Pepsi Natural

I just tried Pepsi Natural (All Natural Cola). It tastes like apple-flavored Coke. I didn't like it, but you might. I will stick with Mexican-bottled Coke (made with sugar, not corn syrup) and San Pellegrino.

Quote of the Day

Quote of the day is from Abraham Lincoln:

As I would not be a slave, so I would not be a master. (1858)

Law: Edwin Stegman

As an attorney, I enjoy Edwin Stegman's articles. He has a diverse legal background, so his ideas tend to be both realistic and individual-oriented. Here is an excerpt from a June 2009 article on how to reform the legal system:

Motions for summary judgment (MFSJ) were originally a summary procedure to deal with the practice of debtors filing unmeritorious answers to delay collection of their debts. CCP §437c, enacted in 1931, required 10 days’ notice for a motion for summary judgment. The motion is no longer “summary.”

Instead of 10, the motion now requires 80 days notice, if by mail. The court may grant a continuance to conduct discovery; then the judge has 90 days to rule, the loser has 15 days to file a motion for new trial and the court has 60 days to rule. Therefore, it can take more than a year for a creditor to obtain a judgment to collect a debt. As a result, collections specialists say the MFSJ has become so slow, cumbersome and expensive ($200 filing fee) that they rarely use it.

So we’re back to pre-1931 and debtors can again file unmeritorious answers to delay collection of their debts.

Oh, the irony.

Kiplinger's Interview with Robert Shiller

Interview with Robert Shiller (June 2009):

http://www.kiplinger.com/magazine/archives/2009/06/interview-with-robert-shiller.html

People think that because we have only so much land, and it is getting scarcer, housing prices must rise. But offsetting that is the decline in construction costs, so it balances out...

The figures show that the market is relatively low-priced now. Based on history, we should get something like 10% real [after-inflation] annual returns from stocks for years to come...

The French philosopher Montesquieu said that history is littered with wars and that it would be great if we could create some peaceful methods of diverting humans from their aggressive tendencies. Business is one peaceful alternative.

Shiller always seems to make a lot of sense. I'm not sure I agree that stocks are a sure thing right now. The article doesn't indicate where the S&P was at the time of the interview.

What if Iran Had a Revolution and Not Enough People Cared?

Andrew Sullivan is doing a great job blogging about the mini-revolution in Iran. Here is one email, from Iran:

WE NEED HELP. WE NEED SUPPORT. Time is not on our side, waiting and making sure means more casualties, more disappointment, more brutality.

The most essential need of young Iranians is to be recognized by US government. They need them not to accept the results and do not talk to A.N government as an official, approved one. They need help by sending true information. All the medias are under arrest or close control. Help them have the information.

They only try to show the fraud to the world. Help them please. You can not imagine the level of brutality we saw these two awful days.

Steve Jobs' Stanford Commencement Speech

Funny: Charlie Brooker

Hilarious article on great books:

http://www.guardian.co.uk/commentisfree/2009/mar/09/charlie-brooker

Nice to see the British haven't lost their wit.

Netflix Finally Addresses Online Captioning Issues

In mid-May 2009, I reported that CEO Reed Hastings had confirmed that Netflix would not take an active approach to captioning its online content. The online community reacted immediately to CEO Hasting's comments. As of today, the Facebook group, "Netflix Watch-Instantly Needs Closed Captions!" had 983 members--most of whom joined after my review of Netflix's annual meeting was published. According to some reports, Netflix recently received thousands of inquiries regarding captioning online content.

Netflix finally issued a statement regarding captions yesterday. Click here to see it. The gist of the statement was that captioning would be supported on a specific Microsoft media player in about one year:

Captioning is in our development plans but is about a year away...I would expect to deliver subtitles or captions to Silverlight clients sometime in 2010.

One reader, Chris, wasn't buying Netflix's explanation:

I am not personally affected by Netflix's lack of subtitles but from reading multiple deaf consumer's complaints about Netflix's lack of support of Closed Captions I can sympathize with their point of view. from a technological standpoint I would say that Netflix has totally failed. I've been able to view DivX movies with subtitles for at least 7+ years. And it in no way required bringing the text into the the video. In fact all it required was a simple time-stamped .txt file that took up maybe 10-20 KB (that is 0.001% the size of a normal Netflix movie). There should be ZERO reason why Netflui/Silverlight can't support the use of .SRT. files and be able to EASILY support CC in multiple languages. Quite frankly I think Netflix has really disappointed a non-significant size of its customer base and is hiding behind non-existent "technological difficulties" as an excuse.

Personally, I view Netflix's response with cautious optimism. After receiving thousands of inquiries about online captioning, Netflix now understands that its cavalier approach to the issue was unacceptable. Also, by publicly declaring that online captioning will be available in some format in "about a year," Netflix has committed itself to a particular date. If it fails to provide online captioning by July 2010, its reputation and perhaps share price will suffer.

To be continued...

Update on June 15, 2009: I forgot to add that celebrity Marlee Matlin gave her support to online captioning via Twitter:

[from her friend] I called Netflix and talked 2 one of corporate offices Over 8000 letters & phone calls about #caption this month! YES!!

Update on July 10, 2009: I recently tried to enjoy Gran Torino, but it didn't have TV captions or DVD subtitles. I called customer service, and she sent me another DVD after assuring me the DVD had captions. (NFLX lists Gran Torino as a closed captioned film.) The second DVD also didn't have captions.

I noticed the DVD cover was gray. It turns out that gray-colored DVDs are made specifically for Netflix and may be different from other publicly-sold DVDs. In this case, it appears the studio, Warner Brothers, didn't provide Netflix with a captioned DVD. No one had apparently figured this out. Netflix and its contract lawyers should ensure that all of its specially-issued DVDs have captions. Why would any studio want to prevent hearing impaired people from enjoying their product?

Update on April 18, 2010: Netflix has finally captioned some online videos, but only 100 so far. More here. Looking at hulu.com's options, which have included captioning and now transcripts, I am still disappointed with NFLX.

Daily Show on Socialism

I don't watch much TV, but I love the Daily Show clips online. Here is one on socialism:

http://www.thedailyshow.com/video/index.jhtml?videoId=225126&title=the-stockholm-syndrome-pt.-2

I couldn't hear much of it, and it doesn't have captions, but I still cracked up. As media shifts from the television and radio to the internet, the pace of captioning isn't keeping up at all. The lack of captioning bars most online media from hearing-impaired persons and many senior citizens as well.

Iran's Elections

Today, Iranian voters are having a very American moment--they have an opportunity to vote for change. Iranians may choose between a reformer (Hossein Mousavi) and a sitting president (Mahmoud Ahmadinejad) who got elected by promising reform. (It seems like every election, the candidate promising the most reform wins.) The time is ripe for another change.

First, Mahmoud Ahmadinejad has grossly mismanaged Iran's economy. When oil prices were high, he had an opportunity to increase currency reserves and did not do so; in fact, Iran has suffered double-digit inflation and continues to import oil because of high domestic use (a fact conveniently left out by all who accuse Iran of developing nuclear power solely to develop a weapon).

Second, President Ahmadinejad has already had his chance to fix the economy and to bring Iranians more prosperity. But the way the country has increased selective prosperity is by printing money and engaging in banking maneuvers that would boggle even Zimbabwe's central bankers. Yes, teachers make more money now. Yes, the abject poor are suffering less now. But anyone can take over a state and print money and give it away to the poor (note to Paul "More Stimulus" Krugman: hope you're reading this). The test of one's competency is whether s/he can combat the tide of inflation and lift all boats.

Third, this election is a very easy choice for Iranian voters--do they want to reaffirm the man who is a living affront to so many groups, or do they want to choose a candidate with less baggage? Even if Hossein Mousavi doesn't turn out to be perfect, right now, there's no question that he's better for the country's image than Ahmadinejad. Most analysts, including Western analysts, believe that Mousavi is the better choice. If it turns out that the Iranian voters were wrong about Mousavi--just as they were wrong about Ahmadinejad--then at least they were in good company.

Interview with Mousavi: http://www.time.com/time/world/article/0,8599,1904343,00.html

General stories on the election: http://news.yahoo.com/s/ap/20090612/ap_on_re_mi_ea/ml_iran_election

http://news.yahoo.com/s/ap/ml_iran_election

http://thelede.blogs.nytimes.com/2009/06/13/landslide-or-fraud-the-debate-online-over-irans-election-results/

Pension Q&A

From the WSJ, what happens to your pension if your company declares bankruptcy?

http://finance.yahoo.com/focus-retirement/article/107142/Pension-Benefits-Are-Protected-in-a-Bankruptcy

Peet's Annual Shareholder Meeting (2009)

Peet's Coffee & Tea Inc. (PEET) held its annual shareholder meeting at an Emeryville hotel on May 20, 2009. The small hotel conference room was filled to capacity. Peet’s offered shareholders Peet's drip coffee, juices, fruit, pastries, and yogurt. Shareholders also received a reuseable Peet’s bag containing coffee beans and a box of tea.

Peet’s shareholder meetings are fun to attend for several reasons. First, although Peet’s is a publicly-traded company, it doesn’t act like most major corporations. Its meetings are less formal, and Peet’s executives seem more receptive to questions and comments than other companies. Second, Peet’s talks about what it is doing to find and develop coffee beans, which usually results in interesting stories involving international travel. Third, it is hard to walk out of a meeting unhappy when Peet’s provides good food, great coffee, and several complimentary items.

CEO and President Patrick J. O’Dea started the meeting with a brief slideshow presentation. He explained that recent economic events have caused American consumers to experience a 30% evaporation of wealth. He mentioned several retailers that had filed for bankruptcy (Circuit City, Levitz, Sharper Image, Linens ’n Things, and Mervyn’s) and indicated these retailers may have expanded too quickly. He talked about an “embarrassment of riches” and how consumers were avoiding conspicuous consumption. Despite these troubling events, however, Peet’s managed to grow sales by 14%.

Peet’s continues to use ERP (enterprise resource planning) to attack inefficiencies and cut costs. CEO O’Dea mentioned that executives had agreed to a management salary freeze for 2009, while increasing salaries for hourly workers. Peet’s commitment to its rank-and-file employees may explain why almost every Peet’s employee I’ve met has provided great customer service. (My local store, run by Store Manager Ian Batra, is particularly good at going the extra mile to make customers happy.)

Peet’s continues to expand by using targeted advertising, such as direct mail and email. Peet’s most recent advertising efforts involve a partnership with San Francisco’s de Young Museum. Peet's also has a promotion that provides a free medium iced drink after you buy five iced drinks. (Make sure you get the card--the promotion ends on August 31, 2009.)

CEO O'Dea explained that Peet’s has multiple channels to sell its products, including retail stores; home delivery; food services; office; and grocery stores. Peet’s coffee is currently sold in over 3,500 grocery stores. While Starbucks relied heavily on expanding its own stores to grow sales, Peet’s grew at a more measured pace and has focused more on grocery store alliances to sell its coffee beans. Peet’s strategy has paid off. Opening fewer stores and selling coffee beans through already-established grocery stores has allowed Peet’s to shift overhead onto third parties and lower its operating costs.

CEO O’Dea then turned the meeting over to coffee buyer Doug Welsh. I am a big fan of Mr. Welsh. Mr. Welsh naturally exudes sincerity and diligence, which is particularly helpful when dealing with international operations and finding reliable business partners. Mr. Welsh talked about how Peet’s finds its coffee beans and what it is doing to maintain quality and sustainability. He showed some pictures (unfortunately, only a few) of himself and buyer Shirin Moayyad in Africa tasting coffee. He explained how he judges coffee beans, using a five point scale:

5 is Peet’s Quality.
4 is Other high grade speciality.
3 is Good quality.
2 is Problematic but saleable.
1 is Defective.

He also explained how Peet’s helps communities create better living conditions. For example, in his never-ending quest for the best coffee beans, Mr. Welsh visited some places where “backyard growers” were smashing coffee beans on rocks, a highly inefficient process. (Mr. Welsh said these people were literally “between a rock and a hard place.”) After Peet’s became involved, it showed the residents how to buy and use various micro-mills to improve coffee production and quality. After residents establish a cooperative and pool money to purchase a micro-mill, production and profits increase. With increased profits, small villages are then able to provide basic health care to their residents and improve their quality of life. (Say what you want about globalization, but I love it for precisely this reason–when it’s done right, everyone benefits.)

Mr. Welsh made some other comments before turning the meeting back to CEO O’Dea. Mr. Welsh indicated he was looking forward to the “New Africa” blend. He said that for logistical reasons, Latin America exports more coffee beans than Eastern Africa. He said that Peet’s tends to pay more than the Fair Trade Certified guaranteed minimum living wage. (Lest you think Peet’s executives are purely altruistic, Mr. Welsh reminded everyone that the ultimate goal was to get the best coffee beans: “Any dime we spend to make the world a better place is your dime. We’re very conscious of that.”)

Mr. O’Dea then opened the meeting to questions. Before I go into the Q&A, I want to make one comment. Peet’s didn’t have a portable microphone. As a result, many questions were difficult to hear. Peet’s might want to bring a portable microphone to its annual meetings to make questions easier to understand. While the CEO repeated most of the questions, it would be better to hear questions directly from the person asking them.

The first question was about free Wi-Fi. CEO O’Dea said that Peet’s offered free Wi-Fi in most of its stores to attract customers.

A shareholder asked about options, referring specifically to page 11 of the proxy statement. The shareholder complained that Peet’s had shortened the vesting time period for certain options from seven years to four years. This change appeared to diminish the link between long term share performance and executive compensation, he said. CEO O’Dea disagreed and later mentioned that 75% of his individual net worth was linked to Peet’s stock.

A shareholder asked whether Peet’s would expand operations in airports and other outlet-type facilities (e.g., BART stations). CEO O’Dea said that Peet’s is always searching for good locations. Later, in response to a related question, CEO O’Dea said that Peet’s had no plans to enter the franchising business but had 70 licensed stores. (A “licensed” store is a store that Peet’s does not own but allows the operator to use the Peet’s brand name and products. Persons serving coffee in those non-Peet’s-owned outlets participate in a Peet’s training program.)

A shareholder asked about what Peet’s was doing to improve brand recognition and sales growth on the East Coast. CEO O’Dea talked about targeted advertising.

Someone asked how many stores Peet’s planned on opening in 2009. (I apologize, but my notes are not definitive on the response, so I cannot provide an answer. In case you are interested, my notes indicate, “10 stores (reduced #) – open in ‘09. 58 –> 200 stores.”)

Someone asked about a Consumer Reports taste test that rated "Eight O’Clock" coffee as the best-tasting coffee. Mr. Welsh said that the survey was flawed for several reasons, which drew some laughter. Mr. Welsh opined that the persons who participated in the taste test probably grew up tasting less strong coffee.

Someone asked whether Peet’s would enter the chocolate business. CEO O’Dea said no, but a partnership might be possible.

Someone asked about diversity, pointing out that the Board wasn’t diverse. CEO O’Dea said that diversity was a continuing process and an important factor. He said that Peet’s had done well in a UC Davis leadership survey when compared to other corporations. He also said that half of the executive team reporting to him were female.

Someone asked what Peet’s did to choose the best tea. A Peet’s employee said that he had inherited many good relationships with tea suppliers. CEO O’Dea said that Peet’s was now selling cold tea in select grocery stores. (I’ve tried these teas–my favorite is the Snow Leopard Tea with Honey.)

A shareholder mentioned that Peet’s was very helpful when it came to composting and that Peet's gave away expired beans for composting.

Someone asked how Peet’s finds high quality coffee. Mr. Welsh said that too-rapid growth leads to reduced standards (a little dig at a certain Seattle-based competitor), and Peet’s slower growth allowed it to focus more on finding high-quality coffee beans.

A shareholder asked if any Peet’s stores had not done as well as expected. CEO O’Dea mentioned that Peet’s had closed the Westminster store due to its poor location/visibility.

I asked Peet’s to publish more information, perhaps on Facebook, about Doug Welsh’s and Shirin Moayyad’s travels. I said I really enjoyed seeing the pictures from the coffee buyers’ international trips, and I regretted that Peet’s only showed a few of them at its meeting. I said Peet’s ought to consider publishing a “coffee table” book with pictures from different countries and, with permission, the people its buyers meet and work with.

I also asked a question about food sales in Peet’s retail stores. It turns out that Peet’s makes 60% of its retail store profits from drinks and 40% from food sales. If I heard the CEO right, the margins Peet’s gets on its food items must be incredible. (Try the vegan chocolate chip cookie–it’s delicious.)

A few tips for Peet’s customers:

1. If you are staying inside the store, order a large drink in a “for here” cup. The “for here” glass cup seems larger than the “to-go” cup. You get more coffee and you also help the environment.

2. It costs Peet’s about 7 cents for a hot coffee “to-go” cup, but about 15 cents for a cold coffee “to-go” cup. As a shareholder, you should buy a Peet’s tumbler, because you get a discount each time you use it, and Peet’s also saves money. Of course, you also help the environment by reducing waste.

3. When ordering a frozen drink (e.g., a frappe), order it “extra bold.” If you don’t order it “extra bold,” your drink won’t have espresso–just regular coffee. [Update: it's actually double-strength coffee, but as I said, no espresso.]

I look forward to attending next year’s meeting and hearing more about Mr. Welsh’s travels. In the meantime, I will be buying lots of Peet's coffee. Although the economy isn't doing very well, and I will earn much less money this year, I cannot bear to give up my one luxury--a Peet's cappuccino.

Note: the pictures above are of myself, Doug Welsh, and Shirin Moayyad, and the food trays after the meeting was over.

Note: a review of Peet's 2008 meeting is here.

Disclosure: I own an insignificant number of Peet’s (PEET) shares.

Star Wars

I've never seen a Star Wars film, but here's an interesting post:

http://www.marginalrevolution.com/marginalrevolution/2009/06/the-islamic-roots-of-star-wars.html

One day, I'll get around to watching the films.

Hayward Police Settles Harassment Case for $5 million

Hayward Police Department settles harassment case for 5 million dollars:

http://www.mercurynews.com/ci_12561714

The lawsuit was settled through the city's insurance companies, which are responsible for paying it. City officials said the settlement will have no effect on the city's general fund or income from Measure A, a utility users tax approved in May.

City Attorney Michael Lawson estimated that the city spent about $500,000 on the case since it was brought forward in November 2007.

Casper said the amount of the settlement indicated the insurance companies "recognized the problems the city has historically had with women being treated fairly at the police department. Close to $5 million is not an amount paid unless someone has recognized years of wrongdoing."

Surprisingly, the amount was paid through an insurance company. Many cities are self-insured, but perhaps Hayward was small enough to get an outside insurance policy. Even though the city paid the settlement monies through an insurance company, taxpayers will still suffer (beyond the half a million dollars spent on legal fees). After all, the insurance company will raise the city's insurance rates, and the higher premiums will be paid by taxpayers.

Intersil Litigation Update

I recently thought about buying a few shares of Intersil (ISIL), which is embroiled in litigation against a Texas company called Texas Advanced Optoelectronic Solutions, Inc. ("TAOS"). I reviewed the online docket, and there's not much going on. The parties have entered into a standard protective order to protect confidential information and have chosen to mediate. Former Magistrate Judge Robert Faulkner is the mediator:

http://www.jamsadr.com/neutrals/Bio.asp?NeutralID=1632

The most recent docket activity was the assignment to mediation. Short interest increased in ISIL shares recently. ISIL should be an interesting stock to follow, especially because it supplies some iPhone parts, and the litigation relates to ISIL's iPhone business.

Disclosure: I own one ISIL share.

California's Budget Crisis Continues

An interesting perspective from Assembly-member Jim Beall, Jr. in Campbell Times (June 2009, page 19):

The state's biggest cost driver is prisons. The prison budget has doubled in the past decade to $10 billion. The state has 173,000 inmates, which is roughly equivalent to locking up everyone in the city of Ontario [California]. We spend roughly $45,000 on each prisoner, which is just about what it costs to send a student to Yale. Yet, California has a 70 percent recidivism rate...what we are doing now isn't working...

The state's 2009-2010 revenue is chiefly derived from personal income taxes accounting for almost half--49 percent; sales and use taxes make up 34.6 percent; corporation taxes represent 10.7 percent; the rest come from a myriad number of sources.

Two thoughts:

1. The war on drugs is bankrupting the state. The state spends huge sums jailing thousands of drug addicts.

2. The pro-law-enforcement mentality post-9-11 may have caused D.A.s to prosecute more non-violent offenders, knowing juries would be more fearful of anyone suspected of a crime.

To be or not to be a libertarian--more Californians should be asking themselves this question.

More on California's problems here.

Morgan Spurlock

Morgan Spurlock just keeps outdoing himself:

http://www.hulu.com/watch/26682/30-days-life-on-an-indian-reservation#x-0,vepisode,1

His episode about living on an Indian reservation was deeply moving. If the link above doesn't work, go to hulu.com and search for the show "30 Days." (Note to Netflix: the online video has captions.)

Kobe Bryant

From ESPN's Bill Simmons, or what I call, "Why Kobe Will Never, Ever Be Like Mike":

http://sports.espn.go.com/espn/page2/story?page=simmons/090608

Important note: Kobe's reputation as a "killer" at the end of games remains overblown. The site www.82games.com just posted a study of game-winning shots from the last five-plus seasons (regular seasons and playoffs since the 2003-04 season) that revealed Kobe was shooting 14-for-56 (25 percent) with one assist and five turnovers, and made 12 of 15 free throws. So let's say that was 70 possessions total, including Sunday night. ... He only had one assist in nearly six years??? That's why Orlando quadruple-teamed him in that spot. Kobe is a phenomenal streak shooter, and he has a real talent for catching fire with a lead and closing games out ... but you can stop him in one-shot situations simply because he's his own worst enemy. He wants to be a hero, he's shooting it, and that's that.

0:00.6: Funniest moment of the game: Kobe storms back to the bench, whacks the chair in disgust and sits down as Phil Jackson (already sitting) looks at him with a bemused, "Should I point out to him that MJ absolutely would have passed there?" smile on his face. Classic.

Mr. Simmons is absolutely right. Is it just me who thinks Kobe's newfound super-intensity is contrived? He mailed it in against Houston in the last series, and in Game 2, he didn't do much until the second half. Then, he gets the benefit of a Jack Nicholson tantrum, which causes the referees to call multiple touch/non-existent fouls against Orlando thereafter. (A significant development when the game later goes into OT.)

Kobe's decision to go four-on-one while Odom was wide open and practically begging for the ball establishes that Kobe is not a clutch player. I'm sorry, but even Mike passed to Steve Kerr (1997 NBA Finals) and enabled John Paxson to take the last shot (1993 NBA Finals).

Even though the following interview took place in 2004, Ray Allen's comments about Kobe are still spot-on:

http://www.seattlepi.com/basketball/195189_sonx14.html

He's going to be very selfish...I think the point production is not going to be so much what people are going to look at because (Tracy) McGrady did it in Orlando, Allen (Iverson) did it in Philly. Can you win a championship? I think that's the question. Carrying guys on your back and making everybody better." ... But is his attitude going to allow him to take a back seat and let Lamar Odom shine and let Caron Butler have his nights and bring those big guys along with him?"

Some final comments: Kobe now has Pau Gasol, who's an All-Star center--a white version of Shaq, if you will. Gasol was an All-Star and FIBA champ before he played with Kobe. Kobe couldn't win with just Bynum. He couldn't win with Kwame Brown. He couldn't win with Radmanovic. He couldn't win with Divac. Bottom line, if Kobe wins the championship, good for him--but don't sully Jordan's reputation and your own basketball IQ by ever comparing Jordan--who won championships with non-All-Stars Luc Longley and Bill Wennington--with Kobe.

Notes for Stan Van Gundy: play Howard and Battie/Gortat together as much as you can. Put Pietrus on Kobe till Pietrus fouls out. Play Alston and tell him before the game that he's the starting PG. Let Alston control his own minutes and sub Nelson at Alston's own reasonable discretion.

Update on June 9, 2009: Tonight was Game 3 of the Orlando-L.A. NBA Finals. From this day forward, whenever anyone compares Kobe to Jordan, all you need to end the discussion are the following five words: "Game 3, 2009 NBA Finals." Kobe not only missed a crucial free throw in the final two minutes, but he turned the ball over and misfired on a three-pointer. Kobe's last play of the game? He fouled an Orlando player with 0.2 seconds left on the clock with Orlando up by 2 points. (The player made both free throws.)

Actel's Annual Shareholder Meeting (2009)

Actel Corporation (ACTL) held its annual shareholder meeting on June 5, 2009 at a Santa Clara hotel. Although around eighteen people attended the meeting, I was the only non-employee there. The hotel served cinnamon rolls, fruit, pastries, water, and coffee.

CEO and President John East gave a slideshow presentation. It appeared that the presentation had been shown to everyone else in the room the day before. Mr. East is a tall man, more Texas than California in his demeanor--friendly, direct, and unreserved. (In case you're interested, here is a 2008 interview with him.)

The meeting began with Attorney David Foster introducing various Actel employees. As part of the formal portion of the meeting, several directors were nominated, and shareholders increased the number of shares reserved for issuance by two million shares. CEO East then began his presentation.

Before I summarize Mr. East's presentation, I will provide some technical background. Actel makes FPGAs. FPGA stands for "Field Programmable Gate Array." A digital gate is a combination of many transistors to make a function such as an inverter or flip flop. Hundreds, thousands or even more digital (or recently analog) cells make an FPGA. FPGAs are useful because companies can configure their desired circuits to make a system application by pick-and-choose or by cut-and-paste.

RAM stands for Random Access Memory (vs. ROM which is Read Only Memory). There is Static RAM, Dynamic RAM, etc. which are digital (logic) circuits. These are used in the computers and other electronic systems. (Mr. East mentioned several times that Actel was focused on the "static" end of the market, and I assume he was referring to Static RAM.)

Two ways of measuring an FPGA are by reviewing its clock speed and data rate. Actel's FPGA "clock" speeds of 200MHz (its low power design) and 350MHz are very good. However, in many data communication applications, "data" speed (or data rate) of several gigahertz (1000 megahertz) are common now. To get a more complete picture of Actel's FPGAs, I should have also asked questions about data speed, which I did not do; however, in pure digital systems, clock and data speeds tend to be very close.

In contrast, in mixed (digital + analog) systems, such as data communication applications, the data rate is usually many times the clock rate (speed). Actel indicated clock speeds of 40 to 60 MHz in its mixed-signal product.

Getting back to the presentation, Mr. East talked for about forty minutes while explaining the various slides. I will do my best to replicate the main points of the presentation.

No debt: Actel has no debt and 140 million dollars in cash and investments.

Broad customer base: Actel has 3500+ customers. 60% of Actel's revenues come from around 1000 customers. [Note: 10K, page 26: Lockheed is a major customer. "Lockheed Martin accounted for 4% of our net revenues during 2004 compared with 11% during 2003."]

Niche markets: Actel is not "going after what the big guys [Altera (ALTR) and Xilinx (XLNX)] are going after."

Static v. Dynamic: Actel is better when it comes to static power.

Survey says: "Which vendor best addresses power consumption" problems in FPGAs?

Xilinx: 27%; Lattice Semi: 6%; Altera, 22%; Actel, 22%.

Flash: Flash is growing, but at a slower rate than anti-fuse.

Slow but steady?: Actel is "gaining share, but not at a rapid pace."

Long-term customers: Actel has many long-term customers in the military, industrial, and medical markets. At the same time, some of these customers have external complications, such as necessary FDA approval, that prevent immediate sales. As a result, although Actel is actively trying to gain more long-term customers, the time it takes to gain such customers may cancel out any immediate revenue effect.

Vision: CEO East talked about how the "whole world is moving" in the direction of "portable" products, i.e., handheld and battery-powered devices. (The cellphone is an obvious example of this movement.) Mr. East mentioned that he had just seen a portable medical device the size of his thumb. (Quite a change from the days of large, immovable medical equipment.) He mentioned that some restaurants no longer using pen and paper but are taking orders on portable devices. He provided many examples of Actel's ability to grow in the future as more devices become smaller and handheld.

Acquisitions: Mr. East talked about Actel's acquisition of Pigeon Point Systems and the possibility that the TCA (Telecommunications Computing Architecture) standard would become industry standard.

I asked several questions. I mentioned that around 40% of Actel's revenues came from the military and aerospace industries. (See 10K, page 25, "[S]ales of our products to customers in the military and aerospace industries...accounted for 38% of our net revenues in 2008.") I asked how the cancellation of various projects would impact Actel. I mentioned specific projects, like the F-22, which had been scaled back or canceled.

This is where it got a little confusing. All CEOs, including the honest ones, are part-salemen. No CEO wants to admit that problems might arise as a result of government spending cuts. As a taxpayer, I am quite happy President Obama is scaling back some defense programs. (See here for more on this issue.) Actel shareholders, however, probably understand that certain military/aerospace cuts may impact Actel's ability to grow. Mr. East did not mention any particular defense program cut that would impact Actel's revenues. Mr. East seemed to say that Actel's product line was diverse enough so that the "cumulative" effect of defense spending cuts would not be significant. Even so, if I was a mutual fund that owned millions of shares, I'd ask Actel to break down exactly how much money it was expecting from each of its defense projects. That breakdown would give a fund manager a better idea of what to expect from Actel moving forward.

Mr. East did mention that "95%" of American-launched satellites used some Actel product. That's an incredible achievement. Mr. East mentioned that there were many civilian satellites, such as weather satellites, and scientific satellites, such as Pluto explorations. His point was that even if the military cuts back on its defense spending, civilian projects would probably continue to give Actel revenue.

I asked about Actel's efforts to diversify its upper ranks. There were only two females in the entire room, and one of them appeared to be a non-executive employee. If I saw a company with 18 women and 1 male in upper management, I'd be concerned, so I asked Mr. East what he was doing to improve diversity. Mr. East seemed a little uncomfortable with this question and first joked that if I was discriminating against older white men, he was going to call his lawyer to come after me. He then pointed out that Actel had some Egyptian and Lebanese employees in the room, and the overall racial composition of Actel's employees was very, very diverse.

When I pressed him further on why there weren't more women in the room, Mr. East became more serious and indicated that there was a "dearth of American-born female engineers." In probably one of the best comments made by a CEO I've heard, he said he didn't have a company car, he stayed in cheap hotels, and he didn't have an executive jet, but he "liked his engineers." His point was that he hired good engineers, no matter what the ethnicity or gender. As he became increasingly more uncomfortable, the sole female manager piped in. She made some excellent comments about how the company wanted to add diversity naturally, not "artificially." She said that in the nine years she had been with the company, Actel had "never" had a hearing before the OFCCP (the OFFCP ensures that federal contractors do not discriminate). Her response was excellent, and having a female employee save the CEO from his discomfort showed that Mr. East was respected within Actel's upper ranks.

Although I enjoyed the CEO's presentation, I will not be buying more Actel shares. When it comes to technology, you want to go with the leaders, and Xilinx and Altera appear to be the leaders in Actel's field. That doesn't mean Actel won't survive or even thrive, but it appears to have made a conscious decision to move away from competing with Xilinx and Altera. That means Actel will probably focus more on lower-growth areas, where the larger players have exited. To give you an idea of the size difference between Actel, Xilinx and Altera, Actel's market cap is around 300 million dollars; Altera's is around 5 billion dollars; and Xilinx's is around 6 billion dollars. Maybe Actel will eventually decide to play the part of David and slay the Goliaths. Anything's possible in our this topsy-turvy world of ours. Right now, however, Actel does not appear to be able to grow at a high enough rate to justify a massive upside in its stock price.

Miscellany: Actel invested in Lehman Brothers' bonds and only recently wrote off the investment. See 10K, page 49: "The total impairment charge of $0.9 million is included in interest income and other, net on our consolidated statement of operations for the year ended January 4, 2009."

Disclosure: I own an insignificant number of Actel and Xilinx shares.

Awesome video

RIP: Alexis Joy Briski

I recently attended Alexis Joy Briski's service at Calvary Church. You may read Alexis's obituary here:

http://www.losgatosobserver.com/2009/05/27/obituary_alexis_joy_briski

The service was beautiful. The large church was filled to capacity. The materials included a bookmark with a picture of Alexis pitching for her softball team and the "The Lord is my shepherd" prayer inscribed at the bottom; a blank page for the kids to draw on; a written transcript of some of the speeches to be given by Alexis's friends; and an outline of how the service would proceed.

Whenever we think we are having a bad day or life is not going the way we want, we should also remember the children who died before they could reach their full potential. Some people weren't given a chance to have all the options many of us have today. Sometimes, our options may be limited, but at least we have options. It is important to remember that.

Sad and Happy Stories

A sad story:

http://www.mercurynews.com/localnewsheadlines/ci_12530827

Andrew King was arrested for molesting girls on Santa Clara's nationally-renowned San Jose Aquatics swim club. I realize all persons are entitled to a presumption of innocence, but it's hard to believe so many women would come forward now to make false allegations. As a youth basketball coach, I despise people like Andrew King. The whole point of coaching kids is to give them a set of skills that will help them become mature adults. When a youth coach violates the trust his community has placed in him, he fundamentally alters a child's maturation process.

And a happy one:

http://rivals.yahoo.com/ncaa/basketball/news;_ylt=A2KIPHfjfClKJlQBLw85nYcB?slug=jn-laue060509

Kevin Laue, a scholarship athlete...with one full arm.

President Obama in Cairo, Egypt

From LA Times: transcript of President Obama's speech in Cairo, Egypt:

http://latimesblogs.latimes.com/washington/2009/06/barack-obama-muslim-speech-text-egypt.html

Scroll down the page for the transcript.

The Economists' Roundtable

Just a wonderful, wonderful exchange between prominent economists:

http://www.nybooks.com/articles/22756

Nouriel Roubini:

[F]iscal policy cannot resolve problems of credit, and it is not without cost. Over the next few years it's going to add about $9 trillion to the US public debt. Niall Ferguson said it's the end of the age of leverage. It's not really. There is not deleveraging. We have all the liabilities of the household sector, of the banks and financial institutions, of the corporate sectors; and now we've decided to socialize these bad debts and to put them on the balance sheet of the government. That's why the public debt is rising. Instead, when you have an excessive debt problem, you have to convert such debt into equity. That's what you do with corporate restructuring—it converts unsecured debt into equity. That's what you should do with the banks: induce the unsecured creditors to convert their claims into equity. You could do the same thing with the housing market. But we're not doing the debt-into-equity conversion. What we're doing is piling public debt on top of private debt to socialize the losses; and at some point the back of some governments' balance sheet is going to break, and if that happens, it's going to be a disaster.

He makes so much sense, it's almost painful to listen.

Rita Pavone: IL BALLO DEL MATTONE (1963)

Movie: Nine Queens

Just saw the 2000 Argentinian film, Nine Queens (Nueve Reina). I try to remember at least one line from each film I see. This film's memorable line occurs after a character asks someone how much it would take for him to do a particular sexual act, hears rejections, and then increases the price until he sees hesitation:

You see? We're not lacking pillow-biters, just financiers.

Ah, the ongoing issue of morality, sex, and price. Overall, a good film. I give it 4/5 stars.

Guantanamo held a 12 year old boy

Congrats to all the Americans who supported Guantanamo under Bush. You favored locking up a 12 year old indefinitely without a trial:

http://sanfranciscochronicle.info/cgi-bin/article.cgi?f=/n/a/2009/05/25/international/i114756D65.DTL

https://www.washingtonexaminer.com/us-lawyers-ask-afghan-court-to-help-gitmo-inmate 

U.S. military lawyers asked Afghanistan's highest court Monday to demand the release of a Guantanamo prisoner they say was only about 12 years old — not 18, as the military maintains — when he was sent to the detention center in Cuba.

We knew President Bush was relying on secret evidence and refusing to be transparent. These kinds of embarrassments always happen when citizens don't demand government transparency. The government gets away with violating the Constitution and destroys our goodwill in the process.

Many years ago, I attended a speech by an ACLU attorney who was representing some of the Guantanamo Bay detainees. She told everyone, in a public meeting, that America was holding a 12 years old child in Guantanamo without a trial. If I remember correctly, she also said Guantanamo was holding a 75 years old man. Everyone knew. No one listened.

The next time you decide to trust your government, just ask yourself, "Is secrecy worth violating our own Constitution, the rule of law, checks and balances, and our goodwill?"

© Matthew Rafat (2009)

Those who would give up Essential Liberty to purchase a little Temporary Safety, deserve neither Liberty nor Safety. --Benjamin Franklin

I am willing to know the whole truth; to know the worst, and to provide for it. --Patrick Henry

Core-Mark Annual Shareholder Meeting (2009)

I attended Core-Mark's (CORE) annual shareholder meeting on June 2, 2009. The meeting was held in a small conference room at the Hyatt Regency San Francisco Hotel. The only refreshment offered was Starbucks coffee. I was a little disappointed, because food-related companies sometimes display their own products. I did not get a chance to try Java Street items or other Core-Mark products.

Around eight people sat in the audience. Core-Mark's executive team, except for the CFO, sat in the front. Other than my friend and I, everyone attending the meeting had a business or employment relationship with Core-Mark. The Chairman of the Board handled the formal part of the meeting.

Core-Mark started out as a tobacco storefront in San Francisco. It grew into a major supplier of consumer goods to various retailers and became known as Fleming Companies. In 2003, Fleming Cos filed for Ch 11 bankruptcy/reorganization. In 2004, Core-Mark emerged from the ashes of Fleming Cos. For more information on Core-Mark's history, click on the following link:

http://en.wikipedia.org/wiki/Fleming_Companies,_Inc

Cigarettes and other tobacco products accounted for 74.9% of Core-Mark's net sales in 2008; however, cigarette sales accounted for only 29.2% of Core-Mark's total gross profit in 2008. (See 10K, page 3.) In short, while Core-Mark continues to sell cigarettes, it has revamped itself into a food/consumer kiosk company. Food and non-food (batteries, etc.) products accounted for 71.0% of Core-Mark's gross profit in 2008. (See 10K, page 4.)

Core-Mark supplies convenience stores, such as 7-Eleven, with refrigerated kiosks containing various products. These kiosks contain packaged salads, bakery items, drinks, sandwiches, juices, fruit, and other items. Core-Mark touts its ability to re-stock its kiosks several times a week, which allows customers to select fresh food. In other words, Core-Mark strives not to be like your grandmother's food kiosks, which tended to sell month-old sandwiches, cigarette packs, and stale candy.

I was the only person who asked questions at the meeting. CEO J. Michael Walsh graciously answered all my questions. I asked how the company would deal with declining cigarette sales and higher "sin"/SCHIP taxes. Mr. Walsh answered that cigarette consumption has been declining for a long time, and as a result, Core-Mark had consciously shifted to the new consumer trend, which was selling fresh food products. He said that Core-Mark wanted to become the leader in fresh food products.

Mr. Walsh also said that higher cigarette taxes actually helped Core-Mark's bottom line. He indicated that rising cigarette taxes allowed Core-Mark to get a higher return on its "working capital." This concept is a bit counter-intuitive, but I will explain it as best as I can.

According to the CEO, Core-Mark must buy "stamps" from states before it can purchase cigarette cartons. These state-issued stamps allow Core-Mark to purchase a certain number of cigarette cartons over a certain period of time. Different states levy different taxes per carton. In California, the current carton tax is $8.70; it is higher in New York.

The "stamp" process functions as a VAT, allowing states to ensure they are paid carton taxes up front rather than at the final point of sale. This process helps states keep track of cigarette sales and may reduce the black market for cigarettes. This system is not perfect. Some entrepreneurs buy cartons in states with lower carton taxes and then illegally re-sell them in nearby states that have higher carton taxes.

Higher carton taxes may help Core-Mark, because Core-Mark buys "stamps" at the beginning of the month; however, it does not have to actually pay for the stamps until later--sometimes up to 30 days later. In the meantime, it still receives its allotment of cigarette cartons and the cash from those carton sales/distributions. That regulatory quirk means Core-Mark sometimes gets a "free" money float of up to 30 days, which helps increase its liquidity. In short, the way states issue "stamps" may result in some companies receiving temporarily subsidized cash flow, which minimizes capital costs. (I hope I've explained this correctly--if not, feel free to correct me by adding a comment.)

Mr. Walsh also indicated that Core-Mark was in a position to consolidate deliveries and take market share from less efficient competitors.

I then asked why cigarette companies wouldn't decide to sell directly to customers, thereby eliminating Core-Mark as a middleman. Mr. Walsh replied that doing so would cost cigarette manufacturers "more money." They would have to "build the infrastructure" first and deal with the "administrative burden" of handing 100,000+ billable accounts. In fact, Mr. Walsh said that some cigarette companies, such as Philip Morris (PM), were favoring third parties as distributors to cut costs. Mr. Walsh's explanation makes perfect sense. If Core-Mark has a highly efficient supply/distribution chain, then its advanced inventory management might act as a wide moat. Walmart, for example, is able to cut its costs by having superior inventory management, but its internal tracking system took years to develop.

I then asked about Core-Mark's pension plan, which is underfunded. (See 10K, page 11.) Under ERISA and other laws, different levels of pension underfunding trigger different corporate fiduciary duties. Companies typically indicate pension funding levels by referring to one of three funding categories: "80% and under"; "80% to 60%"; or "60% and under." When a pension plan falls in the "60% and under" category, it may be a sign that pension assets and investments are being poorly managed. Core-Mark's CFO indicated that the pension was at the 60% level.

I then asked about Core-Mark's executive team and board, which appeared to be non-diverse. More specifically, all Board members appeared to be older Caucasian men. I asked what Core-Mark was doing, if anything, to increase its executive team's diversity. Mr. Walsh pointed out that Core-Mark's CFO was obviously not a white male (she is a white female), and the company was open to diversity. He said that Core-Mark was always open to qualified candidates. Mr. Walsh also indicated that the Board was chosen by Core-Mark's unsecured creditors following Core-Mark's Chapter 11 filing. (In other words, the unsecured creditors were responsible for the Board's composition, and they might be the more relevant party to contact on this issue.)

For a company that was in bankruptcy court just five years ago, Core-Mark has done remarkably well. I especially enjoyed CEO J. Michael Walsh's demeanor and responsiveness. Unlike many CEOs, he answered every single question thoroughly. He had no trace of the arrogance so common in upper-level management. It was a pleasure to meet him.

I had only one issue with the meeting. The Chairman interrupted me once when I was in the middle of a question to ask me for my name, how I held my shares, and the number of shares I owned. He asked me these questions after I had already announced my name and shareholder status. I thought it was inappropriate to ask me how many shares I owned. A shareholder is a shareholder, period. Companies should welcome questions from all shareholders, not just major ones. To date, this is the only company I've seen that has requested this kind of information, i.e., the number of shares held. (There was another issue, but it was minor--a shareholder relations representative wanted me to fill out a name-tag and then complained that my handwriting was illegible. Note to all shareholder relations personnel: you get one day a year to make ordinary shareholders feel welcome. Use it wisely.)

I don't have an opinion on Core-Mark's stock. I haven't bought products from their kiosks, and I'm not a smoker, so I don't have sufficient personal knowledge to state an opinion. It does appear, however, that Core-Mark provides a valuable service to many convenience retailers.

Note: the picture above is of Mr. Walsh and myself.

Disclosure: I own an insignificant number of Core-Mark (CORE) shares.

Update on June 5, 2009: The more I think about the sin/stamp tax issue, the more I think I may have reversed the payment schedule. Perhaps CORE has to buy stamps first and then wait a month or more before receiving cartons to distribute. Otherwise, I am still unclear as to why CORE would make more money when the number of smokers decline. Any comments are appreciated.

More Wisdom from Charlie Munger

Charlie Munger on desire:

I had a considerable passion to get rich. Not because I wanted Ferraris - I wanted the independence. I desperately wanted it. I thought it was undignified to have to send invoices to other people. I don’t where I got that notion from, but I had it.

More from Charlie Munger here.