Monday, April 30, 2007

Dobson Communications--Hang Up & Sell.

US wireless operator Dobson Communications (DCEL-$9.30), which offers services under the name Cellular One in 70 markets in 17 states, primarily in rural and suburban areas, was started as a family business by E.R. and Ruby Dobson, who founded the Company as Dobson Telephone Company in 1957.

Today, after two reorganizations, the scions of E.R. and Ruby have finally handed the reigns of day-to-day management over to outsiders, but as they still own more than 56 percent of the total voting power of the outstanding common stock, the Company is still an open cash register to them:
  • Everett R. Dobson serves as executive Chairman of the Board of Directors and received a compensation package (salary, cash bonus, options) of $1.48 million in fiscal 2006.
  • Stephen T. Dobson has served as a Director since 1990 and took home $211,865 in director fees/stock options in fiscal 2006.
  • DCCLP, a limited partnership controlled by brothers, Everett and Stephen, owns a 90% interest in a limited liability company that owns a multi-building office complex in Oklahoma City. As of April 24, 2007, DCCLP owned shares of common stock representing more than 56% of the total voting power of Dobson’s outstanding common stock. The Company began occupying a significant portion of this complex as its corporate headquarters effective May 1, 2001. The lease is a 15-year, triple-net lease with an annual rental of $3.3 million.
  • Eric and Stephen are also executive officers of DWL Holding Company, which through subsidiaries provides various telecommunications services to Dobson on a fee basis. Dobson purchased $4.3 million of services from DWL, or its subsidiaries, during the year ended December 31, 2006. DCCLP is a principal shareholder of DWL.
  • Until February 18, 2004, their father, Russell L. Dobson was one of Dobson’s directors, too, where he served on the Compensation Committee! When he retired from the Board the Company paid to him a $150,000 ‘retirement stipend.’ The Company continues to maintain a ‘consulting agreement’ with Russell. Digging into long-buried regulatory filings, we unearthed that “in exchange for Mr. Dobson's services” he receives monthly compensation of $15,000 and insurance benefits commensurate with Dobson’s employee plan (effective through August 31, 2008).

Unfortunately, hanging onto the Dobson name has come with a higher-than expected price for past shareholders.

In February 2002, Logix Communications—a subsidiary business organized in the late 1990s to offer a variety of telecommunications services to medium-sized business customers (and borne as part of a first reorganization of Dobson Communications)— filed for voluntary Chapter 11 bankruptcy protection and reorganization. [Everett Dobson served as chairman and CEO of Logix until 1999.]

Logix emerged from reorganization in April 2003, having since been renamed Intelleq Communications and the aforementioned DWL Holding Co.

In fiscal 2006, Dobson reported its first profit in more than a decade! The Company earned net income of $4.2 million, or 2 cents per share, compared with a loss of $130.7 million, or 90 cents per share, in 2005. [Ed. note. Results in 2006 benefited from a 6 cent gain from a one-time tax benefit.]

Sales rose 8 percent to $1.27 billion from $1.18 billion.

Three key metrics showed improvement in fiscal 2006: (1) Gross customer adds rose to 538,500, up from $507,500 in fiscal 2005; (2) average monthly service revenue per customer rose to $48.48, up from $45.26 in the prior year (principally the result of the continued migration of customers to Dobson’s GSM offerings); and, (3) average monthly post-paid churn fell to 1.9% from 2.5% in 2005.

Management believes that the focus of owning and operating a mix of rural and suburban wireless systems will provide strong growth opportunities because these systems currently have lower penetration rates, higher customer growth rates and less competition for customers than wireless systems located in larger metropolitan areas.

In addition, the Company is looking to drive ARPU (average revenue per customer) growth through GSM migration (and the introduction of enhanced wireless services, giving its customers the ability to access the Internet, to send and receive pictures and video, and to download games and music). Dobson has deployed a GSM network in all of its markets and is currently marketing GSM products. Its average ARPU, for GSM customers has proven to be higher than ARPU from Time Division Multiple Access, or TDMA.

As of December 31, 2006, 89.2% of customers were using Dobson’s GSM network.

As of February 14, 2007, Dobson’s wireless systems covered a total population of 12.7 million in 17 states, with approximately 1.7 million customers (with an aggregate market penetration of 13.2 percent).

Although most of Dobson’s markets have demonstrated positive demographic growth trends and generally have maintained a high population density relative to other rural and suburban markets, customers have—on average—three other wireless service competitors to choose among. In various markets, these companies include, but are not limited to, ACS of Alaska, Alltel, Cingular Wireless, Rural Cellular, Sprint Nextel, T-Mobile, US Cellular and Verizon Wireless.

Given Dobson’s small size, the Company remains highly dependent upon the traffic patterns of its roaming partners for top-line growth. Roaming revenue accounted for approximately 22 percent of operating revenue for the year ended December 31, 2006. Cingular Wireless and T-Mobile accounted for approximately 84 percent and 13 percent, respectively, of Dobson’s roaming traffic for the year ended December 31, 2006.

Year-over-year subscription growth—due to the need for the continued expansion and upgrade of the wireless system—has been costly. The Company remains highly leveraged, with net debt five times EBITDA. Total borrowings were more than 13.6 times stockholder equity! And debt-service was a meager 1.07 times operating income (before interest and taxes).

Pinching future liquidity, too, are total contractual cash obligations (debt securities, operating leases, and purchase goods/services obligations) of $77.7 million, $159.5 million, and $1.8 billion in fiscal 2007, fiscal 2008-2009, and 2010-2011, respectively.

ROA and ROE were 0.4% and 2.3%, respectively in fiscal 2006. [Ed. note. Risk free return on a five-year treasury is about 4.60 percent.]

In our view, selling for an enterprise value of more than 8 times expected EBITDA of $485 million, the share price of Dobson already discounts an expected improvement in finacial improvement—from subscriber gains and slightly higher APRU—in fiscal 2007. Verizon Communications Inc. (VZ-$37.89) and Sprint-Nextel (S-$20.21), by comparison are priced at EV/EBITDA of 4.8 times and 6.2 times, respectively.

Take the money and run! The only shareholders who will continue to make out in 2007 have the last name, Dobson.

Editor David J. Phillips does not hold a financial interest in any of the stocks mentioned in this article. The 10Q Detective has a Full Disclosure policy.

Friday, April 27, 2007

Non-Employee Directors Pig-Out on Corporate Perks

Ram: “Sheep do not play with pigs.”
Wilbur: “Why not?”
Ram: “Oh, it's a matter of status. Sheep, for instance, are highly regarded by Zuckerman, because we furnish him with good quality wool. With pigs, on the other hand, it's just a matter of time.”
Wilbur: “Time to what?”
Ram: “Till you're fat enough to kill.”
Wilbur: “What did you say?”
Ram: “Oh, everybody knows it. In the fall, you'll be turned into smoked bacon and ham. Just as soon as cold weather sets in, they'll kill you.” - Charlotte’s Web (E.B. White)

In 2006, the average CEO of a Standard & Poor's 500 company received $14.78 million in total compensation, according to a preliminary analysis by The Corporate Library. This represents a 9.4 percent increase in CEO pay over 2005.

It is worth noting, too, that median weekly earnings for the nation’s 105.9 million full-time wage and salary workers were $693 in the first quarter of 2007.

This being proxy season, everyone from legislators in Washington to shareholders sitting on their porch stoops in Kansas gets (i) to read how generous the named executive officers (NEOs) compensation packages were at their favorite publicly traded Companies in fiscal 2006; (ii) to see how much the NEOs picked up in perks, too—personal use of the corporate jet, club membership fees, housing allowances, home security systems, etc.

It is useful to remind our readers that—flying under the radar—the Boards of directors—who are responsible for setting NEO pay (and perquisites)—are lavished with perks of their own, too:

  • Directors at American Standard Companies (ASD-$56.33), a provider of air conditioning, bath and kitchen products, earn compensation in excess of $200,000. In addition, directors are entitled to receive company products at no cost in connection with their service on the Board.
  • AirTran Holdings (AAI-$11.61), one of the country's largest low-fare airlines, serving 56 U.S. cities, gives each outside director travel privileges, which allows the director and his or her immediate family members to travel on AirTran Airways on a complementary basis.
  • Outside directors at CBS Corporation (CBS-$32.05) earn more than $200,000 in retainer and meeting fees. The mass media company, with operations in television, radio, outdoor, and publishing, believes it is in its best interest for directors to participate in certain Company events and meet with management, customers, talent and others important to the Company, in order for them to experience the Company’s products, services and entertainment offerings. An AFC championship game, the U.S. Open Tennis Championships, Apple's iTunes Music Store downloads, boxing, and concerts—where do we sign up?
  • In addition to annual stock awards in excess of $150,000—and compensation packages that can top $300,000, UST (UST-$58.28), a purveyor of smokeless tobacco products (Copenhagen, Skoal) and wines (Chateau Ste. Michelle, Columbia Crest) treats each non-employee director to medical benefits, a retirement pension, and an annual wine allowance of up to $5,000 to foster use of the Company’s wine products.
  • Non-employee directors at golf club maker Adams Golf (ADGO-$1.95) are entitled to receive, at no charge, up to $1,000 of Adams Golf products (Ovation Fairway woods and drivers; Redline RPM drivers and fairway woods; and, the Tom Watson signature series of wedges) for promotional purposes.
  • Auto retailer Asbury Automotive Group (ABG-$29.57) doles out keys to any car on its lots to its non-employee directors.
  • In addition to compensation that can top $200,000 per annum, outside directors at specialty apparel retailer The Gap (GPS-$18.37) and their immediate families are eligible to receive discounts on merchandise in accordance with Gap’s corporate employee merchandise discount policy. We thought that they were independent, non-employees?
  • Each non-employee director at Red Robin Gourmet Burgers (RRGB-$41.28) is entitled to receive complementary food and beverages at the Company’s restaurants. We wonder if they leave the tip in cash—or tell the staff to ‘put it on their tab?’
  • As part of their ‘continuing education’ each director who is not an employee of Anheuser-Busch (BUD-$50.60) is encouraged to visit Company facilities, and the beer brewer will pay their travel and accommodation expenses—spouses, too. We suspect that the yearning for knowledge rises just in time for the summer vacation months—drinking a Michelob ULTRA Fruit Infused beer at SeaWorld or Busch Gardens.

Richard Fairbank/ Capital One Financial – $249.42 million, Terry Semel/ Yahoo! – $230.55 million, and Bruce Karatz/ KB Homes – $135.53 million—three examples (of many) where a bad year for shareholders in fiscal 2006 was a good one for CEO Compensation.

The 10Q Detective asks (rhetorically), how can directors on the Compensation Committee maintain their independence when they gorge at the same perk trough as NEOs? Perhaps directors are more independent in name than in fact?

As the ram said to Wilbur: “It’s only a matter of time ‘til you’re fat enough to be killed.”

Congress, shareholders, and the 10Q Detective are watching!

Editor David J. Phillips does not hold a financial interest in any of the stocks mentioned in this article. The 10Q Detective has a Full Disclosure policy.

Wednesday, April 25, 2007

Books-A-Million: Overdue for a Stumble?

For the quarter ending Feb. 3, Books-A-Million (BAMM-$17.40), which operates 206 retail bookstores concentrated primarily in the southeastern United States, said its net income grew to $15.1 million, or 90 cents per share, from $11.2 million, or 66 cents per share, in the prior-year quarter.

Sales increased to $174.6 million from $161.1 million.

On April 2, 2007, shares of the bookseller were up $3.32, closing at $17.49 in afternoon trading on the Nasdaq, their largest intra-day percentage gain since mid-2005.

For fiscal 2007, BAMM’s profit rose 45 percent to $18.9 million, or $1.12 per share, from $13.1 million, or 77 cents per share, in fiscal 2006. Revenue climbed 3 percent to $520.4 million from $503.8 million in the prior year.

Comparable store sales for the 52-week period ended January 27, 2007, decreased 0.6% when compared to the same 52-week period last year. The decrease in comparable store sales was primarily attributable to a decrease in magazines sales and café sales, with book and gift sales primarily flat with the previous year.

In a conference call with analysts, Chief Financial Officer Douglas Markham said the same-store sales decline was also due to the lack of a major book-related movie tie-in and an absence of strong nonfiction bestsellers. Offsetting the same-store sales decline, however, were better inventory management and discipline in cost controls.

Improved inventory management resulted in a decrease in inventory balances to $200.3 million at February 3, 2007, as compared to $204.8 million at January 28, 2006. Management said that the improvement in inventory management was driven by enhancements to the inventory replenishment systems, which allowed the Company to more effectively manage inventory levels at the individual store level.

Inventory turnover improved slightly in fiscal 2007, tallied at 1.75 times a year, up from 1.69 times in the prior year. Inventory efficiency, however, still fell short of competitors, Barnes & Noble (BKS) and Borders Group (BGP): 2.7 times and 2.1 times, respectively.

BAMM’s growth strategy is predicated on opening superstores in new and existing market areas, particularly in the Southeast. In general, stores are located on major high-traffic roads convenient to customers and have adequate parking.

In addition to opening new stores, management is constantly reviewing the profitability trends and prospects of existing stores, with an eye towards closing or relocating under-performing locations. Net store openings during fiscal 2007 and fiscal 2006 were one store and (loss of) one store, respectively.

For fiscal 2008, the Company currently expects to open approximately eight to ten new stores, relocate or remodel approximately five to ten stores and close approximately one to two stores.

BAMM’s store expansion plans imply confidence on management’s part that same-store revenue growth will rebound in fiscal 2008. This has not been lost on the investing public, who have pumped the book retailer’s share price up more than 31 percent in the last 52-weeks.

Of interest, management does not disclose its sales per square footage numbers.

In of itself, BAMM’s growth strategy is a little weak in the ‘book’s binding: (1) the industry is highly competitive and competitors include book retailers (Barnes and Noble, Inc., Borders Group, Inc.), mass merchandisers (such as Wal-Mart and Costco), and online retailers (Amazon); and, (2) if—as we suspect, consumer spending slows in the 2H:07, shareholders could be in for a nasty earnings surprise—to the downside!

The 10Q Detective postulates, too, that the reported earnings do not accurately reflect the Company’s true financial performance.

We have several concerns regarding the quality of BAMM’s sales/earnings. In our view, growth is actually being driven by artificial and/or temporary sources.

1) The Company sells gift cards to its customers in its retail stores. Historical redemption patterns show that the likelihood of a gift card remaining unredeemed (gift card breakage) is determined to be after 24 months of card inactivity. At that time, breakage income is recognized for those cards for which the likelihood of redemption is deemed to be remote.

During fiscal 2007, the Company recognized $3.2 million of gift card breakage income. This gift card breakage income is included in revenue, too.

The 10Q Detective calculated that gift card breakage represented 20 percent of the reported three percent rise in net sales for fiscal 2007. In addition, our analysis shows that the gift card windfall added 1.5 million in net income, or 9 cents per share, to EPS last year!

2) Related Party Transactions. The Company sold books to Anderson Media Corp. in the amounts of $2.43 million in fiscal 2006, up from $1.02 million and $115,000 in fiscal 2006 and 2005, respectively. Clyde B. Anderson, Executive Chairman of BAMM—and other members of the Anderson family (who collectively own 48.2 percent of the common stock of BAMM)--control Anderson Media. While the amount is relatively small, the influence the Anderson family has over sales and purchases to related parties raises a red flag with respect to quality of earnings and corporate governance.

3) The fourth-quarter of fiscal 2007 included an extra week of sales. Management said on its conference call that it “didn’t capture the number.” Nonetheless, the 10Q Detective estimates that the extra week added 6 cents to the bottom line.

4) In fiscal 2007, aided by a lower state tax rate, BAMM’s effective rate for income tax purposes dropped to 37.0 percent, down from 39.6% for fiscal 2006. We believe the lower overall tax rate added 4 cents to earnings.

We have identified several items that aided operating results in fiscal 2007. Via our modeling estimates—without the 19 cents boost from one-time windfalls—share-net in fiscal 2007 would have risen 20.7 percent.

Visibility remains low, dampened by a less than favorable consumer-spending environment. In our view, competitive pressures are many and potential for a downward revision in sales growth is high. Some investors maybe attracted to the stock’s 2.1% dividend yield, but we prefer to stay on the sidelines.

Editor David J. Phillips does not hold a financial interest in any of the stocks mentioned in this article. The 10Q Detective has a Full Disclosure policy.

Friday, April 20, 2007

10Q Detective Portfolio Adjustments


600 Shares of Precision Drilling Trust (PDS)
TOTAL:$15,226.95$15, 244.830.12%

Thursday, April 19, 2007

Introgen Therapeutics: Advexin therapy--Hype or Hope?

Introgen Therapeutics, Inc. (INGN-$5.27) is focused on the development and commercialization of targeted molecular therapies for the treatment of cancer and other diseases. The Company’s lead product candidate, ADVEXIN therapy, combines the p53 tumor suppressor with a, non-replicating, non-integrating, Adenoviral Vectors delivery system (the technology is licensed from The University of Texas M. D. Anderson Cancer Center).

Because most cancers are amenable to local treatment and because local cancer treatments are administered far more often than systemic cancer treatments, Introgen believes that ADVEXIN therapy can be deposited directly into a patient’s cancerous tumor by hypodermic syringe. In those cases for which a systemic therapy may be indicated, the Company is developing the use of a systemically administered nanoparticle formulation system to deliver tumor suppressors.

Introgen is initially developing ADVEXIN therapy for head and neck cancer, which has been designated an Orphan Drug under the Orphan Drug Act.

The Company has two ongoing Phase 3 clinical trials of ADVEXIN therapy in patients with advanced recurrent squamous cell carcinoma of the head and neck (recurrent head and neck cancer). These trials involve administration of ADVEXIN therapy, both independently and in combination with chemotherapy, in recurrent head and neck cancer.

The problem at Introgen, as columnist Adam Feuerstein wryly points out in two of his articles, is that top management at Introgen (a) “wrote the book” on how to perform misleading data analysis and (b) has been issuing empty promises about Advexin for years.

In my view, the FDA will not give the nod to ADVEXIN until Introgen scientists (i) identify a set of prognostic indicators associated with high response rates and increased survival in prior Phase 2 clinical trials of Introgen's ADVEXIN therapy and (ii) design, enroll, and carry-out a NEW clinical trial of aforementioned cancer patients with the predictive biomarkers.

At December 31, 2006, Introgen had an accumulated deficit of $172.3 million; and, according to Introgen’s regulatory filings, since inception (June1993), resources have been principally used to conduct research and development activities for ADVEXIN therapy.

This second point, however, is somewhat misleading, for despite repeated years of research and repeated clinical setbacks, some resources have gone to top executives at the Company:

  • David G. Nance, who beneficially owns 8.10% of Introgen’s common stock has served as a member of the Board and as President and Chief Executive Officer since inception. In fiscal 2006 and fiscal 2005, his salary was $594,944 and $538,750, respectively, and he was rewarded with options valued at $2.1 million and $1.53 million, respectively, too.
  • Max W. Talbott, Ph.D. joined Introgen in February 2002 as the Senior Vice President, Worldwide Commercial Development. In fiscal 2006 and fiscal 2005, his salary was $361,667 and $325,000, respectively, and he was rewarded with options valued at $747,864 and $600,300, respectively, too.
  • John N. Kapoor, Ph.D., who beneficially owns 8.01%, or 3.51 million shares, is the Chairman of the Board, and received director compensation in fiscal 2006 of $163,624 (in the form of stock and option awards).

Dr. Kapoor is the sole shareholder of EJ Financial Enterprises, Inc. Introgen has a consulting agreement with EJ Financial pursuant to which EJ Financial provides services to the Company, which include business development, license negotiations, market analysis and general corporate development, for $175,000 per year.

  • In October 2004, Introgen acquired Magnum Therapeutics Corporation, a company owned by Dr. Robert Sobol, Senior Vice President, Medical and Scientific Affairs. Introgen paid approximately $1.75 million to Dr. Sobol for the Magnum stock.

Magnum’s primary asset is the right to receive funding under a grant from the National Institutes of Health. During fiscal 2006 and fiscal 2005, Introgen earned $1.0 million and $163,000 of revenue under this grant, respectively. The funding available to Introgen under this grant has now ended!

Sadly, the empirical data presented—to date—suggests that the pocketbooks of Introgen insiders are doing better than the health of the patients in the Company’s cancer trials.

Editor David J. Phillips does not hold a financial interest in any of the companies mentioned in this posting. The 10Q Detective has a Full Disclosure Policy.

Wednesday, April 18, 2007

Time for Trump Entertainment to tell 'The Donald': "You're Fired!"

The “Trump” name is a powerful one. Nearly every day I'm approached by one company or another wanting me to put that name on some product or service. They know that with the Trump stamp of approval comes immediate recognition and an expectation of quality and success. – Donald J.Trump (February 21, 2006)

In the view of the 10Q Detective, publicly available information suggests that Mr. Trump’s bombastic boastings belie the truth. Trump’s likeness and/or name on casino properties do not seem to be driving incremental gambling revenue or traffic through the front doors.

According to numbers published by the New Jersey Casino Control Commission, two of the three casinos that bear his name—Trump Plaza and Trump Marina—ranked dead last in terms of gambling revenues among the 11 casinos in Atlantic City (January – March 2007).

In addition, Trump Entertainment Resorts (TRMP-$17.10), the casino holding company that emerged from bankruptcy proceedings in 2005 and bears his name, reported operating losses from continuing operations of $23.2 million in fiscal 2006—hit by declines in slot machine foot traffic and the repayment of $130.1 million in interest expense (TRMP owes a whopping $1.4 billion in debt).

I have made the tough decisions, always with an eye toward the bottom line. Perhaps it's time America was run like a business. – Donald J. Trump

In actuality, Mr. Trump, who beneficially owns 28.8% of TRMP’s common stock, is concerned about one bottom line—his own.

Although Mr. Trump received no remuneration for serving as the Chairman of the Board during the fiscal year ended December 31, 2006, ‘the Donald’ did receive about $1.9 million in service payments. This remuneration is separate from a trademark license agreement for use of his name and likeness that Trump signed with TRMP when the Company emerged from bankruptcy.

The Company also entered into a development agreement with the Trump Organization, pursuant to which the Trump Organization has the right of first offer to serve as project manager, construction manager and/or general contractor with respect to construction and development projects (with an initial budget of at least $35.0 million) for casinos and casino hotels and related lodging at the Company's existing and future properties.

In September 2006, TRMP amended the development agreement (Agreement) with the Trump Organization, LLC to provide that so long as Trump Organization LLC does not exercise the rights originally granted under the agreement, it would be paid a monthly retainer to provide cost saving services for any Project and would receive a percentage of any cost savings realized through its efforts!

Trump Organization LLC did not exercise its rights under the Agreement with respect to the hotel tower currently under construction at the Trump Taj Mahal. Ergo, TRMP paid about $1.0 million, including minimum monthly fees of $350,000 and cost saving commissions of $701,000 to Trump Organization LLC during the year ended December 31, 2006.

In the course of business, TRMP engages in various transactions with other entities owned by Mr. Trump, including $79,000 for leasing certain office space in Trump Tower in Manhattan, $87,000 for the periodic use of Mr. Trump’s airplane and golf-courses to entertain high-end customers and $319,000 for costs provided to pilot and maintain Mr. Trump’s airplane. Additionally, in the ordinary course of business, TRMP purchased $563,000 of Trump labeled merchandise, including $470,000 for Trump Ice bottled water served to its customers, from third party vendors. (While TRMP does not directly pay royalties on such merchandise to Mr. Trump, he may be entitled to royalties from third party vendors.)

Donald Trump has described himself as the “hottest brand on the planet.” In an interview with BusinessWeek last year, Mr. Trump bragged that he made $240 million just from lending his name to 42 buildings that are currently under construction around the world.

Granted, whether he puts his name on bottled water, vodka, business suits, or even luggage, it sells—initially. What the Donald will never admit, however, is that his celebrity brand name lacks staying power.

After the success of Donald Trump's television series The Apprentice, in 2004, Milton Bradley / Hasbro reissued Trump: The Game back to stores. The game was DOA.

In 2005, Donald Trump launched the Trump's blog, which is subtitled "ideas and opinions from Donald Trump and the TrumpU Facility," which is connected to Trump University, an online education Web site begun in May 2005. The recent Alexa three-month average rank for his blog/university website was 25,020—lower than his competitor, Mark Cuban ( #19,104), but higher than his nemesis, Rosie O’Donnell ( #40,842).

Green: /blue: Trump /red:

In January 2006, Trump launched GoTrump, an online travel website, dedicated to “the art of the travel deal.” The site features some Trump properties as well as other hotels and travel deals worldwide. Its latest three-month average traffic rank: 222,071 – as compared to #61 and #80 for and Orbitz, respectively (Alexa ranking).

And then there is The Apprentice: Season 6. Contrary to Trump’s repeated boasting that it is “the number one show on tv,” the rankings for national prime-time network television (March 26-April 1) as compiled by Nielsen Media Research place his show dead last in its time slot, with a 57 ranking and only 6.0 million viewers. (In fact, The Apprentice, shown on Sundays at 10:00 PM on NBC, lost 42.5% of the audience from its lead-in, the popular Deal or No Deal, ranking #26.)

When I build something for somebody, I always add $50 million or $60 million onto the price. My guys come in; they say it's going to cost $75 million. I say it's going to cost $125 million, and I build it for $100 million. Basically, I did a lousy job. But they think I did a great job. – Donald Trump

The crux of this exercise is to demonstrate that real estate mogul Donald cares about Donald—not the shareholders of the casino holding company bearing his name.

I mean, there's no arguing. There is no anything. There is no beating around the bush. "You're fired" is a very strong term. - Donald Trump

It’s time the Board pointed their fingers at Mr. Trump and said, “you are fired!”

Editor David J. Phillips does not hold a financial interest in any of the companies mentioned in this posting. The 10Q Detective has a Full Disclosure Policy.

Thursday, April 12, 2007

Particle Drilling--Technologies Still Not Worth a Drill Bit.

Since we first posted on Particle Drilling (PDRT-$3.97) back in October 2006, shares in this developer of the Particle Impact Drilling (PID) System, a patented system utilizing a specially designed “fit for purpose” drill bit fitted with jetting nozzles and polycrystalline diamond compact cutting structures for penetrating hard-rock formations in the exploration of oil and gas, have risen about 42 percent.

This report will address several developments that have been positive catalysts on the stock price over the past few months.

CEO Jim Terry stated: “During this trial, the Company (PDTI) completed the longest ever footage run with its PID technology, drilling a 120 foot interval in approximately eight hours of on-bottom drilling time.”

10Q Detective: Minimized in the excitement was that equipment failures resulted in interruptions of continuous operations, including a mechanical failure with the particle storage drum drive line, a broken valve, and debris plugging a nozzle on the new PID bit.

Pursuant to this agreement, PDTI will provide its patented Particle Impact Drilling services in connection with the Operator's drilling program in East Texas with the initial PID operations expected to commence during the first calendar quarter of 2007.

10Q Detective: “The compensation under this agreement, if any, is based on the Company's performance pursuant to a gain-sharing formula.” As the PID System was still in the developmental phase as of April 2007, it is doubtful that PDTI recognized any revenue from this alleged deal.

Oh, “at the Operator's request, its name was withheld and additional details of the contract remained confidential.”

Shares of the oilfield services driller surged more than 14 percent, or 59 cents, to close at $4.10 on the news.

  • February 12, 2007. It was subsequently revealed in this issue of Oil & Gas Journal that the undisclosed exploration concern was Denver-based Gasco Energy (GSX-$1.92), which with a market capitalization of $163.5 million is hardly “one of North America’s Largest Independent Oil & Gas Companies.”

CEO Terry also said in the interview that PDTI was expecting to have ten sets of equipment available for rental by the end of 2007 (initial costs are estimated at about $1.8 million, with an expected payback period for each unit of about eight months).

The payback period, of course, is subject to changes in day drilling rates, delays due to equipment failures or bad weather, and variable labor costs.

  • During the week of March 16, 2007, the Houston Business Journal ran an article on “Hard-Rock Drilling,” which positioned the PID System as a promising, radical departure from traditional technologies. Did we forget to mention that Thomas Hardisty, senior VP of corporate development at PDTI, wrote the story?

This commercial trial allowed the Company to field-test several new advances to its Particle Impact Drilling system under rigorous conditions: (i) it tested a newly constructed solids-processing and particle-storage unit; (ii) for the first time used a newly designed 8.5 inch diameter bit; and (iii) the Company drilled at depths below 12,500 feet -- its deepest drilling operation to date.

The Company is now focused on completing the development of its new injector system and further improving productive-drilling-time (PDT) as the priorities for the next commercial trial.

CEO Jim Terry points out that several upcoming improvements to the PID system will help the company realize the full potential of its new technology: "Our drilling efficiency continues to improve and we will now focus on getting an operational injector replacement as soon as possible, and will proceed with the next commercial trial when that effort is complete."

On the commercialization front, Terry indicated that the Company is working with a growing number of oil and gas companies to evaluate their target applications. He expects to establish additional contracts with a group of early adopters, thus providing a solid foundation for rapid growth once the PID system is fully commercialized.

Can PDTI management’s claim of its drilling results be trusted? Their repeated promulgations of alleged commercialization have been only outmatched by the fact that the Company still has yet to earn a dollar in rig rentals.

Total revenue generated by the Company from June 9, 2003 (date of inception) to December 31, 2006: nil. Accumulated net loss = $22.6 million.

Do unfulfilled promises justify a 42 percent gain in the stock since last we met?

Wednesday, April 11, 2007

Insiders at St. Jude Medical Profit By Their Own Rules

Mr. Stefan K. Widensohler is a director of medical device maker St. Jude Medical (STJ-$38.47), and the beneficial owner of approximately 45% of the common stock of, Invatec, an Italian company that makes interventional vascular products, including cardiology catheters, an embolic protection system designed for carotid angioplasty, and a line of interventional peripheral vascular products. Invatec is an OEM to St. Jude’s Japanese distribution subsidiary. Sales by Invatec to St. Jude during 2006 were $9,435,744.

As if being a director on St. Jude’s board were not sufficient in of itself to safeguard this recurring revenue stream (for his own company), Messer. Widensohler finds it necessary to collect $133,000 in annual directorship fees from St Jude, too.

In December 2005, St. Jude entered into a preferred investment agreement with an unnamed, development stage medical device company. George Fazio, the President of St. Jude’s Cardiovascular Division had made an equity investment of $25,000 in the Device Company in November 2004 and had made a loan of $50,000 to the Device Company in April 2005.

Under the Investment Agreement, St. Jude has an option to acquire the Device Company at any time through January 2008 for an upfront purchase price and potential milestone payments. If the Company acquires the Device Company, Mr. Fazio could receive payment of up to approximately $322,000 at the closing, and up to an additional $245,000 if certain milestones are achieved by the Device Company following its closing.

In April 2005, St. Jude acquired Velocimed, LLC., a privately owned company that makes specialty interventional cardiology devices, for $74 million.

Paul Buckman, who served as President of St. Jude’s Cardiology Division until August 2006, was a founder and shareholder of Velocimed. At the time St. Jude purchased Velocimed, Mr. Buckman was the beneficial owner of 436,159 shares of its stock, which constituted about 1.6% of Velocimed’s total number of shares outstanding.

At the closing of the acquisition, Mr. Buckman received approximately $714,000 in consideration for his interest in Velocimed. In addition, Mr. Buckman has the potential to receive additional consideration of up to approximately $2.9 million if certain milestones are achieved.

The share price of St. Jude’s has flat-lined in the last sixteen months, as investors fled medical device makers with implantable cardiac devices (product recalls & sluggish sales) and drug-coated stents (safety issues) in their portfolios.

In the last two months, three Research Firms have upgraded their opinion of St. Jude, citing early signs of a recovery in the implantable cardiac device markets (62.2% of the Company’s $3.3 billion in sales during fiscal ’06), combined with the possibility of accelerated sales growth during the 2H:07 (new product introductions).

Year-end calendar 2007 price targets for St. Jude range from $43 per share to $50 per share, or a multiple between 24.8 times and 28.9 times Reuter’s estimates of $1.73 per share.

In our view, the catalysts for P/E multiple expansion are an ICD market recovery and St. Jude’s ability to expand its market share (about 20 percent).

A look at St. Jude’s recently filed Proxy Statement also shows that top executives seem to be making out well during these cloudy days for the Company’s common stockholders. For example, Chairman & CEO Daniel J. Starks and CFO John C. Heinmiller took home $5.8 million and $2.7 million, respectively, in salary and other incentives.

“I don't have to play by these rules or do these things...I can actually have my own kind of version.” – The Smashing Pumpkins’ lead guitarist and vocalist, Billy Corgan

Looks like insiders at St. Jude Medical must be admirers of the music of The Smashing Pumpkins.

Editor David J. Phillips does not hold a financial interest in any of the companies mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Saturday, April 07, 2007

"T-t-talk is cheap" at Circuit City -- Time for Results

Electronics retailer Circuit City Stores Inc. ($18.47) said last week it lost $12.2 million, or 7 cents a share, in the fourth quarter, hurt by charges related to store closings and slower sales growth related to falling flat-panel television prices and uneven demand for computer hardware.

In the year-ago period it earned $141.4 million, or 81 cents a share. Results for the latest quarter include $144.6 million related to the impairment of goodwill, store and facility closures and other restructuring activities.

The Company also announced a ’wage management’ initiative under which approximately 3,400 store employees, or about eight percent of the work force, were notified on March 28, 2007 of their planned termination. The separations were effective immediately and were the result of a Company analysis, which identified employees who were paid well above the market-based salary range for their role.

To meet the changing nature of the consumer electronics retail marketplace, as well as improve its financial performance, Circuit City has announced other changes, too, including the disposition of long-lived assets (e.g. the reduction from ten retail operating regions to eight), losses from discontinued business activities and the associated lease termination costs (e.g. outsourcing of the IT infrastructure to IBM), and non-cash goodwill impairment charges.

"[This] and other aggressive actions [were taken] to improve our cost and expense structure, which will better position us for improved and sustainable returns in today's marketplace," said Philip J. Schoonover, chairman, president and chief executive officer of Circuit City Stores, Inc.

In the recent fiscal year ended February 28, 2007, operating margin as a percentage of net sales fell to 0.1%, down 90 basis points from the prior year.

According to a recent article in The New York Times, the laid-off Circuit City employees worked in the company’s stores and warehouses, selling electronics, unloading boxes and the like. Management recently said that about 60% of those associates were in customer-facing positions. They generally earned $10 to $20 an hour, making them typical of the broad middle of the American work force. Nationwide, the median hourly wage of all workers is about $15.

As a result of the wage manage—forget the euphemism, call it what it is—the gutting of higher-paid workers—the Company expects to record pretax expenses in the fourth quarter of fiscal 2007, totaling $9.9 million, related to the termination of these workers and their post-employment benefits.

The laid-off workers will get a chance to reapply for their former jobs—at lower pay—after 10 weeks, the company said. The Company did not return our call seeking comment on how much the new workers will make, or what the specific future savings will be from re-hiring the laid-off workers at lower wages.

It is a time not just for compassionate words, but compassionate action. – Children’s activist, Marian Wright Edelman

David Leonhardt, who penned the aforementioned New York Times article, says that the real message of the Circuit City layoff is that employees can no longer depend on the private sector as a retirement/health-care safety net.

Albeit we agree with Mr. Leonhardt, in our view, too, Circuit City’s focus on cost containment/ control is standard operating procedure for a retailer facing loss of pricing leverage with many of its key product-lines, such as flat-panel televisions, PC/computer products, and other electronics (camcorders, phones, etc.).

Grabbing the low-lying fruit approach will not stop the hemorrhaging or improve operating metrics, including sales per average square foot and gross margins.

In our view, save for slowing the downward pressure on the Company’s stock price, we look for the “intangible”—employee morale--to adversely impact the tangible—sales productivity.

Just how much will kicking loyal employees to the curb actually help the bottom-line?

Assuming that each displaced worker formerly made $15 an hour, multiply by a 40-hour week, and the Company paid out $31,200 per annum to each worker (excluding health/retirement expenses), or $106.1 million annually to all 3,400 workers.

Rehire 3,400 at $10 per hour, and the nominal cost is $70.7 million (excluding health/retirement benefits). The effective after-tax savings (36%) would approximate $22.7 million per year.

Anyone who has ever bought goods from Circuit City knows that it is the experienced sales persons that can unctuously get you to buy “Peace of Mind” with the Circuit City Advantage Protection plans. In the last twelve-months, net sales from these extended warranties were about 4.0 percent of domestic segment sales, or approximately $440.0 million!

Now tell us again, Mr. Schoonover, how a customer centric operating model will benefit from the loss of tenured sales persons?

In connection with his retirement (as Chairman) from the Company in July 2006, Mr. W. Alan McCollough forfeited his performance-accelerated and time-based restricted stock awards. This did not include, however, vested –and exercisable—stock grants worth an estimated $76.6 million. In addition, on December 22, 2005, he also elected to receive a lump-sum payment—in lieu of annual pension benefit payments—of $4.42 million.

If Circuit City were serious on delivering an improvement in SG&A margins, would it hurt for management to lead by example?

Granted, on its 4Q:07 earnings conference call, Phil Schoonover did say: “Changes [must] include instituting more discipline and expense controls around purchasing, travel, consultants, and many other forms of discretionary spending….”

I don’t wanna hear it
Mmm your talk is cheap
I dont wanna know
I dont wanna hear it
T-t-talk is cheap
I dont wanna know
-- Cinderella (Still Climbing, Track Listing #3, “Talk is Cheap,” 1994)

Circuit City provides a number of perquisites to its executive officers. Executives at the level of Senior Vice President and above are eligible to (i) receive a car allowance of $858.00 per month, (ii) receive a financial planning allowance of up to $6,000 per year, and (iii) participate in the Company’s Officer Evaluation Program which provides consumer electronics merchandise to the executive for personal use in an amount of up to $8,000 retail value per year.

In addition, McCollough and Schoonover and CFO Michael Foss recorded expenses of $82,316 and $83,743, respectively, for their ‘entitled’ personal use of the Company aircraft.

In fiscal 2007, the Compensation Committee also approved an increase in Messer. Schoonover’s base salary from $725,000 to $900,000.

Talk—like the disposable 3,400 sales associates—is cheap.

The 25 percent drop in Circuit City's share price in the past 52-weeks would seem to discount the Company’s lackluster results and recently reduced fiscal 2008 guidance. Nonetheless, with the announced departure of CFO Foss, the consumer electronics provider’s inability to control the pricing sensitivity of their products, reliance on third-party software to stimulate PC hardware sales (witness slower-than expected demand for VISTA), and declining consumer confidence, we expect further gross margin reductions (as the Company continues to face increased competition from discounters and mass merchandisers alike).

Nonetheless, there are several bright spots, in an otherwise dreary landscape:

  1. An expanded seven-year, $775 million Information Technology (IT) infrastructure services contract with IBM. The outsourcing of the Company’s IT infrastructure operation to IBM, will purportedly lend itself to benefits threefold. (i) it will reduce planned infrastructure cost by approximately 16% over the life of the contract; (ii) the retailer also will make used of IBM's extensive experience in managing high-volume Web sites with the company hosting and supporting the technology powering the Circuit City e-commerce channel. Circuit City will get some incremental financial benefits related to retail point of sale and merchandising system transformation with this IBM outsourcing; and, (iii) IBM will provide additional strategic support to assist the Company’s transformation effort;
  2. Digital home services, the total market opportunity for home theater installation and consumer PC-related services are expected to reach $20 billion annually by the year 2010. Circuit City started offering PC services about two years ago and launched the FireDog brand last October. In less than two years, sales have already grown to more than $200 million, and management expects fiscal 2008 sales to approximately double to more than $400 million; and,
  3. In multi-channel entertainment, Forrester forecasts online CE sales to grow by 16% on average for the next three years. Circuit City reached $1.12 billion in fiscal year '07 with web and call center sales and management expects the business to grow 30% to 40% in fiscal year '08.

The 10Q Detective would prefer to see visible signs of a turnaround—like sustainable improvements in cash flow and margins—before committing monies to this short-circuited retailer.

As for the laid off employees, our advice would be to head over and apply for jobs at either Best Buy (BBY-$48.45) or McDonalds (MCD-$45.78)--both Companies would probably treat you with with more respect and dignity.

Editor David J. Phillips does not hold a financial interest in any of the companies mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Wednesday, April 04, 2007

"How A Pro Reads A Proxy Statement."

IR Web Report, a recognized leader in providing unbiased research and intelligence in investor relations website benchmarking and best practices, recently referenced some laudatory comments about The 10Q Detective:

How a pro reads a proxy statement

IF ALL business journalists and finance bloggers were like David Phillips, companies would get away with a lot less nonsense than they do now.

Just go read his post on Aflac: Long Live the AFLAC Duck!

Amazing, isn’t it? I’m talking about the fact that it’s free.

There should be links to this guy’s blog here, here, here, here and especially here (watch the sliding logos for the duck and you’ll know why).

People like Phillips are more effective at investor protection than any of the aforementioned organizations. And I don’t say that lightly. – Dominic Jones, founder.

Thank you, Dominic, for the kind words.

Tuesday, April 03, 2007

Unlike other Executives at Asbury Automotive, CEO Gilman's Been Working for 'Paper Cups.'

Asbury Automotive Group Inc. (ABG-$28.25) is one of the largest automotive retailers in the United States, operating 114 franchises at 87 dealership locations, auto dealer and service chain, with 2006 revenues of approximately $5.7 billion.

The Company operates through geographically concentrated, individually branded regions. These regions operate approximately 87 retail auto stores, encompassing 120 franchises for the sale and servicing of 33 different brands of American, European and Asian automobiles.

In its five-year history of being a public company, the auto retailer has generated compelling results: compounded annual revenue growth of about 13.6%; 18.0% operating profit (CAGR); and enviable industry-leading comp stats: (4Q:04 – 3Q:06), including new and used comp store sales of 5.2% and 12.0%, respectively.

Yet, despite posting admirable numbers-year-in & year-out, the share price traded in a narrow band for much of the prior four years. Patient shareholders were finally rewarded with an approximately 56% gain in the price of Asbury’s stock in the last year. In our view, LBO rumors were the catalyst behind the gain.

In February 2007, ABG issued initial earnings guidance for fiscal 2007 of $2.05 – $2.15 per diluted share from continuing operations. Applying a P/E of about 13 times [derived from historic P/E ratio comparisons] 2007 share-net analyst estimates of $2.13, ABG is fairly valued at $28 per share.

In the last six months, insiders have been net sellers.

The Company recently announced that Kenneth B. Gilman, 60, President and Chief Executive Officer, plans to retire effective May 4, 2007, the date of the Company’s annual meeting.

Take this job and shove it
I ain't working here no more
I will not get all the pieces
I've been working for Paper cups, minimum wage
Just walk on out the door
Take this job and shove it
I ain't working here no more

Pursuant to the terms of his employment agreement, Mr. Gilman is eligible for separation benefits, including (i) a lump sum cash payment of approximately $2.7 million and (ii) the acceleration of 3,333 unvested restricted stock of the Company, which has a value of approximately $94,157, assuming a stock price of $28.25, the closing price of the Company’s common stock on April 2, 2007.

Let's all go use our sick leave up
And then we'll shoot some pool
Got brand new skinhead hair cuts
You think he's a fool
One of these days I'll blow my top
Or somebody's gonna’ pay
I'd hate to see the process
As you enter the factory and say

Gillman also owns 791,559 in unexercised stock options.

Take this job and shove it
I ain't working here no more
I won't let that shit bother me
That I've been working for Paper cups, minimum wage
Just walk on out the door
Take this job and shove it
I ain't working here no more

Unknown is whether or not Messer. Gillman will be allowed to keep a ‘demonstrator’ vehicle given to each senior executive for personal and business use. In the case of Gillman, however, since the Company’s corporate office was not conveniently located near any dealerships, he received a car allowance of $1,500 per month. Our advice—take the car, not a watch!

Take this job and shove it
I ain't working here
Ain't working here
Ain't working here no more
- Dead Kennedys (Album: Bedtime for Democracy, 1987)

During our due diligence, we were pleasantly surprised to find out how little Gillman profited from ‘double-dipping’ during his time at ABG:

  • Thomas F. McLarty, III is employed as the Chairman of Asbury Automotive Arkansas, L.L.C. , and formerly served as a director on the Board from April 2002 until his resignation on July 12, 2006. The Company leases from Mr. McLarty, affiliates, and his immediate family members, properties used by the Company’s dealerships in Arkansas for dealership lots and offices, for monthly rental fees totaling $129,257.

    Mr. McLarty is paid an annual base salary of $100,000. Asbury Arkansas also reimburses Mr. McLarty a total of $5,800 per month for lease and miscellaneous expenses relating to his office space, including administrative support. In addition, Asbury Arkansas pays the monthly rental cost for two vehicles leased on Mr. McLarty’s behalf, for a total amount of $1,185 per month. The agreement expires on February 1, 2010.

  • Director Jeffrey I. Wooley is employed as the Chairman of the Company’s subsidiary, Asbury Automotive Tampa, L.P. The Company leases two properties used by the Company’s Florida region for dealership lots and offices from Jeffrey I. Wooley for a monthly rental fee of $208,255.

    Mr. Wooley receives an annual salary of $100,000, is entitled to the use of an office located at one of Asbury Tampa’s dealership locations and is reimbursed an additional $3,333 per month for administrative support.

    In addition to his salary, Mr. Wooley and his family receive the use of four demonstrator vehicles, the use of which amounted to $29,048 of imputed income to him during 2006.

    Messer. Wooley is also reimbursement for annual dues for membership in two country clubs selected by Mr. Wooley, which dues are not to exceed $20,000.

According to regulatory filings, the Company’s directors and named executive officers may purchase or lease vehicles at the Company’s dealerships that are valued over $120,000.

Kenneth Gilman spent 25 years with the multi-brand retailer The Limited Brands (LTD-$26.43) before signing with ABG in December 2001. In fiscal 2000, his last full year with The Limited, Gilman took home $1.34 million in salary/cash bonus and $350,000 in Other Compensation (as compared to $776,250 in salary/bonus in fiscal 2006 with ABG).

In our view, Gilman's unremarkable severance package from ABG can be explained away by looking at his job history. In July 2001, The Limited announced a
definitive agreement to sell its Lane Bryant chain to Charming Shoppes, Inc. (CHRS-$13.00) At the time, Gilman was the CEO of this women's plus size and misses apparel division. Translation: He was about to be out of a job!

Dear, never forget one little point. It’s my business. You just work here. – Cosmetic empress Elizabeth Arden (to her husband)

Editor David J. Phillips does not hold financial interests in any of the companies mentioned in this article. The 10Q Detective has a Full Disclosure Policy.