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Bad Toys (OTC BB: BTYH) Turn Down Ahead of UpSwing

Here's your year end update on Bad Toys, a company that hasn't given up much to cover in a very long time.

Let's look back at January of '06 when I first wrote about BTYH. Here's what I liked: 1. The company was achieving over $50 million a year in revenues and would likely turn a profit in the $2 to $10 million range. 2. The company was going to embark on a process of "spinning out" its Southland subsidiary- really the only entity in the company with any value in my view, giving most of the shares to BTYH shareholders, and hoping to get Southland to trade separately on a senior exchange at a much higher valuation.

So, let's fast forward to today. The stock is trading at 1/5th of its 2006 high of $2.50 (currently $.50). The stock is trading at a multi year low. The company is delivering about $50 million in annual sales, and is profitable. The stock is now trading at a market valuation of about $11 million. The whole Southland spin off is all but forgotten, and investors have been hugely disappointed about what the company promised vs what it has delivered.

In January of 2006 BTYH announced it would dividend out 1.3 shares of Southland for every share of BTYH you owned. Later, that number was adjusted to a 1 for 1 dividend. Also, BTYH had set a date to dividend out the Southland share without realizing they simply could not legally do it. They were precluded from doing it until Southland became its own public company.

Looking back on '06, here are my main disappointments: 1. BTYH was not nearly as profitable as CEO Larry Lunan suggested it would be in 2006. Q3 was difficult for the company with some restructurings, high overtime costs, and lower margins. Some changes were made, and I now believe Q4 will be back on track. 2. I am very disappointed in the way they announced the dividend record date, and then had to completely backpedal. If you say you are going to do something, make sure you are capable of doing it before you say so. 3. The defaulted debt the company has in the form of back taxes and a note with GE Capital was much more problematic than I originally realized.

Here's what's going on that could bring this one back to life in short order. 

I warned everyone in the original presentation that the regulatory process of spinning out Southland into its own public company could be long and painful, and there was no guarantee the company would be able to deliver this clever "trick" to unlock the value.

Once again, let's fast forward to today. The spin off is all but forgotten. Nevertheless, Bad Toys is finally in a position to execute the spin off, and the original plan is now close to coming to fruition. Southland just filed the third amendment to its registration statement, and in only two weeks. This suggests they are very close to having an effective registration statement.

Here's what I believe is going to happen. The registration statement will be declared effective by the SEC, and BTYH will then be able to announce a real x dividend date. After this date, shareholders of BTYH will get their shares in Southland Health Care, and BTYH will finally trade without the dividend attached- almost exactly one year after it was supposed to the first time around. In advance of going x-dividend, shares of BTYH will probably trade up.

Here's a major concern- one year ago I was not terribly concerned about the defaulted debt with GE Capital and the back taxes due the IRS. I was not concerned about these issues because the company was making a profit, and therefore could afford to go on indefinitely until it could arrange for a new financing to take out these creditors from the previous management.

It's been a nearly a year, and no refinance has materialized. The company has had offers, but all too toxic to existing shareholders according to the CEO. Since they don't have to get the money to survive, they continue to look for more favorable terms. 

As you can see from the chart, 2006 has put the stock right back where it was in October of '05. Here are the potential catalytic events that could get this one headed back up: 1. The company announces the final cut off date beyond which you won't get the dividend share, and 2. The company refinances its debt on favorable terms to shareholders.

The big question: Can Southland trade on the AMEX or NASDAQ Small Cap at $3 or $4? The answer in my view: it is possible if they refinance their debt and come out of default. CEO Lunan disagrees. Here's my challenge to you Larry: show me.

I'm not dropping this one for 2007 because it's just about to get interesting. Current opportunity: I believe this stock will trade up quite nicely off the current tax selling oversold $.50 level when the company announces a real x-dividend date. I believe it's coming soon. This could be a great one month trade from here. Just prior to going x-dividend, you will have to decide if you want to hang in there or take your profit.
 

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