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Comments in the BLOG

Bad Toys has 2006 off to a great start. I published on it the day before the first trading day of 2006. The stock closed 2005 at $1.50, opened 2006 at $1.70, and is now at about $2.40. Net return to OTC Journal subscribers so far- 40% in just four trading days.

There are lots of comments and questions to review in the BLOG. It is very important you read them to get a full understanding of what you are investing in.

To use the BLOG, simply go to the home page at www.otcjournal.com - the BLOG will scroll down automatically on the right side of your screen. The most current journal entries appear in the middle of your screen. Check back frequently for updates particularly when stocks are moving to overbought or oversold levels or in volatile markets. Your questions and postings do not automatically appear, so don't bother posting the same question multiple times. I personally go through to moderate and respond to every reasonable question.

Shareholders of record will recieve 1.3 shares of Southland for every share of Bad Toys they own the morning of January 12th. Therefore, if you have executed a trade and own Bad Toys by close of market on January 11th you will be entitled to the shares. You have until Wednesday.  The stock is going up because investors want the dividend, and no one is selling out in front of the distribution. I still do not know when it will trade x dividend, and how long you have to own it to be sure you will get the dividend. I believe you will not actually receive your shares until Southland is ready to trade publicly on its own, but that could be subject to change.

There is one message I want to empatically get across: If you are not prepared for a significant drop in the value of BTYH once the stock goes x dividend, then take your profit and get out. This idea is not for you. Most of the profit potential in this idea will come from the possibility that Southland opens at $4 plus on the NASDAQ Small Cap, or $3 plus on the AMEX. The company on a stand alone basis qualifies, but there are no guarantees. It could also take many months to happen. 

Once the dividend has occurred, parent company Bad Toys will own 6 million shares of Southland with a theoretical value of $24 million. Therefore, Bad Toys will probably be worth about where it is trading now. However, once the dividend is captured, investors may choose to sell. I don't know what the market is going to do, but if you are not prepared for this possibility then sell your shares.

Here's a slightly revised version of the original presentation. I have updated the chart. I am publishing it for those who might have missed the original presentation last week post Holiday season.
 

Bad Toys (OTC BB: BTYH): Spin Out "Could" Yield 350% Dividend

CEO Larry Lunan runs the show at Bad Toys, and he is a self proclaimed opportunist. Until December of '04, Bad Toys was a custom motorcycle manufacturer delivering about $1 million per year in sales and losing money.

Bad Toys purchased Southland Health Services, and took over in late 2004. Southland was troubled and mismanaged, but had a strong core business. Lunan knows an opportunity when he sees one.

Southland is a medical transportation company. It's a "cash cow" business. Margins are excellent, and receivables are always collected because they come from Government agencies.

Southland operates in over 200 communities within the following seven states: Mississippi, Alabama, Florida, Louisiana, Kansas, Tennessee, and Virginia. They operate in excess of 200 ambulances and wheelchair vans and have over 1,000 full and part-time employees. Southland will have transported more than 130,000 patients in '05.

After exorcising some demons from the company, Lunan has Southland humming on all eight cylinders. Here are the company's results through Q3 of 2005:

• Revenues: $34 million
• Profits: $2.7 million
• Earnings Per Share: $.16

The Spin Off: Turning a Caterpillar into a Butterfly

Bad Toys is spinning out Southland into a separate public company. A stock dividend has been declared. Shareholders of record the morning of January 12, 2006 will be awarded 1.3 shares of Southland for every share of Bad Toys they own.

From there, Southland will be filing an S-1 registration statement with the SEC. Once effective (could take anywhere from 1 to 6 months), Southland will open and trade on its own. The 1.3 share dividend you receive for every share of Bad Toys will be free trading.

Bad Toys has stated publicly it hopes to open Southland for trading on the NASDAQ Small Cap, but could go for an AMEX listing as a back up.

Assuming it all comes together, here's a snap shot of how Southland will look on a stand alone basis in 2006:

• Annual Revenue Run Rate: approximately $48 million
• EBITDA: $9.8 million
• Net Profits: $6 million
• Issued and Outstanding: 24 million
• Public Float: 6 million shares
• EPS: $.25
• Projected PE Ratio with NASDAQ opening at $4: 16

So, how does the spin off turn into a potential 350% dividend? Quite simple- Bad Toys has publicly stated it hopes and plans to open Southland for trading on the NASDAQ. The minimum new listing price for a NASDAQ stock is $4 (16 times 2006 earnings for Southland).

Assuming you own the stock in the $2.30 range, the value of your Southland shares, if it trades at $4, would be $5.20 per share. Furthermore, you still retain your ownership in Bad Toys Holdings, which will retain 25% of the shares of Southland. Should Southland trade in the $4 range, surviving Bad Toys would be carrying a $24 million asset on its balance sheet- and a marginable asset as well. This will give Bad Toys a significant amount of latitude to seek out another blockbuster opportunity.

Is it possible Southland could trade at $4? It is not only possible, it is reasonable when you look at the comparables. NASDAQ listed Rural/Metro Corp (NASDAQ: RURL) is the only true comparable. In terms of revenues, RURL is about 10 times the size of Southland ($500 million in annual sales). The stock trades at $9, and is close to its 52 week high. The company is currently generating about $.40 per share in earnings, equating to a PE Ratio of 22.5. On an equivalent basis, Southland would be valued at about $5.60. Their gross margins are excellent. This is a great business.

There are still a lot of questions to be answered. To sum it up, here's what I know, and here's what I don't know at this point:

Here's what I know:

• You must have executed a trade to own the stock by the close of market on January 11th. Shareholders of record on the morning of January 12th will be entitled to the stock dividend.
• You will receive 1.3 shares of Southland for every share of Bad Toys you own, and you will still own the Bad Toys.
• Southland meets the qualifications for a NASDAQ or AMEX listing. The minimum per share new listing prices are $4 for NASDAQ and $3 for AMEX.
• Southland should deliver $48 million in sales and $6 million in earnings in 2006 ($.25 per share).

• I don't know how long it will take to get Southland trading on its own.
• I don't know exactly what price it will open at, and how much liquidity it will have.
• If you choose to sell Bad Toys before the Southland dividend is received, I don't know if you will still be entitled to the dividend.
• I don't know how Bad Toys is going to trade between now and the opening of Southland for trading on its own.

I like the idea because it has a lot of upside and very little downside. Worst case, the spin off never happens, and you end up owning Bad Toys with it's $40 million plus in annual revenues and $5 million in profits. In the $1.50 range it is simply undervalued.

Best case- Southland opens for trading on the NASDAQ at $4. Bad Toys hangs in there around $1. You have a $6.30 total value when they are both trading against the $1.50 to $2 you have as a cost basis.

I also like this one because it is one of the few microcap stocks I have seen trade well in the 4th qtr of '06. It's trading well because investors want the dividend.

This move is not as unusual as it might seem. LBO specialists, investment bankers, and value players often find ideas where separating companies yields a much higher value. For example- McDonalds is considering separating its entities into a real estate company and restaurant chain. Steve Case, founder of AOL and board member, believes AOL would be worth a lot more if AOL and Time Warner were to split into two companies. Both know that by presenting a more concise and understandable business to Wall Street, the sum of the parts should be worth more than the whole.

Cendant Corp (NYSE: CD) has announced it intention to separate into 4 public companies. Cendant, which owns Orbitz.com and Ramada and Howard Johnson hotels, will create 3 new public companies each focusing on a separate area.  The four proposed companies will be broken up into a hospitality business (including Ramada and Howard Johnson), a real estate business (Century 21 and Coldwell Banker), a travel booking business (Orbitz.com), and a car rental business (Avis and Budget Rent A Car). 

Viacom is alos splitting into two separate companies. So, why not Bad Toys? All of these other companies believe the sum of the parts is worth more than the whole.

I'm sure you have questions. Visit the BLOG and post them as soon as possible. I will work directly with CEO Larry Lunan to get you accurate answers as soon as possible. Check back the following morning for a reply.

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