Weekend Beach Reading: Monday, September 1, 2008

It’s an addiction that threatens our economy, our environment and our national security — oil. In a four-minute video and legends of commercials on television, Boone Pickens, the legendary oil tycoon, says the U.S. can reduce dependence on foreign crude by harnessing domestic energy alternatives (the "Pickens Plan"), such as wind and natural gas.

Jianqiu Yu, Chairman and Principal Executive Officer, said Gushan Environmental Energy (GU-$10.30) plans to raise its annual biodiesel production capacity from 290,000 tons to 400,000 tons by the end of 2008 and 600,000 tons by the end of 2009. Despite a continuing shortage of diesel supply in China, however, operating profitability at the company could come under pressure in coming quarters.

CEO Jack Friedman’s total pay at toymaker JAKK’s Pacific (JAKK-$24.95) remains insensitive to stock performance — the ultimate benefit to shareholders.

Rupert Murdoch continues to make CEO succession a high-profile issue at News Corp (NWS-$14.36). In the company’s just-filed 2008 proxy filing, the first item of note is that the company’s longtime No. 2, News Corp. President Peter Chernin, gets paid as much as the top boss.

The Chairman and CEO of Quest Resource Corp (QRCP-$4.81), Jerry Cash, resigned Monday after the Oklahoma Department of Securities launched an investigation into alleged fund transfers from the natural gas exploration company to an entity controlled by Cash. Initial indications are that the questionable transfers could involve about $10 million. What were the monies to be used for?

Suntech Power (STP-$47.81) said its gross margin rose to 24.1 percent in the second-quarter ended June 30, from 20.3 percent a year ago. The gross improvement was mainly due to stronger pricing driven by strong product demand and appreciation in the euro versus the U.S. dollar — less to do with an expected drop in polysilicon pricing.

Continued rapid growth at United Therapeutics (UTHR-$106.13) is contingent upon the company expanding commercial development of its Remodulin platform from refractory treatment (in the sickest patients) to front-line therapy for newly diagnosed patients.

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

Round 2: Boeing - Machinist Fight

In a stare-down contest with its Machinist union, The Boeing Co (BA-$66.79) blinked first. The aerospace giant yielded to demands from the International Association of Machinists, which represents about 19 percent of its workers, and withdrew a proposal to switch new hires from penion-based retirement plans (with related healthcare coverage) to one based on a 401 (k) plan.

Boeing removing the pension chip from the table was never taken as a serious threat by the union, for the actual return on the $50.4 billion in plan assets has exceeded benefits paid to retirees two years running, according to the 2007 10-K filing. For example, in fiscal 2007 plan assets (as of September 30) increased by $6.02 billion and benefits paid (including related healthcare charges) totaled only $2.39 billion.

Boeing only shelled out $580 million in actual cash in 2007.

Distance between the two sides still remains on how to cut healthcare payments to future retirees. Retired workers already absorbed $135 million in scaled-back coverage in the last two-years. Boeing is still proposing to eliminate early retiree medical benefits for new machinists. The union threatens to call a strike vote if management does not remove this demand by September 4. Although, the status of other post-retirement benefits remains under-funded by $7.57 billion, the company can easily draw from assets in over-funded plans to meet retiree healthcare bills in coming years.

What the two sides can readily agree on, however, is that unless the potential strike is settled soon, the scheduled first flight of the troubled commercial Dreamliner 787 could be delayed beyond the fourth-quarter of this year.

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.

Less than Sexy Growth at Playboy Enterprises

Although successful in cutting $7.4 million in overhead costs, principally in the publishing sector, Playboy Enterprises (PLA-$4.25) still reported a net loss for the second-quarter ended June 30 of $2.1 million, compared to $1.9 million in profit for the prior year period. Additional restructuring initiatives to cut spending further lay ahead in the second half of 2008, according to Chairman and Chief Executive Christie Hefner.

Advertising sales for the third-quarter magazine issues are closed, and management said it expects to report an additonal 10 percent decrease in advertising pages compared to last year, according to its second-quarter 10-Q filed with the SEC.

The firm is also dealing with the fallout from changes in consumer behavior for its digital content. Rival demand from video-on-demand platforms is stealing traffic from its traditional pay-per-view distribution channels.

To stem faltering growth, Playboy's near-term business strategy is the trite "slash-burn" maneuver. Ms. Hefner told analysts on its second-quarter earnings call that the company would implement an additional $10 million in cost reductions, half from TV and publishing and half related to corporate administration, in the second half of the year.

Hefner said the cuts in expenditures were "critical" to the company moving forward with solid footing in 2009. What she modestly forgot to mention, however, is that Playboy is still on the hook for an aggregate $8.3 million in guaranteed purchase payments (due in 2008 - 2010) for the 2006 acquisition of Club Jenna, a hardcore film production company founded by porn star Jenna Jameson.

Did the stripper best the chief executive?

Original new stories can also be found at BNET Energy & BNET Insight: 10-Q Detective

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.

Good Times Pass O'Charley's By

After three years of trying to turn around slumping sales and traffic, casual-dining company O'Charley's Inc. (CHUX-$10.02), home to O'Charley's and Ninety Nine restaurant chains, is backing away from its re-branding recipe efforts in the corporate kitchen, according to its 10-Q filed Aug. 20.

As part of the re-branding initiative, management fiddled with menu offerings, higher guest service standards (complete with guest satisfaction surveys), and the introduction of concept specific elements, including new uniforms, plateware, menu designs, and Curbside-To-Go service.

But contrary to the happy sing-along commercial for its Ninety-Nine Restaurant, diners at the 114 New England locations could not find "ninety-nine reasons to come back for more," as same-store sales and guest traffic for the second-quarter 2008 ended July 13 fell year-on-year 3.1% and 5.8 percent, respectively.

Unfortunately, "Good Food, Good Times" started and stopped with the rolls at the O'Charley's Restaurant, too. Same-store sales and guest traffic at the 228 restaurants for the second-quarter, on average, dropped 1.4% and 4.5 percent, respectively, compared with the prior year.

Management is learning the hard way that tinkering with box economics, which is the relationship between the capital investment in restaurants and the sales and related operating margin that those sales produce, is not as simple as analyzing a Harvard Business School case study. Rising food and energy prices combined with the impact on discretionary consumer spending from a slowing economic environment can flatten the soufflé of the most-gifted chef. Not that the board of directors would know the difference between a reactive and nonreactive saucepan, as just three of the eleven members of the board have any food retailing experience, according to the April 2008 proxy filing.

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.

10Q DETECTIVE Inks Distribution Deal with CBS/CNET

10Q Detective is pleased to announce a definitive distribution arrangement with CBS/BNET, where original 10Q Detective content can now be found on BNET Insights and BNET Energy.

After three years of going it alone, this deal affords us a unique platform from which to nationally distribute 10Q Detective analysis to a wider audience. Weekend Stock Alerts and investment valuation reviews can still be found here on the blogspot site, but for those loyal readers still counting on the 10Q Detective "to dig through businesses’ 8-K, 10-Q, AND proxy statements filed with the SEC, looking for financial statement 'soft spots' and other juicy insider transactions," PLEASE JOIN US AT OUR NEW HOME.

Editor David J Phillips

Weekend Beach Reading: August 25, 2008

AeroVironment (AVAV-$33.01), best known for its hand-launched, remote-controlled surveillance and reconnaissance aircrafts, is quietly gaining altitude in the wind power industry.

Despite record energy prices in the second-quarter, Anadarko Petroleum (APC-$$58.65) said its net income for the three-months ended June 30 fell 98 percent to $23 million, due to $1.6 billion in derivative trading losses.

Green Plains Renewable Energy (GPRE-$6.85) is celebrating commenced production of ethanol at its new 55 million gallon per year facility in Superior, Iowa. If a bill introduced by Senator Kay Bailey Hutchison (R-TEX), and co-sponsored by eleven other Republican Senators-including John McCain – that calls for freezing the corn ethanol mandate at 2007 levels of 4.7 billion gallons – becomes law this fall, the ethanol producer’s celebration could be short-lived.

National Oilwell Varco (NOV-$77.10) benefited from higher rig construction volumes in the second-quarter ended June 30, with its Rig Technology segment reporting a 49 percent year-on-year increase in operating profit of $506.4 million. Going forward, however, higher material costs, such as steel for piping, could offset improved manufacturing efficiencies.

Suntech Power (STO-$46.75) said that 45 percent of its polysilicon, which accounts for about 70 percent of Suntech’s costs of goods sold, still came from the spot market in the second-quarter, and that ratio should remain the same for the rest of 2008. In a conference call with analysts, however, Chairman and Chief Executive Dr. Zhengrong Shi said raw material costs as a percentage of total costs of goods sold are expected to decline at least 20 percent the coming year.

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.

Enough Boasting: "Get 'er Done" -- Raser Technologies

Raser Technologies, Inc. (RZ-$8.05) announced today that it has completed setting the first 20 geothermal generating units at its Thermo plant in Beaver County, Utah. Not one to side-step the limelight, Brent M. Cook, Raser’s Chief Executive Officer said: "We are on schedule to accomplish something that we believe has never been done in the geothermal world. We anticipate that with an October completion, this will be the first commercial geothermal power plant developed in less than a year."

Enough of the boasting. "Get 'er done." -- to borrow a phrase from Larry the Cable Guy.

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.

Co-Founders of Chindex Int'l Call China "Home Sweet Home"

Roberta Lipson, chief executive and co-founder of Chindex International (CHDX-$13.19), epitomizes the mindset of named executive officers—deriving personal benefits at common stockholders' expense. The medical products company, which distributes medical devices and instrumentation (such as diagnostic imaging equipment) to hospitals throughout China, reimbursed Ms. Lipson $74,371 for tuition expenses for her two sons in China—up from $39,400 in the prior year—and $70,000 for family housing expenses, according to the company's Proxy Statement filed with the SEC on August 12, 2008.

Granted, it is common practice in employment contracts to pay the expatriate's living and/or housing costs while the employee is living abroad.

Albeit the company’s administrative and executive offices are located in Bethesda, Maryland, Roberta Lipson is an atypical expatriate. The 10Q Detective notes that Lipson has called China her home since moving to the Far East in the late 1970's. Her staying in China had already been built into her work-life equation when she co-founded the company in 1981. Why then the need for an additional $134,000 in annual "all other compensation?"

Co-founder Elyse Beth Silverberg also received a housing allowance and "home leave" expenses of $60,000 and $10,000, respectively, for fiscal 2007, as guaranteed in her eight-year employment agreement. (Child tuition reimbursements were afforded to her, too, in past years).

Roberta Lipson and Elyse Silverberg beneficially control 20.6% and 12.8 percent, respectively, of the total voting stock in the company.

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.

Weekend Beach Reading: August 18, 2008

Despite record energy prices in the second-quarter, Anadarko Petroleum (APC-$57.61) said its net income for the three-months ended June 30 fell 98 percent to $23 million, due to $1.6 billion in derivative losses.

Although a $250 million cash infusion is good news, if sellers can contract higher liquefied natural gas prices in Europe and Asia, where will Cheniere Energy (LNG-$4.89) find suppliers willing to ship LNG to its U.S. terminals?

The process of digging fossil fuels out of the ground is getting more expensive. Natural gas producer EXCO Resources (EXC-$22.58) said drilling and development capital expenditures alone increased almost 34 percent to $136 million for the second-quarter ended June 30, compared with the prior year quarter.

Rentech (RTK-$2.33) said it lost $54 million in the nine-month period ended June 30, much of it due to R&D expenses, However, the coal-to-liquid fuel company is finally producing liquid synthetic fuel at its $45 million Product Demonstration Unit in Commerce City, Colorado, using natural gas as the feedstock.

Ethanol producer VeraSun Energy (VSE-$7.20) said net sales from ethanol increased $710.4 million to $852.7 million for the second-quarter ended June 30, driven by additional production from new capacity and higher ethanol prices. Nonetheless, escalating prices of corn and natural gas continue to depress gross profit margin, which declined 121 basis points to 7.1 percent as a percentage of sales.

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.

Blank Graduation Diploma for Mesa Labs

At first glance, its razor –to- razor blade business model is working well for Mesa Laboratories (MLAB-$22.00). The electronic instruments and disposables maker reported an impressive 23.5% net profit margin on $20.4 million in sales in the trailing twelve-months ended March 2008. Mesa sells dialysis meters and calibration solutions as well as dialysis meter services. Its data logging and biological indicator products are used in the pharmaceutical industry.

Cash conversion (i.e. the amount of sales turned into cash flow from operations) was 23.6% in 2007.

Compared to the medical instruments and supplies sector, the stock looks cheap. MLAB is trading at a current PE of 15.7 times trailing earnings of $1.41 per share versus the sector PE of 22.3.

Sounds like a winner, right? Don’t hit the bid just quite yet.

For all its success in turning out profits and cash flow, it has taken Mesa twenty-six years to break the $20.0 million annual sales barrier. The company is also falling behind the rest of the industry in terms of growth, slowing to just 9.5% year-over-year—which is half the 20 percent average growth in the rest of the medical instruments industry.

Seeds of underachievement

The Company has put only $2.0 million into research and development in the last five years! Capital spending totaled $2.2 million in the same period. Make no mistake—Mesa has introduced upgrades to its product line, tweaking this feature—or that—to get better performance. However, there has been no major product introduction in some time, leaving open the door to competitors with better "mouse traps."

How were these seeds of underachievement sowed? An investor needs look no further than managements’ bios to answer that question.

Luke Schmieder - The Lost Years

"A man who has never gone to school may steal from freight car; but if he has a university education, he may steel the whole railroad." ~ Theodore Roosevelt

Luke Schmieder, Mesa’s current Chairman and CEO, has been with the Company since its inception in 1982. The five years before that he apparently tinkered around as a consultant on product development in the "medical field." He also worked for Cobe Laboratories, from 1970 to 1977. Investors are left to wonder about his early career accomplishments –if there were any.

At the age of 65, investors can expect at least some indication of what Schmeider was doing in the 1960’s. It might provide a clue to why Mesa has taken 26 years to reach $20 million annual sales.

We also are left to ponder about Schmieder's academic accomplishments, since his biography in Mesa's most recent proxy filing indicates simply that, "Mr. Schmieder attended Ohio State University and Ohio University taking courses in mechanical engineering and business management." Does no word on a degree mean Schmieder did not graduate?

Contributor Debra Fiakas does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Triage Too Late for Triad Guaranty -- Except for CEO Tonnesen

Following unsuccessful efforts to raise capital and to participate in building a new mortgage insurance business, Triad Guaranty (TGIC-$1.65) warned investors it would discontinue writing new mortgage-insurance business on July 15 and pursue the "transition of its existing business to voluntary runoff." In other words, the company's forward revenue will come from servicing current policy obligations in force, set to expire over the next seven to 12 years.

The mortgage insurer has posted a combined loss of $423.8 million in its past three quarters, related to the spreading collapse of the housing and mortgage markets, specifically in the soft markets of California, Florida, Arizona, and Nevada.

The gross default rate for the second-quarter ended June 30 stood at 7.3 percent, up 460 basis points from the prior year period. The composition of default inventories shifted more to newer policy years and the distressed markets.

The company admitted on its earnings call to analysts that it uncovered a much higher than expected amount of fraud and misrepresentation in its recent loan years.

CEO Mark Tonnesen's Golden Years

How did the Board of Directors reward its chief executive of nearly three years, Mark Tonnesen, who oversaw the implosion of the mortgage insurer? An early retirement, complete with a severance and bonus package worth at least $525,000, according to regulatory filings.

Tonnesen, 56, will retire August 15—about 4½ months ahead of the December 31 date set in an employment-contract agreement previously reached in April.

Benefits payable to Tonnesen under his amended severance agreement:

• A retention bonus of $150,000 paid to him in July 2008 for staying on as chief executive through July 1; and, a retention bonus of $300,000 and a severance bonus of $225,000, which will be paid to Mr. Tonnesen in August 2008 as a result of his retirement effective August 15, 2008.

Retention bonus is most likely a euphemism for “don’t let the door hit ya' where the dog should have bit ya'.

• Following his retirement, Triad will also pay Tonnesen $675,000 for work as a consultant.

Not to be rhetorical—but, given the company is not issuing any new mortgage insurance, why does Triad need him around as a consultant for two more years?

This is the same chief executive who waited until October 2007 to tell analysts that "the implementation of more stringent underwriting guidelines focused on agency conforming products by lenders… was prudent and good for the mortgage insurance industry."

Ironically, when production volume surged through its flow channel—from preferred customers like Wells Fargo Home Mortgage and Countrywide Credit—underwriting guidelines were not a chief concern of Tonnesen.

Could the $675,000 consultancy agreement be nothing more than a feeble ruse to reimburse Tonnesen for monies lost in previously awarded equity/option grants and phantom stock, which are now worthless? Fellow investors in Triad stock can take solace in the wretched knowledge that Tonnesen did lose more than $3.9 million—or almost 99 percent—in market value of the aforementioned equity awards.

We doubt the 45 percent of the workforce recently terminated got as good a severance deal as Tonnesen.

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.

Weekend Beach Reading: August 11, 2008

ENSCO Int’l (ESV-$64.01) reported another record quarter with net income up 17 percent year-on-year to $297 million, reflecting higher day rates and improved utilization. With the planned expansion of its active deepwater rig fleet commencing in 2009, management believes that its deepwater assets will contribute 30 percent of total revenue by 2012.

First Solar (FSLR-$257.87) reported net income year-over-year rose 57 percent to $69.7 million, as higher-than-expected production from a new plant in Kulim, Malaysia and yield and efficiency improvements helped it meet surging demand. The company, which currently sells most of its modules to European customers, is looking to establish a foothold in the United States.

Even though revenue rose almost 32 percent in the second-quarter ended June 30 to $22.2 billion, Marathon Oil (MRO-$45.99) said its net income declined 50 percent to $774 million, or $1.08 a share, hurt by lower refining and marketing margins. Management is considering a plan to split the company into two independent companies, one focused on upstream activities, such as exploration and production, and the other dedicated to refining and marketing.

Ocean Power Technologies (OPTT-$8.85) is struggling to gain commercial acceptance for its proprietary PowerBuoy wave generation system, which extracts the natural energy in ocean waves, converting it into usable electrical power for utility-scale grid-connected applications. Can anyone get the chief executive to admit that demonstrating proof-of-concept differs from commercial acceptance?

Quicksilver Resources (KWK-$25.20) is demonstrating the success to be found via the drill bit on the Barnett Shale Formation near Fort Worth, Texas. Production volumes of natural gas and natural gas liquids in Barnett Basin grew by 120 percent for the second quarter.

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.

Bumpy Road for CarMax

Aggressive incentives offered by new vehicle makers, coupled with consumer preferences for smaller cars in the face of rising gas prices, is denting demand at used car retailer CarMax (KMX-$14.87). Traffic and sales have weakened further since Memorial Day weekend, with the largest retailer of used vehicles in the U.S. reporting a (comparable store) used unit sales drop of 17 percent, on average, for the months of June and July.

As a result, CarMax said it reduced its used vehicle inventory by 9,500 units, or about $150 million, during those two months and adjusted the vehicle mix to reflect changes in consumer preferences. Management did not disclose the amount of asset charge-offs to be expected from the forced inventory reduction.

Moving the bloated inventory of trucks and SUVs on its used car lots will undoubtedly force the company to lower retail prices, too, further eroding profit margins of those vehicles.

Auto Loan Issues

In addition, the 10Q Detective alerts investors that problems brewing at consumer loan originator CarMax Auto Finance (CAF) will adversely affect margins in fiscal 2009.

In the first quarter of fiscal 2009 ended May 31, CAF segment income declined 74 percent year-on-year to $9.8 million, hurt by higher funding costs.

Past due accounts as a percentage of ending managed receivables rose 44 basis points to 2.41 percent. And, the recovery rate, which represents the average percentage of the outstanding principal balance received when a vehicle is repossessed and liquidated at wholesale auction, hovered at about 47 percent.

As the economy sinks further into a recession, we expect delinquencies and losses to accelerate at CAF.

Long-term Outlook

CarMax has a healthy balance sheet, with only $315.4 million in long-term debt (20 percent of stockholder equity), and can weather the current economic storm better than its retailing peers, Penske Auto Group and Group 1 Automotive, with respective total debt –to- equity ratios of 182.5% and 216.3 percent.

Furthermore, existing operations penetrate 41 metropolitan markets, comprising approximately 43 percent of the U.S. population. A national brand that leverages a website as a marketing tool helps turn traffic into customers, too.

Nonetheless, we are still window-shopping, not sold that the worst is behind CarMax and its stock price.

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.

ENSCO Int'l Hits Dry Hole with Auction Rate Securities

Add ENSCO International (ESV-$64.09) to the list of companies holding unrealized losses in auction rate securities (ARS). Talk about poor timing, the contract driller acquired the $73.3 million of securities in January 2008—just as illiquidity problems with Level 3 paper became widely known to investors.

In the second-quarter ended June 30, the company took a $3.3 million unrealized loss due to the reduced value of its portfolio of student loans. And, like other companies holding the dung, management said the adjustment to its ARS holdings were but "a temporary decline in value." As the 10Q Detective has cogently argued prior—if temporary, why did the company subsequently reclassify this portfolio as non-current investment securities? Albeit a non-cash loss, this signals to us that actual market value losses could be much larger, for such an accounting maneuver keeps the value declines of the income statement (unrealized losses are reported in a contra stockholders' equity account on the balance sheet) until ultimate sale.

Management now intends to hold its ARS until they "can be liquidated in a market that facilitates orderly transactions." If need be, the company will hold their investments in this illiquid paper until their maturity dates, ranging from 2025 to 2047!

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.

AMDL Management Self-Promoting a Buyout

AMDL (ADL-$3.00), which derives almost 70 percent of its sales in China from two products—the anti-emetic Domperidone and Human Placental Histosolution (Goodnak), part of its anti-aging treatment portfolio—has a history of disappointing investors.

On Friday, the specialty pharmaceutical company revised its second-quarter earnings and revenue guidance lower, largely due to unexpected delays in revenue recognition from unshipped product of Domperidone, which management blamed on the May 12 earthquake in Southwestern China.

All things are subject to interpretation whichever interpretation prevails at a given time is a function of power and not truth. ~ German philosopher Friedrich W. Nietzsche (1844 – 1900)

The 10Q Detective notes that sales in Southwest China represent about one percent of aggregate sales, according to a July 3 Investor Relations presentation.

The news on second-quarter results overshadows AMDL's announcement last month that it had finally received—after years of delay—clearance from the U.S. Food and Drug Administration to market its immunoassay ELISA DR-70 Blood Test, a method for monitoring patients with previously diagnosed colorectal cancer (CRC).

The near and long-term business strategy of management is to market the DR-70 CRC blood test, obtain regulatory approval to market additional generics, and to fund the growth of existing products.

In light of deteriorating fundamentals and cash on hand of approximately $2.0 million—enough to fund about five-months of existing operations—the 10Q Detective believes that the U.S. launch of the CRC blood test and expansion of its Chinese sales force will be delayed until the company attracts additional operating capital.

Corporate Governance

CEO Gary Dreher received a 41.9% raise in his base pay to $649,999 and a guaranteed bonus of at least $100,00 (cash and/or stock options) for fiscal 2008, according to the Proxy Statement filed on August 1 with the SEC. Given the erratic operating performance of AMDL, his new riches sound more like a retention bonus.

Self-Promoted Buy-Out

AMDL is promoting itself as a buyout candidate. Citing its attractive infrastructure of 118 distributors in the Peoples Republic of China, management says: "AMDL could easily become a buy-out target for a firm such as Teva Pharma or other Big Pharma by the end of 2008."

Given the continued financial troubles at AMDL, Dreher, who beneficially owns 8.6% of the outstanding stock, including 600,000 shares with strike prices between $3.45 a share and $3.70 a share, would probably give a thumbs up to a deal.

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.

Weekend Beach Reading: Monday, August 4, 2008

In the first half of 2008, net income at Arch Coal (ACI-$54.21) nearly tripled to $194.1 million compared with the first half of 2007. The company’s latest operating performance offers more evidence of tight supply conditions and strong demand for coal globally.

Energy watchers buzzed over the announcement that Brigham Exploration (BEXP-$13.98) completed its Mrachek 15-22 1H well, located west of the Nesson Anticline in North Dakota, at an early flowing production rate of approximately 727 barrels of oil equivalent per day. Contrary to expectations, given the highly variable nature of the Bakken Shale Formation reservoirs stretching across North Dakota and Montana, it is unlikely that aggregate Bakken production will exceed more than three times the current rate of 1,276 barrels equivalent per day in North Dakota.

ExxonMobil (XOM-$79.72) announced record net income of $11.7 billion in the second quarter, up 14 percent from last year, due to record-high oil prices. Management said, however, aggregate oil and gas production slipped 7.8 percent. The Company also spent $8.8 billion on repurchases during the second quarter. Given growing global restrictions on its access to productive reserves, is a stock buyback the most prudent expenditure?

GT Solar Holdings, LLC, sold 30.3 million shares of its stake in GT Solar International (SOLR-$11.88) at a price of $16.50 per share, leaving the investment entity with a 78.3 percent controlling interest after the initial public offering. The solar-cell equipment supplier lost about 30 percent in market value in its first two days as a public company, suggesting the heretofore unthinkable — the growth outlook for solar fabrication makers might be powering down.

Although he failed to meet fiscal 2008 performance goals — implementation of Sarbanes-Oxley initiatives and gross margin and net income targets — the Board of Hoku Scientific (HOKU-$6.06) is paying chairman and CEO Dustin M. Shindo a cash incentive payment of $760,000, or 200 percent of base salary for the year that ended in March. Hoku is rewarding Shindo more for his ability to raise capital than actual management or business strategy skills.

Like most of its coal-mining peers, Peabody Energy (BTU-$64.77) benefited from favorable supply and demand fundamentals in the second quarter. Continued higher-than-expected prices, combined with significant open-ended supply agreements (unlocked pricing) on future tonnage, positions the company to record fiscal 2009 and 2010 earnings, too. How long before the discussion on windfall profit taxes shifts from oil to coal on Capitol Hill?

Schlumberger Ltd. (SLB-$100.20) said its second-quarter profit rose 13 percent year-on-year to $1.42 billion, as higher oil and natural gas prices led to record spending among customers seeking to renew reserves. Could the shift of oil-wealth management from integrated oil companies to nation states be a big plus for oil-service contract companies?

Valence Technology (VLNC-$3.75) claims that more than 100 companies are testing or have implemented its energy storage technology. The only way the lithium-battery maker can cover its working capital needs, however, is by borrowing monies from founder and chairman Carl Berg, according to its proxy statement.

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.

More Pain Ahead for KV Pharma Shareholders

The share price of KV Pharmaceutical (KV.A-$20.49) is close to a two year low and fetches a scant 10.9 times FY 2010 earnings. Nonetheless, the 10Q Detective opines that the stock of the integrated specialty drug company, home to brand name products, such as the anti-infective Clindesse and the prescription prenatal PrimaCare ONE, and a host of generic products, is not a value play.

The company grew consolidated net revenues at a compounded annual growth rate of 19.4% in the last five years. Similar forward growth could easily lead to a doubling in the current market capitalization of $1.02 billion, save for an excess of problems distracting management.

Talking Points

• Relations with the FDA have soured, which could adversely impact marketing approval of new submissions. Federal authorities seized more than $24 million of unapproved new drugs (to treat coughs, colds and gastrointestinal conditions) on Tuesday.
• Generic morphine tablets were recalled in Canada after some were found to contain too much of the painkiller.
• The company disclosed a material weakness in its internal controls related to the accounting of some customer rebate programs. Remedial actions are being implemented, including a procedure to verify actual customer receipt dates.

Stuffing the channels
Perception of sales growing
Watch out for chargebacks. ~ 10Q Detective Haiku poem

• In the fourth-quarter of fiscal 2008 ended March 31, the company took a $1.6 million unrealized loss due to the reduced value of the auction rate securities (ARS). Albeit this was a non-cash charge, the company holds $83.9 million in principal amount of such "illiquid" securities.

Of interest, management had said the adjustment to its ARS holdings were but "a temporary decline in value." If so, why did the company subsequently reclassify this portfolio of student loans as non-current investment securities? This signals to us that actual market value losses could be much larger, for such an accounting maneuver keeps the value declines of the income statement (unrealized losses are reported in a contra stockholders' equity account on the balance sheet) until ultimate sale.

Corporate Governance

The Hermelin family, through the family trusts, controls about 11.5% of Class A shares and 68.6% of Class B shares, according to the recent Proxy Statement filed with the SEC. Both classes of stock trade for about the same price, but Class A shares have only one-20th the voting power of Class B shares.

This explains why KV founder Victor Hermelin, 94, who retired more than thirty years ago, still receives a salary and other compensation (which totaled $142,970 in 2008) "in consideration of continuing valuable services as a consultant to the company, ongoing role as confidante, and contributions that could not be contemplated."

Current management includes his son, Chairman and CEO Marc S. Hermelin, 66; daughter-in-law, Sarah R. Weltscheff, employed as Senior Vice President, Human Resource; and, his grandson, Vice President of Corporate Strategy David S. Hermelin, 41.

Even in death, shareholders remain indebted to Marc Hermelin. His employment contract provides that upon his demise the company will make a $500,000 donation to the charity of his choice!

A constant battle for the ultimate state of control
After you've heard lie upon lie
There can hardly be a question of why
Some love is just a lie of the heart.

As if common stockholders did not have enough to worry about—another distraction at KV is familial infighting, for Victor is struggling to wrest control of the company from his son Marc—something to do with Victor’s second wife and her two daughters, whom he adopted in 2005.

The cold remains of what began with a passionate start
But that can't happen to us
Because it's always been a matter of trust. ~ singer/songwriter Billy Joel

That said, if Marc can get dad off his back, there is a huge incentive to sell the company—$39.6 million worth of motivation.

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.