Medtronics Inc. (NYSE:MDT) has found itself abound in rumors recently. The company told shareholders at last Thursday's annual meeting that the company was not for sale, despite rumors that Johnson & Johnson was preparing a bid. Medtronics CEO Art Collins insisted that the company had not been seeking a buyer; however, despite this rebuke, the possibility for a takeover bid still exists. The idea of a possible buyout came as a result of the company's sliding stock price, which dropped from $60/share earlier this year down to its current range in the $40s. The company attributed this drop to the industry-wide recall of cardioverter defibrillators along with reduced coverage of medical devices by government programs and lower ICD revenues. Typically, when companies experience such drops, they become vulnerable to buyout offers and even hostile takeover bids.

Interestingly, on August 28th three company directors purchased or acquired large blocks of shares at market close. These transactions included the acquisition of over 1,500 shares, an open market purchase of 1,000 shares, and a string of open market purchases totaling 25,000 shares. The transactions all occurred on August 24th - the day of the annual meeting. Are these insiders simply making regular purchases based on the notion that their company will perform well in the future, or do they know something? Although there is an absence of call options (which are the most telling indicator that mangement knows something that would affect the price in the short-term), the purchases do raise question especially since this is the first instance of open market purchasing (as opposed to acquisition) in several months. This is definitely a stock to keep an eye on...

Related Companies
Biomet, Inc. (BMET)
Boston Scientific Corp (BSX)
St. Jude Medical, Inc. (STJ)

Bally Total Fitness (NYSE:BFT) recently announced, in an ammended 13D filing with the SEC, that they had signed a confidentiality agreement with activist hedge funds Liberation Investments and (earlier) Pardus Capital. According to the most recent filing:

"On August 28, 2006, a representative of LIGLLC executed a confidentiality agreement (a copy of which is attached hereto as Exhibit 99.34, the “Confidentiality Agreement”) with the Company pursuant to which the Company agreed to make available to LIGLLC and certain of its representatives on a confidential basis certain information (the “Evaluation Material”) of the Company, including, without limitation, information relating to the Company’s business, products, markets, condition (financial or other), operations, assets, liabilities, results of operations, cash flows and prospects."

So, why do they want this information?

"Following their review of the Evaluation Material, the Reporting Persons may determine to attempt to arrange or participate with third parties in an extraordinary corporate transaction with respect to the Company, such as an acquisition, a sale of all or substantially all of the Company’s assets, a reorganization, a recapitalization, or a significant debt or equity investment."

These hedge funds have a long history with Bally: Last year, the two hedge funds launched a proxy battle to gain control of the board - a battle eventually led to ousting of then-CEO Paul Toback and the appointment of two Pardus-supported board members. The company then made an unsuccessful attempt to put itself up for sale. Meanwhile, Bally's shares plummeted to under $3/share from a high of $9/share just a month earlier. This freefall was the product of poor operating results posted at the end of July along with the uncertainty surrouding the company's future.

Now, with these latest confidentiality agreements, the hedge funds will have more indepth access to the company's financial condition to either put it up for sale or begin a restructuring plan. Given the fact that Bally's stock is near a 52-week low right now, a possible buyout is the most likely of the two. If the hedge funds are successful, it could be a substancial gain; however, there is always the risk that the hedge funds will simply bail on the investment and cut their losses (like Pirate Capital did to OSI not long ago!). So far investors have applauded these announcements, bringing the stock up nearly 15% since the original announcements. Though this is purely speculative at the moment, it is a great stock to keep an eye on and perhaps play with longer-term options.

Related Companies
Lifetime Fitness Inc. (LTM)
Town Sports International Holdings, Inc. (CLUB)

Educate Inc. (NDAQ:EEEE) announced yesterday in an 8-K filing with the SEC that they had sold off their Education Station business segment in an $18 billion deal. The business segment, which helped public schools comply with the No Child Left Behind Act, was sold for $6 million with another $12 million being paid for software licensing and support. The business unit has long been a drag on the company's earnings despite increasing revenues. The stock moved up 11% in today's trading as investors applauded the move, which should help the company follow through with its turnaround plans that caused so much difficulty last quarter. The stock is currently being heavily traded by technical analysts; however, if the turnaround is successful, it may become a decent play for fundamental investors as well.

Related Companies
The Princeton Review, Inc. (REVU)
The Washington Post Co (WPO)
EVCI Career Colleges (EVCI)

New Frontier Media Inc. (NDAQ:NOOF) announced yesterday in an 8-K filing with the SEC that activist hedge fund Steel Partners had expressed interest in leading a management buyout. According to the filing:

"At the regularly scheduled Board of Directors meeting of New Frontier Media, Inc., on August 15, 2006, Mr. Warren Lichtenstein of Steel Partners II, L.P., was provided, at his request, an opportunity to address the Board of Directors. Mr. Lichtenstein expressed an interest in leading a 'management buyout' of the shares of New Frontier Media, Inc. Mr. Lichtenstein expressed a willingness to pay a premium over the market price but declined to state the price per share or the amount or range of premium over market price that he is prepared to offer."

Two days after this announcement on the 15th, there were five insiders who obtained 25,000 call options at $7.80 (found in Form 4s). Note that call options are short-term derivatives used to take advantage of short-term price movements. This turned out to be a great buy as the stock moved up around 10% after the 8-K was released yesterday. This just goes to show how important it is to keep an eye on management activity, especially when activist hedge funds are involved.

So, is the stock still a good deal? Steel Partners likely anticipated this announcement and price movement, and therefore are probably willing to pay a premium to even this price if the transaction goes through. The stock is still cheap, trading at just 16x earnings with solid growth, good margins, and a strong cash position. This is definitely a stock worth watching, and perhaps getting involved with using an options play once things get a little clearer.

Related Companies
Playboy Enterprises, Inc. (PLA)
EchoStar Communications (DISH)
DirectTV Group, Inc. (DTV)

Double-Take Software, Inc. took one more step towards becoming a public company with an S-1 filing on August 10th. The company would be the third data company to IPO this year following CommVault and Riverbed. Double-Take provides affordable backup and data recovery software to small to midsized enterprises - a market that is predicted to grow at a 25% annualized rate.

Will the company be a good buy? Well, the company has increased its revenues from $7.1m in 2001 to over $40m in 2005, although it only recently turned a profit. The company also acquired a software distributor (Sunbelt System Software) a few months ago to help expand. Sunbelt had been a long-time partner, authorized training provider and reseller for Double-Take software. The acquisition provided the company with a well qualified support and training staff as well as a stronger physical presence in Europe.

In addition to strong fundamentals, the company is also in an interesting position in their market. They are very small compared to larger competitors like EMC, and with the recent M&A activity many people thought that Double-Take would take the acquisition route instead of IPO'ing. Depending on their final valuation, the company might eventually become an acquisition target as a public company given their small market cap and strong market position.

Overall, the pricing on the IPO remains to be seen, so it is not possible to fully speculate as to how undervalued the stock is or whether or not it would be an acquisition target; however, it is definitely an IPO worth keeping an eye on.

PW Eagle Incorporated (NDAQ:PWEI) manufactures and distributes polyvinyl chloride pipe and fittings and polyethylene pipe and tubing products used for turf and agricultural irrigation, natural gas transmission, water wells, fiber optic lines, electronic, and telephone lines. The company has triped in price since mid-2005 as a result of a restructuring, refinancing, and strong operating results. However, their strong balance sheet and cash flows attracted some unwanted attention...

The company revealed in a 13D filing last week that activist hedge fund Pirate Capital had increased its stake in the company from 17% to just over 21%. Pirate also bought almost $300k worth of additional shares two days later. Why? In their original SC13D filing on March 10th, Pirate said:

"The Reporting Persons originally acquired Shares for investment in the ordinary course of business because they believed that the Shares, when purchased, were undervalued and represented an attractive investment opportunity. The Reporting Persons intend to encourage the Issuer to actively pursue strategic alternatives to maximize shareholder value, including the potential sale of the company."

In the same filing, Pirate also announced its intention to nominate its own directors to the company's board during their 2006 annual shareholders meeting. Moreover, they demanded to see the company's books and shareholders on record - a move which usually indicates that the fund is going to solicit a proxy battle. This move was supported by another activist hedge fund - Caxton Associates - who also has a large interest in the company. PW Eagle, eager to avoid a proxy battle, quickly agreed to expand the board of directors and give both hedge funds a seat on the board. This immediately resulted in a special committee appointed to "explore strategic alternatives" for the company, headed by Pirate's own Zachary George. And it was this committee that likely pressured the company into instituting the $40m share buyback, which was recently announced in the company's 10Q filing with the SEC.

Is this buyback all that the hedge funds were seeking or is there something more? Many traders are speculating that something else is in the works. Caxton recently acquired a lot of call options, which are instruments that make the most money on short-term price movements, not long term investment. This, combined with Pirate's 5% increase in ownership, indicates a lot of conviction by those closest to the company. What exactly will happen remains to be seen, but one thing is certain - PW Eagle is definitely a stock to keep an eye on.

Related Companies
Westlake Chemical Corporation (NYSE:WLK)

The Warnaco Group, Inc. (NDAQ:WRNC) is the most recent target of the Barington Group, an activist hedge fund seeking to "unlock shareholder value" through any means possible. In their 13D filing with the SEC on the 21st, Barington disclosed a 5% stake in the company and outlined the issues it wanted the company to address:

• the improvement in execution by the Company’s senior management team and oversight provided by its Board of Directors in light of a string of what the Reporting Entities believe to be recent operating disappointments stemming from (a) the recently announced financial restatement caused by accounting issues at the Company’s Chaps division and swimwear segment and the resulting Securities and Exchange Commission informal inquiry, (b) disruptions and excess costs associated with poor implementation of SAP at the Company’s swimwear segment, and (c) missed revenue growth and gross margin targets;
• a substantial reduction in equity grants, including stock options and restricted stock, which have averaged 5.0% annually or a staggering 17.6% cumulatively of the Company’s shares outstanding over the past three and one-half fiscal years;
• the improvement in gross and EBITDA margins, which currently trail peer averages by approximately 800 and 600 basis points, respectively, through a reduction in SG&A and corporate expenses and better merchandising;
• the disposition of non-core brands and licenses, especially in underperforming divisions of the Company's intimate apparel and swimwear segments; and
• the exploration of strategic alternatives, including, without limitation, the possible sale of the Company.

The company's stock rose slightly on the news, settling around $19 per share. The company is trading at a discount with a 0.82 PEG ratio and a 12x forward PE ratio. The company is also solid fundamentally with solid brand names like Speedo, Calvin Klein, Chaps, Nautica, JLO and Ocean Pacific. Any of the actions mentioned above would likely boost the price of this stock significantly.

Currently, these are just words; however, Investors should watch for future Form 4 and 13D filings from Barington as the fund positions themselves to convince management to make these changes happen. Investors should also watch for a response from the company's management and/or any meetings with the Barington Group. Warnaco is definitely a stock worth keeping an eye on as this story unfolds.

Related Companies
Maidenform Brands, Inc. (MFB)
Kellwood Company (KWD)
V.F. Corporation (VFC)

Google Inc. (NDAQ:GOOG) made an interesting filing on July 20th that is only now starting to garner attention after the WSJ covered it. The filing is a 40-APP, which is an "application for exemption and other relief filed under the Investment Company Act of 1940". Although the document is only a automated notification generated as a result of a paper submission, it does highlight Google's concerns.

The Investment Company Act requires any company that holds more than 40% of their worth in securities to disclose their holdings - as they are considered in the eyes of the SEC as an investment company/fund. Google currently has just over $14 billion in assets with almost $6 billion of that in securities - unfortunately for Google, that's 42%. The company also has $4 billion in cash! Google currently holds primarily U.S. Governement bonds, but is seeking to move its money into higher yielding municipal bonds and high-grade corporate bonds. Notably, companies like Yahoo and Microsoft obtained similar exemption which allowed them to utilize higher yield investment tools.

It is unclear as of now whether or not Google will be granted the exemption. If they are not, a look into their investments might tip investors and their competition off as to future acquisitions and other intentions. What does this mean for Google investors? Well, if they are able to gain the exemption, it will mean increased investment returns for the company. These returns could be substancial given the large amount of cash and securities that the company has invested. If they are unable to gain the exemption (which was Yahoo's problem before they tried a second time), they may be forced to reveal their equity holdings, which would give investors a good look into possible acquisitions and areas of interest for Google. Either way, this is definitely something to watch.

Related Companies & Competition
Yahoo! Inc. (NDAQ:YHOO)
Microsoft Corporation (NDAQ:MSFT)
Baidu.com, Inc ADR (BIDU)

Science Applications International Corp, or SAIC, announced yesterday in an 8k filing with the SEC its plans to go through with their restructuring and initial public offering. SAIC is one of the world's largest private companies, providing technological products and services to various private and governmental agencies - the company is most well known for its close ties to the CIA and Department of Defense. SAIC initially planned on going public in the first few months of 2006; however, they delayed the process in December after it incurred unexpected costs from the a contract with Greece, which resulted in a $115m loss.

In a memo, the company outlined the upcoming IPO process:

"We will file an amendment to our IPO registration statement with the SEC in early September that contains a prospectus including updated financial statements for the first six months of fiscal 2007. The prospectus will also show an initial or preliminary IPO price range within which we expect to sell shares in the IPO. We will determine the price range in consultation with our underwriters (Morgan Stanley and Bear Stearns), which will reflect current market conditions and recent financial performance. Shortly after filing our IPO registration statement, senior management will embark on a "road show" to present information about our company and its prospects to potential investors."

When the company updates its prospectus it will give shareholders a better view of the company's current financials. With many related companies experiencing a slowdown recently, many analysts are casting doubt as to whether SAIC will be able to IPO at a price close to their June projected price of $47.28. Regardless, when one of the largest private companies on earth is going to IPO, it is always something worth keeping an eye on...

A recent report by Glass, Lewis & Co. revealed that the number of delinquent quarterly filings by companies with a market cap over $75m has hit a new high of 138 after the previous record of 120 set just last quarter. The number is about 52% higher than the number one year ago at this time. The commission attributes most of these deliquencies to the recent options backdating scandel that has hit the market, which have caused many companies to take another look at their books before releasing their most recent numbers. Over 80 companies are currently under some kind of investigation from the SEC - 48 of them have delayed their quarterly filings as a result. So far, only two companies have had prior CEOs convicted. Other reasons for the delays include restatements and unresolved accounting issues. The final impact of these delays remains to be seen, with some analysts suggesting that this will all blow over and others saying this is something that cannot be ignored.

Aether Holdings Inc. (NDAQ:AETH) has decided to switch businesses yet again. For those who don't remember, Aether started out in the wireless business back before the dotcom boom. After reducing its workforce by over 99% and watching its stock price move from mover $300 to under $3, the company decided to get into the mortgage securities business. Now, in a recent 8-k filing with the SEC, they announced they were changing businesses yet again - this time to the footwear business (through their NexCen Brands subsidiary). According to the filing:

"On August 21, 2006, Aether Holdings, Inc., a Delaware corporation (the “Company”), NexCen Franchise Brands, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“NexCen Brands”), and NexCen Franchise Management, Inc., a Delaware corporation and wholly owned subsidiary of NexCen Brands (“NexCen Management,” and together with NexCen Brands, the “Purchasers”), entered into an Equity Interest and Purchase Agreement (the “Purchase Agreement”) with Athlete’s Foot Marketing Associates, LLC (“Seller”), Athlete’s Foot Brands, LLC (“Brands”), The Athlete’s Foot Marketing Support Fund, LLC (“Support Fund,” and together with Brands, the “AFB Companies”), Robert J. Corliss (“Corliss”), Donald Camacho (“Camacho”), Timothy Brannon (“Brannon”) and Martin Amschler (“Amschler,” and together with Corliss, Camacho and Brannon, the “Shareholders”)."

They also announced their exit from the mortgage securities business with the sale of their remaining assets:

"Exit from Mortgage-Backed Securities Business:

At the same time as it approved the Acquisition, the Company’s Board of Directors (the “Board”), taking into account a range of business, strategic and financial considerations, decided that it was in the best interests of the Company and its stockholders for the Company to sell its remaining MBS investments for the purposes of exiting the MBS business and allocating those assets to support the growth and development of Aether’s IP business. The decision to exit the MBS business and focus on the IP business is not conditioned upon the completion of the Acquisition and, in light of the Company’s intention to finance a portion of the Acquisition purchase price with third-party debt, the Company expects to complete the Acquisition without needing to liquidate any of its MBS investments.

Because the reallocation of the Company’s MBS resources to the IP business may be considered a 'sale of all or substantially all' of the Company’s assets under Section 271 of the Delaware General Corporation Law, the Company will seek stockholder approval at its 2006 annual meeting to effect this reallocation of its assets. The Company expects to file a proxy statement for the annual meeting with the Securities and Exchange Commission within the next two weeks and anticipates that the annual meeting will be held early in the fourth quarter."

The company's new business plan is to convert all the stores it acquires into franchises and then maximize their value by building their brand. So why should we be concerned with such an unfocused company with a long history of losses that is currently struggling with it's second turnaround attempt? Well, because of the long history of losses (and its bank account)! In the tax world, there is something known as a "net operating loss carryforward" (NOLs), which enables companies to deduct their past losses against future earnings. This will give Aether a big break as it works to turnaround the company in a new market. Moreover, the company also has about $2/share in cash! This will help the company with funding acquisitions and paying off long-term debt. All things considered, the company has a dirty past and a long road ahead of it, but management has a lot of leftover "benefits" available to them to effectively capitalize on their new strategy. Whether or not they are able to do so remains to be seen; however, the stock definitely warrants keeping an eye on!

Intermagnetics General Corporation (NDAQ:IMGC) announced yesterday in a 14A filing with the SEC that they plan on moving forward with their merger plans with Royal Philips through their subsidiary Philips Holding (NYSE:PHG). This merger, which was originally announced on June 15th, had been the subject of two outstanding shareholder lawsuits that sought to prevent the merger. The lawsuits alleged that the company had "breached their fiduciary duties by failing to publicly announce an open bidding process or otherwise seek additional officers to acquire Intermagnetics, and by failing to provide full disclosure to certain material financial information." In their filing, the company noted that these lawsuits had been resolved, but gave no details. Shareholders who are on record as of August 16th will be able to vote on the proposed merger on September 26th.

Their proxy statement outlined the details of the transaction:

"If our stockholders adopt the merger agreement and the merger is subsequently completed, you will be entitled to receive $27.50 in cash, without interest, for each share of Intermagnetics common stock you own, unless you have properly exercised your appraisal rights. On June 14, 2006, the last full trading day prior to the public announcement of the merger agreement, the closing price of our common stock was $21.38 per share."

The lawsuits may have had some merit. The buyout premium in this case is only 28% - at a price less than a recent 52 week high made by the company. Why wasn't a bidding process announced so other suitors could potentially offer a greater amount to current shareholders? The board of directors, who approved this plan, are supposed to always act in the best interest of shareholders...

With these lawsuits settled, the company only needs a proxy vote and approval from the EU before moving forward. With a 70% institutional ownership stake, it is likely that the merger will move ahead as planned.

Related Companies
American Superconductor Corporation (NDAQ:AMSC)
General Electric Company (NYSE:GE)
ABB Ltd (ADR:ABB)

Activist hedge fund Pirate Capital announced its final slate of nominees for the Cutter & Buck, Inc. (NDAQ:CBUK) board of directors today in their ammended 13D filing with the SEC. According to the filing:

"On August 18, 2006, pursuant to discussions between representatives of the Issuer and representatives of the Reporting Persons, the Issuer notified the Reporting Persons of its decision to include David A. Lorber, a Director and Senior Investment Analyst at Pirate Capital, amongst the Issuer's eight nominees for election as directors at the Issuer's 2006 annual meeting of shareholders (the "Annual Meeting"). Concurrently, the Issuer also notified the Reporting Persons of its decision to include Thomas O'Riordan, an industry expert recommended to it by the Reporting Persons and considered by the Governance Committee of the Issuer, amongst the Issuer's eight nominees for election as directors at the Annual Meeting. Mr. O'Riordan is a consultant to the footwear, apparel and sporting goods industries and was recently a senior executive and director with Fila. Mr O'Riordan is also a member of the Board of Directors of Innovo Group, a publicly traded apparel company."

Pirate also revealed a 13.5% stake in the company, amassed since December 10, 2004, when it first announced it's ownership in the stock. After buying at the top and watching the stock sink from the mid-14s to it's current level below $10, the fund is now ready to step in and unlock shareholder value. Although it may be a long-term play, Pirate Capital has a very skilled management team and a high rate of success when it comes to unlocking shareholder value through turnarounds or liquidations. Given their likely averaged price, you can be sure that they are looking for a significant premium to the current price. CBUK is definitely a good stock to keep an eye on when it comes closer to the board's election at the upcoming shareholder's meeting.

Related Companies
Ashworth, Inc. (ASHW)
Sport-Haley, Inc. (SPOR)
Hartmarx Corporation (HMX)
Oxford Industries, Inc. (OXM)

Great Wolf Resorts, Inc. (NDAQ:WOLF) has recently drawed some confusion from investors after an August 15th 13D filing made by Hayground Capital. The confusion arose when Hayground - the Wolf's largest shareholder - announced the the company had contacted him seeking advice regarding a possible sale of the company:

"On August 9, 2006, Bruce Neviaser,  Chairman of the board of directors (the "Board") of the Issuer,  called Mr. Ader to elicit Mr. Ader's views  regarding a possible sale of the Issuer.  Mr. Neviaser  expressed his belief that the Issuer has a worth of at least $16 per share of Common  Stock  and  sought  Mr.  Ader's advice as to which  investment  banking firm to contact and how best to go about an  organized a sale of the Issuer as a way to maximize  the value of the Common Stock for all  shareholders.  Mr.  Ader  expressed  his strong  support  for the Issuer's  engagement of an investment  banking firm to explore a sale and stated that any one of a number of major investment  banks could add substantial  value in conducting an organized sale process."

The stock immediately jumped from $11 to $12 on this announcement. (Side note: The next day, at around 2pm, there was a Form 4 filed with the SEC by Bruce Neviaser - the same man who had interest in a possible sale of the company and insisted it was worth at least $16 - announcing a sale of 3,500 shares he owned. Moreover, this same man had told Mr. Ader that he intended to sell 200,000 additional shares on the open market, despite the buyout proposition.) A day later, the company then released a press release via an 8K filing (PR) saying the following:

"Great Wolf Resorts, Inc. (NASDAQ: WOLF), America’s leading family of indoor waterpark resorts, today said that the company has no plans to sell the company or engage an investment banking firm to explore the possible sale of the company. Yesterday, the company received a letter from Hayground Cove Asset Management LLC, a shareholder, in which Hayground encouraged the company’s Board of Directors to engage an investment banker to explore a sale of Great Wolf Resorts."

If the board wasn't interested in a sale of the company, why did they contact Mr. Ader? Apparently, the board of directors "routinely discusses prospects for Great Wolf Resorts", which included a possible sale of the company. That's fine, but just how serious is Hayground in seeking a sale of the company? Well, they had this to say in the 13D filing:

"By letter  dated  August 14, 2006 to the Board,  Mr. Ader  reiterated the highlights of his August 9 discussion with Mr. Neviaser and articulated his view that at this time shareholder value would be maximized by a sale of the Issuer. He encouraged the Board to take immediate steps to unlock long-term  shareholder value by retaining an investment banking firm to explore the sale of the Issuer. Mr. Ader noted that the Issuer's two  significant earnings  shortfalls in 2005 caused serious damage to  management's  credibility  and the Issuer's  overall reputation  with  investors, resulting  in  the  Common  Stock trading  at  a significant  discount to underlying  asset value.  Mr. Ader requested a meeting with the Board to discuss the Reporting  Person's views  regarding  valuation of the  Issuer." (A copy of the letter can be found attached to the filing link above)

With less than 9% of the float, Mr. Ader might have some difficulty starting any kind of proxy battle; however, if he did manage to get ahold of more shares he might be able to convince enough investors to force a sale, especially given the company's poor performance in recent quarters. This stock is definitely a good one to keep on the radar as this story unfolds.

Related Companies
Morgans Hotel Group Co (Q:MHGC)
Interstate Hotels and Resorts, Inc. (N:IHR)
Lodgian, Inc. (A:LGN)

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.

Related Companies & Competitors
Hewitt-Packard Company (N:HPQ)
Gateway Inc. (N:GTW)

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.

Related Companies & Competitors
Thornburg Mortgage, Inc. (NYSE:TMA)
Federated Investors, Inc. (NYSE:FII)
American Capital Strategies, Ltd. (NDAQ:ACAS)
Allied Capital Corporation (NYSE:ALD)
Global Cash Access Holdings, Inc. (NYSE:GCA)

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.

Related Companies & Competitors
BlockBuster Inc. (NYSE:BBI)
Netflix, Inc. (NDAQ:NFLX)
Hastings Entertainment, Inc. (NDAQ:HAST)
GameStop Corp (NYSE:GME)
CBS Corporation (NYSE:CBS)

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.

Since the beginning of the year, Websidestory Inc. (WSSI) has halved from $20 in February to its current level of around $10. The most recent sell-off was due to a recent 10Q filing with the SEC on the 8th in which the company announced lower than expected results for the quarter due to a continuing increase in expenses. This was followed by a downgrade by JMP Securities, which dropped the stock even further to its current levels.

So, why should you care? Well, Websidestory filed a series of Form 4s yesterday, just as the stock is hitting its 52-week low at around $10. Director William Harris disclosed that he bought just over 199,000 shares on August 8th at $9.85 to $10.14 per share. This brings his stake to almost 207,000 shares. Director Douglas Lindroth and Chairman Jeffrey Lundsford also disclosed purchases of 5,000 and 10,000 shares, respectively. Investors are betting that this insider buying is an indicator that the company is poised for a turnaround after a devastating year.

To add to this bit of optimism, an analyst for ThinkEquity, one of the better research firms around, called the investors’ sell-off “irrational” stating that “the market largely ignored management’s focus on building out a stronger business … We were disappointed by the earnings miss and margin compression, but were also equally encouraged by record booking activity, revenue outperformance, customer wins, and raised revenue guidance, all important indicators of a company prospect”. Canaccord Adams analysts agreed with this sentiment stating that the sell-off represents “a buying opportunity for investors” citing recent acquisitions which have enabled the company to better compete in the digital marketing sector.

So, is Websidestory Inc. a buy at these levels? Insider buying and analyst opinion indicate a resounding “yes”; however, it is difficult to say how long it will take management to implement its strategies and curb its expenses. The stock is definitely worth keeping an eye on as future filings paint a clearer picture of any turnaround efforts.

Celebration Express Inc. (BDAY) is the target of a so-called Shareholder Value Committee consisting of several independent funds, namely Spencer Capital and Thesis Capital. The Committee collectively controls approximately 19% of the company. The group unsuccessfully petitioning the board for two seats (while controlling nearly 20% of the company) in June. They were stopped dead in their tracks when the board reacted by instituting a "shareholder rights plan" that severely limited voting power, in an apparent attempt to thwart the group. In an open letter to shareholders dated August 7th, the group commented on the situation:

"We are now convinced, however, that we must have even greater Board representation than we previously requested in order to influence the Company's strategic direction in a meaningful way. Recent Board actions alarm us as shareholders: only last month, in an apparent response to our efforts, the Board unilaterally implemented a poison pill and adopted several bylaw amendments aimed at limiting shareholder rights. Significantly, the Board changed the Company's bylaws so that a majority of the Company's shareholders can no longer amend them. Rather, a supermajority of 66. % of the outstanding stock is now required."

Undeterred, the group is now threatening a proxy battle, saying in their 13D filing:

"In connection with the upcoming Annual Meeting, the Filers and the Shareholder Value Committee intend to file a proxy statement with the Securities and Exchange Commission (the "SEC") to solicit stockholders of the Company with respect to the election of directors ... [the group] determined to nominate Dr. Shubin Stein, Mr. Roseman and Matthew C. Diamond for election at the Company's 2006 annual meeting of stockholders (the "Annual Meeting"), which the Filers expect will be held in October 2006."

The group stated in an earlier filing that "they believe that the market price of the Common Stock does not adequately reflect its intrinsic value." This vague 13D filing was later clarified in the letter to shareholders:

"If elected, our nominees will push to establish a Board committee to consider and pursue strategic alternatives for the Company, including a possible sale of the Company. We believe this is a necessary step toward maximizing value for all shareholders, and a process that should be undertaken immediately."

A possible sale of the company would mean quick price appreciation. Most of the groups shares were acquired at or above the current market price - so they would likely be seeking a great premium in the event of a sale. The group plans to file its proxy statements and individually contact shareholders in the coming month before the vote. This company is definitely worth keeping an eye on - if the Shareholder Value Committee succeeds, it could mean quick profits!

Xtent Inc. announced their plans to IPO yesterday with their S-1 filing with the SEC. The company is seeking a $103m IPO to enter the $5b drug eluting stent (heart device) market. The filing noted that coronary artery disease, or CAD, is the most common form of cardiovascular disease and the number one cause of death in the United States and Europe. The disease kills over 650,000 people each year and afflicts over 13 million Americans, according to the American Heart Association. This makes the market for their product one of the largest in the medical devices world.

Xtent says that “current commercially available stent systems include stents with fixed-lengths of up to 33mm, and require a separate device for each stent used. Fixed-length stent systems require physicians to estimate the size and shape of the artery's lumen, and then use their judgment to select the proper length and diameter stent for the lesion.” The company aims to combat these shortcomings by creating customizable drug eluting stent systems that are “designed to enable the treatment of single lesions, long lesions and multiple lesions of varying lengths and diameters, in one or more arteries with a single device.” This, in turn, would simplify the process and enable physicians to act more quickly and accurately.

The company plans to have its products on the market in Europe in late 2007 and the United States at the end of 2009 (at the earliest). The company also faces approval requirements by the FDA, PMA, and European agencies before it can market any of its products to the public. Although risky, if the company’s technology is successful, it may become a cornerstone in the $5b (and growing) market for stent heart devices. Also, short-term traders might want to keep an eye on the IPO - sometimes it is a good impulse buy at open and then a fade in the afternoon.

Lilly Eli & Co filed their quarterly 10-Q statement with the SEC on August 4th, which outlined their current financials and also brought to light the magnitude of lawsuits coming as a result of their two blockbuster drugs Zyprexa and Prosac. The company is also involved in several other lawsuits, including a class action lawsuit and corporate lawsuits involving insurance coverage.

The company was slammed back in 2005 when the U.S. Attorney General announced that it was investigating the company for Medicaid fraud. The government argues that Lilly illegally promoted Zyprexa for unapproved uses, and seeks to recover millions of dollars on behalf of customers. This case is still pending and, the company warned, could expand from Zyprexa to include other company drugs. The company also stated that it settled 10,500 Zyprexa-related lawsuits last year; however, 7,600 remain with 850 tolled claims. Both of these cases are still pending. The problem now is that insurance companies are attempting to reduce their liability in the matter. In their 10-Q filing, the company stated:

"We have insurance coverage for a portion of our Zyprexa product liability claims exposure. The third-party insurance carriers have raised defenses to their liability under the policies and are seeking to rescind the policies. The dispute is now the subject of litigation in the federal court in Indianapolis against certain of the carriers and in arbitration in Bermuda against other carriers. While we believe our position is meritorious, there can be no assurance that we will prevail."

Later in the filing, the company also notes:

"We have experienced difficulties in obtaining product liability insurance due to a very restrictive insurance market, and therefore will be largely self-insured for future product liability losses. In addition, as noted above, there is no assurance that we will be able to fully collect from our insurance carriers on past claims."

The company recorded a net pre-tax charge of $1.07b during the second quarter of 2005 to cover the Zyprexa lawsuits and reserves "to the extend that they can formulate a reasonable estimate of". While all pharmaceutical companies often experience a number of lawsuits centered around their drugs, Lilly's $1.07b charge was above average. And, the company could face even higher charges in the future if it fails to defend its right to insurance payouts, loses insurance coverage, or fails to defend itself in the large government and class action lawsuits that are currently pending. The result will either be a cheap buy, if the company prevails when the dust settles; or, it could mean a potential diseaster for the company. Either way, it is definitely something to keep an eye on.

Liberation has had an eye on Multimedia Games (MGAM) since late May of this year when it began quietly acquiring shares on the open market. Since then, the investment group has amassed an 8% stake in the company and has begun an activist campaign to increase shareholder value.

In Liberation’s initial June 30th filing with the SEC, they stated that they had met with Michael Maples, Chairman of the Board of the Company. During the meeting, the two parties discussed ways in which to maximize shareholder value. In particular, the investment group “urged the company to focus on a transaction or restructuring to monetize the Company’s participation arrangements with Native American tribes in the State of Oklahoma and use the proceeds to implement a substantial stock buyback or otherwise create a mechanism to deliver maximum value to shareholders”. Finally, the group warned that if the company did not demonstrate “in the near term” that it has made progress towards these goals, it would pursue all available alternatives.

Well, in a recent amendment to their original filing yesterday, the group stepped up their campaign by announcing:

“Unless the Company promptly articulates a strategy to maximize shareholder value, the Reporting Persons intend to solicit shareholders to call a special meeting of shareholders for the purpose of electing new directors to the Board. If a special meeting is called, the Reporting Persons intend to nominate individuals for election to the Board who will actively pursue strategies to maximize shareholder value consistent with, but not limited to, those described above. The Reporting Persons also intend to solicit proxies in support of the election of such directors at the special meeting.”

The company threatened to install its own board capable of action, or even resort to more extraordinary measures such as M&A activities or liquidation. Overall, this stock is definitely worth watching. The stock is currently trading at only $8.89. This investment group has averaged in from $11 down through $9 a share, and therefore would likely seek strategic alternatives that would recoup all or more of their investment, which represents a 10% to 20%+ premium from the current market price.

Delcath Systems (DCTH) has been involved in a long battle with hedge fund Laddcap Value Fund for over a year. The fund is seeking to replace the company's board and possibly put the company up for sale. While this would result in a nice short-term spike for investors, the company argued that its long-term prospects would pay off. The company continued its battle against Laddcap Value Fund today by announcing a lawsuit alleging that the fund failed to disclose critical details about its proposed replacement board. Their PRE-14C filing with the SEC today shed some interesting details on the funds owners and motivations.

The company begins by pointing out that the current board has witnessed a 916% increase in the share price over the past three years - this kind of performance does not justify shareholder action to replace the board. The company then shed light on the funds management and proposed slate of directors:

"Ladd Defendants have failed to disclose is that one of their director nominees, Paul William Frederick Nicholls, filed Chapter 7 personal bankruptcy in 2002. Among other items, Mr. Nicholls amassed credit card debt of $105,349.75 on nine credit cards, including cards issues by such luxury retailers as Bloomingdale's, Bergdorf Goodman and Macy's. They failed to disclose that another nominee, Fred. S. Zeidman, served on the Audit Committee for Seitel Corporation, a company that restated its financials for seven quarters and subsequently filed for bankruptcy. The Ladd Defendants failed to disclose that Mr. Zeidman was named in seven lawsuits arising out of the restatements. They failed to disclose that Michael Karpf, M.D. sat as Vice Provost of the UCLA hospital system through its period of financial woes, necessitating the hiring of an outside firm to ascertain what went wrong. And certainly, the Ladd Defendants have failed to disclose the abysmal performance of the Laddcap hedge fund run by Mr. Ladd."

Now, Delcath shareholders are faced with a choice. If the proposed consent solicitation garners enough interest for a proxy battle and Ladcapp is able to take over the company, they are likely to attempt to put the company up for quick sale. This hunch is based on the fact that they demanded that the company contact an investment bank several months ago to explore strategic alternatives - an attempt which ended up failing after lawsuits were filed. If current managements remains in place after a proxy battle, the stock price is likely to appreciate also due to the added security that current management will remain for long-term growth. If, however, the lawsuit and solicitations are dropped (which has been what has happened in the past), the uncertainty and the threat of takeover remains which may be a drag on the stock price in the near term. Overall, this situation warrants a close watch, as a proxy vote of any kind could mean a catalyst to a quick increase in the stock price.

Verizon announced in 2005 that is was exploring strategic alternatives for its Yellow Pages business. Recently on July 7th of this year the said that they would be spinning off their Yellow Pages and Directories business in their Form 10 filing with the SEC. Under the terms outlined in this filing, current Verizon shareholders will receive one share of the new spin off, Directories Corp, for every twenty shares of Verizon that they own along with cash for any fractional shares. As the pending spin off comes closer to reality, let's take a look at how you can benefit from this spin off!

First, let's take a look at what we know. The new spin off would create the world's second largest yellow pages directories publisher in the United States along with the largest yellow pages directory on the Internet. The company's products would include print yellow pages, print white pages, an Internet yellow pages directory (SuperPages.com), and an information directory for wireless subscribers (SuperPages On the Go). These products had an estimated market share of about 72% in the top fifteen metro areas in the U.S. We also know that the company makes 90% of its revenues from sale of advertising in print yellow pages, 4% from sale of advertising in print white pages, and 6% from Internet Yellow Pages advertising. Finally, the Form 10 filing also noted a pro forma net income of over $1 billion and strong cash flows but also warned of "substancial debt". This debt includes a note receivable from Verizon of $507m and the issuance of up to $9.1b in debt comprised of senior term loans and other debt securities. More of the financial information can be found in the Form 10 filing.

Next, let's take a look at why the spin-off took place. In the Form 10, the company gave the following reasons:

• Enhance Directories Corp's ability to execute a potential acquisition strategy.
• Permit Directories Corp to enhance the efficiency and effectiveness of equity based compensation.
• To allow each company to determine its own capital structure.
• To allow each company to focus on its own core business.

The first two reasons listed here are of interest - we can see that the company is interested in pursuing a potential acquisition strategy and that the new owners have a big interest in making this happen (as much of their compensation is in equity based compensation, both from this event and from their holdings that came as a result of the VZ spin off itself). By carefully watching insider buying and selling after the sale, we will be able to tell how confident and vested owners are in making this happen. Following insiders, especially when they have a large stake in the success, is always a good idea.

Another advantage of this spin off situation is the fact that the stock is usually undervalued shortly after the spin off occurs. This comes as a result of the spin off process itself - shares of the new company are automatically distributed to all holders of VZ stock. More often than not, these VZ investors are not interested in the new spin off, and therefore immediately sell their shares. Also, some instituational holders are not allowed to hold the new stock. This results in a massive sell off that typically drives the price below its proper valuation.

All of this creates not only a short-term buying opportunity for swing traders, but also may be an opportunity for long-term investors to get in cheaply.

Apple Computers is the latest in a long series of headlines relating to the SEC's crackdown on backdated option grants - an issue potentially affecting a number of public companies, primarily in the tech sector. Apple recently launched its own internal investigation which uncovered several violations which may significantly impact the valuation of their stock. In an 8k filing with the SEC dated August 4th, Apple stated:

“Apple’s financial statements for the fiscal years ended 2003, 2004 and 2005, the interim periods contained therein, the fiscal quarters ended December 31, 2005 and April 1, 2006, and all earnings and press releases and similar communications issued by Apple relating to periods commencing on September 29, 2002 should no longer be relied upon.”

The company also notified investors that it would likely delay its 10Q filing with the SEC until further notice. Many other tech companies are also feeling the heat as the SEC cracks down. Among the potentially affected companies are Broadcom, Rambus, Sycamore Networks, and McAfee. Currently, Brocade is the only company facing criminal charges by the SEC. If found guilty, company officers involved in the crime can face up to 20 years in prison and $5 million in fines.

What Are Backdated Option Grants?

Option backdating occurs when a company grants a call option (a right but not obligation to buy at a certain price) with an exercise price below the price of the stock on the day of the grant. This means that the owner is entitled to an immediate gain on paper if he/she decided to immediately exercise their option. Now, as surprising as it sounds, this is not illegal. In fact, it is perfectly legal for a company to backdate options; however, the option grants must be classified as being backdated.

The SEC recently got involved when it discovered that several companies were classifying these backdated option grants as a type in which the exercise price is the same as the stock price on the day of the offer. This enabled companies to hide millions of dollars of expenses from the public, which in turn artificially boosted net income by reducing operating expenses. As a result many companies may be forced to restate many years worth of earnings due to the manipulation of net income. This will force investors to revalue (to the downside) the companies based on the new lower net income levels. Needless to say, these investigations will have a material effect on the offending companies.

In October 2001, Computer Associates, one of the world's largest software companies, reported pro-forma income of $359M for its fiscal 2nd quarter, nearly a 60% increase over the previous year. The impressive numbers were the result of a new business model, which stretched software revenues over the entire year. At the same time, the company reported to the SEC a loss of $291M for the quarter using GAAP. This story underscores the importance of always relying on GAAP-based SEC filings and also illustrates one of the most common genres of creative accounting - revenue recognition.

Revenue recognition is simply when a company books its sales. Most companies book their sales when delivery has occurred or services have been rendered, while others do it when the company receives payment. Some companies, however, book sales more creatively or outright fraudulently. Although Computer Associates technically did nothing illegal, but their new results were misleading to some investors. Some more fraudulent companies might go the extra mile and actually book future sales as current revenue. This happened at Xerox in the late 1990s and into 2000 when they accelerated the revenue recognition of leasing equipment over four years. This time, even the GAAP financial statements showed a higher net income. So, how can investors see through this smoke screen?

The key is looking at the one thing that most accounting tricks cannot change - cash. The simple check is this: Compare net income from the balance sheet to cash from operations on the statement of cash flows. If these two numbers do not correlate, then something is amiss. When Xerox showed a net income of over $100M and operating cash flow was -$8M, clearly something was wrong! By using this simple five-minute check, investors can avoid many of the most common types of accounting fraud.

Where do you find this information? A company's financial statements can be found quarterly in form 10Q and yearly in form 10k, usually under Section 1. A company's net income can be found towards the bottom of the Income Statement, and indicates how much the company "made" - that is, all revenues minus all operating expenses. The company's cash from operations can be found in the statement of cash flows, in the first section "cash flow from operating activities". The number we are looking for is "net cash provided by operating activities" or simply "net operating cash". This number takes all cash receives and subtracts all cash expenditures. Even if a company claims a future sale on net income, they could not have possibly received cash for it - and that's how we can tell! For an example of a 10Q statement, check out Microsoft's latest filing.

You can find all of the SEC filings filed by a company, including their annual report and financial statements at SECFilings.com.

James River Coal Company (JRCC) is a coal company that mines, processes and sells regular coal (the kind used for energy). Back in February of this year, the company was issued an ultimatum by Pirate Capital (an activist hedge fund), who threatened to start a proxy war if the Board of Directors didn't comply with their demands to put the company up for sale or reform. In their 13D filing with the SEC on February 10th, Pirate Capital argued that the company's management were inexperienced and illequiped to run the company. Perhaps more importantly, Pirate insisted that the company was grossly undervalued:

"Pirate Capital has had significant discussions with investment
bankers and is highly confident that there are a number of strategic buyers
that would be interested in purchasing the Company at a substantial premium
to the current stock price.  We have been advised that such a strategic
transaction could provide existing James River investors an opportunity to
participate in the upside of a more diversified operator with a stronger
balance sheet and just as importantly, a deeper and stronger management team
better positioned to derive value from James River's assets."

And keep in mind this was written in February when JRCC sat in the $40s! At the end of their letter to the Board, they stated:

"Should the Board fail to meet Pirate Capital's demands, it is our
intention to provide the requisite advance notice to the Company of our
intention to solicit proxies to elect a slate of directors to gain control
of the Board at the Company's next annual meeting."

Well, it turns out that the board did fail to meet the demands, and Pirate released an intention to solicit proxies on July 5th through another 13D filing which provided a "Shareholder Notice of Intent to Nominate Persons for Election as Directors and to Move Certain Business" along with a "Demand for Right to Inspect Books" which would give Pirate Capital shareholder information that the need to solicit a proxy vote to institute four of their own directors. This potential hostile takeover is set to take place at the company's next annual meeting, which will be set after the company has completed analyzing Pirate Capital's proposals and intentions.

This is a great stock to keep an eye on - If a hostile takeover does successfully take place, Pirate Capital will have four of their own board appointees and will likely try and sell the company. This should result in a substancial premium over the current price, especially given Pirate Capital's average acquisition prices. Here are the filings for Pirate Capital and James River Coal Company (JRCC).

Have you ever wished you could look over the shoulders of Wall Street's best and brightest? Thanks to the SEC's ownership disclosure rule, it is possible for anyone to watch the most successful traders and investors in the market. This SEC rule requires anyone who acquires more than 10% of a company to disclose the number of shares they hold, the price they purchased at, and even their investment objectives. This rule applies to everyone from the successful activist hedge fund Pirate Capital to Warren Buffet himself! Let's take a look at how you can track some of today's top money managers...

The first step is finding an investor worth watching. Now, the downside of this rule is that these investors do not reveal ownership until their holdings reach 10%, so it is important to seek out those that care about the long-term, not those interested in making a quick buck (because they have already averaged in at much better prices while not disclosing ownership). One of the most popular groups to watch are activist hedge funds, like Pirate Capital or Steel Partners. These groups vigorously take over companies and work to unlock shareholder value by turning around the company, forcing share buybacks, forcing dividend payments, or selling off the company in pieces. This has resulted in 20% - 30% annual returns for Pirate Capital, and similar returns for Steel Partners. Often times savvy individual investors can catch a free ride on these forced liquidation events and dividends. Obviously the second most popular group to watch are market savvy individuals like Warren Buffet, and their companies.

There are several types of filings to keep an eye on:

• 13D-G will let you view when the investor acquires more than 10% of a company and also the investor's investment objectives.
  
• Form 4 will let you know each time the investor trades in the companies they own (more than 10%).
• 13F will show you a holdings report for the investor along with the amount, value, and voting power of the shares they hold.

In addition to this required content, these filings can also include things such as letters to management, letters to the board of directors, shareholder demands, calls for a proxy vote, and other material that can be of enormous interest to opportunistic investors. Therefore, it is always important to read any attached exhibits.

To keep up to date with all of these filings, SECFilings.com allows you to subscribe to instant e-mail alerts. Simply add the companies, funds, and investors of interest and instantly receive notice when they file paperwork with the SEC!