What Does The MION IPO Delay Mean for ACAS?

The Question
After the MION IPO didn't go through last week at 16, and had apparently been attempted at 14, and had the plug pulled on it at 11, I was emailed a question recently about whether ACAS had valued its Mirion holdings at 16 or 17.

Why Ask?
If ACAS had valued its Mirion equity at 16 or 17, the market's reception to the IPO would be a rejection of ACAS' supposed "fair value" and a bad signal for ACAS' NAV. So, the question was eminently worth addressing. Did ACAS have a bad value on the books?

The Answer
The answer, as it turns out, is "neither".

In the 10-Q filed most recently before the non-IPO, ACAS declared its entire holdings in Mirion Technologies, Inc. to have a FAS-157-compliant "fair value" of $322.9m. ACAS' investment in MION is, however, dominated by debt: ACAS holds MION senior and junior debt valued at $181.8m, leaving the value of ACAS' entire equity interest (including not only common shares but convertible preferred and warrants) at $141.1m. Although the convesion features aren't discernible from where the Jaded Consumer stands, the MION filings make clear that when all its interest has been expressed, ACAS' holdings will total some 14,020,037 shares (ignoring those it will sell in the IPO). This leaves a per-share value that rounds to $10.06.

What The Answer Means
While one can make arguments about the value of a control premium or an illiquidity discount in figuring the "fair value" of holdings, I would submit that controlled but illiquid interests creates a circumstance in which there effects might tend to cancel. If it is true that ACAS could have consummated the deal at $11 and chose not to, it means that ACAS decided to forego the advantage of eliminating the illiquidity discount to the fair value of its post-IPO MION equity in order to obtain something closer to what ACAS considered the company's fair value, and thereby delay the possibility of increasing the FAS-157-compliant reported value of MION from "base plus control premium minus illiquidity discount" to "base plus control premium". If ACAS really could have agreed to be picked off at $11, ACAS' decision not to do so (and therefore, a decision not to be paid a couple hundred million in cash) strongly suggests that ACAS had more important things on its mind than raising cash or propping up NAV.

Especially since Mirion Technology is among ACAS' top few holdings, ACAS' stewardship of the investment is worth watching. Had ACAS been truly desperate for cash, ACAS could have taken the deal at $11, knowing that it would still be repaid its debt in full and would enjoy subsequent appreciation on its retained >40% interest. ACAS' conviction that MION is worth more than $11, coupled with its patience in accepting an exit offer, shows that management is willing to go through some noticeable trouble to get the most out of its investors' capital. ACAS will presumably continue to shop MION to institutions interested in energy plays, alternative energy plays, and safety equipment and services – in the expectation of peddling the equity again when multiples are better.

The Future of ACAS and MION
With this in mind, what is ACAS' position for the future? There is a short answer: Much as its position has been in the past.

ACAS is being paid interest on its debt and dividends on its convertible preferred, and it is working to produce an exit that allows ACAS' investors to enjoy ongoing returns. Unlike the Riddell investment, in which ACAS ended up with a few percent interest in a privately held company that might not pay dividends, Mirion offers a control block in a publicly-traded company with at least one easy exit alternative open on any given trading day. (Of course, realizing the control premium requires more work.) Mirion would presumably be of a like position as AGNC: an ACAS-controlled investment in an enterprise with potentially broad third-party participation, serving as an ongoing advertisement for ACAS' operations expertise and private equity services. Although ACAS won't get a management fee from Mirion, it will be in a position to enjoy subsequent capital appreciation and dividends – which have proven much more valuable at AGNC than the management fee. Moving MION into a position from which ACAS is less interested in developing exit strategies is an attractive move, not the lease because the new (lower) headcount at ACAS surely can't support as much simultaneous strategic activity as before, and ACAS still has a lot of our money to multiply.

The Immediate Furure of ACAS
While news on the MION IPO is welcome, the next big news will likely be in connection with the debt restructuring project. If the lenders don't all get onboard with the plan, ACAS' move will be to a court with the jurisdiction to force them into agreement. Unfortunately for short-term ACAS holders, the name of the court having this jurisdiction is the United States Bankruptcy Court, and parties havign business before that court get rough treatment in the press. Some investors' charters prohibit investment in companies before the court, which would cause a certain amount of exodus completely aside from the stink and noise of the proceedings. The immediate results would be favorable to ACAS' business operations, however: as a Chapter 11 debtor, it is entitled to operate its business so long as it continues to make timely payment of non-default-rate interest. This means that ACAS could possibly improve its margins overnight with a $1039 bankruptcy filing fee. All that money ACAS lends to portfolio companies is financed, and improving the spread on the paying debt would dramatically improve ACAS' NOI. I don't know how long it would take ACAS to get the Court to order the debt restructured in accordance with the plan to which I understand most of the lenders have already agreed, but during that whole time ACAS will be sucking in more cash than it has in years.

The downside of debt restructuring under these circumstances is that ACAS gets the "black eye" of bankruptcy court and the scorn of financial counterparties who see that ACAS wasn't able to "take care of business" by contracting and performing, but was required to get a court to bully its counterparties into line. While the long term would not likely suffer, it's a reputational hit that will take a little while to get over. I can't estimate whether this is or is not material to ACAS' business. On the other hand, the "getting out of bankruptcy" pop some companies get when everyone thinks the restructuring has given a firm a new lease on life could be just the thing ACAS needs to get attention drawn to it for the right reasons.

For preference, and to avoid surprise, the better alternative is of course to see ACAS reach agreement with its creditors. Unfortunately, without knowing what the hold-up is in the deal (unreasonable lender terms? 11th-hour effort to renegotiate in ACAS' favor?), we can't know whether to hope compromize is reached or to hope the court quickly orders the reatructuring as planned.

Any thoughs welcome :-)

ACAS: On The Eve of an IPO

ACAS rose above $5 this morning, possibly on sentiment related to the soon-to-close Mirion IPO. If the deal closes this week, ACAS will be repaid all its MION-related debt and will exit millions of shares, and will end up with what is probably a control block (not a majority stake, but enough to direct the business) of a publicly-traded company with fortunes that will likely only improve with the rise in demand for both energy and non-petroleum energy.

Of course, the last couple of weeks' lousy market has impacted the valuation of companies, including Mirion at IPO, so the $16 discussed in MION's last filing is sure not to occur as hoped. However, the ~8m sh ACAS is selling isn't the only place it gets benefit from the IPO. ACAS gets its debt repaid, and it gets to change the value of the ~10m shares ACAS will keep on its books. ACAS turns illiquid holdings into cash, plus liquid shares that no longer suffer an illiquidity discount. Under FAS 157, ACAS may even be able to apply a control premium. ACAS gets cash and it gets to engineer its FAS 157 valuation of its remaining MION shares toward the good side. On my math, at the plausible IPO price range, ACAS should get at least $150m and the ability to re-price its remaining equity consistently with FAS 157. The NAV impact of the issuance is thus highly advantageous to ACAS at any plausible IPO price, which I'm currently guessing (Warning: WAG) to be north of 10 despite the current market.

The next question is what ACAS will do with all that cash.

If ACAS' lenders don't sign on to the proposed refinancing arrangement, ACAS will eventually have enough to just pay them off. I don't see that happening, though. ACAS' management said earlier that they thought ACAS' refinancing deal would turn out to have good long-term financing terms, and I don't see ACAS wanting to start over from scratch with new lenders. Maybe if ACAS found lenders who wanted to lend to ACAS and refinanced to pay off all the departing lenders and much of the remaining lenders, ACAS could more forward with a credit line reduced by the size of the portion underwritten by the departing lenders. Honestly, one could go blind working out what might and might not be possible – the real questions are what management wants to do, and what the hold-up is with the current lenders. Is ACAS trying to renegotiate the deal on the basis of its improved prospects, or is the hold-up really with the lenders?

As attractive as bankruptcy is for solvent debtors, it would frighten some owners out and force some instutitions out (who can't hold "bankrupt" equities), and tarnish management's reputation for being able to perform its contracts – having its banks forced by court order to take a deal they didn't agree to take isn't the way we want our company to be seen to operate, is it? ACAS has a strong incentive to avoid bankruptcy, but also a strong incentive to refinance its 10%+ debt back into the single digits. The liquidity and FAS-157 impact of the IPO will help improve ACAS' flexibility and negotiating position, and leave us with optimism for the future but continuing puzzlement about the delays in the debt refinancing we'd expected to be done late last year.

I'll look forward to evidence of the MION IPO pricing and ACAS' take from the deal, and I'll look forward to evidence of ACAS' plan for its refinancing debt. Of course, with the banks currently enjoying default interest rates, banks may be dragging their heels on purpose without any intent to shut down dealings with ACAS at all ....

Iced Tea Report: Ruggles

Friday night, some parents took their Kindergartners' teacher to a "nice dinner" at Ruggles' original restaurant location near Montrose. The event was held upstairs, the only plausible solution to the layout of the noisy restaurant, and an effective way to police the movement of the children: guard the stairs.

When we arrived, nobody took drink orders even as family after family arrived with children. Nobody took appetizer orders. It was an undirected mess for the better part of forty-five minutes while I walked around wondering who would take responsibility for ensuring that we were served. It took forever to get a waiter to come to our tables, and I knew the kids were at their limit.

The hunger-maddened children was my first order of business with the waiter.

"For the safety of your establishment," I began, "bring this girl --" and here, I pointed at a child who was past all patience but soldiering on like a champ "-- Mac and cheese as fast as it is possible for the kitchen to deliver." I gave this instruction before ordering anything at all. I kept pointing at the girl while I looked from the waiter to the girl and back to make sure he had directed his attention appropriately. I thought my point had been clearly made: this was an emergency.

After an eternity, one parent begged for some bread, or something, to aid the increasingly distressed children. By then some kids were past reason, unwilling to eat anything but what they'd ordered. Like the Mac and cheese ordered by my targeted would-be diner.

The girl held her abdomen as if in pain and said, "I'm hungry."

I found the waiter and urged him to do something about the kids' meals and the Mac and cheese I'd specifically requested be brought faster than anything else. He agreed.

Adults began receiving their appetizers, mine included, and I went in search of the waiter. I asked about the Mac and cheese. He said they were moving as fast as possible and he was doing everything he could.

The adults received their entrées. I tried to work with the little one about whom I was worried, and she was insensible. She was hungry past reason. She wept – literally wept.

I went asking after a manager, and found someone willing to enter the kitchen and ask for the Mac and cheese. Within a minute, Mac and cheese sat before all the kids who'd ordered it. One parent reported that from their arrival to their kids' receipt of food took an hour and forty minutes.

Then, I reached for my tea.

The big steak in the foreground of the photo on the left was well-favored, but I'd ordered it medium and it was delivered mostly well-done and therefore considerable drier in the middle than I am accustomed to eating and lacked the texture I expect in a quality steak. Despite the definitely-quality-steak price of the thing, I was starved and unwilling to wait again for food, and entirely unwilling to take up another customer service issue with the staff. The stress of telling people they've botched things when you are trying to have a sit-down dinner with your family and the kids' teachers is just not my idea of a good evening.

After a couple (2) of tea refills, they stopped sending anyone near enough to notice, or even to have their attention attracted to the state of my tea glass. So look carefully at the picture, paying special attention to the empty glass with the ice, lemon, and tea spoon: if you go to Ruggles, this will happen to you!

Eventually, dinner was completed around 8PM, and the kids needed to go home. Unfortunately, Ruggles doesn't help people get home with any more seal than they help people get food or iced tea. Those families that came in two cars split up: the bill was so slow coming that a paying adult was left to wait while the families took off for home and bed.

It took an hour from finishing dinner to see a bill. A dinner that "started" at 6PM didn't let me back to my car ($4 to valet, and no apparent parking anyplace) until after nine o'clock.

Everyone had pitched in to cover the teachers' bills, so they were together. Everyone else had a one-family bill. Nevertheless, despite the three- and four- and five-person checks, that characterized the room (we went so far as to place name tags on the table so the staff could tell whose bill they were serving), there was a 20% tip added. After an hour waiting, and with kids past sense, I had no possibility of spending time getting justice. The wretched service – one waiter for maybe thirty people who took up the entire upper floor of the restaurant, and not a very attentive waiter at that – wasn't worth 5%, except that I like to make sure the people who actually work get paid. (L's chicken was superb, but you won't want to suffer the rest of the experience to get it.)

By chance, I had a lunch date the next day at the more mainstream-priced Ruggles Café and Bakery in the Village on Rice Boulevard. I ordered a turkey Reuben and iced tea, with fruit substituted for the fried potatoes that are normally served with the sandwich.

The iced tea is self-serve, so you can get all the lemon and sugar and refills you care to pour. There is no tip tacked onto your bill, even when you eat with friends. If you are lucky enough to get a table close to the drink fountain, you can get refills without much hassle.

The picture on the left shows how Ruggles substitutes fruit in favor of fries.

My conclusion is that while there are outstanding elements at Ruggles' associated restaurants, there is no ethic of service at all, and the tea – despite being offered with lemon, a tea spoon, and even sugar in the raw – is a C at the main restaurant for want of service. It is a B+ at the Ruggles Café if you can get a table close enough to the drink fountain to make refills likely. (Otherwise you leave your company repeatedly to get refills, or forgo them, either of which greatly reduces the quality of your experience.)

Between the two, Ruggles Café is the one to visit. It is also vastly cheaper. You can easily get better service nearly anyplace else in town, though. For the price, what you get at Ruggles' main restaurant is awful.

CNAM: 1Q2010

The Chinese recycler and metal distributor China Armco (Ticker:CNAM) recently announced its results for the first quarter of the year. CNAM is another case in which ascertaining the enterprise value requires looking at more than the SEC-reported earnings, and snooping into the sources of reported income and expense.

CNAM's 1Q2010 revenues were up 59% from $5.4 million to $8.6 million compared to 1Q2009. Good, right? CNAM reports non-GAAP earnings of $670,000 or $0.06/sh, well ahead of its non-GAAP earnings of $185,000 or $0.02 per share in the year-ago quarter.

The GAAP earnings (the ones the SEC requires be reported) were only $53,000, or $0.01 per share, down from GAAP earnings of $0.03 per share in the year-ago quarter.

The difference is stark: up a third or down a third? And from how much?

So, what's behind this?

FAS 157.

When CNAM issued stock at $3 in a private offering in 2008 to raise funds to build its new recycling plant, it also issued warrants that could be exercised for shares at $5. As the price dropped in 2009, the value of the warrants under FAS 157 declined, and under GAAP, CNAM recognized "income" from the change in paper value of warrants that CNAM could not exit at a profit but seemed less likely to be exercised. As the price rose in the first quarter of 2010, CNAM was required by FAS 157 to book "losses" associated with value recovery in the same warrants. As CNAM went past $10, investors exercised at $5 and CNAM gained valuable capital with which to increase the size of its business deals.

What investors buy isn't the paper value of warrants a company can't exit, though. Investors buy a future income stream on a diluted-share basis. On that basis – the basis on which investors actually evaluate businesses – CNAM has shone. Net revenues increased 59% – in a quarter in which its recycling plant wasn't fully up and running. Net income (ignoring the warrants) increased 262% over the year-ago quarter. CNAM ended the quarter with over $4m cash, up from less than $750k in the year-ago quarter.

The best news? This growing income stream is in undervalued Chinese currency, the value of which will pop when prices normalize. CNAM is a buy at its current $4 because nobody is bothering to read the details.

Google on Background Applications

Faced with a question about battery life of devices running Google's Android, Google's co-founder Larry Page said developers needed to be smarter about their applications' use of system resources, particularly when running in the background. If your phone doesn't last a day, google says to blame your third party developers.

This may expose an experience advantage of Apple in the platform-delivery business, which in the resource-constrained world of the mobile device could be a significant advantage. Apple has delivered platforms for third-party development for decades, and is fully aware how developers (ab)use system resources. Apple's strategy to allow only specific APIs to execute on behalf of a background app in iPhone OS v.4 is a design decision made on the strength of long experience that lazy developers' behavior will reflect on the platform. Apple's MacOS 9 crashed only when misbehaving apps ran; yet, who got the blame? Apple has learned something important about both the behavior of developers and about the nature of the blame game, and Apple's design decision is likely to pay off over the next few years as Apple delivers better and better hardware while making it easier and easier for developers to code non-abusive applications.

Apple's decision to craft a particular customer experience, and to expect that developers who want to reach those customers will code accordingly, has caused some irritation. At the end of the day, though, the proof will be in the pudding: do people like what Apple delivers, or perfer a competitor? The fact that Google is out there doing the same things so differently probably helps Apple in its position that users have broad choice and are not being locked into an Apple solution. There's plenty of room in the sandbox.

ACAS: IPO Fever?

The Jaded Consumer recently cheered the apparently impending Mirion IPO, which presumably will be closing in short order. ACAS has been busy, though. There's more IPO in the quarter:

ACAS recently enjoyed the Roadrunner Transportation Services (Ticker:RRTS) IPO onto the NYSE at $14/share. Although American Capital entities (including managed funds) held some 1,493,138 shares amounting to a 7.3% interest in the newly-fledged public company (which would be valued at about $10.8m at IPO prices), ACAS claimed only 7,000 shares in its 1Q2010 10-Q. The 7,000 shares seemed to have a FAS-157-compliant value of $7.9m, making it apparent that some kind of share conversion or transmutation was afoot between the end of the quarter and the day the shares launched: 7,000 shares weren't any $7.9m at $14 a pop. Without specific knowledge of the split of RRTS between ACAS and its managed funds, it would be hard to ascertain the receipts that will actually flow to ACAS' bottom line. ACAS valued the debt it was owed by Roadrunner at $21m at the end of 1Q2010, and Roadrunner acknowledged about $20.5m in principal owed ACAS at the end of 2009 but discussed a deferred-interest arrangement in which RRTS would owe ACAS a deferred margin atop its periodic payments. Presmably ACAS' payoff includes all the deferrals in addition to the principal and interest. The comment from the Prospectus was: "This amount includes $20.5 million owed to American Capital, Ltd., which we intend to pay from the net proceeds of this offering." The question is what beyond the $20.5m ACAS gets in the deal. Anybody have an idea?

Now that RRTS is actually trading, it's safe to say that – press release or no – ACAS has its cash back. The next question is whether the Mirion transaction – first filed last August, and re-filed as a bigger deal twice since then – will occur as described. Give it a few days and we may know more.

As for ACAS' debt restructuring, I can't imagine that ACAS doesn't prefer to get out of its default-rate debt and into a more respectable posture from which it could go back to issuing shares above NAV. And why would Paulson have invested in a deal that his due diligence didn't assure him was about to get straightened out? And why would ACAS have parted with shares below NAV without a hard plan to turn the money into improved NAV? It's times like these that the wait until after the end of the quarter to learn what happened seems such a loooooooong time. Hopefully we get some news soon so we can stop speculating, and the market can stop fearing.

ACAS: Getting Something For Nothing

At the end of last year, ACAS' equity investment in Roadrunner Transportation Systems Inc. had a FAS-157-compliant "fair value" of $0. Shares of the company are being priced from $14 to $16 in a New York Stock Exchange IPO described in a recent SEC filing (this update first provided to the Jaded Consumer by this poster). With a share count of 7,000, this doesn't amount to much for ACAS directly. However, ACAS-managed funds hold over a million shares. Turning $0 assets into hard cash has to be a worthwhile move for ACAS' fee-based asset management service business.

One wonders how many $0 assets on ACAS' books are actually top-tier exchange listings about to happen?

On the debt front, ACAS is slated to be paid $20.5million for subordinated notes which at the end of 2009 had a "fair value" of $17.5m. The 18.5% notes were current at that time. As long as the deal remains pending, ACAS will presumably continue to enjoy the 18.5% interest payable on the $20.2 face value of the notes.

The fact that $0 assets are near-IPO holdings and below-face notes turn out to be about to be repaid early makes one wonder what ACAS' portfolio holds that the street doesn't know and can't price into the shares.

In other news, ACAS' publicly-traded REIT AGNC is issuing 6m new shares at $25.75, with an additional possible 900,000 shares available to cover over-allotments. Given AGNC's end-of-quarter net assets of $22.91 per share, the sale is accretive to shareholder value: AGNC can do the same deals with the same leverage strategy, but bigger – and with more money per share for revenue generation. This is a big win, because it is not only accretive to book value, but grows AGNC by more than 50%. The transaction, which is expected to close May 19, 2010, will net AGNC approximately $147m. On ACAS' management fee of 1.25% of net assets annually, payable monthly, this means ACAS' fee income has gone up overnight by $153,000 per month in cash, or $1.8375 million per year. (Getting the exact number of shares over time requires looking at each quarterly report, because AGNC has instituted a DRIP and realizes above-book sales of newly-issued shares at each dividend payment. Last quarter, that new DRIP equity totaled $62m.) Making larger transactions on the same overhead makes good sense for ACAS, and improves the net it keeps of its gross fee income.

AGNC offers a quick overview of its business, showing how it obtains its interest rate spread and explaining how much leverage it uses to obtain its results. ACAS' ability to grow its managed funds with AGNC's issuance, DRIP, and subsequent offerings shows ACAS still has some managed-funds business capability. ACAS' 2.5m shares of AGNC ensure AGNC owners that ACAS is taking the owners' interest seriously, as well. Making a percentage from someone else's equity is great, but making huge ROE on your own equity is a thing of beauty.

Let's hope for more $0 that turns out to be valuable :)

Iced Tea Report: Danton's

Danton's sits at the southeast corner of Montrose and the Southwest Freeway in the same commercial development as Main Street Theater's Montrose location. When I visited May 14, parking was tight because so many school busses full of schoolkids, dressed by color so adults could sort them back into the right busses, had descended on the place to attend an event at Main Street Theater.

First, a word about Main Street Theater: See the shows. The ticket is much cheaper than at The Alley, and you won't be "treated" to some unheard-of new Mamet production whose main child lead sounds like he's reading the ingredients from a cereal box. (This is not to trash The Alley; its production of Proof was absolutely outstanding in a way the movie – which lacks the intermission cliffhanger – was at pains to achieve. But for The Alley's price, I expect consistency. I am now quite careful only to attend what is proven in advance to be worth seeing. At Main Street Theater, you can show up and see anything you please, without fear.) I took L to Main Street Theatre's production of Oscar Wilde's wildly entertaining The Importance of Being Earnest (best bought in a collection for many more hours of enjoyment; also now both a movie and an older movie), and there is only one way to put it: they nailed it. Main Street Theater has also done outstanding work with titles you've never heard of, such as the based-on-the-true-story play The Trust (now apparently a movie) which explains – to the widening eyes of locals who had no idea the story was so fraught with intrigue – how Rice University came to be funded.

But I was meeting a client for lunch at Dalton's: to time to stop for a show. Dalton's enjoys the same comfortable booths that have characterized the place since it was a steak joint run by an opera singer back before the Montrose bridge project cut off access to the property and, over a period of grueling months, suffocated the business in an ignominious death. Like many Houston restaurant locations, it's been the scene of a production whose tradition is much older than any ever cast at The Alley or Main Street: the survival of the fittest. Dalton's succeeds a string of fore-bearers in occupancy of the northwest corner of the southeast block of the intersection.

And the Jaded Consumer is here to tell you about the iced tea service at Danton's. As seen in the picture, Danton's serves a tall glass cylinder of tea as full of ice as drink, complete with lemon and ready for sweetening with a tea spoon and collection of sweeteners. The lemon is served on the edge of the glass so that one may – without need to fish in one's drink for the fruit slice – choose to ignore, remove, or squeeze the lemon into the tea. When the tea arrives, the sugar is already there – and present in sufficient quantities to service two refills before the need arises to request more. The refills come swiftly, and the skilled staff cares enough to honor your request not to overstuff the glass with ice as the tea is poured, so your second glass can be stirred without further intervention. That first glass, though, can't be stirred at all until you dish some ice into the water glass. Fear not, though: you have a spoon and the water is right there. All is well. Besides, you get to giggle while you do it. All is good.

Not present in the photograph was the switfness of the waitstaff. No sooner than I sat was I given water and asked for my choice of drink. Before it arrived, my waitress had introduced herself as Rebecca and also inquired after my drink preference. When the bus-boy showed with the tea, I thought it only sporting to suggest he let Rebecca know the tea had been covered already. (He never told me his name.)

The downside? The tea seems a bit overbrewed, requiring an extra sugar or two to kill the bitterness. This accomplished, it's juuust fine. Drank several of them with relish and was sad to leave the empty glass behind as I took off to my next appointment. I mean, if someone would follow the glass, refilling it and the sugar service, I would feel like a king all day.

GRADE:
A Lemon
A Tea Spoon
B- Ice (rescued from D by presence of an ice water into which to ferry extra ice by using the spoon, which was conveniently there as soon as the ice arrived; the water preceded the tea; disaster easily averted)
A Sugar
A Refills
Conclusion: the whole is better than the sum of the parts. Getting all this right is exactly what we need for an outstanding tea experience. Dalton's has serving tea figured out, and gets full marks.

Now for the main course. The restaurant seemed to be of the $$$ variety (menu can be downloaded here), with most entrées in the $20+ range and a wine list preceding all food for the first pages of the menu handed out at lunch. However, I was there to discuss documents with a potential client and needed something that would not occupy me too thoroughly. In the sandwiches section was something the restaurant called Debris, which turned out to be stewed beef on an open-faced French loaf. I ordered it with a side of grilled vegetables. The carrots in particular were excellent, but the flavor of the veggies was uniformly fine. Seasoning was mild and enjoyable. Debris was outstanding. I ate it with a knife and fork rather than fold it into a po-boy, because I was intermittently handling documents, and it was excellent. The larger parts of the beef were happily forkable and didn't require recourse to a knife; the only reason I needed a knife at all was to slice through the French loaf underneath and to get mouth-sized bites. Debris was $9.95, including one side. Outstanding.

Blues – from things I didn't recognize to near-pop titles from Creedence Clearwater – played in the background and was enjoyable while allowing conversation. Noise level was excellent, booth seat comfort was excellent, table size was ample, and service was swift and attentive. Nobody pressured me off the table when the food was gone, I was refilled until I left, the place was pleasant on the eyes. What more could you ask?

There is a weekend live-music event nearly every Sunday, with 1.5 hour sittings that include bayou blues from ancient fonts of blues who still know how to lay it down. At $30 for adults and free under 12 years, I'll need to see if the kiddos like blues music. Could be educational :-) Since the opera singer no longer runs a steak joint, the music has changed; but the quality of the experience remains high at the corner of Montrose and the Southwest Freeway.

Danton's Gulf Coast Seafood gets a very solid A on mere average. However, the whole is greater than the sum of the parts, and Danton's is an A+ on overall. Go eat there: I'm told by a local – living two blocks away – that everything else is good, too.

Handheld Hegemon Update

Apple's handheld business, previously predicted to explode right here, recently posted a +131.6% annual handset unit growth in a market that grew 56.9%, causing share growth from 10.9% in Q1 of 2009 to 16.1% in Q1 of 2010. This share came at the apparent expense of RIM, whose Blackberry products' unit growth of "only" 45.2% led to a share drop from 20.9% to 19.4%. Unit growth like RIM's can't really be called "failure", but the trend suggests that Apple's operating system is on the rise and RIM's – dependent as it seems to be on high-overhead corporate server middleware licenses – is losing its shine.

HP To Face Lenovo's ARM/Flash Problems?

If the "Hurricane" tablet HP is rumored to launch this summer is really an ARM/WebOS number, how would it deliver Flash support in the face of Lenovo's ARM/Flash issues?

Hypothesis: HP will declare Flash unfit for non-Intel machines and use Apple as an illustration that non-shipment of ARM should be accepted by the market. Else, HP has Adobe working on an ARM version that is ostensibly going to be ready by HP's ship date, and is being paid to promote Flash as "the real web". It's not likely HP really believes Flash is a competitive advantage over the long run – even current Flash supporters think Adobe's Flash is not the future of the web, but is a next-18-months phenomenon.

Might HP think Flash is an advantage over the next few quarters? Since content sources haven't prepared HP-tablet-specific apps for delivering streaming content yet, HP would have to rely on HTML5 migration if it didn't deliver an acceptably-working Flash plug-in.

CBS Joins Flash Snub

Unlike ABC, which uses a custom app to provide its web site's video content to Apple's iPad users, CBS will provide all its content by delivering an HTML5 web site by next season– apparently cutting Flash out of its future video tool chain.

Web standards über alles?

Maybe Adobe's plan to offer the best HTML5 tools is the best defense of its content developer tools after all.

DWA: Attractive

The 3D IMAX presentation of How To Train Your Dragon closed today at my nearest 3D IMAX, but the film's run upon the (merely) wide screen continues. (I saw it twice in IMAX 3D. When 3D TV becomes common, people will want to fly on a dragon in 3D and will buy this in droves.) DreamWorks – discussed earlier as a way to make money on <$20 amusements – reported at the end of April that Dragon had taken in a worldwide box office of $375m. The return of Dragon to the #1 spot on the charts the week after Kick Ass launched suggested good staying power, and I have no doubt it will do well on video once that occurs.

The DWA report was a penny ahead of expectations, but was clobbered because its lumpy revenue (it only does so many major films a year) left it with less q/q earnings. I think that as DWA matures and expands its ongoing franchise revenues, it'll continue to make good money in a market that'll only get bigger.

Adobe Flash Delays ARM Notebooks

Adobe's delayed release schedule for its Flash plug-in targeting Lenovo's new ARM-based mini-notebook is causing delays in Lenovo's release of ARM-powered notebook hardware, according to ARM's marketing VP Ian Drew.

Apple's decision not to allow Adobe to sit between users and content on Apple's ultraportable platforms seems quite rational. Imagine Apple waiting on Adobe to launch a phone based on a custom Apple chip for which Adobe doesn't prioritize optimization. Hmm. I'll just stick to imagining the phone with the Apple chip.

To think about Apple products suffering from third parties not bothering to dedicate optimization resources is s0 1996.

UPDATE: Opera's Philip Grønvold has weighed in on the HTML v. Flash debate, saying that "Flash as a video container makes very little sense for CPU, WiFi battery usage et cetera – you can cook an egg on [devices] once you start running Flash on them and there's a reason for that." Opera will continue to support Flash, "But at Opera we say that the future of the web is open web standards and Flash is not an open web standards technology." So it's good news for Lenovo: in a couple of years, Lenovo will be able to sell whatever ARM-based or other alternative hardware it wants, without worrying whether Adobe sees fit to optimize Flash adequately for users. In the meantime, though, it's nice to be Apple ....

Iced Tea Report: Barnaby's

When the Jaded Consumer was first conceived, it was to discuss the things we're offered to consume. Lest I be criticized as a never-happy customer, allow me to take a moment to present a recent lunch at Barnaby's:
The iced tea has been refilled (A-: it was allowed to go empty). It came with a lemon slice in the tea (plus for a lemon, minus that I can't squeeze it into the tea without fishing in the tea first; a B+). It was served with a tea spoon. (A+: this means I can sweeten it with provided sugar, and begin drinking without further need to attract a waiter. Unfortunately, I did have to ask for sugar, since the last diner consumed it all at my table, a trick I in turn pulled on the next customer. They could be better about ensuring tables are restocked between customers. I withhold the "no sugar" grade of D because there was sugar on every table, including the next one, and I didn't even have to reach for it because the waiter swiftly remedied my problem the moment I mentioned it, without one of those oh-so-annoying trips to the back, where they tell a bus-boy to fix it, and he forgets because he's fixing something else and his tip-out share isn't enough for him to care about service. Swift and complete remedies are almost as good as initial perfection.) The iced tea came with enough ice to make it gooood and cold, but not too much to allow stirring of sugar: A+. Overall Tea Report grade: A.

Outside the tea, I can assure you (1) that the chicken salad was a huuge salad and its grilled chicken both generous in supply and unbelievably tender to the point of competing for best-in-town status (in Houston, Land of Food, this says something), (2) that the burgers were too big for my girls to eat (even though sharing a burger), and (3) that you can't visit without ordering the pink-smoked chicken, which is falling-off-the-bone tender and has excellent hardwood flavor and a tasty sauce. You don't go home hungry from Barnaby's.

Houston has several locations, and the decor (winged dog bones, dogs painted on walls painted as cloudy skies, dog houses in the sky) proves Barnaby's founder loved his dearly departed sheepdog. By the time you are finished eating, you will too.

Scribd to go HTML5, Abandon Flash

Adobe's Flash has taken another beating at the hands of standards: online document sharing site Scribd is going HTML5. Scribd's co-founder and Chief Technological Officer could not make the company's position more clear that the switch is based on technical and not merely political reasoning: "We are scrapping three years of Flash development and betting the company on HTML5 because we believe HTML5 is a dramatically better reading experience than Flash. Now any document can become a web page." (For clarity in parsing those links, the Jared Friedman quote is from Schonfeld's article at TechCrunch.)

Scribd joins Google (YouTube HTML5 beta here), Apple, Microsoft (which moved from merely sending video to iPhones in H.264 to declaring "The future of the web is HTML5"), Virgin America, and a variety of other content providers in leveraging new standards to provide a full-featured alternative to historically buggy and insecure proprietary plug-ins like Flash.

Apple is still winning the Flash chicken.

1Q2010: ACAS Still Making Money

ACAS' streak of increasing NAV continued through the just-announced results of the 1Q2010 quarter, in which it reported a fair-value of net assets totaling $8.98 per share, up from $8.29 at the end of 2009. Net operating income of $49 million (largely the result of portfolio companies' results flowing to ACAS' bottom line due to consolidation of balance sheets) brought ACAS to a NOI of $0.17 per share, while net earnings of $187 million resulted in $0.65 per share in net earnings.

ACAS' net earnings aren't leading it to a dividend any time soon, though – something the Jaded Consumer regards as good news for those who want ACAS to reinvest the money management has on-hand. This is because realized portfolio losses were $107 million, even as ACAS booked $367 million in unrealized gains. Because BDCs' dividend-payment requirements are driven by taxable income, it is the realized income (and not the FAS-157-compliant changes in holdings' values that the SEC requires be reported as "income") that will determine ACAS' future dividends. As ACAS builds a backlog of realized losses (anyone have a number?), it will be able to absorb future income without being forced into coughing up its valuable cash in the form of dividends. When the losses are completely consumed, ACAS will get some attention for suddenly having a big dividend, but that's for down the road.

ACAS closed the quarter with $820 million in unrestricted cash. Because of the April issuance, ACAS will have some dilution; however, the $1.2 billion of unrestricted cash on-hand at the end of April places it in an interesting position to conduct financial engineering and to acquire distressed opportunities available in the marketplace. If, as the Jaded Consumer expects, the issuance frees ACAS to bring ECAS out of default of its debt covenants, ACAS could show a FAS-157-compliant "fair value" of ECAS that's substantially better than its last-reported values, resulting in a net gain to NAV in the same manner that ACAS expected to achieve when it bought ECAS from the public market by issuing ACAS shares below NAV. ACAS will, at the same time, be retiring debt. What's the impact of ECAS' current discount to NAV? ECAS' fair value increased $50m over the quarter (less $15m in currency net depreciation) to $0.3B, which is $0.5B less than its $0.8B NAV. The market environment in which ACAS' NAV improves is a plausible environment in which to expect ECAS' NAV to improve, and we've seen ACAS' NAV on the march for several quarters now. The ECAS valuation upside isn't limited to the $0.5B of NAV discount, but the 5/8 discount applied to future NAV improvement as well.

A hypothetical exercise: a company has NAV of $400 but has a fair value of $150 because it is in technical default of debt covenants on $200 of debt, which causes its "fair value" to be discounted to 3/8 its non-defaulted value. The company contains $600 in assets, but has $200 in debt, which is why its NAV is $400. If the company pays its debt with cash on-hand so that it has $400 in assets and zero debt, it will perforce be free of any breach of a debt covenant, because the debt will be retired and its obligation discharged. The "fair value" would cease having a defaulted-debt discount to NAV, and "fair value" would again approach the $400 NAV. Movement from fair value of $150 to fair value of $400 was achieved simply because the company was sufficiently liquid. An illiquid company might have continued to fail to met debt covenants, and defaulted not only on covenants but payments, and might have ended up in bankruptcy court where its failing businesses could have been sold off to meet the demands of unpaid creditors. Liquidity beats mere value. Because ACAS is liquid – to the tune of $1.2B – ACAS can explore financial engineering unavailable to illiquid competitors.

Cash from realizations – not issuance, but events like debt repayments and equity exits – produced $163 million in cash. ACAS expects more cash realizations in connection with the Mirion IPO later in 2010. ACAS invested $84 million in new investments over the quarter, so the company is clearly not dead in the water and unable to make quality investments.

Moreover, ACAS is working to improve its margins. The debt refinancing agreement ACAS has commenced calls for interest rates of LIBOR+5.5%, plus another 1% until the principal balance falls below $1Bn. This compares quite favorably to ACAS' current debt burden, which has grown from 9.9% to 10.3%. (The one-year LIBOR rate, the highest rate listed in the prior link, is cheap compared to ACAS' current rates even after adding 5.5-6.5%. Refinancing will apparently improve ACAS' spread by hundreds of basis points.) Freeing itself from default rates of interest will improve ACAS' margins by lowering the cost of the money it's lending to portfolio companies. Turning cash into both decreased principal and decreased interest rates will help ACAS' margins in the immediate term by lowering both the principal and the interest rate on conclusion of the refinancing. The press release makes apparent that hold-out lenders will have the deal shoved down their throats by a court if they don't agree out-of-court. Bankruptcy court is good for a solvent debtor in the United States, particularly when the debtor has nearly all his lenders onboard with his refinancing plan.

I think the future looks good for ACAS. NOI will benefit from the refinancing transaction, because it will allow ACAS to realize better spreads. I'm dying to learn about ACAS' new investments, but honestly I think the best returns ACAS will be getting in the immediate term will be from financial engineering designed to restore value to ECAS. Over the long term, however, I think fire-sale acquisitions may be the key to ACAS' upside. Improvement of earnings will continue through spread expansion and the improvement of the overall performance of portfolio companies as the economy improves (portfolio companies' operating income flows to ACAS' bottom line because it is required to consolidate with its own accounting the results of its wholly-owned and mostly-owned subsidiaries, just as Berkshire Hathaway books revenue earned by GEICO and Dairy Queen), and the better ACAS is doing without thinking about exits, the more opportunity ACAS will have to reap the benefits of being a patient investor without pressure to flip holdings.

I'm optimistic about ACAS and don't expect the pullback to last. Succeeding rounds of good news – whether in the form of refinancing press releases or quarterly reports showing improvements in NAV – will eventually drive ACAS back toward its historical NAV premium.

Paulson and Goldman Getting the Shaft in the Media

I recently read an online report of comments made by Warren Buffett about Goldman's fortunes in the aftermath of the recent SEC complaint. Ignoring the theory that the SEC's effort against Goldman is directly linked to Goldman's lobbying efforts and their diametric opposition to the views of SEC brass and the White House, I was frankly shocked at the number of people who, reading nothing but the New York Times (that prominent purveyor of truth), decided that Buffett was lying to enhance his investment potential. This, in the face of the fact that Buffett makes more money while Goldman is in trouble because it impairs its freedom to call Buffett's high-paying Goldman preferred shares. In other words, the truth appeared to be that Buffett, in defending Goldman, was speaking against his pecuniary interest.

But who cares about the truth when there's an old meme to flog?

In the interest of advancing the quest for truth, I thought it worth posting a link to the other side of the story – Paulson's response to the SEC allegations. Since it's Goldman and not Paulson being threatened by the SEC, Paulson's reply comes in the form of a letter to investors. Still, I thought Paulson's reply was interesting.

In short, Pauson's willingness to take the short side of a subprime mortgage CDO didn't confer on Paulson the power to stuff it with specially-selected garbage. The buyer had previously bought the same securities in other packagings and knew full well what it was buying. Moreover, the asset manager that DID have the power to pick what was being used to structure the investment actually reviewed the investments, picked some, rejected some, then sent the whole off to a rating agency which then exercised its own judgment in rating the investments. Paulson wasn't pushing crack on naïve children, he was selling cigarettes to adults under a sign (that he himself had erected) that read "Cigarettes Are Bad For Your Health. $3/Pack." The buyers were sophisticated investors who, looking at the available information, decided Paulson was wrong and they were willing to take him to the cleaners over it. The only problem with the transaction was, in truth, that Paulson was right.

Buffett probably has it right: Goldman and Paulson aren't the bad guys in the subprime implosion. They saw a market and didn't do anything to poison it, they simply played it. In Paulson's case, he played it while openly criticizing the investment thesis of those playing the long side of the subprime bet. The irony? The SEC's claims aren't about a CDO but an artificial CDO created to offer products to buyers after the real investments had all been sold. The derivative was based on real investments, but needed a counterparty to take the risk on the side opposite the buyer. Paulson's position as the counterparty wasn't secret, and the buyers knew they were buying something no longer available on the market. The buyers were so hungry for subprime investments that they were willing to pay a premium to Goldman to home-brew a substitute.

Paulson's fund is now such a large owner of ACAS that he must report as an insider.

Flash In The Pan

The escalating Apple vs Adobe exchange on Flash (vs migration to open standards like HTML5) and the adequacy of open-standards alternatives has another data point:

[I]n the past four quarters, the H.264 format went from 31 percent of all videos to 66 percent, and is now the largest format by far. Meanwhile, Flash [encodings] represent only 26 percent of all videos. That is down from a combined [Flash encoding] total of 69 percent four quarters ago. So the native Flash codecs and H.264 have completely flipped in terms of market share
Erick Schonfield of TechCrunch, quoted by Philip Elmer-DeWitt in "Apple vs. Adobe: Is Flash Dying?"

Given what Apple has demonstrated is possible using open standards and modern browsers, the need for proprietary plug-ins to deliver content or interfaces to customers or other users seems solidly on the decline.