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    Thursday, June 12, 2003

    ALGX declared Chapter 11. I was surprised and it unfortunately happened while I was on vacation. It seems that the negotiations between the company and the bondholders went fine but ALGX had decided that much of the bank debt needed to be equitized and they could not get agreement on this. The shares are down to 7c today. Well I was right in that it was resolved by May 15th. The outcome was most similar to my option 2 below but there was not a pre-pack but rather a standard chapter 11. The company has a couple of months left to file their reorganization plan. I am waiting to see if an equity committee is encouraged by the company and allowed by the trustee. A valuation simply based on the book value of shareholders equity values the company at 30c. There is still some chance this works out well and I haven't sold and won't until I understand how to value this again.

    On to more interesting matters... Since I wrote about AES and OCA they are up in a big way. AES has gone form 4.29 to 8.05 (88%) and OCA from 5.82 to 8.08 (39%). The S&P is up from 868.30 (15%) and 898.81 (11%) respectively to 998.51 today. I have been buying OCA on the way up. I still think $12 is a reasonable target by the mid year earnings announcement.

    OCA PUTS: I took some time to look at writing puts on OCA. I was considering the $7.5 puts expiring in December. With the margin requirements the cash on cash return is 36.6% (63% annualized). The stock just has to close above $7.5 on the third Friday in December and $5250 is yours to keep. If it closes below $7.5 then you have effectively bought the stock at $6.45 a share instead of the $8.12 it is trading at now. I consider this to be an extremely low risk trade but a) additional cash could be required if there is a large drop in the stock price and b) the tax treatment of the income is short term capital gains.

    The alternative is just going long OCA at $8.12. If it hits $12 and you use 50% margin on the same $14,330 that is required for 50 put contracts (each contract covers 100 shares) then your profit would be $13,536 or 94% cash on cash return. If the stock dropped below $4 though, you may end up having to add up to $14,330 more cash. In the margin case though, you could have to add up to $37,500. So there is a risk 'a' as above but it is less of a risk and if I keep the shares for 12 months there is only a 15% long term capital gains tax (go Bush!!).
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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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