Accounting Magic Erases Big Loss (the NY Times article)
By FLOYD NORRIS
NEW YORK -- For a corporate executive who must meet Wall Street expectations every quarter, a dream come true would be to have a couple of months that would pass unnoticed. There would be no need to pump up sales, and every reason to take all possible expenses.
That is just what U.S. Robotics, the big computer modem maker now part of the 3Com Corp., has accomplished. And, to make things even better, 3Com has found a way to count six good months of U.S. Robotics earnings twice. It is accounting alchemy at its most impressive.
It is also, accountants say, completely legal under the bizarre merger accounting rules now in force. But it is doubtful that any company has ever done more to take advantage of those rules than did 3Com.
The rules deal with combining financial statements in a merger that uses pooling-of-interests accounting. When the two companies have different fiscal years, the result can be dropping a period, or double-counting one. Here we get both.
The period that disappears from the financials is the two months ended May 24. And it was during those months, just before the merger with 3Com took effect, that U.S. Robotics stopped shipping products.
Buried in the footnotes of a filing sent to the Securities and Exchange Commission last week -- and never to show in any financial statement published from now on -- is the disclosure that U.S. Robotics had sales of just $15.2 million, and a loss of $160.8 million, for that period. Sales were down 96.7 percent from the pace of the preceding quarter.
Judging from the size of the loss, it appears that the company also loaded in expenses during the period.
The accounting wizards also found a way to put U.S. Robotics results for the six months ended Sept. 29, 1996, into the financials for the merged company in two different fiscal years. They double-counted sales of $1.19 billion and profits of $76.8 million.
Like many other companies, U.S. Robotics reported revenue when it shipped items to dealers or wholesalers. The company's critics had suspected it was puffing up reported sales by stuffing inventory into its dealers. The 3Com filing, called to public attention by Herb Greenberg, a financial columnist for The San Francisco Chronicle, comes close to confirming that. U.S. Robotics, it reports, wanted "to reduce levels of channel inventory and conform sales return and allowance reserve philosophies" with those of 3Com.
In English, that means some sales previously reported were canceled. Profits appeared when people were looking, then vanished.
The latest quarterly report for 3Com shows even more of that, with a $426 million charge for merger-related expenses. Some of the charge -- the company did not say how much -- reflects the return of products previously reported as sold.
Even with all that, 3Com says its distributors still have more inventory than is desirable. That disclosure sent 3Com's price down $5.875, to $49.75, last week.
Technology analysts can ponder whether 3Com's problems signal a falloff in the demand for personal computers.
Investors in 3Com may want to consider how much confidence they should place in a management that resorts to such aggressive bookkeeping practices.
While the accounting appears to be legal, 3Com could have chosen more conservative accounting that would have made the bad period apparent even to those who do not dissect footnotes in quarterly reports. |
