Monday, June 30, 2008

Former Brown-Forman CFO in Fine Spirits

Phoebe A. Wood retired from her position as chief financial officer of Brown-Forman (BF.B-$75.96) at the end of the distiller’s fiscal year (April 30, 2008). In connection with her departure, Wood signed a one-year consulting agreement with the maker of Jack Daniel's, Southern Comfort and Korbel Champagne, whereby she would be available for up to eight-hours a week to assist incoming Donald Berg with his new duties as CFO.

Sounds harmless enough. What
the press release blithely ignores is that Wood is afforded the opportunity to earn an additional year of salary ($625,000)—for just being available twenty percent of working time—to help Berg, 19-year veteran of the company (who already has tenure in corporate finance, treasury, and tax matters), during the alleged transition period .

"It’s just egregious!" When one reads an article on excessive exit packages for top executives in any of a number of leading publications—BusinessWeek, Forbes, or The Wall Street Journal—prominent chief executives oft-mentioned include Home Depot’s Robert Nardelli, Pfizer’s Hank McKinnell, and ExxonMobil’s Lee Raymond, who took home a respective $225 million, $200 million, and $357 million in severance.

Activist shareholders who traditionally have advocated for more curbs on executive pay might want to sharpen their 'say-on-pay' pencils to include those little-noticed compensatory good-bye packages awarded to hundreds of departing top executives like Phoebe Woods, too.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Saturday, June 28, 2008

Weekend Beach Reading: June 28, 2008

American Superconductor (AMSC-$37.00) won a $450 million order for core electrical components from Beijing’s Sinovel Wind. The parts will be used in Sinovel’s 1.5-megawatt and three megawatt wind turbines, totaling approximately 10 gigawatts of wind power capacity, according to Greg Yurek, American’s founder and CEO. Nonetheless, this purchase order does not change the company’s weak operating dynamics.

Atwood Oceanics ($ATW-$120.03)
announced a new contract for its moored semisubmersible rig "Atwood Hunter," which can operate at water depths up to 5,000 feet and drill down to approximately 28,000 feet, commencing in Sept. 2008, for a four-year term with Kosmos Energy and Noble Energy to pursue deepwater drilling opportunities offshore West Africa. Given record prices in the contract of $511,000 to $545,000, Atwood will likely exercise an option with Jurong Shipyard to begin construction on a $590 million floater before a looming June 30 deadline.

Flooding in the Midwest and
rising corn costs adversely impact the profitability at Aventine Renewable Energy Holdings (AVR-$4.74), a leading distributor and producer of fuel-grade ethanol.

Will financial irregularities-topple wind turbine and tower maker BroadWing Energy (BWEN-$21.60).

Clean Energy Fuels (CLNE-$11.00), the largest provider of compressed and liquefied natural gas for alternative-fuel vehicles in North America,
is an attractive alternative to ethanol as a renewable energy resource.

Do as I say, not as I do at Credo Petroleum (CRED-$13.63).

balance sheet overburdened by debt constrains the ability of power merchant Dynegy (DYN-$8.44) to expand its expansion strategy.

expansion of world tanker fleet capacity expose General Maritime’s (GMR-$26.44) to significant decline in day-rate pricing when Lukoil’s charter contracts begin to expire come 2010?

Occidental Petroleum (OXY-$88.02) is acquiring 15 percent of the multibillion-dollar Joslyn oil sands project in northern Alberta. But
the move may not be a prudent means of adding to its slowing oil/gas reserves growth rates. Despite the current price of oil, are the economics sufficiently more attractive now to warrant Occidental’s return to an area it abandoned in 2000?

At seismic driller OMNI Energy (OMNI-$6.46),
it's all in the numbers.

SunPower (SPWR-$75.71)
frequently negotiates solar services agreements that allow customers to limit the purchase to just the electricity generated — not the solar-power systems themselves. Shifting financing obligations may accelerate sales of its solar-electric systems, but is the company digging deeper into financial uncertainty?

Synthesis Energy Systems (SYMX-$9.17), which operates integrated coal-to-methanol gasification plants,
completed a $93 million equity offering to finance its 50 percent joint interest in the Golden Concord project, a 100-megawatt gasification plant under construction in Inner Mongolia, which the company expects to come online in the first half of 2010. How attractive are the potential returns from capital invested in these facilities?

Zoltek Companies (ZOLT-$24.81), a producer of parts for wind turbines,
faces an investigation into accounting irregularities that could have serious implications for its business.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Friday, June 27, 2008

Gazprom and Gasification with The Jewish Autonomous Region

In a swampy, remote region in the Soviet Far East bordering China, on the banks of the Amur River, Joseph Stalin and his Russian Federation established the Jewish Autonomous Oblast in 1928. The idea was to create a new "Soviet Zion," in a socialist framework. The Stalin answer to settle the "Jewish Question."

The name was somewhat misleading, for the Jewish population never reached more than 25 percent to 30 percent of the population. Today, despite Stalin’s attempt at national engineering, the Jewish population is about two percent of the 190,000 locals.

Gazprom OAO ($56.45), the Russian natural gas giant, noted in its 2007 Annual Report that the company had signed contracts on "Gasification" with the Jewish Autonomous Region. Stalin’s two purges to stamp out Yiddish culture, the Holocaust, and rising anti-Semitism—whoever dreamed up the gasification name might want to rethink the global wisdom of using that label to describe Gazprom’s natural gas projects.
When translating its filing into English, it's a good thing Gazprom knew the difference between the prepositions 'with' and 'of.'

Thursday, June 26, 2008

Cracks Widening in Homebuilder Hovnanian Enterprises' Foundation

While Hovnanian Enterprises’ (HOV-$6.14) balance sheet is improving, the operating environment in general for the industry remains bleak in an ongoing recession-like environment.

The US housing industry has been hit hard in the past two years, a decline which will take longer than usual to correct (as depicted in the image below)-- exacerbated by rising unemployment and food & energy prices.

Although the homebuilder’s cancellation rate is improving, from38 percent to 29 percent, backlog is down 54 percent-- or $1.2 billion—and its last quarter metrics remains abysmal, alongside its comparable rating amongst BZH (Ba1), TOL (Baa3), DHI (Ba1) and CTX with a Caa1.

As if the inflationary environment is not enough, HOV has a real possibility of going insolvent because the money it raised from stock and debt issuance ($126 and 600 mn, respectively) went towards working capital needs and paying back revolver drawings. In addition, the company has limited access to its revolving credit facility. Latest EPS loss was almost 2x as high as Street expectations, coming in at -$5.29 vs. -$2.65 a share.

Cash on hand has been rising at most homebuilders (sales of subsidiaries, stock and debt issuances—TOL recorded $1.23 bn, CTX $775 mn, BZH $277.3 mn and DHI $519 mn). HOV management expects to be cash flow positive by year- end. , The Company has $500 mn in cash and expects to have $800 mn by year- end.

However, given the continued declines in housing starts (dropped 3.3% in May, the lowest level since '91 with single and multi-family homes declining 1% and 8%, respectively) and NAHM sentiment index dropping to 18 in June from 19 in May, there is no telling how bad it's going to keep getting –continuing increase in foreclosures and bankruptcies (i.e. LandSource, a significant joint-venture of LEN filing for bankruptcy).

Contributor Yaser Anwar does not hold a financial position in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure policy.

Tuesday, June 24, 2008

Is CEO of Rubicon Tech Coming or Going?

Raja M. Parvez, has served as chief executive officer of Rubicon Technology Inc (RBCN-$21.77), a provider of sapphire substrates and products to the high-brightness Light-Emitting Diodes (LED), Semiconductor, and Optical (blue laser diodes) industries, since August 2006. Yet, the electronics material supplier is still reimbursing him to commute from his home in Pennsylvania to executive offices in Franklin Park, Illinois.

"Pending his relocation," Parvez received $114,049 in the aggregate for fiscal 2006 and 2007, according to the company’s proxy filing on July 20, 2008.

Perhaps Parvez is too busy traveling to put roots down in the Prairie State, for more than 70% of sales are made to customers in Asia, principally to Taiwan-based Crystalwise Technology, a wafer fabricator, and Japanese-based Shinkosha Co, an optical communication device-maker.

Business Strategy

A shift away from incandescent to more energy-efficient LED lighting positions Rubicon for aggressive growth. However, Rubicon is highly dependent on increased market acceptance of solid state lighting, with approximately 62% of revenue derived from sales of components for use in the manufacture of LED products, ranging from mobile appliances (cell phones, digital cameras), flat panel televisions, signage (for very large advertising and stadium displays), and headlights for the automotive industries.

One key end-use application driving high demand is LED-backlighting units for notebook computers. "LED backlight units are being adopted by notebook manufacturers at an increasing rate and the penetration rate may now reach over 10% in 2008," said CEO Parviz on the company’s 1Q:08 earnings call on April 30.

CONTENT PIRACY IS STEALING: Copyright is a form of property and copyright infringement is theft. If you are reading blog content from the 10Q Detective on The Houston Chronicle website or any other site where material is being distributed by you are knowingly perusing the unauthorized use of our content protected by copyright law. As 10Qdetective blog does not have a license content agreement with The Houston Chronicle and/or, you, too, are violating our rights under copyright law. In other words—YOU ARE STEALING, TOO! Such violations can result in a lawsuit and money damages, and in some cases, criminal prosecution with jail time.

Albeit sapphire is currently the preferred substrate material for high brightness (HB) white, blue and green LED applications, silicon carbide, aluminum nitride, zinc oxide and bulk gallium nitride are other substrates being investigated and used in research and development for certain LED applications. Ergo, as technology progresses and sapphire is displaced as the substrate of choice for certain LED applications, Rubicon’s operating performance could flameout like an energy-inefficient, tungsten-filament light bulb.

In our view, Rubicon must leverage the growing demand for sapphire wafers in the LED markets by executing strategies for increasing and diversifying revenues to other applications. For example, larger diameter (6” to 8”) sapphire wafers are increasingly used for high performance Silicon-on-Sapphire Radio Frequency Integrated Circuits (RFIC) chips used in cell phones and base stations, wafer carriers for other substrates and as optical windows in the aerospace, medical device and sensor markets. These new applications are turning to sapphire for its high-performance and affordability.


Rubicon now has larger furnaces operational, producing larger, high quality, sapphire crystals to better serve the 6 and 8-inch markets, according to Parviz.

Addressing the potential for larger diameter sapphire in other industry applications suggests continued high growth for the Company. However, management is not raising top end of its guidance estimates until they are sure capacity can continue to come online ahead of schedule. Rubicon anticipates revenue for 2008 of between $47 million and $49 million and share-net of between $0.45 and $0.47.

What do you say, Mr. Parvez, is it time to "Cross the Rubicon?"

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Sunday, June 22, 2008

CEO of HomeFed Homesteading on Wrong Coast

Paul J. Borden, has served as a director and President of HomeFed Corp (HOFD-$47.00), a developer of residential real estate projects in Southern California, specifically in the San Diego area, since May 1998. Although executive offices are in Carlsbad, California, located thirty miles north of San Diego, Borden maintains his primary residence in New Jersey.

In 1998, Borden, then a Vice-President of Leucadia National Corp (LUK-$48.43), signed an Administrative Services Agreement to steward the San Elijo Hills project, a master-planned community in San Diego County, California, of approximately 3,400 homes and apartments as well as commercial properties.

Leucadia, a holding company with interests in a broad range of businesses, from gaming entertainment to timber, plastics and prepaid calling services, owns 29.9% of HomeFed.

HomeFed and Leucadia are developing a 700-acre non-adjoining acres of land located within the larger 22,900 acre Otay Ranch master-planned community south of San Diego, California, too.

All my bags are packed,
I'm ready to go
I'm standing here outside your door
I hate to wake you up to say goodbye
But the dawn is breakin, its early morn
The taxis waiting, hes blowin his horn
Already Im so lonesome I could cry.

HomeFed maintains a "temporary residence" in California and reimburses Borden for airfare to and from his primary residence, according the Company’s annual proxy filing. Albeit the definition of temporary is "lasting or existing only for a short time," the real-estate concern arranged this temporary allowance starting in 2002—first detailing the remuneration in its 2005 proxy statement.

So kiss me and smile for me
Tell me that youll wait for me
Hold me like youll never let me go.
I'm leavin on a jet plane
I don't know when Ill be back again
Oh, babe, I hate to go.
~ Folk singers Peter, Paul & Mary

For 2007, Borden received $29,838, $43,787, and $62,579, respectively for his housing allowance, airfare to and from his primary residence in New Jersey, and tax-gross-ups.

Unlike the lyrics in the song, Borden knew when he’d be back home again—more times than he left!

HomeFed is not immune to the turmoil in the mortgage markets. The Company estimated that total home sales (both new and re-sales) at the San Elijo Hills project were approximately 227 in 2007 and 300 in 2006, as compared to 470 in 2005 and 860 in 2004. In addition, HomeFed has not sold any new residential lot sales at the San Elijo Hills project or Otay Ranch since June 2006.

As business is non-existent these days, why even bother flying Borden back and forth from New Jersey?

Given Borden’s past history with Leucadia, the 10Q Detective can understand the disingenuous housing allowance perquisite. The $307, 000 paid to Borden in cash bonuses for each of fiscal 2006 and 2007—now that’s a blatant disregard for shareholder common interests.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Thursday, June 19, 2008

Sinking Ship at Blockbuster?

While Blockbuster, Inc (BBI-$2.79) currently has sufficient liquidity to meet its cash obligations, the company is at risk of potential covenant violations in 2009, according to Moody's analysts.

"Companies with weak business models—like Blockbuster—face pressure on both revenue and on operating margins - calling cash-flow generation, or even survival, into question," Moody's analysts wrote in a report on 102 U.S. retailers.

Like the remake of the Poseidon Adventure, the original version is often better.

Regular readers of the 10Q Detective know that we scooped Moody's on BBI's outlook,
warning investors of the video retailer’s liquidity crisis back in early May. Unlike Moody’s, we do not charge for our advice.

Pyrrhic Victory for Raser Tech Bulls: 10Q Detective Banned from Yahoo!

It’s official: Yahoo! officially banned 10Q Detective from posting comments on its Message Boards.

Before the investors of Raser Technologies—who flooded Yahoo! with alleged complaints of our biases—revel in their victory, remember the ghosts of erstwhile investors in
thinkorswim Group, Force Protection, Brooke Corp, Heelys, Inc, USANA Health, and a plethora of other former highfliers –who gloated that we were third-rate hacks, too. Ask them how many years it will take them to write-down their capital losses.

Censoring freedom of expression and search-engine results that powerful entities find objectionable is nothing new at Yahoo. Just ask Wang Xiaoning and Shi Tao, two Chinese journalist currently serving 10-year prison sentences in China because of information Yahoo! provided to the Chinese government.

We can never be sure that the opinion we are endeavoring to stifle is a false opinion; and if we were sure, stifling it would be an evil still. ~ Philosopher John Stuart Mill, On Liberty, 1859

Yahoo's own recent failure(s) to execute on new search engine initiatives speaks volumes about its own incompetence, too.

A special thank you to
Fat Pitch Financials for standing behind our search for the truth.

BioHeart Talks About It's MARVEL Future With 10Q Detective

Marty Schildhouse, communications consultant to BioHeart, Inc (BHRT-$2.45), a biotech developing autologous (patient - derived) cell therapies for heart failure,
responds to questions the 10Q Detective asked about the pivotal MARVEL trial:

  • Please comment on why MyoCell [based on pending MARVEL data in 2009] might be viewed positively by FDA—given stem cell trials to-date—failed to show clinically significant improvement in ventricular contractility?

As you have noted, previous stem cell clinical trials were designed to show mechanical improvement as their primary endpoints. Our confidence in the MARVEL Trial's potential to be viewed positively by the FDA stems from the fact that we have designed this trial differently than our previous trials, or those of other stem cell trials.

The trial design focuses on measurements the FDA has expressed interest in, as well as used as the basis for approvals of complimentary therapies. As such, we are confident that we have a trial that meets the FDA's expectation in terms of primary and secondary endpoints. The primary endpoints in the MARVEL Trial are based on qualitative measurements, aligning to the FDA's belief that these measurements are more reflective of, and appropriate for, this patient population. This is consistent with FDA's review/approval of bi-ventricular assist devices targeting this same population.

Mechanical endpoints, such as LVEF, will be measured as secondary endpoints in this trial. As the trial is powered to meet the more demanding statistical needs of a qualitative measurement, the MARVEL Trial is also appropriately powered for the secondary endpoints. Additionally, along with qualitative and mechanical endpoints, MARVEL will have secondary endpoints based on gathering pharmacoeconomic and health economic data. MARVEL is the largest, and most clinically rigorous trial of its kind.

  • Does BioHeart plan on a private placement to raise the $17 million needed to complete the MARVEL trial—or are third-party agreements a possibility?

We are currently pursuing a secondary financing transaction and hope to report on our progress in our Q-2 communication. The company continues to be open to potential other sources of financing and will seek those sources based on the best terms and long-term benefit to the organization.

The 10Q gives a thumbs up to the transparency proffered by Schildhouse and BioHeart.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Wednesday, June 18, 2008

Huntsman Still Brewing a Chemical Deal

Huntsman (HUN-$20.20) is one of the world's largest manufacturers of diversified and commodity chemicals, with leading market positions in MDI, titanium dioxide, epoxy-based polymer formulations, maleic anhydride, amines and surfactants.

  • In July 2007, Apollo Management (through its subsidiary Hexion Specialty Chemicals) agreed to purchase the chemicals maker for $28/share, $10.6 billion (inclusive of $4 billion in debt). Hexion will acquire all of HUN’s outstanding shares for $28/share, and this price will increase 8%/annum starting April 6, 2008 if the merger has not been completed prior to that date.
  • Recently, Hexion exercised its right to extend the Termination Date for the merger by 90 days, from April 5 to July 4 (Hexion is allowed a total of two 90-day extensions). If the deal should fall through, HUN will receive a net breakup fee of $225 mn. The transaction is not subject to a financing condition and Hexion obtained commitments for all necessary debt financing from affiliates of Credit Suisse and Deutsche Bank AG.
  • However, given the current state of credit markets, one has to take these financing guarantees with a grain of salt, which is why the rumour that Hexion is considering selling HUN's titanium dioxide (weak performance) and epoxy business (anti-trust issues), respectively.
  • In addition, the European Commission delayed the deadline Tuesday for it to approve or reject the purchase plans, moved back the deadline to June 30 from June 16. The additional time will allow customers and competitors to review and comment on the proposals.


  • Chemical companies are sensitive to oil prices because they utilize them for their raw materials to produce products. The majority of US chemical companies, even global, have recently announced price increases i.e. Dow Chemical, even HUN by 25%, and some have even contemplated adding an energy surcharge for a wide range of products.
  • Across two HUN divisions (Material & Effects and Performance Products - 25 and 24% of HUN's portfolio), results in Q108 benefited of industry pricing power, largely due to rising commodity/raw material prices, and sales volumes were lower, except in the case of Polyurethanes (40%) where sales & volumes were high enough to offset raw material costs. Pigments (11%) continued to be depressed by the extremely weak NA housing market, US dollar and increased SG&A costs (alongside raw materials, lower average selling prices).
  • Its MDI (Methylene diphenyl diisocyanate, used in the in the manufacturing of polyurethane) business has been benefiting from higher prices, improved volume in both Asia and Europe due to its new MDI plant in China, and FX. The MTBE business is seasonal and the upcoming driving season should help to improve margins. However, while Asian demand for MTBE will keep growing, MTBE's competition ethanol will benefit as MTBE is being phased out in the United States.** MTBE is added to gasoline to improve combustion and to reduce harmful carbon monoxide emissions. It is added to gasoline to improve the overall quality of air.
  • Furthermore, given HUN derives 66% of sales from outside the US, results benefited by FX gains. On average, EBITDA across HUN divisions declined by 25% YoY (Polyurethanes being the only division EBITDA improved due to improved productivity gains and stronger demand).

Given Apollo's previous chemical acquisitions (Hexion chemicals, formed by a merger between two Apollo companies + currently Apollo & Blackstone are bidding for another, smaller chemical related company Chemutra), and the shareholder/management deal approval, a large spread does exist. Part of it can be blamed on the current credit environment (meaning financing) and part of it on the regulatory issues leading to uncertainty about the deal closing on its original terms.

Even if a lower price is negotiated, say $25-6, the risk/reward is worth the deal (which looking at the spread seems likely).If the deal should fall through, the downside could be to $17, but since there was interest in HUN by Basell for $25.25, who acquired Lyondell for $19 billion in 2007, at the time of the Hexion’s offer, that should provide a floor around $17, the pre-bid price.

Contributor Yaser Anwar does not hold a financial position in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure policy.

Monday, June 16, 2008

Rabid Raser Tech Bulls Push Yahoo! to Ban 10Q Detective

The rabid stockholders of Raser Technologies (RZ-$9.60) are mounting a campaign to stifle our First Amendment right by lobbying Yahoo! Inc to deny the 10Q Detective access to its Finance Message Boards.

"It has come to our attention that you may have violated the TOS (
Terms of Service)," said an anonymous Email received by the 10Q Detective on Sunday. “Pursuant to the TOS, Yahoo! reserves the right to terminate your account in the event that, among other things, Yahoo! believes that you have violated or acted inconsistently with the letter or spirit of the TOS."

Of interest, the anonymous (gutless) Email did not reference specific violations.

Did the 10Q Detective post content that was abusive, defamatory, obscene, or otherwise objectionable? Offensive, no—unless the readers prefer idle gossip to empirical-grounded data.

Did the 10Q Detective falsely state or otherwise misrepresent its affiliation with a person or entity? Contrary to countless allegations by our detractors, the 10Q Detective has never worked for Jim "Mad Money" Cramer or any third party looking to short Raser Technologies common stock.

Did the 10Q Detective upload, post, email, transmit or otherwise make available any Content that infringed any patent, trademark, trade secret, copyright or other proprietary rights of any party? No. But if Yahoo! prefers to get technical, its message boards often violate the copyright protection afforded the 10Q Detective, for we often find our postings uploaded to its Message Boards without our prior written permission!

Does the 10Q Detective disrupt the normal flow of dialogue on the Message Boards? Yes! If one assumes that those long the geothermal stock wish to engage in Al-Anon support-like talk on many of their threads, absent fact-based information.

"Kum Ba Yah!"

What’s next, getting together to do 'trust falls' in each other’s arms?

And, speaking of 'Full-Disclosure,' would Yahoo! ever have disclosed the employee severance issue that derailed the Microsoft bid if it were not for shareholder litigation?

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Sunday, June 15, 2008

Another Fisherman's Tale at Raser Tech

One month after Raser Technologies (RZ-$8.85) broke ground for the construction of its first geothermal power plant in Beaver County, Utah, the executive management team updated analysts on the company’s progress on its pilot 10-megawatt facility. Steve Brown, Executive Vice President of Construction and Engineering, commented that its first plant is projected to be online in October. Doubt it!

The Company is already calling its first geothermal power station a success—even though its production wells have yet to be flow tested! Volumetric flow rate, static and flowing pressure surveys, net power potential—the precise data needed to determine the electrical production characteristics and the feasibility of the recoverable geothermal reservoirs as a base-load energy source is still not available.

Largely overlooked by all the investors long Raser common stock, too: independent third party analysis of the resource must be issued, too, before Merrill Lynch releases the requisite construction funding for the plant (under the terms of its Commitment Letter).

Looking at competitive well-test programs, flow-testing scheduling should take no longer than one to two more months to complete.

The 10Q Detective looks forward to more successful Financial Analyst Days ahead at Raser.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Friday, June 13, 2008

Where is Visual Pleasure in Radvision's Price Performance?

Israeli networking device maker Radvision Ltd (RVSN-$6.85) operates through two segments, Networking Business Unit (72% of total revenue) and Technology Business Unit (28% of total revenue). RVSN's geographic revenue picture: Americas, Europe and the Middle East, and Asia represented 58%, 24% and 18%, respectively. All four regions registered annual and sequential declines.

According to the Telecommunications Industry Association (TIA), between 2008 and 2011, the American telecom industry is expected to grow slower than its counterparts in the rest of the world. While the US is slated to grow at 7.2% to touch $1.36 trillion, the rest of the world will grow at 10% to touch $3.6 trillion.

The key takeaway is that RVSN needs to increase its revenue based from faster growing economies of Middle East and Asia.

First-Quarter 2008

RVSN has a high level of revenue concentration with CSCO, which accounted for about 32% of total revenue in 2007, 35% of total revenue in 2006 and 27% of total revenue in 2005. The high level of dependency on Cisco for sales needs to be monitored closely. However, in the 1Q:08 ended March 31, the non-CSCO channel began to show positive signs on the back of its SCOPIA platform, with LifeSize up 18% and Aethra up 10% sequentially.

The network business unit (NBU) contributed $14.1 million, a 23% decrease YoY and an 18% decrease from the previous quarter. The technology business unit (TBU) revenue was up sequentially and down annually to $5.5 million, in line with Street expectations. The weakness continued to be in the Americas.

The weak trending at NBU continued, with revenues down 18% Q/Q, mainly on lower Cisco orders which reflect weak enterprise spending, as well as some seasonality. TBU was essentially flat at $5.5m, and during the call management noted similar TBU volumes were here to stay. Recently, CFO Tzipi Kagan announced her resignation, due July 30th and one viewed by the market as negative as she had good credibility with the investors, who will be replaced by Adi Sfadia, former VP of Finance at RVSN.

Forward Guidance

RVSN's guidance for Q208 called for revenue to be $20.5 million and pro forma EPS to be $(0.11), which excludes stock-option expense. While the analyst community and investors anticipated this loss, it will be larger as costs for R&D increases due to the impact of FX (approximately $800K of the sequential increase in R&D is due to the weaker dollar, according to Cantor).

Boaz Raviv, Chief Executive Officer, said in May the company is "executing on its recovery plan and is fully focused on returning to operating profitability and revenue growth in the second half of the year."

Investment Merits

Analysts at Wedbush Morgan maintain a "hold" rating on RVSN, opining the uncertain macro environment would continue to present challenges to the company in achieving operating profits by end-2008. The 12-months target price was reduced from $10 to $9.The best thing about RVSN is the 6$/share ($128 mn in net cash), which should put a floor on its price at the moment and allow the company to increase its R&D and overseas growth.

Contributor Yaser Anwar does not hold a financial position in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure policy.

Wednesday, June 11, 2008

Constellation Brands CFO in High Spirits Despite Deflated Real Estate Market

Home price declines are hitting those in the executive suite, too. Robert Ryder left IMG, a major sports marketing company in Cleveland, Ohio, to become CFO of Constellation Brands (STZ-$21.14) in May 2007. He sustained a loss of $324,269 on the sale of his home in Ohio when he relocated to the beer, wine, and spirits distributor's headquarters in Fairfield, New York.

Constellation Brands, however, reimbursed Ryder an aggregate $458,900 (including the aforementioned loss) for relocation expenses incurred in his move, according to the annual proxy filing.

Mr. Ryder also received a $349,700 tax gross-up related to his relocation. The Company did not delineate the specifics of this reimbursement.

"Hmmm." Ryder's
original employment offer covered 'reasonable' closing and relocation expenses, including the relocation of all his and his family members' personal effects, but excluded his new home purchase in New York.

Do the math: is $134,631 a warranted amount to spend on movers? Throw in the alleged tax recompense and you have enough to buy a house!

Constellation Brands, home to a portfolio of imported beers (Negra Modelo, Tsingtao, and Corona Extra), premium wines (Franciscan Oakville Estate and Ravenswood), and spirits (Black Velvet scotch and SVEDKA Vodka), provides a drinking perquisite to its executives and directors, too, known as the 'complimentary product allowance.' According to management, "product allowances enhance product knowledge and appreciation."

The amounts of these benefits provided to Chairman Richard Sands, his brother Chief Executive Officer Robert Sands, and CFO Robert Ryder in 2007 were $4,828, $5,303, and $4,771, respectively.

Consumers adopting the fashionable "cocktail culture" respond very favorably to the exciting flavors, concepts, packaging, positioning, convenience and flair of new and recently introduced premium spirits, says the Constellation Brands website. The 10Q Detective can think of some insiders who have embraced the spirit of this drinking strategy, too. [Constellation Brands reminds you to please drink responsibly.]

Indicators of real estate distress suggest the market has not hit a cycle trough: foreclosure activity is at record levels, non-owner occupied buying activity is increasing, and the credit markets are still a mess. Absent his firing for cause, Robert Ryder remains one of the lucky ones immune to bank buybacks or reset adjustable rate mortgages.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Tuesday, June 10, 2008

Peabody Energy Does Not Need Santa's Help With Coal Sales

Peabody Energy (BTU-$79.25), one of the world’s largest coal producer, provides more than 10% and 2% of the total electricity demand in the domestic and global markets, respectively. BTU's customers are utilities (accounted for 85% of sales), steel producers, and industrial companies.

With reserves of nearly 10 billion tons, BTU produces 240 million tons of coal a year from 32 mines in the US and Australia.

US based coal producers benefit from a weaker USD as it makes US coal less expensive vs. countries with stronger currencies. Coal is a vital resource to the country’s energy needs as it accounts for more than half the electricity generated in the U.S.

An estimated 267.6 billion short tons puts US as the largest known coal reserve holder, while China is the world’s largest coal producer and accounts for over a third of the coal mined worldwide.

Growing Demand

The International Energy Agency (IEA) estimates coal’s share of total world energy consumption is projected to increase from 25% in 2005 to 28% through 2030, and in the electric power sector, its share is estimated to rise from 43% in 2004 to 45% in 2030.

BTU - alongside its comparables Consol Energy (CNX), Arch Coal (ACI), Massey Energy (MEE) - have been on a tear of late, driven by demand from thermal coal markets and short and long-term factors, such as:
  1. production delays (Australia, world's largest exporter of coal, for BTU which saw revenues drop 93% due to flooding);
  2. drop in coal inventory levels at power utilities (i.e. South African exporters are 2.5 million tonnes lower YTD and the local utility companies announced a need to rebuild inventories by 45 million tonnes over the next two years);
  3. consumption demand, especially from the steel industry and developing countries (i.e. India, where coal demand, as forecasted by IEA, is expected to nearly triple by 2030). In total, global coal consumption is expected to grow 73%, or more than 4 billion tons by 2030;
  4. new global coal generation (e.g. new coal-fired electric plants under construction in the U.S. are expected to increase coal consumption by 50 million tons and new generating plants are under planning and construction in more than 70 nations);
  5. alternative energy supplies fall short or aren't developed to fully supply the market for now;
  6. major coal exporting nations retain more coal for domestic use (i.e. Indonesia and Russia);
  7. demand from Japan due to a nuclear reactor being shut down following an earthquake;
  8. China increasing coal imports as it has been adding thermal power plants to its generation fleet, as well as a series of snowstorms early in the year, thus reducing the delivery of coal from mines in northern China to power plants across the southern and western regions
  9. Coal-to-Liquids projects, such as developmental deals to transform coal to diesel and jet fuels.

More than 80% of the growth in global coal demand is expected to come from China and India. These two countries comprise approximately 45% of global coal use, which is projected by IEA to grow to 80% by 2030.

"We believe strong coal markets will continue worldwide, as long as growth continues in the US, Asia and other industrialized economies that are increasing coal demand for electricity generation and steelmaking." BTU Management, latest 10Q filing.


BTU's Q1 2008 total revenues increased $166.2 million, 15% YoY, to $1.28 billion thanks largely to higher volumes in the Powder River Basin and improved pricing from all domestic regions.

In Q1, BTU also benefited of a gain of $54 million from the sale of non-strategic coal reserves and surface lands located in Kentucky. Investors should note that BTU has off-balance sheet arrangements and hedging activities with VaR for their coal trading portfolios at approximately $50 million.

While some of the smaller met coal U.S. producers have outperformed BTU YTD—unlike BTU they are not likely to see much of an increase to 2008 estimates. Peabody had by far the most exposure of any producer to record benchmark prices, since it was easily the most unhedged met coal producer as of the beginning of this year.

Price Catalysts

Upcoming catalysts for BTU include the El Segundo Mine in New Mexico, which is a 6-million ton/year operation and is expected to be highly productive, with an overburden ratio approximately half of the neighbouring Lee Ranch Mine. With the addition of El Segundo, Peabody's New Mexico production should grow to nearly 10 million tons in 2010 from 5.8 million tons in 07.

The floods in the Australian (Queensland) subsidiary of BTU led to decrease in EBITDA by 94%/$58.7 million vs. last year. Once the Australian operations are back online, full utilization by Q4, BTU’s decision in 2006 to substantially increase its Australian exposure with the purchase of Excel Coal will begin to pay dividends.

Contributor Yaser Anwar does not hold a financial position in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure policy.

Monday, June 09, 2008

BioHeart: Too Early To Inject Hope into Heart Failure Patients

BioHeart, Inc (BHRT-$3.11) offers investors an opportunity to participate in the potentially profitable field of regenerative medicine. The Company is developing commercially viable products within the field of heart muscle repair: autologous myoblast-based clinical therapies to improve the contractile function of damaged hearts.

It's lead product candidate,
MyoCell, is an innovative clinical therapy designed to populate regions of scar tissue within a patient’s heart with stem cells from transplanted thigh muscle tissue for the purpose of improving cardiac function in chronic heart failure patients (months or even years post-myocardial infarction, NYHA Class II - IV).

In our view, the Company's business strategy is sound, first obtaining regulatory approval of MyoCell to treat patients with less severe heart damage, such as a Class III subgroup. If initial regulatory approval of MyoCell for Class III Subgroup were approved, the Company would then have a reasonable basis to sponsor clinical trials in an effort to demonstrate that MyoCell should receive expanded regulatory approval to treat patients in all NYHA Classes of heart failure—and increase its leverage in valuing licensing deals.

Over the last two years, the Company has successfully increased the maximum dosage of myoblast cells injected as part of the MyoCell therapy to approximately 800 million myoblast cells, which is believed to be the most effective therapeutic dose.

In terms of clinical development, safety and efficacy data ((patient deaths and irregular heartbeats) with skeletal muscle for heart repair has been mixed.

Skeletal Muscle for Heart Repair Studies

MG Biotherapeutics was conducting a European Phase II clinical trial,
MAGIC, powered to assess the safety and efficacy of two doses of autologous skeletal myoblasts, when compared to placebo injections, in the treatment of ischemic heart failure in 300 patients. In February 2006, after enrolling just 95 patients, the trial's Data Monitoring Committee recommended the termination of the study, concluding there was little likelihood that therapy would result in hypothesized improvements in heart function (contractility or global function)—although cellular therapy did appear to reverse LV remodeling.

Clinical findings from a European Phase II-a study of MyoCell,
SEISMIC, presented at the American College of Cardiology 2008 Scientific Sessions in April put to bed prior safety concerns. Data suggested the implantation of MyoCell in patients with heart failure was feasible and may provide symptomatic relief. However, global left ventricular ejection fraction [LVEF] still remained unchanged.

Form a safety perspective, skeletal myoblast cell therapy in SEISMIC was not associated with an increase in arrhythmias and appeared safe (risk management included implantable cardioverter defibrillator, or ICD, and anti-arrhythmic drug therapy in study patients prior to enrollment).

In terms of clinical development pathway, BioHeart has demonstrated positive 'proof-of-concept' data surrounding the safety and function of MyoCell. Surrogate physiological efficacy markers of heart function are mixed: no-change in LVEF, but positive changes in NYHA classification and ventricular remodeling.

The SEISMIC trial was an open-label study. To eliminate the possibility of patient and investigative biases, clinical data from a pivotal Phase 3 double-blind trial (MARVEL) on MyoCell is expected in the fourth-quarter of 2009.

There is some controversy in using LVEF as a primary efficacy endpoint in clinical studies, especially in the stem cell field. "EF is a fairly imprecise and somewhat variable number even in a single patient, because it represents the summation of the contribution of every wall of the heart and its loading conditions," said Warren Sherman, MD,
a principal investigator of the MARVEL study. "The EF misses changes occurring at the regional level, such as improvement in wall motion with exercise. This is especially important in evaluating area that have been injected with cells."

In terms of clinical development, our review of available data suggests BioHeart's adult muscle stem cell program is progressing quicker than competitors treating damaged hearts with fat or bone marrow cells

Adipose-Tissue Derived Stem Cells

Cytori Therapeutics, principally involved in developing autologous, adipose-tissue derived stem cells intended to be used in breast reconstruction patients, is using its proprietary stem cell platform in cardiac patients, too. Enrollment began for the APOLLO trial in January, a 48-patient, randomized, placebo-controlled, dose escalation, safety and feasibility multi-center study. A dose of adipose-derived regenerative cells, or a placebo, will be delivered through an intracoronary catheter within 36 hours following the onset of a heart attack.

Bone-Marrow Derived Stem Cells

Osiris Therapeutics completed a Phase I dose-escalation, safety study of its adult bone marrow-derived mesenchymal stem cell (MSC) product,
Provacel, for the treatment of acute MI.

Disease & Treatment: Paradigm or Paradox?

The ability to generate new muscle tissue within the scarred regions of a heart from stem cells is a new area of clinical development. As such, the commercial viability of MyoCell remains uncertain and challenging, for it is unclear what demonstrates acceptable [FDA] clinical endpoints—are improvements in NYHA Class or reduction in hospitalization rates less important surrogate markers than mixed improvement in cardiac function, such as LVEF?

Valuation Analysis

The market potential for MyoCell sales in the treatment of patients in NYHA II or NYHA Class III heart failure is significant. According to the American Heart Association and the European Society of Cardiology Task Force for the Treatment of Chronic Heart Failure, in the United States and Europe there are approximately 5.2 million and 9.6 million, respectively, patients with heart failure.

Given regulatory uncertainties, the 10Q Detective prefers to value BioHeart based on peer collaboration agreements.

For example, Boston Scientific invested a mere $5 million in Osiris’ development of Provacel for acute MI (deal recently terminated). Perkin-Elmer, which purchased ViacCell, best known for preserving umbilical cords of newborns, is selling its stem cell business', but will likely receive no more than $30 million to $50 million.

In our opinion, the science of stem cell therapies must continue to mature before large biopharma companies become more active investors. And that inflection point has yet to be reached.

We believe the 14.5 million shares of BioHeart fully-value the progress to-date of MyoCell clinical programs. This assigns nominal value to its
broad pipeline of complementary product candidates for the treatment of acute and chronic heart damage, including Bioheart Acute Cell Therapy, an autologous, adipose cell treatment immediately following an MI, and MyoCell SDF-1, a proposed therapy utilizing autologous cells genetically modified to express additional growth factors.

Contrary to the opinions of management, we anticipate that the regulatory approval of MyoCell is critical for further development of these other product candidates.

The Company said pivotal data for MyoCell will not be available until 2H:09. Its stock price will likely remain range-bound until news is heard from various European regulatory bodies to market MyoCell to treat the Class III Subgroup.

Investment Risks & Considerations

The MARVEL trial will require $17 million to complete. As of April, BioHeart had only $4.7 million in cash, with a monthly burn of $1.5 million.

The Primary MyoCell Patent expiry, which covers a composition for the treatment of muscle degeneration, comprised of cultured myogenic cells for use in their administration to diseased muscle, is July 19, 2009. Under the U.S. Drug Price Competition and Patent Term Restoration Act of 1984, however, BioHeart could petition the FDA for up to a five-year extension (to compensate the patent holder for a portion of the time required for research and FDA review of the product). As the FDA will likely complete its review of—and grant approval for?—MyoCell after initial patent expiry, management expects to seek interim extension beyond July 19, 2014.

The 10Q Detective cautions investors that MyoCell is not protected by patents outside of the United States, which means that it may be vulnerable to generic intrusion—competitors free to sell products that incorporate the same or similar technologies. As a result, MyoCell would lose valuable sales in European countries, which demographics suggest could be one of the largest potential markets.

Additional intellectual property portfolio patents, including heart muscle regeneration methods and device products do not expire until December 2019, and beyond.

Corporate Governance

Florida’s unemployment rate for April 2008 was 4.9 percent, standing at its highest level since February 2004. Irrespective of the economic slowdown, BioHeart takes care of family.
  • Mr. Spencer, III, a member of the Board, is the father of Mr. Spencer, IV, Vice President of Clinical Affairs and Physician Relations.
  • Mr. Leonhardt, Executive Chairman and Chief Technology Officer, is the cousin of Scott Bromley, Vice President of Public Relations, and the brother-in-law of Ms. Sulawske-Guck, Vice President of Administration and Human Resources.
  • The Company, from time to time, enters into consulting agreements and arrangements with certain members of its Board of Directors, too:
  1. BioHeart paid to Ascent Medical Technology Fund, an affiliate of 'independent' Director, Peggy Farley, Chairperson of the Governance & Nominating committee, a fee of $150,000 for the private placement of common stock in May 2007.
  2. Mr. Leonhardt has guaranteed Dr. Murphy, a director, the repayment of his initial $200,000 investment in the Company, too!

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Saturday, June 07, 2008

A Brave New World With Barack Obama

"Jerusalem will remain the capital of Israel, and it must remain undivided," Barack Obama declared Wednesday, to rousing applause from the 7,000-plus attendees at the American Israel Public Affairs Committee policy conference.

But a campaign adviser clarified Thursday that Obama believes "Jerusalem is a final status issue, which means it has to be negotiated between the two parties" as part of "an agreement that they both can live with."

Does Barack Obama switch his opinion more often than a parent changes a baby’s diaper? Guess it depends on whom he is pandering to on any particular day. “Political language is designed to make lies sound truthful,” said George Orwell, “and to give an appearance of solidity to pure wind.”

For more than 20 years, Barack Obama gloriously sung doxological hymns, praising roots in the Black religious experience: "We are a congregation which is Unashamedly Black and Unapologetically Christian....We are an African people, remaining "true to our native land," the mother continent, the cradle of civilization."

  • I agree with Trinity United Church of Christ supporters who argue that
Black Liberation theology is not ethnocentric. Neither, however, should these same advocates assume a Caucasian congregation solemnly upholding their own trust in God through cultural expression of a White worship service and ministries—remaining true to their Euro-centric values—is necessarily embracing superiority and the view that everyone else is inferior!

Hostilities between Iran-Iraq. How I miss the Imposed War, which lasted from September 1980 to August 1988. Bayonet charges by human-waves of boy-soldiers running into known minefields, aerial bombardment of urban centers, and static trench warfare—aside from fanatical Muslims killing other fanatical Muslims (for the glorious afterlife paradise where they can each marry 72 black-eyed virgins) - all abortive blunders leaving borders unchanged in the end.

Do not call me inhumane, for the "the enemy of my enemy is my friend." That said, this infidel's heart skips a beat when dwelling on the economics of the conflict status quo ante bellum: An estimated 500,000 Iranian dead (disputed), financial losses exceeding $500 billion, and a damaged oil infratsructure hurting oil production to this day.

If not for Sadam Hussein's personal miscalculation to invade Kuwaiti oil fields in 1990, leading to the cascade of events that culminated in his swinging from a rope on December 29, 2006, a parity might still exist between Iran and Iraq. Sadly—and thank you Bush, Cheney, and Rumsfield—Iran has emerged as the dominant power in the Persian Gulf.

  • In the historical context of the interminable Arab-Israeli conflict, few do-gooders—would that include ex-President Jimmy Carter?—seem to recall that in the period immediately after World War II, none of the Arab states was enthusiastic about setting up a Palestinian state. In fact, Transjordan, Syria and Egypt intended to carve up Palestine between them, or parts of it, and to prevent each other from having too large a slice of Palestine.

Fast-forward to 2008—Why must the Islamic dimension of the Palestine conflict leverage an illegitimate claim to sovereignty over Jerusalem? Kneeling on a musalla, Muslims perform their compulsory daily prayers in supplication to Allah facing Mecca. Wake-up, Barack!

…. Another inconvenient truth.

Wednesday, June 04, 2008

Raser Tech Update: Ha! Ha! Ha!

Raser Technologies, Inc. (RZ-9.97) recently held a groundbreaking ceremony in conjunction with the construction of its planned 10 megawatt (MW) Thermo geothermal power plant near Beaver, Utah. Steven Overback, The Salt Lake Tribune, brings us up to date on this "turning point in our energy future."

Monday, June 02, 2008

Bristol-Myers Boosts Oncology Pipeline With Kosan Biosciences Purchase

Bristol - Myers Squibb Co (BMY-$22.79) said on Thursday it agreed to buy Kosan Biosciences Inc (KOSN-$5.42) for $5.50 a share in cash, or about $190 million. In looking to replace lost sales of Taxol to generics, some analysts believe BMY overpaid for the cancer therapeutucs company, offering a 230% premium (to its stock price prior to the merger).

BMY is buying a company with two novel asset classes: heat shock protein 90, or Hsp90, inhibitors, and epothilones.


Heat shock protein 90 (Hsp90) is a molecular chaperone whose association is required for the stability and function of multiple mutated and over-expressed signaling proteins that promote the growth and/or survival of cancer cells. By binding to cell-surface Hsp90 client proteins, including mutated p53 and HER2/Neu (ErbB2), Hsp90 inhibitors cause the destabilization and eventual degradation of Hsp90 client proteins, offering the potential to overcome resistance after chemotherapeutic relapse and to potentiate the intial activity of existing cancer therapies.

The Company’s first and second generation Hsp90 inhibitor product candidates have demonstrated antitumor activity in multiple indications in early clinical trials.

Tanespimycin, or KOS-953, is an injectable suspension formulation in a Phase 3 clinical trial in combination with Velcade (bortezomib) in first-relapse patients for multiple myeloma, as well as in a Phase 2 clinical trial in combination with Herceptin (trastuzumab) for HER2-positive metastatic breast cancer.

Tanespimycin is not without liabilities. After promising earlier results, Kosan discontinued development of tanespimycin in metastatic melanoma after observing: "Phase 2 trial did not observe sufficient clinical activity to warrant continued pursuit of this indication." Huh? The 10Q Detective is left to suppose that limited efficacy owed to patients enrolled in the trial whose tumors lacked specificity for an Hsp 90 inhibitor.

Epothilones inhibit microtubule function, possessing a mechanism of action similar to taxanes, including paclitaxel, marketed as Taxol by Bristol-Myers Squibb Company, and docetaxel, marketed as Taxotere by Sanofi-Aventis. In contrast to taxanes, however, epothilone analogs are cytotoxic for cells overexpressing P-glycoprotein, a characteristic that makes them potentially more active against multi-drug cancer cell lines.

KOS-1584 is the lead epothilone in development, with a
Phase 2 trial underway in patients with non-small cell lung cancer who have already received one prior chemotherapy regimen.

KOS-1584, an analog of epothilone D, complimenting BMY’s existing epothilone program, which includes recent-to-market
Ixempra (ixabepilone) for metatstatic breast cancer, an analog of epothilone B.

The 10Q Detective acknowledges that the competitive field is crowded with epothilone analogs, including Biogen Idec, which has Phase 1 and 2 clinical trials in solid tumors with its oral synthetic Hsp90 inhibitor; Bayer Schering Pharma AG, which is in Phase 2 clinical trials with sagopilone; and, Novartis AG, which is reported to be in Phase 3 clinical trials with patupilone.

Valuation Analysis

In terms of economics, we fail to understand how BMY overpaid for Kosan. BMS had signed a licensing agreement worth up to $400 million with respect to the company’s epothilone compounds, of which $150 million targeted KOS-1584 oncology milestones, including regulatory approval.

Lazard Frères performed an analysis of the net present value of projected operating free cash flows for 2008 to 2018, using discount rates ranging from 12% to 16 percent, derived from the weighted average cost of capital analysis that Lazard calculated for the company. Based on this analysis, Lazard arrived at an implied value per share range for the Company of $4.47 to $6.32 a share, consistent with the per share consideration of $5.50.

BMY, with about $2.64 billion in hand, could pay for this deal out of petty cash.

Editor David J. Phillips holds a financial interest in Bristol-Myers Squibb. The 10Q Detective has a Full Disclosure Policy.