6,000,000 yearly discussed earlier and is likely not going to change the present control structure of the company. We cannot place the same people responsible for the overnight disintegration of the company in charge of the cleanup.

9. Act at all times in the best interest of all stockholders – End the Agency Conflict at Tandy Brands.

10. Allocate Capital with conservative return expectations and lower the company’s risk of loss.

11. Maintain and grow the balance sheet by making wise long term investments.

12. Focus on the bottom line, putting TBAC shareholders first.

I have a solid long-term plan for this company which involves allocating capital in a more conservative, shareholder friendly manner and monitoring costs like a hawk. It is my belief that the company plans on spending more of your hard earned money on themselves, regardless of your performance as a stockholder.

They say:

“Don’t let Nick Levis derail the company’s plan”

My response is that:

“It is NSL Capital’s belief that the company’s plan is to continue to enrich entrenched management and the well paid board of directors at the expense of the shareholder – the time for change is now!”

Please vote and return the Gold Proxy Card sent to you by NSL Capital Management, LLC and throw away the white card sent to you by management. Let’s save what we have left of our investments in TBAC and grow it into the future by voting for thriftiness and shareholder value. NSL Capital and Quark Fund own 370,610 shares of TBAC common stock representing approximately 5% of the company’s outstanding shares.


Nicholas Southwick Levis
NSL Capital Management, LLC

Mr. Levis followed that October 14 letter with another on October 17, reproduced below:

We believe that Britt Jenkins has Earned Millions from Shareholders While Running Tandy Brands Into the Ground: We feel the Board of Directors at Tandy Brands are receiving excessive fees each year (around $100,000 per board member) and are not independent. Furthermore, we believe that TBAC Management and the Board of Directors desperately want to continue enriching themselves at your, the shareholders and true owners of Tandy Brands Accessories, expense.

TBAC: Turnaround Story… or 25% Yearly Front Loaded Closed End Mutual Fund?: It is my opinion that Britt Jenkins and the top brass of Tandy do not want you to know that $6,000,000 of your money is spent EACH YEAR on salaries to the board and Mr. Jenkins ($2,000,000), for expenses related to the fancy Empire State Building showroom in NYC and the plush Dallas offices ($1,000,000), for travel and conventions ($2,000,000), and for upper management pay or perks ($1,000,000). To me, and to other concerned shareholders, $6MM in executive expenses each year on a stock valued at $24MM is like paying a 25% sales charge or “Load” to a money manager each year. In the mutual fund or hedge fund industry, this type of pay for underperformance (or abhorrent performance) fee structure would truly never stand…. At Tandy Brands, this pay scheme is “good governance.” Please Vote the Gold Proxy Card.

NSL Capital’s slate offers hope for the company that what we see as corporate waste, greed, and inflated pay packages will no longer rule the boardroom at Tandy Brands Accessories and no one will ever charge this 25% yearly “load” from the shareholder ever again. I do not hold fault to CEO’s of companies that perform. Good CEO’s are the backbone of American Business. The fact that Britt Jenkins destroyed $49MM in shareholder value last year while charging shareholders over $1,000,000 in compensation, however, is not acceptable to me. Making matters worse for us shareholders, Mr. Jenkins and the Board continue to rent an entire floor in the Empire State Building and lease lavish offices in Dallas that have almost no use whatsoever in my opinion to the operations of Tandy Brands other than its service as what we view as a management perk – why can’t we office out of a small rental space like most $24MM companies? Berkshire Hathaway has less lavish offices that Tandy in my opinion.

Let’s talk about those director fees… Can someone please explain to me why we should pay $800,000 a year to a Board of Directors who we feel just lost nearly half the value of this company and who own almost no stock? We feel this company is run for the enrichment of stakeholders alone with no regard at all to stockholder value. We have asked the board of directors to drop their yearly fees to $25,000 each which is all we will accept from the company if you vote the Gold Proxy Card. We feel the company over the years has performed just well enough to stay below the radar – management remains unaccountable for their actions and mistakes that cost us shareholders real money.

Please vote the Gold Proxy Card for the NSL nominees and vote for paying TBAC executives for performance. Vote for accountability. While the opposition complains about the “distraction” of this proxy fight and my lack experience, they are making thousands of dollars each day as we lose more and more money on our investment in the company. I can get the job done. Let’s stop the spending spiral right now.

With Warm Regards,

Nick Levis

His final letter to stockholders was filed October 21 and is reproduced below:

Dear Fellow Shareholders,

We feel that Tandy Brands needs to take action to turn around the business to save employee jobs, eliminate wasteful spending, and create lasting value for shareholders. We are very happy with Rod Mcgeachy’s qualifications and background, however, we feel he would have a better chance to save the company if Tandy lowered board fees and rental expense as well as other overhead that is unrelated to headcount. Frugality is the cornerstone to any turnaround story.

In my last two letters to shareholders focusing on my plan to implement needed cost cuts the first step is lowered board pay and lowered lease expenses. I am sure these suggestions have made me unpopular in the short run at the company, but given the present perilous times we face, drastic action is necessary for survival.

I believe I have the experience to aid in this turnaround having sold several companies as a merger advisor, having placed needed capital with cash starved companies, and having years of experience investing and in financial markets.

Survival depends upon a program of forceful expense reductions. I believe it is time for a turnaround. Who is going to save this company — the same board of director members who are hunkered down and who have lost significant shareholder capital? I believe we need a fresh start and an immediate turnaround and restructuring of the company. I have spent around $25,000 and will ask only for this amount as reimbursement for out of my pocket expenses related to this proxy contest. Compare that with the $175,000 Bill Summitt received after settling with the board last year or the $100,000 each board member receives every year and you will realize what a bargain my slate truly is. I am not saying the board is filled with bad people, just that the business is in a turnaround and we need leadership who recognizes that these are the most difficult times the company has faced and everyone must make sacrifices. We feel the new CEO will not have the power to lower expenses enough to make the company profitable, because the Board of Directors is comprised of the same individuals who failed to prevent the problems that began in 2005. I would argue that the Board has failed to provide the guidance that we, the shareholders and true owners of the company, expect from an independent Board. If I am elected I will work to reduce overhead by urging the new CEO and Board to reduce overhead by at least five million dollars per year by working to implement lower convention, travel, lease, legal, and compensation expenses. This step will provide immediate aid to the company’s turn around.

I am not in this for personal gain from fees or from “gaining control” of the company. My slate will represent a minority on the Board and I will not be able to make decisions without majority vote. Furthermore, I feel my 5% ownership in the company’s common stock uniquely positions me to represent the interests of outside shareholders. I am not a corporate raider and do not intend to sell or liquidate the business. If you elect me to your Board of Directors, I want to retain and grow jobs at the company, but turnarounds start by recognizing that there is a problem first. We should consider retaining a turnaround firm to immediately work on taking Tandy off the fast track to bankruptcy and onto the long road to recovery. Surely, reigning in spending will be my top priority along with regrouping and rebuilding the business. I think in this environment it will take hard work from every single member of the business to make a full and complete turnaround a viable possibility. Please Vote the GOLD PROXY CARD.

With Warm Regards,

Nick Levis

TBAC’s management, in its proxy materials, attacked Mr. Levis on the basis of his inexperience. The relevant slide from the presentation is produced below:

tbac-proxy-materialWe don’t know a great deal about Mr. Levis, NSL Capital Management or the Quark Fund. The earliest filing we can find for them is February 11, 2008, which is, coincidentally, the initial 13D for TBAC. His TBAC proxy material described him as follows:

Nicholas Levis , 29, is a C.E.O. of NSL Capital, a deep value hedge fund. Mr. Levis served as Acquisition Director for Journey International, a middle market M&A advisory firm headquartered in Scottsdale, Arizona prior to founding NSL Capital. Journey was run by Steve Gootter ( ). At Journey, Mr. Levis worked on a three person team that secured merger advisory engagements totaling over $250MM in revenues. Mr. Levis served as Account Executive Assistant with Inc. 500’s Alliance Capital Corporation, prior to working with Journey securing financing for the purchases of industrial machinery and equipment. Mr. Levis has held positions with Merrill Lynch’s Institutional Advisory Division and with Merrill’s Private Client Group. In the summer of 2000, Mr. Levis worked under a top investment manager with Solomon Smith Barney. Mr. Levis holds a Bachelor of Science degree in Finance from the W.P. Carey School of Business.

NSL Capital Management’s website sports in Mr. Levis’ biography his “summer analyst positions with Merrill Lynch’s Institutional Advisory Division in Dallas Texas and with Merrill’s Private Client Group in Santa Barbara, CA.” It describes Mr. Levis’ “probalistic” (sic) approach to the markets” in this way:

NSL Capital Management, LLC is run by value investor Nicholas Southwick Levis and takes a probalistic approach to the markets, which we believe are Complex Adaptive Systems. There is no certainty in life or in the markets, just chance events and random probabilities. These probabilities are what we at NSL Capital Management, LLC constantly study and apply to the financial markets.

The website invites those seeking more information to contact Mr. Levis at a hotmail account (you can find us throwing stones from a glass house at On the positive side, the NSL Capital Management website says that “Nobel Laureate Physicist Dr. Murray Gell-Mann serves as Senior Advisor to the hedge fund.” A “Nobel Laureate Physicist” is a credit to NSL Capital Management. We’ve only got a few Fields Medalists and Nobel Prizes in Literature toiling away in the Greenbackd sulphur mines. (We’re kidding about those awards. We did get a gold star from Ms. Thomas in 3rd grade for a pretty amazing crayon drawing of what we’d be doing when we grew up – it wasn’t writing a blog.) To be fair to Mr. Levis, none of the foregoing necessarily prevents him from shaking up TBAC and wresting what value there is to be had from the company for the stockholders. While he has no track record as NSL Capital Management, he makes some excellent points in his letters to shareholders. In our opinion, he’s clearly identified in the letters why TBAC’s value is deteriorating and why it’s so deeply undervalued. Unfortunately, we think he’s also identified why it’s destined to remain that way.


The stars are not aligned in this situation. TBAC is undervalued at present, but it has a deteriorating value. Normally we would ignore any apparent “trend” in the liquidation value on the basis that it would regress to its long-term mean, or stabilize. In this case we have to consider the real possibility that TBAC will have no value in liquidation in short order if it continues on its current path. TBAC needs urgent, heroic, life-saving surgery, and we don’t think the current board are the ones to crack open TBAC’s chest and massage its heart. We don’t want to damn Nick Levis as TBAC’s undertaker, but we don’t see him in the role of its dashing young doctor either. Given his penchant for guns, the whole situation is beginning to feel a little “vaudeville” for our tastes. It’s as if we sat down to watch some MSNBC and found a Three Stooges film playing instead. Only the diehard fans will be laughing if Mr. Levis gets on the board but we can still admire his ability to inflict pain, if only to himself. As much as we’d like to see Mr. Levis hold TBAC’s nose between his knuckles and belt it, we think this one is better seen from the comfort of the couch. We’re not buying, but if you don’t mind a poke in the eye, go right ahead.

TBAC closed yesterday at $1.88.

The S&P500 Index closed yesterday at 885.28.

[Disclosure:  We don’t have a holding in TBAC. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]


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Borders Group, Inc. (NYSE:BGP) has released its 10Q for the third quarter. We’ve previously posted about BGP here. When we first looked at it, we said that it presented a rare opportunity to invest in a stock with a well-known brand alongside one of the best activist investors in the US, William A. Ackman of Pershing Square Capital Management, L.P. At that time, BGP’s market capitalization was $39.4M (at the previous day’s close of $0.65) and we estimated that its liquidation value was some 250% higher at $135M or $2.23 per share. Well, we’ve now had an opportunity to review the 10Q for the third quarter and the results aren’t pretty. In fact, we now believe that there is a risk that the assets may have no value in a liquidation and we’re out.

The updated value proposition

BGP has made a $175M loss for the quarter, operating cash flow was negative in the amount of $51M and the company has taken on $55M in new debt. By way of contrast, in the last quarter to August, while the company made a loss of $9M, operating cash flow was positive in the amount of $77M and the company retired $129M in debt. Our summary analysis of the balance she

et is set out below (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):

bgp-q3-summaryBGP’s value remains concentrated in its inventory and property, plant and equipment, both of which are up slightly on the last quarter. Compared to $18.01 per share in Q2, inventory is now $20.75 per share, which we’ve written down by two-thirds to $13.91 per share (written down value of $12.07 in Q2). Property, plant and equipment is now carried at $27.18 per share compared to $27.04 per share in Q2. We have written it down the by half to $13.59 per share (slightly higher than the written down value of $13.52 per share in Q2). While its assets have increased slightly, the real problem for BGP is the growth in its substantial liabilities. Total liabilities now stand at $29.83 per share, up from $25.92 per share, the debt portion of which is up from $7.69 per share to $8.68 per share.

Our previous estimate for the liquidating value of BGP was around $2.23 per share. We now estimate that its liquidating value is -$9.6M or $-0.16 per share. This is on the basis of a very conservative treatment of its tangible assets and does not take into account BGP’s intangibles, like consumer brand recognition, which must have some residual value. We also note that BGP has a seasonal business, and this most recent quarter sees BGP in a much better position than the same quarter last year, at which time we estimate that its liquidating value was closer to -$4.87 per share. We think there’s a good chance that BGP will have some substantial asset value next year, and that it’s worth more than its liquidation value, but on our very conservative treatment of its assets, it has a negative liquidating value at this point in time.

As a brief diversion, set out below is a summary financial analysis of BGP without any discount applied to the assets (both the “Carrying” and “Liquidating” columns shows the assets as they are carried in the financial statements):

bgp-q3-summary-carrying-valueIn this analysis, with no discount applied to the carrying value of the assets, BGP appears wildly undervalued. We prefer our much more conservative estimate of liquidating value for two reasons:

  1. We think the discounted values are more likely to be right; and
  2. If we’re wrong in our estimate, we hope that we’ve applied a sufficient discount that we’re wrong on the upside, and not the down side. Valuing assets in liquidation is not an exact science. Prior to the actual sale, we don’t know with any certainty how much any given asset might yield. If we were to value assets at close to their carrying values, we think that more often than not we’d be disappointed.

You can read more about our undervalued asset situations philosophy on our About Greenbackd page and our rationale and method for calculating values on our About liquidation value investing page.


Our overly optimistic conclusion when we first wrote about BGP deserves repeating here (if only to stop us doing it again). We said, “It’s not often that the stars align like this: a stock with a well-known brand selling at less than a third of its value in a liquidation with one of the best activist investors in the US controlling almost a third of its outstanding stock. BGP has already embarked on its value enhancing transformation. We believe that, given time, BGP will be worth more than its liquidation value, but, if we’re wrong, it’s still trading at a third of that value, which is a bargain.” We even bolded that last part, which, in retrospect, we regret. While we still agree that BGP has a well-known brand, Will Ackman is one of the best activist investors in the US, and BGP will be worth much more than its liquidation value, it’s no longer trading at a third of its liquidation value, so the downside protection is gone. Our focus here is undervalued asset situations, and BGP is not an undervalued asset situation at this time. So that mean we’re out for now. We are, however, going to keep an eye on it for its next few quarters to see if the value returns.

BGP closed yesterday at $0.58. We liked it at $0.65, so we’re down 9.83% on an absolute basis.

The S&P 500 closed yesterday at 904.42 and closed at 816.21 (+10.81%) when we liked BGP, so we’re down 20.64% on a relative basis.

[Disclosure: We have a holding in BGP but we plan to exit it soon. We may acquire it again in the future. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

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MathStar Inc (OTC:MATH) is another tiny net cash stock with a substantial stockholder lobbying management to liquidate the company. The stock closed yesterday at $0.68, giving it a market capitalization of just $6.2M. We estimate the liquidating value to be more than 120% higher at $14.4M or $1.57 per share. The value in liquidation is predominantly cash and short term investments in the amount of $14.8M. MATH has twice rejected unsolicited merger proposals. The board has largely suspended the company’s operations and is in the process of evaluating its “strategic alternatives, which could include merger, acquisition, increasing operations in another structure or liquidation.” Salvatore Muoio of S. Muoio & Co. LLC filed a Schedule 13D on December 15, 2008 urging MATH’s board to consider liquidation rather than a merger.

About MATH

MATH is a fabless semiconductor company engaged in the development, marketing and selling of high-performance, programmable platform chips and design tools required to program chips. The company’s investor relations website can be found here.

The value proposition

MATH has rapidly burned cash throughout the year, mainly on research and development. The company has now put a stop to its R&D activities, which has reduced the cash burn significantly from $6.6M in the June quarter to $1.6M in the September quarter. From the Business Overview section of the September 10Q:

During 2008, sales of our field programmable object array, or FPOA, did not materialize as expected, and development of the next generation of FPOA fell even further behind schedule. As a result, on May 20, 2008, the Board of Directors voted to suspend research and development activities and ongoing operations while analyzing strategic alternatives to protect the remaining value and increase the liquidity to the stockholders. The Board of Directors continues to explore these strategic alternatives, which could include merger, acquisition, increasing operations in another structure or liquidation.

Set out below is our summary analysis of the company’s balance sheet (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):


The company has a net cash position (i.e. cash remaining after paying out all liabilities) of $13.9M or $1.52 per share, which is around 120% higher than MATH’s closing price yesterday of $0.68.

The catalyst

This is one of the rare instances where management seems to have taken proactive steps to protect the company’s remaining value. The board also appears to be seeking a way to unlock that value through a merger, acquisition, increasing operations in another structure or liquidation. Salvatore Muoio of S. Muoio & Co. LLC annexed to his 13D filing the following letter setting out his preference for a liquidation over a merger:

December 12, 2008

Mr. Douglas M. Pihl
Chairman of the Board
MathStar, Inc.
19075 NW Tanabourne, Suite 200
Hillsboro, OR 97124

Dear Mr. Pihl,

Thank you for taking time out to speak with me today about MathStar’s history and current status.

To reiterate, and for the record, given the current business environment and the company’s assets and prospects, we strongly urge the Board to pursue a path of liquidation.

We have been investors in the securities of companies in liquidation for over 25 years and believe the process to be relatively straight-forward, in particular for companies as clean and litigation-free as MathStar.

As I mentioned, we don’t believe the current environment represents an attractive opportunity to merge with a speculative business in need of the company’s cash. We also don’t believe the incremental but uncertain future value of the company’s NOL in a merged entity offsets the hard cash equivalent value shareholders would receive in a liquidation in the current environment.

In addition, we would be particularly concerned if a transaction were to be announced where any appearance of a conflict of interest were present.


Salvatore Muoio, C.F.A.
Managing Member


MATH is one of the best prospects we’ve run across recently. It is undervalued at $0.68, trading at 45% of its net cash of $1.52 per share. Management has already taken proactive steps to reduce its formerly significant cash burn rate and seems to be actively seeking a way to unlock the company’s value. We feel more comfortable that Salvatore Muoio is keeping an eye on management’s exploration of strategic alternatives and has expressed his strong preference for a liquidation. As always, the risk is that MATH is unable to unlock its value before dissipating its remaining cash but in this instance we believe that risk is low.

MATH closed yesterday at $0.68.

The S&P 500 Index closed yesterday at 913.18.

[Disclosure: We do not presently 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.]

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InFocus Corporation (NASDAQ:INFS) held a conference call yesterday to discuss the progress of its auction. We’ve previously posted about INFS here, here and here, writing that it is a deeply undervalued asset situation with two activist investors, Nery Capital Partners and Lloyd I. Miller, III, pushing the company to “consider the views expressed by its shareholders and pursue new alternatives to increase shareholder value.”

The call is pretty tightly scripted and doesn’t shed much additional light on the auction progress (the archive of the earnings webcast is available here) (registration required). CEO Bob O’Malley, the speaker, says that INFS has retained Thomas Weisel Partners, an investment bank, to provide advisory services including advice concerning unsolicited offers from outside sources. O’Malley attributes the interest in purchasing the company to INFS’s “good brands, good projectors, market share, channels, strong and dedicated team etc.” He continued that the special committee will work with the investment bank to review the offers “so management can continue running the company.” The “structure and nature of the offers vary” so the review will take an “undeterminate” (sic) amount of time. INFS will provide updates when they reach “definitative offer” and “completed agreement” stages or “the board has terminated the process.” O’Malley reitereated that INFS has “put on hold” the buy back. Other than that, there was little else to report. O’Malley refused to take questions, so no commentary from Nery Capital Partners or Lloyd I. Miller, III, which was a little disappointing.

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ValueVision Media Inc. (NASDAQ:VVTV), which we posted about on Wednesday last week, has filed its November 10Q. In our earlier post, we wrote that VVTV seemed to us to be one of the better opportunities available because it’s a net net stock (i.e. a stock trading for less than its net current assets) with other valuable assets and noted activist investor Carlo Cannell of Cannell Capital has an activist position in it. The company also seemed to us to be taking steps to realise that value, publicly announcing that it has appointed a special committee of independent directors to “review strategic alternatives to maximize stockholder value.” The strategic alternative the company was pursuing was an auction that the company expected to complete by February 2, 2009. At $1.66 per share, VVTV’s liquidating value is still some 300% higher than its close yesterday of $0.41, which should provide a good margin of safety until the auction can be completed.

Updated value proposition

When we first looked at the company we wrote that we estimated its liquidating value, which included its property, FCC broadcasting licence, NBC trademark licence agreement and the Cable distribution and marketing agreement, at around $2.23 per share. We now see that value lower at $1.66 per share due to the increase in liabilities from $74M to $94M, which equates to an increase of $0.57 per share. Set out below is our updated summary analysis (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):


At its close of $0.41, VVTV is trading at 25% of its liquidating value.

The Catalyst

Given the substantial deterioration in the company’s liquidating value in the last quarter (and in the last few years), we were expecting an update on the auction, which the company has not provided in this 10Q. The company has simply restated its earlier disclosure almost verbatim:

On September 11, 2008, our board of directors announced that it had appointed a special committee of independent directors to review strategic alternatives to maximize shareholder value. The committee currently consists of three directors: George Vandeman, who serves as the committee’s chairman, Joseph Berardino and Robert Korkowski. The special committee retained Piper Jaffray & Co., a nationally-recognized investment banking firm, as its financial advisor. There can be no assurance that the review process will result in the announcement or consummation of a sale of our company or any other strategic alternative.

The company removed the final sentence from the last disclosure:

We do not intend to comment publicly with respect to any potential strategic alternatives we may consider pursuing unless or until a specific alternative is approved by our board of directors.

This may have been removed because Mr. George Vandeman, chairman of VVTV’s special committee of independent directors charged with administering the stategic review, made public statements that VVTV has received bids from a number of companies and instructed its advisers to invite several of the proposed buyers to take part in the next phase of the process.

There have been no further public statements from Cannell Capital. We will provide an update if one is made.


Provided that management will sell the company in the auction process if it receives a sensible bid, this still seems to us to be one of the better opportunities available in the market. Although it has deteriorated since the last 10Q, at $1.66 per share, VVTV’s liquidating value is still some 300% higher than its close yesterday of $0.41. Cannell Capital has previously publicly stated that he sees the value as high as $5.98 per share. The company seems to be taking steps to realise that value through an auction that it expects to complete by February 2, 2009. Any investor intending to take a position should bear in mind the company’s disclosure that “there can be no assurance that the review process will result in the announcement or consummation of a sale of our company or any other strategic alternative.”

VVTV closed yesterday at $0.41.

The S&P 500 Index closed yesterday at 913.18.

[Disclosure: We have a holding in VVTV. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

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We posted about Avigen, Inc. (NASDAQ:AVGN) on December 1, 2008, noting that it was a rare opportunity because it was a net cash stock (i.e. it was trading at less than the value of its cash after deducting all liabilities). Since our initial post, AVGN has fallen from $0.65 to close yesterday at $0.54. At $0.54, AVGN has a market capitalization of $16.1M against a net cash position of $36.5M, some 127% higher.

Biotechnology Value Fund (BVF), who we noted in our earlier post had an active interest in AVGN, filed an updated 13D last week. In the new filing BVF says that it sent a letter to AVGN “expressing its displeasure with [AVGN]’s recent performance and continued destruction of shareholder value.” The letter is reproduced below:

Members of the Board:

As you know, Biotechnology Value Fund, L.P., together with its affiliates, is the largest shareholder of Avigen, Inc. (“Avigen” or the “Company”), holding an ownership stake of approximately 29% of Avigen’s outstanding common stock. We first became investors in Avigen in 2004 and have provided capital directly to the Company. We are writing to express our frustration with recent developments at Avigen, particularly with what we perceive to be this Board’s self-serving actions and disregard of shareholder interests.

Since January 1, 2004, Avigen’s stock price has fallen more than 90% and the Company has accumulated a deficit of more than $110 million. Presently, Avigen’s stock trades at less than 1/3 of its net per share cash value, indicative of the investment community’s conviction that Avigen’s Board will destroy its remaining value. We have repeatedly reached out to the Company and have offered to work collaboratively to maximize shareholder value. The Company responded to our offers by unilaterally increasing and broadening management’s “golden parachute” severance agreements and by unilaterally adopting a “poison pill.”

The Board’s increase and broadening of its “golden parachute” severance agreements with management, under the ridiculous justification that such payouts are necessary to “attract and retain key employees,” is particularly outrageous given Avigen’s current circumstances. Our analysis indicates that these payouts, which we believe would be triggered by most “change in control” scenarios, including a liquidation, total at least $3 million, an incredible 20% of the Company’s entire market value. The recipients of these golden parachute arrangements include Avigen’s CEO, Ken Chahine, who resides in Park City, Utah, while the Company is based in California. How can the Company justify such actions as necessary to “attract and retain key employees” when Avigen has no real business at this time and has abandoned the development of all its products? These hastily adopted severance arrangements need to be revoked.

In addition, we believe the Board’s implementation of the “poison pill” serves no purpose other than to keep BVF from purchasing additional stock in the Company. We are concerned that management and Board members are more concerned with retaining their jobs and compensation than with maximizing shareholder value. As evidence, Avigen’s stock price has fallen more than 20% since the adoption of the poison pill. We find the poison pill to be disrespectful and offensive, given our substantial ownership position and our long history with the Company. Nevertheless, our response was to offer a compromise proposal: modify the poison pill to allow anyone to acquire as much stock as they like, however, neutralize the voting power on all shares of Avigen stock above a specified threshold. We specifically offered to have any additional shares that we acquire to abstain from voting or to vote in proportion to all other outstanding shares. This offer was not accepted. The pill should be redeemed altogether.

The Board’s recent actions reveal its true self-interest and leave us concerned that Avigen will indeed destroy and/or take all remaining value. Consequently, our primary issue has been and remains that Avigen immediately guarantee the worst case outcome for all shareholders. This guarantee could be accomplished in several ways, including by dividending or otherwise distributing all excess cash to shareholders now, or by offering to buy back any and all shares from holders that wish to sell at a specific price at a specific future date (i.e., $1.25 per share in December, 2009). In both cases, shareholders could stand to reap potentially substantial upside derived from the monetization of Avigen’s remaining assets and could finally stop worrying about whether the Company will destroy its substantial cash value. To the extent the Board believes it can generate value in excess of its cash in the bank today, offering downside protection ultimately costs the Company nothing. However, by rejecting our proposal to provide a downside guarantee, the Board has indicated its willingness to place its remaining cash at continued risk, without shareholder consent.

As the Company’s largest shareholder, we are fighting to return value to all shareholders, not just ourselves, and we feel a responsibility to do so. To be clear, we do not seek to impose our own agenda on Avigen, we only ask that shareholders be empowered to decide the fate of the Company’s residual cash, rather than the management and Board of a company which has repeatedly tried and failed to create any shareholder value whatsoever. Shareholders have good reason to worry that Avigen’s management fully intends to put its remaining cash at risk. Yesterday, at the RBC Capital Markets Healthcare Conference, CEO Ken Chahine said, “We are going to be looking at building…How do we do that?…There are some opportunities as well that have emerged from the credit crisis. There are some commercialization, or near-commercialization, type companies that could use an infusion of cash…Those are some of the things we are looking at. Now, will that be in the therapeutic space? It could be…We’re opening it up because I think that there are opportunities outside of therapeutics…We will spend the balance of 2009 trying to look for opportunities.” Mr. Chahine, shareholders do not need or want you to invest their money.

If recent empirical evidence with respect to numerous other failed biotech companies is any guide (e.g., Corgentech, Renovis, Novacea, Nitromed, Nuvelo and others), the future does not bode well for Avigen shareholders if left to its own devices. In one similar situation, the company could have returned in excess of $10/share in cash to shareholders had it been liquidated in 2005. Instead, after opting for a value-destroying merger, that company today trades at a mere 0.09 cents per share – a 99% decline! Avigen’s golden parachutes have incentivized management to merge with any company that will take it. Management would walk away with its $3 million cash windfall; shareholders would get stuck with potentially worthless stock in a merged company. In the current fiscal environment, shareholders will no longer tolerate such self-interested behavior on the part of failed biotechnology companies.

We believe the Avigen Board is not only willing to sacrifice and squander shareholder money but, in the process, its members are making a mockery of their obligations to fulfill their fiduciary duties as directors of the Company. To that end, please be advised that we intend to hold each member of the Board and management fully accountable for any continued erosion of value from the current liquidation value of the Company.


Mark Lampert


As we noted in our earlier post, while it’s frightening to see AVGN hemorrhaging cash, BVF is working to persuade it to salvage what remains of the company’s value. If BVF is able to cause the company to quickly distribute its remaining cash to stockholders, AVGN is an attractive investment opportunity. The risk is that BVF is unable to persuade the company to do so before AVGN dissipates its remaining cash.

AVGN closed yesterday at 0.54.

The S&P 500 Index closed yesterday at 868.57.

[Disclosure: We do not presently 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.]

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Electro Scientific Industries Inc (NASDAQ:ESIO) is one of the more complex undervalued asset plays we’ve dug up, but a worthwhile one to watch nonetheless. ESIO has announced a merger with Zygo Corporation (NASDAQ:ZIGO) and an authorization to buy back $100M in stock (see the October 16 announcement here). Activist investor David Nierenberg of Nierenberg Investment Management owns 15% of ESIO, supports the merger and is pushing the company to buy back stock. Management expects the the merger to be completed in the first calendar quarter of 2009.

About ESIO

ESIO and its subsidiaries provide high-technology manufacturing systems to the global electronics market, including advanced laser-based systems that are used to microengineer semiconductor device features in high-volume production environments. Website is here.

About ZIGO

ZIGO designs, develops, and manufactures ultra-high precision measurement solutions to improve its customers’ manufacturing yields, and top-tier optical sub-systems and components for original equipment manufacturers (OEM) and end-user applications. Website is here.

The value proposition


As it stands now, ESIO is an undervalued asset sitation, with a market capitalization of $177M at yesterday’s close of $6.56. We estimate ESIO’s stand alone liquidating value at around $277M or $10.12 per share, which is 54% higher than its close, as the following summary analysis demonstrates (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):



ZIGO, ESIO’s partner in the merger, has a market capitalization of $110M at it’s $6.54 close yesterday. We estimate ZIGO’s stand alone liquidating value at $118M or $7.00 per share. At $6.54 ZIGO is trading only slightly lower (about 7%) than its $7.00 per share liquidating value, and so is close to value, as the following summary analysis demonstrates (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):


The catalysts

1. Details of the merger

ESIO is offering 1.0233 shares of ESIO for each share of ZIGO. In the merger, ESIO will issue to ZIGO stockholders 18.1m shares of ESIO. This will increase the issued stock of ESIO from 27M pre merger to 45.1M post merger and give ZIGO stockholders 40% of ESIO. On October 15, the day before the announcement, ESIO closed at $10.07, valuing the merger $10.30 for each share of ZIGO, which had closed at $7.57.

The merger will reduce the liquidating value of each share of ESIO because ZIGO at $6.54 is trading much closer to its liquidating value than ESIO at $6.56. The following summary analysis shows ESIO after the merger with ZIGO is complete (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):


After the merger we estimate that ESIO stock will have a liquidating value of $391M. This equates to $8.66 per share when the expanded number of ESIO stock on issue are taken into account, down from $10.12 per share pre-merger with ZIGO. A liquidating value of $8.66 per share is around 32% higher than ESIO’s close yesterday but it’s nothing to get excited about. Fortunately, the buy back goes some of the way to restoring ESIO’s liquidating value to pre-merger levels.

2. Effect of the buy back

In the announcement of the merger with ZIGO, ESIO also announced an authorization to buy back $100M of stock. If that $100M buy back was completed at $6.56, the closing price of ESIO yesterday, ESIO would buy back around 15.2M shares, leaving around 29.9M on issue. The following summary analysis assumes that ESIO buys back $100M of stock at $6.56 and shows ESIO after the buy back is complete (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):


The buy back increases ESIO’s per share liquidating value from $8.66 to $9.74. It’s legitimate to question whether all of this sturm und drang is worth it if it only serves to reduce the liquidating value of ESIO. The honest answer is that we don’t know but we suspect that it’s probably not. We think it would have made more sense for ESIO to buy back its own shares rather than merge with ZIGO. If a merger with ZIGO was an inevitability, perhaps it would have been better to buy back the shares before the merger, especially since ESIO seems to be getting less in value from ZIGO than the value it is issuing to ZIGO’s shareholders. There is also a risk that the buy back will not proceed. According to the announcement,

The repurchases will be made at management’s discretion in the open market in compliance with applicable securities laws and other legal requirements and are subject to market conditions, share price and other factors. There is no fixed completion date for the repurchase program.

3. David Nierenberg

According to his most recent 13D, David Nierenberg (The Motely Fool has a profile here) of Nierenberg Investment Management owns 15% of ESIO. The filing details Nierenberg’s agreement with ESIO regarding ESIO’s stockholder rights plan, which prevents any stockholder – other than 19.99% owner Third Avenue Management LLC – from owning more than 15% of the company. If any stockholder purchases more than 15%, the plan limits the stockholder to voting only that portion of the stockholding up equivalent to 15% of the outstanding stock. The other shares automatically vote with ESIO’s board. Nierenberg’s agreement with ESIO provides that if ESIO buys back enough stock to push Nierenberg’s holdings over 15% of the outstanding shares, he will still be able to vote all of his stock as he wishes. The agreement will be in effect for a minimum of three years.


ESIO as a stand alone entity is deeply undervalued, trading at less than two-thirds of its $10.12 per share liquidating value. The effect of the merger – which appears likely to succeed – is to reduce ESIO’s per share liquidating value to $8.66, which is only 35% higher than the company’s close yesterday. This will be remedied by the $100M buy back authorized for ESIO, which will increase ESIO’s per share liquidating value to $9.74, which is nearly 50% higher than yesterday’s close. There is a risk that the merger will go through but the buy back will not be completed but we think this risk is relatively low.

There are two ways to play this:

1. If you are confidant that the merger will go through, buying ZIGO at $6.54 is buying ESIO for $6.41 (a 2.3% discount). This is because in the merger each share of ZIGO equates to 1.0233 shares of ESIO ($6.56 / 1.0233).

2. If you believe there is a risk that the merger will not go through, ESIO offers the better downside protection because it is at a deeper discount to its liquidating value.

ESIO closed yesterday at $6.56.

ZIGO closed yesterday at $6.54, which equates to paying $6.41 for ESIO.

The S&P 500 closed yesterday at 868.57.

[Disclosure: We do not presently hold either ESIO or ZIGO.  This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

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