Former Homestore CEO Stuart Wolff "Coulda Been a Contender."

Back in March 2001, in an online interview with BusinessWeek, the then founder and CEO of online real estate listings company Homestore Inc., Stuart Wolff, credited the ability of his company to survive the dot.com meltdown to its ‘unique’ business plan: “The companies that had models that showed there was a new way of doing business are the ones that have gone by the wayside (like Pets.com and Webvan). Our model was always to partner with our industry. It was our intent to use technology to help make realtors more efficient, not to put them out of business.”

History has shown, however, that there was nothing singular about Homestore’s business model. Instead, like many other erstwhile Wall Street highfliers, Wolff and his Company's success was grounded in accounting fraud. Wolff and a dozen or so other executives—motivated by greed—schemed to artificially inflate revenues through a ‘circular flow’ of money (by way of more than $67.0 million in sham online advertising—Homestore booked its own cash as sales).

As of December 31, 2000, Wolff held about 550,000 “in-the-money” stock options worth an estimated $5.56 million (at the fair market value of $20.13 per share).

In the prior two years, too, Wolff had exercised options to acquire some 2.35 million shares of common stock in exchange for a promissory note of about $3.24 million (at an interest rate of between 5.21 percent – 5.49 percent).

Indicted in April 2005, a federal court jury returned a guilty verdict against Wolff in his criminal trial (in June 2006) on 18 counts, including conspiracy, insider trading, filing false reports with the SEC, falsifying corporate records, and lying to the auditors.

On Oct. 12, 2006, prior to sentencing, Judge Percy Anderson said, “There comes a time when you have to accept responsibility…. Your failure to do that compels me to impose a substantial sentence.” Wolff was sentenced to 15 years in federal prison (of which at least twelve-years must be served before he is eligible for parole) and ordered to pay $8.64 million in restitution and a $5 million fine.

“You had marketable skills, you had money,” scolded Judge Anderson, "there was no excuse for this.”

“You don’t understand! I coulda had class. I coulda been a contender. I could’ve been somebody, instead of a bum, which is what I am.” – Terry Malloy (Marlon Brando—actor, On the Waterfront – Directed by Elia Kazan)

Wolff, 43, who holds a doctorate in electrical engineering from Princeton University (with research experience at AT&T Bell Labs and IBM), headed Homestore from 1997 until he resigned in January 2002 (amid an internal probe of the Company’s finances). His salary/cash bonus totaled $487,115, $447,308, and $285,538 in fiscal year 2000,1999, and 1998, respectively.

The Company, which provides real estate listings and related services on the Internet, has since changed its name to Move, Inc. (MOVE-$5.45).

Wolff’s attorneys (who had sought a sentence of two-to-six-years) said that an appeal is expected.

Editor David J. Phillips holds no financial interest in any of the stocks mentioned in this article. The 10Q Detective has a full disclosure policy.

The Vultures are Circling above Bodisen Biotech

As predicted, the window of class action lawsuits has opened against organic fertilizer maker Bodisen Biotech (BBC-$5.29).

Earlier today, in their ongoing attempt to “champion the rights of investors nationwide,” New York-based Rosen Law firm filed a class action against Bodisen Biotech and certain of its officers and directors, as well as Benjamin Way and New York Global Group for violations of federal securities laws. The Complaint alleges that the Company failed to disclose that it was paying New York Global to issue positive research reports on the Company. As a result of the alleged fraud, Rosen charges that the value of the Bodisen’s stock has declined and damaged investors.

Committed to you—the investor—the Law Offices of Howard G. Smith announced that it has filed a securities class action lawsuit (on behalf of shareholders who purchased the common stock of Bodisen Biotech, too).

Their complaint alleges that defendants violated federal securities laws by issuing a series of material misrepresentations to the market during the Class Period (between August 26, 2005 and November 14, 2006) concerning the Company's business, prospects and financial performance, thereby artificially inflating the price of Bodisen securities.

The 10Q Detective spotted this joke online the other day: What's the difference between a lawyer and a vulture? The lawyer gets frequent flyer miles.

And the self-professed “champion for victims of corporate wrongdoing,” Kahn Gauthier Swick, LLC (KGS), announced that it has commenced an investigation into Bodisen Biotech to determine whether it has violated federal securities laws by issuing false and misleading statements to its shareholders.

According to KGS’ website, one of its founders was Wendell Gauthier (1943 – 2001), a nationally prominent lawyer most responsible for the national tobacco settlements in excess of $200 billion, and numerous other recoveries for thousands of plaintiffs in excess of $3 billion.

It is no joke – the vultures are already flying over Bodisen’s body, which is not even dead yet!

Long Positions in'10Q_Detective' sorted by Bought in Ascending order
Bodisen Biotech, Inc. (BBC)
Symbol	Position	Bought	Open Price	Value	Cost	Net	%Change
BBC	300	10/02/2006	8.81	1,587.00	2,655.99	-1,068.99	-40.25%
BBC	500	11/14/2006	6.04	2,645.00	3,032.09	-387.09	-12.77%
Total				4,232.00	5,688.08	-1,456.08	-25.60%

The 10Q Detective has a full disclosure policy.

How to Perform the Three-card Monte? Ask the Management of Bodisen Biotech, Inc.

Bodisen Biotech (BBC-$5.90) is spreading more than nontoxic soil conditioner around these days.

Last month, the China-based maker of organic fertilizers said that it expected ‘strong’ growth in revenue and profit for the third quarter ended September 30, 2006. Shares of Bodisen have tumbled about 45 percent in two days, reflecting investor disappointment in the Company’s posted net income of $3.2 million, or 17 cents a share, for the three months ended Sept. 30, compared to a profit of $2.9 million, or 18 cents a share, in the year-ago equivalent period.

And today management disclosed that its prior financial filings “may have to be corrected or amended due to incomplete, misleading or inaccurate disclosures.”

Easy-lending credit policies, negative operating cash flow, and a questionable prior relationship with advisor Benjamin Wey and his New York Global Group—the 10Q Detective saw red flags waving in the wind when we first posted on Bodisen Biotech. On October 2, 2006, we wrote: “albeit red flags do exist, in our view, we can shrug them off (for now) because the Company does have a strong balance sheet without any long-term debts.” Instead we chose to marvel at the Company’s strong (Chinese) agricultural product distribution network and upbeat comments by management.

Our favorite financier, statesman, and presidential adviser Bernard Baruch said: “Never pay the slightest attention to what a company president ever says about his stock.”

We wish we had listened—or at least paid heed--to the warning of Dow Jones columnist Herb Greenberg when he rhetorically asked (of Bodisen’s management): “If the company can't answer that question (regarding their investment in China Natural Gas), or offer a good explanation, I would wonder what else might be exaggerated or not quite right?”

We are more than pissed off, for we feel like the mark in a game of three-card Monte. That said, in our view, management is not finished with their sleight of hand card tricks. CEO Wang has already hinted at a sequential slowing of sales growth in the coming quarter, saying: ``While the fourth quarter, which represents the end of the harvest season, typically is our slowest period of the year, we expect to continue to achieve year-over-year revenue and earnings growth in the last quarter of the year.'' [Ed. note. Forget the hyperbole and read between the lines!]

In addition, we suspect that [more than one] class-action litigation is around the corner. [Ed. note. We can only hope, too, that the Company’s product ingredients really do not contain manure or other waste products.]

“If you get all the facts, your judgment can be right; if you don't get all the facts, it can't be right.” –Bernard Baruch.

Given the blatant discrepancies between management’s public comments and disclosures (in SEC filings), we have lost faith in this Company. Contrary to our concern(s)—and hoping to flip the “money card”—we are disclosing that we did do speculative buying in the Common Stock of Bodisen near the close of trading today—trusting that there is truth to the Wall Street saying that “even a dead cat will bounce if it is dropped from high enough.”

Editor David J Phillips is long shares of Bodisen Biotech and China Natural Gas. The 10Q Detective has a full disclosure policy.

Precision Drilling Trust--Spudding Dry Holes for Investors?

David,

"I am looking to diversify my portfolio and am looking at oil/energy stocks. I read your nice review on Precision Drilling Trust and decided to buy the stock. Unfortunately, this was the day before the plunge happened after Flaherty's comments. I bought at $28 and got out at $25 during the panic. But the only reason why I sold was because of the overall sell-off - I was trying to be disciplined about selling when the loss got past 8-10% (an IBD strategy). Now the stock is down to $23 and I am considering getting back in, especially given the "watered down" context of Flaherty's comments. I like the dividend and I think the stock has hit a bottom - one accentuated by politics. The dividend realized is actually 15% less than the proclaimed yield, however, as the Canadian govt. takes a 15% cut as a foreign tax - my own experience from holding Canadian Imperial Bank shares. So, do you still support the stock and do you feel that this is a nice opportunity to get back in?”

Ed. Note: We expect the dividend payout ratio (about 92.0%) to be cut substantially, for (i) the current dividend payout is built-on the existing premise of a corporate [expense deduction] pass-through to unit trust holders and (ii) the Company will need to reconcile its dividend distributions and expected capital spending expenditures with the final income trust tax bill.

The Common Stock of Precision Drilling Trust (PDS--$22.42), Canada's largest oilfield services company, has plunged about 27.8% since November 1, when Jim Flaherty, Canadian Finance Minister, stunned investors on Bay Street to Wall Street with news that the Canadian government was planning to tax dividends on income trusts.

Royalty (income) trust have become increasingly popular in our Neighbor to the North, for the trust structure avoids the double taxation that came from combining corporate income tax with shareholders' dividend tax. By passing through the earnings—in the form of both cash dividends and a pro-rata share of return-of-capital, the trust structure reduced—or eliminated—its income tax liability, thereby increasing the amount of cash available for distribution to unitholders and for future capital expenditures.

Anticipating that increasing cash distributions to unitholders would provide an attractive rate of return without impairing Precision’s ability to finance maintenance and expansion capital expenditures, the Company (on November 7, 2005) converted to a trust structure through a plan of reorganization.The Trust, through its wholly-owned subsidiaries, now operates the Company’s contract drilling services to the Canadian oil and natural gas industry.

When Canadian telecom giants Bell Canada Enterprises (BCE-$23.99) and Telus Corp. (TU-$47.98) announced plans to convert to income trusts, the Tory-led government feared a domino effect would occur in other sectors of the economy (allegedly among financial institutions and other energy concerns). According to Flaherty, “$70 billion of new trust conversions had been announced so far this year — and (this) converting was solely to avoid paying corporate taxes.”

Flaherty imposed this punitive tax on income trusts to “stem the growing number of companies” that were converting to trusts—and broke a central election promise. The Tories promised in their platform book to preserve income trusts by not imposing any new taxes on them (after accusing the Liberals of attacking retirement savings). Acknowledging the broken election platform, the Tories still countered that income-trust acceleration would have meant the loss of billions in the tax base provided by corporations. “Increasingly, individuals and families in Canada would shoulder the burden,” Mr. Flaherty said.

It is estimated that foreigners only hold about 20 percent of all (Canadian) income trust units. This means that Canadians—with many being retirees dependent on the distributions from these trusts to meet monthly expenses—(despite proposed tax relief) will eventually feel the impact of less income (in addition to the loss in savings/assets from the drop in market value of all the affected trusts).

The Tory-led government will be under pressure, too, from Canadian oil & gas executives, as foreign investors look away to more attractive markets.

American investors ought to note that the Conservatives have—at best—a tenuous hold on power. In the 2006 Canadian federal election, held on January 23, 2006, the Conservative Party of Canada won a plurality of seats in Parliament: 40.3% of seats, or 124 out of 308—but mathematically, the numbers resulted in a minority government led by the Conservative Party with Stephen Harper (becoming the 22nd Prime Minister of Canada).

On September 25, 2006, the Conservative government announced that within the fiscal year, there would be a $13.2 billion-dollar surplus (that will be used to pay down the country's debt). This statement supports a modification of the income-trust tax proposal.

Even if Harper’s Tories stand together, tax reform will still require support of either the New Democratic (NDP) or Bloc Québécois parties for passage of the Trust Tax. [Ed. note. Taxes are the only politics that the Conservatives have in common with the New Democratic party (with 29 members in the House), for the NDP’s ideology is more to the left—and liberal—to that of the Tories. The Bloc Québécois party has 50 seats in the House of Commons.]

Although the new tax (estimated to be 34 percent) is not slated to take full effect until 2011, we must assume the core advantage of being an income trust has been mortally wounded.

Absent final clarification by the Harper-led gang on Parliament Hill in Ottawa, uncertainty will continue to shadow all income trusts, including our Precision Drilling holding, for all affected companies need to know what tax reform bill it is that they need to adjust to (reconcile dividend distributions with capital spending needs)?

Granted, we just said last week that cheap can get cheaper, but with the price of Precision Drilling Trust off about 41 percent from its April 2006 high (of $38.30 per share), the contraire in us loves the uncertainty, and we bought more shares of the Common Stock (which has a book value of $8.46 per share and little in long-term debt, only 14.1% of equity).

Long Positions in'10Q_Detective' sorted by Bought in Ascending order
PrecisionDrilling Trust (PDS)
Symbol	Position	Bought	Open Price	Value	Cost	Net	%Change
PDS	200	10/18/2006	28.48	4,458.00	5,708.97	-1,250.97	-21.91%
PDS	200	11/03/2006	25.14	4,458.00	5,040.99	-582.99	-11.56%
PDS	200	11/13/2006	22.32	4,458.00	4,476.99	-18.99	-0.42%

Editor David J Phillips is long shares of Precision Drilling Trust but has no financial interest in any other company mentioned in this posting. The 10Q Detective has a full disclosure policy.

Adobe CFO Furr Resigns--Window into His Universe

On May 18, 2006, Adobe Systems (ADBE-$39.41), which makes a number of popular software applications, including PhotoShop and Acrobat, introduced Randy Furr as its new Chief Financial Officer. Pursuant to his employment agreement, Mr. Furr’s was to receive (i) an annual base salary of $500,000; (ii) a bonus of up to 75% of his annual base salary; (iii) a sign-on bonus of $100,000; (iv) eligibility to participate in the Adobe profit sharing plan and an executive “Performance Shares” program (with a targeted grant of 20,000 shares in FY 2007); and, (v) an option grant—which vested over four years—to purchase 300,000 shares of Adobe common stock at an exercise price of $28.78 per share (which was equal to the closing price of the Company’s common stock on June 19, 2006).

CEO Bruce Chizen lauded Furr's move to Adobe, saying: “Randy, welcome to the Adobe team. We are proud of the company we have built and are confident you will soon discover why it’s simply better at Adobe. We look forward to your contributions to Adobe’s ongoing success.”

Yesterday, after just six months on the job, Adobe Systems announced the resignation of CFO Randy Furr. The Company said, “Furr's departure had nothing to do with his job performance. In addition, no issues had been raised regarding the integrity of the company's financial statements.”

The 10Q Detective called the Company seeking additional clarification and was told that Furr left of his own accord, for “personal reasons.”

A salary/cash bonus potential of about $875,000 per annum and the forfeiture of (up to) 300,000 share options more than $10.00 (per share) ‘in-the-money’—we had to pinch ourselves. Human nature—we speculated—who would pass up such a sweet compensation package? Did Furr leave voluntarily, without prompting or coercion, or was the “personal reason” more rhetoric than fact?

Before arriving at Adobe, Furr spent thirteen years at the integrated electronics parts manufacturer Sanmina-SCI (SANM-$4.17), serving as President and COO from 1996 to 2005, and as CFO from 1992 to 1996.

Some analysts pondering the mystery of Randy Furr believe that he resigned from Adobe because of his possible involvement in a stock option scandal announced by a Special Board Committee at Sanmina on October 12, 2006.

Sanmina said last month that its internal inquiry found that most stock option grants to executives and other employees between 1997 and 2006 were not correctly dated or accounted for and would require that the Company restate its historical financial results and record non-cash compensation charges. In addition, two former senior level executives employed during this time period had been implicated in the backdating option scandal.

In a conversation with Sanmina spokeswoman, Paige Bombino, she declined to identify the two executives who helped to engineer the option scheme, confirming to us only that it was not the company's [current] chief executive officer or chief financial officer.

Similar to his stated reason for leaving Adobe, Furr left this other San Jose-based technology firm (and a $500,000 –plus- annual salary) in October 2005, citing “personal circumstances and family reasons that required his immediate attention.”

Sadly, the 10Q Detective has since learned that Furr was telling the truth, for his wife, Karen, was fighting (a losing) battle with cancer.

When talking about quantum mechanics, Albert Einstein said: “The theory yields a lot, but it hardly brings us any closer to the secret of the Old One. In any case I am convinced that He [God] doesn't play dice.”

As to whether or not the hint of scandal shadows Furr’s resignation from Adobe, the 10Q Detective prefers not to roll the dice, for we are convinced that only Furr, God, and the SEC know for certain.

Editor David J Phillips does not own any of the stocks mentioned in this article. The 10Q Detective has a full disclosure policy.

Delphi Corp. Bankruptcy: How Wise the Oracle?

Increasing competition from foreign suppliers; a reduced number of motor vehicles being produced by General Motors; U.S. labor legacy liabilities and noncompetitive wage and benefit levels; restrictive collectively bargained labor agreement provisions; and, increasing commodity prices, most notably steel, petroleum-based resin products and copper —all these variables compounded an already deteriorating financial picture at Delphi Corporation, the U.S. largest auto-parts maker. In October 2005, Delphi (and certain of its U.S. subsidiaries) threw in the proverbial towel, filing voluntary petitions for reorganization relief under chapter 11 of the Bankruptcy Code.

On October 11, 2005, the New York Stock Exchange (NYSE) announced the suspension of trading of Delphi’s common stock. The NYSE subsequently determined to suspend trading based on the trading price for the common stock, which closed at $0.33 on October 10, 2005, and completed de-listing procedures on November 11, 2005.

The Common Stock of Delphi (DPHAQ-$2.25) currently trades on the Pink Sheets, a quotation service for over the counter (OTC) securities, and is no longer subject to the regulations and controls imposed by the NYSE. Unlike securities traded on a stock exchange, such as the NYSE, issuers of securities traded on the Pink Sheets do not have to meet any specific quantitative and qualitative listing and maintenance standards.

“A speculator is a man who observes the future, and acts before it occurs.” –Bernard Baruch.

The share price of Delphi has gained an amazing 582 percent in value in the last year, as investors speculate that there will be material value left for shareholders when a solvent Delphi emerges from bankruptcy proceedings.

Scottish writer Thomas Carlyle (1795-1888) said, “Conviction is worthless unless it is converted into conduct. “ Given Delphi’s current obligations, the 10Q Detective does not subscribe to the optimistic conviction and believes that the Company’s course of conduct will prove the Common Stock to be declared worthless.

The plan of reorganization has a human face— ’early’ retirement for hourly workers and modified retiree benefits. Still, the Delphi bankruptcy remains a balance sheet event. Ultimately, it was the Company’s inability to effectively respond to a magnitude of financial challenges, including its U.S. legacy liabilities (such as debt-service levels, fixed labor costs, and prior pension and health care funding obligations) and dependence on GM for top-line growth (about 48% of 2005 net sales) that pushed the Company over the edge:

• As of June 30, 2006, Delphi had total assets of $15.06 billion (less inventories and goodwill) and total liabilities of about $25.3 billion. Additionally, the Company owes about $1.27 billion in other financial contracts and obligations (such as IT purchase commitments and capital/operating leases) that come due in the next four years.
• Management believes that the average rates at which it currently compensates its hourly workers, including employee and retiree benefits, is nearly three times the average hourly labor rates paid by its U.S. peer companies. Specifically, Delphi’s U.S. hourly pension and other post retirement benefits (OPEB)—mainly health and life insurance—exposed Delphi to approximately $10.7 billion in unfunded liabilities at December 31, 2005, of which approximately $2.3 billion was attributable to unfunded pension obligations and $8.4 billion was attributable to OPEB obligations. [Ed. note.The Company is only allowed to defer these contributions until it emerges from Chapter 11. As such, the projected future cash outflows for hourly pension contributions and OPEB payments will increase as Delphi’s U.S. workforce continues to age and the ratio of retirees to active employees increases.]
• Delphi is currently operating as “debtors-in-possession” (DIP). Specifically, DIP is unique from other financing methods in that it provides the lenders with (a first lien) priority over existing obligations, including debt and equity (current shareholders are considered unsecured claimants).

J.P. MORGAN SECURITIES INC. and Citigroup Global Markets, Inc arranged the DIP. As of December 31, 2005, Delphi had $250 million in term loans and $7 million of letters of credit outstanding under its DIP credit facility. However, Delphi has the ability to borrow up to $2.0 billion from its lenders. [Ed. Note. Again—each additional dollar borrowed means one less potential dollar for shareholders.]

• The Chapter 11 Filings triggered defaults on substantially all debt obligations, including 10.0 million shares of trust preferred securities [collectively known as Delphi Trust I and Delphi Trust II]. The property trustee of each Trust is in the process of liquidating each Trust’s assets and it is expected that the holders of the trust preferred securities will receive in exchange for their securities a pro rata share of the Trusts respective junior subordinated notes issued by Delphi (which leaves even less of the money pie for Common Stock holders).

As of June 30, 2006, Delphi had a total stockholder deficit of $(7.93) billion [understated!], or about $(14.12) per share.

Albeit Delphi will probably emerge from bankruptcy as a viable entity, the math suggests that it is the creditors and bondholders who will become the Company’s new owners—not the stockholders.

Despite the empirical evidence to the contrary—conventional wisdom—and the efficient market hypothesis—do little to explain why investors would invest $2.00 in a stock that is seemingly worthless. In our view, mob psychology might help to define why individual investors tend to ignore responsible judgment. Being part of a group—(in this stock example) the plethora of message boards (and related threads)—makes investors absorb the behavior of the collective (while also being able to mask their actual identities). Ergo, as the price [of Delphi] started to rise from pennies to quarters, the message boards started buzzing that the price was headed much higher.

"Friends, Romans, countrymen, lend me your ears;
I come to bury Cæsar, not to praise him.
The evil that men do lives after them;
The good is oft interred with their bones." –And in his stirring speech, Marc Antony incited the gathering mob to drive Julius Caesar’s assassins from the city of Rome. [William Shakespeare’s Julius Caesar.]

Editor David J Phillips does not own any of the stocks mentioned in this article. The 10Q Detective has a full disclosure policy.

Red Tag Sale with Renovis Inc.'s Common Stock?

The mission statement at biotech Renovis Inc. (RNVS) is "renew, restore, repair." These days the Company is in desperate need of some renewal and repair for itself.

On October 26, 2006, shareholders abandoned Renovis Inc. after the Company announced that its novel free radical trapping neuroprotectant, NXY-059, did not meet efficacy endpoints in a pivotal Phase III Trial for Acute Ischemic Stroke. As NXY-059 was the Company’s most advanced product candidate, news of the setback sent the price of the Common Stock plummeting 75.8% in active trading (to close at $3.43).

At the time, some investors (and equity analysts) thought the loss in market valuation excessive. The Company was in reasonably sound financial health with $104.73 million, or $3.57 per share, in cash and cash equivalents (as of June 30, 2006).

Renovis has an active pain and inflammatory diseases research program. Its most advanced drug discovery program is focused on small molecule compounds that inhibit a molecular gateway to the pain pathway, called the vanilloid receptor, VR1, with the objective of developing a new class of treatment for inflammatory pain, neuropathic pain, and other neurological disorders.

In May 2005, Renovis entered into a two-year agreement with Pfizer to combine respective drug discovery efforts surrounding VR1. Pfizer has the option to extend the agreements for up to two additional years (subject to specific progress of the VR1 collaboration and additional funding requirements).

In addition to its VR1 Antagonist Program, Renovis is also pursuing novel molecules called purinergic receptor inhibitors (which have potential as broad-spectrum analgesics and anti-inflammatories). The Company, however, has no product candidate currently beyond the initial research stage.

Today, the share price of Renovis closed at $3.10—showing us that cheap can get cheaper.

Editor David J Phillips does not own any of the stocks mentioned in this article. The 10Q Detective has a full disclosure policy.

Nothing to Smile About At Concord Camera

	6/01	6/02	6/03	6/04	6/05	6/06
(dollars)
Concord Camera Corp.	100	86.46	117.97	55.93	21.19	10.85
Nasdaq Stock Market – U.S. Index	100	70.34	78.10	98.58	99.24	105.85
Peer Group Index	100	85.31	95.06	111.08	111.61	145.80

In its Report on Executive Pay, the Compensation Committee of photographic equipment maker Concord Camera (LENS-$0.51) stated that it “sought to ensure that the Company’s compensation policies were designed and implemented to promote the goal of enhancing long-term shareholder value.”

According to the Company’s recently filed DEF 14A with the SEC, $100.00 invested in the Common Stock of Concord Camera on June 1, 2001, was worth $10.85 per share (as of June 1, 2006).

Despite an abysmal stock performance—an 89.2% loss in shareholder value in the last five-years—Ira B. Lampert, who has been Chairman and CEO since 1994, seems to be immune from the Company’s purported compensation policies. In the last three fiscal years, Mr. Lampert earned $2.78 million in salary and $9.54 million in “other compensation.” [Ed. note. At a time when most working families are looking at shrinking retirement nest eggs, 78.3% of the $9.54 million in other compensation, or $7.47 million, was a FY 2006 distribution from his Supplemental Executive Retirement Plan (SERP).]

The Pay Committee believes that the key to enhancing shareholder value is to “attract, retain and motivate qualified and experienced executive officers through forms of compensation that encourage and reward long-term service to the Company, and enable those who succeed in building shareholder value to share in the value they have helped to create.”

However, their actions seem to contradict their intent. Until last year, Lampert’s employment agreement required that the Company make a $500,000 annual contribution to a SERP adopted for his benefit—independent of corporate performance.

Other annual benefits received by Lampert included auto allowance and costs, partial housing costs and reimbursement of taxes, respectively, of $30,000, $48,000 and $62,452 for fiscal 2006; $30,000, $48,000 and $76,694 for fiscal 2005; and $30,000, $48,000 and $105,114 for fiscal 2004.

Despite restructuring initiatives begun in 2004, net sales for fiscal year ended 2006 were $137.5 million, a decrease of $36.8 million, or 21%, as compared to net sales for fiscal 2005. The decrease in net sales was due to the cessation of a design and manufacturing services contract for single-use camera sales to Eastman Kodak (EK-$25.01) and a decrease in digital and 35mm traditional film camera sales in European and Asian markets.

Concord Camera remains highly dependent on two retail customers for net sales: Wal-Mart Stores, Inc. (WMT-$48.29) and Walgreen Co. (WAG-$42.21) represented 33.8% and 15.2% of total net sales in FY 2006, respectively.

The Compensation Committee engages the services of outside consultants to obtain advise them on competitive levels of compensation used by public companies of comparable size. [Ed. note. What good does this analysis do if one advocates that the peer (comparable) firms were also headed by CEOs who were paid too much?]

In our view, Lampert’s pay package is just another case where a CEO’s pay has nothing to do with his performance (or any quantifiable effect on shareholder value). In addition, Concord Camera reinforces the argument that a CEO may not make all that much of a difference in whether the company is a success or a failure.

Concord Camera has received a Notice of Delisting because of its failure to maintain a minimum $1.00 bid price requirement. If the bid price of the Company's common stock does not close at $1.00 per share or more for a minimum of 10 consecutive business days before December 26, 2006, the Company will (probably) be delisted from the NASDAQ Global Market.

The employment agreement of Ira Lampert, 61, does not expire until July 1, 2009.

Editor David J Phillips does not own any of the stocks mentioned in this article. The 10Q Detective has a full disclosure policy.

Particle Drilling's CFO Responds

David:

"Very articulate research on my company[Particle Drilling Technology]; however, I need to point out that some of your valuation metrics are in conflict with our public disclosures. Following the recent private placement, we have just over 30 million shares outstanding. If you add in all of the options and warrants (many of which are currently under water), there are approximately 37.5 million shares fully diluted.

In terms of market size and earnings potential, I would direct investors to our investor presentation on our website. We have identified in excess of $1 billion in revenue potential in just three basins in the domestic market (see slide entitled "Initial Target Markets" on page 8 of the investor presentation). Further, we have stated on page 15 of that investor presentation that each PID unit should be capable of generating annual EBITDA $2.4 million. With a market of over $1 billion, it would not make much sense for us to simply operate two or three units as you speculate in your research.

We will in due time publish our own earnings forecast but not until we have more operating history. Due to regulation FD concerns therefore, I will need to leave it up to the analysts and others to speculate as to how many PID units we are able to deploy over the next 3-4 years.

Just to illustrate the point however, based on our publicly disclosed assumptions, 10 PID units should yield annual EBITDA of approximately $24 million, while 40 units should yield closer to $96 million. While the royalties we are obligated to pay on the technology are not insignificant, they represent the cost of protecting the $1 billion plus market and therefore they have been considered in our business model. I am limited as to what I can post in this forum but felt that I should highlight those few data points. Again, your article does a good job of pulling together the history of the Company and most of the public information so I look forward to your future comments as the Company moves toward full commercialization."

Regards,
Chris Boswell, SVP & CFO
Particle Drilling Technologies, Inc

-----------------------------------------
10Q Detective Response:

Chris:

1. I did not add in the options and warrants too far “out of the money” to arrive at 40.0 million shares. In order to enter the oilfield services market on a full-scale basis, Particle Drilling must successfully complete additional research and development, the cost of which is estimated to exceed the amounts that your management team currently has budgeted in its operation’s plan. Ergo, I built in to my valuation metrics the assumption that you would have to tap the capital markets—preferably the issuance of additional shares.
2. My calculation of EBITDA of $3.0 million for FY ending September 30, 2008 assumes (i) resumption of commercial testing in 1H:07; (ii) first sales in 2008; and (iii) first royalty payments in 2008.
3. I do admit that my earn-out numbers are conservative, but I’d rather be proven wrong!
4. I am not passing a business judgment on the royalty payments as so structured, for as you say, “they [royalties] represent the cost of protecting the $1 billion plus market and therefore they have been considered in our business model.”

I look forward to eying your Company’s progress as it moves toward full commercialization.

Respectfully,
David J Phillips, Publisher
10Q Detective

Is Particle Drilling's Technology Worth a Drill Bit?

Particle Drilling Technologies Inc (PDRT-$2.80), based in Houston, Texas, is a development-stage oilfield service company in the process of commercializing its patented advanced drilling technology known as Particle Impact Drilling (PID).

Unlike earlier particle recovery systems, PID technology does not require high surface pressures—up to 11,000 psi—in order to give the small particle the velocity to abrade the formation ahead of the drill bit. The PID System, which incorporates hydraulic energy, utilizes larger particles at normal rig pressures to fracture the formation ahead of the drill bit.

The PID system proprietary technology employs a specially designed “fit for purpose” drill bit fitted with jetting nozzles and polycrystalline diamond compact cutting structures that readily adapts to typical conventional drilling rigs.

The system will be provided and operated by Particle Drilling as a service to the oil and gas company for drilling certain rock intervals (specifically in wells where hard and/or abrasive formations result in penetration rates averaging ten feet per hour or less).

The PID system is designed to connect to and service an operational well in progress with minimal interference to normal drilling operations. All PID System equipment is either mounted on trucks or trailers, and the Company expects that the system can be installed on a rig during a scheduled bit trip. A good portion of the PID System may be mobilized and rigged up offline so as not to interfere with the drilling operation in progress. Once the operator is finished with the PID System, it is expected that it can be taken offline in one to two hours and demobilized with no further interference with the drilling operation. Management believes this operational transparency is extremely important for industry acceptance of the PID System.

Test applications—to date—have demonstrated that the PID system is capable of drilling through rock formations at rates from two to four times faster than current conventional techniques. Depending on the volume of shot introduced into the drilling mud, the number of shot strikes on the formation is in excess of four million per minute, thereby yielding a higher rate of penetration than conventional roller cone rock bits (reducing the amount of time the operator spends on location to drill the well). The result is a much more efficient and cost-effective drilling process—generating savings in labor, fuel, rentals, rig time and other variable well costs.

The reduction in drilling time and reduction of other drilling problems resulting from the utilization of the PID system represents estimated savings between 35% and 50% of conventional drilling costs.

Financial Analysis

To date, the business has not generated any revenue from its operations.

As of June 30, 2006, Particle Drilling had approximately $5.1 million in cash, current liabilities of $1.6 million, and neglible long-term debt.

The accumulated deficit was $17.3 million.

Current monthly operating overhead is approximately $660,000 (excluding non-cash expenses such as depreciation and stock-based compensation) as compared to $240,000 in FY 2005.

In order to enter the oilfield services market on a full-scale basis, the Company must successfully complete additional research and development, the cost of which will exceed the amounts management has budgeted in its operation’s plan.

The financial condition of the Company has improved, however, for on October 19, 2006, the Company completed a private placement of 5.0 million shares, at a per share price of $2.35, which raised net proceeds of about $10.7 million. These monies will be utilized by the Company to manufacture additional PID Systems, to fund the development of a new particle injection system, to fund additional research and development, and for general corporate purposes.

[Ed. note. As the Company has yet to generate cash flow from operations, and until revenues commence, the Company is highly dependent upon debt and equity funding. Ergo, stockholders should expect further dilution, for additional funds will have to be raised in the future, too.]

Valuation Analysis

How does one value a development company with no current revenue? On a relative basis, with no operating cash flow, earnings, or terminal growth projections, the intrinsic value of Particle Drilling is limited to its liquidation value—about 50 cents per share.

After the recent announcement by management that it has suspended a commercial trial of its drilling technology due to the failure of a frac pump transmission, expected revenues of $16.3 million in FY 2007 are probably premature.

The price of the Common Stock of Particle Drilling has plunged 58.9% since late January 2006, as investors showed their disappointment in commercialization delays by selling en masse.

It is difficult to value Particle Drilling utilizing a going concern approach given: (1) no history of positive earnings and (2) the Company’s assets are not earning much in the way of return(s).

Nonetheless, the 10Q Detective is willing to go with The Rules-of-Thumb Approach, which can indicate certain measurable criteria that can be assessed and applied to “potential value.”

Recent acquisitions in the drilling equipment universe provide a comparable valuation analysis for Particle Drilling’s future valuation prospects:

1. Tenaris S.A. (TS), a leading global manufacturer and supplier of tubular products used in the drilling, completion and production of oil and gas wells recently acquired tubular steel maker Maverick Tube Corporation for (US) $65.00 per share in cash, or 10.8 times trailing EBITDA of $288.0 million.
2. Downhole instrumentation maker Sondex plc. has entered into an acquisition agreement with a leading Canadian manufacturer of downhole tools and equipment used in the oil & gas sector, Innicor Subsurface Technologies. Under the agreement, Sondex will acquire Innicor for approximately (C)$72.8 million, or about 10 times trailing EBITDA.
3. Shares of NQL Energy Services, a leading independent supplier of directional & performance/straight hole drilling tools for oil and gas fields, was recently acquired by Houston-based energy drilling services company National Oilwell Varco Inc. (NOV) for (C)$345 million, or about 9 times trailing EBITDA.

The 10Q Detective went into our Due Diligence of Particle Drilling thinking that it had some “sizzle” to smell. Sadly, there just is no meat to be found. Even assuming the Company were to successful bring to market the PID System in 2008, based on the aforementioned comparables, the stock price—optimistically—is probably worth no more than $1.00 per share. [This target is based on shares outstanding of 40.0 million, little cash/debt on the balance sheet, and 2008 EBITDA of $3.0 million. As such, (even without using an appropriate risk discount, for Particle is a fraction the size of its comparables) the $1.00 price target would still value Particle Drilling at a slight premium over recently acquired drilling equipment companies.]

Catalysts for a turnaround in Particle Drilling’s stock include (i) the Company’s ability to produce a successful commercial field test and (ii) negotiations of commercial contracts with potential customers.

The Company has experienced leaders at the helm to deliver the goods. Chairman Ken R. LeSuer came onboard after retiring as Vice Chairman of Haliburton Company (HAL-$32.15) in 1999; Jim B Terry, CEO since January 2006, was formerly the Vice-President, Oilfield Drilling Services for Weatherford International (WFT).

The Company’s initial target customers will be oil and gas operators drilling onshore wells in geologic basins of the U.S. known to have hard rock and/or highly abrasive formations.

Management intends to initially focus its marketing and sales efforts on operators with multi-well drilling programs centered in a single U.S. basin.

Investment Risks & Considerations

Particle Drilling has a limited operating history and no revenues and is subject to risks inherent in a new business enterprise. Buying its Common Stock is a highly speculative investment and there are no assurances that the Company will be successful in achieving profitable operations, additional financing, or continue as a going concern.

The Company’s cash flows used for operations are primarily affected by its research and development progress and business development. Net cash flows used for operations during the nine months ended June 30, 2006 were $(5.2) million. Working capital since inception (June 9, 2003) has been fully funded from cash flows from financing activities.

Our biggest concern is that the Company—like down on his luck farmer, Jabez Stone, in Steven Vincent Benét’s “The Devil and Daniel Webster”—might have sold away its soul to the Devil.
The Company—in Off-Balance Sheet Arrangements—is obligated to make certain royalty payments that will limit its profitability:

• Particle Drilling has agreed to make certain royalty payments to ProDril Services (PSI). Particle Drilling is obligated to pay a royalty on a quarterly basis equal to 18.0% of its earnings before EBITDA derived from the use of the PID technology for such quarter until an aggregate of $67.5 million has been paid to PSI.
• Under a separate agreement with ProDril Services International, Ltd. (PSIL), the Company is obligated to pay PSIL a royalty on a quarterly basis equal to 2.0% of EBITDA derived from the use of the PID technology for such quarter until an aggregate of $7.5 million has been paid.
• There is an additional royalty agreement that requires Particle Drilling to pay a total of 4.0% of its quarterly gross revenue derived from the use of the PID technology to certain entities from which the Company acquired the PID technology [Curlett Family Limited Partnership, Ltd. & CCORE Technology and Licensing, Ltd.].

Harry Curlett founded ProDril as a Texas corporation in May 1992 for the purpose of developing oil and gas drill bit and served as CEO, president and board chairman.

Potential Parker Drilling investors ought to note that in late 2002, ProDril ran out of financial resources—still having not brought to market the hard-rock drilling technology

In October 2005, Curlett and three other individuals (William D. "Dan" Elsom, David A. Nall and Justin C. Nall) were indicted for conspiracy to sell unregistered securities. According to court documents filed in February 2006, Curlett and the others "induced at least 400 individuals in Wyoming and Texas to invest about $6.4 million in shares of ProDril Services stock." The shares or securities were neither registered with the U.S. Securities and Exchange Commission nor deemed exempt from such registration, the indictments stated.

Through the plea bargain process, Curlett is currently serving a four-month federal prison sentence (conspiracy to sell unregistered securities). The two other ProDril executives, Elsom, and David Nall, each pleaded guilty to one felony charge in the case and are currently under house arrest.

The price of the Common Stock of Particle Drilling might get a (short-term) boost when the Company announces a new commercial test for the PID system. Still, in our view, investing monies in Particle Drilling is no better than throwing your dollars down a sinkhole.

Editor David J Phillips does not have any financial interest in the stock of Particle Drilling Technology.

Force Protection Redux & Other News

Crude oil futures closed at $61.37/bbl., fueled by news of more unrest in Nigeria and a U.S. government report that inventories had their biggest one-week decline since July 2006.

Below-normal temperatures in the U.S. Northeast and continued strong demand for U.S. distillates, including heating oil and gasoline, are bullish indicators for the 10-Q Detective’s stock portfolio—which is heavily weighted towards energy-related stocks.

“The really unhappy person is the one who leaves undone what they can do, and starts doing what they don't understand; no wonder they come to grief.” – Johanne W. Goethe

The price of the Common Stock of blast-protected military vehicle maker Force Protection (FRPT-$7.20) has dropped an armored plate, losing about 10.5% in value since our last report on the Company (less than two weeks ago). Might this have something to do with the fact that defense contractor BAE Systems recently moved to introduce the RG-33L as a Cougar/Buffalo competitor?

Force Protection has been working as a sub on a BAE contract to supply 4x4 Iraqi Light Armored Vehicles—which are similar in design to the Cougar 4x4 . If BAE is successful in rolling out the RG-33L, might this squash persistent rumors of a BAE buyout of Force Protection?

10Q DETECTIVE Portfolio Transaction(s) Update

STOCK	TRADE DATE	BUY	PRICE	NET COST	CURRENT VALUE	% CHANGE
PDS	10-18-06	200	$28.48	$5,708.98	$6,060	6.14%

The 10Q Detective has a FULL DISCLOSURE Policy.

New Executive Agreements at The Yankee Candle Co.--The Sweet Smell of Timing!

On September 14, 2006, the Board of Directors of The Yankee Candle Company, Inc. (YCC-$33.73) authorized the Company to enter into an Executive Severance Agreements with the Chairman of the Board and CEO Craig W. Ryden, President and COO Harlan M. Kent, CFO Bruce H. Besanko, as well as each of the other six top executives of the Company:

If any of the executives terminate their employment for “Good Reason” [is there any other kind?], or if the employment is terminated within two years following a “Change in Control” of the Company (without Cause) the executives will be entitled to receive severance benefits consisting of the following primary components:

• a continuation of medical and dental benefits (subject to the severance period acknowledged for each so-named executive);
• a one-time payment of their incentive award target under the executive compensation plan, pro rated based on the number of days of that fiscal year for the so-named executive was employed; Messrs. Ryden, Kent, Besanko could each receive (up to) an estimated $726,243, $200,000, and $187,000, respectively; and,
• a one-time payment of the following amount: (1) in the case of CEO Ryden, an estimated $2.40 million; (2) in the case of the COO Kent, an estimated $912,000; (3) for the CFO Besanko, an estimated $653,190; and, (4) in the case of the Senior Vice Presidents, 100% of the sum of their base salary plus incentive award targets;

Immediately prior to a Change in Control Event,

• all stock options held by the executives shall become fully vested (Ryden-540, 300 shares; Kent-155, 000 shares; and, Besanko- 60,000 shares);
• each executive will be entitled to receive 66-2/3% of the target number of performance shares specified in the Award of Performance Shares Agreement covering the three fiscal years ending December 31, 2005, December 30, 2006 and December 29, 2007 (Ryden-29, 700 shares, Kent-6, 666 shares, and Besanko-6, 666 shares); and,
• each so-named participating executive who remains employed by the Company for at least three months following a Change in Control Event will be entitled to a Special Retention Bonus, ranging from 20% -- to – 50% of their respective annual base salaries. Messrs. Rydin, Kent, and Besanko will receive an estimated $145,248, $81,605, and $124,230, respectively.

These Executive Severance Agreements smell as sweet as a Yankee candle—as long as a Change in Control event was to happen by April 1, 2007….

“We always have time enough if we will but use it aright.” – Johanne W. Goethe

The scented-candle maker announced on Wednesday that is being sold to a Chicago-based private equity investment firm, Madison Dearborn Partners, LLC.

Under the agreement, Madison Dearborn will pay approximately $1.4 billion in cash -- or $34.75 a share -- and assume about $300 million in debt. The Company expects the transaction to close in the first quarter of 2007—one does not need to be a member of Mensa International to suppose that the deal will close by April 1, 2007.

Chairman and CEO Ryden said, " This transaction was in the best interest of our shareholders.”

In the case of Ryden and the other senior executives, his comment rings loud and true.

Editor David J Phillips does not have any financial interest in the stock of The Yankee Candle Company.

Costco's CEO Refuses 2006 Bonus--Not Exactly Financial 'Hari-Kari.'

On October 17, the Compensation Committee of Costco Wholesale Corp. (COST-$51.69), the nation's largest wholesale club operator, approved final bonus awards for executive officers for fiscal year 2006. The Committee did not release (previously approved) performance bonus awards to President and Chief Executive Officer James Sinegal or Chief Financial Officer Richard Galanti of $200,000 and $82,000, respectively.

According to last Thursday's regulatory 8-K filing with the SEC, Sinegal and Galanti suggested that they not receive their bonuses this year due to to prior irregularities in the Company’s stock options granting process that occurred on their watch.

Following the recent publicity regarding the granting of stock options, Costco initiated an internal review of its historical stock option grant practices to determine whether the stated grant date of options (made during the years 1996 through 2005) were supported by the Company’s books.

As the 10Q Detective has repeatedly disclosed in prior postings, it is rare that corporate leaders unclothe themselves to be held accountable. They would either deny wrongdoing—seeing himself or herself above the law—rex non potest peccare (“the King can do no wrong”); or hide behind the veil of immunity just because they were the leaders—immunity rationae materiae.

We laud the gestures of accountability displayed by both Sinegal and Galanti to refuse their cash bonuses. Sadly, however, the 10Q Detective suspects that both executives might have been motivated more by their regard to self-interest than by unselfish minding for corporate governance.

Although the inside review identified no evidence of fraud, falsification of records, or intentional deviation from generally accepted accounting principles, the audit did find, however, that in several instances, it was impossible to determine “with precision” the appropriate measurement date for specific grants. For these grants it was feasible only to identify a range of dates that included the appropriate measurement dates, where some dates in the range were after the recorded grant date.

In April 1997, both Sinegal and Galanti received “one grant subject to imprecision that may have benefited (Sinegal) by up to $200,000” (and Galanti. by an undisclosed amount).

When Louise Augusta, Queen of Prussia, met the conquering Napoleon (July 1807) in person at Tilsit in Russia to sign a peace treaty, she toasted to him: "To the health and kindness of Napoleon the Great. He has taken our states, and soon will return them to us." Napoleon bowed and replied, "Do not drink it all, Madame."

Although the Company has not disclosed the total compensation for fiscal year 2006 earned by each of the above-named executive officers, it is safe to suggest that their absence of performance bonuses (for the option “imprecisions”) will not be a cause of financial hardship:

· In FY ’03 – ’05, the Company granted Sinegal and Galanti 450,000 and 225,000 stock appreciation rights (SARs), respectively;
· During FY ’05, Sinegal and Galanti exercised stock options worth a realized value of $3.74 million and $2.72 million, respectively;
· At Fiscal Year-End 2005, the value of in-the-money (exercisable) Options/SARs held by Sinegal and Galanti were $20.77 million and $5.98 million, respectively.

Certain Relationships and Transactions

· James D. Sinegal’s son and brother-in-law were employed by the Company during fiscal year 2005 at annual salaries (including cash bonuses) of $266,209 and $216,541, and received grants of 37,500 and 18,750 options, respectively.
· In addition, a company controlled by one of Mr. Sinegal’s other sons (who is not employed by the Company) sold merchandise to the Company for resale in FY ‘05, for which the Company paid $1,351,826.

Suffice to say, in light of all these facts, Sinegal and Galanti were no corporate martyrs committing hari-kari.

One might readily argue, however, that compared to their respective peers at BJ’s Wholesale Club (BJ-$28.60), the nation’s third-largest warehouse membership club, that CEO Sinegal and CFO Galanti are either under-paid in terms of performance (or BJ’s top executives are overpaid)?

Costco’s and BJ’s operating margins and ROEs (trailing twelve-month basis) were 2.71%, 2.36% and 12.18%, 12.40%, respectively.

In FY ’05, the Chief Executive Officer of BJ’s, Michael T. Wedge, and the CFO, Frank D. Forward, earned cash compensation of $1.63 million and $742,000, respectively. In comparison, Costco CEO Sinegal and CFO Galanti earned cash compensation of $450,000 and $536,800, respectively, in the last fiscal year.

Valuation Analysis

This no-frills, self-service BOX-Retailing business model enables the Company to operate profitably on smaller margins than discount retailers like Target Corp. (TGT) and Wal-Mart Stores.

On October 12, 2006, Costco reported that 4Q:06 Earnings Edged Up two cents (share-net of 75 cents) on an 8 percent rise in same-store sales comparables and net-income growth of 0.25 percent to $355.6 million.

In our opinion, the 9.4% gain in the price of the Common Stock already discounts an improving earnings growth picture (given the nearly 43 percent drop in the price of retail gasoline—in the same time period—to about $2.00 per gallon).

For fiscal year 2007, consensus estimates call for Costco to earn $2.58 on estimated sales of $65.4 billion. The Common Stock is fetching 17.6 times forward September ’08 share-net estimates of $2.94.

The Common Stock is selling at about an 8 percent discount to its intrinsic value of $56.00 per share (derived from a blend of average P/E multiples and discounted cash flow analysis—which includes a weighted average cost of capital of about 7.6 percent and a forward earnings growth rate of 11.3 percent).

Risks to this value proposition include rising energy prices, delays in store expansions, and decreasing pricing power (due to increased competition).

Editor David J Phillips does not own any of the stocks mentioned in this article. You can see his portfolio holdings in the sidebar. The 10Q Detective has a full disclosure policy.

Precision Drilling Trust--Offering Income & Growth

Precision Drilling Trust (PDS-$28.30) is the leading provider of energy services to the Canadian oil and gas industry.

Income-oriented investors might want to take a look at Precision Drilling, for it is an open-ended investment trust that makes monthly cash distributions. The estimated dividend yield for FY 2006 is about 12 percent. The Trust holds a 99.12% interest in Precision Drilling Limited Partnerships (which owns Precision Drilling Corp.).

Company Overview

Precision’s operations are reported in two segments. The Contract Drilling Services segment—which comprises the foundation of the Company’s oilfield services enterprise (about 77 percent of operating profits)—includes contract drilling rigs, camp and catering (LRG Catering), oilfield supply, and manufacturing divisions. The Completion and Production Services segment includes well servicing (for completions, workover, maintenance and abandonment work on any well), wastewater treatment units, rig-assist snubbing (for under-balanced drilling), and rental divisions.

Precision is Canada’s largest drilling contractor with a 30 percent market share and a modern fleet that consists of 234 rigs covering depth ranges from a few hundred meters to almost 6,700 meters.

Precision dominates in the Western Canada Sedimentary Basin (WCSB). The WCSB has a complex mix of energy reserves—oil sands, heavy oil, conventional oil, coal bed methane, deep gas and shallow gas—as well as challenging geography and ever-changing weather conditions. As the basin matures, Precision is able to offer its customers greater efficiencies and “best-of” technology through the provision of a diversified inventory of oil-service equipment and a highly qualified and experienced technical staff.

Precision has a balanced drilling rig portfolio, with a particular strength in deep drilling. As customers turn to deeper wells to discover new reserves, Precision’s 40 percent market share in rigs with a depth capacity greater than 3,600 meters is noteworthy. Drilling opportunities for natural gas reserves is a market where the Company has an advantage, a market many expect to emerge in Canada.

Financial Overview

For the six months ended June 30, 2006, earnings from continuing operations were $312.5 million on revenue of $759.9 million, as compared to $97.6 million on revenue of $541.3 million in 2005. The 1H:06 benefited from a combination of higher equipment utilization (in part due to dry weather conditions) and continued strong pricing in both the Contract Drilling and the Completion and Production business segments.

Net earnings per unit share were $2.49 in the 1H:06 compared to $1.32 in 2005. A lower effective tax rate (as Precision converted to a Trust in November 2005) and substantively enacted tax rate reductions contributed to an increase of $0.81 per unit in the 1:06 over the same period last year. The effective income tax rate in the 1H:06 was about 8 percent compared to 37 percent last year.

In the 1H:06, the Company had a dividend payout ratio of 68.3 percent, declaring $1.70 in distributions per unit share.

Precision’s liquidity and financial health remains strong, as working capital exceeded long-term debt and other liabilities by $83.7 million at June 30, 2006. Long-term debt stood at $45.0 million, for a long-term debt to long-term debt (plus equity ratio) of 4.0 percent.

Growth Initiatives

Accretive growth is being delivered organically through the addition of new equipment lines across the organization and geographic expansion into other North American markets. Growth is anticipated, too, from value-added acquisitions.

Precision Drilling is moving forward on several growth initiatives:

1. The geographic expansion of Precision’s Contract Drilling services segment to the United States is proceeding as planned. A drilling rig commenced work in Texas in late June 2006. Plans to construct an additional 10 drilling rigs for the U.S. market is proceeding on schedule. Precision expects to have a fleet of 11 drilling rigs operating in the U.S. by the end of the second quarter of 2008.
2. By the 4Q:07, Precision expects to have a fleet of 252 drilling rigs operating in Canada, up from the 2Q:06 end count of 234.
3. The Completion and Production Services segment has initiated several growth measures for its domestic market. The Service Rig unit secured a long-term customer commitment to construct two slant service rigs for the heavy oil market.
4. By the 1Q:07, the Company’s Production Services segment expects to be operating a fleet of 239 service rigs compared to a current fleet size of 237.
5. In addition, the snubbing unit division has initiated plans to construct four new stand-alone units, of which two will be a rack and pinion design. By the end of the 3Q:07, Precision expects to be operating a snubbing fleet of 30 units.
6. In August 2006, Precision acquired Terra Water Group Ltd., an Alberta based company that operates 40 wastewater treatment units for the traditional drilling rig camp market in western Canada

Valuation Analysis

The oils-service industry has been in a freefall since May, as investors fled the stocks in the belief that declining energy prices meant that the current cycle in drilling activity was peaking. The Philadelphia Oil Service Sector Index (OSX) has slipped 20.2 percent in the last five-months.

Our forward view remains that energy prices will stabilize, and possibly turn higher, for a supply imbalance (where field depletion rates outstrip new reserve additions) will put a floor on commodity prices and precipitate the continuing need for exploration and drilling activity.

Albeit oil and gas prices have slipped, they still remain high relative to historical benchmarks. West-Texas Intermediate (WTI) oil prices averaged US ($) 56 per barrel during 2005, an increase of 37 percent over the 2004 average of US ($) 41 per barrel.

North American natural gas prices are also being supported by strong fundamentals (as older, shallow wells are being depleted). North American Henry Hub natural gas prices surged 45 percent in 2005, averaging US ($) 8.96 per mmbtu, an increase of US ($) 2.78 per mmbtu over 2004. Demand for natural gas is increasing with economic activity while the supply from relatively mature basins is continuing to decline.

Industry fundamentals remain strong in Canada. Although the Canadian Association of Oilwell Drilling Contractors has decreased its 2006 industry well count forecast from 26,070 to 23,827 wells, it has increased its estimate of average drilling rig operating days per well assumption from 6.4 to 7.2 days. This results in a net increase of 3 percent in the forecast industry operating days for 2006 from 166,849 to 171,489 days.

On a valuation basis, Precision Drilling is selling at for a forward 12-month P/E multiple and trailing EV/EBITDA of 8.73 times and 5.90 times, respectively. The Common Stock is selling at a discount to its peers: Schlumberger Ltd. (SLB), 16.68x and 14.03x; Baker Hughes Inc. (BHI), 13.55x and 10.54 times; and, Nabors Industries Ltd. (NBR), 6.42x and 7.19 times, respectively.

Precision offers attractive growth prospects (and income) for value-oriented investors and a “bounce” trading opportunity for speculators (the stock has slipped about 23 percent in price since early May).

For traders, the catalysts for a positive shift in investor sentiment could be a colder-than expected winter in North America and a firming in energy prices.

Investment Risks and Considerations

Financial performance in the oilfield service industry in Canada is subject to seasonal trends. The first quarter is usually the most active and prosperous as winter ground conditions typically allow complete access to well locations [frozen lakes and compacted snow make for good roads]. In the second quarter, spring weather (rain) softens ground conditions and can slow oilfield service activity dramatically. Subject to dry weather, activity resumes and will sequentially gain momentum in the third and fourth quarters.

Volatility in oil and natural gas prices can impact Precision’s customers’ activity levels and spending for its products and services. While current energy prices are important contributors to positive cash flow for its customers, expectations about future prices and price volatility are generally more important for determining future capital spending levels. For example, almost three-quarters of the drilling activity in western Canada is targeting natural gas reservoirs, making this activity the primary driver of demand for Canadian oilfield services. A continued decline in natural gas prices could lead to capital spending cuts by the customers—with a resultant slowdown in demand for Precision’s products and services

Precision operates in a highly competitive environment, which may adversely affect the Company’s ability pricing power (e.g. rig rates).


Editor David J Phillips is long shares of Precision Drilling Trust but has no financial interest in any other company mentioned in this posting. The 10Q Detective has a full disclosure policy.

OCTOBER--PORTFOLIO TRADE CONFIRMATIONS

10Q PORTFOLIO TRADES

STOCK	DATE	BUY	PRICE	NET COST	Current Value	% CHANGE
CHNG	09-27-06	1,000	$3.15	$3,162.99	$3,100	%(1.99)
BBC	10-02-06	300	$8.81	$2,655.99	$2,610	%(1.73)
NTO	10-06-96	1,000	$3.64	$3,652.99	$4,190	%14.70
				$9,251.97	$9,900	%7.00

The 10Q Detective has a FULL DISCLOSURE Policy.

Force Protection Update -- Would Bernard Baruch Be a Buyer?

Famous Wall Street financier, Bernard Baruch (1870 – 1965), was reputed to have said: "Don't try to buy at the bottom and sell at the top. It can't be done except by liars."

Back in August, when the stock price of blast-protected military vehicle maker Force Protection (FRPT-$8.04) was already up about 306 percent, we expressed our concerns that—although the Company had an attractive product(s) and backlog—that (1) with relatively short production runs and high fixed factory costs, sustainability of future profitability would be difficult to predict; and (2) the price run-up in the stock already reflected the profits being reaped by the Company because of the U.S. military’s need to ramp-up of combat-ready protective vehicles for service in Iraq and Afghanistan.

Contrary to what the ardent bulls believe, the stock price of Force Protection continues to defy gravity. On September 23, 2006, the Common Stock price hit an intra-day (52-week) high of $9.43—probably fueled by investor euphoria after leaving—the revival tent—oops!—the annual shareholder meeting.

First described by Sir Isaac Newton in his universal law of gravitation, what goes up—must come down.

“Millions saw the apple fall, but Newton was the one who asked why” – Bernard Baruch.

As the following table highlights, selling of shares by insiders - which includes executives, directors and top shareholders at the Company - has been rampant in recent months. In our view, the Common Stock of Force Protection is Newton’s apple, almost ready to fall from the tree:

Beneficial Owner	Relation	Transaction Date	Ownership Action	Shares	Price ($)
Gordon R. McGilton	CEO	10-09-06	Disposed of	100,000	8.38
		10-10-06	Disposed of	77,400	8.17
		10-11-06	Disposed of	122,600	8.11
Frank Kavanaugh	Director	10-03-06	Disposed of	178,600	8.55
		10-04-06	Disposed of	114,123	8.48
		10-05-06	Disposed of	287,277	8.11
Gordon R. McGilton	CEO	9-26-06	Disposed of	83,333	8.77
Ervin R. Scott	Director	9-25-06	Disposed of	190,736	8.90 – 9.10
		9-21-06	Disposed of	134,000	8.99 – 9.18
		9-22-06	Disposed of	129,500	8.90 – 9.05
Frank Kavanaugh	Director	9-15-06	Disposed of	599,640	7.48
		9-18-06	Disposed of	84,865	7.98
		9-08-06	Disposed of	309,000	7.02
		9-11-06	Disposed of	119,750	7.01
		9-12-06	Disposed of	119,750	7.36
Ashford Capital, LLC Frank Kavanaugh, Mngr.			Disposed of	1.0 M	Ongoing
On August 10, 2006, a prospectus related to the sale of up to 8,250,000 shares of Common Stock was filed by existing stockholders with the SEC. Force Protection will not receive proceeds from the sale of shares of Common Stock in this offering.

Is the stock price of Force Protection starting to tire?

On October 6, 2006, Congress approved a $448 billion defense-spending bill (including $70 billion in emergency spending for the Iraq and Afghanistan wars). The news boosted the prices of most defense contractors, with the Spade Defense Index (^DXS), which tracks the industry and trades on the American Stock Exchange, rising 4.3 percent in the last two weeks. The price of Force Protection dropped 0.7 percent in the same period.

In the appropriations bill are line items provisions that could prove attractive to the top-line of Force Protection, including contract opportunities for a chunk of the (1) almost $300 million allocated for Mine Resistant Utility Vehicles (MURVs); and (2) $1.7 billion targeted for the indigenous Iraqi Defenses Force as it continues to build-out its own security capabilities (which we assume would include armored vehicles).

If insiders thought that the Company was going to benefit from the latest appropriations bill, would it not be in their best interest to hold on to their shares?

“There is something about inside information which seems to paralyze a man's reasoning powers.” – Bernard Baruch

At the recent shareholder meeting, CEO Gordon McGilton remarked: “The future of the company looks better than it ever has, to those that are working in, and on, it daily. Vehicle deliveries to the customer are increasing steadily. We have now secured contracts with an international customer, and we have future products well into the development process that will create an even broader product offering as we go forward.”

“Never pay the slightest attention to what a company president ever says about his stock.” – Bernard Baruch

Apparently, the company's insiders seemed to have ignored McGilton's remarks (including himself). Granted, insiders sell for many reasons, but when Force Protection insiders register to dump (sell) on the market —or have already sold hand over fist—a combined 23.5 percent of the Common Stock float in the last ten weeks, this raises an ominous red flag.

There has been no reported insider buying during this time period, too.

“Do not blame anybody for your mistakes and failures.” – Bernard Baruch

There will be investors who will fail to heed this warning—instead, accusing the 10Q Detective of being a shill for short-sellers. As editor, I will repeat one more time: The 10Q Detective has NO financial interest in Force Protection and has a FULL DISCLOSURE policy.

In our view, fiscal 2007 may represent the cyclical peak in a multi-year rise in military spending. We caution that unseen rust may be corroding the underbelly of Force Protection’s armored growth engine. The catalysts for a precipitous collapse in the price of the Common Stock price include (a) the missing of unit volume targets because of delays in certain military contracts; (b) a November mid-term elections (majority) win by the Democrats in either the House or the Senate (which could lead to a future draw-down of U.S. troops in Iraq); and (c) less-than-anticipated contract wins.

“I made my money by selling too soon.” – Bernard Baruch

Editor David J Phillips does not have any financial interest in the stock of Force Protection (long or short). You can see his portfolio holdings in the sidebar. The 10Q Detective has a full disclosure policy.