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.

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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.