Alpha, Also check out Reddy Ice (OOTC:RDDC),, it looks like the company is in Chapter 11.

http://www.reddyice.com/restructuring.html

I still cannot really explain the recent price surge in K-V Pharmaceuticals (OOTC:KVPHQ) (flat for a while around $0.07 and then the last week above $0.20).

Today (February 5, 2013) it's scheduled a hearing to consider K-V Pharmaceutical's motion for an exclusivity extension.

I'll try to gather more information.

Alpha, since you are taking a look at special situation plays I am wondering what you think about K-V Pharmaceuticals (OOTC:KVPHQ). We would need to check if equity is going to be canceled during the Chapter 11 proceedings. The company has had a few positive developments of late.

Premium alert sent to members on 2/17/2012

Cdc Corporation (OOTC:CDCAQ) entered Chapter 11 bankruptcy in late 2011. Since then, management has been taking steps to realign the company. On February 1^st, 2012 the company entered into an agreement to sell its ownership stake in Cdc Software (PINK:CDCSY) to an investment group (Archipelago Holdings) for $250 million or $10.5 a share.

"The purchase price under the SPA for the Company's share holdings of CDC Software is $10.50 per share, in cash, or approximately $249,788,301."

As stated on Feb 8, CDCAQ and CDCSY have traded significantly higher on this news. CDCAQ finished up 103.33% at $3.05, while CDCSY rose 68.37% to $8.25 on the day of this announcement. While this development appears bullish on the surface, our first inclination is to assume that the transaction terms are more transparent for CDCSY.

At the current of price of around $9.00, CDCSY shares are trading comfortably below the value of the transaction ($10.50). We presume if private equity is willing to pay $10.50, they see value well beyond this price, as they would likely have negotiated a discount to the company's true value. So if and when the proposed transaction closes we would expect the stock to rise at least 20% above the value implied by the deal to at least to $12.60. We will continue to monitor the situation for the close of the deal. The fact that an entity is willing to pay $10.50 is good for CDCSY even if does not go through, provided OTGDD confirms the legitimacy of its operations.  Investors should also realize that that per the February 1^st filing:

"the purchase and sale of the CDCSY shares are subject to solicitation of higher and otherwise better offers pursuant to bidding procedures approved by, and an auction and sale process to be conducted under the supervision of, the Court pursuant to Section 363 of the Bankruptcy Code (the “Sale Order”)."

Thus, it is plausible that a better offer could be made for CDCSY shares.  We have not performed OTGDD on CDCSY.

The implications for CDCAQ shareholders are not as clear.

First Challenge: Determining the Value of CDCAQ, Post Transaction

Referencing an impressive I-Hub post by HKTrader40 (We have verified his work):

Numbers from the Schedules pertaining to the Chapter 11 case filed in on November 7, 2011.

• Total assets, per schedule A, of $172.5 million. This includes $160.4 million for the interest in all subsidiaries, including CDC Software, which is their largest asset.
• Total debts, per schedule A, are $108.5 million, which includes $66.8 counterclaim by Evolution capital against CDC related to ongoing litigation proceedings and $40.0 million in Inter-company obligations to CDC Software. (The $66.8 million is in litigation and CDC disputes parts of this and has a counterclaim). (Total debt removes the liabilities specifically attributable to CDCSY).
• The February 1, 2012 6-K filing, exhibit 99.4, section 8.01 specifically states all Inter-company amounts owed by CDC will be cancelled upon a completion of the sale transaction. At a minimum, this resolves $40 million in debt.

Worst case scenario valuation for CDCAQ, assuming that the $160.4 million for the interest in all their subsidiaries is mainly related to CDC software (the asset to be sold) and that they lose the legal battle with Evolution Capital.

• CDCAQ assets: $172.5- $160.4 = $12.1M
• CDCAQ Liabilities: $108.5M - $40M of forgiven inter-company debt= $68.5M
• CDCAQ assets if it receives $250M: $250M + $12M = $262.1M
• Net assets after subtracting liabilities: $262M - $68.5M= $193.6M
• Value per share: $193M / 35.7M= 5.50

Scenario assumes that:

• Common stock shareholders' interests will not be altered, as often happens, during chapter 11 restructurings.
• The transaction to sell CDCSY is consummated. Investors need to monitor the execution of the escrow payment by Archipelago Holdings.  We presume this action would increase the probability of the consummation of the deal.
• There is no change in assets or liabilities assumptions.

Second Challenge: What Will CDSCY do with the Cash?

It appears that CDCAQ has lost its primary operating assets. Its remaining operating entities have not significantly contributed to the company's financials and are losing money. Will CDCAQ actually return capital to shareholder or attempt to use cash to revamp questionable operations? This can be a major issue in determining if maximum value can be attained post-transaction.

At this time we cannot fully value CDCAQ shares which are trading at about $3.50. There seems to be some upside potential from current prices, but mainly if the company returns capital to common shareholders. We have also not performed OTGDD on CDCAQ.

Disclosure: Long CDCSY, CDCAQ

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Muscleman,

Trans-Lux (OOTC:TNLX) took off. Was just about to look at this puppy closer too..

http://blog.geoinvesting.com/?page_id=3090

I see no news. Will attempt to call management.

France and German indeed reached agreement...... Should have realized this earlier last week.

Regarding DEXO, I have one more question:

Why don't they buy back their debt from the market, instead of paying the principle off? Their debt is only trading at 40% of the face value.

http://www.nytimes.com/2011/12/05/world/europe/leaders-struggle-for-deal-to-keep-euro-intact.html?_r=1

I just came across this news. It looks like the only disagreement between Germany and French is the EU treaty change. Therefore I think my previous post is wrong. They will likely reach an agreement, so the market will go up before their announcement of the next bailout plan.

Therefore I think I should go long on cheap stocks and growth stocks for now. I just took a look at DEXO again. Here are my questions:

1. What's exactly their digital sales revenue now? Sorry for asking this dumb question, but I can't find it on their SEC filings except for them saying the digital sales growth is strong.

2. What's the average length of their printed ads' contracts? I think before their digital sales business becomes mature and competitive, the key of their survival is dependent upon the existing contracts, which are declining fast. If these contracts can help them pay off the huge debt. and by then the digital sales become strong, then the stock would be worth a lot. I am worried that the revenue decline is too fast and they suddenly cannot service the debt.

3. How do they compete with Google and to a lesser extent, Yelp? 

4. From section 5. long term debt below, why is the fair market value of the debt so much lower than the carrying value? I would be very cautious about buying stocks when the debts are trading at 40% of their face value.

http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=8221257-1143-238478&type=sect&TabIndex=2&companyid=10180&ppu=%252fdefault.aspx%253fsym%253dDEXO

These are my key questions. Are you going to have your analysts interview them on Monday? What are your questions?

Maj.... I think US is about to get into recession and Euro zone is already in recession.

It will be harder to make money on the long side during recession, like in 2008, especially for companies like DEXO that has huge debt and fast decreasing revenue. I would not be interested in going long on a cheap valuation during recession, because I found that in 2008, cheap stocks fall even faster than fairly priced stocks that have strong balance sheet. Right now I think big macro events will over-write individual companies' own valuation.

I think the market will more likely to go down quite a bit from now on. German is talking about EU treaty change but still rejects euro bond, so I speculate that they want a way to kick out Greece and Italy. However France is talking about bailout and saying no one will default. These two will meet on Monday and no agreements will be reached, and then market will panic.

If you want to do any interviews for the short side, I would be very interested. If you don't have one yet, how about OPEN that still has over 6 P/S and zero revenue growth for the past 3 quarters?

Muscleman.. Dex One (NYSE:DEXO) has been inching up again after a pull back ... I need to interview these guys ASAP.

Trans-Lux (OOTC:TNLX)

Just completed a meaningful restructuring plan to avoid chapter 11 bankruptcy. Look like a new investor (Gameco) entered the picture to infuse capital into the company to help reignite growth and satisfy old debts. Will watch closely to see if the company can reverse its history of losses and return to profitable operations it once attained.

took risk here and bought a bunch of Orchids Paper Products Co. (AMEX:TIS)..  think $17.00 could be in the cards in the near term..

Orchids Paper Products Co. (AMEX:TIS) (Ex-GeoBargain)...  $13.80

Stock had  really fell apart after its tenure as a GeoBargain.. They had trouble integrating a capacity expansion plan amidst a rising raw material environment. Revenue growth also slowed.

However, it finally looks like the near term EPS picture has improved (GPR = 3).  They reported decent numbers in October (Not great). But more importantly they doubled the quarterly dividend today. Prior to the boost, the div yield the market assigned was  about 3.2%. It now stands at 6%. As the story may now embody less risk we are wondering if the market will begin to fill the div yield gap by lifting shares..  Will listen to the CC ASAP.

Thanks Maj.

I first got interested in SuperMedia, because I found a few super investors holding it. Then in its report it said it hired CEO from the once failed  Dex One (NYSE:DEXO).

These two companies are similar: Just emerged from chp 11, and having huge amount of debt, and revenue declining very fast. SuperMedia has an agreement with the creditors for using 80% of their earning to pay off debt, if I remember correctly.

You must have also made money from CRBC's earning report, eh?

Musleman.  Dex One (NYSE:DEXO) is on our radar: http://geoinvesting.com/companies/dexo_dex_one/alerts . we traded it nicely on the day of these earnings. The stock has already retraced much of its gains from that day.

Looks like a chapter 11 play, but need to get into the details.  In particular we want to know how much debt (if any) was exchanged for equity and what is the timeline to reduce debt. It is good that their interest coverage ratio is above 1.5 (its about 1.8)  Overall, chapter 11 restructured plays have been extremely successful for us. I did not notice that a full break down of the operating cash flow items. 

Looks like it is in the same space as GeoSpecial Wolverine World Wide, Inc. (NYSE:WWW)

Thanks! I will take a look into that one. Have you checked DEXO yet? I am impressed with its cheapness, but I am worried if its tremendous debt and competition from Google will kill it.

We will track the Anpath Group (OOTC:APGR) story since we have had tremendous success investing in companies that have emerged from Chapter 11 bankruptcy. We Still need to locate pro forma financials that take into account restructured/improved balance sheet. See more

Hei, Inc. (NBB:HEII) been very strong. Have tried to set up interview, but to no avail. looks like a turn around play. They also give no guidance. Mucsleman,, can you take a look at this story?

This company specializes in deep sea oil and gas production. It was deeply hurt last year when BP spilled the oil and Obama halted all Gulf of Mexico operations. Short interest is over 50%.

However, with recent oil price surge, the government wants to resume GOM productions. ATPG's titan platform is put into full drilling operations since April, and now it has completed drilling of one well.

They are expecting to start production of that well in this fall, and complete another well in Feb. 2012. After that, I would estimate 40000 BOE per day production.

So here is my forecast for next year's cash flow:

http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=7801644-872-512220&type=sect&TabIndex=2&companyid=79515&ppu=%252fdefault.aspx%253fsym%253dATPG

page 41: lease operating expense: $11.6 per BOE, so total is $464 Million

General and administrative: $6 per BOE, so total is $240 Million

Interest expense: $250 Million. (using last year's total interest expense of 222 million as reference, plus recent $172 Million convertible preferred stock)

Their oil is 75% of total production, and remaining is gas. Gas price is low in US, but pretty decent in UK, so I would give a conservative estimate of $80 per BOE.

Therefore revenue would be: 80 *365 * 40000 = 1.2 Billion.

So free cash flow would be $246 Million next year, which means forward price/FCF of only 3.

Notice that my estimates here is very conservative. They are very likely to reach 50000 BOE/day production in early 2012.

Notes:

1. They are spending millions of dollars into capex in the past few years. I wouldn't expect that trend to continue after spring 2012, because their infrastructure is now complete.

2. Their primary risk is governmental regulations, which seems ok at this point.

3. Their 3rd platform which is currently being constructed in China is postponed to 2014, which would reduce short term cash burn until their production is fully ramped up next year.

4. They specialize in acquiring deep sea proved undeveloped oil fields that smaller companies have no resource to drill into production. This gives them good niche, and 98% rate of drilling success, so I would assume that their probability of failure to drill the current two wells into production is low.

http://www.investorpoint.com/stock/IACZW-IACInterActiveCorp%20Warrant%20Pur%20.5%20Com%20Exp%20$15.27%20Expiring%2005072012/options/

IAC/InterActiveCorp Warrant Pur .5 Com Exp $15.27 Expiring 05/07/2012 (IACZW) Options

Common is at $36.41

Warrant is at $6.9

$6.9 + $15.27 strike = $22.17 per 0.5 common

1 common via warrant = 2 * 22.17 = $44.34

44.34 - 36.41 = $7.93 extra paid if getting common through warrants. That is the leverage premium the market is currently demanding, beyond the intrinsic value.

No arb opportunity here.

-Fernando

so I guess one share would be double that. . I will call the company in the am. Might be an opportunity for a little arbitrage.. Notice the performance of the warrant compared to the stock price has been much more dramatic of late.

hrm....... interesting.

I just called fidelity, and they said the warrant has the right to buy only half a share for $15.27. That data is completely different from your broker.

Muscleman,  I agree with your comments from a pure investment point of view.    IACZW are the warrants, but they seem to be trading at a discount to intrinsic value of the common.  The firm i use to clear my trades claims that these have an exercise price of $26.86  The underlying stock  Iac/interactivecorp (NASDAQ:IACI) is $37.84..  This implies a $10.98 intrinsic value. I am wondering if there is  some funky conversion ratio i am missing.  But the warrants trade on the pinks which could lead to inefficient pricing..

I looked through its financials during my program's compiling time. My wild guess of your investment thesis is that you are buying this as a good quality growth company. Looks to me that its main growth driver is the search segment. If they keep a 15-30% growth, isn't the current P/E a little bit too high?

My understanding of the search engine market is that only #1 can win. Others are all losers. It is a free service so why use a less sophisticated one.

Maybe I am not right. Could you please share your thesis here?

Thanks. Today is a workaholic day in my company. Will have to wait till I go home to look at this.