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To: Jim Willie CB who wrote (47265)	1/30/2002 6:05:22 PM
From: stockman_scott	Read Replies (1) \| Respond to of 65232

Special Report: Exploring the Enron Explosion How Enron Points Up the Need for Better Disclosure of Investment Risks The Enron/Arthur Andersen scandal has spawned a raft of Congressional hearings and is sure to be front-page news for months. But are there really flaws in the system, or is this just a unique case? Some Wharton professors believe that while certain regulatory and accounting rules may indeed need to be changed, better disclosure of investment risks could resolve the most troubling aspects of Enron's conduct. The entire article is available at: knowledge.wharton.upenn.edu

To: Jim Willie CB who wrote (47265)	1/31/2002 11:21:46 AM
From: stockman_scott	Read Replies (1) \| Respond to of 65232

Don't Write Off Writedowns By David Simons Forbes.com 01.31.02, 8:00 AM ET Goldman Sachs guru Abby Joseph Cohen said not to worry about her Jan. 24 estimate that massive writedowns of acquisitions and other bull-market asset excess will cut into 2002 earnings of S&P 500 companies by 35%. Ms. Cohen maintained her year-end price target of 1,300 to 1,425 for the index. She noted that the writedowns would be excluded as special charges from the earnings Wall Street analysts look at. But don't ignore the writedowns. What's behind them can give clues about future performance of the companies doing the cutting. A full-color preview of the 2002 action came last July when telecom-equipment maker JDS Uniphase (nasdaq: JDSU - news - people) announced a $46.6 billion haircut of $61.4 billion worth of deals done near the peak of the bubble. Based upon the acquired companies' quarterly reports just prior to the deal closings, JDS Uniphase paid a princely 43 times the combined $1.4 billion of their annualized revenue, and a drunken maharajah multiple of 156 times the combined earnings before interest, taxes, depreciation and amortization. Annualized net losses totaled $330 million. Accounting rules require a writedown if the fair value of an acquisition or investment has fallen significantly and, in bean-counter lingo, the decline is deemed "other than temporary," meaning fat chance that it will recover. The implosion of the telecom sector clearly had made the JDS Uniphase acquisitions fit that bill. Yet within four days of the writedown announcement, JDS Uniphase shares had more than made up a brief 10% reflex dip. Investors took the perspective, also espoused by the company, that the writedown didn't matter because JDS Uniphase had merely overpaid for the companies with overpriced stock. Had the deals been done after the bubble had burst, they say, the amounts subject to writeoff would have been smaller or nonexistent. Apart from being a shaky rationale for overpaying, the logic ignores significant implications of the nuts and bolts of the writedown process. What's written down is goodwill--the difference between the purchase price and the book value of what was acquired. Investors often downplay goodwill, because in accounting terms it's deemed an "intangible asset." But the prescribed method chosen by JDS Uniphase to compute the writedown is quite tangible. The present value of cash flows from the acquired businesses over the next five years was estimated. The difference between that and the goodwill that hadn't already been amortized was written off. In doing so, JDS Uniphase was saying that five-year cash flows from the acquired businesses would be $4 billion, rather than the $57 billion implied by the acquisition prices. So much for the common perspective that the goodwill "intangible" is merely a plug factor to make accounting statements balance. Of course, much of that cash-flow deficit was reflected by the bubble-bursting of JDS Uniphase stock and the waterfall decline of the bottom line from a best-face $137 million pro-forma profit in the June 2000 quarter to a $477 million loss a year later. Still, the assumptions JDS Uniphase used to arrive at the cash flow were optimistic. In filings with the Securities and Exchange Commission (SEC), the company said it used annual growth rates of 15% to 60%, and a 13.75% average discount rate. The discount rate is supposed to reflect the risk in the growth rate. Nortel Networks (nyse: NT - news - people) used a 20% discount rate in arriving at a $12.4 billion June writedown of four bull-market acquisitions. The JDS Uniphase discount was more appropriate to a cement plant than to a supplier of new-age telecom gear looking for double-digit growth in an uncertain sales climate. The company warned in SEC filings, "It is reasonably possible that the estimates and assumptions used...may change in the near term, resulting in the need to further write down our goodwill." In other words, the cash flows from the acquisitions would be even less. Investors who dismissed the writedowns as irrelevant probably also ignored the implication of that warning. Sure enough, on Jan. 24, JDS Uniphase announced a $1.3 billion downward adjustment of the writedowns, amidst a companywide revenue decline of 52% since they were first made. At the least, the warnings and the aggressive calculations that preceded it signaled that JDS Uniphase remained prone to overly optimistic projection. Then, in its Jan. 24 earnings announcement, the company recanted its estimate made only a month earlier that the March quarter would mark the low point of declining sales. Nortel's writedown was more conclusive at the outset. It wiped out the 90% that remained of $14 billion goodwill from $17 billion of bubble-era outlays for three companies. That translates to estimated cash flow generated over five years being 78% less than what Nortel paid. Fiber-optic king Corning's (nyse: GLW - news - people) June writedown of its September 2000 deal to buy Optical Technologies USA shows just how tangible goodwill can be. In the nine months prior to the deal, Optical Technologies had lost $5.6 million on $17 million in sales. Corning paid $4 billion--176 times the annualized sales--and paid not in stock but in cold cash. The writedown reduced the value to $800,000, meaning that Corning literally had done the equivalent of totaling 80,000 brand new Cadillacs.

To: Jim Willie CB who wrote (47265)	1/31/2002 11:38:20 AM
From: stockman_scott	Read Replies (1) \| Respond to of 65232

Enron directors backed off-book practices Washington Post Published Jan 31 2002 WASHINGTON, D.C. -- Members of Enron Corp.'s board of directors received detailed briefings as early as four years ago about the purpose and structure of controversial partnerships whose losses triggered the company's bankruptcy, according to minutes of the meetings. The minutes, which cover four board meetings in 1997 and 1999 and three finance committee meetings in 2000, suggest that board members approved aggressive accounting actions, including moving debt off the company books. A dozen congressional committees as well as the Justice Department and the Securities and Exchange Commission are investigating Enron's collapse, which cost investors and employees billions of dollars. A focus of the inquiries is whether Enron hid debt and inflated its profits by using the private partnerships run by its chief financial officer. Individual Enron board members, who themselves are being sued and investigated, have said little publicly about their role in the transactions. The minutes, made available to the Washington Post by a source critical of the board, suggest that the partnerships were a key part of Enron's growth strategy and show they were regularly reviewed by the directors. When it was reported last fall that Andrew Fastow, the Enron CFO, made $30 million running partnerships with names such as LJM, Raptor and JEDI, then-chairman Kenneth Lay announced that the board was setting up a special committee to investigate. The minutes show that members of that special committee attended board meetings in which Fastow described the intricacies of the entities. Sources said the committee's report, which is expected to be completed as early as Friday, will say that while the Enron board approved the partnerships, management and auditors withheld key information. That is expected to be the key element of the defense that will be offered by Lay and board member William Powers when they testify before Congress Monday, sources said.