Posts Tagged ‘Special Situation’

The excellent Above Average Odds Investing has a great analysis of Visteon Corporation (VSTNQ). Here’s the pitch:


The Visteon Corporation is a classic post reorg/special situation with a large margin of safety and substantial near-term upside potential.

Brief Business Description:

Visteon Corporation is a global Tier 1 supplier of automotive products to original equipment manufacturers (OEM’s). Visteon is a market leader in each of its three core product groups: climate, electronics, and interior systems. Visteon is geographically diversified and is not overly reliant on any one particular OEM. The company’s three largest customers are Ford, Hyundai/Kia, and Nissan/Renault (which make up 29%, 27%, and 9% of the company’s revenues respectively).

Opportunity Overview:

Visteon’s shares are currently trading on a “when issued” basis at roughly 3x 2011 EBITDA, and after backing out the company’s significant ownership in high growth subsidiaries, we believe the core Visteon business trades for between 1.5x and 1.7x EBITDA. Given Visteon’s multiple internal and external catalyst’s, highly attractive absolute valuation and the outsized spread between the company’s “when issued” shares and the already depressed valuation’s of its global competitors, we think that the stars are aligning for bargain hunting investors to generate spectacular returns of 30%+ in a short period of time with relatively low risk. Keep in mind that this isn’t “your father’s” Visteon, as the company will exit bankruptcy permanently improved and completely transformed, offering investor’s both a 1) quick, high-return, relatively risk-free arbitrage and/or 2) an inexpensive way to play any upturn in – or at least the stabilization of – global auto sales and economic activity in general.

The idea here is simple. As Visteon exits chapter 11, the near to medium-term upside will likely be driven by a combination of 1) a couple of imminent, high probability catalyst’s that should force the market to assign this company with a much more appropriate valuation on an absolute basis and relative to its peers and 2) various operational and financial enhancements that the company recently undertook while in bankruptcy should continue to yield visible and increasingly positive operating results for the foreseeable future.

Our expectation is that the initial roughly 30%+ will come almost instantaneously (within a month or so) as 1) the stock begins to trade regular way 2) equity analysts initiate coverage and 3) various institutional and index funds that have been unable to purchase the stock up until this point (due to restrictions on purchasing company’s in Ch. 11), begin buying in droves. Notably, the return assumption above assumes that upon re-emergence the company trade’s at an incredibly non-demanding multiple of 3.75x EBITDA or, to put it another way, in line with the cheapest automotive suppliers within the industry as a whole. Keep in mind that we think this estimate is very (almost unjustifiably) conservative given that on average Visteon’s peers tend to be considerably more levered, and typically possess both lower EBITDA margins as well as less attractive long-term growth prospects.

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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:


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.


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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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):


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.


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.


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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