Michelle, Neta has the ongoing problem with the SEC Re. cookie jar accounting, I was short them in January at 60, they have been a dangerous company.
Herb Greenberg wrote several articles on their honey pot accounting
check this out:
Herb on TheStreet: What's the
Difference Between 'Cookie Jar' and
'Honey Pot' Accounting?
By Herb Greenberg
Senior Columnist
11/20/98 6:30 AM ET
SEC Chairman Arthur Levitt has made quite a stir, as
recently as last Monday, by talking tough about the SEC's
assault on so-called "cookie jar" accounting. This, according
to Levitt, is when companies create bigger-than-needed
reserves during the good economic times "so they can reach
into them when needed in the bad times" and thereby make it
seem like they've got steady sales and earnings growth.
Enter Network Associates (NETA:Nasdaq), a software
maker that has been highly criticized by short-sellers for what
they claim are aggressive accounting issues related to its
high number of back-to-back acquisitions. The entire Network
Associates issue was laid out last month by Senior News
Editor Kevin Kelleher in TheStreet.com's Cracking the Books
report. But with the SEC's attack on "cookie jar" accounting,
short-sellers can't help but wonder whether the SEC will start
looking at Network Associates.
As San Jose Mercury columnist Adam Lashinsky reported
back in September, CEO William Larson used the term
"honey pot" during a conference call in September.
Cookie jar? Honey pot?
What was the context of the "honey pot"?
According to a transcript of the conference call prepared by
someone on the call -- a transcript that has never before been
published -- the term was used in response to this question
from an investor: "It looks like you're probably over reserving
for indirect (retail) sales ... if you want to give any clarity on
that, that's terrific. And ... it looks like your deferred revenues
shot up a lot in the last quarter, so it looks like you were
holding back revenue recognition ..."
Larson's response: "You're absolutely right on both counts.
We've been extremely conservative and that's how you build
little honey pots that you can go to, because when you make
these acquisitions in our business planning, we always
project a sequential decline in the revenue of the acquired
company, and we have to go back to our core business to
get faster growth to cover up the potential 10% to 15%
decline in revenue. And that's where you see the releasing of
backlog and, uh, you know, that kind of thing -- you can only
do that if you've created, you know, these acorns out there."
Acorns? Acquiring companies whose sales will slide? What's
up with that? Sure sounds like honey pots and cookie jars
have a lot in common.
But in an interview yesterday Larson insisted they don't, and
that the comments he made on the conference call "are
being misinterpreted by some individuals out there." He
claims he got the term "honey pot" from reading Winnie the
Pooh to his six-year-old. It refers to the company's hot
products and geographic diversity.
Larson says what he wished he had said was that Network
Associates "is a financially disciplined company that is
disciplined in its financial planning." He says the planning is
required because Network Associates usually expects the
revenues of companies it acquires to fall for a quarter or so
following the transaction and any dislocation from it.
"You have to honor your commitment [of growth] to Wall
Street and not blame a shortfall on the transaction," he says,
"So what we do is we rely on our strength of diversity of
product line and the strength of our geographic revenue
stream, and we make the revenue number by selling other
stuff."
Selling other stuff? That's right. According to Larson, when
sales look weak the company dips into its "honey pot" and
searches for "acorns" of top-selling products, like Viruscan,
which it can use to replace lost sales. How? "It's
straightforward," Larson says. "You sell more," using such
things as promotions, direct mail and advertising. "You might
give spiffs [incentives] to a sales force to sell this product vs.
that product. It's called 'management.'"
He further says the company consistently defers 20% of
sales to cover the costs of free support and upgrades. And
since it's a consistent number, "we have limited discretion"
that would allow the company to play with the numbers. "We
don't over-reserve," he says. He adds that the company's
writeoffs are "legitimate," covering such things as leases and
severance. "We're confident in the quality of our writeoffs, and
they're justified, with the caveat being our in-process research
and development, because that's an art, not a science."
But $515 million of writedowns over the past seven quarters,
vs. shareholders' equity of $352 million, is "vastly
disproportionate to the size of the company," says one
prominent short-seller. "There's a clear desire to charge off as
extraordinary as much as possible." He alludes to the
company's 10-Q, which discloses that additional charges
may be necessary. "That basically tells you if things are
working fine, that's ordinary, and if things aren't working fine,
we'll take a charge."
Larson says he hasn't read the 10-Q because he's a sales
and marketing guy, and 10-Qs are "written by attorneys. ... If
you read the 10-Qs, you would never buy a stock." HO HO Ho
It's unclear whether anybody but the shorts are reading the
Network Associates' 10-Q.
And this final point: In his most recent speech on the subject,
Levitt said the SEC is seeking "remedies" from one unnamed
company and its top execs "for allegedly creating or
increasing 'excess reserves' in the absence of an underlying
basis." Larson says it's not Network Associates, because it
hasn't been contacted by the SEC. Please pass the honey.
and this::
January 7, 1999
Network Associates Estimates
Strong Profit in Fourth-Quarter
By JIM CARLTON
Staff Reporter of THE WALL STREET JOURNAL
Network Associates Inc. reported strong preliminary fourth-quarter net
income of $70 million but also disclosed it is the latest software company
to fall under government scrutiny for enforcement of accounting rules.
The estimated profit of 47 cents a diluted share in the period slightly
exceeded analysts' estimates and reversed a year-earlier loss of $80.9
million, or $1.16 a share, related to one-time charges. The Santa Clara,
Calif., company, which makes software that safeguards corporate
networks, also estimated its sales rose 57% to $272 million from $173.3
million a year ago, not including the pooling effect of its most recent
acquisitions.
The upbeat results were somewhat overshadowed, though, by the
company's revelation that the U.S. Securities and Exchange Commission is
reviewing the firm's write-down of $220 million in
research-and-development costs related to acquisitions last year of
CyberMedia Inc. and Magic Solutions.
Analysts say the company potentially could be made to reverse all $220
million of those write-downs, although they add the more likely scenario is
that only a portion would fall under the review expected to conclude in
March.
The company's shares initially fell as much as 9% before recovering to
close at $58.1875, down $1.75, in Nasdaq Stock Market trading.
"Anytime people see an SEC review, they get spooked," said John
Powers, analyst at BancBoston Robertson Stephens in San Francisco.
Concerned over possible excesses, the SEC recently began enforcing a
30-year-old accounting rule that limits the amount of write-offs a company
can take on the cost of R&D by another company it acquires. But since
the main asset of a software company usually is its R&D, industry
executives have expressed concern the crackdown could make some
deals more difficult and expensive.
Officials at Network Associates, however, say they don't expect the
review to slow the company's strong growth, which is being stoked by the
boom in corporate Internet usage. "We are firing on all cylinders," said Bill
Larson, chairman, president and chief executive.
For the year, Network Associates estimates it earned $229.4 million, or
$1.54 a diluted share, on sales of $972 million. Last year, the company
reported an acquisitions-related loss of $28.4 million, or 41 cents a share,
on sales of $612.2 million. Those sales do not include a pooling of assets
under the company's 1998 mergers, which increase the 1997 sales to
$727 million. |
