Archive for July, 2009

Lamassu Holdings has sent another scorching letter to the board of Ditech Networks Inc (NASDAQ:DITC). In the letter, Lamassu claims that the “decisions of this board have shown a pattern of director entrenchment characterized by prioritizing the interest of its members in the face of poor results at the expense of the shareholders” and has called for shareholders to “receive ample representation on the board.”

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.” Lloyd I Miller III has also disclosed a 5.9% holding and has come out in support of Mr. Leehealey and Mr. Sansone – the director candidates nominated by Lamassu Holdings for election to the board of directors at the DITC annual meeting – as “candidates who are independent of management and he seeks to encourage greater attention to corporate governance by all members of the Board of Directors.” The stock is up 47.2% from our initial $0.89 to close yesterday at $1.31, giving the company a market capitalization of $34.5M. We last estimated the net cash value at around $32.2M or $1.23 per share and the liquidation value at around $43.4M or $1.65 per share. While the deterioration in value is a concern, Mr. Miller’s support of Lamassu Holding’s director candidates introduces a new element to the position. We’re inclined to hold on to see how the annual meeting plays out.

The press release setting out the text of the open letter from Lamassu Holdings is set out below:

Lamassu Holdings LLC Says Ditech Network’s Board of Directors Benefits at Shareholders’ Expense

Lamassu Holdings LLC files an open letter to the Board of Directors of DITECH NETWORKS, INC. (NASDAQ: DITC)

NEWPORT BEACH, Calif.–(BUSINESS WIRE)–Lamassu Holdings, LLC has sent the following letter to the Board of Directors of Ditech Networks, Inc.

Dear Board of Directors:

The purpose of this letter is to inform you that while you have historically operated with impunity in your role as Directors of Ditech Networks (NASDAQ: DITC – News), going forward your actions will be regarded with a much higher degree of scrutiny. The decisions of this board have shown a pattern of director entrenchment characterized by prioritizing the interest of its members in the face of poor results at the expense of the shareholders. In light of this trend, it is time that the shareholders receive ample representation on the board.

We have taken the time to go through the company’s filing and pull out some of the decisions that were clearly made to benefit the board while adding no value to shareholders. It is worth noting that these decisions were, for the most part, made by the same people who currently serve. We believe these decisions illustrate that, with the exception of Mr. Simpons and Mr. Dramis, all of the currently serving members, including Mr. Harper, Mr. Manoliu, Mr. Sugishita, Mr. Hasler and Mr. Avis, have established a clear pattern of rewarding themselves while shareholders suffer.

In 2003 (see Figure 1), Ditech Networks moved from a policy in which board members were paid in options to one in which they were paid with both cash and options. It is worth noting that during the three years prior to this change, there was a dramatic drop in the equity value of the company. In short, since the options you awarded yourselves were no longer worth anything, you chose to guarantee your compensation regardless of performance.

In 2005, after another very difficult period for shareholders, shown in Figure 2, the Board again rewarded itself with pay raises. Beginning on July 15, 2005, non-employee directors began receiving an annual retainer of $16,000; the chairman of the Audit Committee received an additional annual retainer of $5,000; and the chairmen of the Compensation Committee, the Corporate Governance Committee and the Nominating Committee received additional annual retainers of $2,500.

The final insult is the most recent decision made little more than a year ago. As the table below shows, effective May 1, 2008, the Board raised its salaries and several other fees. Ironically, you even actually raised the amount you get paid for “phoning it in” [“Special (telephonic)” line items below]. To put these pay increases in their full context, at the time you granted these raises for yourselves the stock was hitting all time lows on a daily basis and wouldn’t ultimately level off until it reached well below a dollar. In addition, the fundamentals of the company were never as bad as they had been. As a result of poor decisions and failed strategic maneuvers by the Board of Directors, the company had lost millions and millions of dollars. Despite this backdrop, you rewarded yourselves with additional cash at a time when the company apparently didn’t have enough money to buy back its own stock, despite the record low levels.

Lamassu Letter Table

(The table above has been modified from the original to fit this space)

Had compensation increases been used to attract new talent to the Board of Directors and resulted in new directors that brought with them a history of sound business decisions and responsible business practices, then the pay raises could be justified. However, the pay raises were not used for this purpose. Instead, in the face of massive shareholder equity losses and a long list of bad investments, the Board increased its pay with no regard for the massive losses the shareholders were experiencing—losses that were painless for the members of the Board due to their low levels of stock ownership. It is clear that under the current leadership, it has been more financially rewarding to be on the Board than to be a shareholder. For this reason and many others Lamassu has moved to replace two of the current board members with its own nominees. It is our hope that this will both give shareholders a direct voice on the Board, as well as bring about a level of fiduciary responsibility that we believe is currently lacking.


Lamassu Holdings, LLC

[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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Soapstone Networks Inc (NASDAQ:SOAP) has announced that the stockholders have approved the liquidation and dissolution of the company.

We started following SOAP (see our post archive here) because it was trading well below its net cash value with an activist investor, Mithras Capital, disclosing an 8.7% holding in October last year. The stock is up 68.4% from $2.50 when we initiated our position to close today at $4.13, giving SOAP a market capitalization of $61.0M. We last estimated the company’s net cash value to be $80.3M or $5.21 per share. The company has now announced that it proposes to liquidate. It estimates that the total distribution, including an extraordinary cash dividend of $3.75 per share, will be between $4.00 and $4.50 per share. The initial dividend was paid yesterday and the stock trade’s ex-dividend today.

The press release from the company is set out below:

BILLERICA, MA–(Marketwire – July 28, 2009) – Soapstone Networks Inc. (NASDAQ: SOAP), today announced that, at the Company’s annual meeting of stockholders held on July 28, 2009, the stockholders of Soapstone Networks voted to approve the liquidation and dissolution of the Company pursuant to a Plan of Liquidation and Dissolution (the “Plan of Liquidation”).

As previously announced by the Company, in connection with the approval of the Plan of Liquidation, the Company’s Board of Directors has approved an extraordinary cash dividend of $3.75 per share of the Company’s common stock. The dividend will be paid on July 29, 2009 and the Company’s stock will trade ex-dividend commencing July 30, 2009.

The Company intends to file a certificate of dissolution on July 31, 2009 with the Delaware Secretary of State in accordance with the Plan of Liquidation. At the close of business on July 31, 2009, the Company expects to close its stock transfer books and cease recording transfers of shares of its common stock. At that time, the Company’s common stock, and stock certificates evidencing the shares of common stock, will no longer be assignable or transferable on the Company’s books. We have notified Nasdaq OMX of the date we intend to file our certificate of dissolution, and we will seek to delist our shares of common stock as soon as practicable thereafter. In addition, we requested that the Nasdaq Global Market suspend the trading of our common stock effective at the close of business on July 31, 2009. After the Company ceases trading on the Nasdaq Global Market as a result of such suspension, shares of the Company’s common stock held in street name with brokers may be traded in the over-the-counter market on an electronic bulletin board established for unlisted securities such as the OTC Bulletin Board or the Pink Sheets. Such trading will reduce the market liquidity of the Company’s common stock. As a result, an investor would find it more difficult to dispose of, or obtain accurate quotations for the price of the Company’s common stock, if they are able to trade the Common Stock at all.

The Board of Directors has fixed July 31, 2009 as the record date for determining stockholders entitled to receive any future distributions of available assets and as the final date for the recording of stock transfers. Only those stockholders of record as of the close of business on July 31, 2009 (the “Record Stockholders”), will be entitled to such future distributions. The Company anticipates that its first distribution after the July 31, 2009 record date is not likely to occur prior to the first quarter of 2010. Prior to winding up its affairs under Delaware law, the Company intends to make at least one additional liquidating distribution to the Record Stockholders. The Company has not yet established the timing or per share amount of any such distributions.

[Full Disclosure:  We have a holding in SOAP. 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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Autobytel Inc (NASDAQ:ABTL) has filed its 10Q for the quarter ended June 30, 2009.

We last estimated ABTL’s liquidation value at $24.3M or $0.54 per share. Following our review of the 10Q, we’ve reduced our estimate to$21.8M or $0.48 per share. The stock closed yesterday at $0.48, which means it’s trading at our estimate of the liquidation value. On that basis, we’re exiting. We opened our position at $0.43, so we’re up 11.6% on an absolute basis. The S&P500 closed yesterday at 979.62, and was at 899.24 when we started following ABTL in December, which means we’re up 2.7% on a relative basis.

Post mortem

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. 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. On expiry of the offer, Trilogy sent a letter to the board saying that it would “continue to evaluate [ABTL’s] business, its cash position, and its operating performance” and 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.” That did not eventuate.

ABTL has consumed a great deal of cash over the last years. Its principal sources of liquidity are from proceeds from dispositions of non-core businesses and the patent litigation settlement payments. Our estimate for ABTL’s liquidation value 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):

ABTL Summary 2008 6 30


Our position in ABTL has been a disappointing one, and has dragged down the performance of the portfolio. That aside, we can’t be too unhappy with a slightly positive result in a declining company.

[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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In the following video, legendary value investor Marty Whitman discusses Benjamin Graham’s net-net formula and his adjustments to it. We’ve previously covered those adjustments here, but we’ve added the video because we think it’s quite amazing to see the great man explaining his rationale for making them. The highlight, from our perspective, is this gem:

We do net-nets based more on common sense. As, for example, you have an asset – a Class A office building – financed with recourse finance, fully tenanted by credit-worthy tenants; That, for accounting purposes, is classified as a fixed asset, but, given such a building, you pick up the telephone and sell it, and really it’s more current than K-Mart’s inventories, for example, which is classified as a current asset. 

 Enjoy the rest of his wit below:



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Catalyst Investment Research, the collaboration between Damien J. Park of Hedge Fund Solutions and The Official Activist Investing Blog, and Jonathan Heller, CFA, of Cheap Stocks, has a new Special Report on the Steel Partners II Investment Portfolio (.pdf).

In the Special Report, Damien and Jonathan analyze the Steel Partners II portfolio companies to determine which have been “unfairly impacted by the recent selloff” following Steel Partners II’s announcement that it will restructure as a publicly-traded holding company.

Damien and Jonathan describe the opportunity as follows:

Following months of litigation with several investors seeking to block the restructuring, Steel was granted Court approval to move forward with the plan on June 19. As a result, on July 15, Steel Partners distributed approximately half of the economic value of their fund via cash and a pro rata in-kind distribution of securities to those investors seeking to exit the fund immediately. Following the distribution, a number of smaller, illiquid securities observed enormous selloffs – causing a massive imbalance in supply and demand, and resulting in a precipitous decline in the market value of certain companies. We believe the dramatic reduction in value at a few of these companies is a short-term phenomenon and not correlated with the fundamental value intrinsic to the company.

Read the rest of the Special Report by clicking here (.pdf).

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Digirad Corporation (NASDAQ:DRAD) has filed its 10Q for the quarter ended June 30, 2009.

We started following DRAD (see our post archive here) because it was an undervalued asset play with a plan to sell assets and buy back its stock. The stock is up more than 118% since we started following it to close yesterday at $1.92, giving the company a market capitalization of $36.1M. We last estimated the liquidation value to be around $29.5M or $1.56 per share. We’ve now increased our valuation to $32.5M or $1.73 per share following a very good quarter for DRAD, in which it generated over $2.2M in cash. DRAD has also now started to buy back stock under its previously announced $2M stock repurchase plan.

The value proposition updated

DRAD had a very good second quarter, generating $3M in operating cash flow and ending the quarter up more than $2.2M in cash. Our updated estimate for the company’s liquidation value 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):

DRAD Summary 2009 6 30

Off-balance sheet arrangements and contractual obligations: The company hasn’t disclosed any off-balance sheet arrangements in its most recent 10Q. The contractual obligations as at December 31 were around $3.0M, around $1.4M of which falls due in the next 12 months to December 31, 2009.

The catalyst

DRAD’s board has announced a stock buyback program:

The Company also announced that its board of directors has authorized a stock buyback program to repurchase up to an aggregate of $2 million of its issued and outstanding common shares. Digirad had approximately 19 million shares outstanding as of December 31, 2008. At current valuations, this repurchase plan would authorize the buyback of approximately 2.1 million shares, or approximately 11 percent of the company’s outstanding shares.

Chairman of the Digirad Board of Directors R. King Nelson said, “The board believes the Company’s direction and goals towards generating positive cash flow and earnings coupled with an undervalued stock price present a unique investment opportunity. We are confident this will provide a solid return to our shareholders.”

According to the most recent 10Q, the company has now started to buy its own stock, albeit a relatively small amount:

On February 4, 2009, our board of directors authorized a stock buyback program to repurchase up to an aggregate of $2.0 million of our issued and outstanding common shares. The timing of stock repurchases and the number of shares of common stock to be repurchased are in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. The timing and extent of the repurchase depends upon market conditions, applicable legal requirements, and other factors. During the three and six months ended June 30, 2009, we repurchased 198,000 and 209,000 shares, respectively, of our common stock at a cost totaling $0.3 million at a weighted average price of $1.28 per share.


At its $1.92 close yesterday, DRAD is trading at a small premium to its $32.5M or $1.73 per share in liquidation value. We’re generally sellers of secondary securities trading at a premium to liquidation value, but DRAD seems to have the potential to transition to a cash generator. We’d like to see where it can go. We can see no other reason to cease holding DRAD in the Greenbackd Portfolio and so we’re going to maintain the position for now.

[Full Disclosure:  We do not have a holding in DRAD. 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 Official Activist Investing Blog has published its list of activist investments for June:

Ticker Company Investor
ACMR A.C. Moore Arts & Crafts, Inc. Glenhill Advisors
ADF ACM Managed Dollar Income Fund Bulldog Investors
ASUR Asure Software Red Oak Partners
ATGN AltiGen Communications Wanger Investment Management
AXC Advanced Technology Acquisition Corp Bulldog Investors
BASI Bioanalytical Systems Peter Kissinger
BASI Bioanalytical Systems Thomas Harenburg
CAMD California Micro Devices Gamco Investors
CFW Cano Petroleum Carlson Capital
COHM.PK Coachmen Industries Inc Gamco Investors
CTO Consolidated Tomoka Land Co Wintergreen Advisers
CWLZ Cowlitz Bancorporation Crescent Capital
DCS Dreman/Claymore Dividend & Income Fund Bulldog Investors
DITC Ditech Networks Lloyd Miller
ENTU Entrust Inc. Arnhold & S. Bleichroeder Advisers
FMMH.OB Fremont Michigan Insurance Corp Harry Long
FPU Florida Public Utilities Co Energy West
FTGX Fibernet Telecom Group Carlson Capital
GGP General Growth Properties Pershing Square Capital
HBRF.OB Highbury Financial Peerless Systems
HDIX Home Diagnostics Discovery Group
HEOP Heritage Oaks Bancorp Patriot Financial Partners
IPAS iPass, Inc. Foxhill Capital
JTX Jackson Hewitt Tax Service Shamrock Activist Value Fund
KANA.OB Kana Software KVO Capital Management
KONA Kona Grill BBS Capital Management
LGF Lions Gate Entertainment Carl Icahn
MZF MBIA Capital Claymore Man Dur Inv Grd Muni Fund Western Investment
NUF Nuveen Florida Quality Income Municipal Fund Western Investment
OPTV OpenTV Corp Kudelski SA
OPTV OpenTV Corp Discovery Capital
PHH PHH Corporation Pennant Capital
PLCE The Childrens Place Retail Stores, Inc. Ezra Dabah
PTSG.OB Petrosearch Energy Corp Tiberius Capital
PYMX.OB PolyMedix, Inc. Target Capital Management
QGLY Quigley Corp Ted Karkus
SLRY Salary.com Raging Capital Management
SNG Canadian Superior Energy Inc. Palo Alto Investors
STAA Staar Surgical Co Broadwood Partners
SUAI Specialty Underwriters Alliance Hallmark Financial Services
TICC TICC Capital Corp Raging Capital Management
TLX Trans Lux Corp Gamco Investors
TTSP.OB TransTech Services Partners Bulldog Investors
TXI Texas Industries Shamrock Activist Value Fund
UAHC United American Healthcare Corp. Strategic Turnaround Equity Partners
VXGN.OB Vaxgen Inc Steven Bronson

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In Blank Checks Firing Blanks (Breakingviews.com via NYTimes.com), Lauren Silva Laughlin and George Hay write about the recent performance of blank check companies, otherwise known as special-purpose acquisition corporations or SPACs. Blank checks are shell companies that raise money from the public in order to acquire a business the identity of which is not known at the time the capital is raised. The trick is that a deal must be consumated before a certain date or the funds must be returned to the investors.

Many of the blank checks raised in 2007 are running out of time to complete an aquisition. While some 2007 SPACs did manage to seal a deal, it seems most were unable to do so because of the turmoil in the markets and were forced to liquidate:

About 40 of 66 SPACs that started in 2007 have been liquidated or will probably end up being liquidated, according to SPAC Research Partners.

It turns out that those SPACs forced to liquidate have outperformed those that actually completed a transaction:

And SPACs that sat on cash and safe investments have actually outperformed those that did deals. Take the GSC Acquisition Company, established by GSC Group, a debt-focused investment firm. The SPAC’s bosses tried to acquire Complete Energy, a power producer. But the deal wasn’t completed in time, and GSC Acquisition was liquidated last month.

Investors received around $9.80 a share in cash, just shy of the $10 they paid in its initial public offering two years earlier.

Investors in SPACs that did deals haven’t been so lucky. Shares of Aldabra 2 Acquisition Corporation, for instance, have plunged more than 75 percent since that SPAC bought Boise Cascade’s paper, packaging and transportation business and changed its name to Boise Inc. in February 2008.

From a deep value investor’s point of view, SPACs present an interesting investment opportunity. The value analysis is simple enough: Most trade at a discount to net cash. The difficulty is in assessing which will actually return the cash and which will spray it away on an acquisition. In making such an assessment, it helps to have a large activist investor sitting on the register. Cue Daniel Loeb and Third Point LLC. Third Point’s most recent 13F filing shows a number of SPACs in Loeb’s portfolio, including the following (via Market Folly):

  1. Liberty Acquisition Holdings (LIA): 11.75% of Loeb’s portfolio
  2. Victory Acquisition Corp (VRY): 5% of Loeb’s portfolio
  3. Trian Acquisition (TUX): 4.95% of Loeb’s portfolio
  4. Triplecrown Acquisition (TCW): 4.35% of Loeb’s portfolio
  5. Global Brands Acquisition (GQN): 2.4% of Loeb’s portfolio
  6. Global Consumer Acquisition (GHC): 1.8% of Loeb’s portfolio

We haven’t looked at any of these in detail, but they might present a happy hunting ground for the liquidation value investor. We’ll return to these stocks if there’s further turmoil in the market.

[Full Disclosure: We do not have a holding in any of the securities listed above. 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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Avigen Inc (NASDAQ:AVGN) is back in negotiations with MediciNova, Inc. regarding a proposed acquisition of AVGN by MediciNova. The consideration for the deal is AVGN’s “net cash liquidation value plus $3 million” and “a contingent payment right for a specific product program milestone payment associated with Avigen’s Assignment Agreement with Genzyme Corporation, potentially subject to certain adjustments.”

We started following AVGN in December last year (see archived posts here) because it was a 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 closed yesterday at $1.32, up 103.8% from our $0.65 purchase price. We last estimated the net cash liquidation value at around $34M or $1.14 per share. Including the $3M from MediciNova would increase that value to around $37M or $1.24 per share. We believe that there is a reasonable chance that AVGN will yield more than its current $1.32 share price when the “contingent payment right” capturing the near term payments from Genzyme is taken into account. AVGN shareholders also have an option-like exposure to any value in AVGN’s AV411 assets and program, although we cannot estimate the value of this with any certainty.

The press release from AVGN regarding the business combination with MediciNova is set out below:

MediciNova and Avigen Confirm Understanding for Key Terms for a Business Combination

SAN DIEGO and ALAMEDA, Calif., June 25, 2009 (GLOBE NEWSWIRE) — MediciNova, Inc., a biopharmaceutical company that is publicly traded on the Nasdaq Global Market (Nasdaq:MNOV – News) and the Hercules Market of the Osaka Securities Exchange (Code Number:4875), and Avigen, Inc. (Nasdaq:AVGN – News), a biopharmaceutical company, today announced that they have confirmed their understanding of certain key terms for a proposed acquisition of Avigen by MediciNova that would combine the companies’ broad neurological clinical development programs based on ibudilast (Avigen’s AV-411 and MediciNova’s MN-166).

MediciNova and Avigen currently contemplate that the terms of the merger would provide that Avigen shareholders receive consideration approximating Avigen’s net cash liquidation value plus $3 million. Avigen shareholders would be able to elect to receive this consideration in cash at closing or to receive a convertible security by which that cash consideration may be converted into MediciNova stock at a conversion price equal to the greater of $4.00 or a mutually agreeable volume-weighted average price of MediciNova common stock. At the end of 18 months, any unexercised convertible securities would be paid out at their cash value. This would allow shareholders of both companies the opportunity to participate in the future value created by combining the companies’ product portfolios. In addition to the consideration above, all Avigen shareholders would receive a contingent payment right for a specific product program milestone payment associated with Avigen’s Assignment Agreement with Genzyme Corporation, potentially subject to certain adjustments.

Yuichi Iwaki, M.D., Ph.D., MediciNova’s President and Chief Executive Officer, said, “We are excited to announce this important step towards a potential acquisition of Avigen and believe that the proposed merger presents clear advantages for the shareholders of both companies, most notably, the ability to more fully take advantage of the opportunities that the ibudilast compound and analogs provide in a variety of indications and markets. We look forward to finalizing definitive documentation as expeditiously as possible and to presenting this transaction for shareholder approval in due course.”

“Avigen believes the proposed merger on the terms currently contemplated would be in the best interests of our shareholders and we intend to continue to negotiate with the goal of reaching agreement on all of the terms and presenting it to our shareholders for approval in the third quarter of 2009,” commented Andrew Sauter, Avigen’s Chief Executive Officer, President and Chief Financial Officer. “We believe that combining our ibudilast programs, AV411 and MN-166, would enhance the global development potential for the compound in a range of neurological indications, including Multiple Sclerosis, neuropathic pain and drug addiction.”

The understanding reached by the parties is nonbinding and subject to definitive documentation and due diligence. The closing of any proposed merger would also be subject to customary closing conditions, including required shareholder and regulatory approvals and the absence of material adverse changes. MediciNova and Avigen are not legally obligated to continue discussions regarding the proposed transaction on the terms described herein or on any other terms. No definitive agreements have been reached, and there can be no assurances that definitive agreements will be successfully negotiated, that the proposed terms will not be revised or that the proposed merger will be completed.

[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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Forward Industries Inc (NASDAQ:FORD) is a new position for us. We haven’t deviated from our love of deep value (it’s trading at a discount to net cash and liquidation value), but there’s no obvious catalyst in the stock at this stage. Management appears to be considering a “strategic transaction” of some kind, although this might include an “acquisition or some other combination.” At its $1.44 close Friday, FORD has a market capitalization of $11.4M. We estimate the liquidation value to be around 60% higher at $18.7M, or $2.60 per share. Trinad Management did have an activist position in the stock, but has been selling recently and only one stockholder owns more than 5% of the stock. We’re attracted to it because it looks cheap, and we think the elements are in place for a catalyst to emerge, so we’re adding it to the Greenbackd Portfolio.

About FORD

FORD designs, markets, and distributes “custom-designed, soft-sided carrying cases and other carry solutions products made from leather, nylon, vinyl, and other synthetic fabrics.” The cases and other products protect “portable electronic devices such as medical devices and cellular phones.” It sells directly to original-equipment-manufacturers in Europe, the “APAC Region,” and the Americas and to retailers and distributors in the United States, Canada, and Europe. It has been in operation since 1961.

The value proposition

FORD has been confronted with blustery headwinds over the last four years. FORD management write in the most recent 10Q (for the year ended March 31, 2009) that “deteriorating economic conditions, rising unemployment, tight credit markets, and heightened uncertainty in financial markets” has “adversely impacted discretionary consumer spending, including spending on the types of electronic devices that are accessorized by [FORD’s] products. [FORD’s management] expect this challenging business environment to continue in the foreseeable future.” Revenues are down from $50M+ in 2005 to less than $20M this year. The drop in net income has been even more precipitous, from a profit of $12M in 2005 to a loss of $1.1M in the most recent quarter, bringing the loss for the last 12 months to around $1.9M. Despite this, FORD still had around $19M of cash and equivalents at the end of March (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):

FORD SummarySummary balance sheet adjustments

We’ve made the following adjustments to the balance sheet estimates (included in the valuation above):

  • Cash burn: We’ve got no real idea about FORD’s prospects. Its cash burn over the last 6 months has been around $0.8M. That was made up of a net loss of $1.3M, reduced by $0.6M for non-cash items, and changes in working capital items of $0.1M. Accounts payable decreased $0.6M, which had the effect of contributing to the net cash used by operating activities. If we assume, as management has, that the company will face a similarly tough operating environment over the next 12 months, we estimate cash burn of around $2M.
  • Off-balance sheet arrangements: According to FORD’s most recent 10Q, it has no off-balance sheet arrangements.
  • Contractual obligations: FORD’s contractual obligations are minimal, totalling $0.6M.

After making the adjustments above, we estimate FORD’s liquidation value at around $18.7M or $2.60 per share.

Possible catalysts

FORD’s President and Acting Chairman, Mr. Doug Sabra, said in the letter to FORD shareholders accompanying the notice of annual shareholders’ meeting, that in 2008 “management began to implement operational and strategic initiatives in order to put [FORD]’s business on a stronger, more sustainable footing. …  This past August we retained an outside consultant to assist us in vetting possible partners for a strategic transaction.” It seems that the “strategic transaction” might include a “possible acquisition or other combination that makes sense in the context of [FORD’s] existing business, without jeopardizing the strong financial position that we have worked so hard to build.” FORD’s focus on a “strategic transaction” is a positive, in our view, although our vast preference is for a sale of the company, buyback, special dividend or return of capital over an acquisition.

Any transaction will require the consent of FORD’s board. While it has a free float of around 92%, the company’s so-called “Anti-takeover Provisions” authorize the board to issue up to 4M shares of “blank check” preferred stock. From the 10Q:

The Board of Directors has the authority and discretion, without shareholder approval, to issue preferred stock in one or more series for any consideration it deems appropriate, and to fix the relative rights and preferences thereof including their redemption, dividend and conversion rights.


At its $1.44 close Friday, FORD is trading at a substantial 60% discount to its $2.60 per share liquidation value and $2.16 per share net cash value. While there’s no obvious catalyst in the stock at this stage, management’s consideration of a “strategic transaction” is a positive. The risk to this position is management spending the cash on an acquisition. We think a far better use of the company’s cash is a buyback, special dividend or return of capital. Another concern is Trinad Management exiting its activist position in the stock. Those concerns aside, we’re attracted to FORD because it looks cheap at such a discount to net cash. We’re adding it to the Greenbackd Portfolio.

FORD closed Friday at $1.44.

The S&P500 Index closed Friday at 940.38.

Hat tip PP.

[Full Disclosure:  We do not have a holding in FORD. 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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