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Technology Stocks : S3 (A LONGER TERM PERSPECTIVE) -- Ignore unavailable to you. Want to Upgrade?

To: Bill Lin who wrote (7691)	11/10/1997 4:08:00 PM
From: Tom Terf	Respond to of 14577

Lawsuit forecast Number of lawsuits filed on Nov. 7 : 2 Number of lawsuits filed on Nov. 10: 2 Number of lawsuits filed on Nov. 11 : 1 It's getting better gang !

To: Bill Lin who wrote (7691)	11/10/1997 6:02:00 PM
From: Ken Muller	Read Replies (2) \| Respond to of 14577

To All: This is a long post but probably needs to be read and saved .( I promise not to re-hash this issue again.) I am going through the issue of the revenue re-statement, why it happened and why I would want just one new honest board member. To start with, I have been in the semiconductor sales channels since 1979. I am very familiar with how distribution channels operate and their invoicing and inventory procedures The Scam (Inventories are the key) The story S3 has released is that they sent product to Far East distributors and recognized it as revenue when they sent it rather than when it actually got sold. Indication are that this over-stated revenue by $40-70 million over the last 2 quarters. Lets assume $60 million ($30 million/quarter) to keep things simple. What this statement says is that as of 6/30/97 , several Far Eastern distributors had previously placed orders which increased their inventory position by $30 million. (S3 can't ship product without a purchase order.) It seems they had done so without having offsetting orders from their customers. For some reason they continued to do this through July, August, and September ending up with an additional $30 million more in inventory ($60 million total). (In order for their inventories not to increase, distribution would have to have sold product as fast as it was coming in. If was the case, there would be no reduction in re-stated revenue, at least for the 3rd quarter.) This leads to a number of questions: 1. Why would a distributor order huge quantities of material for which he has no present or expected orders. (The end customers provide both S3 and distribution with their forecasted production run rates.) 2. Did the distributors pay for this material after 60 days? 3. Why, after having additional inventory, did distribution continue to order product over and above what they could sell? 4. Who would have had the relationship with the Far Eastern distributor owners to have them over-inventory. 5. Who profited? ANSWERS 1. After having 2 bad revenue months (April and May), S3 realized they were in a serious trouble. Hoping it was a one time problem, they decided to enlist the support of their Far Eastern distributors. They were asked to place orders for additional product or to reschedule for immediate delivery orders already on the books. This material was shipped during June. Since S3 couldn't take credit for those sales immediately, they switched accounting methods to reflect additional revenue for the quarter. (S3's 10K statement for the 2nd quarter lists the third month, June, as the month in which the increased revenue showed up) 2. No rational distributor could afford to pay for $30 million in additional inventory. As a result the accounts receivable number at S3 rose $30 million as of 6/30/97 and an additional $30 million as of 9/30/97. (This is why an announcement had to be made before another 10K was issued. The AR number would be way out of line.) Credit restrictions for the Far East distributors would have to have been changed. Accounts receivable personnel at S3 would have been told to ignore the unpaid invoices. The distributors would have been told they could sell the material in the future at whatever the market price was and S3 would "back end" a guaranteed profit. (Ship and debit) 3. "In for a penny, in for a pound" What was hoped to be a one-time short quarter turned out to be a disaster when 3rd quarter was under way. The situation got worse as several add-in board customers (DIMD, STB ?) reduced their requirements. The distributors were told to continue ordering product. 4. Who's the responsible guy(s)? Not Gary Johnson. He doesn't have the relationship with the Far Eastern disty owners. Sales or accounting? Nope, they would get canned in a minute. Doesn't leave very many choices left, does it? 5. Investors who shorted the stock during the summer and fall. Who would have suspected the truth about the revenue situation? GJ, the acting CFO, Accounts Receivable manager, Sales manager, Intl Sales Manager, Disty sales manager, Account receivable supervisor for Far East accounts, disty owners, some disty employees, Production Control Mgr and some of his staff, plus all the husbands/wives, or significant others of the above. Oh, one other person probably suspected: the person(s) who thought up this whole scheme. And you can believe none of these people ever leaked any word on what going on to the investment community! New Board Member It is vitally important that we have 1 new, honest, truthful, and interested person on the board. This whole scenario could not have happened if one board member had been alert. Its not important that he be in the majority. Its vitally important that if he suspects something isn't right, he voices his objections publicly. (I suspect GJ was told privately that the whole board would go along with this scheme) That's it guys. Not very pretty. The 10K could be gruesome. Ken