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Posts Tagged ‘Activist investment’

ASPN files notice of meeting; includes proposal to give directors authority to liquidate

Posted in Aspen Exploration Corporation (OTC:ASPN), Net Net Stocks, Stocks, tagged , , on October 12, 2009| 2 Comments »

Aspen Exploration Corporation (OTC:ASPN) has filed its definitive proxy statement for its November 30, 2009 general meeting and included is a proposal seeking authority for ASPN’s board of directors to dissolve 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 ($5M to $5.5M), and the possibility that the company will dissolve. The stock is up 6.6% since we initiated the position to close Friday at $1.05.

The relevant portion of the definitive proxy statement is set out below:

10. Why is the Board of Directors submitting a proposal to the stockholders to grant the Board authority to dissolve Aspen?

In connection with preparing for and conducting the May 22, 2009 meeting of stockholders, one stockholder submitted a request that Aspen include a dissolution proposal to be considered at the same time that the stockholders were being asked to consider the sale of Aspen’s oil and gas assets to Venoco, Inc. The Board of Directors had previously considered that possibility, but had determined that presenting the dissolution proposal at the same time as the asset sale proposal would add a significant amount of complexity and risk stockholder consideration of the asset sale. Consequently, Aspen advised the stockholder that Aspen would offer stockholders the opportunity to consider dissolution of Aspen at the next meeting. In response to that statement, the stockholder withdrew his proposal and the Securities and Exchange Commission was able to complete its review of the proxy statement for the May 22, 2009 meeting.

11. How does the Board recommend that I vote with respect to the proposal that would grant the Board of Directors the discretion to dissolve Aspen?

The Board of Directors proposed dissolution of Aspen for consideration of its stockholders because of commitments made in March 2009. The Board, however, has not determined by majority vote what recommendation should be made to stockholders in connection with the vote:

* One director, R.V. Bailey, believes that the prospective value of Aspen as a public corporation with a continuous filing record and clean financial statements exceeds the value of the remaining net assets, and believes that stockholders may benefit by the possibility of making a business acquisition (including a reverse takeover) that could offer Aspen’s stockholders potential long term value.

* Three directors, Robert A. Cohan, Kevan B. Hensman and Douglas P. Imperato are continuing to evaluate whether they believe the Company can identify and execute on a business opportunity that may offer long term value to the Company’s stockholders and as such none have yet authorized the Board to make a recommendation for or against approval of Proposal No. 2.

Although the Board did not determine whether dissolution is in Aspen’s best interests at the present time, the Board did determine it is appropriate to submit the proposal to its stockholders at the Annual Meeting. As such the proposal is being submitted to the stockholders without any recommendation from the Board of Directors. For further discussion on this issue see page 30 of this Proxy Statement.

It’s worth noting that R.V. Bailey, the director opposed to the liquidation, holds 19.17% of the outstanding stock.

[Full Disclosure:  We 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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The best unknown activist investment of 2009

Posted in About, Activist Investors, Stocks, tagged , , on October 9, 2009| 12 Comments »

In keeping with our penchant for stories about idiosyncratic investors who trade in odd securities found off the beaten track, we bring you perhaps the best unknown activist investment of 2009. With a far away land, a young protagonist, an odd treasure, an unexpected twist and a narrow escape, it’s a bullwhip and a fedora short of being an Indiana Jones movie. In the role of young protagonist is Nicholas Bolton, a 27-year old investor who made A$4.5M ($4M) almost bringing down BrisConnections, the developer of a A$4.8B ($4.3B) Australian toll road. What’s most amazing is that he achieved this with an initial stake worth just A$47,000 ($42,000). In so doing, he became the bête noire of his fellow BrisConnections investors, attracted the attention of the Australia Securities and Investments Commission (similar to the SEC) and drew the ire of the Australian media, who variously described him as a “meddling kid,” “Australia’s foremost prat,” “the ultimate poster-boy for the much-maligned Generation Y” and “the best proof that karma does not exist.” How did he do it and why all the vitriol? Read on.

BrisConnections: The Temple of Doom

Several unusual elements make the Nicholas Bolton versus BrisConnections story reasonably complex. Bear with us, to understand the story it’s necessary to understand the BrisConnections security in detail.

BrisConnections, backed by Deutsche Bank, Credit Suisse Group, JPMorgan Chase & Co. and Macquarie Bank, raised A$1.23B ($1.16B) in July last year through the sale of an unusual equity security called a stapled unit. The BrisConnections stapled unit is a unit in the trust holding the toll road assets and a share in the corporate trustee. The trust unit and the share must trade together, and hence are said to be stapled. The reasons for creating such a security are beyond the scope of this post, but suffice it to say that stapled securities offer certain tax benefits. What really makes this story interesting is that the BrisConnections stapled units were issued on an installment basis. Installment means that on application purchasers paid A$1 ($0.90) for each stapled unit and were then obliged to make two further installments of A$1 ($0.90) each, payable nine months and 18 months after the IPO. In a world of rapidly rising stock prices, installment securities present no problem. When stockmarkets are in decline, however, the securities can trade down dramatically as investors attempt to avoid paying further installments.

The BrisConnections’ IPO tanked spectacularly, dropping 60% on the first day of trading before falling into terminal decline. A few months before the first installment was to fall due, the units had traded down to A$0.001 (that’s 1/10th of a cent). At a unit price of $0.001, a BrisConnections unit became a very dangerous security for those not realising that the units came with two A$1.00 installments for each $0.001 paid. That meant, for example, that a purchaser of $1,000 of the units owed $2M in installments and a purchaser of $10,000 owed $20M. It seems that there were many purchasers at $0.001 who were unable to fulfil their obligations and then decided that they would rather not own BrisConnections units. Unfortunately for them, they had run out of greater fools. As Charlie Munger might say, they were like the mouse who cries, “Let me out of the trap, I’ve decided I don’t want the cheese.” A month out from the first installment, there were ~70M units on the ask at $0.001 – the minimum price at which a security can trade on the Australian Stock Exchange – and no bids.

Enter Nicholas Bolton.

Bolton: Raider of the Lost Ark

Bolton had started acquiring BrisConnections units through an investment company, Australian Style Investments, in November last year. Before too long, he’d spent A$47,000 to acquire a 15% stake and become BrisConnections largest unitholder. He’d also taken on a A$94M liability, money that he did not have. What he did next comes straight from the World Poker Tour. No, he didn’t fold. He went all in, upping his stake to 19.9%. Why 19.9%? Under Australian law, a purchaser of 20% of a company’s stock is obliged to make a takeover bid to all remaining stockholders. By sitting at 19.9%, Bolton had the option of making a bid for the remaining stock, but not the obligation. He then approached BrisConnections about refinancing the liability. When BrisConnections failed to respond, he moved to have management removed and the trust dissolved. The application achieved its end: It got the attention of management. It was, however, a long shot. Bolton needed the support of 75 per cent of his fellow investors to have the dissolution resolution passed. It was also not clear that it would prevent the fund from collecting the first installment. Under Australian law, the trust had 21 days to call a general meeting and 45 days to hold it, by which date the notice demanding the first installment fee would have been issued. If BrisConnections management was nervous about the dissolution, they didn’t show it in the media. The chairman, a Mr. Trevor Rowe, described the application as “frivolous,” while a spokesman described it as “a mere sideshow to a $5B infrastructure project that is promising to provide 11,000 jobs.” They also made it known that a liquidation of the trust would not extinguish the first A$1 liability owing on each unit. BrisConnections advisers where not so sanguine: one, Macquarie, co-underwriter and financier of BrisConnections, brought an injunction action against him seeking to prevent him from holding the meeting. In a two-minute hearing, the judge did not uphold any of Macquarie’s claims, or grant the injunction to stop the meeting of unitholders from proceeding. It was swift justice, and it seemed to set the scene for something very rare: a highly entertaining general meeting.

The Last Crusade

After succeeding against Macquarie and BrisConnections in an extensive court battle, it seemed that BrisConnections was a general meeting away from dissolution. Bolton held 19.9% of the units on issue, and a sizeable number of the other holders had purchased their units at $0.001. Perhaps sensing that Bolton had the momentum, management told those investors present at the meeting were told their units would be worthless if BrisConnections was liquidated, as BrisConnections would have ”zero value” as a company. Bolton, however, was not one of the investors present at the meeting. Why? He had already voted against the resolutions he had proposed and defended at court. BrisConnections chairman told the startled unitholders present at the meeting that Australian Style Investments had voted against all seven resolutions when its proxies were received several days before the meeting. Accordingly, the special resolution fell short of the required 75% voting threshold. The unitholders might have seen Bolton as a savior after he went to court to ensure the vote took place, but they were cursing his name by the end of the day. What had happened to cause Bolton to vote against his own resolution?

Unknown to the investors at the meeting, Bolton had already sold his voting rights to Thiess John Holland, the design and construction contractor for the Airport Link. The price? A$4.5M. It seems this had been Bolton’s strategy all along. Rowe, the chairman, described to Inside Business a discussion he had with Bolton as he was searching for a buyer for his voting rights:

I called [Nicholas Bolton’s] adviser and asked him what he had in mind. He mentioned some numbers to me. I said I thought they were pretty excessive and I gave him a lower number. And he said well Mr Bolton needs $5 million otherwise he is not going to do this. And we thought about it and we decided that we would not engage further.

…

I said to him when he proposed a number which I thought was preposterous that it’s more like a two to three [million] number than a seven and half [million] number.

…

I didn’t engage in a negotiation.

Rowe didn’t want to cough up for the votes. Thiess, however, was happy to part with A$4.5M to prevent the A$4.8B project from falling over. BrisConnections other investors were unhappy. A hedge fund that was BrisConnections’s second biggest investor at 13%, threatened legal action, telling the The Sydney Morning Herald:

He’s not going to get (the $4.5 million), I can promise you that.

…

He’s just ruined his corporate life forever.

…

I’d trust Mr Bolton like I’d trust a rabbit with a lettuce leaf.

Post mortem

To date, we are not aware of any proceedings being started against Bolton. It seems he got away with the A$4.5M. Not a bad payday for an initial $47,000 investment and a little negotiation. What about the liability? Did Bolton know that the securities came with that huge downside? It seems he did. He contained the liability to his investment vehicle, Australian Style Investments. The A$4.5M was paid to an another entity of Bolton’s, Australian Style Holdings, to quarantine it from the $120M liability in Australian Style Investments. The Weekend Financial Review also reported that Bolton had been searching for an opportunity like BrisConnections for a while: A company in which he could take a large interest quickly and easily. In a confidential strategy document emailed to Ernst & Young and Deloitte in early December last year, Bolton detailed a plan to increase his holding in BrisConnections up to 49.9 per cent of the listed units and then recapitalize the company. Those advisers rejected his takeover plan, so he adjusted his strategy in late December or early January to a liquidation. He told one newspaper he was “playing a game” from the start” and “the result of that game was to extract a benefit from the carcass of BrisConnections:”

I took a commercial approach to this before buying in.  I saw an opportunity to improve the position of unit holders through our entry in the company, and the actions we were planning to undertake. It was a commercial transaction, intended for commercial gain, for unit holders and for myself.

To the extent there was an altruistic outcome it was unintended, in that my interests were aligned with the interests of all other unit holders. But there was always a commercial intention on our part. We didn’t seek the tag of white knight, and it doesn’t fit.

[Let] me say it would be commercially remiss and foolish of me, on a matter of indifference, not to take a dollar or to leave a dollar. It’s a commercial decision.

Conclusion

What’s the lesson? It’s better to be lucky than good? Well, yes, but that’s doing a disservice to young Nick. We think the lesson is that there’s value in the control or influence of a company beyond the underlying intrinsic value of the stock. It’s why we have in the past followed activist investors into stocks when it’s possible that there’s no underlying asset value, and it’s why we’ll do it again in the future.

What happened to the other investors? Well, it’s a happy ending for them too. Macquarie Bank has now thrown them a lifeline and agreed to buy their obligations if they give up their holding and 100 per cent of their units for free.

So that’s our nominee for the best unknown activist investment of 2009. Let us know if you’ve got a better one.

[Full disclosure: We don’t have a holding in BrisConnections.]

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Value investors for change nominates directors to board of MRV Communications Inc (OTC:MRVC)

Posted in Activist Investors, MRV Communications Inc (OTC:MRVC), Stocks, Value Investors for Change, tagged , , , , on October 8, 2009| 2 Comments »

Value Investors For Change, a group dedicated to restoring stockholder value to damaged companies, filed a definitive proxy statement today nominating eight candidates to the board of MRV Communications, Inc. (OTC:MRVC). Value Investors For Change sent a letter to stockholders  detailing the failures of the current board and the turnaround plan put forth by Value Investors For Change.

We’ve been following MRVC (see our MRVC post archive) because it’s 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. 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.

The stock is up 19.4% since we started following it to close yesterday at $0.86.

The text of the letter to stockholders is set out below:

Dear Fellow Stockholders of MRV Communications, Inc.:

We are seeking your support to elect highly qualified and experienced telecom and corporate finance executives to the Board of Directors of MRV Communications, Inc. (“MRV” or the “Company”) at the 2009 Annual Meeting of stockholders on November 11, 2009. Value Investors for Change and its participants named in our proxy statement filed on October 7, 2009 collectively own 1,982,085 shares of common stock of MRV. We are concerned and alarmed by the actions this Board has taken over the past ten years, which we believe have not been in the best interests of stockholders. The Board members have enriched themselves at the expense of stockholders. It is imperative that the incumbent Board members be replaced with our qualified nominees who will truly represent the interests of stockholders.

DO NOT LET THE CURRENT BOARD MEMBERS FURTHER JEOPARDIZE YOUR INVESTMENT

In our view, this Board’s actions of the last ten years reflect poor corporate governance, poor acquisition strategy and poor oversight of management. The incumbent Board has presided over a company that has failed to file its financial statements for any period since the quarter ended March 31, 2008, failed to hold an annual meeting since 2007, and failed to file an Annual Report for the year ended 2008. Meanwhile, this Board has paid itself hundreds of thousands of dollars per year.

For years, the incumbent Board members have compensated themselves with generous cash payments even as MRV’s stock price has fallen. In contrast, our nominees will accept no cash payments. In fact, our nominees will accept no compensation whatsoever except for stock option grants at or above market value. Our nominees will therefore earn absolutely nothing for their Board service unless they increase the share price.

We expect that the incumbent Board members will now spend stockholder money to keep their positions with mailings and telephone calls aimed at discrediting our nominees and our views of their stewardship. For example, the incumbent board recently sent a letter to stockholders that claimed the Company’s recent troubles were caused by “one of the most economically challenging periods in recent history.” In fact, MRV’s troubles began long before the recent global economic crisis.

Fact: The share price of MRV has dropped from $95 (adjusted for stock split) on March 9, 2000 to 66 cents on August 21, 2009. On August 21, 2009, we announced our intention to intervene at MRV to create value for all MRV stockholders.

Fact: Over a period of 15 years (1993 to 2007), MRV has reported losses of approximately one billion dollars.

Fact: While MRV’s performance has continued to be poor under this Board’s leadership, its competitors have thrived. Ciena Corporation and Extreme Networks posted net income of $39 million and $8 million, respectively, for 2008. MRV has not filed its financials for most of 2008 and has not filed any financials for 2009, but in the first quarter of 2008, it posted a net loss of $3.68 million. This is consistent with the negative net income numbers MRV posted in 33 of the last 41 quarters for which it has actually disclosed its financials.

Fact: Under this Board’s “leadership,” MRV was suspended from its listing on the NASDAQ Global Market on June 17, 2009 and formally delisted on August 31, 2009 with a stock price of 74 cents per share.

THIS BOARD HAS PURSUED ILL CONCEIVED ACQUISITIONS THAT HAVE DESTROYED STOCKHOLDER VALUE OVER THE COURSE OF NEARLY A DECADE

• MRV began a risky acquisition strategy in 2000 that we believe has destroyed well over a billion dollars of stockholder value.

• MRV spent $690 million during an acquisition spree in 2000, over 4 times the Company’s current market capitalization.

• Almost $500 million — or 72% — of the purchase price of acquisitions in the year 2000 was allocated to goodwill (indicating the Company might have paid a substantial premium over fair value). After just two years, in 2002, the Company recorded nearly $300 million of impairment (cumulative effect of accounting change) related to goodwill and other intangibles, in addition to impairment of $73 million of goodwill related to the acquisitions. We believe impairment of goodwill so soon after the acquisitions is consistent with a failure of management to operate the business capably.

• MRV acquired Fiber Optic Communications Inc. for $310 million in April 2000 and acquired Quantum Optech Inc. for $36 million in July 2000. In October 2002, 78% of Fiber Optic and 100% of Quantum Optech were sold to the prior management of Fiber Optic for a mere $8 million, resulting in an astonishing loss of hundreds of millions of dollars for MRV stockholders.

We believe the most egregious of the Company’s ill conceived out acquisitions was the 2007 acquisition of Chinese component manufacturer Fiberxon, Inc. Fiberxon was a company so fraught with accounting irregularities that its own auditing firm resigned midway through the transaction process. Yet the Board of MRV decided to continue to pursue the acquisition anyway. Below is a time line displaying a decision-making process at odds with the best interests of the Company’s stockholders:

• In January 2007, MRV announced the merger of one of its wholly owned subsidiaries with Fiberxon. We believe questions concerning the integration of two such disparate companies existed, especially considering MRV’s poor acquisition history.

• During the due diligence phase of the acquisition, MRV became aware of accounting irregularities at Fiberxon that called into question the reliability of Fiberxon’s historical financial statements, which were serious enough in nature to lead to the removal of the Chief Executive Officer and the Vice-President of Finance of Fiberxon in the first half of 2007. The Chief Financial Officer of MRV, who had been playing a major role in the auditing process, resigned mid-way through the transaction process in July 2007.

• Fiberxon’s own auditors walked away from the auditing engagement in June 2007 when they determined that insufficient progress had been made by Fiberxon to correct identified issues. The auditors stated in a Form 8-K filed by the Company on July 2, 2007 that they found “a number of serious issues and encountered significant difficulties in the performance of the audit that…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 U.S. and China.”

• On July 1, 2007, the MRV Board decided to proceed with the merger despite (1) the accounting issues communicated to them throughout the auditing process, (2) the resignation of MRV’s Chief Financial Officer and (3) the resignation of Fiberxon’s own auditors.

• After spending over $875 million on acquisitions in the past ten years, MRV’s current market cap today is under $150 million.

THE CURRENT BOARD’S CORPORATE GOVERNANCE FAILURES, LACK OF INDEPENDENCE AND EXCESSIVE COMPENSATION ARE DETRIMENTAL TO STOCKHOLDERS

MRV has not filed financial statements for any period since the quarter ended March 31, 2008. Five financial quarters have passed since MRV last filed financials. Why has it taken so long?

We believe the MRV Board suffers from a significant lack of independence and a lack of share ownership by its independent directors. We also believe the Board has a particularly cozy relationship with the management team that it is supposed to be overseeing. For example:

• Shlomo Margalit, Chairman of the Board, and Near Margalit, the head of MRV’s wholly owned subsidiary Luminent, are father and son.

• Harold Furchtgott-Roth, a director on the Board since 2005, served on the Audit Committee during MRV’s failure to file financials for almost two years, and beneficially owned only 27,500 shares of MRV as of April 2007. Mr. Furchtgott-Roth is related to the wife of the Company’s Chief Executive Officer, Noam Lotan, and according to a Company filing with the U.S. Securities and Exchange Commission on October 2, 2009, received $119,000 in cash compensation for sitting on the Board, over twice as much as any other “independent” Board member.

• The Board has complete discretion over executive compensation with no formula tying compensation directly to Company performance. In fact, despite being delisted and failing to file financial statements for any period since the quarter ended March 31, 2008, the Compensation Committee recently awarded a bonus to Near Margalit, the son of MRV’s Chairman, for “his efforts in addressing the impact of the challenging market environment.”

This Board has made a number of poor decisions which have led to value destruction for all stockholders. By electing our nominees, you are sending a clear message to the Board that they will be held responsible for these actions.

The incumbent independent directors own little or no shares and the Board continues to be paid without having to even run for election – until now. Indeed, Spencer Capital Opportunity Fund, LP had to bring a lawsuit to compel the Company to hold its 2009 Annual Meeting. Our nominees are committed to working hard to maximize value for all stockholders. They will show their commitment by accepting no cash compensation and only receiving stock option grants at or above market value. Accordingly, they will be compensated only if they increase MRV’s stock price.

OUR NOMINEES HAVE THE EXPERIENCE TO IMPROVE THE PERFORMANCE OF MRV AND THEREFORE THE VALUE OF ITS STOCK

Value Investors for Change has assembled a team combining individuals with extensive telecom expertise with financial experts who understand the importance of corporate governance. We firmly believe our nominees, along with our industry advisors, will make a significant positive impact for the benefit of MRV’s stockholders.

Our proposed nominees and our advisors have experience and specific skill sets that are complementary and will benefit the Company. The telecom executives, who are part of Value Investors for Change, have more than 90 years of combined experience. Others in the group bring operational, legal, financial and management expertise. Our nominees and advisors have worked with Fortune 500 telecom companies and venture-funded start-ups, they have navigated turnaround situations and managed high-growth companies. They understand operations, marketing, R&D, sales and have extensive international business development experience.

The following is a list of our Board Nominees:

Raul Martynek is an experienced telecom executive who has successfully executed turnarounds on several occasions during his 15-year career. He currently serves as a Senior Advisor to Plainfield Asset Management, advising them on investment opportunities in the telecommunications sector and also works with portfolio companies on strategic and tactical initiatives. Mr. Martynek received a B.A. in Political Science from SUNY-Binghamton and received a Masters in International Finance from Columbia University School of International and Public Affairs.

Christopher Downie is a telecom executive with diverse experience spanning more than ten years. He is currently the President and Chief Financial Officer of The Telx Group, Inc. and he previously served as Vice President, Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer of Motient Corporation, D/B/A Terrestar Corporation. Mr. Downie received a B.A. from Dartmouth College and holds an MBA from New York University Stern School of Business.

Michael McConnell is currently the Chief Executive Officer of Collectors Universe, Inc., a third-party grading and authentication services company. Previously he was a Managing Director of Shamrock Capital Advisors, Inc., a privately owned investment company of the Roy E. Disney family, where he helped guide numerous companies through strategic restructurings. Mr. McConnell received a B.A. in economics from Harvard University and his MBA degree from the Darden School of the University of Virginia.

Mark Stolper has served in numerous executive capacities in different industries over his 15-year career. He is currently the Chief Financial Officer of RadNet, Inc., a leading owner and operator of outpatient medical diagnostic imaging centers in the United States. He received a B.S. in Finance and B.A. in Social Economics & Public Policy from the Wharton School and the College of Arts and Sciences at the University of Pennsylvania.

Mark Crockett is a performance improvement consultant with more than 15 years of experience. He worked at McKinsey & Company for five years and served as Chief Executive Officer of Tax One, a retail financial services company from 1999 to 2002. He received a B.S. in Economics from Brigham Young University and a J.D. from Stanford Law School.

Charles Gillman is an experienced value investor with expertise in the analysis of companies going through dramatic corporate transitions. He is the founder of Value Fund Advisors, LLC, an investment management firm. Mr. Gillman is an alumnus of McKinsey & Company. Mr. Gillman received a B.S. from the Wharton School of the University of Pennsylvania.

Kenneth Shubin Stein is the founder of Spencer Capital Management, LLC, an investment management firm. A successful value investor, he began his career in medicine serving as an Orthopedic Resident at Mount Sinai Hospital. Dr. Shubin Stein is a graduate of the Albert Einstein College of Medicine and graduated from Columbia College.

Kiril Dobrovolsky is the principal and founder of SFVentureLaw, PC, a law firm in San Francisco. Mr. Dobrovolsky practices as a corporate and securities law attorney and has extensive expertise in equity and debt offerings, mergers and acquisitions, licensing and partnering arrangements and commercial agreements. Mr. Dobrovolsky received a B.A. from University of California at Berkeley and a J.D. from Stanford Law School.

The following two individuals are our special advisors:

Dilip Singh is a special advisor to Value Investors for Change. With more than 35 years of operational executive management experience, Mr. Singh is well suited to provide tactical and innovative guidance to the Value Investors for Change team through his blend of business acumen, market and technical knowledge and strategic insight. He has held key leadership roles at of Telia-Sonera Spice Nepal, Telenity, Sprint, GTE, ADC Telecom, Alcatel, NewNet, MC Venture Partners and United Database. Mr. Singh will not be soliciting proxies on our behalf for this solicitation.

Jack Whelan is a special advisor to Value Investors for Change. He is a former networking industry sales executive whose career spans more than 30 years. From 1989-1996, he was Vice-President for business development for Xyplex Inc., a telecommunications company that later became MRV Communications.

OUR NOMINEES HAVE A PLAN TO IMPROVE THE COMPANY’S OPERATIONAL AND FINANCIAL PERFORMANCE, WHICH WE BELIEVE WILL MAXIMIZE VALUE FOR STOCKHOLDERS

Value Investors for Change will take steps we believe will restore profitability and create wealth for all MRV stockholders.

• Our nominees will immediately suspend the practice of paying excessive fees to Board members. Our nominees will accept no cash payments for board service, and will not accept any form of compensation except for stock option grants at or above market value. Therefore the only way our nominees can benefit financially from their service to the Board will be through long-term appreciation in the stock price.

• We will institute a management compensation system that is heavily weighted towards pay for performance.

• We will conduct a forensic review of the Company’s financials and bring MRV into compliance with all of its reporting requirements.

• We will work with regulatory authorities and outside parties to quickly resolve the many outstanding legal difficulties of the Company.

• We will look to optimize MRV’s cost structure and maximize operating efficiency.

• We will utilize the expertise of our advisors and board members to enhance the Company’s distribution channels, both domestically and internationally.

• We will work tirelessly to create substantial long-term wealth for the stockholders.

These changes and others will unlock stockholder value and put MRV in a position to realize its full potential.

VOTE THE WHITE PROXY CARD TODAY AND PUT NEW PEOPLE ON THE MRV BOARD – PEOPLE WHO ARE COMMITTED TO ACTING IN THE BEST INTERESTS OF STOCKHOLDERS

PROTECT YOUR INVESTMENT FROM AN INCUMBENT BOARD THAT HAS SPENT ALMOST TEN YEARS DESTROYING STOCKHOLDER VALUE

We urge all stockholders to elect our director nominees on the enclosed WHITE proxy card today. Vote for much needed change at MRV by signing, dating and returning the enclosed WHITE proxy card. Or you may vote by telephone or internet if you own stock through a bank or broker. We urge stockholders to discard any proxy materials you receive from MRV and to vote only the WHITE proxy card.

If you have already voted the proxy card provided by the Company, you have every right to change your vote by executing the enclosed WHITE proxy card – only the latest dated proxy card returned will be counted.

Your vote is very important, regardless of how many or how few shares you own. If you have any questions, or need assistance in voting your shares, please call our proxy solicitors, Okapi Partners LLC, toll-free at 1-877-274-8654.

Thank you for your support,

VALUE INVESTORS FOR CHANGE

[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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Manual of Ideas’ List of activist targets includes ACLS

Posted in Activist Investors, Axcelis Technologies Inc (NASDAQ:ACLS), Spencer Capital Management, Stocks, tagged , , on October 6, 2009| Leave a Comment »

The always superb Manual Of Ideas has nine new additions to its list of activist targets. Companies on the list must have a “strong balance sheet that could be recapitalized or liquidated to achieve activist value creation; and insiders must own less than 20% of the shares, implying an inability to exercise voting control over the company:”

  • Semiconductor equipment provider Axcelis Technologies (ACLS) joins the list in first place, based on a ratio of “net net” current assets to market value of 1.3x, making ACLS a Ben Graham-style bargain stock. We calculate “net net” current assets as current assets minus total liabilities. A ratio of 1.3x suggests that the liquidation value of ACLS may exceed the company’s market value, potentially attracting the interest of activist investment funds.
  • Biotech drug developer Myriad Pharmaceuticals (MYRX) joins the list in second place, as the company has net cash of $169 million versus market value of $135 million. Insiders own virtually no shares of the company, making Myriad vulnerable to activist shareholder action.
  • Communications equipment provider Radvision (RVSN) joins the list in 12th place. Radvision shares recently tumbled to a market value of $115 million, only $8 million above the company net cash balance. The stock price decline came on the heels of Cisco’s announcement that it would aquire video conferencing company Tandberg. Radvision provides such technology to Cisco, with the latter Radvision’s largest customer.
  • Specialty steel product maker Universal Stainless & Alloy (USAP) joins the list in 30th place. The shares trade at 0.8x price to tangible book value, and the company has 19% of its market value in net cash. “Net net” current assets account for two-thirds of USAP’s market value, making the company a potentially interesting recapitalization candidate.
  • Biopharma company Progenics Pharmaceuticals (PGNX) joins the list in 34th place. The shares trade within 10% of their 52-week low, reflecting the stock’s lack of participation in the recent stock market rally. With a market value of $155 million and more than $100 million of net cash, the shares could attract the attention of activist investors familiar with the biopharma industry.
  • Cancer drug discovery firm Infinity Pharma (INFI) joins the list in 36th place. While the company is losing money as it advances its drug development pipeline, management has stated that the company has sufficient liquidity through 2013. INFI has a market value of $152 million versus a net cash position of $150 million.
  • Zoran Corp. (ZRAN), a provider of digital solutions for application in the digital entertainment and imaging markets, joins the list in 42nd place. The company recently posted strong sequential revenue growth in key business segments and returned to positive cash flow generation. With 63% of the market value in net cash, the company may be in a position to aggressively repurchase shares, thereby boosting shareholder value on a per-share basis.
  • Semiconductor equipment company Rudolph Technologies (RTEC) joins the list in 43rd place. The company’s Q2 revenue growth exceeded guidance, but investors continue to shun the stock. RTEC has one-third of its market value in net cash and nearly two-thirds in “net net” current assets.
  • Finally, fabless semiconductor company Sigma Designs (SIGM) joins the list in 44th place. With one-half of market value in net cash and an enterprise value-to-revenue multiple of 0.9x, the shares appear quite cheap. The company may be in a position to boost shareholder value by using excess liquidity to repurchase shares or pay a one-time cash dividend.

We’ve been following Axcelis Technologies Inc (NASDAQ:ACLS) since January 8 this year (see our post archive here) because it is an undervalued asset play with an activist investor, Sterling Capital Management, holding 10.7% of its outstanding stock. ACLS has completed the sale of its 50% interest in SEN Corporation, its joint venture with Sumitomo Heavy Industries, Ltd. (SHI) to SHI for proceeds of $122.3 million. ACLS received around $35.9M in cash after applying $86.4M of the proceeds to meet obligations to the holders of the company’s 4.25% Convertible Senior Subordinated Notes, upon which ACLS defaulted in January. Our position in ACLS is up 120% to $1.32, which gives the company a market capitalization of  $137M. We’re not quite as bullish on ACLS as the Manual of Ideas. We last estimated ACLS’s liquidation value at around  $113.6M or $1.10, because we think that cash burn is a significant issue for ACLS. At the current rate of cash burn, we estimate the company has around six months before its liquidation value is around $0.60, and around a year before it’s worthless. That said, Citi thinks ACLS could be worth $3 (for what that’s worth):

Citi upgrades Axcelis Technologies Inc (Nasdaq: ACLS) from Hold to Buy. Price target lowered from $5.50 to $3.

Citi analyst says, “Following the collapse of its merger talks with Sumitomo Heavy Industries (SHI) and subsequent ~70% decline in stock price, we think the stock is now trading below liquidation value. So, while we are far from bullish on business prospects and we acknowledge that there’s risk to ACLS’ ability to raise much-needed cash in the next several months, we think the company will be able to raise sufficient capital w/o going to the public markets.”

Axcelis Technologies, Inc. (Axcelis) designs, manufactures and services ion implantation, dry strip and other processing equipment used in the fabrication of semiconductor chips.

[Full Disclosure:  We do not have a holding in ACLS. 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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Aspen Exploration Corporation (OTC:ASPN)

Posted in Activist Investors, Aspen Exploration Corporation (OTC:ASPN), Stocks, Tymothi O. Tombar, tagged , , , , on October 1, 2009| 3 Comments »

We’re adding Aspen Exploration Corporation (OTC:ASPN) to the Greenbackd Portfolio for the reasons identified by MCN1 in his September 3 guest post. ASPN closed yesterday at $0.985, giving it a market capitalization of just $7.2M. We estimate the liquidation value to be around 20% higher at $8.5M or $1.17 per share. Again, not a huge upside but reasonably certain. There are several potential catalysts in the stock. Investor Tymothi O. Tombar filed a 13D notice on July 30, 2009 disclosing a 5.8% holding and calling for the liquidation of the company. Additionally, the company plans to distribute substantially all of the net, after-tax proceeds from the completion of the Venoco sale to its stockholders, an amount that the company estimates will be from $5M to $5.5M.

About ASPN

From the most recent 10K:

Aspen was incorporated under the laws of the State of Delaware on February 28, 1980 for the primary purpose of acquiring, exploring and developing oil and gas and other mineral properties. Our principal executive offices are located at 2050 S. Oneida St., Suite 208, Denver, Colorado 80224-2426. Our telephone number is (303) 639-9860, and our facsimile number is (303) 639-9863. Our websites are http://www.aspenexploration.com and http://www.aspnx.com. Our email address is aecorp2@qwestoffice.net. During our fiscal year ended June 30, 2009, we were engaged primarily in the exploration, development and production of oil and gas properties in California and Montana. On June 30, 2009, the Company disposed of all of its remaining oil and gas producing assets and is not currently engaged in any oil and gas producing activities. We have an interest in an inactive subsidiary: Aspen Gold Mining Co., a company that has not been engaged in business since 1995.

During more than the past five years through June 30, 2009, our emphasis had been participation in the oil and gas segment, acquiring interests in producing oil or gas properties and participating in drilling operations. We were engaged in a broad range of activities associated with the oil and gas business in an effort to develop oil and gas reserves. Our participation in the oil and gas exploration and development segment consisted of two different lines of business – ownership of working interests and operating properties.

(1) We acquired and held operating interests in oil and gas properties where we acted as the operator of oil and gas wells and properties; and

(2) We acquired and held non-operating interests in oil and gas properties.

Previously, we held a non-operating working interest in approximately 37 oil wells in the East Poplar Field, Roosevelt County, Montana which contributed only nominally (if at all) to our positive cash flow and profitability, and during much of the latter half of calendar 2008 resulted in operating losses. Effective January 1, 2009, we sold our entire interest in these oil properties.

Prior to June 30, 2009, we operated 67 gas wells in the Sacramento Valley of northern California. Additionally, we held a non-operated interest in 26 gas wells in the Sacramento Valley of northern California. As described below, we sold our interest in our California properties on June 30, 2009.

Additionally, in the past we have engaged in business activities related to the exploration and development of other minerals and resources. At the present time, we are not engaged in any drilling operations or acreage acquisition programs nor have we drilled any new wells in our current fiscal year.

The value proposition

ASPN is another relatively simple value proposition: it’s liquid assets of $10.7M of cash and marketable securities against total liabilities of around $2.3M, and it has no active business operations. 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):

ASPN Summary G

The catalyst

ASPN proposes to distribute substantially all of the net, after-tax proceeds from the Venoco transaction to its stockholders. It estimates that this amount will be between $5M and $5.5M or between $0.69 and $0.76 per share. ASPN “needs to complete certain calculations before it is able to determine the dollar amount of the assets to be distributed” but “believes it will be able to make this calculation after the October 28, 2009 settlement date based on preliminary tax calculations.” It also proposes to present a dissolution proposal to its stockholders at its next annual meeting, tentatively scheduled for late November 2009. Such a dissolution is not certain, as ASPN “intends to consider other opportunities in the broad scope of the natural resources industry, which may include an acquisition of assets or business operations, or a merger or other business combination.” ASPN has “engaged in preliminary discussions with third parties about various possibilities” however “none of these discussions have resulted in an agreement or any definitive steps toward the conclusion of any future relationship.” One issue worth noting is that such a transaction “may or may not require stockholder approval”:

If the transaction does not require stockholder approval, the board of directors will be entitled to accomplish the transaction in its discretion, although the board may (but would not be required to) seek an advisory vote of the stockholders. There can be no assurance that Aspen will identify an appropriate business opportunity or corporate transaction and consummate any such transactions.

Tymothi O. Tombar filed a 13D notice on July 30, 2009 disclosing a 5.8% holding and calling for the liquidation of the company:

As Aspen currently has no active business operations and a significant amount of liquid assets, Mr. Tombar believes that there is broad shareholder support for the implementation of a plan of liquidation and distribution of substantially all of the proceeds from the Sale and Aspen’s additional liquid assets to Aspen’s stockholders. Mr. Tombar is considering several stockholder resolutions in accordance with SEC Rule 14a-8 for inclusion in Aspen’s proxy statement for its next meeting of stockholders. In the unlikely event of a delayed meeting of stockholders beyond the anticipated late October or November 2009, Mr. Tombar may acquire a sufficient number of additional shares of Aspen’s stock or contact other shareholders with the intent of calling a special meeting to consider shareholder proposals and the election of new directors to the board of the corporation.

Conclusion

ASPN is trading at a small discount to its liquidation value with a likely catalyst in the near future. At its $0.985 close yesterday, it has a market capitalization of $7.2M against a liquidation value we estimate at $8.5M or $1.17 per share. It’s not a huge upside but we believe it’s reasonably certain given that has no active business operations. There are several potential catalysts in the stock. Investor Tymothi O. Tombar filed a 13D notice on July 30, 2009 disclosing a 5.8% holding and calling for the liquidation of the company. Additionally, the company plans to distribute substantially all of the net, after-tax proceeds from the completion of the Venoco sale to its stockholders, an amount that the company estimates will be from $5M to $5.5M, which equates to between $0.69 and $0.76 per share.

ASPN closed yesterday at $0.985.

The S&P500 closed at 1,057.07.

[Full Disclosure:  We 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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VXGN Full Value Committee nominates director candidates; VXGN clarifies rights to AIDS vaccine

Posted in Activist Investors, Net Cash Stocks, Stocks, VaxGen Inc (OTC:VXGN), tagged , , , on September 30, 2009| 6 Comments »

It’s been a big week for VaxGen Inc (OTC:VXGN). On Tuesday last week the “VaxGen Full Value Committee” nominated five director candidates to the board. Then on Thursday BizJournals.com reported that VXGN’s “failed AIDS vaccine” was “successful in a new trial that combined it with another failed vaccine in reducing the risk of becoming infected with HIV.” The stock ran on the news, prompting VXGN to clarify yesterday that it “retains an option to obtain the exclusive right to manufacture, commercialize, and further develop the HIV vaccine candidates in the U.S., Europe, Japan and other countries that are members of the Organization of Economic Cooperation and Development” but “has no rights or obligations to manufacture or develop the vaccine candidates unless and until it exercises this option.”

We’ve been following VXGN (see our post archive here) because it is trading at a substantial discount to its net cash position, has ended its cash-burning product development activities and is “seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.” Management has said that, if the company is unable to identify and complete an alternate strategic transaction, it proposes to liquidate. One concern of ours has been a lawsuit against VXGN by its landlords, in which they sought $22.4M. That lawsuit was dismissed in May, so the path for VXGN to liquidate has now hopefully cleared. The board has, however, been dragging its feet on the liquidation. Given their relatively high compensation and almost non-existent shareholding, it’s not hard to see why.

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.”

Another group led by Spencer Capital and styling itself “Value Investors for Change” has also filed preliminary proxy documents to remove the board. In the proxy documents, Value Investors for Change call 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.

VXGN is up 41.7% since we initiated the position. At its $0.68 close yesterday, it has a market capitalization of $22.5M. We last estimated the company’s liquidation value to be around $25.4M or $0.77 per share. VXGN has 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. The authors of a letter sent to the board on July 14 of this year adjudge 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.

The entry of the VaxGen Full Value Committee into the proxy contest will certainly make the next meeting an interesting spectacle, and, with any luck, we will see a liquidation of VXGN soon, either at the hands of the present board, by Value Investors for Change or the VaxGen Full Value Committee. We believe VXGN’s rights to the AIDS vaccine should make little difference to the outcome of the proxy contest.

The press release announcing the nomination is set out below:

Contact: Steven N. Bronson

Telephone: 561-362-4199 ext 4

The VaxGen Full Value Committee Nominates Five Highly

Qualified Candidates to Replace Current VaxGen Board

Boca Raton, FL, September 22, 2009 –(Business Wire)–The VaxGen Full Value Committee (Committee) today reported that, on September 17th, it delivered to VaxGen Inc. (VXGN.OB) a solicitation notice for the nomination of five highly qualified director candidates to reconstitute the board of VaxGen at the upcoming 2009 annual meeting.

Members of the Committee, which currently consist of BA Value Investors LLC, a private investment firm founded by Steven N. Bronson, and ROI Capital Management, a registered investment advisor managed by Mark T. Boyer and Mitchell J. Soboleski, collectively own 13.7% of the outstanding common stock of VaxGen. The Committee expects that, if elected, its nominees will work to–

1. Return capital to VaxGen’s shareholders, including an immediate distribution of $10,000,000 in cash;

2. Negotiate a termination of VaxGen’s real property lease, which is out of all proportion to the Company’s needs and constitutes a serious drain on the Company’s resources;

3. Explore ways to monetize VaxGen’s value as a “public shell,” including the utilization of the Company’s substantial net operating losses; and

4. Protect for the benefit of shareholders royalty payments receivable as a result of the sale of VaxGen’s intellectual property.

The VaxGen Full Value Committee is dedicated to maximizing value for all shareholders. After the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board publicly disclosed that it would either pursue one or more strategic transactions or, failing to do so, dissolve the Company. The Company has done neither. Instead, members of the VaxGen board of directors have been paid compensation in amounts that the Committee believes are exorbitant, considering that the Company has no operations and is continuing to burn cash and cumulate losses. Since 2008, over $300,000 annually was paid to each of two non-employee directors serving on the strategic transaction committee of the Company’s board. It was only after Mr. Bronson’s letter to the board in June 2009 that the Company announced that it was discontinuing the compensation to the two outside board members for service on this committee. The Committee is committed to eliminating this type of board conduct.

Certain information concerning the Committee’s nominees follows.

Steven N. Bronson. Mr. Bronson, age 44, is the President of Catalyst Financial LLC, a privately held full service investment banking firm, and has held that position since September 1998. Mr. Bronson also serves as an officer and director of 4net Software, Inc., Ridgefield Acquisition Corp. and BKF Capital Group, Inc.David E. Castaneda. Mr. Castaneda, age 45, is the President of the Market Development Consulting Group, Inc. (MDC Group), a management consulting firm he founded in 1991 to offer expertise in corporate finance, corporate development and investor relations. From January 2004 to October 2007, he was Vice President Investor Relations for Cheniere Energy, Inc.

Leonard Hagan. Mr. Hagan, age 56, is a partner at Hagan & Burns CPA’s, PC in New York and has held that position since 2004. Mr. Hagan is also a director of 4net Software, Inc., BKF Capital Group, Inc. and Ridgefield Acquisition Corp.

Mark Boyer. Mr. Boyer, age 52, has been the President and a Director of ROI Capital Management, an investment advisor, since July 1992.

E. Steven zum Tobel. Mr. zum Tobel, age 42, is the founder, director and shareholder of First American Capital & Trading Corporation, a wholesale institutional specialty brokerage firm. He has been with First American Capital since 2002.

The press release clarifying the rights to the HIV vaccine is set out below:

VaxGen Congratulates HIV Prime-Boost Vaccine Study Collaborators and Clarifies Commercial Rights

South San Francisco, California — September 25, 2009 — VaxGen, Inc. today congratulated the Thai Ministry of Health, the U.S. Army, Sanofi Pasteur and VaxGen’s licensee Global Solutions for Infectious Disease (GSID) on the encouraging results demonstrated in the RV144 clinical trial. The top-line results of the placebo controlled study in 16,000 Thai volunteers were released today, and according to the sponsors of the trial, demonstrated that the vaccine regimen reduced HIV infection in a community-based population by 31.2% compared with placebo. The full results of the clinical trial have not yet been released by the study sponsors. The vaccine regimen tested in the study combined a priming vaccine developed by Sanofi Pasteur (ALVAC® HIV vCP1521) and GSID’s boosting vaccine (AIDSVAX® B/E).

In January 2006, VaxGen granted to GSID a worldwide license to research, develop, manufacture, register, use, market, import, offer for sale, and sell its HIV vaccine candidates, including the AIDSVAX B/E vaccine. VaxGen retains an option to obtain the exclusive right to manufacture, commercialize, and further develop the HIV vaccine candidates in the U.S., Europe, Japan and other countries that are members of the Organization of Economic Cooperation and Development. This option is, however, subject to an option held by Genentech, Inc. to commercialize HIV vaccines in North America. VaxGen’s option may be exercised during a period immediately following the filing of an application for marketing approval (i.e., a Biologics License Application with the U.S. FDA, or equivalent). VaxGen has no rights or obligations to manufacture or develop the vaccine candidates unless and until it exercises this option. If VaxGen exercises its option, it will owe royalties to GSID and be required to reimburse 50% of GSID’s development expenses. If VaxGen does not exercise its option, it will be entitled to receive royalties for sales in the above-mentioned countries. VaxGen is not entitled to royalties on sales in developing countries as defined in the agreement with GSID. VaxGen believes it will not receive any payments under the agreement, if ever, for many years.

Substantial additional research and clinical development will be required to clarify the public health benefits of this outcome. The vaccine combination tested in Thailand was developed based on the strains of HIV that circulate in that country. Separate versions of the vaccine may have to be developed for HIV strains that predominate elsewhere in the world, including Europe and North America. “We are very pleased that this clinical study has yielded encouraging results, and may provide significant new scientific insights into the future development of effective HIV vaccines,” said James P. Panek, VaxGen President. “However, we believe potential commercialization of such a vaccine remains many years away.”

[Full Disclosure:  We 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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Cadus Corporation (OTC:KDUS)

Posted in Activist Investors, Cadus Corporation (OTC:KDUS), Carl Icahn, Net Cash Stocks, Net Net Stocks, Special Situation, Stocks, tagged , , , , , on September 29, 2009| 7 Comments »

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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Hedge Fund Activism and Shareholder Value Summit

Posted in About, Activist Investors, Catalysts, Greenbackd, Value Investment, tagged , , on September 18, 2009| Leave a Comment »

We’ll be in San Diego next week for the Hedge Fund Activism and Shareholder Value Summit. If you’re going too, and you’d like to catch up, we’d love to hear from you. You can reach us at greenbackd [at] gmail [dot] com.

We’ll be posting intermittently next week, but we’ll be back to our regular schedule starting from Monday, 28 September. Hopefully we’ll have some new insights to share.

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DITC agrees to nominate Lamassu representatives to the board; Greenbackd exits

Posted in Activist Investors, Ditech Networks Inc (NASDAQ:DITC), Lamassu Holdings LLC, Stocks, tagged , , , on September 14, 2009| Leave a Comment »

The board of Ditech Networks Inc (NASDAQ:DITC) has agreed to nominate Lamassu Holdings’ representatives, Alan B. Howe and Frank J. Sansone, to be elected to the board at DITC’s next annual meeting. It seems that the board’s concern in nominating Howe and Sansone was that they not participate in any “withhold the vote” campaign or disparage the board. It’s a big win for Lamassu, and it appears their letter writing campaign was successful. The stock is now trading at a premium to our estimate of its liquidation value, which value is continuing to deteriorate, so we’re exiting the position. The stock is up from our initial $0.89 to close Friday at $1.75,which is an absolute return of 96.6%. The S&P500 closed at 788.42 when we opened the position, and closed Friday at 1,0472.73, which means our outperformance over the S$P500 was 64.4%.

Post Mortem

We started following DITC (see our archive here) because it was trading below its net cash value with an investor, Lamassu Holdings LLC, disclosing a 9.4% holding in November last year. Lamassu had previously offered to acquire DITC for $1.25 per share in cash. At that time, Lamassu said that it “[anticipated] its due diligence requirement [would] take no more than two weeks and there [was] no financing contingency.” Lamassu then nominated two candidates for election to the board “who [were] committed to enhancing shareholder value through a review of the Company’s business and strategic direction.” Lloyd I Miller III subsequently disclosed a 5.9% holding. Miller came out in support of the director candidates nominated by Lamassu as “candidates who [were] independent of management.” Miller said he sought “to encourage greater attention to corporate governance by all members of the Board of Directors.”

Lamassu then initiated a pointed letter campaign aimed at DITC’s board. In the first letter, Lamassu accused DITC management of “spending as though Ditech Networks has money to burn, adding to the amount of money you have already lost for shareholders during your tenure,” “aggressively [overstepping] the bounds of good corporate governance” and “clearly [violating] your fiduciary responsibility.” In the second, Lamassu claimed that the “decisions of this board [had] shown a pattern of director entrenchment characterized by prioritizing the interest of its members in the face of poor results at the expense of the shareholders” and called for shareholders to “receive ample representation on the board.” The campaign was succesful, and DITC agreeing to nominate Lamassu Holdings’ representatives for election to the board. The stock is up from our initial $0.89 to close Friday at $1.75, which gives the company a market capitalization of $46M. We last estimated the net cash value at around $32.2M or $1.23 per share and the liquidation value at around $43.4M or $1.65 per share. With the stock at a premium to the liquidation value, and that liquidation value deteriorating, we’ve decided to exit the position for a 96.6% gain.

The proxy statement for DITC’s 2009 annual meeting of stockholders more fully describes the agreement between Lamassu and DITC thus:

The Board of Directors currently has seven members. There are two directors in the class whose term of office expires in 2009. Both of the directors currently in serving in this term will not be standing for re-election. The Board of Directors has nominated two new persons to fill these positions. The two nominees, Mr. Alan B. Howe and Mr. Frank J. Sansone, are not currently directors of Ditech. The nomination of each of Mr. Howe and Mr. Sansone was recommended by a securityholder. If elected at the annual meeting, each of the nominees would serve until the 2012 annual meeting and until his successor is elected and has qualified, or until the director’s death, resignation or removal.

On September 2, 2009, Ditech and Lamassu Holdings L.L.C. and certain of its affiliates (collectively, “Lamassu”), entered into a letter agreement in which Ditech and Lamassu agreed that each of Mr. Howe and Mr. Sansone would be nominated to be elected to the Board of Directors at this annual meeting. In addition to the nomination of each of Mr. Howe and Mr. Sansone for election to the Board of Directors, the letter agreement also provides that:

• If Mr. Sansone is unable to serve as a director at a time when Lamassu owns at least 5% of the Ditech common stock, Ditech will appoint a replacement director designated by Lamassu and reasonably acceptable to Ditech Networks;

• Mr. Sansone and any replacement director will sign a conditional resignation from the Board of Directors, which may be accepted by the Board of Directors in the event that Lamassu’s beneficial ownership of Ditech common stock falls below 5% of the outstanding Ditech common stock;

• Lamassu will vote all of the shares it beneficially owns in support of the slate of directors nominated by the Board of Directors at this annual meeting of stockholders (and will not support or participate in any “withhold the vote” or similar campaign, or support any other nominees other than the slate of directors nominated by the Board of Directors);

• Lamassu withdrew its previously announced notice of its intent to nominate directors with respect to this annual meeting of stockholders;

• For a period ending 90 days from the date of this annual meeting of stockholders, Lamassu will not (i) make any public statement regarding Ditech, the Board of Directors or any of Ditech’s officers, directors or employees, except for the press release attached to the agreement or as may be required by law, or (ii) disparage Ditech, the Board of Directors, or any of Ditech’s officers, directors or employees, in any manner, including in any manner which could be harmful to Ditech or its business, the Board of Directors or its reputation, or the business reputation or personal reputation of any officer, director or employee of Ditech.

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

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Shareholder ignorance is bliss

Posted in About, Activist Investors, Stocks, tagged on September 11, 2009| Leave a Comment »

ClusterStock has an article by John Carney, How Ignorant Are Shareholders?, in which he argues that the financial crisis has “dealt a serious blow” to the “idea that corporate governance reforms that empower shareholders to direct the activities of corporations would make companies more financially responsible.” We think John’s got it wrong, but before we begin our rant, let us just say that there is much to respect about John Carney. According to his bio, he’s got a law degree from the University of Pennsylvania, and he practiced corporate law at Skadden, Arps, Slate, Meagher & Flom and Latham & Watkins, both of which are preeminent firms. We also almost wholly agree with his positions on plenty of contentious issues, as summarized here in his bio:

He has argued that failed banks should not be bailed out, Lehman’s collapse was not a disaster, AIG should be declared bankrupt, that naked short selling is not a problem, that backdating isn’t so bad, insider trading should be legal, many corporate CEOs are underpaid, global solutions are worse than local solutions, Warren Buffett is overrated, Michael Milken is a great American, the collapse of the hedge fund was not a scandal, hedge funds are over-regulated, education is overrated by the educated, bonuses at successful Wall Street’s firms are deserved and possibly undersized, management buyouts are boons to the economy, Enron’s management was victimized by an over-zealous prosecution, Sarbanes-Oxley should be repealed, corporate compliance culture is a disaster, shareholder democracy is overrated, hostile takeovers ought to be revived, the market is permanently moving away from public ownership of equity in corporations, private partnerships are on the rise, public ignorance is encouraged and manipulated by governments and corporations, experts overrate expertise, regulatory agencies are controlled by the businesses they supposedly regulate and Wall Street is much more fun than people give it credit for.

He’s trained in the dark arts of the law and he’s practiced with the best. In other words, he should know better.

John’s premise is that financial companies that score highest on most measures of corporate governance performed poorly during the crisis. He argues that shareholders are ignorant, and giving them more say in the management of a company is like tossing the car keys to a blind man and jumping in the back seat:

In political science, the roles of irrationality and public ignorance are well understood. Studies going back decades prove that the public is not only ignorant, it is stubbornly ignorant. It remains ignorant even in the face of widely available and easily obtainable information. Voters are so ignorant that they cannot rationally choose between different programs offered by politicians. And the ignorance persists so that they cannot assign blame or credit to the parties responsible for the programs that are ignorantly selected.

If economists were to take this seriously and apply it to shareholder behavior, they might discover that the case for shareholder democracy is seriously undermined. Instead, many continue to doubt that shareholder ignorance is a serious problem. And those who acknowledge it could be a problem, often assume it can be overcome by providing shareholders with more information. This simply ignores what we’ve learned in political science about shareholder ignorance.

Now, we don’t disagree that many shareholders are ignorant. It’s well known that many don’t read disclosure documents, and many can’t read financial statements. We’ve also argued previously that even those who do read financial statements often ignore important parts of those financial statements, like the balance sheet. Our own About Greenbackd page argues that there are opportunities for investors focused on the balance sheet, because many investors are mesmerized by earnings and totally ignore assets. Where earnings understate the asset value, this creates an opportunity for investors like us. No, we don’t disagree that many shareholders are ignorant. In fact, we rely on that ignorance to make our living.

The point at which we diverge from John is his contention that this ignorance precludes a shareholder from voting. We don’t allow shareholders to vote because that is the best way to manage a company. Shareholders vote because it is their right to do so. A share is nothing more than a bundle of rights: A right to a dividend, a right to a share of the assets on a winding up, a right to a say in the affairs of the company on certain issues, a right to determine who directs the affairs of the company. They are property rights, and standing is accorded to the holder to enforce those rights.  The board, and, indirectly, the officers of the corporation, serve at the pleasure of the shareholders. Often a board will seek to prevent a shareholder attempting to demonstrate this last point, for example, by implementing poison pills and other shareholder unfriendly devices, but that is nothing more than an implicit recognition by the board that it is true. Voting, then, is simply a shareholder exercising one of their property rights. If you advance your money, we think you should get all of the attendant property rights, whether you’re ignorant or not. In this society, for good or ill, the owner of property is the person who controls its destiny. We’d argue that this is generally a good thing, and almost all progress the world over stems from this simple principle. Any attempt to sever the relationship between private property and ownership strikes right at the heart of capitalism.

So why the seeming relationship between “good corporation governance” and poor returns? Who knows, really? Statistics can be massaged to say anything. If we had to guess, without reading the paper, we’d guess that it’s a problem of definition. The phrase “good corporate governance” is at best meaningless, and at worst a smoke screen to obfuscate what it really is: an attempt by management to operate on behalf of “stakeholders” (read “parties other than shareholders”), to adhere to the “triple bottom line,” “The Equator Principles,” and other similar ideas irrelevant to shareholders. It’s no wonder that the corporation performs poorly. The board’s worried about everyone other than the owners. We’d argue that those are not proper considerations for the board. What sensible suggestions fall within the remit of “good corporate governance” are necessary only because shareholders don’t have sufficient voice in the operation of the company. They are simply unnecessary, additional regulation to paper over holes left because shareheolders are disenfranchised.

What’s the alternative? Plato’s Republic shoehorned into the corporations law? Philosopher-king CEOs? Frankly, the thought makes us gag. No, the real alternative is shareholder enfranchisement. Force the stewards of capital – the boards and officers – to recognize the rights of shareholders – the rightful owners of that capital. Ensure that shareholders are properly able to deal with their property as they see fit, and to express their desires for that property to the board without restriction. Carl Icahn has prepared a good starting point in a series of essays, Capitalism Should Return to Its Roots, We’re Not the Boss of A.I.G. and It’s Up to the Shareholders, Not the Government, to Demand Change at a Company.

John concludes by calling on economists to “survey shareholders and objectively document ignorance.” There’s no need. They can be as dumb as a box of hammers, but they should still be allowed to cast their vote. If that right is taken away the key foundation of capitalism is lost, and we’re pulling our money out of the market and putting it into shot-gun shells and tinned food.

End rant.

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