Wednesday, March 31, 2010

Comedy from Congressman Gene Green

This gets more amazing by the minute, as a congressman admits that he's dragging CEO's in front on a committee hearing, despite those CEO's simply abiding by accounting laws.

Congressman Gene Green of Texas on the left, forced to admit that the union he is a member of wrote a letter begging congress not to pass the legislation that has enraged the White House and Henry Waxman.

I would love to say it's funny, but it's really not...

US Treasury hits the JACKPOT with Hartford Investment. WELL DONE!!! (HIG)

Treasury should be doing the Carlton dance:

Insurance firm The Hartford (HIG) announced that they'll be repurchasing the $3.4billion TARP investment they accepted last June.
HARTFORD, Conn., Mar 31, 2010 (BUSINESS WIRE) -- The Hartford Financial Services Group, Inc. (NYSE: HIG) today announced that it has repurchased all of The Hartford's preferred shares issued to the U.S. Department of Treasury under the Capital Purchase Program (CPP).
"We are pleased to complete our plan to return the U.S. Treasury's investment in The Hartford and appreciated the opportunity to participate in CPP and the support of the government and American taxpayers," said Liam E. McGee, The Hartford's Chairman, President and Chief Executive Officer. "With the capital raise completed and the investment repaid, we are well positioned from both a capital and balance sheet perspective."
The Hartford paid $3.4 billion to the U.S. Treasury to repurchase the preferred stock, plus a final dividend payment of about $21.7 million. The Hartford funded the repurchase with proceeds from its recent equity and debt offerings, as well as from available resources. The U.S. Treasury continues to hold warrants to purchase approximately 52 million shares of The Hartford's common stock at an initial exercise price of $9.79 per share. The company does not intend to repurchase the warrants from the U.S. Treasury.

I hope no one missed that above.  Treasury has warrants to purchase 52million shares at $9.79....while the shares are current trading at $28.54!!!!!!!!!  Those warrants are worth $973million, on a $3.4billion investment, not even including the 5% dividends!

Trade of the year!!!  Do Hartford shareholders know that the exercised warrant profits will come out of their pockets?  I'm not sure, as the stock is up 1.8% today....

Copyright 2010 AlphaNinja

A BIG day for domestic oil and gas exploration

While it's a flat day for the markets in general, the oil and gas sectors are having a GREAT day, thanks to a reversal on the ban of offshore oil drilling in most US waters.  

“By responsibly expanding conventional energy development and exploration here at home we can strengthen our energy security, create jobs, and help rebuild our economy,” said Salazar. “Our strategy calls for developing new areas offshore, exploring frontier areas, and protecting places that are too special to drill.  By providing order and certainty to offshore exploration and development and ensuring we are drilling in the right ways and the right places, we are opening a new chapter for balanced and responsible oil and gas development here at home.”

They probably didn't ask the opinion of our energy-hating Secretary of Energy, who is quite certain that $8 gasoline is good for business.  Secretary Chu once said  "Somehow we have to figure out how to boost the price of gasoline to the levels in Europe."  Glad to see his influence is waning.

It must be noted of course, that this is just a first step for this anti-energy administration.  Republican House leader John Boehner pointed out the exclusion of California and Alaska waters from this announcement:

“The Obama Administration continues to defy the will of the American people who strongly supported the bipartisan decision of Congress in 2008 to lift the moratorium on offshore drilling not just off the East Coast and in the Gulf of Mexico, but off the Pacific Coast and Alaskan shores as well. Opening up areas off the Virginia coast to offshore production is a positive step, but keeping the Pacific Coast and Alaska, as well as the most promising resources off the Gulf of Mexico, under lock and key makes no sense at a time when gasoline prices are rising and Americans are asking ‘Where are the jobs?’

Up especially big are exploration and production companies along the gulf coast:

Copyright 2010 AlphaNinja

Helping Henry Waxman understand (T)

In light of Henry Waxman's April 21st CEO inquisition, the WSJ explained the recent uproar by the Obama Administration and Congress over company earnings write-downs related to the healthcare bill.

Before getting to Waxman, here is a quote from the AFL-CIO's December letter letter warning about the consequences of the healthcare bill's tax treatments.  And the AFL-CIO is a HUGE Democrat money source - it's not as if this came from people opposed to the healthcare bill:

It is clear that in drafting Section 9012, the Senate was not aware of, and therefore not able to
take into consideration, the significant negative impact, required under Financial Account
Standard No. 109, on the financial statements of companies currently providing retiree drug
coverage. Regardless of the effective date of the provision, accounting rules dictate that
immediately upon being signed into law, this deferred tax liability would have to be reflected on
company financial statements. This would substantially increase liabilities for the very
companies providing the most comprehensive coverage to current and future retirees. In the
current economic environment, this would be particularly ill-advised and disruptive.

Poor Henry is confused, because he was told by "independent analysts" that the healthcare bill would reduce costs.  Now that companies are following accounting laws that REQUIRE them to take an asset impairment charge in light of higher future taxes on retiree benefits, he thinks they're playing politics.

 As the WSJ explains, the write-downs relate to closing the "loophole" in which companies get a tax subsidy for proving retirees with prescription drug benefits:

Presumably the White House is familiar with the Financial Standard Accounting Board's 1990 statement No. 106, which requires businesses to immediately restate their earnings in light of their expected future retiree health liabilities. AT&T, Deere & Co., AK Steel, Prudential and Caterpillar, among others, are simply reporting the corporate costs of the Democratic decision to raise taxes on retiree drug benefits to finance ObamaCare.
When the Medicare prescription drug plan was debated in 2003, many feared that companies already offering such coverage would cash out and dump the costs on government. So Congress created a modest subsidy, equal to 28% of the cost of these plans for seniors who would otherwise enroll in Medicare. This subsidy is tax-free, and companies used to be allowed to deduct the full cost of the benefit from their corporate income taxes (beyond the 72% employer portion).

As explained by one of the offenders, AT&T, in their 10k:

"We recognize a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion, or all, of a deferred tax asset will not be realized."
That sounds innocuous enough, but apparently the reality of accounting laws rubbed the White House the wrong way.  According to the WSJ: 

A White House staffer told the American Spectator that "These are Republican CEOs who are trying to embarrass the President and Democrats in general. Where do you hear about this stuff? The Wall Street Journal editorial page and conservative Web sites. No one else picked up on this but you guys. It's BS." (We called the White House for elaboration but got no response.)
In other words, CEOs who must abide by U.S. accounting laws under pain of SEC sanction, and who warned about such writedowns for months, are merely trying to ruin President Obama's moment of glory. Sure.

Here is part of Waxman's laughable letter to AT&T CEO Randall Stephenson, in which Waxman says "The New Law is designed to expand coverage and bring down costs, so your assertions are a matter of concern."

Copyright 2010 AlphaNinja

Rite Aid, happy to close the door on a rough 2009 (RAD)

Shares of pharmacy Rite Aid (RAD) are down about 6% this morning, on very weak forward earnings guidance.

They reported a fourth quarter loss of 24cents, but that included various one-times charges, among them a write-down in the valuation of deferred tax assets, likely due to the new healthcare bill.  Stripping out those items, the loss of 14cents per share was better than the street expectation of a 19cent loss.

Commenting on the quarter, CEO Sammons cited lower Medicare reimbursements and a weak cold/flu season:

Results were negatively impacted by lower sales and continued pressure on pharmacy margins resulting from less profit on new generics and a significant reduction in reimbursement rates. An improvement in front end margin and good SG&A cost control were not enough to offset the decline in pharmacy margin.
“It was a difficult quarter with continued weak consumer demand, a weaker cough cold and flu season than last year and continued pressure on pharmacy reimbursement,” said Mary Sammons, Rite Aid chairman and CEO. “But our team did a good job of improving front end margins and holding tight on expenses. Thanks to our working capital initiatives, we moved into the new fiscal year with a strong liquidity position.”
The company's guidance however, is the reason for the shares weak performance today.  The outlook is for a loss of 52cents per share, versus current expectations of a 32cent loss.  The downside to estimates is from a slightly weaker revenue outlook, along with what looks like price investments (cuts) to promote customer loyalty:
Outlook for Fiscal 2011
The company's outlook for fiscal 2011 is based on current trends, a continued weak economy with high unemployment and the impact of the investment Rite Aid is making in its new customer loyalty program.
Rite Aid said it expects sales to be between $25.2 billion and $ 25.6 billion in fiscal 2011 with same store sales expected to range from a decrease of 1.0 percent to an increase of 1.0 percent over fiscal 2010.
Adjusted EBITDA (which is reconciled to net loss on the attached table) is expected to be between $875 million and $975 million.
Net loss for fiscal 2011 is expected to be between $355 million and $570 million or a loss per diluted share of $0.41 to $0.65. Capital expenditures are expected to be approximately $250 million.
Not a fun time for this company, and the coming year promises to be a bad way.
Copyright 2010 AlphaNinja

Tuesday, March 30, 2010

Investors Bancorp, growing deposits the opportunistic way (ISBC)

In turbulent (to say the least) times, many banks find that the best way to get their hands on some pristine deposits is from failed or struggling banks.

New Jersey-based Investors Bancorp (ISBC) just announced they will acquire $575million in deposits and 17 branch locations of Millennium BCP Bank, as well as a yet to be determined portion of Millennium's loan portfolio.  ISBC shareholders should hope that any loans taken off the hands of Millennium are subject to exhaustive due diligence, as their website shows a pretty low-rent operation.

Millennium's loan profile is 35% weighted toward commercial real estate, triple the weighting at Investors.  I would also take Millennium's estimates of problem loans as a "starting point," if you will.  There could be some real garbage lurking in there:

From the release:

SHORT HILLS, N.J.March 30 /PRNewswire-FirstCall/ -- Investors Bancorp, Inc. (Nasdaq:ISBC - News) announced today that Investors Savings Bank ("Investors"), its wholly-owned subsidiary, has signed a Purchase and Assumption Agreement with Millennium bcpbank ("Millennium") to acquire approximately $575 million of deposits and seventeen branch offices in New Jersey,New York and Massachusetts for a deposit premium of 0.11%.
Under the purchase and assumption agreement the parties intend to enter into a Loan Purchase Agreement in which Investors will purchase a portion of Millennium's performing loan portfolio. Also under the Purchase and Assumption Agreement the parties will negotiate a Loan Servicing Agreement for Investors to service those loans it does not purchase.
Commenting on the transaction, Kevin Cummings, President and CEO of Investors said, "This is an excellent opportunity to expand our branch network and improve our core deposit mix. We look forward to providing the same high quality, personalized level of customer service these depositors have become accustomed to."

Usually as of late, banks have bought assets & deposits from the FDIC after another bank has failed, with FDIC assurance that they will share in any losses.  In this case, Millennium is selling ALL their 17 branches and ALL their deposits, if the information on their website is accurate.

This deal will increase ISBC's deposit base by 10%, so it's certainly not a "game-changer" in terms of size.  I worry though that they are buying the ENTIRE loan portfolio of this questionable-looking bank.  Often times, a bank like this might be largely dependent on brokered deposits, or "hot money."  According to the most recent FDIC report on Millennium however, the deposit profile looks pretty healthy, with only $22million in brokered deposits out of a total $647million in total deposits, as of December 2009.  ISBC is likely not even buying those deposits.

This deal looks to be a nice growth driver for Investors Savings.  Cheers to them, and BIG CHEERS to their healthy loan profile:

Copyright 2010 AlphaNinja

Applied Materials updates revenue growth expectations. Looks conservative. (AMAT)

Semiconductor-equipment giant Applied Materials (AMAT) updated Wall Street on its revenue expectations for the fiscal year ending October 2010. They boosted their outlook for total revenue to be up 60% from 2009's levels, which still leaves it below the street's estimate of a 65% gain from last year:

From their release:

Applied is seeing growth in demand across a number of its businesses, and the company now expects fiscal 2010 net sales to be more than 60% higher than in fiscal 2009 – compared to its previous forecast of up more than 50%. Applied’s current expectations by business segment are as follows:
Segment Net Sales Expectation as of 2/17/10 Net Sales Expectation as of 3/30/10
SiliconUp >100% over fiscal 2009Up >120% over fiscal 2009
Applied Global ServicesUp 30% over fiscal 2009Up >35% over fiscal 2009
DisplayUp 30% over fiscal 2009Up >50% over fiscal 2009
Energy and Environmental SolutionsFlat to +/- 10% from fiscal 2009Up >5% over fiscal 2009

A look at their fiscal 2009 10k shows AMAT's diligence (or craziness in some people's mind) in maintaining spending on Research & Development and Capital Expenditures.

Even as Gross Profits and backlog (expected revenue) cratered, the company maintained a commitment to invest for the future. As signs of life are coming back to the semiconductor industry, this investment should pay off handsomely. While the company will add to the employee base, we should still see leverage from a smaller operating structure as sales recover.

Net of cash, AMAT trades at 15times 2010 earnings estimates and less than 10 times 2011 expectations. These shares have room to run...

Copyright 2010 AlphaNinja

Congratulations Charles Schwab, you may have written the most disingenuous OP-Ed EVER. (SCHW)

Absolutely *%(&**% shameless. (as usual, that was only a swearword if your dirty mind deems it so)

Charles Schwab put pen to pad today, fighting for our seniors in a Wall Street Journal Editorial! He laments the low rates on CD's and shorter-term debt, correctly pointing out the harm to savers:

In February 2006, when Ben Bernanke was first sworn in as chairman of the Federal Reserve, the federal-funds target rate stood at 4.5%. That same year, the average yield on a one-year certificate of deposit was 5.4%. A retiree who diligently saved for a lifetime and had amassed a nest egg of $100,000 could count on an added $5,400 in retirement income per year. That may not sound like much to the average Wall Street Journal subscriber, but for a senior on fixed incomes that extra money improved the quality of his life.
Today's average rate for an identical one-year CD is roughly 1.3%. On the same nest egg, that retiree will now get annual payout of just $1,300—a 76% decline in four years.

At the end, the description says:

Mr. Schwab is founder and chairman of the Charles Schwab Corporation.

It should have said:

In the interest of full disclosure, Mr. Schwab's firm makes between 28-33% of their revenue from "Net Interest Expense," and is a direct beneficiary of high interest rates.

Schwab's 2009 10k explicitly states that the company benefits from a "rising interest rate environment."

The steep yield curve (near-zero short term rates with the 10 year near 4%) has been part of the design, to repair bank balance sheets. It definitely hurts people who depend on CD's. But for Charles Schwab to write an op-ed "for the seniors" with no disclosure of his firm's huge upside in a rising rate environment is ridiculous. On $58billion in interest earning assets, Schwab would benefit tremendously from higher rates.

If the company returned to 2007-level net interest revenue as a percent of interest earning assets, the company's earnings upside could be nearly $1.00 per share. That is the entire amount they're expected to earn in 2010, so it could effectively double the value of SCHW stock. Pretty nice motivation - oh, along with concern for the seniors! - to plea for higher rates for savers....

Copyright 2010 AlphaNinja

Dare I say it? A full and fair price for an acquisition! White Electronic Designs (WEDC,MSCC)

Shares of Phoenix-based defense semiconductor firm White Electronic Designs (WEDC) are up 28% today, on news they will be acquired by Microsemi (MSCC).  White's chips help make GPS-guided munitions significantly more accurate than they would be otherwise.

IRVINE, Calif. and PHOENIX, March 30, 2010 (GLOBE NEWSWIRE) -- Microsemi Corporation (Nasdaq:MSCC - News), a leading manufacturer of high performance analog mixed-signal integrated circuits and high reliability semiconductors, announced today that it has entered into a definitive agreement to acquire White Electronic Designs Corporation (Nasdaq:WEDC - News) through a cash tender offer at $7.00 per share for a net transaction value of approximately $100 million, net of White Electronic's projected cash balance at closing.

The offer of $7 per share works out to about $163million, but one should back out White's $64million in balance sheet cash.  That "net" offer of $100 million is still a pretty healthy 21x earnings and free cash flow.  A nice full and fair price for WEDC shareholders!
Microsemi shares are up 1.5%, as possible room for cost-cutting at WEDC should make this deal nicely accretive to earnings.

Copyright 2010 AlphaNinja

Monday, March 29, 2010

Retail investor pain, illustrated.

Ugh, just ugly.

Investors pulled out money form equity funds at precisely the worst times over the past three years.  It's an absolute debacle, especially as much of this money is under the stewardship of financial advisors.

If your advisor pulled some of your money during this timeframe, maybe don't pay them their % of assets management fee...or at least demand a fee reduction.

Copyright 2010 AlphaNinja

RIMM, AT&T down, Apple and Verizon up on reports of a new iPhone

Shares of CrackBlackberry maker Research in Motion (RIMM) and AT&T (T) are suffering in after-hours trading, while Verizon (VZ) and Apple (AAPL) shares are up.

The Wall Street Journal reports that Apple may soon offer an iPhone that can work on Verizon's CDMA network, which would be a negative for AT&T, who has iPhone exclusivity right now.

From the WSJ story:
Apple Inc. is developing a new iPhone to debut this summer and also appears to be working on a model for U.S. mobile phone operator Verizon Wireless, say people briefed on the matter.
While Apple has unveiled a new iPhone every June or July since launching the product in 2007, the new model with CDMA capability, the cellular technology used by Verizon, is notable because Apple and AT&T Inc. have long had an exclusive relationship with the iPhone. That has given AT&T a competitive edge over other carriers including Verizon for the last three years.
Copyright 2010 AlphaNinja

More love for Viacom (VIA.b)

Viacom (Via.b) shares are up  a bit this morning, after Barrons profiled the company over the weekend.  Shares are also benefiting from a Morgan Stanley upgrade.  The firm raised their target to $37 from $33, which is still below the mid-$40's that I think the shares are worth.

Shares are up nicely since I wrote about Viacom's huge boost thanks to "Snooks and the Sitch" from MTV's breakout hit Jersey Shore on February 13th - but then so is the broad market.  These lovable jackasses are having a demonstrable effect on MTV's viewership, and will result in better ad rates for Viacom's cable channels.

"I'm above the street with my 2010 and 2011 estimates for earnings and free cash flow, but I can say that with an appropriate 8% Free Cash Flow Yield, Viacom B shares should trade above $40 versus $28.90 right now.  Lots of upside here."  -- AlphaNinja 2/13/2010

In their weekend profile, Barrons mentioned that the market is effectively pricing in the company's long-suffering Paramount division at zero, based on comparable media valuations.

Copyright 2010 AlphaNinja

Bell Micro to be acquired by Avnet. (BELM, AVT)

Earlier this morning, electronics distributor Bell Microproducts (BELM) announced they had agreed to a buyout proposal from Phoenix-based Avnet, a larger competitor in their industry.  Bell shares are up 28% on the news, and Avnet's shares are up 6.2% on a well-received acquisition, in addition to a boost to this quarter's earnings guidance.

From the release:
Bell Microproducts Inc. (Nasdaq:BELM - News) ("Bell") announced today that it has entered into a definitive agreement to be acquired by Avnet, Inc. ("Avnet") in an all cash merger for $7.00 per share. The total transaction value of approximately $594 million is based upon an equity value of approximately $252 million and a Bell debt position, at face value and net of cash, of $342 million at December 31, 2009. 
Bell also updated guidance for the current quarter, noting that a product mix-shift will hurt gross margins.

In 2009, Bell did about $51million in Free Cash Flow, inclusive of $26million in outside legal and accounting fees that will fall sharply in the coming years. This buyout values the company at a Free Cash Flow Yield of 23%, a HUGE number.  The reason for this fat yield is the company's enormous debt load of $350million, versus the implied $222million in the equity buyout.  Bell's pretax, pre-deprecation interest coverage ratio is less than 2, which is not a comfortable margin.  If I owned BELM shares, I would prefer the company "operate" its way out from under this debt load, rather than sell out at these levels. However, such is the risk you run owning shares of a company with a very concentrated ownership structure.

In this buyout, Avnet will strip out costs from Bell's operating structure, and this deal should be HUGELY accretive.  They didn't mention the deal's effect on earnings, and sometimes that's out of "respect" for the acquired company's management.  As in, if Avnet announced it 's a raging steal of a buyout, then Bell's management will come under fire.  Nice work here by Avnet.

Copyright 2010 AlphaNinja

Friday, March 26, 2010

3M's hit to earnings from the healthcare bill (MMM)

Well, at least return on equity will increase!  Umm, because there will be less equity to earn a return on....

From the press release:
ST. PAUL, Minn.--(BUSINESS WIRE)--3M Company (NYSE:MMM - News) said today that it expects to record a one-time non-cash charge of $85 to $90 million after tax, or approximately 12 cents per share, in the first quarter of 2010, resulting from the recently enacted Patient Protection and Affordable Care Act, including modifications made in the Health Care and Education Reconciliation Act of 2010 passed by Congress on March 25, 2010. The charge is due to a reduction in the value of the company’s deferred tax asset as a result of a change to the tax treatment of Medicare Part D reimbursements. The company’s 2010 GAAP earnings expectations, as provided in 3M’s Form 8-K dated January 28, 2010, were based on tax law in effect as of that date and therefore did not include the impact of the Act.
To be fair, we usually focus on return on tangible equity, which nets out intangibles like this.  If anything, this non-cash hit to earnings will let 3M - and thousands of other companies - pay less in taxes this year as this write-down reduces pretax earnings.  So that Healthcare Act just put us even more into the red...

Copyright 2010 AlphaNinja

Radioshack up on buyout speculation (RSH)

Radioshack(RSH) shares are up 8% today, after The New York Post ran a story suggesting the firm might put itself up for sale.

RadioShack is looking to shack up with a deep-pocketed investor.
The Texas-based electronics chain is exploring strategic alternatives including a possible sale of the company that could fetch more than $3 billion, sources told The Post.
Investment bankers have already begun pitching their private-equity clients about a leveraged buyout of RadioShack, notifying them of the retailer's willingness to sell, according to people close to the situation.

And how about this possibility:

Another possibility is a merger with big-box rival Best Buy, which lately has experimented with a smaller retail format to meet fast-growing demand for smartphones and other wireless gadgets.

"This is all about handheld devices," said one banking source close to the situation. "A whole new wave of these products are coming out and they're going to break the monopoly of the carriers," whose market power has bruised RadioShack's profits in the past."

And the price? It MUST be north of $30 per share, in my opinion. A fair value would be $42 per share. Radio Shack shares trade at $23, and they have SEVEN DOLLARS per share in cash and equivalents. If you boost this year's eps by 30% - which is the "private equity" cost cutting effect, then put a 15x multiple on that number and add back the $7 per share in cash, you get to a $42 stock. Radioshack should extract that value from a buyer, or simply not sell. That simple.

(See here for my November post on RSH, in which I said Barrons undervalued the stock...)

Copyright 2010 AlphaNinja

Thursday, March 25, 2010

Goldman, Pru dumped by Nevada's pension fund (GS, PRU)

The WSJ reported earlier today that the Nevada Public Employees' Retirement System has dumped two of its managers, Prudential and Goldman Sachs, for lack of performance (That's what She Said!) :

Goldman, which managed $600 million for the pension fund, fell below the fund's index by just over 1% for more than two years, Mr. Lambert said. He said there has been a lot of turnover among the managers, but he said performance was the main reason for the fund's decision.
The unit of Prudential, Quantitative Management Associates, handled $500 million in investments for Nevada. Mr. Lambert said the firm fell below the fund's performance target by more than 4% in the last two years.
Goldman and Quantitative Management, both hired in 2007, declined to comment.

Quantitative Management Associates runs about $70billion, according to their website.

Their investing strategy:
"Quantitative Management Associates (QMA) combines analytical discipline and seasoned judgment to deliver customized investment solutions."
Ahh, nothing like the "seasoned judgement" that only career academics can provide! In layman's terms, these guys build a model for stock-picking, back-test it, then let it ride...

Copyright 2010 AlphaNinja

Board member resignation at Biomarin raises questions, among them a possible buyout (BMRN)

(first reported at

Biomarin (BMRN) released some back-and-forth between the company and resigning board member Joseph Klein.

In his resignation letter, Klein claims his efforts were unappreciated, especially in regards to internal audit investigations and dealings with management.

The market is sending shares higher today on buyout speculation, but what caught my interest was the disagreements over depreciation timetables.

There exists disagreement between the Board and me on my view of a number of issues as I learned from colleagues on the board. The following are some examples:

Disagreement over How and When I ask questions as Chairman of the Audit Committee. Specific examples cited were (a) question on revenue recognition of a shipment to a Japanese distributor was asked in the presence of the external auditor and the entire finance team; and (b) question on extension of lives for fixed asset depreciation was asked in the presence of the external auditor and the entire finance team. These questions were viewed as “inappropriate” and “micromanaging the audit committee process.

The company reports Depreciation of about $5.8million per quarter.  If this had to be increased, then it would reduce GAAP earnings per share.  Earnings for this quarter are expected to be zero, and next quarter the estimate is one cent.  Any boost to Depreciation would put both of these estimates into the red, which (to a cynic!) could be reason enough for a management to keep Depreciation inappropriately low...

Judging from this letter, Klein is looking out for shareholders by keeping management accountable (keeping separate the chairman and CEO positions), as well as watching out for inappropriate poison pills (anti-takeover measures).

Disagreement over How to Conduct an Ongoing Investigation of a Serious Matter. While I still do not believe there has been any wrongdoing by the company and an investigation of an alleged violation is ongoing, there were some disagreements about how to conduct an independent investigation and, in my opinion, management has influenced both the direction and conduct of the investigation. My suggestions about the investigation process were viewed as “micromanaging the audit committee process.”

Disagreement over How to Modify the Company’s Poison Pill. When asked, I was in favor of removing the poison pill, but then compromised my position by suggesting we establish an automatic sunset provision, which would force regular evaluation of the Poison Pill to determine if it was in the best interest of the shareholders.

Disagreement with the CEO on How and When the CEO should present to our entire Board a serious, reasonable offer by a third party to acquire the company. I continue to believe that the CEO should present any serious offer that he has received to acquire the company to the full Board so that the full Board can determine what is in the best interests of our shareholders. In my opinion, these discussions should be by the entire Board in a duly-noticed board meeting, and not in selective one-on-one telephone conversations or emails.

Disagreement with the CEO over his Desire to Combine the Chairman and CEO Roles. I continue to believe that BioMarin’s existing practice of having a Chairman that is separate from the CEO represents best practice in corporate governance and is in the best interest of our shareholders.

Below are a few portions of the company's response:

Disagreement Regarding How and When Mr. Klein Asked Questions as Chairman of the Audit Committee
While members of the Board have raised the issue of the appropriateness of the manner and timing of certain questions previously asked by Mr. Klein, these comments were made solely in the context of Mr. Klein raising these issues and asking these questions when the directors were in meetings where junior personnel of the Company were in attendance. The Board requested that Mr. Klein refrain from asking questions or raising sensitive issues at these meetings and that he instead raise them first in meetings with senior management or other directors or in executive session with the independent auditors. None of the other Board members took issue with the substance of the questions, but rather the appropriateness of asking such questions in the presence of certain junior personnel. The other directors believe that these were legitimate requests to make and that Mr. Klein, as the Chairman of the Audit Committee, should understand that he should follow the proper procedure and channels for discussing issues among the Board. On several occasions, dating back months before March 2010, Mr. Klein acknowledged that some of his comments and questions were made in an inappropriate context and that he should be mindful of the problems that such behavior could cause. However, in connection with deliberating on Mr. Klein’s nomination, the Board found at the March 15, 2010 meeting that this conduct had not been remedied appropriately over the past year and was continuing to interfere with constructive Board meetings.
Disagreement Regarding How to Conduct an Ongoing Investigation Regarding a Serious Matter
The Company disagrees with Mr. Klein’s characterization of the ongoing preliminary investigation of a matter by the Audit Committee. The Audit Committee believes it has fulfilled and is continuing to fulfill all of its obligations in handling this preliminary investigation and has taken its responsibilities regarding the potential matter seriously. Although the preliminary investigation is ongoing, the Audit Committee has not to date developed any evidence that a violation of law has occurred. In the course of an investigation not related to the matter referenced in the Resignation Letter, the Company discovered an email that contained a statement that the Audit Committee believed required serious inquiry to determine the meaning of such statement as it related to the fact that a third party agent of the Company may have engaged in potential misconduct. In seeking to understand the nature of the


context in which any allegation of potential misconduct may have occurred, the Audit Committee (with the participation and affirmative vote of Mr. Klein) determined to first conduct a preliminary investigation with the supervision of outside counsel to evaluate whether the circumstances surrounding the email warranted a full investigation. Mr. Klein participated in every significant decision about the conduct of the preliminary investigation and noted his agreement with each of these decisions. The Audit Committee and the Board are still evaluating the information and have not yet made a determination as to whether or not to initiate a full investigation into the matter. The Company is taking the matter seriously and believes that the current direction and conduct of the preliminary investigation is appropriate based on the information available at this time. Moreover, the Board disputes Mr. Klein’s premature characterization of the work to date of the Audit Committee as a full and formal investigation or that a serious matter to be investigated has occurred.
Disagreement Regarding How to Modify the Company’s Poison Pill
The Board disputes Mr. Klein’s characterization that a discussion among Board members regarding whether a stockholder rights plan should be adopted and if so, what provisions should be contained in the plan, constitutes a disagreement with the Board that forms the basis of his resignation. The Board believes that discussions prior to adoption as to different provisions to be contained in a stockholder rights plan is common among directors. The existing stockholder rights plan was approved in February 2009 by the Board by a vote of 7-0. Mr. Klein attended a prior meeting where the plan was discussed, but, although he received appropriate notice of the meeting, was unable to attend the meeting when the plan was approved due to a scheduling conflict. Moreover, the Board cannot reconcile how the changes to the Company’s stockholder rights plan could be deemed to be a disagreement that ultimately caused Mr. Klein to resign since the Board made the decision in February 2009 and Mr. Klein continued to serve as a director for over a year following the adoption of the Company’s existing stockholder rights plan.
Disagreement with the CEO Regarding How and When the CEO Should Present Reasonable Offers by a Third Party to Acquire the Company
The Company disputes Mr. Klein’s assertion that Mr. Bienaim√©, the Company’s Chief Executive Officer, received a bona fide offer from a third party and failed to share this offer with the Board for consideration. The Company has never received any such offer while Mr. Bienaim√© has been Chief Executive Officer and the Company has not engaged in a sale process or the evaluation of similar strategic alternatives as the Board believes that the best course of action to maximize long-term stockholder value is to execute on the Company’s long-term business plan as an independent entity. The Board and management of the Company well understand and acknowledge their obligations under Delaware law regarding third party offers.
Disagreement with the CEO over his Desire to Combine the Chairman and CEO Roles
The Company disputes Mr. Klein’s characterization of the issue of whether to combine the Chairman of the Board and Chief Executive Officer roles as a disagreement with the Chief Executive Officer or the Board. As part of its regular review of the roles and positions held by the directors of the Company, including the position of Chairman of the Board, memberships on the committees of the Board, and the scope of responsibility for the Chief Executive Officer, the Corporate Governance and Nominating Committee (including Mr. Klein) has discussed whether the Chief Executive Officer can also hold the position of Chairman of the Board. The members of the Corporate Governance and Nominating Committee have to date unanimously determined that the current Board governance structure separating the Chairman of the Board and Chief Executive Officer roles continues to be appropriate at this time. The matter was never raised to the full Board and the Chief Executive Officer was not involved in the discussion at any Corporate Governance and Nominating Committee meeting. The Board does not believe that its position is contrary to Mr. Klein’s view that the offices of Chief Executive Officer and Chairman of the Board should be held by different persons, so the Board is unable to reconcile how Mr. Klein’s view forms a valid basis for his resignation.

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