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.