Carmike Cinemas Inc. (NDAQ:CKEC) revealed today that Watershed Asset Management had increased its stake in the company to 6.7% and nominated one of its own to the company's Board of Directors. Watershed has had an investment-only interest in the company for a long time. Back in October 2005, the fund made several recommendations to the Board in a letter attached to a 13D/A filing with the SEC:

1. Eliminate growth capital expenditures
2. Seek amendments to your bank documents and bond indentures to increase restricted payments flexibility
3. Buy back stock with excess cash; if consent from bondholders can not be secured, buy back bonds at a discount
4. Increase your dividend
5. Begin evaluating options to extract value from your real estate portfolio
6. Communicate your new free cash flow strategy

The fund summarized:

"In summary, we believe that,despite the troubles that Carmike has experienced over the last three quarters, the  compan has a number of practicalmopportunities to improve its return to investors. Moreover, with a rebound in box office performance to 2003 or 2004 levels, Carmike's EBITDA, adjusted for the GKC acquisition, could be $115 million or more. Free cash flow available for shareholders could exceed $60 million. With discipline on capital expenses and a commitment to deploy cash with a view to enhancing shareholder value, Carmike's shares would trade dramatically higher."

Since then, the stock has dropped further from a high of $35 to its current levels of $17 per share. Watershed is likely attempting to remedy the situation by electing its own member to the Board in an effort to further influence these changes within the company. In an 8K filing with the SEC yesterday, the Board announced that its current Director - James J. Gaffney - would not be running for re-election, and the company would recommend Watershed's Kevin D. Katari to shareholders. This Board spot will enable Watershed to help the company execute its plan to enhance shareholder value, and ultimately increase the stock price. This makes CKEC a stock definitely worth watching during the next few months.

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The Rowe Companies (AMEX:ROW) announced today that it would commence voluntary proceedings under Chapter 11 in an attempt to restructure the company and return it to profitability. The company has been beaten up from its highs of nearly $6 in 2005 to its current price of just $0.43. The company announced that it plans to sell off its retail division - Storehouse, Inc. - so it can focus on its core manufacturing operations. Meanwhile, Rowe intends to continue with business as usual with not even a payroll modification.

So, why is this company worth noting? Well it turns out that bankruptcies can provide investors with great opportunities to profit. The key is not in buying stock now, but rather after the company emerges from bankruptcy. Often times these companies will issue new shares to creditors, which the creditors have no interest in keeping. Therefore, there is almost always a sell off that floods the market with cheap shares. It is also important to look at the "new" company's financials once (and if) they emerge from bankruptcy. Rowe will likely report pro-forma earnings that will show whether the company is performing poorly overall due to bad management, or whether the retail segment was responsible. If it was only the retail segment causing trouble, and the company has sold it off, Rowe could be an attractive investment long-term.

Not all companies perform great after emerging from bankruptcy, but a combination of creditor selling pressure and a sale of any poorly performing segments tilts the odds in investors' favor. This stock is definitely one to watch as this situation unfolds...

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Napster Inc. (NDAQ:NAPS) announced yesterday that it was hiring UBS AG to assist the Board of Directors in reviewing strategic alternatives, which could include a sale of the company. The company noted that this decision came as a result of unnamed third parties that expressed interest in a possible business combination or acquisition. In the press release, the CEO noted:

"Our goal is to enhance shareholder value which could potentially lead to a new strategic partnership or the sale of the company but in any event our primary focus will remain on growing Napster."

The CFO also highlighted the company's strong financial position:

"Napster has a strong balance sheet with a healthy cash position of $97 million as of the close of the first quarter and we are currently generating annual revenues in excess of $100 million."

While the company certainly is not cheap by traditional measures, it does have some things going for it. With the new flurry of new products and deals in the music industry, many were expecting this kind of consolidation. The online music market is only going to grow, and Napster has a strong brand name and a large customer base. The stock is currently up over 15% on the news. As of now, we can only speculate on a buyout price; however, any future announcements will come in the form of a press release or 8K filing with the SEC - this stock is definitely one to keep an eye on!

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Cost Plus, Inc. (NDAQ:CPWM) - more commonly known by its brand name "World Market" revealed today in a 13D filing that Red Mountain Capital Partners LLC had taken a 6.2% stake in the company.

In the filing, they noted:

"Red Mountain acquired the Common Stock reported in this Schedule 13D for investment purposes because it believed that the Common Stock was undervalued and represented an attractive investment opportunity.

Red Mountain has met with the management of Cost Plus and expects to maintain a dialogue with management regarding, among other things, Cost Plus’ operations, strategic direction, capital structure and corporate governance and Red Mountain’s expectation that management will pursue appropriate measures to enhance shareholder value. In addition, Red Mountain may communicate with other persons regarding Cost Plus, including, without limitation, the board of directors of Cost Plus, other shareholders of Cost Plus and potential strategic or financing partners.

Red Mountain may, at any time and from time to time, take such actions with respect to its investment in Cost Plus as it deems appropriate, including, without limitation, (i) proposing measures which it believes would enhance shareholder value, (ii) seeking representation on the board of directors of Cost Plus, (iii) purchasing additional Common Stock or other securities of Cost Plus, (iv) selling some or all of any securities of Cost Plus held by Red Mountain, (v) proposing, whether alone or with others, a transaction that would result in a change of control of Cost Plus, or (vi) otherwise changing its intention with respect to any of the matters referenced in this Item 4."

This is good news for shareholders of the stock, which has declined from $40 in early 2004 down to its current levels of around $11 per share. Currently the company is trading below its enterprise value of $15.16 per share with a forward P/E of 21x. Any further improvements in the company's bottom line and capital structure would make it substancial undervalued - possibly even a potential buyout target, given the company's market reach. This is definitely a stock worth keeping an eye on!

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We covered Advancis Pharmaceuticals Corporation (NDAQ:AVNC) in an article back on August 18th. We noted that the company had successfully successfully achieved its Phase III PULSYS trials, which demonstrated that it's drug distribution technique was effective. Moreover, we noted a 13G filing (a more passive version of the 13D) which indicated a 17% ownership stake by Deerfield Capital Management - a fund that invests in "special opportunities".

New developments at Advancis make the situation more promising. On September 13th, the company announced that "it has received correspondence from the U.S. Food and Drug Administration (FDA), confirming that the Company's recent successful Phase III clinical trial, along with other data, would be considered adequate for filing a New Drug Application (NDA) via the 505(b)(2) regulatory pathway." The company anticipates filing the Amoxicillin PULSYS NDA in December 2006 or January 2007.

The stock is currently trading around $5.13 per share, up over 20% since our first mention of the company.

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National Atlantic Holdings Corporation (NDAQ:NAHC) revealed on Friday that 8.2% holder, The Commerce Group, Inc. (NYSE:CGI), may be interseted in more than just an investment. According to the 13D filing:

"The purpose of this statement is to report that Commerce is in the process of evaluating a potential transaction with the Issuer, including the possibility of entering into a business combination or other strategic transaction with the Issuer such as an acquisition.

Whether Commerce decides to pursue any action as described above will depend on its continuing assessment of pertinent factors, including without limitation the following:  the results of its due diligence review of the Issuer; the Issuer's and Commerce's business and prospects; the outcome of discussions and negotiations between Commerce and the Issuer concerning the terms and conditions on which any potential transaction described above would take place, including, without limitation, the purchase price for the Issuer's common stock; other business and investment opportunities available to Commerce; general economic conditions; stock market and money market conditions; the attitude and actions of the management and Board of Directors of Commerce or the Issuer; the availability and nature of opportunities to dispose of Commerce's interest; and other plans and requirements of Commerce."

The stock is up over 5% today on the news to $11 - a continuing recovery from its $8.50 lows in late June. The stock has a forward P/E of just over 7 along with over $2.90 per share in cash with no debt - making it a decent acquisition target. However, it is worth noting that the current enterprise value of the stock sits at only $7.29 per share, which reduces the likelihood of any large premium over the current price in the event of a merger or buyout. Despite this, the stock is definitely worth watching as this story unfolds.

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Regular readers of our blog may remember Sizeler Property Investors, Inc. (NYSE:SIZ), which we covered back on September 7th, when the company received a letter from Opportunity Investors questioning why they weren't reviewing competitive bids. Well, Sizeler announced yesterday in an 8K filing with the SEC yesterday that it finally would consider the rival bid from Compson.

The company also revealed more details about the bid: It turns out that the bid is structured as an asset purchase, rather than a bid for the company as a whole. This means that the $16.10 per share would be paid for the real estate holdings of Sizeler; however, other company assets and liabilities would remain. The company said that the actual value to shareholders would be less than $16.10 per share; however, they are still currently working to review the bid.

Interestingly, about 10 minutes later, Revenue Properties Co. (with whom the company has the merger agreement at $15.50 per share) filed a 13D/A pointing out the flaws in the Compson bid:

"Among other relevant aspects of the Proposal, we would note the following: (1) the Proposal is non-binding and subject to negotiation of definitive documentation, (2) the Proposal relates to a purchase of assets only (and not a purchase of the public entity) and, as such, (i) Sizeler (and indirectly its stockholders) would continue to be responsible for significant wind-up costs, (ii) the actual receipt of consideration by Sizeler's stockholders would necessarily be subject to increased risk and delay, and (iii) Sizeler's stockholders would, we understand, be liable as transferees under State law for any liabilities of Sizeler that are not assumed or paid off by the purchaser under the Proposal, (3) while the Proposal refers to debt financing, a commitment letter was not included with the Proposal, (4) the Proposal appears to suggest that only $20 million of equity would be available for the transaction, (5) the Proposal calls for a break-up fee of $12 million, (6) the Proposal includes additional closing conditions relating to asset conveyances and estoppel certificates, and (7) while the Proposal does not seem to contemplate a "diligence out" in the definitive documentation, there appears to be an information review process
built into the Proposal."

The final valuation on the deal have yet to be determined by the company's analysts; however, the door is still open for a more competitive bid from either side. It is possible that Opportunity Investors and other majority holders may also want to review the proposal before siding with either offer. Currently investors are remaining prudent with shares sitting around $15.34 - up 2% since our first mention of the stock.

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We posted Goldman Sachs Group, Inc. (NYSE:GS) earnings announcement on September 12th, which was released a few days before other companies in its industry (investment banking/brokerage). Days later, most of the other brokerages that announced similar results that caused their stocks to move up on the news. Despite how obvious this concept may seem, many investors do not realize this correlation between companies within the same industry. Note the chart below, which illustrates Goldman Sachs (GS), Morgan Stanley (MS), and Lehman Brothers (LEH) - the three major players in the investment banking/brokerage industry:

Notice the strong correlation between the three companies - especially the jumps in price after the earnings announcements. Depending on the market, many large companies announce earnings similar to their peers. Therefore, if an early-reporting company beats analysts with strong earnings, it is worth the time to check out other companies in the industry. This is especially true if the operating results note a strong "macro environment" helping their growth as opposed to internal changes.

You can find companies in the same industry by visiting Google Finance, and you can find their 8k and 10k filings at SECFilings.

Lone Star Steakhouse & Saloon Inc. (NDAQ:STAR) recently passed the U.S. antitrust milestone, but may face another roadblock after new information surfaced today that may put its proposed buyout at risk. In a 13D filing with the SEC, the company disclosed that Deutsche Bank had upped its stake to 9.8%. Moreover, the bank noted in its filing that it "decide to vote against the transactions contemplated by the Merger Agreement and may seek appraisal of the fair value of its shares". This filing comes shortly after activist hedge fund Barington Capital noted (in its 13D filing) that "based on its analysis to date, it believes that the transaction consideration fails to provide adequate value to the Company’s stockholders". Barington also notes (in an attached press release) that their opinion is also shared by other experts:

"The transaction, which is subject to stockholder approval, would only provide stockholders with a 15% premium to the closing price of Lone Star's stock on August 17, 2006, the day before the deal was announced. Barington notes that Lone Star's stock has traded higher than the transaction price less than three months prior to the date the deal was announced. Barington also notes that CL King & Associates' analyst Michael Gallo has reported that the $27.10 share price looks low in their view and that Oppenheimer & Co. analyst Michael Smith currently rates Lone Star a buy with a 12-month price target of $32 a share. Based on Barington's evaluation of the transaction thus far, Barington does not believe that the consideration adequately reflects the value of the Company's extensive real estate holdings and upscale Sullivan's and Del Frisco's restaurant brands."

Combined, these two shareholders own 19.2% of the company's outstanding shares. With so much uncertainty surrounding the situation, the company may face a tough proxy vote in the fourth quarter of this year (to be announced before Oct. 15th). Meanwhile, the CEO of the company revealed in an August 28th filing that his stock and options would enable him to make roughly $80 million after the transaction. With 1,178,639 options at $12.41 per share, the CEO has a strong interest in making this transaction go through. If the merger fails, the CEO's risk-free options money will have to be exercised - costing him over $14 million while taking the additional risk of the company underperforming in the future. Whether or not the vote goes through remains to be seen, but with the stock currently trading above the buyout price, some investors are banking that new bidders will surface or the company will be saved by Barington and company. This stock is definitely worth keeping on the radar as this situation unfolds.

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Zunicom, Inc. (OTCBB:ZNCM) announced on September 12th that it would be spinning off its wholly owned subsidiary, Universal Power Group. The new supply chain logistics company would trade on the Amex with the symbol UPG. In UPG's S-1 statement with the SEC, they elaborate on their company:

"We are (i) a third-party logistics company specializing in supply chain management and value-added services and (ii) a leading supplier and distributor of portable power supply products, such as batteries, security system components and related products and accessories ... These services enable our customers to operate more efficiently and enhance their business by providing them with cost savings through effective sourcing, reducing inventory maintenance levels and streamlining distribution and order fulfillment. In addition, we also source and distribute batteries and portable power products under various manufacturers’ and private labels, as well as under our own proprietary brands, UPG™, Adventure Power®, UB Scootin®, Batteries & Beyond™, Charge N’ Start™ and UNILOK™. We believe that we have one of the largest inventories of batteries in the United States and are one of the leading domestic distributors of sealed, or “maintenance-free,” lead-acid batteries.

Our customers include original equipment manufacturers (“OEMs”), distributors and retailers, both on-line and traditional. The products we manage and distribute are used in a diverse and growing range of industries, including automotive, marine, recreational vehicles, medical devices and instrumentation, consumer goods, electronics and appliances, marine and medical applications, computer and computer-related products, office and home office equipment, security and surveillance equipment, and telecommunications equipment and other portable communication devices. Our largest customer is Brink’s Home Security (“Brinks”), one of the largest installers of security systems in the United States.

In each of the last nine years we have achieved double digit growth in net sales. Over that nine-year period, our compound annual growth rate in net sales was 32.86%. Similarly, our income before taxes has grown in four of the last five years. Over that five-year period, our compound annual growth rate in income before taxes was 18.26%. For 2005, our net sales were $81.3 million, and our income before taxes was $1.9 million. For the six months ended June 30, 2006, our net sales were $44.2 million, and our income before taxes was $1.2 million."

Unlike most spinoffs, this company has a long operating history (having first organized in 1968) - this removes one of the key risks associated with spinoffs. However, this stock does have one big risk - Brinks Security accounts for nearly 50% of their business. Although they have been lowering this number during the past few years, the loss of Brinks would be a significant hit to the company's earnings. The contract with Brinks is up for renewal in May 2007.

So, will this new stock be a buy? Well, spinoffs generally outperform the market because of one key factor that often makes them undervalued... When parent companies launch a spinoff, shares of the spinoff are distributed to parent company shareholders. Often times these shares are unwanted and immediately sold. This creates a windfall that artificially deflates the stock's price (since there was no change in fundamentals). This makes UPG a stock worth watching as it gets closer to spinning off.

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