Bob Davis
Re: FIBR, on your letter
napeague.com
First, my disclosure, I am long on FIBR.
Your details and explanation of the events surrounding the
reverse split in FIBR are a little off, although I don't argue
too much with your general statements.
1. The reverse split was announced about 7/1/98.
2. The reverse put the opening price just above $7, which was
a few days before your arrow on the chart.
3. The reverse split was NOT performed to to prevent de-listing,
but to enable NASDAQ National market listing, which was achieved
in December, 1998.
4. The turn around occurred after a conference call at or about
9/24/98. The day after this call, the stock went from $2.50 to
$4.00/ share. The reason will be explained below.
The reverse split was almost "the kiss of death" because of two
other factors. The company had issued $8 million in floorless
convertible preferreds in May, 1998. The company had quarter over
quarter declining revenues. Things LOOKED bad from a financial
point of view and the sell off at one point brought the market
cap. of Osicom down to about $16 million.
However, if Osicom could survive this death spiral, the fundamentals
kept improving. Osicom was/is oddly put together. It has four
divisions, two of which sell old, legacy products. These old
divisions have declining revenues. The two new divisions have
new, award winning products. Go peruse the news on Yahoo.
The problem is that the lead times for deployment of these products
are over a year for each one. One because of slow acceptance and
integration, the other because a circuit board must be designed
around it for each customer. So, while these two new divisions
were ramping up (Osicom needed the $8 million to deploy the
Gigamux, one of the two products, in customer's labs for
evaluation.), the two old divisions were declining, hence the
bad looking financials.
What turned the share price around was the announcement that
one of the old divisions was up for sale. This division consists
mostly of an ISO 9000 rated factory in Hong Kong. It's margins
are only 20% and it was suffering from the Asain flu. However,
it is worth $30-$60 million. Even in a fire sale, the CEO
announced that Osicom could get at least what Osicom paid for
it, $11 million. With $11 million in Osicom's pocket, they could
redeem the convertible preferreds with no dilution to the stock.
In the end they allowed about 12% dilution, not the 50% dilution
people were afraid of. They continue to redeem the convertible
at the rate of about $.75 million/month, out of current income.
They still intend to sell the Hong Kong plant, but are waiting for
a fair price. They had 8 bidders at the last conference call.
In this case the threat of selling the Hong Kong plant stopped
the death spiral.
Osicom had substantial revenue for the two new products last
quarter. The fiscal year just ended Jan 31, 1999. The CC
should be in early March. They let everyone listen. In fact,
the last two conference calls are still available via RealAudio
at
osicom.com
What do I expect from this company? (Here is the SPAM.) I
believe the fair (base buyout) price for Osicom is about
$530 million. The current market cap. is under $150 million.
The reason is comparable values in the industry. Nortel just
bought a private company called Cambrian for $300 million.
They bought Cambrian specifically to acquire a developing product
which is the same or similar to Osicom's Gigamux product. The
other new Osicom product is NET+ARM. This is roughly equivalent,
thought much superior in some ways to what the company Echelon
(NASDAQ: ELON) offers. Echelon has a market cap of $100-$300
million depending on what day you look at it. Finally, I value
the Hong Kong plant at $30 million. Cash.
The sales of the new products will, in my opinion, double quarter
over quarter for a while.
The other comp. to the Gigamux is Ciena's products. Ciena does
not have a viable short haul product. That is what the Gigamux is,
a short haul DWDM box.
The reverse split allowed me to triple my equity position in this
company.
Joe Hoane |
