where bookkeeping has gone bad. Two categories: advancing sales and booking nonexistent sales.
You can have a problem where LGTOE booked sales that have not occurred and never will occur (e.g., renegade salesman recording sales on hope, and the hope not being realized). This leads to the eventual revision of the books, because sooner or later the lack of cash to match the booking becomes too obvious (accounts receivable just grows and grows). LGTOE is revising books. I hope that there is not too much revision of books to totally wipe out sales (as opposed to reassigning sales to different quarters).
It is better if LGTOE was just advancing sales one quarter or so. As long as they are consistent in using this system, you can try to adjust to reality. Let's say for instance, that a company reports sales at:
1st Q 2nd Q 3rd Q 4th Q
year one 5.0 6.0 6.9 8.3
year two 10.0 12.0 14.0 16.0
You simply adjust this to:
1st Q 2nd Q 3rd Q 4th Q
year one ** 5.0 6.0 6.9
year two 8.3 10.0 12.0 14.0
** prior year's 4th quarter reported revenue.
But you cannot just do this with EPS. Because you are pairing next quarter's revenue to this quarter's expenses (and expenses are growing rapidly as well). Thus you would have to adjust sales one quarter back, and then take that quarter's expenses. LGTOE was running about 10% as net profit, but adjusted it would of course be lower than that. But this is still preferable to having to revoke sales.
My guess is that the company has not really been profitable. However, it is certain that they have products in demand and that sales have been growing. The enterprise, if run properly, could be quite valuable. They probably have some pretty good technical people, who will now be looking for jobs elsewhere. Poor fellows, they kept up their end of the bargain; now their options are worthless or worth much less.
The best thing would be if LGTO could get the revised books out quickly, and for management to be ousted, and new management to sell the company.
I guess this only goes to prove you have to do your own DD. There must have been some strong clues to these problems for someone who dug. What about those analysts too? Obviously, they don't get out of the house much. About as useful as touts at the racetrack. Consider as one example this synopsis of one of the reports coming out some time ago:
Robertson Stephens issued a Company Report on November 15, 1999 for Legato Systems Inc..
On November 15, 1999 Robertson Stephens analyst John Powers issued a 5 page Company Report on Legato Systems Inc.
Report highlights: 'The company reported 3Q99 EPS of $0.18 versus $0.08 in the same period last year. A STRONG BUY
rating was reiterated. The company's three-year earnings growth was projected at 40%.'
Report No.: F0114015 |
