Altria Group (NYSE:MO) shares rose today after the tobacco industry's legal picture became a bit clearer. The judge in the government's racketeering lawsuit stated the tobacco companies were deceiving the public, however, there were no significant fines attached to the ruling. Any other stipulations found in the 1600 page ruling will likely be appealed in the appelate courts. The judgement clears the way for Altria to spin-off its 88% stake in Kraft Foods (NYSE:KFT), which moved down on the news. The timetable for this action is likely to be between 10 and 14 weeks.

Spinoffs present an interesting opportunity for investors. When Altria spins off its stake in Kraft, it will distribute its 88% stake in Kraft to its own shareholders. Typically, a significant portion of these shareholders will sell their shares of Kraft because they are only interested in Altria. Many larger funds that acquire a large number of shares may also not want to hold Kraft. This results in selling pressure that has nothing to do with the underlying value of Kraft Foods. Even more, Kraft has an existing float that is being publicly traded. Some of these investors may sell off their shares in anticipation of this selling, which could result in a windfall. When and if this occurs, there will be many cheap shares available on the market for enterprising investors! The key to seeing if any of this will happen is watching Altria Group's SEC filings, particularly their Form 10.

Many people are also very bullish on the tobacco sector in general. This announcement should allow investors to remove the majority of the risk premium that was associated with this lawsuit, which should result in an increased share price. Many analysts are calling for $95 - $100 per share.

Advancis Pharmaceutical Corporation (NDAQ:AVNC) has been a rollercoaster ride for investors since it IPO'd back in 2003 at $9/share. Since then it has plummeted to under $1 before recently rebounding to over $4. What's causing this volatility? Well, the company is focused on the development of a new drug delivery system for antibiotics, known as PULSYS. This system essentially releases "bursts" of antibiotics over time instead of releasing it all at once. The theory was that this method would not only fight infections more effectively, but also reduce the risk of long-term immunity to antibiotics.

The company ran into trouble, however, when their clinical trials failed in mid-2004. The tests performed at the time concluded that the differences between PULSYS and normal drug delivery methods were not statistically significant. This news devastated investors as the stock sank from $8 to $3. Luckily, the company had acquired the rights to sell Keflex along with a $12m credit facility, which allowed them to stay afloat while they re-applied for approval. Recently on August 10th, the company redeemed themselves when it's Phase III trials of Amoxicillin PULSYS achieved its endpoints (showed statistical significance), and the stock reached a new 52-wk high. In a press release, the CEO said:

"'The positive outcome of this trial provides proof-of-concept that PULSYS antibiotic dosing is effective in eradicating streptococcal bacteria in humans,' stated Edward Rudnic, president and CEO of Advancis. 'If approved for marketing, we believe our once-daily version of amoxicillin would represent a major advance in the most widely used antibiotic in the U.S. and would be the first and only once-daily amoxicillin therapy approved for marketing in the United States.'"

This proof-of-concept has apparently attracted new investors. A 13G filing with the SEC on August 17th revealed a 17% ownership stake by Deerfield Capital Management through a hedge fund that invests in special opportunities. Note that this was bought through five different vehicals, so the reporting was not required until at least one of them reached 5%.

Although the company's recent 10Q was lackluster, these recent developments finally help prove that Advancis' technology does work. If it continues this success, it may be able to revolutionize the antibiotics market - a $27b market - through its more efficient drug delivery system. The company definitely has a long way to go, but it's a great stock to put on the radar.

Dell Inc. (NDAQ:DELL) fell after hours today after it released its 8K filing to the SEC, which announced disappointing earnings and revealed that it is currently involved in an informal SEC investigation into the ways it booked revenue during the past year.

Dell's earnings were cut in half from $0.41/share a year ago to just $0.22/share today, which was below analyst expectations. The company attributed this to "aggressive pricing in a slower market". Perhaps as a consequence, Dells market share did increase by 6% to 19.3% - most of that growth coming from outside of the United States. The company's CEO said the following:

"While we are disappointed with the results for the quarter, we are taking the necessary actions to correct missteps and improve our results for the long term," said Kevin Rollins, Dell chief executive officer. "Key actions include accelerating cost initiatives, increasing investments in service and support, and better pricing management."

Meanwhile, the company also announced an SEC investigation:

"In August 2005, Dell received notice from the U.S. Securities and Exchange Commission that it was conducting an informal investigation of the company. The notice stated that the investigation is not an indication that any violations of law have occurred. The SEC has requested information relating to revenue recognition and other accounting and financial reporting matters for certain past fiscal years, and Dell has been cooperating. In the course of responding to the requests, the company recently discovered information that raises potential issues relating to certain periods prior to fiscal 2006. While the company does not believe that these issues have had or will have any material impact on its financial position or the reported results of operations for the relevant years, the company's audit committee, upon the recommendation of management, has initiated an independent investigation. Management is committed to addressing any questions, concerns or issues the SEC or the audit committee may have."

Note that companies are not required to disclose anything that is not material. As a result, this is the first time we've heard of this SEC investigation dating back to August of 2005. The cause for concern is that the company's internal investigation has "discovered information that raises potential issues relating to certain periods prior to fiscal 2006". Whether or not this will have a material affect on the company has yet to be seen; however, it is something that will be held over Dell's head until resolved.

Currently, Dell is trading at a PE of around 19, which is at a discount to their industry and most of their peers. Provided Dell is able to find itself innocent of any wrong doings with the SEC and recover from its pricing mistakes, it could represent a great buy at these levels.

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TriPath Imaging Inc. (NDAQ:TPTH) was bought out by Becton, Dickinson and Co. (N:BDX) on Monday for $9.25/share in an all-cash transaction. According to the company's 13D filing with the SEC:

"BD has elected to convert its filing on Schedule 13G, filed with the Securities and Exchange Commission (the "SEC") on August 8, 2001, into a filing on this Schedule 13D to reflect its decision on August 14, 2006 to submit to the Issuer's Board of Directors a letter, dated August 14, 2006 (the "Proposal Letter") containing a non-binding proposal to acquire all of the issued and outstanding Common Stock of the Issuer, that BD does not currently own, at a valuation of $9.25 per share in cash in a merger transaction (the "Proposal"). The Proposal also contemplates the payment of such cash consideration to all holders of existing options, stock appreciation rights and warrants granted by the Issuer."

This announcement came as a suprise to many shareholders, as the stock doubled on Monday to its current $8.87 level (still a 4% discount to the buyout price). Most of the suprise was due to the fact that BDX announced this in their initial 13D filing! So, there was no prior evidence that BDX was even remotely interested in TPTH shares before Monday... Under the agreement, the acquisition won't be going through until the first quarter of 2007, which leaves plenty of time for other companies to place a bid. So, TPTH is a great stock to put on the radar incase anything else does come along. Any future bids would likely be tipped off by BDX moving up their deadline or strange price activity.

This acquisition also illustrates a key concept that goes along with trading based on insider ownership - a way to tell if the buyers are interested in acquiring the company. One hint, or tip-off, in this case was the massive insider selling that suddenly stopped shortly before this acquisition. A quick look at their SEC filings shows massive selling via Form 4s before and during June. These sales occurred almost every day like clockwork! Suddenly, on June 2nd, they stopped and never resumed. So, what happened? The law says that insiders are not allowed to buy or sell when they know their company would receive an offer - this would be insider trading. Although the 13D filed was the first indication of a third party interested in acquisition, the suddenly decline in insider selling could have tipped off the fact that something was going on that would benefit the company's shareholders. This is something to watch if you are holding shares in a company that could be a potential acquisition target.

InnerWorkings, Inc. (NDAQ:INWK) IPO'd today at $9/share, raising over $95m to help fund its future growth. The printing procurement provider's stock quickly rose to over $10.80 today, representing a gain of over 19% on the day. Is this a stock to be looking at? Although it is difficult to value a stock that has just IPO'd, the company's S-1 filing with the SEC can give us a good idea of what to expect.

InnerWorkings was formed in 2001 to provide an outsourcing platform for printing products though its web portal. Since it began operations in 2002, the company has enlisted over 2,700 suppliers in its database and serves over 1,100 clients (with over 97,000 bids). The company's financials also show strong growth of about 148% per year, with revenues moving from $5m in 2002 to $76.9m in 2005. How is the industry? Well according to their filing:

"Our business of providing print procurement solutions intersects two large and growing industries, commercial printing and business process outsourcing, or BPO. Total shipments in the worldwide commercial print industry were projected to be approximately $367 billion in 2005 and are expected to increase by an average of $8 billion per year through 2009, according to a 2005 Datamonitor global commercial printing industry profile. To become more competitive, many businesses seek to focus on core competencies and outsource non-core business functions, such as print procurement. According to a 2005 IDC global BPO forecast, the worldwide market for BPO is estimated to grow from $422 billion in 2005 to $641 billion in 2009, representing a compound annual growth rate of 11%."

One of the key factors to consider when looking at a new company's potential is its "disruptive" capability. High growth companies typically provide a new technology that disrupts the current market place. For example, Dell used the Internet and commoditization to disrupt the market for PCs. InnerWorkings believes that its technology will disrupt the printing industry by further commoditizing its products and better connecting products with customers (not unlike what Dell did to PCs). In the company's S-1 filing, they stated:

"Our fully-integrated print procurement solution disrupts the traditional print supply chain by aggregating the collective print demand of our clients and greatly increasing the number of suppliers that can efficiently bid for our clients’ print jobs. Our print procurement costs are often 30 to 50% less than the print expenditures historically incurred by our clients, and we believe that we offer a compelling value proposition to our clients by passing on to them a considerable portion of such cost savings. In addition, our solution reduces the amount of internal resources our clients must dedicate to print procurement, accelerates the print procurement process and consistently delivers a high-quality product. We believe that our business model, which is unencumbered by commercial print production assets, offers the first enterprise solution capable of meeting the entire print procurement needs of corporate clients."

One of the major risk factors associated with the business is competition coming into the market - especially given its potential. The two major factors combatting this are the company's proprietary technology and their large supplier network. The company also has a very capable management team and a scalable business model on their side.

Overall, the company is in a solid position fundamentally to disrupt the market for print outsourcing; however, the limited financial data makes it difficult to come up with a valuation for the company, especially given the fact that it has only been in operation since 2002. This company is definitely worth keeping an eye on, however, as we learn more about it in future filings with the SEC.

Tri-Continental Corp (NYSE:TY), a closed-end mutual fund, may have a new board come September 28th if Art Lipson's Western Investment Hedge Partners is able to convince shareholders to nominate their slate of directors. On August 9th, Mr. Lipson sent a letter to shareholders, also filed with the SEC in form 14A, to inform shareholders of his intentions. In this letter, Mr. Lipson gives for reasons for change:

• William Morris, Tri-Continental's Chairman, is named in an investigation by the New York State Attorney General. As you probably know, the New York State Attorney General has determined to commence against Seligman an action for fraud relating to alleged mutual fund timing activities in certain funds managed by Seligman. The Attorney General has alleged that in excess of $80 million was "diluted" from the value of these funds during Mr. Morris's tenure. Moreover, Morningstar, the well-respected rating company for mutual funds, recently rated the Seligman family of open-end mutual funds with an "F" for corporate governance, the lowest possible grade.
  
• Tri-Continental underperformed the S&P 500 index in 12 of the last 15 years. The performance by Seligman as manager during the last 15 years, under Mr. Morris's direction, has been abysmal. During this period, the S&P 500 index returns were 56% higher than Tri-Continental's returns.
  
• Tri-Continental's proxy fails to disclose, (a) the cost to stockholders of the last election; (b) the actual investment performance of Tri-Continental for the first six months of 2006 (which again lags the S&P 500 index); and (c) the fact that its Chairman, William Morris, and its President, Chief Executive Officer and Director, Brian Zino, have been named in the investigation by the New York State Attorney General.
• The Company needs an independent set of eyes to protect our investment and to see to it that Seligman does the job that it is paid to do.

The company fired back by accusing Art of attempting to open-end or liquidate the company. Mr. Lipson insists that this is a scare-tactic, and he has no intention of open-ending or liquidating Tri-Continental, alleging that the company is intentionally misrepresenting his position. In his letter, Art stated:

"I am a fellow stockholder and I am leading a group that has owned Tri-Continental stock since 1999. We care about Tri-Continental's performance certainly as much as anyone else since we are the largest stockholder ... I have listened to stockholder concerns and want to make it clear that, despite statements made by the Tri-Continental Board, my goal is not to open-end or liquidate Tri-Continental. When Tri-Continental tells you to the contrary it is misstating my position. I am committed to improving Tri-Continental to return it to being an excellent company rather than being sub-par."

If Mr. Lipson is successful in overtaking the board, it will be good new to shareholders, who have been forced to suffer through years of sub-par returns under the old board. The new candidates are all well qualified and could help turn around the company.

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Movie Gallery Inc. (NDAQ:MOVI) stock was cut in half recently as they revealed their quarterly financials in their August 10th 8k filing with the SEC. The company said that same-store total revenues for the second quarter of 2006 decreased 4.6% from last year, reflecting a "continued softness in the video rental industry." The company reported a net loss of $14.9m (0.47/share) in the second quarter. This is due to, among other things, a 4.6% drop in same store revenues. The companies balance sheet doesn't look any better - the acquisition of Hollywood Video left the company with a massive debt totaling over $1.1 billion.

While management refused to give guidance, they made it clear that they were working to turn around the company. Meanwhile, the rental movie market may rebound with the recent blockbuster titles leaving the theaters. The Chairman noted:

"Our business continues to be affected by a weak home video release schedule and other industry-wide challenges, but we are making great progress on a number of internal initiatives intended to improve Movie Gallery's financial and operational performance.  We continue to expect a slow late summer, as is typical due to the seasonality of our industry, with gradually improving business conditions beginning in October when the first of several $100 million titles will be released to home video. In the meantime, Movie Gallery is aggressively pursuing opportunities to increase revenues and further improve operating efficiencies.  We have engaged Merrill Lynch to advise us on ways to improve our capital structure as well as Alvarez & Marsal, a leading turnaround management, restructuring and corporate advisory firm.  This great company, together with its dedicated associates and partners, is taking the steps necessary to reposition Movie Gallery for renewed success."

So, is the company worth buying? Probably not at these levels. The company is still riddled with debt, and according to their 8k filing, their "internal initiatives" designed to improve their performance won't be fully realized until late 2007 or 2008. Meanwhile, the company is struggling to deal with its debt-load and declining revenues which may be headed towards a violation of bank covenants in January. Finally, there is no guarantee that the market will improve with competitors like Netflix and Blockbuster who are gaining market share with their online rental programs. Despite these things, the stock is worth keeping an eye on, because a turnaround at these levels could mean big money in the future.

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Last week, billionaire investor Warren Buffet announced in an August 11th 13D filing with the SEC that his company added another half million shares of USG Corp (USG) to his existing 14 million shares. This brings Berkshire Hathaway's stake in the company to over 16%.

USG Corp (USG) is a construction company that went bankrupt in mid-2001 primarily due to asbestos-related lawsuits and a general slowdown in the industry. Since the company's dramatic decline, Berkshire has been working with the company to formulate and enact a bankruptcy reorganization plan. To accomplish this, Berkshire has recently helped the company raise around $1.8 billion through a rights offering to shareholders. While the rights offering is still attractive to current investors (as it is set at around $40/share), Berkshire has pledged to purchase all shares not bought by others in the rights offering to assure that this target it met. This means that Berkshire could end up holding more than 50% of the company's outstanding shares.

So, is USG an investment opportunity? If the company manages to successfully emerge from bankruptcy, there is indeed significant potential upside. The risk of shares being further diluted or disbanded is also greatly reduced by Berkshire's massive holding of common stock. Finally, the fact that Warren Buffet's company (which has a great track record) is behind the reorganization efforts also helps improve the odds. However on the down side, the company has taken a nearly 50% haircut in the last few months, and the results of any reorganization process could take a couple years to materialize. If nothing else, USG is a great company to keep on the radar to monitor the reoganization process.

IMAX Corporation (IMAX) shares nearly halved in the last few days after the company dropped two bombshells on investors. The first one came in their 10Q filing, where they announced the SEC's informal inquiry into their revenue recognition:

"The Company is in the process of responding to an informal inquiry from the U.S. Securities and Exchange Commission regarding the Company's timing of revenue recognition, including its application of multiple element arrangement accounting in its revenue recognition for theater systems ... As reported in the Company's 2005 10-K, the Company recognized revenue in the fourth quarter of 2005 on 10 theater installations in theaters which did not open in that quarter."

According to the company, these ten installations all took place within a reasonable timeframe (although not all in the fourth quarter); however, one of the ten systems had to be removed at a cost of about $0.1m, which was not recorded into income. This is an example of one of the most common types of revenue recognition fraud, and will likely not have a large material impact on the company.

Investors were hit with another bombshell on August 10th, when the company stated in their 8k filing:

"Today the Company reported that while it received significant initial interest [to acquire the company,] from multiple parties, its view is that there are presently no buyers who have indicated a willingness to acquire the Company at a valuation sought by the Board of Directors. Because interest remains from several parties at a lower valuation, however, the Board has authorized the Company's bankers to explore these opportunities. This process is ongoing."

The original range, cited by analysts, was around $12 - $14 per share. It is uncertain what the "interested parties" now being considered by the company's bankers are willing to pay. But with the stock currently trading around $6, the company would not be able to turn down any offer above $9, which would represent a 33% premium over today's price. Moreover, the company has a strong balance sheet, strong growth, and is trading at only 10x earnings after its decline.

So, have investors overreacted to these two events? Well, there is still a strong possibility of buyout at a substancial premium to the current price, and even if the stock doesn't get bought out, it is still in a solid financial position on its own. This is definitely a stock worth keeping an eye on.

UnitedHealth Group (UNH) reported today that they were delaying their 10Q filing due to an options review. The company explained the situation in note 12 of their NT-10Q (replacement of their missing 10Q):

"This continued [options backdating] assessment includes the possibility that certain stock options may require variable accounting under APB 25, rather than fixed plan accounting as they were reflected in the then-current estimate of the maximum potential impact presented in Note 13 of the First Quarter 10-Q. Under variable accounting for these options, total stock option compensation expense is re-measured in each quarter based on the difference between the quoted market price of the stock and the stock option exercise price until the option is exercised. As the market price of the stock increases or decreases, non-cash compensation expense is adjusted and the increase or decrease is recognized over the remainder of the service period related to the options or in each quarter if the option has vested. If, upon conclusion of the independent review, the Company determines that variable accounting is the appropriate treatment for certain stock options, the resulting non-cash charges for 2005 and prior years are likely to be significant because of the substantial increase of the Company’s stock price during the period under review. Under FAS 123R, the accounting standard currently applicable to the Company (and adopted for all historical periods as disclosed in Note 1), the Company believes that the maximum potential impact of all stock option matters under review would not be significant."

So, the problem is determining how these stock options should be valued - with variable accounting or with fixed accounting. As you've read in their statement, variable accounting calls for the options prices to be recalculated each quarter. When a company's stock is rising quickly, variable accounting is the most timely/accurate way to calculate non-cash compensation expense. Fixed accounting can lead to these charges being underestimated, which is the cause for concern.

The non-cash charges mentioned in this statement are charges made by the company that do not require a cash outlay. Other examples of non-cash charges include depreciation, amortization, and depletion accounts. If the non-cash charges increased "substancially" in past years, this would result in lower earnings in the period when the charge was made - and lower earnings means a lower valuation. This is definitely a stock to watch as UNH could quickly become a buy at a discount or become a potential short.