Tuesday, July 31, 2012


After being about the last person in the world to get a Twitter account, I finally took the plunge. I absolutely love it- Twitter is a great way for sharing things that don't require much explanation. As such, instead of posting links of interest on here, I will be sharing them on Twitter so that Ragnar can be devoted to more "in depthy" stuff.

Feel free to follow. More than that, I would encourage you to start your own twitter and to post what you find interesting. That way, I can follow and read even more good ideas and thoughts. :)



Thursday, July 19, 2012

Sometimes, It's Best To Take A Pass #6: A Blank Check, With No Milk Attached.

Cullen Agricultural (CAGZ) is a neat little shell of a company that has come about from a ton of different mergers and such.

This is their basic business model:

Our principal focus is to use our intellectual property in forage and animal sciences to improve agricultural yields. The Company was formed to develop, adapt and implement grazing-based farming systems in regions of the world where the geophysical and climatic conditions are suitable for a pasture-based model. While the potential for the pasture or grazing model is significant in many of the world’s developed and developing economies, the systems are highly specific and require significant adaptation and modification to be successful. We have identified the global dairy industry as a primary opportunity in which our systems can be applied to improve yields on land and drive cost-base efficiencies. We believe that cost savings of up to 40-50% are achievable in the long term. Further, we believe the high cost structure, which is employed by over 95% of milk producers in the U.S. and supported by government subsidies, will help to maintain a floor to milk prices in the U.S. and provide us with long term margin protection. By having direct access to a domestic market, we believe our business plan provides a unique opportunity to invest directly into food production while limiting earnings volatility linked to foreign exchange exposure, typically associated with returns from commodity production in exporting countries, such as New Zealand. In addition, we believe the potential opportunity to vertically integrate, while maintaining control of the supply chain, provides a further opportunity to reduce volatility and maximize profitability.

Then you read this in the most recent 10Q:

We have been in the process of attempting to obtain land development financing backed by the property we own and operate to support our working capital needs and implement our business plan. However, due to the recent performance of similar types of farming operations in the region, as well as the general economic downturn, financial institutions have been unwilling to provide such financing. As a result, we have been unable to obtain the necessary funding to support the implementation of our business plan at this time. Accordingly, we explored all financing and strategic alternatives available to us, including disposing of or leasing portions of our land in order to continue to support our working capital needs. In 2011 and 2010, the Company disposed of approximately 2,600 acres of land. On March 5, 2012, we entered into a Sales Contract with a buyer to lease the Company’s remaining 1,035 acres of land for the remainder of the 2012 crop year for the sum of $76,000 and to sell to the buyer the land for a purchase price of $1,524,000. This land constitutes the last of the Company’s property which we had planned to use to deploy our pasture based dairy and beef business plan. It is our intention to either seek additional financing to allow us to implement our pasture based dairy and beef business plan, or to seek alternative opportunities available to us unrelated to our business plan in an effort to maximize shareholder value. To this end, the Company has in the past had, and may in the future have, discussions with potential merger candidates wishing to become publicly traded.   There is no assurance that the Company will be successful in any of such efforts.  If the Company is unable to secure additional financing or find another alternative, the Company will not have sufficient capital to implement its business plan and may be forced to suspend all operations until such time as capital or another alternative is available to it.  (Italics are mine)

Basically, the last part of what they had originally figured to be viable business plan, has been sold off... granted, this was a business plan that no one wanted to lend money to, more or less because it is probably a bad business.

So, what's left? A company that has just a touch over $3 million in cash and $~135K in liabilities (I replaced the real estate with $2mm per this 8K). Since they have historically lost money, and as such have a hair more than $3.5mm in net operating losses that don't start expiring until almost 2030, they seem to be praying they can merge with someone else. Without that happening, they will likely bleed money until they are dead, much like i mentioned in my write up of FCCC Inc.

At least the executives don't seem to be gouging the company for executive pay:

And what do you pay for this company? $4.91 million dollars. Certianly, a premium for any sort of company like this. I would rather buy Moduslink if I was on the prowl for NOLs (accounting mishaps or not)!

Interestingly, the price formerly reflected a lot of the downside, but was bid up in very small amounts of volume:

But yet again, I find myself taking a pass...

Disclosure/Disclaimer: I have no position in regard for or against any of the entities mentioned. I reserve the right to change my positions at any time. This post is my opinion. Always do a ton of your own research before even contemplating anything that I say, do, write, or so much as think about.

Wednesday, July 18, 2012

Walking Away From A Few Million Dollars... Part 3: Inspectors and Codes

On day one, we pretty much knew that we had some sort of financing in line. It was just a matter of finding someone who wanted to do the deal (which, was pretty easy since the numbers made so much sense). As such, I was now doing all I could to talk to the various state and local agencies that we would be dealing with to get them on the same page that we were for an easy renovation process... due to the nature of the risk we were taking on if we didn't have everyone on the same page, this had to be taken care of well a head of closing

When reading on the different jurisdictional authorities, it seemed that the main building with the 1 BR units would fall under the state due to it's Titanic size, but the smaller 2 would be overseen by the city. That said, due to the size of the complex, it seemed that the city didn't want to have much to do with it, but then again, neither did the state. When it came to the inspections that would occur every time a unit rented out, the City Frankfort would address those.

When talking with them, the standard introduction was the total truth: "Hey! My name is Jeff Moore. I am in the process of buying this boarded up apartment complex that has fallen into disrepair and has been abandoned for 2 or 3 years. I am wanting to talk with you about it, because there is a lot of work to be done and I need to figure out how to make it safe, profitable, and something that the community can be proud of again. Can you help me out?"

A lot of things, we were trying to improve simply because we wanted to. Certain matters of code are not really aplicable in all situations. For example, I would argue that the banister on the outsides of the buildings would be very easy for a kid to fall through. As such, we were wanting to alter them. When bringing that up to the state, it was the sort of thing where the construction that was existing didn't readily accomodate new codes. It was an interesting situation where if we made something safer, that wasn't always good enough, because if we did one thing, we would likely need to do it all. For the stairs, it seemed as if it might be easier to tear them down and start over due to some interpretations of clearance issues, that ironically, would have made this particular case harder to navigate. Or, we could do nothing (which, probably would have been fine, since they were pre-existing and met code when built). Though, putting up some sort of cast lattice work could be considered a decoration and accomplish our main goal.

This experience highlights the one thing that was evident from day one of meeting with the various government agencies: none of them really wanted to make a definite call as to what needed to be done or even who should regulate it. I was almost always told something to the effect of "just talk to a licensed trade person and they will know what to do." The problem with that, is that a contractor is naturally going to try to juice their customer for as much money as they possibly can. When it comes to finding out what upgrades need to be made for code, it is in their best interest to say "well, while both of these fixes are safe, the state is going to want you to do this one (that is more expensive)..." Right. That sounds like a hell of a plan to me...

Since the whole complex had been vacant for a long time, it was pressing to find out if the complex had been condemned. The head of the city's code enforcement had assured me that it had not been and that he had "closed out the file on it." The Fire Chief however, was certain that it had been, since he was there on New Year's Eve a few years back when they were kicking everybody out due to failed inspections. What should be a pretty easy thing to figure out, was actually quite difficult. Given the scope of what needed to be done, meeting with as many inspectors was pressing and as such, took precedence. After all, if the inspectors didn't know what was condemned or what needed to be fixed, who else would? In our minds, it didn't really metter either way, as from where we were planning on doing all that we could to bring things up to code, simply to make the place safe. Besides, when there is a ton of copper missing anyway, it would generally be more work to do a bad job on the project.

To further complicate matters, the general interpretation of code in my state, is that if you touch something, it must be brought up to current code. However, if you are simply replacing an item, you can get around it... sometimes. Basically, this vagueness in the language of legalese means that it often times just depends on the mood of the inspector that you are talking to (or, how much they like your contractor). Generally, this lack of clarity causes a lot of people to simply not get items inspected, which is pretty unfortunate, actually. In the event that you are sure that an inspector is trying to get you to "fix" something that doesn't need to be fixed, it is an expensive and time consuming fight. This generally takes the form of either in lost rents or the need of a Professional Engineer that is willing to back up what you want with their "P.E." stamp.

While I know that inspectors making you do things that aren't really necessary sounds absurd, it happens all the time; in a lot of instances, they don't know the codes that they are supposed to enforce! A good example of a fight with an inspector involves the use of GFCI outlets in bathrooms. Personally, even as a person who leans libertarian, I think that having a GFCI protected circuit should be in building codes for electrical receptacles that are near water... actually, one potentially saved my life once when I was dealing with a sump pump that was not functioning properly. My uncle once ran into a situation where an inspector went crazy over a bathroom wall outlet that was next to a sink that wasn't a GFCI receptacle- alone, a reasonable reason to fail a house for an inspection. That is, until my uncle pointed out that the circuit was GFCI protected by the circuit breaker in the breaker box, which is totally acceptable... the inspector didn't budge, so Bill had the outlet change, as a receptacle that is $15 bucks is a lot cheaper and quicker than appealing something and making the guy look bad.

Since it was vitally important to get the electrical system safe and functioning before anything else, that was the first inspector I got over to the property. Given the amount of copper that had been ripped out, there was not only the risk of people getting shocked on electrical wires, but, also a major fire hazard. The main thing that the inspector was concerned about was that there were runs of line that were above a drop ceiling, but staple below the floor joists. While I am still not convinced that this is much of a danger with a drop ceiling, I understand why you would want the wire to go through bored holes in the floor joists for extra protection, or even have them in steel cable. I wasn't convinced that we would have to update it if we pressed the matter, but a few thousand dollars of work on it wouldn't be the end of the world, especially from where a lot of it needed to be replaced anyway.

Additionally, there was some debate as to where we could splice wires together. The inspector made some comment about not being able to to wire connections in the breaker pannel and that we would have to add in additional boxes around the pannel to pass inspection. While I still don't understand why this is a good idea sheerly from a maintenance perspective, as you can't monitor performance of wire nuts when they are sealed in a box behind drywall, but, can at any point when you take the face off the electrical pannel (not to mention that connecting a wire to a circuit breaker is a connection AND in the pannel) we accepted it and figured that we would get our electrical crew to get her to change her mind.

When talking with the state building inspectors, their biggest initial concerns was that we had banisters in the stairwells, adequate lighting in the event of a power outage, doors that had proper fire ratings, and doors that swung out in the right direction and couldn't lock people in in the event of a fire. These were all things that were already there, or, were things that we were going to fix for reasons of pride in the building, safety, and a host of other reasons. They also wanted us to seal up the holes in the firewalls that were not filled in around the plumbing and sprinkler systems. Again, a reasonable request that we were more than happy to do and would have done if left to our own devices.

One of the one of the more agitating stories arose with the plumbing inspectors. On the day that we were meeting with the electrical inspector (literally, the first inspector we met with) while standing in the lobby of the main building, out of the corner of my eye, I saw a state truck pull into the parking lot with 2 older gentlemen in it. They got out of the truck and immediately barged into the building with their flashlights, walking right past me. I was kind of stunned by the move, but despite my thinking it was rude, walked up to them and introduced myself.

In the course of a civil conversation, that by the way, they didn't stand still for as they crawled around the building, it came out that a plumber that we had been talking to about the job told them of the project while getting permits one day... The funny thing, is that I was going to call them that very day about coming to look at the project as we had nothing to hide. When showing them the various issues, they just kept saying "well, you are going to need a licensed plumber to do that."

It was all I could do to keep from saying "What kind of jackass do you think I am!? Even if I had a desire to break the law, which I don't, I am getting ready to take on a Hell of a project smack dab in the middle of where every inspector in the state is employed... And here you are implying that I am getting ready do something illegal!? Are you kidding me!?" Thankfully, discretion won out on that one...

The two gentlemen were really concerned about the lines that came off the pressure relief valves of the hot water heaters. They kept saying that since there were 4 hot water heaters on each line and our line was undersized for that number, we were going to need to size up the line. This is something that I immediately talked to them about. The lines were galvanized pipe and run in such a way where it would be difficult at best and totally un-economical to replace them. This was in addition to the fact that the installation met code when originally built- as such, there is no real requirement to fix what they deemed to be a problem. Furthermore, the code that they cited is likely a touch over reaching, despite being well intended: it assumes that all 4 hot water heaters on the line will simultaneously have their thermostats fail and that they will all build up a crazy amount of pressure due to a gas valve that would be constantly be on, thus activating the pressure relief valve, filling the line with the excess pressure.

Now, I am sure that everyone has seen the Mythbusters where they blow up a hot water heater. However, they actively tried to do that for the sake of the experiment. First and foremost, the worst situation that I could conceive of in regard to this matter at the complex was not in any way, shape, or form going to blow the building up. Secondly, hot water heaters rarely have problems where a pressure relief valve is needed, in fact, said valve is generally the part of the hot water heater that goes bad, develops a small leak of water, and needs to be replaced. Between my uncle and I, we have over 1,500 years of hot water heater life from the houses we own- neither of us have ever had one of our hot water heaters malfunction in a way that caused the pressure relief valve to be used for it's intended purpose. Not once. In fact, other than some stories on the internet, we have never even heard of it happening (which, believe me, would be talked about by the people we know)... Given that, the inspectors backed down on their unnecessary stance pretty quickly.

The HVAC inspectors were probably the nicest out of all of them. We actually all talked in the parking lot for a while about the project. Real jovial guys, actually. They basically said that HVAC units in the individual apartments couldn't heat or cool the hall ways. A pretty reasonable request. One thing that neither they, or the plumbing inspectors really said anything about (which, frankly, really bothered me) was that there were a lot of gas devices that didn't have drip legs on them (see the picture to the right). The sole purpose of them is to catch any debris that is in the gas line and thus, keeps it from clogging a pilot light. Really, they are a really cheap way of ensuring that a device will function properly for a long time. Yet, no one ever seemed to say anything about them missing.

Another item that bothered me was that if we elected to replace the gas furnaces with safer PTAC units (like in hotels), we were told that the total area of the individual dwelling (even in an efficiency apartment) couldn't have a temperature differential of more than 3 degrees. If that code was taken to the extreme, space heaters should probably be illegal. Despite my thinking that the code was unnecessary, as a ceiling fan or opening a door could fix the problem. I more or less said "whatever" as we could put grills in the walls walls to make air flow a bit better for very little expenditure.

After all, we had money to spend and it wasn't as if we weren't getting a steal on the place. Despite the troubles that we were running into, they were bearable. I was excited as ever.

More to come...

Tuesday, July 17, 2012

Sometimes, It's Best To Take A Pass #5: Preferred Stock and Banyan Rail Services.

Banyan Rail Services is a really neat little company. They get paid by railways to take their old rail ties, then, sell them to power plants to burn for fuel or to other companies to chipped up for mulch. Anything where a company pays you to take something off of their hands and then another party pays you to take off of yours immediately strikes me as a very interesting and profitable business model. Really, Banyan strikes me as the middleman's shark of a middleman. Couple this with a constantly increasing tangible book value and they seem even more interesting... However, historically, this company has done nothing but lose money and dilute common stockholders.

When you dive into their annual report and see things like the following (not to mention some really hair risk factors such as large amounts of customer concentration):

As a result of the private placements including issuances of preferred stock in 2011, there are shares of outstanding preferred stock which can be converted into as many as 1,878,030 shares of our common stock for $1.10 to $2.50 per share.  In addition, as of December 31, 2011 we have issued options to purchase 175,000 shares to our directors as compensation for serving on the board at prices ranging from $2.00 to $3.50 a share. If the directors’ options are exercised or the shares of preferred stock are converted, your ownership of the Company will be diluted. In addition, the issuance of a significant number of shares upon conversion of shares of preferred stock or the exercise of options could depress the price of our stock if there isn’t enough demand for the shares in the market. Even if the shares of preferred stock are not converted, the large number of shares issuable upon conversion of the preferred stock could cause an overhang on the market.
Not only this, but, the dividends that have been paid to the holders of the stock (which, seem to be insiders of the company) have been making up a huge percent of the company's earnings losses...

Granted, preferred stock issuance can often times be a great thing, in recent memory, it has been used to keep individual companies a float. When Warren Buffett buys the stuff, it is a vote of confidence that due to Reflexivity, can actually save an economy and a stock market. While preferred stock at Banyan has certainly kept the company a float, it has done little more than stretched out the losses that have been racking up to the holders of the common stock.

Looking above, we see that while the company, on a market cap of ~$6 million is trading for something like 20x the previous years improvement in tangible book (a metric that I have developed a loose liking for) for a startup that has potential, it is interesting. However, the improvement has been solely caused by preferred stock issuance and is bogged down by the company's operations. Interestingly, there are just over 3 million shares outstanding and the preferreds are convertable into nearly 2 million common shares.

Then, check out the subsequent events of the most recent 10Q:
Note 13. Subsequent Events
In April 2012, the Company filed a certificate of designation with the Delaware Secretary of State designating an additional 10,000 shares of its preferred stock as Series C Preferred stock.

In April 2012, the Company issued 4,000 shares of its series C Preferred shares to Patriot Rail Services. The preferred shares were issued for $100 per share, or $400,000 in the aggregate at a conversion price between $2.50 and $2.40 per share of common stock. The proceeds of the money received were used to fund working capital requirements.

On May 11, 2012, the Company completed a refinancing of its existing debt into one $3.0 million term note that matures on June 1, 2017. The new term note has principle payments of $50,000 per month plus interest. The note shall bear interest at the prime rate plus 3% or Libor (2.0% floor) plus 4.5% (6.5% as of March 31, 2012). The note is secured by certain of the Company's assets.
On May 11, 2012, the Company was completed the financing of a new $1.0 million line of credit working capital and a $500,000 line of credit for capital expenditures. The working capital line will mature on June 1, 2017 and the capital expenditure line will mature on June 1, 2013 at which time the amounts outstanding will convert to a term loan maturing on June 1, 2017. Both loans shall bear interest at the prime rate plus 3% or Libor (2.0% floor) plus 4.5% (6.5% as of March 31, 2012), and are secured by certain of the Company’s assets.
Now, check out the related party transactions from the 10K:

"During 2011 the Company issued 4,000 shares of its Series B Preferred and 7,850 shares of its Series C Preferred Stock of Patriot Rail Services, Inc. (“PRS”). The preferred shares were issued for $100 a share, or $1,185,000 in the aggregate."

A few lines before that, there is this:

"Our Chairman and CEO, Gary O. Marino; President, Donald Redfearn; Director, Bennett Marks; are officers and significant stockholders of Patriot Rail."

Granted, as I previously stated, if a rail company has cash and can set something up where they can save and even make a company profitable through buying preferred stock, that is a good thing- even if the firm doing the saving is largely owned by insiders to the company in distress. The flip side, however, is that there is a potential for those very people or entity to further seize or gain control of a company by doing such transactions, without buying shares of the company in the open market, which would often bid the price of the shares up.

All thas said, if the company does manage become profitable, it is comforting to know that they have over $4 million in net operating losses that have a decent life on them (2011-2030: see note 14 of the most recent 10K). Heck, only $66K of them expire before 2018! Certainly, the preferred shares have kept the company a float, which, if there is much of a future for the company is a great thing. However, from where I sit, the common shares seem to be priced for an overly good scenario that I don't see playing out very well for present holders of the common stock.

I again find myself yet again, taking a pass...

Disclosure/Disclaimer: I have no position in regard for or against any of the entities mentioned. I reserve the right to change my positions at any time. This post is my opinion. Always do a ton of your own research before even contemplating anything that I say, do, write, or so much as think about.

Tuesday, July 3, 2012

Syms Has A Plan & A Rights Offering.

In an interesting turn of events, that seems as Syms will exit bankruptcy and be able to monetize it's significant real estate assets, rather than sell them of in a fire sale. A plan has been hatched:

"Under the revamped proposal, which will update the company's previous plan to reorganize around its real-estate holdings, all allowed claims against Syms will be paid in full, "pursuant to certain agreed upon time frames." Allowed trade and other vendor claims against subsidiary Filene's Basement LLC--whose retail operations, like Syms's, were shuttered in the wake of the November bankruptcy filing--will also be paid in full. Holders of allowed unguaranteed lease-rejection claims against Filene's will see a 75% recovery.

Those recoveries could be funded, in part, by a two-step transaction that's the new heart of the creditor-repayment plan. First, Syms will redeem shares owned or controlled by Marcy Syms, the company's majority shareholder, chief executive and daughter of founder Sy Syms, at a price of $2.49 per share. Then, Syms will launch a rights offering, through which it expects to raise $25 million in cash by offering new common stock at the same share price.

The resulting money "will be used to fund Chapter 11 exit costs, working capital for the reorganized company, and to the extent of any excess, toward partial payment for the redemption of shares owned or controlled by Ms. Syms and the payment of Syms creditors in accordance with the plan," Syms said in court papers."

Here is the filing from the court.

This does a few things. First and foremost, it cashes out Marcy Syms and gets her into retirement, which based on previous performance: desirable. Besides, from what I have gathered in the past, with a host of litigation and such, Marcy Syms has been looking for a way to exit for quite sometime. She is a millionaire and can enjoy not fighting anymore. Next, the agreement has the potential to further solidify the control of the company into the hands of the equity committee- they are the big shareholders and are backstopping the offering. Furthermore, the company is only on the hook for 75% of the Filene's leases as well, which is a big money saver... Not to mention that there will be fewer legal fees and the like from the BK ending sooner, rather than later.

It also seems as if all shareholders that are also accredited investors are able to essentially buy Marcy's shares for $2.49/share (or, about $36mm dollars)- a price at which, I would think is pretty cheap, given that the company as a single piece of real estate that is likely worth significantly more:

View Larger Map

While we have yet to see how this plays out, but, I am certainly not upset by the move. Another point is that the equity committee, due to the composition of the various shareholders, is set up in a way (by the BK court) that represents shareholders- again, not a bad thing. All in all, I think that this was necessary to juice the full value out of the real estate that the company has. From what I have read, I am far from unhappy about the move.

EDIT: It is interesting the amount of saber rattling that appears to be taking place. While I personally detest such matters. As such, there is still uncertainty in the matter. I do wonder how much of this matter has been blown out of proportion by various lawyers, who are generally paid to draw things out as long as they can. Regardless, I am still long shares of Syms and will continue to watch the situation with great interest.

Disclosure/Disclaimer: My family investment club is long shares of Syms. We reserve the right to change our positions at any time. This post is my opinion. Always do a ton of your own research before even contemplating anything that I say, do, write, or so much as think about.