In light of the fact that between July 1998 and June 1999, Integrity has amortized $4M of their 'product masters' this should be an interesting development:
October 25, 1999
Barron's Features
Cash Ain't Trash
A new earnings measure could give these stocks a boost
By ANDREW BARY
The recent profit news from Intel marked a milestone in financial reporting -- not so much for what the giant chip maker said as for how it said it. With its third-quarter report, Intel became the most prominent company to emphasize so-called cash earnings over a standard calculation of profits. Cash earnings are derived by adding goodwill amortization back to reported earnings. And many accounting experts believe they offer a truer picture of a company's profit power than do current reported earnings.
"For a company of Intel's stature to take this step helps legitimize the technique for companies considering early adoption of cash earnings," says Bob Willens, accounting expert at Lehman Brothers. Willens believes that cash earnings will become the key measure of financial performance for many companies and that price-earnings ratios may have to be reevaluated. Some institutional investors already are drawing up lists of companies that have a big spread between reported profits and cash earnings, in an effort to capitalize on a potential revaluation.
Under current accounting rules, companies must deduct goodwill amortization from their profits, depressing results. The goodwill typically arises from acquisitions that use the "purchase" method of accounting, which requires buyers to record as goodwill the difference between the price of an acquisition and the acquired company's book value. This goodwill must be written off against earnings over time. Cash earnings adds back this goodwill component to reported profits.
Willens and other advocates of cash earnings say that this is no accounting gimmick. They argue that cash earnings better reflect a company's financial health because goodwill amortization is a non-cash charge resulting from an accounting convention, not an impairment of a company's assets.
EOQ
'Product masters' is the same as goodwill. Basically, it helps Integrity reflect the 'book value' of the company: If an artist signs a contract, what does he or she actually bring to the contract? Until the recording starts selling, nothing has actually been created. Yet, an advance is usually paid to the artist and at the same time, since there is outgo, Integrity has income recorded in product masters. It's not counted as earnings at all and over the next 20 years (I think), the entire product masters is deducted from earnings. The 'integrity' of book value is maintained but Integrity's earnings as we see them are of very little value.
I don't know what the writeoff was for the 3rdQ but between July 1998 and June 1999, ITGR earned $5.5M ($1/share) without the amortization. Most of this goes to pay off debt, now. It's almost like the better shape ITGR is in, the faster we seem to be bailing. Things will turn around at ITGR.
I have sent a copy of the article to IR. The article points out that institutional investors are already using 'cash earnings' analysis to draw up a list of good buys.
Feel free to email me if you have any questions.
WH
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