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To: Sean Reilly who wrote (7377)	10/26/1997 9:38:00 AM
From: Stan Price	Read Replies (2) \| Respond to of 12454

Sean, Unless Bohemia justifies the share increase in the form of a BT press release or some other positive news that changes the mindset of the shareholders in the next week or so, then they face certain defeat on all these issues IMO. That is, of course, assuming we get our proxies in time to vote. Regarding the first question, It could definitly be applied to both equally.

To: Sean Reilly who wrote (7377)	10/26/1997 12:07:00 PM
From: Rick	Read Replies (1) \| Respond to of 12454

Sean, I wonder if your alma mater considered this? BTW:Is Aronson still there? =========================== japonica.com Free Cash Flow: A Better Value Indicator? With so many ways to manipulate and manage earnings, should investors demand a better performance and value indicator? Share your Views. Situation Companies can manipulate or manage earnings using a number of methods, including restructuring charges, inventory write-offs, acquisition accounting or one-time realignment charges. The use of these methods appears to be on the rise, most commonly in the form of restructuring or realignment charges. Several articles have appeared in the Wall Street Journal and The New York Times, and The Center for Financial Research and Analysis ("CFRA"), a prominent accounting research firm, has published reports highlighting these methods for investors. An article in this week's Barron's ("Profits? What Profits? There's Less to Those Earnings Numbers Than Meets the Eye") examines the gap between reported "inflated" earnings and economic earnings, and its impact on market valuations. Restructuring Charges When companies announce "one-time" or "non-operating" events, investors and analysts adjust earnings upward to reflect "earnings before charges," thereby eliminating the impact of these charges on current period earnings. Companies harvest the benefits of these charges not only in current, but in future periods as well. By not including these charges in EPS calculations, current earnings are inflated, and by reversing charges in future periods and using them to pay for certain expenses, future earnings are not impacted and therefore also inflated. Using these charges, management can meet targeted earnings results with no real performance. Reserves can simply be used to show the desired results. Furthermore, it would appear that the Street seems to like the accounting magic's impact on improving ROA and ROE. Many analysts seem willing to integrate 100% of projected savings into a company's earnings estimates before a penny's savings is accomplished. Several Japonica Interactive Network ("JIN") Investor Forums (list at bottom of page) are dedicated to this issue. A recent JIN submission seeks suggestions on how best to isolate accounting-based earnings from performance-based earnings in association with an upcoming major restructuring annoucement by Sunbeam. Why Free Cash Flow? A review of a company's cash flow can reveal the use and misuse of charges and their impact in distorting actual performance. In calculating cash flows, all expenses are recorded as they are incurred, significantly reducing the possibility of manipulation by management or use of accounting shenanigans. Table 2 provides an illustration: Company X takes a $120 mil. restructuring charge in '96. Its '96 earnings before the charge are $50 mil.. Claiming the $120 mil. is a "one-time" charge, analysts disregard it in calculating EPS and share value. Over three years, 1996-1998, the company proceeds to spend the $120 mil.: $10 mil. in '96, $40 mil. in '97 and $70 mil. in '98. Interestingly, these expenses are not reported in the Company's income statements in any of the three years, because the $120 mil. has already been charged to 1996 earnings. Costs are therefore understated and earnings are overstated in each of the three years. Inflated Earnings The company benefits in all three years by reporting higher earnings of $50 mil. in '96, $90 mil. in '97 and $130 mil. in '98. If the charges are reported as they are incurred, earnings would be substantially lower: $40 mil. in '96, $50 mil. in '97 and $60 mil. in '98. Free cash flow, which records expenses as they are incurred, would appear to provide investors with a better and more accurate indicator of the Company's performance and value. Newell: Acquisition Accounting An analysis of financial statements at Newell, a $2.5 bil. consumer products company, provides insight into how management of earnings, through acquisition accounting, can mask deteriorating performance trends, including negative free cash flow. While Newell has sustained solid earnings growth over the past 4 years, it has not had a single year of positive free cash flow (after costs of acquisitions) during that period. Analysts and investors, who primarily use earnings as an indication of value and future prospects, have rewarded Newell with higher value and share price. Newell's stock price has increased 34%, to $30 5/8 at June 30, 1996, from $22 7/8 at year-end 1991. Over the same period, Newell's tangible book value has declined 19%, to $2.91 per share at June 30, 1996, from $3.58 at year-end 1991. Interact: Join the Discussion: Given management's ability to manipulate earnings, shouldn't investors start using free cash flow as a more reliable and consistent indicator of performance and value? Sunbeam - Accounting Checklist Rubbermaid - 1996 Reserve Reversals Newell - Newellization vs. Accounting Related JIN Stories: Newell: Progress or Retrenchment? Rubbermaid's $98 Mil. "Realignment Charge" Conference Call Highlights: July 16 call with Rubbermaid management discusses 2Q earnings Related Sites: Center for Financial Research and Analysis Rubbermaid Barron's japonica.com