Restatement News release
A few observations: The problem dates back to the first quarter of 1996.
Therefore, the erroneous practice was in effect during the previous CFO's
term. Since there is barely a restatement on the 3rd qtr 1997, the
practice may well have been detected and discontinued by the recently
appointed CFO, Amaral. If this is the case then the timing of the
announcement may have been deliberately delayed as not to coincide with
the release of the 3rd qtr results, as the company would have been obliged
to alert the market accordingly and they may not have not yet the extent of
the problem at that time.
The amount of the restatement of $58 mm is cumulative and over a much
longer period and therefore not as significant as if it had been over
a 2 or 3 quarter period.
The information provided says that $22 mm revenue and $0.11/share
were restated in the first 9 months of 1996 alone. The press release is
not clear as to what happened in the 4th qtr of 1996 except that
stockholder's equity was restated downward by $6.8 mm. Since $5.8 mm
was restated in the first 9 months there must have been a restatement
of $1 mm in the 4th qtr, a total of abt $0.13share in 1996. This
leaves about $0.10/share for 1997.
The 3rd qtr saw only a minimal restatement in revenues (from $120.4 mm
to $119.604 mm) but the first 9 months saw revenue go from $367.4 mm
to $334.4). So revenue was restated by abt $22-25 in 1996 and $33-36 mm
in 1997 (in the first half). However, the effect on earnings was abt
$0.13/share in 1996 and only $0.10/share in 1997.
This seems to reconfirm that the practice was virtually discontinued
during the 3rd qtr, the period that Amaral got on board.
Coincidence? Maybe, but I like to give him the benefit of the doubt and
there may be credit due.
The fact that the prior CFO left so long ago and having no CFO for a long
interim period may have contributed to the continuation and perhaps even
escalation of the practice.
While there is no certainty that management and the Board had any knowledge
about this, if they did not they are guilty of gross neglect to the
detriment of all shareholders, and all shareholders are entitled to expect
clear, firm and decisive steps to be taken to remedy the serious lack of
controls and bring about change in the composition of the leadership.
Let us not forget, the erroneous practice may be the cause of the restatement,
but it is the symptom of a deeper problem. Like any good doctor, we do not wnat to
treat the sympton, we want to treat the cause of the disease. The deeper
problem is the lack of clear direction and focus of where S3 should be heading
with its leading edge technology. If, what we have seen is all the current
S3 visionairies can offer, we need new visionairies on board who will get us all
where we want to be.
All in all, I don't consider the extent of the problem worth a $3 + drop
in stock price since the November 3 news release. The net change is abt
$0.23/share. The company sells for less than 2 times BV, so the drop in stock
should not have exceeded $0.46/share at best.
Why then the big drop? Overreaction, panic selling, doomsayers like Tom
Terf (by the way he is spreading his news on the Fool S3 thread), Sep K.
and the likes, and the clear loss of confidence of the market and the
shareholders in the ability of the current Board and management team to steer
S3 in the right direction.
With the proper changes in the composition of the Board and the managemen
team S3 should be soon on its way to a more realistic market value, one
that is commensurate with its position in the market place. Read me well:
"With the proper changes ..."
Just MHO
Jan |
