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Bad Toys (OTC BB: BTYH) Provides Update on Southland Spin Off

The best laid plans of mice and men can sometimes go awry. Bad Toys was out with an update on the Southland spin-off today and the x dividend date associated with the process.

If you are unfamiliar with the Bad Toys special situation for a potential 320% dividend, now would be a good time to go and review the January 2nd introductory edition. All the information contained therein still applies.

Those who have been following the BLOG have had this 411 for a while. As it turns out, BTYH had every intention of going x dividend back on January 12th. However, there was a snag. There are conflicting regulations between the NASD and the SEC concerning the mechanism by which they can distribute the shares. If they had simply sent you a stock certificate, they would have been in violation of NASD regs. If they had escrowed your stock certificate and sent you a letter, they would have been in violation of SEC Regs. I don't quite understand the fine points, but in essence I believe that's what is causing the delay.

Apparently, the NASD and the SEC are going to talk about it offer the correct solution. Exactly when, I can't say. However, I can say that the company is getting very close to having the S1 registration statement done, and at the current time intends to file same as soon as possible. Southland is just about finished with its 2005 audit, and those audited numbers will be included in the S1 Registration statement.

Nevertheless, for those of you who may have had doubts, today's news release from Bad Toys clarifies the situation. The company is absolutely committed to moving forward with the spin off of Southland Health Services, and you will receive 1.3 shares of Southland for every share of Bad Toys you hold.

So- let's review what might happen. It would appear that Southland will eventually spin out and trade as a separate entity. In 2006 here are the projected numbers for Southland's financial performance:

• Revenues: $48 million
• Net Profits: $6 million
• Issued and Outstanding Shares: 24 million
• EPS: $.25 per share

Let's muse about what might happen. Bad Toys has publicly stated it will be going for either a NASDAQ Small Cap or Amex Listing for the trading of Southland. The company certainly qualifies for either exchange based on financial metrics. In the case of the NASDAQ SC, a $4 minimum opening price is required. In the case of the AMEX, a $3 price is required.

Therefore, if you own 1,000 shares of BTYH at today's market of $1.60 ($1,600), the value of your 1.3 shares of Southland on NASDAQ SC with a minimum $4 open would be $5.20 ($5200). It would be $3.90 ($3900) if the stock opens at the minimum bid on the AMEX. As a bonus, you still own your 1,000 shares of Bad Toys wherever it happens to be trading.

With a $4 opening, the PE Ratio of Southland will be a very reasonable 16 based on forward looking '06 numbers. At $3, the PE Ratio would be 12.

Bad Toys has a little gold mine in Southland Health Services, and is attempting a very clever maneuver to unlock the value on behalf of its shareholders. Southland, separated from money loser Bad Toys, should be worth a lot more than where it trades today.

Here's a chart going back to when the company announced the X-Dividend date would be delayed. The press release covering the delay offered no explanation. Therefore, I believe investors began to question the company's intentions. Perhaps they didn't believe the company would go through with the plan.

Uncertainty breeds fear, and fear leads to selling. In this case, I believe this is a simple situation. If you liked the idea, the theme is completely intact. The upside is every bit the same as it was the first week of January.

I simply don't understand why anyone who liked this idea would sell the stock. If you had doubts, read today's news release. It is clear CEO Larry Lunan of Bad Toys has every intention of going ahead with the spin off.

Here's a few words of caution. 1. It could take some time before Southland trades separately. It will be at least a matter of months. If you don't have that kind of time horizon, don't invest. 2. There are no guarantees the stock will open at $3 or $4. Based on corporate performance, it makes sense, but it's not done until it is done. 3. Expect Bad Toys common stock to trade down significantly when it trades x-dividend. The company is giving the majority of its value to shareholders, and therefore will be worth far less.

Since we're going for 3 to 5 times our money, you have to expect it to take some time. Returns like that rarely happen overnight. However, I believe the reward profile in this case makes it worth the risk: $48 million in sales and $6 million in profits in the health services industry should help bolster your belief in the possibilities. I know it works for me.

Here is the complete text of today's news from Bad Toys:
 

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