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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: Berney who wrote (45)	3/7/1998 4:33:00 PM
From: porcupine --''''>	Respond to of 1722

Norris on Accounting Abuse (Compliments of Wayne) Market Place: SEC Pressure on 3Com May Augur New Merger Rules By FLOYD NORRIS When 3Com Corp. acquired US Robotics last year, the accounting wizardry was at least as impressive as any high-technology product ever produced by either company. When the books of the two companies were combined, two very bad months in the history of US Robotics, a maker of computer modems, vanished into thin air. All this was perfectly legal under generally accepted accounting principles, 3Com said at the time. Friday, under pressure from the Securities and Exchange Commission, it revised the accounting. The reversal is interesting not because it will affect the future results of 3Com, but because it may signal a tightening of the way the SEC is interpreting the merger rules when two companies with different fiscal years are merged and their books are combined using the pooling of interests accounting method. It appears to have been the first time the SEC has stepped in to correct what it saw as an abuse of that accounting rule. At the same time, as the SEC had done with several other companies, it forced 3Com to reduce the size of a merger-related restructuring charge that was taken after the merger was completed. The SEC has been concerned that companies take reserves that are too large, confident that investors will basically ignore them, leaving them in a position to later report better profits than otherwise would have been reported. The first issue stems from a difficulty inherent in combining the books of two companies that have different fiscal years. The accounting rules allow the combining of calendar periods that come close to matching. In some cases, that can mean that a period from one company simply vanishes from the combined results. In others, one or more months can end up being counted twice. In a particularly aggressive move, 3Com originally chose to use both techniques. Six months of very good results from 3Com ended up being counted twice in the historical results of the combined companies. That double counting added sales of $1.19 billion and profits of $76.8 million. At the same time, the combined results left out two horrendous months for US Robotics: April and May of last year. Those months saw sales of $15.2 million and a loss of $160.8 million, a fact that was disclosed but would have vanished from historical financial statements. During those months, US Robotics all but stopped shipping product, as it tried to work down inventories in the hands of dealers. On Thursday, 3Com chairman and chief executive Eric Benhamou said the restatement came about at the request of the SEC, which raised questions after the accounting was criticized in a column in The New York Times in October. The new numbers will count April and May, but will double count one month for US Robotics -- March 1997 -- by including it in both the third and fourth quarters. March was a very good month, with sales of $531 million and profits of $113 million, but Chris Paisley, the company's chief financial officer, said that was justified because US Robotics typically did most of the business for each quarter in the final month of the quarter, and it would be unfair to have any historic quarters without a final month in them. The result of the change is that for the year ended last May, the combined company is now reporting profits of $500.5 million, or $1.42 a share, compared with a previous report of $611.2 million, or $1.69 a share. The merger restructuring charge had been taken in the first quarter of the 1998 fiscal year, ended Aug. 31, 1997. That charge was scaled back from $426 million to $270 million. Paisley said that three adjustments were made. Part of the charge had dealt with the cost of providing customers with new products to replace those being dropped as a result of the merger. The SEC determined those costs should be charged when they occurred, and should be based on the company's cost, rather than retail price for the new products. That change led to small reductions in profits for quarters since the merger. Another part of the merger write-off change came from a better estimate of the cost of closing duplicate operations. And the final one reversed a write-off of good will that had been on US Robotics' books. Paisley said that the company did not have sufficient information to justify that write-off.