Movie Gallery Inc. (NDAQ:MOVI) stock was cut in half recently as they revealed their quarterly financials in their August 10th 8k filing with the SEC. The company said that same-store total revenues for the second quarter of 2006 decreased 4.6% from last year, reflecting a "continued softness in the video rental industry." The company reported a net loss of $14.9m (0.47/share) in the second quarter. This is due to, among other things, a 4.6% drop in same store revenues. The companies balance sheet doesn't look any better - the acquisition of Hollywood Video left the company with a massive debt totaling over $1.1 billion.

While management refused to give guidance, they made it clear that they were working to turn around the company. Meanwhile, the rental movie market may rebound with the recent blockbuster titles leaving the theaters. The Chairman noted:

"Our business continues to be affected by a weak home video release schedule and other industry-wide challenges, but we are making great progress on a number of internal initiatives intended to improve Movie Gallery's financial and operational performance.  We continue to expect a slow late summer, as is typical due to the seasonality of our industry, with gradually improving business conditions beginning in October when the first of several $100 million titles will be released to home video. In the meantime, Movie Gallery is aggressively pursuing opportunities to increase revenues and further improve operating efficiencies.  We have engaged Merrill Lynch to advise us on ways to improve our capital structure as well as Alvarez & Marsal, a leading turnaround management, restructuring and corporate advisory firm.  This great company, together with its dedicated associates and partners, is taking the steps necessary to reposition Movie Gallery for renewed success."

So, is the company worth buying? Probably not at these levels. The company is still riddled with debt, and according to their 8k filing, their "internal initiatives" designed to improve their performance won't be fully realized until late 2007 or 2008. Meanwhile, the company is struggling to deal with its debt-load and declining revenues which may be headed towards a violation of bank covenants in January. Finally, there is no guarantee that the market will improve with competitors like Netflix and Blockbuster who are gaining market share with their online rental programs. Despite these things, the stock is worth keeping an eye on, because a turnaround at these levels could mean big money in the future.

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

Last week, billionaire investor Warren Buffet announced in an August 11th 13D filing with the SEC that his company added another half million shares of USG Corp (USG) to his existing 14 million shares. This brings Berkshire Hathaway's stake in the company to over 16%.

USG Corp (USG) is a construction company that went bankrupt in mid-2001 primarily due to asbestos-related lawsuits and a general slowdown in the industry. Since the company's dramatic decline, Berkshire has been working with the company to formulate and enact a bankruptcy reorganization plan. To accomplish this, Berkshire has recently helped the company raise around $1.8 billion through a rights offering to shareholders. While the rights offering is still attractive to current investors (as it is set at around $40/share), Berkshire has pledged to purchase all shares not bought by others in the rights offering to assure that this target it met. This means that Berkshire could end up holding more than 50% of the company's outstanding shares.

So, is USG an investment opportunity? If the company manages to successfully emerge from bankruptcy, there is indeed significant potential upside. The risk of shares being further diluted or disbanded is also greatly reduced by Berkshire's massive holding of common stock. Finally, the fact that Warren Buffet's company (which has a great track record) is behind the reorganization efforts also helps improve the odds. However on the down side, the company has taken a nearly 50% haircut in the last few months, and the results of any reorganization process could take a couple years to materialize. If nothing else, USG is a great company to keep on the radar to monitor the reoganization process.

IMAX Corporation (IMAX) shares nearly halved in the last few days after the company dropped two bombshells on investors. The first one came in their 10Q filing, where they announced the SEC's informal inquiry into their revenue recognition:

"The Company is in the process of responding to an informal inquiry from the U.S. Securities and Exchange Commission regarding the Company's timing of revenue recognition, including its application of multiple element arrangement accounting in its revenue recognition for theater systems ... As reported in the Company's 2005 10-K, the Company recognized revenue in the fourth quarter of 2005 on 10 theater installations in theaters which did not open in that quarter."

According to the company, these ten installations all took place within a reasonable timeframe (although not all in the fourth quarter); however, one of the ten systems had to be removed at a cost of about $0.1m, which was not recorded into income. This is an example of one of the most common types of revenue recognition fraud, and will likely not have a large material impact on the company.

Investors were hit with another bombshell on August 10th, when the company stated in their 8k filing:

"Today the Company reported that while it received significant initial interest [to acquire the company,] from multiple parties, its view is that there are presently no buyers who have indicated a willingness to acquire the Company at a valuation sought by the Board of Directors. Because interest remains from several parties at a lower valuation, however, the Board has authorized the Company's bankers to explore these opportunities. This process is ongoing."

The original range, cited by analysts, was around $12 - $14 per share. It is uncertain what the "interested parties" now being considered by the company's bankers are willing to pay. But with the stock currently trading around $6, the company would not be able to turn down any offer above $9, which would represent a 33% premium over today's price. Moreover, the company has a strong balance sheet, strong growth, and is trading at only 10x earnings after its decline.

So, have investors overreacted to these two events? Well, there is still a strong possibility of buyout at a substancial premium to the current price, and even if the stock doesn't get bought out, it is still in a solid financial position on its own. This is definitely a stock worth keeping an eye on.

UnitedHealth Group (UNH) reported today that they were delaying their 10Q filing due to an options review. The company explained the situation in note 12 of their NT-10Q (replacement of their missing 10Q):

"This continued [options backdating] assessment includes the possibility that certain stock options may require variable accounting under APB 25, rather than fixed plan accounting as they were reflected in the then-current estimate of the maximum potential impact presented in Note 13 of the First Quarter 10-Q. Under variable accounting for these options, total stock option compensation expense is re-measured in each quarter based on the difference between the quoted market price of the stock and the stock option exercise price until the option is exercised. As the market price of the stock increases or decreases, non-cash compensation expense is adjusted and the increase or decrease is recognized over the remainder of the service period related to the options or in each quarter if the option has vested. If, upon conclusion of the independent review, the Company determines that variable accounting is the appropriate treatment for certain stock options, the resulting non-cash charges for 2005 and prior years are likely to be significant because of the substantial increase of the Company’s stock price during the period under review. Under FAS 123R, the accounting standard currently applicable to the Company (and adopted for all historical periods as disclosed in Note 1), the Company believes that the maximum potential impact of all stock option matters under review would not be significant."

So, the problem is determining how these stock options should be valued - with variable accounting or with fixed accounting. As you've read in their statement, variable accounting calls for the options prices to be recalculated each quarter. When a company's stock is rising quickly, variable accounting is the most timely/accurate way to calculate non-cash compensation expense. Fixed accounting can lead to these charges being underestimated, which is the cause for concern.

The non-cash charges mentioned in this statement are charges made by the company that do not require a cash outlay. Other examples of non-cash charges include depreciation, amortization, and depletion accounts. If the non-cash charges increased "substancially" in past years, this would result in lower earnings in the period when the charge was made - and lower earnings means a lower valuation. This is definitely a stock to watch as UNH could quickly become a buy at a discount or become a potential short.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Later in the filing, the company also notes:

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

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

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

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

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

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

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

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

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

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

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