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Point Blank Solutions - Way out of the Money Option

Point Blank Solutions filed for Chapter 11 protection on April 14, 2010. It has an equity market cap of approximately $5 mm. As of petition date, the Company had $10.5 mm debt. The DIP facility is $20 mm, a portion of which will pay off prepetition debt.

There are 48.8 mm shares outstanding but of that, 23% are held by Ex-CEO, who is in prison on fraud charges and facing the possibility of 25 years. In my opinion, it is highly unlikely that he will be a beneficiary, if there is any recovery for equity in this bankruptcy. Therefore, from a practical standpoint, the adjusted market cap is closer to $4 mm.

Point Blank is a supplier of body armor to US military, law enforcement agencies, international and commercial customers. Due to contract delays and operational glitches, Co revenues have declined from $343 mm in 2005 to $158 mm in 2009. In that five year period, PBSOQ has posted losses in four years and eked out a small net profit in 2008. In 2009, it posted a $40 mm loss.
After looking at these financials, I was tempted to move on to other things, except that while reading the Co’s last 10Q (dated 11/9/09), I came across this section:

“Securities Class Action and Shareholder Derivative Action
The securities class action settlement is final except insofar as the derivative action settlement could affect it. One party has appealed the derivative action settlement. The Commercial Litigation Division is not an appealing party, but has filed a court brief in objection to the settlement.
The grounds for the appeal and the issue raised by the Commercial Litigation Division is that the settlement terms involve an indemnification of Mr. Brooks by the Company. The appellant has argued that the SEC is expected to take action against Mr. Brooks that, if successful, would force him and others to pay money back to the Company under the Sarbanes Oxley Act. The appellant has alleged that the amount sought by the SEC could be as much as $180,000. Meanwhile, the settlement agreement has a provision by which the Company has agreed to indemnify Mr. Brooks for any amounts he is ordered to pay back to the Company. In essence, if Mr. Brooks is ordered by the SEC to pay money back to the Company, the money will move in a circle and will leave both Mr. Brooks and the Company in the same position they were in.”

$180 million. This suggests a potential recovery from litigation, however remote, of an amount representing up to 45x PBSOQ’s (adjusted) market cap.

This case is probably one of the most complex and multi-layered cases that I have ever encountered. With a market cap of less than $5 mm, I can’t imagine anyone following it closely other than the folks directly involved.
In a nut shell, PBSOQ situation is interesting because:

1. The SEC has sued Brooks in the US District Ct – Central Florida and has asked that he disgorge his ill-gotten gains ($186 mm) from stock sales. As you can see from the language in the 10Q, this money could come back to the Co. The case has been stayed pending the outcome of the criminal case.

2. Due to a prior settlement, the monies could move in a circle and right back to Brooks. However, under bankruptcy rules, the Debtor is allowed to reject an executory contract. I have to assume that Pointblank will reject this settlement.

3. It’s one thing to have a claim on someone, another to win a judgement in court and yet another thing to actually recover the judgement. The good news here is that the US government has actually frozen property which exceeds the $185 mm.

4. However, as I had mentioned before, there are multiple claimants on the monies involved here so one can only watch how the various cases are resolved, the principal one being USA versus David Brooks (US District Ct Eastern District of NY Case 06-550).

5. In the mean time, the body armor business appears to be holding its own. So much so, that the unsecured creditors filed an objection to the DIP loan, alleging that it is not needed until later and that Point Blank has ample cash to support its operational needs (see story at the end)

DJN: DJ Point Blank Creditors Say Loan Hands Control To Insiders
(Dow Jones 05/10 10:04:23) By Eric Morath
Unsecured creditors of Point Blank Solutions Inc. (OTCPK:PBSOQ) are balking at the body-armor maker's $20 million bankruptcy loan, claiming that the financing is designed to give company insiders control of the case.

The loan from Steel Partners LLC is really a power grab by Chairman and Chief Executive James Henderson and other executives, creditors said in papers filed Friday with the U.S. Bankruptcy Court in Wilmington, Del. They claim Henderson and another Point Blank director are affiliates of
Steel and that the lender itself owns 4.2% of Point Blank's stock. The loan allows Point Blank's reorganization to be "controlled solely by one party wearing three hats"--shareholder, chief executive and bankruptcy lender, the unsecured creditors committee said in court papers.

The creditors are asking the court to delay granting final approval of the loan so that they can have more time to investigate the terms of the financing and the company's financial condition. Point Blank did not immediately respond to calls seeking comment.

The company obtained preliminary approval to tap the loan on April 16, two days after it filed for Chapter 11 protection and nearly two weeks before the creditors committee was appointed.

Point Blank said the funds were necessary to finance its operations as it seeks to reorganize. The creditors questioned how much of the loan will actually fund the company's operations. Under the terms of the financing, the loan will be used to repay a $10 million prebankruptcy secured debt from a group of lenders led by Bank of America (NYSE:BAC). Creditors say the company has failed to show why that loan must be repaid at this point in the bankruptcy case. The bankruptcy loan also dictates that Steel Partners will be paid up to $1 million in fees and expenses in exchange for providing the financing.

"The payment of fees...is excessive in comparison with the amount borrowed," the creditors said. The creditors say once the prebankruptcy loan is repaid and all other expenses are accounted for, "at most" $6 million will actually flow to the company's operations. They also said the company is not in desperate need of fresh funding. Instead of tapping the loan, the creditors said Point Blank should use $6 million in cash reserves to fund its operations. Point Blank is set to seek final permission to borrow on the loan at a Wednesday hearing.

The Pompano Beach, Fla., company blamed mounting legal bills and a slowing pace of orders from the U.S. military for its Chapter 11 filing. Point Blank currently faces a class-action lawsuit steaming from allegations that the publicly-traded company's disclosures were false or misleading and that the company's body-armor products were defective. The company is also subject to ongoing investigations by the Securities and Exchange Commissionand the U.S. Attorney's Office.
Point Blank makes bullet, fragmentation and stab resistant apparel and related accessories used by military, law enforcement and government agencies.

Disclosure: Long PBSOQ