Archive for November, 2009

The superb Abnormal Returns has a post “Investing by the seat of their pants,” which, among other things, discusses William Bernstein’s conjecture that “only a tiny fraction, 1 in 1000, investors have the skills to become truly competent investors.”  In the preface of his new book, Bernstein suggests four abilities successful investors must enjoy (via Information Processing):

First, they must possess an interest in the process. It is no different from carpentry, gardening, or parenting. If money management is not enjoyable, then a lousy job inevitably results, and, unfortunately, most people enjoy finance about as much as they do root canal work.

Second, investors need more than a bit of math horsepower, far beyond simple arithmetic and algebra, or even the ability to manipulate a spreadsheet. Mastering the basics of investment theory requires an understanding of the laws of probability and a working knowledge of statistics. Sadly, as one financial columnist explained to me more than a decade ago, fractions are a stretch for 90 percent of the population.

Third, investors need a firm grasp of financial history, from the South Sea Bubble to the Great Depression. Alas, as we shall soon see, this is something that even professionals have real trouble with.

Even if investors possess all three of these abilities, it will all be for naught if they do not have a fourth one: the emotional discipline to execute their planned strategy faithfully, come hell, high water, or the apparent end of capitalism as we know it. “ Stay the course ” : It sounds so easy when uttered at high tide. Unfortunately, when the water recedes, it is not. I expect no more than 10 percent of the population passes muster on each of the above counts. This suggests that as few as one person in ten thousand (10 percent to the fourth power) has the full skill set. Perhaps I am being overly pessimistic. After all, these four abilities may not be entirely independent: if someone is smart enough, it is also more likely he or she will be interested in finance and be driven to delve into financial history.

But even the most optimistic assumptions — increase the odds at any of the four steps to 30 percent and link them — suggests that no more than a few percent of the population is qualified to manage their own money. And even with the requisite skill set, more than a little moxie is involved. This last requirement — the ability to deploy what legendary investor Charley Ellis calls “ the emotional game ” — is completely independent of the other three; Wall Street is littered with the bones of those who knew just what to do, but could not bring themselves to do it.

Bernstein’s is an interesting thought experiment. Steve Hsu at Information Processing, after considering the abilities identified by Bernstein, categorizes them as follows:

…the right interests (history, finance theory, markets — relatively easily acquired, as these subjects are fascinating), personality factors (discipline, controlled risk taking, decisiveness — not so easily acquired, but can be improved over time) and intelligence (not easily acquired, but perhaps the threshold isn’t that high at 90th percentile).

Bernstein’s list and Hsu’s categorization of it feels right. Whether it winnows the universe of competent investors down to 1 in 10,000 is open to debate, but I think few would have a genuine quibble with the content of the list. The only other element that I would suggest – and it is possible that it’s already captured within Bernstein’s list as “emotional discipline” – is the ability to think and act counterintuitively.

There are many examples of strategies that are counterintuitive and produce above-market returns. Value is a counterintuitive strategy. Glamour feels like a better bet than value, but studies have shown over and over again that value outperforms glamour or momentum. Tangible asset value – liquidation value investing or low price-to-book value investing – is counterintuitive even to practitioners within the value school, who predominantly seek Buffett-style earnings and growth. The counterintuitive element is that companies within the lowest price-to-book quintile – not, by any means, earnings machines – tend to grow earnings faster than companies in the highest price-to-book quintile, a phenomenon that value investors recognize as “mean reversion”.  Even with the liquidation value investment world itself, the counterintuitive strategy – buying loss-making net nets – outperforms the intuitive one – buying net nets with positive earnings.

This suggests to me that the ability to understand a concept from an intellectual standpoint is a necessary but insufficient condition for competent investing. One must also be able to suspend instinct or intuition or disbelief and follow intellect through to action. That seems to me to be a rare trait, but one that I believe can be developed. Is it possible that, if one follows a counterintuitive strategy for long enough and succeeds with it, it becomes intuitive? I think so, but I’d like to see what you think too.


I knew I was asking for it when I wrote the panglossian, “I think few would have a genuine quibble with the content of the list.” An astute reader has a quibble, and I’m embarrassed to say that I think he’s right:

I flatly deny Bernstein’s assertion that “investors need more than a bit of math horsepower.” I cite the highest authority:

1. Ben Graham explicitly warned against “calculations made about common stock values, or related investment policies, that went beyond simple arithmetic or the most elementary algebra.” Indeed, “whenever [calculus] is brought in, or higher algebra, you could take it as a warning signal that the operator is trying to substitute theory for experience, and usually also to give speculation the deceptive guise of investment.”

2. “If calculus were required,” Buffett has said, “I’d have to go back to delivering papers. I’ve never seen any need for algebra … It’s true that you have to divide by the number of shares outstanding, so division is required. If you were going out to buy a farm or an apartment house or a dry cleaning establishment, I really don’t think you’d have to take someone along to do calculus.”

3. Elsewhere, Buffett has said “read Ben Graham and Phil Fisher, read annual reports, but don’t do equations with Greek letters in them.”

4. In one of his books, Peter Lynch recounts at length that the mathematical stuff he learnt in MBA-School were hindrances rather than helps, and that “the arts/philosophy side” (or words to that effect) of his education have stood him in much better stead. Indeed, I recall Lynch saying something like “all the maths you need to invest competently you learnt in primary school.”

5. The “Ben Graham, Meet Ludwig von Mises” paper you cited a while back discusses the Austrian conception of value, markets and entrepreneurial discovery. None of these things rely upon maths, probability or stats. But they do, I think, hinge upon the ability to think unpopular or contrarian thoughts — like adherence to the Austrian School!

Mind you, I’ve never liked Bernstein and indeed have long thought that he does far more harm than good. This assertion is but one in a long list of silly things he’s said over the years. In short, not only is mathematics NOT a necessary condition of successful investment; it may be a sufficient condition of investment failure.

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TSR Inc (NASDAQ:TSRI) is an interesting play at a discount to liquidation value and an ongoing cash flow positive business. At its $2.10 close yesterday, the stock has a market capitalization of $8.5M. I estimate the liquidation value to be around 26% higher at $2.65. 26% is not a huge upside, but in this instance I would not regard liquidation value as the upside. Rather, here it is the worst case scenario. TSRI has generated positive cashflow from operating activities over the last four years, growing it from around $1m per annum in 2006 to around $1.6M in 2009. The growth in its operating cash flow is encouraging, though I’ve got no particular view on TSRI’s business – contract computer programming – or the prospects for that business. It’s a consulting-type business, which means that in tough times its fixed overhead should be quite low, and it can trim its sails for the business conditions. In better times, it should be able to readily expand, although I suspect its competition will seek to do the same, pushing up salaries by competing for consultants and thereby keeping margins static. In summary, TSRI seems to have a good, ongoing, cash-generative operating business that should survive the current general malaise. It might even do a little better in the good times. If I’m wrong, as Walter Schloss would say:

We can always liquidate it and get our money back.

About TSRI

According to the 10K:

TSR, Inc. (the “Company”) is primarily engaged in the business of providing contract computer programming services to its clients. The Company provides its clients with technical computer personnel to supplement their in-house information technology (“IT”) capabilities. The Company’s clients for its contract computer programming services consist primarily of Fortune 1000 companies with significant technology budgets. In the year ended May 31, 2009, the Company provided IT staffing services to approximately 80 clients.

The Company was incorporated in Delaware in 1969.


The Company provides contract computer programming services in the New York metropolitan area, New England, and the Mid-Atlantic region. The Company provides its services principally through offices located in New York, New York, Edison, New Jersey and Long Island, New York. The Company does not currently intend to open additional offices. Due to the continuing impact of the current economic environment, the Company has reversed its plan of hiring additional account executives and technical recruiters in its existing offices to address increased competition and to promote revenue growth. As of May 31, 2009, the Company employed 9 persons who are responsible for recruiting technical personnel and 10 persons who are account executives. As of May 31, 2008 the Company had employed 14 technical personnel recruiters and 16 account executives.

A primer on Contract Computer Programming Services

Also from the 10K:


The Company’s contract computer programming services involve the provision of technical staff to clients to meet the specialized requirements of their IT operations. The technical personnel provided by the Company generally supplement the in-house capabilities of the Company’s clients. The Company’s approach is to make available to its clients a broad range of technical personnel to meet their requirements rather than focusing on specific specialized areas. The Company has staffing capabilities in the areas of mainframe and mid-range computer operations, personal computers and client-server support, internet and e-commerce operations, voice and data communications (including local and wide area networks) and help desk support. The Company’s services provide clients with flexibility in staffing their day-to-day operations, as well as special projects, on a short-term or long-term basis.

The Company provides technical employees for projects, which usually range from three months to one year. Generally, clients may terminate projects at any time. Staffing services are provided at the client’s facility and are billed primarily on an hourly basis based on the actual hours worked by technical personnel provided by the Company and with reimbursement for out-of-pocket expenses. The Company pays its technical personnel on a semi-monthly basis and invoices its clients, not less frequently than monthly.

The Company’s success is dependent upon, among other things, its ability to attract and retain qualified professional computer personnel. The Company believes that there is significant competition for software professionals with the skills and experience necessary to perform the services offered by the Company. Although the Company generally has been successful in attracting employees with the skills needed to fulfill customer engagements, demand for qualified professionals conversant with certain technologies may outstrip supply as new and additional skills are required to keep pace with evolving computer technology or as competition for technical personnel increase. Increasing demand for qualified personnel could also result in increased expenses to hire and retain qualified technical personnel and could adversely affect the Company’s profit margins.

In the past few years, an increasing number of companies are using or are considering using low cost offshore outsourcing centers, particularly in India, to perform technology related work and projects. This trend has contributed to the decline in domestic IT staffing revenue. There can be no assurance that this trend will not continue to adversely impact the Company’s IT staffing revenue.

The value proposition

TSRI’s annual cash from operating activities has grown from $0.96M in 2006 to $1.63M in 2009. That growth is encouraging, but I’ve got no idea how sustainable it is. TSRI’s balance sheet is very liquid and it holds no debt (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):

TSRI SummaryThe catalyst

There are no obvious catalysts in the stock other than a general turnaround in business conditions, which might lead to the company restarting its stock buy-back or its dividend. The company has previously repurchased stock, but the buy-back was suspended earlier in the year. It was also previously paying a dividend, but that was suspended in the second quarter and is yet to be restarted. Restarting the dividend would be an obvious positive catalyst for this stock.


As I mention above, I’ve got no special insight into TSRI’s business or its prospects. I believe it to be a reasonably low risk bet that the company can muddle through the downturn and do better in a few years’ time. At its $2.10 close yesterday, it’s trading at around 80% of $2.65 per share liquidating value, most of which is in cash and equivalents and other liquid current assets. Add to that the positive cash flow from operating activities in the amount of $1.63M for the last year, which has grown from just under $1M in 2006, and TSRI looks like a reasonable prospect. If it can continue to grow the cash from operations, it should do well over the next few years. If it doesn’t, the discount to liquidation value provides some downside protection. I’m going to add it to the Greenbackd Portfolio.

TSRI closed yesterday at $2.10.

The S&P500 Index closed yesterday at 1,098.51.

[Full Disclosure: I hold TSRI. 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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Convera Corporation (NASDAQ:CNVR) is a liquidation play. The stock closed yesterday at $0.221. The company estimates the value of the distributions to be in the range of $0.37 to $0.45 per share.


According to the 14(c) information statement:

The board approved the plan of dissolution on May 29, 2009. The liquidation will not be put to a shareholder vote as “the affirmative vote of holders of a majority of all outstanding shares of our Class A Common Stock is required. In order to approve the election of directors, the affirmative vote of a plurality of all outstanding shares of our Class A Common Stock is required. As of the close of business on September 22, 2009, the Record Date for the approval of the above matters, there were 53,501,183 shares of our Class A Common Stock issued and outstanding, which shares are entitled to one vote per share. Holders of our Class A Common Stock which represented a majority of the voting power of our outstanding capital stock as of the Record Date, have executed a written consent in favor of the actions described above and have delivered it to us on September 22, 2009, the Consent Date. Therefore, no other consents will be solicited in connection with this Information Statement.


From the information statement:

We plan to distribute $10,000,000 shortly after the closing of the Merger, with the remaining $4,000,000 to be distributed in $2,000,000 increments at six months and 12 months after the closing of the Merger, subject to possible holdbacks for potential liabilities and on-going expenses deemed necessary by our board of directors in its sole discretion.

The present value of this cash distribution, assuming a discount rate of 10%, is estimated at $0.26 per share.


Hempstead assessed the value indication associated with a one-third equity interest in VSW based upon the discounted cash flows methodology. Specifically, under a discounted cash flows methodology, the value of a company’s stock is determined by discounting to present value the expected returns that accrue to holders of such equity. Projected cash flows for VSW were based upon projected financial data prepared by our management. Estimated cash flows to equity holders were discounted to present value based upon a range of discount rates, from 25% to 35%. This range of discount rates is reflective of the required rates of return on later-stage venture capital investments. The resultant value indications for the VSW component of the transaction, on a per-Convera share basis, are as follows:


Based upon the above analyses, the value indications for the cash and VSW stock to be received by our stockholders in exchange for their current Convera shares are within a range of $0.37 to $0.45 per Convera share.


The trading price of the VSW stock is an unknown, but the $0.26 in cash distributions offer some protection at yesterday’s close of $0.221. Buying up to say $0.23 means getting paid $0.03 to hold a free option on the VSW stock, which, according to Hempstead, the financial consultant providing the fairness opinion, could be worth between $0.11 and $0.19 per share. It’s very thinly traded at this price, so good luck getting set, but it’s worth buying if you can get a reasonable line of stock. I’m going to add it to the Greenbackd Portfolio at yesterday’s close.

CNVR closed yesterday at $0.221.

The S&P500 closed yesterday at 1,093.01.

Hat tip to Sean.

[Full Disclosure:  We do not have a holding in CNVR. 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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Warren Buffett’s position on gold is well known, if a little difficult to fathom. This is from Buffett’s appearance on CNBC’s Squawk Box on March 9, 2009, but could have been taken from any of his commentary over the last fifty years:

BECKY: OK. I want to get to a question that came from an investment club of seventh and eighth graders who invest $1 million in fake money every year. This is the Grizzell Middle School Investment Club in Dublin, Ohio, and the question is, where do you think gold will be in five years and should that be a part of value investing?

BUFFETT: I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot–and it’s a lot–it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that. The idea of digging something up out of the ground, you know, in South Africa or someplace and then transporting it to the United States and putting into the ground, you know, in the Federal Reserve of New York, does not strike me as a terrific asset.

Then there’s this comment from Buffett on the relative performance of Berkshire Hathway book value and an ounce of gold over fifteen years in the 1979 letter to shareholders:

One friendly but sharp-eyed commentator on Berkshire has pointed out that our book value at the end of 1964 would have bought about one-half ounce of gold and, fifteen years later, after we have plowed back all earnings along with much blood, sweat and tears, the book value produced will buy about the same half ounce. A similar comparison could be drawn with Middle Eastern oil. The rub has been that government has been exceptionally able in printing money and creating promises, but is unable to print gold or create oil.

Fifteen years of blood, sweat and tears from the greatest investor in the world and he just breaks even with gold, which “just sits there and eats insurance and storage and a few things like that.” And still he recommends avoiding gold.

For tis the sport to have the enginer
Hoist with his owne petar.

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CoSine Communications Inc (OTC:COSN) has released its 10Q for the quarter ended September 30, 2009.

We’ve been following COSN (see Greenbackd’s COSN post archive) because it is a cash box controlled by activist investor Steel Partners. Steel Partners own 47.5% of the stock and sits on the board. The stock is up 11.4% since our initial post to close Friday at $1.95. I initially estimated the net cash value to be around $22.2M or $2.20 per share. After reviewing the 10Q I’ve slightly reduced it in line with the ~$0.3M cash burn for the last two quarters to $21.9M or $2.17 per share. The net cash value has remained relatively stable through 2006, 2007, 2008 and 2009. COSN presents an opportunity to invest alongside Steel Partners at a discount to net cash in a company with substantial NOLs.

The value proposition updated

Little has changed over the last two quarters. The valuation on COSN remains straight-forward: It has around $22.7m in cash and short-term investments, $0.2M in liabilities and 10.1M shares outstanding. I’ve set out the valuation below in the usual manner (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):

COSN Summary 2009 09 30

Balance sheet adjustments

I’ve made the following adjustments to the balance sheet estimates above:

  • Cash burn: The company used $0.58M in cash in the last three quarters, which we’ve annualized to $0.6M.
  • Off-balance sheet arrangements and contractual obligations: According to COSN’s 10Q, it has no off-balance sheet arrangements.


A quick primer on net operating loss carry-forwards (“NOLs”) from the most 2009 10K:

NOLs may be carried forward to offset federal and state taxable income in future years and eliminate income taxes otherwise payable on such taxable income, subject to certain adjustments. Based on current federal corporate income tax rates, our NOLs and other carry-forwards could provide a benefit to us, if fully utilized, of significant future tax savings. However, our ability to use these tax benefits in future years will depend upon the amount of our otherwise taxable income. If we do not have sufficient taxable income in future years to use the tax benefits before they expire, we will lose the benefit of these NOLs permanently. Consequently, our ability to use the tax benefits associated with our substantial NOLs will depend significantly on our success in identifying suitable acquisition candidates, and once identified, successfully consummating an acquisition of these candidates.

Additionally, if we underwent an ownership change, the NOLs would be subject to an annual limit on the amount of the taxable income that may be offset by our NOLs generated prior to the ownership change. If an ownership change were to occur, we may be unable to use a significant portion of our NOLs to offset taxable income. In general, an ownership change occurs when, as of any testing date, the aggregate of the increase in percentage points is more than 50 percentage points of the total amount of a corporation’s stock owned by “5-percent stockholders,” within the meaning of the NOLs limitations, whose percentage ownership of the stock has increased as of such date over the lowest percentage of the stock owned by each such “5-percent stockholder” at any time during the three-year period preceding such date. In general, persons who own 5% or more of a corporation’s stock are “5-percent stockholders,” and all other persons who own less than 5% of a corporation’s stock are treated, together, as a single, public group “5-percent stockholder,” regardless of whether they own an aggregate of 5% of a corporation’s stock.

The amount of NOLs that we have claimed has not been audited or otherwise validated by the U.S. Internal Revenue Service (“IRS”). The IRS could challenge our calculation of the amount of our NOLs or our determinations as to when a prior change in ownership occurred and other provisions of the Internal Revenue Code may limit our ability to carry forward our NOLs to offset taxable income in future years. If the IRS was successful with respect to any such challenge, the potential tax benefit of the NOLs to us could be substantially reduced.

According to the 10K, as of December 31, 2008, COSN had federal NOLs of approximately $353M, which begin to expire in 2018 if not utilized and state NOLs of approximately $213M, which will begin to expire in 2009 if not utilized. The NOLs have a substantial value as a tax shield should COSN acquire a business with taxable earnings, but assessing that value is beyond us.


Steel Partners’ most recent 13D filing sets out its 47.5% holding. Steel Partners’ strategy is to use COSN’s cash to acquire a business with taxable earnings that can be offset by the NOLs. From the 10Q:

Redeployment Strategy and Liquidity

In July 2005, after a comprehensive review of strategic alternatives, our board of directors approved a strategy to redeploy our existing resources to identify and acquire one or more new business operations with existing or prospective taxable earnings that can be offset by use of our NOLs.

Ordinarly, I would prefer a return of cash to the acquisition of a business. This situation is different from the usual case because Steel Partners’ business is investment, and so I think the risk that they might make a bad investment is low. That said, there’s no assurance that they will find a suitable candidate, or if they do, that COSN will be able to use the NOLs.


COSN initially presented an opportunity to invest alongside Steel Partners at a 26% discount to net cash in a company with substantial NOLs. With the increase in the stock price the discount to its net cash position has narrowed to around 11%. I’m maintaining the position in the Greenbackd Portfolio.

[Full Disclosure:  We do not have a holding in COSN. 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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A call for help

Please read the following request from Hunter of Distressed Debt Investing about Alan Cohen, who runs the credit and distressed debt book at York Capital Management:

I recently learned that Alan Cohen, the head of credit and distressed debt investing at York Capital Management, is suffering from leukemia. Many of us in the distressed community have worked with or know Alan and his team at York – simply incredible people.

Alan is in need of a blood stem cell match. If you are in New York City, there will be a match drive at York Capital Management on November 19th. Please contact Hunter for details. I really hope to see you there.

If you are outside of New York City, you can visit the National Marrow Donor Program for more details on where and how you can become a possible bone marrow donor (all that’s required is a saliva sample) and possibly make a life-saving transplant possible.

Please forward this to all those interested – the more people we get out, the better.



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I am absolutely thrilled that Greenbackd made The Reformed Broker’s superb Period Table of Finance Bloggers. I slept through most of my high school chemistry classes, but I think Greenbackd occupies the same esteemed place accorded to carbon on the periodic table of elements. Carbon’s got a bad rep at the moment, but that doesn’t bother me. Being a value investor, I know that “Many shall be restored that now are fallen and many shall fall that are now in honor.

Disclosure: Long Carbon (C).

Click to see a readable version (via The Reformed Broker):

Reformed Broker Periodic Table

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Distressed Debt Investing has today launched the Distressed Debt Investors Club, a “community of investors dedicated to sharing ideas and helping each other navigate the sometimes mine-filled path of the distressed debt world.”

Members are admitted on the strength of their application and the thought process evident in the investment idea. Only 250 members will be admitted. Hunter is taking applications for next few weeks and will then admit those accepted to the site at the same time to “allow each member to see other admitted applicant’s ideas and thus begin the process of idea generation and sharing.”

If, like me, deep value, liquidations and activism are your thang, I would encourage you to join. The ability to analyze and trade in the debt side of the ledger will markedly expand your investment universe. Buy up all the bonds and get control like old “Net Quick” Evans or just agitate like Icahn.

Here is the Distressed Debt Investors Club FAQ.

Further questions should be directed to hunter[at]distressed-debt-investing[dot]com.

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Aspen Exploration Corporation (OTC:ASPN) has announced that it will pay a cash dividend of $0.73 per share to stockholders of record on November 16, 2009 from the proceeds of the sale of its California oil and gas assets to Venoco, Inc. $0.73 per share represents $5.3M, which is just over the mid-point of the $5.0M to $5.5M range estimated by the company.

We’ve been following ASPN (see our ASPN post archive) because it’s trading at a discount to its $1.17 per share liquidation value and there are several potential catalysts in the stock, including a 13D filing from Tymothi O. Tombar, a plan to distribute substantially all of the net, after-tax proceeds from the completion of the Venoco sale to its stockholders ($5.3M), and the possibility that the company will dissolve. The stock is down 0.2% since we initiated the position to close yesterday at $0.983. This values the remaining stub of ASPN at $0.253 ($0.983 less $0.73) against a liquidating value I estimate at $0.44 ($1.17 less $0.73). I still think there’s obvious value here, and there might be another interesting play in the stub after the dividend. This is worth watching. It’s should also be noted, as reader bellamyj has pointed out, that, regardless of outcome of the upcoming shareholder vote, ASPN may not liquidate. This is not necessarily a bad thing if the controlling shareholder plans on monetizing the shell and its remaining cash. He owns 20% of the stock, so he’s got some incentive to do so, and he’s paying out a big cash dividend, which is a shareholder-friendly act. That said, it’s not clear whether that dividend was as a result of Timothy O. Tombar’s agitation or a spontaneous effort on behalf of the board. I’ve been wrong about managers before, but hope springs eternal.

Here’s the 8K filing:

On November 2, 2009 Aspen Exploration Corporation (“Aspen”) declared a cash dividend of $0.73 per share. The dividend will be paid to stockholders of record on November 16, 2009, with the dividend being paid on or about December 2, 2009. A copy of the news release describing the dividend is attached hereto as Exhibit 99.1. The distribution follows the final settlement of the sale of Aspen’s California oil and gas assets to Venoco, Inc., at which the parties made a number of immaterial adjustments to the purchase price paid at the June 30, 2009 closing, and made certain other payments that were not determined until after the closing. At the final settlement date Aspen received a net payment from Venoco, but was required to make various payments to third parties which ultimately resulted in a cash outflow from Aspen in an amount not considered to be material.

Aspen expects that after the payment of the dividend, and its anticipated operations through the end of the current calendar year, on December 31, 2009 it will have more than $3 million of working capital remaining. Aspen currently intends to utilize its remaining funds to maintain its corporate status as a reporting issuer under the Securities Exchange Act of 1934 and to explore other business opportunities. Pending developments with respect to any business opportunities Aspen identifies, Aspen may later reevaluate its status and plans and consider alternatives to wind up its affairs. Aspen’s projections and future plans described in this report are “forward-looking statements” (as such term is defined in Section 21E of the Securities Exchange Act of 1934, as amended) which are dependent upon a number of factors. There can be no assurance that Aspen’s projections will prove to be accurate or that Aspen will be able to successfully execute or implement its operations as described herein.

Hat tip Joe G.

[Full Disclosure:  I do not have a holding in ASPN. 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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VaxGen Inc (OTC:VXGN) is all over. The latest 10Q has come out and, while not much has changed, it’s irrelevant in light of the pending deal with OXGN. The liquidation value remains around $23.6M or $0.71 per share. Whether that deal is consummated or not, VXGN shareholders will be worse off. The stock price is in no man’s land at the moment. It’s not cheap enough to buy more, and it’s still trading at a big discount to liquidation value. In this instance, it’s probably justified given the malice the board seems to have towards its shareholders. I’m closing Greenbackd’s position out at yesterday’s closing price of $0.53. Greenbackd is up 12.5% on VXGN on an absolute basis, which is off 13.0% relative to the S&P500. It’s a shame because I had plenty of chances to read the writing on the wall and get out at a decent profit. I didn’t, so more fool me. I hung around for too long, hoping that something would happen. Nothing did. The end.

Post mortem

We started following VXGN (see the VXGN post archive here) because it was trading at a substantial discount to its net cash position, had ended its cash-burning product development activities and was “seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.” VXGN had other potentially valuable assets, including a “state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products” and rights to specified percentages of future net sales relating to its anthrax vaccine product candidate and related technology. I initially estimated the liquidation value to be around $0.84 per share, although that reduced over the holding period to yesterdays $0.71 per share. The authors of a letter sent to the board on July 14 of this year adjudged VXGN’s liquidation value to be significantly higher at $2.12 per share:

Excluding the lease obligations, the net financial assets alone of $37.2 million equate to $1.12 per share. The EBS royalties (assuming a 6% royalty rate and a $500 million contract as contemplated by NIH/HHS and EBS) of $30 million and milestones of $6 million total $36 million of potential additional future value (based clearly on assumptions, none of which are assured), or $1.09 per share. Adding $1.12 and $1.09 equals $2.21 per share.

On the catalyst front, management had said that, if the company was unable to identify and complete an alternate strategic transaction, it proposed to liquidate. One concern of mine was the lawsuit against VXGN by its landlords, in which they sought $22.4M. That lawsuit was dismissed in May, at which point the path for VXGN to liquidate appeared to clear. Unfortunately the board dragged its feet on the liquidation, which, given their relatively high compensation and almost non-existent shareholding, was not difficult to understand.

This state of affairs drew two competing alternate proxy slates seeking nomination to the board of VXGN, Value Investors for Change and the VaxGen Full Value Committee. Value Investors for Change, led by Spencer Capital, filed preliminary proxy documents in August to remove the board. In the proxy documents, Value Investors for Change called out VXGN’s board on its “track record of failure and exorbitant cash compensation”:

VaxGen does not have any operations, other than preparing public reports. The Company has three employees, including the part-time principal executive officer and director, and four non-employee directors. Since the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board has publicly disclosed that it would either pursue a strategic transaction or a series of strategic transactions or dissolve the Company. The Company has done neither. In the meantime, members of the Board have treated themselves to exorbitant cash compensation. Until July 2009, two non-employee members of the Board were paid over $300,000 per year in compensation. The principal executive officer will likely receive over $400,000 in cash compensation this year.

The VaxGen Full Value Committee, comprising BA Value Investors’ Steven N. Bronson and ROI Capital Management’s Mark T. Boyer and Mitchell J. Soboleski, intended to replace the current board with directors who would focus on the following objectives:

1. Returning capital to [VXGN]’s shareholders, including an immediate distribution of $10,000,000 in cash;

2. Terminating [VXGN]’s lease with its landlord, Oyster Point Tech Center, LLC, and settling with the landlord the obligations of [VXGN] on the remaining lease payments;

3. Exploring ways to monetize [VXGN] as a “public shell,” including the utilization of [VXGN]’s Substantial Net Operating Losses; and

4. Protecting for the benefit of shareholders royalty payments receivable from the sale of [VXGN]’s intellectual property.

BA Value Investors had previously disclosed an activist holding and, in a June 12 letter to the board, called on VXGN to “act promptly to reduce the size of the board to three directors; reduce director compensation; change to a smaller audit firm; terminate the lease of its facilities; otherwise cut costs; make an immediate $10 million distribution to shareholders; make a subsequent distribution of substantially all the remaining cash after settling the lease termination; distribute any royalty income to shareholders; and explore ways to monetize the public company value of the Issuer and use of its net operating losses.”

For a while it looked like a decent outcome was possible, but then VXGN threw a spanner in the works, striking an appalling deal with OXGN at a discount to VXGN’s $0.70 close the prior day. It is also priced at a discount to VXGN’s net cash and liquidation values, and payment is to be made in the watered scrip of OXGN, a speculative biotech play (see our more detailed take on the terms of the VXGN / OXGN deal). BA Value Investors and VaxGen Full Value Committee exited the stock shortly thereafter. Value Investors for Change has also been conspicuously silent, so I think we can assume they’ve thrown in the towel.

Disgruntled shareholders have now initiated several class actions against the board of VXGN over possible breaches of fiduciary duty in the sale to OXGN. The board certainly deserved the suit, but a successful outcome in any litigation will be a Pyrrhic victory for participating VXGN shareholders. As I understand it, VXGN’s board is indemnified out of VXGN’s assets and so as any damages award will return to VXGN plaintiffs VXGN’s assets less legal fees and the break fee.

It’s also possible that the merger will not survive the shareholder vote. As reader bellamyj noted, in November 2007 VXGN announced another disastrous merger with Raven Biotechnologies. Over the next few days VXGN stock fell almost 50% and the merger was terminated the day before the special meeting, apparently due to shareholder opposition. Perhaps that will happen again. If it does, OXGN will still tear out ~$2.5M from VXGN, but it may be a better outcome than the deal on the table. If that happens, we’ll revisit VXGN, but for now, we’re going to say, “Good riddance.” VXGN directors, hang your heads in shame.

Hat tip garp.

[Full Disclosure:  We don’t have a holding in VXGN. 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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