To George and All
The S3 Story
"The first lie is always the hardest"
There are lots of questions as to why S3 inflated their revenues. In order to answer the questions, you have to look at the timing of the inflated revenue along with the amount of insider trading. See Charts Below
Original Revenue by Quarter ($000)-----Inflated revenue ($000)
1st qtr 96 - 110,072--- 1st & 2nd qtr 96 - (12,655)
2nd qtr 96 - 103,825
3rd qtr 96 - 119,440--- 3rd qtr 96 - (9355)
4th qtr 96 - 132,041--- 4th qtr 96 - (3031)
1st qtr 97 - 138,066--- 1st & 2nd qtr 97 - (32,214)
2nd qtr 97 - 108,892
3rd qtr 97 - 120,439--- 3rd qtr 97 - (745)
Insider sales
Sept, Oct, Nov 1996--- 171,455 shares 11 Directors and officers
December 2,1996--- 5000 shares 1 Officer
January 1997--- 59,667 1 Officer
It all started innocently enough in early 96, just slip a few extra million into the disty channel to bolster earnings. It could be taken care of by year end. 2nd quarter, slip another 6 million into disty, with growth going out of sight it wouldn't matter much. 3rd quarter, and time for the public bond offering of $103 million. Sales were growing but S3 wanted a bigger splash. These bonds were yielding lower than market interest rates. Pump another fictitious $12 million into the disty channel. Yowser! Successful bond placement. Meanwhile, in spite of sterling growth in both revenue and earnings, glowing reports of new product acceptance and design-ins, high analyst recommendations and a soaring stock price, 12 officers and directors of S3 sold their stock from 8/26 to 12/2. No company officer ever made a recorded purchase. Could it be they were expecting some bad news? I think the conclusion most would reach is that all expected an earnings restatement at year end to take care of the inflated revenue number. But then fate took a hand....
For reasons known only to himself, Disodado Banatao, the chairman of the Board sold 59667 shares of stock on Jan 27 and 28. Clearly, there now could be no restatement of 1996 earnings. It would cause too much scrutiny of Disodado Banatao's insider sale. Divestiture would be almost certain. In addition, the high flying sales S3 was experiencing had hit a brick wall. The bottom had dropped out of S3's market.(Surprise!)
The CFO, George Hervey, now under the gun to do 2 things: 1. sign off on the inflated year end revenue numbers for the outside audit and 2. Increase the improper disty revenue to $15-20 million for the 1st quarter 1997. Either action could put George in serious trouble with the SEC. Exit George Hervey, stage left.
With George gone, and S3 inflating their disty shipments by $32 million during the first half of the year, it would have been suicide to bring on a new CFO. The search was put on hold until the disty channels had absorbed and sold much of the product. It was not until September until Walt Ameral was hired as the new CFO. He would be responsible for "finding" the inflated revenue and instituting new controls. ( For anyone interested, once Walt was hired, the restatement announcement was inevitable. S3 stock started to plummet as soon as Walt's appointment was announced)
So why did they do it? Probably arrogance. Mixed with a little greed. (How many company directors/officers ever get punished?) The scheme was known to all but who could step forward?. They all participated in the insider sales. When Disodado Banatao sold his stock in January they were all trapped, prisoners of their own making.
So what happens now?
It all depends on what the SEC decides to do. If they decide to prosecute the key personnel (Disodado Banatao, Gary Johnson, possibly George Hervey) I think the company is history. The legal liability would be too high. If not, S3 may rise again. Place your bets.
Unemotionally,
Ken
PS. I wouldn't count on either Gary Johnson or Disodado Banatao being affiliated with S3 much longer. |
