|Shares Out. (in M):||38||P/E||0.0x||0.0x|
|Market Cap (in $M):||10||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||25||EBIT||0||0|
A quick word of warning - I will spend hardly any time on the actual business of PBS because it's largely irrelevant. With that in mind, PBS makes body armor for law enforcement and the military. They filed for chapter 11 in April 2010. You might remember this company better by its former name, DHB Industries. DHB/PBS was the victim of its CEO, David H Brooks. Short story is that DHB was a glorified pump-and-dump and management sold hundred of millions in stock at the top after years of accounting fraud. Brooks himself is a piece of work, I encourage a quick Google search - the guy is a first-rate pos.
Today, PBS sits in bankruptcy. They have a $25m in DIP and another $40m in other claims. There are 38m shares outstanding after cancelling out the shares still owned by Brooks and his family. PBS as a going concern is maybe worth $10-20m at the most, it's a lousy business. So with a business worth only ~$15m, no cash, and no other hard assets, how did they get a DIP loan for $25m? Why wasn't this a chapter 7?
Give credit to Sarbanes-Oxley. (Incredible I realize, SOX actually helping us out for a change) SOX provision 304 states that if there was a fraud at a company, the CEO and CFO mus repay the company for all bonus comp (stock/option sales, cash bonus) during the time the fraud was ongoing. Interestingly, this can even be applied if the CEO and CFO had no knowledge of the fraud, although in PBS' case they obviously did. Brooks reaped fraudulent gains of about $190m and today most of it's in a seized account at Goldman, just sitting there in "US denominated currency". Brooks has various other seized assets, such as luxury cars and an incredibly tacky pen collection (just goes to show that you cant buy taste) that aren't worth much in relation to the cash. PBS is also in the process of recovering a $35m shareholder lawsuit that was voided. That money is being clawed back because the subsequent management stated they would indemnify Brooks personally against SOX 304 as part of the settlement, even though a judge later ruled they didn't have the authority to do so and rejected the settlement.
So the money is just sitting there but it's owed to shareholders of PBS and here's where things get a little tricky. Debtors proposed a plan that would create a reorganized NewCo and a recovery trust for the SOX 304 assets. The SOX 304 cash isn't in PBS' bank account yet because the SEC has to actually litigate the matter, which cant be done until Brooks is sentenced (coming soon). They wanted to split the recovery trust 70/30 with existing shareholders (which would leave existing shareholders with $.60-70) but that plan is now off the table after they failed to submit an amended disclosure statement with additional details. This is really what this case is about - how are we going to split this money?
I'm not sure if the lawyers on the equity committee are stupid or just lazy, although nothing says those are mutually exclusive. EC has taken the position that because the DoJ theoretically has the power to step in and siphon the SOX 304 recovery, they cant prove its value to a judge and therefore argue that a plan is fair or unfair. Without that proof they are somewhat powerless to receive a more equitable split of the recovery trust, which is for the most part the only thing people really care about in this case. That's their story, at least, it has some truth to it. I say that EC has been lazy because they haven't argued anything in front of the judge regarding this, and they seem to totally ignore the fact that there is NO precedence for the DoJ actually "stealing" this cash a second time from victimized shareholders, not that the SOX 304 list is long (the most notable case was William McGuire from United Health paying $600m - ouch). EC just had some new members appointed and I'm hopeful we'll see a little more grit.
Leading the charge for shareholders, although not part of EC, has been PBS' former general counsel of all people, a guy named David Cohen. Cohen was a whistleblower and has been fighting the good fight against the admittedly creative lawyers from debtors and creditors. Now we wait for another plan to be filed. My guess is it's basically the same as the old plan but with a more favorable split of the recovery trust, say 50/50, enough to get the objectors to shut up. This scenario would leave equity with $2.00 in value after paying off DIP, other claimants, and incurring another $15m in legal expenses. I feel okay about this whole situation because even under the "I get screwed" scenario of the original plan, equity would've been worth ~$.60-70. This is not going to be a zero for us. There are some other aspects of the case I'm glossing over in the interest of brevity, a lot of it having to do with some incestuous relationships between management, creditors, and equity.
There's $35m in clawback from the rejection of the shareholder settlement. The business itself is probably worth $15m. Then there's $190m up for grabs from SOX 304. Against this is $25m in DIP, $40m in other claims, and $15m in future legal expenses. With a 50/50 split of the recovery trust (that's post all claims, btw) PBSOQ is worth a little over $2.00. If the plan is approved with this split the stock probably spikes to $1.00-1.25 and shareholders can exit if they want or wait around for the recovery and distribution, which I'm sure will take an eternity. I think the only way we lose money is the nightmare scenario of the DoJ stepping in and taking the money for whatever purpose they want, otherwise I struggle to think of how equity is a goner.