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

To: Ken Muller who wrote (8509)	12/21/1997 4:38:00 AM
From: Ken Muller	Read Replies (1) \| Respond to of 14577

To All: With everyone discussing the management changes at S3, I decided to sit down over the weekend and review S3's re-stated accounting data in detail. I believe most of the data is accurate but please let me know if something doesn't look right. Some data was derived from subtracting previous quarterly data from either 6 month or 9 month summaries. I still need the individual restated 1st and 2nd quarterly 1997 results to be complete, but, until they are released, I have combined them. Original Revenue by Quarter ($000) - not restated 1st qtr 96 - 110,072 2nd qtr 96 - 103,825 3rd qtr 96 - 119,440 4th qtr 96 - 132,041 1st qtr 97 - 138,066 2nd qtr 97 - 108,892 3rd qtr 97 - 120,439 After re-statement, increases(reductions) in Revenue 1st & 2nd qtr 96 - (12,655) 3rd qtr 96 - (9355) 4th qtr 96 - (3031) 1st & 2nd qtr 97 - (32,214) 3rd qtr 97 - (745) Total revenue reductions = 58,000 (1/1/96-9/30/97) (If anyone wants my worksheet on the calculations, please let me know) As the figures show, the highest level of improper revenue recognition occurred during the 1st and 2nd quarters of 1997. After reviewing the original revenue statements it would seem that the 1st qtr 97 was "loaded up". (In hindsight, this may have been the reason that George Hervey submitted his resignation on 3/4/97. He may have felt the game was getting out of hand). We now move along to 2 other accounts of interest: Inventories and Accounts Receivable. (S3 re-stated figures) Accounts Receivable $76,120 - 12/31/96 $117,458 - 9/30/97 Inventories $53,466 - 12/31/96 $50,727 - 9/30/97 Analysis While S3 has indicated that their accounting problems are attributable to improper timing of revenue recognition, the accounting numbers cause some doubt. As a prime example, the 1st and 2nd quarters of 1997 show a total combined revenue reduction of $32,959. If this was due to improper revenue recognition of product shipped into distribution, a re-statement of the financials would show an increase in inventory of at least 20 million (64% COG). Clearly, this did not happen. The actual inventory DECREASED in the restated reports(from 12/31/96-9/30/97). Nor is this due to a writedown of inventory in the 3rd quarter. A careful review of the 10Q submitted by S3 on 11/19/97 contains no mention of an writedown in their inventory valuations. Therefore, a writedown, if one was taken, would have to have occurred during the 2nd quarter at the same time S3 was shipping the product into distribution and taking the full revenue credit. I don't think this scenerio would be very likely since it would be clearly fraudulent. I have considered that the material was simply put into distribution and the distributor told to sell it as best they could. But 32 million? How could that be explained as a simple accounting error? Would they have been able to get rid of it all within the 2nd and 3rd quarters? This would keep the overall inventory numbers about the same. However, the distributor shipments would then have to be reduced by $32 million over the same timeframe in order to keep the inventories down. Would Gary Johnson be making positive statements in the second quarter knowing he's down 32 million in expected distributor shipments? Its seems improbable. So I don't think the full story is in yet. There may be more than just a restatement of revenue issue. The critical data will be the re-stated inventory numbers for the 1st and 2nd quarters 97. Happy Holidays, Ken PS. For those who haven't read the 65K byte file on the 11/19 10Q filing, there was one sentence stuck in the middle of the document: << The Company has received from the United States Securities and Exchange Commission requests for information relating to the Company's recent restatement announcement. The Company has responded and intends to continue to respond to such requests.>>