Back-of-the-Envelope Liquidation Analysis
Rock: When doing a liquidation analysis, always start with the balance sheet (see below for the 12/31/00 version).
The first thing I noticed is that Goodwill Net of Accumulated Amortization ($286MM) is greater than the book value of Total Stockholders Equity ($210MM). Right out of the gates, and we're already underwater.
Likewise, Accounts Receivable under a liquidation scenario are usually only valued at 80-85% of book value given the difficulty of collecting on otherwise good accounts when a company is insolvent (e.g., unknown offsets get applied by customers, customers simply refuse to pay knowing that the company typically has difficulty collecting when insolvent). Since total receivables (contract, other, tax, and reinsurance) at 12/31/00 were $72MM, then their net realizable value in a liquidation scenario should be discounted by 15-20% (an $11-14MM hit to book value).
Similarly, Inventories are usually discounted by 50% in a liquidation (another $20MM hit), machinery and equipment often go for a 30% discount (another $78MM hit), and all Prepaid Expenses are usually considered worthless (another $13MM hit).
So far, a back of the envelope liquidation analysis indicates that equity is already well underwater...
Net Tangible Asset Value:
$822MM book value of assets
- $286MM hit from goodwill
- $12MM hit from uncollectible A/R
- $20MM hit from unrealizable inventory values
- $78MM hit from unrealizable M&E values
- $13MM hit from uncollectible prepaid expenses
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= $413MM net tangible asset value (excl. variance in R/E)
This compares to $612MM of Total Liabilities at 12/31/00, yielding a total deficit to equity holders of approximately $200MM using 12/31/00 figures.
Furthermore, this is all before accounting for the typical financial deterioration that occurs pre-petition (i.e., the balance sheet probably got much worse from the period of 12/31/00 to the petition filing date).
The only upside I can see would be, as you suggested, in the market value of the real estate. Since I don't see a category in the balance sheet for real property per se, I assume it is probably lumped in with the PP&E. If the real estate is unmortgaged, and its market value is much greater than its book value, then the net tangible value of the equity may revert back to positive. At the present time, however, I can only speculate on this particular issue. Perhaps the footnotes in the recent 10-K405 address this issue? Otherwise, we will probably have to await the 10-K/A to be filed no later than May 15th for a more complete picture of the balance sheet.
Hope this helps explain my pessimistic view for the long-term equity value of FGHLQ.
Again, the above is strictly my opinion and nothing more. As I said before, I have no position here, either long or short. I just hate to see fellow investors (especially good cyber-friends) lose money betting against house odds that are so heavily stacked against them.
Best regards,
Razor
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BALANCE SHEET FROM THE LATEST 10-K405
(FILED 04/02/2001)
December 31,
--------------------
2000 1999
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 25,244 $ 15,124
Receivables, net:
Contract receivables................................... 46,270 124,140
Other receivables...................................... 10,225 18,897
Income tax receivable................................... 591 38,657
Inventories, net........................................ 41,234 45,261
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 73,224 143,769
Prepaid expenses and other.............................. 12,827 17,048
Deferred income tax asset............................... 30,997 45,403
-------- ----------
Total current assets................................. 240,612 448,299
Reinsurance receivables.................................. 14,975 9,599
Investment in unconsolidated subsidiary.................. -- 13,035
Property, plant and equipment, net of accumulated
depreciation............................................ 261,337 334,642
Goodwill, net of accumulated amortization................ 285,641 195,137
Other assets............................................. 19,449 9,779
-------- ----------
Total assets......................................... $822,014 $1,010,491
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 93,885 $ 115,918
Accrued liabilities..................................... 77,879 117,966
Reserve for losses on uncompleted contracts............. 101,997 66,226
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 32,397 50,725
Current portion of long-term debt, including debt in
default................................................ 74,877 13,645
-------- ----------
Total current liabilities............................ 381,035 364,480
Long-term debt, less current portion and debt in
default................................................. 147,397 299,075
Non-current liabilities.................................. 29,498 9,599
Deferred income tax liability............................ 24,405 56,190
Deferred government subsidy, net of accumulated
amortization............................................ 29,886 33,026
Stockholders' equity:
Preferred stock; $0.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding........... -- --
Common stock, $0.01 par value; 125,000,000 shares
authorized; 48,708,979 and 39,972,844 shares issued and
outstanding at December 31, 2000 and December 31, 1999,
respectively........................................... 487 400
Additional paid-in capital.............................. 299,350 230,166
Retained earnings (deficit)............................. (87,851) 18,520
Accumulated other comprehensive loss.................... (2,193) (965)
-------- ----------
Total stockholders' equity........................... 209,793 248,121
-------- ----------
Total liabilities and stockholders' equity........... $822,014 $1,010,491
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