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Archive for the ‘Special Situation’ Category

Highway Holdings Limited (NASDAQ:HIHO) is presently the only stock listed on the American Association of Individual Investors website with a Piotroski F_SCORE of 9, the highest possible Piotroski F_SCORE. An F_SCORE of 9 indicates that HIHO is “financially strong” in Piotroski’s framework. An F_SCORE of 8 indicates that it has failed on one dimension, and so on. Piotroski’s F_SCORE probably works better in the aggregate than in the case of a single company simply because the binary signal of each component is insufficiently granular to provide much information. Ideally, I’d identify 30 high BM companies scoring 9 on the Piotroski F_SCORE and construct a portfolio from them. The only problem with the practical implementation of that strategy is there aren’t 30 high BM companies scoring 9 on the Piotroski F_SCORE, so we’re stuck with HIHO as the only representative of Piotroski’s F_SCORE in practice. For that reason, this test is imperfect, but that does not mean it is not useful. It analyses more dimensions that I typically do, so perhaps it will work fine for a single company.

HIHO closed Friday at $1.73, giving it a market capitalization of $6.5M. Book value is $11.4M, or $3.03 per share, which means that HIHO is trading at approximately 57% of book value (a P/B of 0.57 or a BM of 1.75). I estimate the liquidation value to be around $5.2M or $1.39 per share, which means that HIHO is trading at a premium to its liquidation value and is not, therefore, a liquidation play. I regard the $1.39 per share liquidation value as the downside in this instance, and the $3.03 per share book value as the upside.

About HIHO

HIHO is a foreign issuer based in Hong Kong. From the most recent 6K dated November 10, 2009:

Highway Holdings produces a wide variety of high-quality products for blue chip original equipment manufacturers — from simple parts and components to sub-assemblies. It also manufactures finished products, such as LED lights, radio chimes and other electronic products. Highway Holdings operates three manufacturing facilities in the People’s Republic of China.

The value proposition: Piotroski’s F_SCORE

The objective of Piotroski’s F_SCORE is to identify “financially strong high BM firms.” It does so by summing the following 9 binary signals (for a more full explanation, see my post on Piotroski’s F_SCORE):

F_SCORE = F_ROA + F_[Delta]ROA + F_CFO + F_ ACCRUAL + F_[Delta]MARGIN + F_[Delta]TURN + F_[Delta]LEVER + F_[Delta]LIQUID + EQ_OFFER.

The components are categorized as follows:

  • F_ROA, F_[Delta]ROA, F_CFO, and F_ACCRUAL measure profitability
  • F_[Delta]MARGIN and F_[Delta]TURN measure operating efficiency
  • F_[Delta]LEVER, F_[Delta]LIQUID, and EQ_OFFER measure leverage, liquidity, and source of funds

The following are based on HIHO’s March 31 year end accounts set out in its 20F dated June 22, 2009. Here’s how HIHO achieves its F_SCORE of 9:

  1. F_ROA:  Net income before extraordinary items scaled by beginning of the year total assets (1 if positive, 0 otherwise). HIHO’s net income for 2009 was $0.8M/$17.8M = 0.04, which is positive so F_ROA is 1.
  2. F_CFO: Cash flow from operations scaled by beginning of the year total assets (1 if positive, 0 otherwise). HIHO’s cash flow from operations for 2009 was $2.0M/$17.8M = 0.11, which is positive so F_CFO is 1.
  3. F_[Delta]ROA: Current year’s ROA less the prior year’s ROA (1 if positive, 0 otherwise). HIHO’s ROA for 2009 was 0.04, and its ROA for 2008 was -0.09, and 0.04 less -0.09 = 0.13, which is positive so F_ROA is 1.
  4. F_ACCRUAL: Current year’s net income before extraordinary items less cash flow from operations, scaled by beginning of the year total assets (1 if CFO is greater than ROA, 0 otherwise). HIHO’s net income for 2009 was $0.8M/$17.8M less cash flow from operations of $2.0M/$17.8M. CFO > ROA so F_ACCRUAL is 1.
  5. F_[Delta]LEVER: The change in the ratio of total long-term debt to average total assets year-on-year (1 if decrease, 0 if otherwise). HIHO’s long-term debt ratio in 2009 was $0.6M/average($17.8M and $20.5M) = 0.03 and in 2008 was $0.8M/average($22.4M and $20.5M) = 0.04, which is a decrease year-on-year so F_[Delta]LEVER is 1.
  6. F_[Delta]LIQUID: The change in the current ratio between the current and prior year (1 if increase, 0 if otherwise). HIHO’s current ratio in 2009 was $14.9M/$5.9M = 2.53 and in 2008 was $16.8M/$9.2M = 1.83, which means it was increasing year-on-year and so F_[Delta]LIQUID is 1.
  7. EQ_OFFER: 1 if the firm did not issue common equity in the year preceding portfolio formation, 0 otherwise.  HIHO reduced its common equity on issue in 2009 by 99,000 shares, so EQ_OFFER is 1.
  8. F_[Delta]MARGIN: The current gross margin ratio (gross margin scaled by total sales) less the prior year’s gross margin ratio (1 if positive, 0 otherwise). HIHO’s gross margin ratio in 2009 was $6.7M/$33.7M = 0.2 and in 2008 was $5.1M/$33.2M = 0.15. 0.2 less 0.15 = 0.05, which is positive, so F_[Delta]MARGIN is 1.
  9. F_[Delta]TURN: The current year asset turnover ratio (total sales scaled by beginning of the year total assets) less the prior year’s asset turnover ratio (1 if positive, 0 otherwise). HIHO’s 2009 year asset turnover ratio was $33.7M/$17.8M = 1.9  and in 2008 was $33.2M/$20.5M = 1.6. 1.9 less 1.6 = 0.3, which is positive, so F_[Delta]TURN is 1.

HIHO has a perfect 9 on the Piotroski F_SCORE.

The value proposition: Liquidation value

Here is the liquidation value analysis based on its most recent quarterly financial statement to September 30, 2009 (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):

Conclusion

With a book value of $11.4M against a market capitalization of $6.5M, HIHO has a book-to-market ratio of 1.75 and is therefore a high BM stock. This makes HIHO an ideal candidate for the application of the Piotroski F_SCORE, which seeks to use “context-specific financial performance measures to differentiate strong and weak firms” within the universe of high BM stocks. HIHO scores a perfect 9 on the Piotroski F_SCORE, which indicates that it is a “strong firm” within that framework. As a check on the downside, I estimate the liquidation value to be around $5.2M or $1.39 per share. For these reasons, HIHO looks like a reasonable bet to me, so I’m adding it to the Special Situations portfolio.

HIHO closed Friday at $1.73.

The S&P500 Index closed Friday at 1,105.98.

[Full Disclosure: I do not have a holding in HIHO. 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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Cadus Corporation (OTC:KDUS) is an interesting play, but not without hairs on it. First, the good news: It’s trading at a discount to net cash with Carl Icahn disclosing an activist holding in 2002, and Moab Capital Partners disclosing an activist holding more recently. At its $1.51 close yesterday, the company has a market capitalization of $19.9M. The valuation is straight-forward. We estimate the net cash value to be around $20.6M or $1.57 per share and the liquidation value to be around $23.2M or $1.77 per share. The liquidation value excludes the potential value of federal and New York State and City net operating loss carry-forwards. It’s not a huge upside but it’s reasonably certain, and we think that’s a good thing in this market. The problem with the position is the catalyst. It’s a relatively tiny position for Icahn, so he’s got no real incentive to do anything with it. He’s been in the position since 2002, so he’s clearly in no hurry. That said, he’s not ignoring the position. He last updated his 13D filing in March this year, disclosing an increased 40% stake. He’s also got Moab Capital Partners to contend with. Moab holds 9.8% of the stock and says that it “has had good interaction with the CEO of Cadus, David Blitz, and feels comfortable that he will structure a transaction with an operating business that will generate significant long-term value for Cadus holders.” KDUS could end up being a classic value trap, but we think it’s worth a look at a discount to net cash, and two interested shareholders.

About KDUS

From the most recent 10Q:

The Company was incorporated in 1992 and until July 30, 1999, devoted substantially all of its resources to the development and application of novel yeast-based and other drug discovery technologies. On July 30, 1999, the Company sold its drug discovery assets and ceased its internal drug discovery operations and research efforts for collaborative partners.

At June 30, 2009, the Company had an accumulated deficit of approximately $34.9 million. The Company’s losses have resulted principally from costs incurred in connection with its research and development activities and from general and administrative costs associated with the Company’s operations. These costs have exceeded the Company’s revenues and interest income. As a result of the sale of its drug discovery assets and the cessation of its internal drug discovery operations and research efforts for collaborative partners, the Company ceased to have research funding revenues and substantially reduced its operating expenses. The Company expects to generate revenues in the future only if it is able to license its technologies.

The value proposition

KDUS is a relatively simple value proposition. It’s $21M of cash, and $3.1M in Bank of America Columbia Strategic Cash Portfolio (more on this below) against total liabilities of around $0.03M (that’s ~$27,000). We’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):

KDUS Summary

Bank of America Columbia Strategic Cash Portfolio

We are not treating the Bank of America Columbia Strategic Cash Portfolio as cash. The asset has some issues, best described by this passage from the 10Q:

On December 10, 2007, the Fund notified the Company that conditions in the short-term credit markets had created a broad based perception of risk in non subprime asset-backed securities causing illiquidity across the market which led to extreme pricing pressure in those securities. The Fund also notified the Company that it is primarily invested in such securities, that it will begin an orderly liquidation of such securities, that unitholders would no longer be able to redeem their units in the Fund and that the Fund would redeem its units as it liquidated its investments. The Fund also began to value its securities based on market value rather than amortized value for purposes of determining net asset value per unit. The Fund has continued to pay interest monthly. The Company reclassified its investment in the Fund from cash equivalents to short-term investments. Through December 31, 2008, the Fund redeemed 19,445,459 units held by the Company for $18,787,142, which redemption was $658,317 in the aggregate less than the cost of such units. From January 1, 2009 to June 30, 2009, the Fund has redeemed an additional 2,314,849 units in the Fund for $1,934,798 which redemption was $380,051 in the aggregate less than the original $2,314,849 cost of such units. At June 30, 2009, the Company still owned 3,793,032 units in the Fund which was recorded on the balance sheet at $3,135,321. Such 3,793,032 units had a net asset value of $3,306,385 at June 30, 2009. The Fund has advised the Company that the balance or most of the balance, of the Company’s investment in the Fund will be redeemed by December 31, 2009. However, there can be no assurance as to when the redemption will take place or as to the net asset value at which the Company’s investment in the Fund will be redeemed.

We’ve applied a 20% discount to the Strategic Cash Portfolio, which is an additional discount to that applied by KDUS. This may be too conservative, but that is the only way that we feel comfortable.

The catalyst

Carl Icahn filed an amended 13D notice on March 12 this year, indicating an increased 40% holding in KDUS. Moab Capital Partners also holds around 9.8% of KDUS. Said Moab of its KDUS position in the August 16, 2007 13D:

The Reporting Persons have purchased the Shares in open market transactions because in their opinion, the market has not given full appreciation to Cadus’ cash balance, net operating loss carry-forwards and future prospects. Based on publically available information, as of 8/16/07, the company currently holds cash, equivalents and investments in marketable securities of $25.4 million and has significant federal and New York State and City net operating loss carry-forwards. The current market capitalization stands at $23.1 million, a 9% discount to the cash and investments on Cadus’ balance sheet. Moab feels the loss carry-forwards should also be ascribed market value. Cadus is cash flow positive and the share count has not increased in over five years. Moab has had good interaction with the CEO of Cadus, David Blitz, and feels comfortable that he will structure a transaction with an operating business that will generate significant long-term value for Cadus holders.

Moab’s purchase prices – between $1.86 and $1.76 – are higher than the current trading price of KDUS.

Despite these promising sentiments, a catalyst in KDUS is probably not imminent. We believe the position will require some patience for the following reasons: First, KDUS is controlled by Icahn and represents a very small part of his empire. He’s got no real immediate impetus to unlock the value. The play is probably Icahn selling his stake to another investor looking for a shell, or Icahn vending into KDUS some other business. You’d have to be brave / insane / a little of both to buy from Icahn usually, and doubly so in this instance given that he’s got no reason to sell. Second, it’s illiquid. Average volume is close to nada: 900 shares were traded on Friday and 6,500 were traded on Thursday. Even a small retail investor could make the entire market for a day or so. Finally, KDUS is a fairly well known position in the industry. It’s viewed as a stock that has been stagnant for years and unlikely to go anywhere because Icahn is too rich to care. We’ve heard that investing in KDUS is a “right of passage for would-be shell buyers.” Consider yourself warned.

Conclusion

Despite the foregoing misgivings, we’re reasonably comfortable with a position in KDUS for several reasons:

  1. The value. We’re primarily attracted to KDUS’s cash and liquidation values. While it’s not a huge upside from here, it’s downside is very limited. With slightly higher interest rates, KDUS will also likely return to cash flow positive territory.
  2. While Icahn is obviously not seeking an immediate resolution of the position, he controls an asset with a value not yet fully recognised by the market. If a worthwhile transaction materializes like Marley’s ghost before Scrooge’s eyes, we’re prepared to bet that Scrooge will buy us the biggest turkey in the poulterer’s shop. But it won’t happen this Christmas.

KDUS won’t ever be a 10 bagger, or even a double, but it’s got 20 – 30% in it. In an overheated market, that’s good enough for us. For these reasons, we’re adding it to the Greenbackd Portfolio.

KDUS closed Friday at $1.51.

The S&P500 closed Friday at 1,044.38.

[Full Disclosure:  We have a holding in KDUS. 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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MRV Communications Inc  (OTC:MRVC) is an activist play with Value Investors for Change – who recently filed proxy documents in relation to VXGN – seeking to replace the “current, ineffective board of directors” with a new board of “highly qualified, independent directors committed to realizing for all MRVC stockholders the fullest potential of their investments.” Value Investors for Change detail a litany of problems with this stock in the preliminary proxy filing, which range from a simple failure to file financial statements or hold an annual meeting to the mishandling of an acquisition and an options dating scandal. What’s the attraction to the stock? Two things:

1. As at the last filing date, for the period ended March 31, 2008, MRVC’s (unaudited) NCAV was around $113.9M or $0.72 per share, which is yesterday’s closing price. Note that the liquidation value is likely negligible and the financial statements are more than a year out of date (which makes any valuation problematic). One positive is the revenue: the company has annualized revenue of around $500M. A small improvement in margins could result in a big improvement in earnings.

2. Value Investors for Change believes the company has a “valuable franchise and a strong market position” and we like their approach, described in the preliminary proxy documents thus:

The participants in this solicitation (collectively, “Value Investors for Change”) are investors who seek to encourage companies to create, preserve and enhance long-term value for their stockholders, the true owners of America’s public companies. We have developed a sophisticated screening process that we use to identify public companies that we believe (i) are undervalued, (ii) are not adequately serving the interests of their stockholders and (iii) require a new board of directors, so that, with the encouragement of stockholders such as you, we can begin implementing reforms ourselves with the goal of increasing stockholder value.

We’re adding MRVC to our Special Situations portfolio at its $0.72 close yesterday.

About MRVC

From the last 10Q:

MRV Communications is a supplier of communications equipment and services to carriers, governments and enterprise customers, worldwide. We are also a supplier of optical components, primarily through our wholly owned subsidiaries: Source Photonics and Fiberxon. We conduct our business along three principal segments: (1) the network equipment group, (2) the network integration group and (3) the optical components group. Our network equipment group provides communications equipment that facilitates access, transport, aggregation and management of voice, data and video traffic in networks, data centers and laboratories used by telecommunications service providers, cable operators, enterprise customers and governments worldwide. Our network integration group operates primarily in Italy, France, Switzerland and Scandinavia, servicing Tier One carriers, regional carriers, large enterprises, and government institutions. We provide network system design, integration and distribution services that include products manufactured by third-party vendors, as well as products developed and manufactured by the network equipment group. Our optical components group designs, manufactures and sells optical communications products used in telecommunications systems and data communications networks. These products include passive optical network, or PON, subsystems, optical transceivers used in enterprise, access and metropolitan applications as well as other optical components, modules and subsystems. We market and sell our products worldwide, through a variety of channels, which include a dedicated direct sales force, manufacturers’ representatives, value-added-resellers, distributors and systems integrators.

In July 2007, we completed our acquisition of Fiberxon, a PRC-based supplier of transceivers for applications in metropolitan networks, access networks and passive optical networks, for approximately $131 million in cash and stock. Fiberxon is part of the Optical Components group, and its results of operations are included in our Consolidated Financial Statements from July 1, 2007.

The value proposition

The main problem with any analysis of MRVC is that the financial statements are more than a year out of date. As at the last filing, MRVC’s NCAV was around $113.9M or $0.72 per share. We believe that the liquidation value is likely neglible. We’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):

MRVC SummaryAs at the last filing date, the company had quarterly revenue of $125M, which annualizes to around $500M. A small improvement in margins could result in a big improvement in earnings. Value Investors for Change seek to provide that improvement, which they describe in the preliminary proxy documents set out below.

The catalyst

From the preliminary proxy documents:

REASONS FOR THE SOLICITATION

Value Investors for Change believes that the Company has a valuable franchise and a strong market position. However, we believe this value has been masked and the Company’s potential remains unrealized due to the Board’s lack of effective oversight and appropriate corporate governance policies.

Our Nominees will provide new independent voices in the Company’s boardroom and they will seek to start the process of rebuilding stockholder value. Our Nominees are committed to fully implementing and embracing long overdue corporate governance reforms.

We do not believe the current directors serving on the Board are acting in the best interests of stockholders and are concerned that this Board will fail to take the steps we believe are necessary to preserve stockholder value.

Fate of the Company’s remaining cash balance

This Annual Meeting may be the only opportunity for stockholders to determine the fate of MRVC’s substantial remaining cash balance (this amount was $73.7 million as of June 30, 2009, including short-term investments, as per the Company’s press release attached as an exhibit to its Form 8-K filed on July 27, 2009). Actions and statements by the Company indicate that the existing management and Board are prepared to ignore the best interests of the Company’s stockholders. Indeed, their track record of negative operating cash flows over the past several years is reflective of the same. If the incumbent Board and management are not replaced at this Annual Meeting, stockholders may not only lose any hope of determining the fate of MRVC’s remaining cash reserves, but also will likely have their share value further eroded. If elected to the Board, none of our Nominees intend to accept any cash fees from the Company. The Funds’ only interest here is as a stockholder.

Deficient Corporate Governance Procedures; Recent Options Scandal

The Company continues to be embroiled in an options scandal. We believe the Board was in need of change even before the current scandal broke, but the options scandal has served to underscore the need for urgent reform.

According to a press release issued by the Company on June 5, 2008, beginning in the middle of 2006 through early 2007, MRVC conducted an informal review of its share-based award practices and concluded that there was no evidence that grant dates of options were designed to occur on dates with more favorable exercise prices (i.e., on dates with lower market prices). Given subsequent events, it appears though that this review, which lasted over six months, was inadequate and did not discover certain inappropriate practices which had taken place. During this lengthy investigation and after its completion, the Company filed numerous quarterly reports and an annual report on Form 10-K for the fiscal year ended December 31, 2007, certifying to the accuracy of those financial statements. Well after this investigation and after these filings, management then determined that the conclusions reached from the earlier review were incorrect with respect to certain options granted during the period from 2002 through the first quarter of 2004. The Board determined that the financial statements for the periods from 2002 to 2008 and the related reports of MRVC’s independent public accountants, earnings press releases, and similar communications previously issued by MRVC should not be relied upon as a consequence of the pending restatement of its historical financial statements. It has been over a year since the press release announcing this major problem for the Company was issued and yet no restatements of the Company’s financial statements have been filed.

As a result of these actions,

• the Company currently faces an inquiry by the Securities and Exchange Commission (the “Commission”);

• the Company has been unable to file its annual report on Form 10-K for the year ended December 31, 2008;

• the Company has been unable to file its quarterly reports on Form 10-Q for the periods ended June 30, 2008, September 20, 2008, March 31, 2009 and June 30, 2009;

• the Company has received 6 determination letters from NASDAQ informing the Company that it would be subject to delisting as a result of its failure to timely file its financial statements and, on June 17, 2009, NASDAQ suspended the listing of the Company’s common stock from the NASDAQ Stock Market as a result of the Company’s failure to file such financial statements;

• on August 19, 2009, the NASDAQ Stock Market announced that it will delist the Company’s common stock (NASDAQ will file a Form 25 with the Commission to complete the delisting which becomes effective ten days after the Form 25 is filed); and

• the Company faces various lawsuits related to its stock option practices.

These option grants raise serious questions about the Board’s judgment and apparent disregard for the interests of stockholders. Such behavior raises significant doubts about the integrity of the Board.

Mishandling of the Acquisition of Fiberxon

On June 26, 2007, the Company amended an Agreement and Plan of Merger between affiliates of the Company and Fiberxon, Inc. that was initially entered into on January 26, 2007 (the “Merger Agreement”) to, among other things, remove as a condition precedent for the consummation of the merger that Fiberxon, Inc. deliver to MRVC its audited consolidated financial statements prior to the closing of the transaction. This amendment was unanimously approved by MRVC’s Board despite their knowledge that:

• there were allegations of financial and accounting irregularities that called into question the reliability of Fiberxon’s consolidated financial statements for its fiscal years ended December 31, 2004 and 2005 raising serious concerns regarding Fiberxon’s financial and reporting processes;

• in addition to the irregularities, Fiberxon’s independent auditors called into question the commitment of Fiberxon’s management to maintain reliable financial reporting systems, including accounting books and records, in conformity with accounting principles generally accepted in the United States and the People’s Republic of China;

• in the view of Fiberxon’s auditors, these matters also raised doubt on the ability of Fiberxon’s existing management to provide its auditors the written representations required under auditing standards generally accepted in the United States; and

• the suspension by the independent auditors of its audit of Fiberxon’s financial statements in June 2007 would likely have an adverse impact on the Company’s ability to obtain and file Fiberxon’s financial statement within the time allowed by, and in the form and content required by, the Commission’s rules thereby leading to:

• MRVC not being eligible to use the Commission’s short-form registration statement on Form S-3 to register the issuance of its securities; and

• the delisting of the Company’s common stock from the NASDAQ Stock Market and, as a result of the delisting, a default on the Company’s outstanding convertible notes.

Additionally, the Board was aware that if MRVC delayed filing with the Commission certain financial statements relating to the Fiberxon acquisition, as required by the Commission, this would put at risk the Company’s ability to use an effective registration statement to issue securities, thus handcuffing the Company’s ability to raise funds if it became necessary to do so. We believe this lack of regard that the Board showed for the stockholders of the Company highlights the incompetence of the Board and the management of the Company.

Failure to Hold an Annual Meeting

The Annual Meeting is the once-a-year event for all stockholders to voice their views and concerns. Despite the Company’s professed commitment to stockholder democracy and good corporate governance, the Company appears unable to take appropriate actions regarding governance.

On July 20, 2009, Spencer Capital Opportunity Fund, LP filed a lawsuit in Delaware pursuant to Section 211(c) of the Delaware General Corporation Law requesting that the Court of Chancery of the State of Delaware (the “Chancery Court”) order MRVC to hold its 2009 annual meeting of stockholders without delay and to grant other relief deemed appropriate by the Court. Under Delaware law, if a corporation fails to hold an annual meeting of stockholders or take action by written consent to elect directors for a period of 13 months, any stockholder may petition the Chancery Court to order that a meeting be held. MRVC has not held an annual meeting of stockholders since May 29, 2007 and accordingly has not met its obligations under Delaware law.

Pursuant to a Stipulated Order entered into in the Chancery Court dated August 7, 2009 (the “Order”), MRVC will hold its Annual Meeting on or before November 11, 2009. In the event that the Company’s Board or its outside auditor determines that the Company’s restatement of its financial statements is complete such that the Annual Meeting could be held at a date earlier than November 11, 2009, then the Company will hold the Annual Meeting not more than 40 days after this determination.

Damage to Company’s Credibility

It seems clear to us that the crucial issue of the credibility of the Company’s Board and management has been identified both outside and inside the Company. We believe MRVC is at a crossroads. The Company is beset by problems arising out of actions taken by management and overseen by the Board. Moreover, these issues have diverted the Board and management from attending to the successful operation of the business. In the face of these developments, the Company’s stock price meaningfully lags behind its peers. It is up to us, as MRVC’s stockholders, to send a clear and definite message to MRVC’s Board and management that meaningful change is needed. By voting for our Nominees, you will join us in sending that message to the current Board and help put MRVC back on the right course.

Dismal Share Price Performance

Last, but certainly not least, is MRVC’s ever-worsening stock price. Between January 1, 2005 and July 20, 2009, the date on which Spencer Capital Opportunity Fund, LP, filed a complaint requesting that the Chancery Court compel the Company to hold its Annual Meeting, MRVC’s stock price has fallen by 87.2%. We believe this is due to the perception of the investment community that this Board will destroy the Company’s remaining value.

An action plan to rebuild stockholder value is needed, and fast. Value Investors for Change proposes to take the following steps which we believe will return the Company to a positive track and serve the best interests of all of MRVC’s stockholders:

(1) Restore confidence in the Board and management by:

• appointing new independent, unbiased directors to the Board who are both expertly capable and determined to steer a new course for the Company; and

• instituting corporate governance reforms, including applying a pay for performance compensation plan for management.

(2) Create and implement a new corporate strategy by:

• assessing the Company’s competitive prospects and strategic options for growth and profitability and implementing a new corporate strategy; and

• enlisting the guidance of telecommunications industry executives to assist with this review and strategy.

(3) Resolve the outstanding accounting, legal and regulatory issues by:

• concluding the internal accounting review and taking appropriate steps to rectify this matter;

• coming into full compliance with the rules of the Commission; and

• engaging with plaintiffs in the various lawsuits against the Company to seek timely resolutions.

Value Investors for Change urges you to vote FOR the Funds’ proposal to elect our Nominees on the enclosed WHITE proxy card, thereby ending this disregard for stockholder interests. For too long, MRVC has operated without proper oversight by the Board and has hidden behind poor corporate governance policies that neither respect the interests of the Company’s stockholders nor provide meaningful Board accountability. Vote to elect a new slate of directors who are willing to stand up for the interests of all stockholders and work to maximize stockholder value.

Conclusion

MRVC is an activist play with Value Investors for Change. Two things attract us to the stock:

1. MRVC’s NCAV is around $113.9M or $0.72 per share, although we note that the liquidation value is likely negligible and the financial statements are more than a year out of date, which makes any valuation problematic. One positive is the revenue: the company has annualized revenue of around $500M. A small improvement in margins could result in a big improvement in earnings.

2. We like the approach of Value Investors for Change.

We’re adding MRVC to our Special Situations portfolio at its $0.72 close yesterday.

MRVC closed yesterday $0.72.

The S&P500 closed yesterday at 1,025.56.

[Full Disclosure: We do not have a holding in MRVC. 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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Robert L. Chapman, Jr. recently resigned as Chief Executive Officer of EDCI Holdings Inc (NASDAQ:EDCI) to focus on Chapman Capital in what he says “may be the most dynamic passive investment environment of a lifetime.” In the announcement to the market, said Chapman in his inimitable style:

Having ablated and amputated certain incontinent expenditures, and set EDCI on a prudent, judicious course of balanced scrutiny of acquisition vs. recapitalization, in addition to orchestrating EDC’s Blackburn-Hannover consolidation plan, I avidly look forward to shifting all my attention to Chapman Capital and related investment portfolios during what may be the most dynamic passive investment environment of a lifetime.

We’ve written previously about Chapman’s fondness for “asset-rich companies with battered stock prices,” which sees him frequently operating in the universe of stocks trading below liquidation value. We think it’s a good sign for sub-liquidation value investors like us that Chapman is back.

Read the announcement here:

EDCI Holdings, Inc. Announces Resignation of Robert L. Chapman, Jr. as Chief Executive Officer

NEW YORK, July 2 /PRNewswire-FirstCall/ — EDCI Holdings, Inc. (Nasdaq: EDCI – News; “EDCI”), the holding company for Entertainment Distribution Company, Inc., the majority shareholder of Entertainment Distribution Company, LLC (“EDC”), a European provider of supply chain services to the optical disc market, today announced the resignation of Robert L. Chapman, Jr. as Chief Executive Officer. Mr. Chapman, who also has resigned from EDCI’s Board of Directors, had replaced Interim Chief Executive Officer Clarke H. Bailey, who himself now replaces Mr. Chapman as EDCI Chief Executive Officer and EDC Interim Chief Executive Officer, effective July 2, 2009.

Mr. Chapman commented, “When I accepted the invitation six months ago from EDCI and EDC’s Boards of Directors to lead these companies through the difficult industry and global recessionary environment that characterized the first half of 2009, I conceived and preached the mantra of ‘Don’t Burn It & Don’t Blow It’ as it related to preserving EDCI’s sacred cash holdings. Furthermore, the seemingly constant headwinds of operating in the disc manufacturing and distribution business, with Universal Music Group as EDC’s supermajority customer, required immediate countermeasures to bolster EDC’s liquidity and longevity. Having ablated and amputated certain incontinent expenditures, and set EDCI on a prudent, judicious course of balanced scrutiny of acquisition vs. recapitalization, in addition to orchestrating EDC’s Blackburn-Hannover consolidation plan, I avidly look forward to shifting all my attention to Chapman Capital and related investment portfolios during what may be the most dynamic passive investment environment of a lifetime.”

Horace Sibley, Chairman of EDCI’s Governance Committee, commented, “In the CEO position at EDCI and EDC, Bob has demonstrated the fortitude to make tough decisions to solve tough problems. Over just a few months, Bob has reformulated the culture and streamlined the cost structure in ways that should benefit both EDCI and EDC for years to come. While the Boards of both EDCI and EDC were disappointed to learn of Bob’s decision to re-focus all his energy on his investment business, there can be no doubt that Clarke Bailey, Chairman of the Board, is the ideal leader to whom the baton should be handed to serve as CEO once again.”

Mr. Chapman joined EDCI’s Board of Directors as an independent director in November 2007, and is the Managing Member of Chapman Capital L.L.C., an investment advisor focusing on activist investing and turnaround investing. Prior to founding Chapman Capital in 1996, Mr. Chapman co-managed the Value Group within Scudder Stevens & Clark, which followed employment with NatWest Securities USA and Goldman, Sachs & Co.

Mr. Bailey joined EDCI’s Board of Directors in December 1990. From September 2008 to January 2009, he served as EDCI’s Interim Chief Executive Officer, after serving as EDCI’s Chief Executive Officer from October 2003 to November 2006 and from December 1990 to March 1994. Mr. Bailey has served as Chairman EDCI’s Board of Directors since October 1999, following his service as EDCI’s Vice Chairman from November 1992 to June 1996. Currently, Mr. Bailey serves as a director on the Boards of Directors of both Iron Mountain Incorporated and ACT Teleconferencing, Inc.

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Dr. Roderick Wong has withdrawn his slate of director nominees for election at Facet Biotech Corporation’s (NASDAQ:FACT) 2009 annual meeting of stockholders. Wong’s withdrawal means that our investment thesis is gone, and we’re closing the position.

We opened the position at $9.13 and closed it at $8.96, which means we’re down 1.86% on an absolute basis. The S&P500 Index closed at 850.08 on the day we opened the position and closed yesterday at 919.53, which means we’re off 10% on a relative basis.

Post mortem

FACT was a new category of investment for us: special situations (see our post archive here). It was an activist play with a catalyst in the form of Dr. Roderick Wong’s nomination for the annual meeting of an alternative slate of directors, including well-known activist investor Robert. L. Chapman. The dissident slate called for a cash dividend of up to $15 per share and demanded the sale of the other non-cash assets, estimating they may be worth an additional $8 to $16 per share, which represented a substantial upside at FACT’s $9.13 closing price (equivalent to a market capitalization of $216.8M) at the time we opened the position. We estimated the liquidation value to be anywhere from nil to $259M or ~$10.85 per share and the net cash value from nil to $228M or $10.54 per share, so it wasn’t a typical liquidation play for us. The company was burning through its cash at a rapid rate, so the main risk to the investment was that the status quo was maintained. Although Wong et al held only 0.5% of FACT’s outstanding stock, we thought the presence of Bob Chapman and other noted activist and deep value investors on the register (Baupost Group holds ~18%) indicated a good chance of success for the dissidents.

The position started falling apart when Chapman and Broenniman withdrew their consents:

In March 2009, Facet Biotech Corporation (the “Company”) received a notice of intention to nominate five candidates for election to the Company’s five-person Board of Directors at the Company’s 2009 Annual Meeting of Stockholders (the “Annual Meeting”). Sent by Roderick Wong, the notice stated the intent to nominate Philip R. Broenniman, Robert L. Chapman, Jr., David Gale, Bradd Gold and Roderick Wong, for election to the Company’s Board of Directors. On April 30, 2009, Philip R. Broenniman and Robert L. Chapman, Jr. each separately notified the Company in writing that they were withdrawing their consent to being named as nominees for election to the Company’s Board of Directors at the Annual Meeting.

And the death knell was Wong withdrawing the entire slate:

RODERICK WONG WITHDRAWS DIRECTOR NOMINATIONS

Redwood City, Calif., May 4, 2009 — Facet Biotech Corporation (Nasdaq: FACT) and Roderick Wong, M.D., today jointly announced that based on productive discussions between Facet and Dr. Wong, Dr. Wong has withdrawn his slate of director nominees for election at Facet’s 2009 annual meeting of stockholders and will not present, recommend or move for the election of any of the nominees he had submitted for election.

Faheem Hasnain, president and chief executive officer of Facet, said, “We thank Dr. Wong for raising important concerns held by some of Facet’s stockholders and advocating for these stockholders. Our Board values his insights regarding the future of the company and we look forward to an ongoing constructive dialogue with Dr. Wong.”

Dr. Wong said “I am pleased to have brought this situation to an amicable conclusion. Our discussions have focused on issues that are critical to Facet’s success and I appreciate the time and attention that the company has devoted to our discussions.”

Wong gives no indication in the press release what, if any, concessions were made by FACT to bring the situation to an “amicable conclusion.” There were no reasons given for Chapman and Broenniman’s withdrawl either. It could be that, without Chapman and Broenniman, Wong felt he didn’t have the support to roll the board and so sought a face-saving resolution with the company. We don’t know, but we welcome speculation in the comments.

[Full Disclosure:  We do not have a holding in FACT. 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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Genaera Corporation (NASDAQ:GENR) is a first for us: a short play. The company has announced that the board of directors has approved a Plan of Liquidation and Dissolution forecasting distributions of between $0.002 and $0.0173 per share contingent on a sale of its assets. We believe the most likely outcome to be a distribution of nil. The stock is currently at $0.18. The risk to the short position is a sale of the company’s intellectual property, which we think is unlikely for the reasons we describe below.

About GENR

GENR is a biopharmaceutical company focused on advancing the science and treatment of metabolic diseases. It has announced a plan to liquidate:

Genaera Corporation Announces Approval of Plan of Liquidation and Dissolution by Board of Directors

Plymouth Meeting, PA – April 28, 2009 – Genaera Corporation (the “Company”)(NASDAQ: GENR) today announced that its Board of Directors has determined, after extensive and careful consideration of the Company’s strategic alternatives, that it is in the best interests of the Company and its stockholders to liquidate the Company’s assets and to dissolve the Company. The Company’s Board of Directors has approved a Plan of Complete Liquidation and Dissolution of the Company (the “Plan of Dissolution”), subject to stockholder approval. The Company intends to hold a special meeting of stockholders to seek approval of the Plan of Dissolution and has filed preliminary proxy materials with the Securities and Exchange Commission (“SEC”) and will file definitive proxy materials in the near future.

The Plan of Dissolution contemplates an orderly wind down of the Company’s business and operations. If the Company’s stockholders approve the Plan of Dissolution, the Company intends to file articles of dissolution, satisfy or resolve its remaining liabilities and obligations, including but not limited to contingent liabilities and claims, lease obligations, severance for terminated employees and costs associated with the liquidation and dissolution, and attempt to convert all of its remaining assets into cash or cash equivalents. Based on current projections of operating expenses and liquidation costs the Company currently estimates that it will not make liquidating distributions to stockholders unless and until a sale of one or all of its assets has been consummated. Following stockholder approval of the Plan of Dissolution and the filing of articles of dissolution, the Company would delist its common stock from NASDAQ.

If, prior to its dissolution, the Company receives an offer for a corporate transaction that will, in the view of the Board of Directors, provide superior value to stockholders than the value of the estimated distributions under the Plan of Dissolution, taking into account all factors that could affect valuation, including timing and certainty of closing, credit market risks, proposed terms and other factors, the Plan of Dissolution could be abandoned in favor of such a transaction.

The value proposition

GENR has funded its operations primarily from the proceeds of public and private placements of its securities and through contract and grant revenues, research and development expense reimbursements, the sale of a Pennsylvania research and development tax credit carry forwards and interest income. It has not nor will it ever have products available for sale and has incurred losses since inception.

The notice of special meeting filed yesterday anticipates a maximum distribution of $0.0173 per share and the company does not expect to make a distribution “unless and until a sale of one or all of our assets has been consummated.” The balance sheet as at March 31, 2009 shows $5.3M in cash and equivalents less $2M in liabilities, which equates to a net cash value of $3.3M or $0.19 per share before we deduct the following:

  • ongoing operating expenses;
  • expenses incurred in connection with extending directors’and officers’ insurance coverage;
  • expenses incurred in connection with the liquidation and dissolution process;
  • severance and related costs; and
  • professional, legal, consulting and accounting fees.

Assuming between $3M and $4M for the foregoing, GENR has between $0.02 per share and nil net cash value in liquidation, with nil being more likely.

The company’s own estimates are as follows:

Based on our current projections of operating expenses and liquidation costs, we currently estimate that distributions to stockholders would only occur in the event of a consummation of the sale of one or more of our assets:

genr-summary

(1) Estimated salaries and related benefits for employees through May 31, 2009.
(2) Represents final research and development expenses related to the wind down of our trodusquemine program, including clinical trial costs, third-party contract research costs and manufacturing expenses.
(3) Other operating expenses consists of facilities expenses, legal, accounting and intellectual property expenses, consulting and other fees and insurance costs including the payment of $255,000 for directors and officers liability insurance covering six years from the date of stockholder approval of the Plan of Dissolution.
(4) Estimated cash use for severance payments to employees remaining after March 31, 2009, including Executive Officers. Amounts included in the table for Executive Officers do not include amounts due under the Executive Officers and Dr. Wolfe’s change of control agreements. See “Interests of Certain Directors and Executive Officers in Approval of the Plan of Dissolution – Summary of Benefits of Certain Executive Officers” for additional information related to severance payments to the Executive Officers. The severance costs shown in the table include $1,012,000 to be paid to the Executive Officers, $516,000 to be paid to other employees, $95,000 of associated payroll taxes and $42,000 for ongoing health benefits under employee severance agreements for all employees.

The risk to this analysis is the company actually manages to sell its intellectual property assets, and we’re going to explore GENR’s efforts to sell those assets in some detail below.

Likelihood of asset sales

According to the proxy statement for the special meeting, GENR has made extensive efforts to sell or license its intellectual property without success since 2008. Throughout 2008 management contacted over 90 prospective strategic partners, both domestic and international. This resulted in approximately 25 companies signing non-disclosure agreements and receiving non-public evaluation materials. Subsequently, two parties submitted expressions of interest in the purchase of two separate assets.

GENR and its legal advisors have been engaged in discussions with one prospective purchaser in an attempt to reach an agreement regarding the acquisition price and the other terms of a definitive agreement. According to GENR, the parties are generally in agreement on the proposed terms of a definitive agreement and continue to communicate, but have been unable to complete the transaction. With regard to the second potential purchaser, GENR is currently engaged in discussions in an attempt to reach an agreement regarding the acquisition price of the other asset.

In 2009, as a result of limited interest in GENR’s other assets and the unanticipated delay in the consummation of the transaction, GENR engaged of outside parties to assist in licensing and/or partnering its trodusquemine program. The scope of the oustide engagement included searching for a purchaser, licensee or partner acceptable to GENR and assisting it in negotiating the financial aspects of a transaction.

Between January and March 2009, the oustide parties contacted 43 potential purchasers and/or partners, which resulted in 23 rejections, 9 pending reviews and the execution of 11 non-disclosure agreements to review non-public evaluation materials. The review of confidential information resulted in six rejections and meaningful discussions with three potential licensors and/or purchasers.

At the April 8, 2009 meeting of the board, the board reviewed the prospects for partnering and/or licensing the trodusquemine program, the status of the sales of two of its assets, as well as alternative means to fund the company. As neither of the asset sales had been consummated or were projected to be consummated imminently, the board instructed management to prepare a plan of dissolution in conjunction with the outside counsel for review and consideration at the next board meeting.

Conclusion

GENR is a short play because the current stock price is almost ten times the company’s projected distribution in the liquidation of the company. The stock is currently at $0.18. The company forecasts distributions of between $0.002 and $0.0173 per share contingent on a sale of its assets. We believe there is a very real possibility the distribution could be nil.  The risk to the short position is a sale of the company’s intellectual property, which we think is unlikely.

Hat tip Anon.

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Facet Biotech Corporation (NASDAQ:FACT) is a new category of investment for us: special situations. It’s an activist play with a catalyst in the form of Dr. Roderick Wong’s nomination for the annual meeting of an alternative slate of directors, including well-known activist investor Robert. L. Chapman. The dissident slate has called for a cash dividend of up to $15 per share and demanded the sale of the other non-cash assets, estimating they may be worth an additional $8 to $16 per share, which represents a substantial upside at FACT’s $9.13 closing price yesterday. The company currently has a market capitalization of $216.8M. We estimate the liquidation value to be anywhere from nil to $259M or ~$10.85 per share and the net cash value from nil to $228M or $10.54 per share. The company is burning through its cash at a rapid rate, so the main risk to the investment is that the status quo is maintained. Although Wong et al hold only 0.5% of FACT’s outstanding stock, we think the presence of Bob Chapman and other noted activist and deep value investors on the register (Baupost Group holds ~18%) indicates a good chance of success for the dissidents. It’s not one for the Greenbackd Portfolio, but it’s an interesting play, so we’re creating a new Special Situations portfolio and adding FACT as our first holding.

About FACT

FACT is a biotechnology company spun out of PDL Biopharma, Inc. (PDL) in December last year. It operates what previously had been PDL’s biotechnology business. In the spin-off, PDL contributed to FACT certain intellectual property associated with the biotechnology business, $405 million in cash, an assignment of future payments from Biogen Idec Inc. and Bristol-Myers Squibb Company (BMS) and royalty and milestone revenues from certain other agreements. FACT is now engaged in “identifying and developing oncology therapeutics.” It has four antibodies in the clinic for “oncology and immunologic disease indications,” of which two are in phase II and two in phase I. The company has several “investigational compounds in various stages of development” for the treatment of cancer and immunologic diseases, three of which it is developing with Biogen Idec and one with BMS. The company’s investor relations website is here.

The value proposition

The company’s hard asset value (which excludes the PDL biotechnology business intellectual property) rests mainly on its holding of cash and equivalents contributed by PDL (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):

fact-summary1

Balance sheet adjustments

We need to make the following adjustments to the balance sheet estimates above:

  • Cash burn: We’ve assumed cash burn to the annual meeting on May 26 of $40M (management estimates $90M for the year).
  • Off-balance sheet arrangements and contractual obligations: According to FACT’s 10K, it has no off-balance sheet arrangements, but its contractual obligations are extensive, including $220M in lease payments and related obligations, $10M in contract manufacturing obligations and $2M in equipment operating leases for a grand total of $234M.
  • Termination payments: If Wong’s nominees are elected to the board at the annual meeting, five officers will receive around $10M in termination payments. Not bad for a few quarters work. Those payments are pretty obscene, so we’ve set them out below:fact-termination1

If the company sustains another twelve months of cash burn and must pay out all its contractual obligations, it has next to no value in liquidation aside from the intellectual property associated with PDL’s biotechnology business, the value of which we can’t estimate. On that view, we estimate the liquidation to be nil. If the dissidents get control quickly, stop the cash burn and can sublease or assign the leases or otherwise negotiate the contractual obligations away, then we estimate liquidation value of around $259M or ~$10.85 per share and net cash value of $228M or $10.54 per share plus whatever PDL’s biotechnology IP is worth (the dissidents estimate between $8 and $16 per share). Of course, the dissidents have a different plan in mind, calling for an immediate cash dividend of up to $15 plus the sale of the company to crystalize the value of the non-cash assets.

The catalyst

The FACT situation kicked off with the dissident slate’s March 30 press release:

Facet Alternate Director Slate Proposed

Cash Dividend, Sale of Company Demanded

NEW YORK, March 30 /PRNewswire/ —

* Alternate Slate Delivered to Facet: On March 26, 2009, a proposed alternate slate of directors (the “Alternate Slate”) was delivered to Facet Biotech Corporation (“Facet,” or the “Company”; http://www.facetbiotech.com) CEO and President Faheem Hasnain (“Mr. Hasnain”), and to the Facet Board of Directors (the “Incumbent Board”), with a stated platform of maximizing shareholder value via a substantial cash dividend followed by a sale of the Company. Facet apparently has determined not to make immediate public disclosure to its owners that such an alternative to the Incumbent Board now is available.
* Alternate Slate Concern Heightened Following Dialog with Facet Management: Following receipt of notice of the Alternate Slate, Mr. Hasnain and CFO Andrew Guggenhime held a conference call with three members of the Alternate Slate, including nominating shareholder Dr. Roderick Wong. On the call, Dr. Wong expressed extreme dissatisfaction with the rapid cash-depleting business plan of the Company, expected to approach $100 million in 2009 alone. Moreover, the Alternate Slate made clear its view that a substantial cash dividend, followed by a sale of the Company, is favored by a preponderance of Facet’s owners. Based on the unsatisfactory response from Facet management to these presented views, the Alternate Slate determined it prudent to make public disclosure of its formation and of its conference call with the Company.
* Immediate And Substantial Cash Dividend Of Up To $15 Per Share Demanded: Subject to a review of the Facet 2008 Form 10-K, which should be released by the Company on March 31, 2009, the Alternate Slate is seeking the immediate distribution of a substantial portion – up to $15 per share – of the approximately $17 per share on the Company’s balance sheet as of December 31, 2008, followed by a sale of Facet.
* Non-Cash Assets May Be Worth An Additional $8 – $16 Per Share: Subject to further review, the Alternate Slate currently estimates that the Company’s non-cash assets, including the antibody technology platform and the drug candidates, could yield an additional $8 – $16 per share via a sale of the Company.
* Liquidation Demand From Alternate Slate Follows Similar Action At Other Companies: The Alternate Slate notes that similar demands were made of management at Northstar Neuroscience, Inc. and, most recently, at Avigen, Inc. As with Facet, investors in these two companies insisted upon and, appropriately, were rewarded with corporate liquidations.

As demonstrated by the Company’s public valuation near the low end of the range within the biotech sector, as measured by a variety of metrics, the Alternate Slate believes the preponderance of Facet shareholders have little confidence in the strategic plans supported by management and the Incumbent Board. Moreover, given that the top five (by percentage ownership per Securities and Exchange Commission public filings) Facet owners appear to represent over 45% of the outstanding shares, the Alternate Slate believes that the Company’s management and Incumbent Board may, with only modest effort, conclude that the majority of Facet investors agree with the cash dividend and sale platform endorsed by the Alternate Slate.

According to S.E.C. filings, these top-five holders are:

1. Baupost Group, LLC 16.68%
2. Iridian Asset Management, LLC 12.39%
3. Goldman Sachs Group, Inc. 6.20%
4. AXA 5.29%
5. Barclays Global Investors 4.82%

Dr. Roderick Wong then nominated an alternative slate of directors, including Philip R. Broenniman, Robert L. Chapman, Jr., David Gale, Bradd Gold and Roderick Wong. While we don’t know much about Wong, we’ve written about Bob Chapman before (see our earlier post, Where in the world is Chapman Capital). In response to Wong’s nomination, FACT sent the following letter to Wong on April 6:

Dear Dr. Wong:

We are in receipt of your letter dated March 26, 2009 and the accompanying notice of your intent to nominate directors at our 2009 Annual Meeting of Stockholders. We welcome the input of our stockholders, and our Board has considered the suggestions articulated in your letter and March 30, 2009 press release.

Our Board and management remain firmly committed to increasing the value of the Company to our stockholders. To this end, our Board has regularly evaluated the Company’s business plan as well as strategic alternatives to create value for our stockholders since the Company’s spin-off less than four months ago. In this regard, we note the following:

· Facet has undergone a rigorous analysis of its strategy, both in connection with our recent spin-off and subsequently.

· Our goal has been to focus on therapeutic areas that we believe hold the greatest opportunity for us to create meaningful value for our stockholders. As a result of our continued review and analysis, we are focusing our efforts on oncology.

· We believe our development programs and technology capabilities represent substantial potential value for our stockholders. Indeed, our collaborations with Bristol-Myers Squibb and Biogen Idec on certain of our development programs validate the value of these programs. We firmly believe that by continuing to advance these and other programs, as well as our proprietary protein engineering technology platform, we can enhance value for our stockholders.

· Furthermore, in an effort to maintain strict financial discipline, we have aggressively lowered our cost structure. In particular, as we recently announced, we have reduced our headcount and our overall anticipated cash utilization in 2009, thereby extending the time period for which we have funding.

We believe that our current Board, comprised of four independent directors and Faheem Hasnain, our President and Chief Executive Officer, and the management of the Company have a record of working to advance the interests of all stockholders, consistent with their fiduciary duty.

Based on our strategic review and ongoing analyses, the Board believes that our current strategic plan is the right plan to build value for our stockholders. Since we are committed to considering all

alternatives to creating value, we have reviewed your proposal for the liquidation of the Company. We have, however, unanimously concluded that the interests of our stockholders are best served by continuing to focus on executing our current strategy. Moreover, the Board believes that the assumptions stated in your March 30 press release with regard to the Company’s ability to distribute a significant cash dividend do not properly take into account, among other things, the Company’s significant lease and other obligations, which are detailed in the Company’s 2008 Annual Report on Form 10-K. Further, we believe that in this current economic environment, your proposals would significantly impair the Company’s ability to realize appropriate value for its existing assets.

Accordingly, we do not believe that your suggestions are in the best interests of our stockholders. We intend to maintain an open and active dialogue with our stockholders as we continue to work to enhance stockholder value.

Sincerely,

Brad Goodwin

Chairperson of the Board

Seth Klarman’s Baupost Group filed its 13D notice on April 8, disclosing a 17.8% holding in FACT. We’ve written extensively about Klarman’s liquidation value investment process (see our Klarman post archive here). Klarman is a noted deep value investor. While the Baupost Group’s position was built at a lower price than persists today, we feel reasonably comfortable following Klarman into a position.

Conclusion

FACT is a special situation: an activist play with an upside of $15 per share in a special cash dividend and an additional $8 to $16 per share upon the sale of the other non-cash assets. The downside is potentially unlimited. The dissidents appear to be led by Dr. Roderick Wong, and include noted activist investor Robert. L. Chapman. Seth Klarman’s Baupost Group, holds 17.8% according to its most recent 13D notice. The dissidents’ initial press release seems to imply that they have the support of stockholders representing 45% of the outstanding stock, although this is not independently verifiable. At its $9.13 closing price yesterday, the company has a market capitalization of $216.8M. We estimate the liquidation value to be anywhere from nil to $259M or ~$10.85 per share and the net cash value from nil to $228M or $10.54 per share. The company is burning through its cash at a rapid rate, so the main risk to the investment is that the status quo is maintained. We think the presence of Bob Chapman on the slate and Klarman’s Baupost Group on the register bodes well for the dissidents, so we’re adding FACT to our new Special Situations portfolio.

FACT closed yesterday at $9.13.

The S&P500 Index closed yesterday at 850.08.

Hat tip to John Allen.

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