Everyone,
I just received this e-mail message......... Thought I would pass it along.
Jon Leonard
Dear Investor to Investor readers:
Dear Investor to Investor readers:
The SEC has temporarily halted DCTC due to the fact that they are doing away
with "pooling of interest" accounting. It is my understanding that all
companies that have recently acquired other companies through a "pooling of
interest" acquisition are being asked to restate their acquisitions through
"purchase" accounting.
DCTC has been given a deadline to restate earnings and submit to the SEC by
May 14, 1999. I spoke with Joe Murphy this morning in regard to the
suspension. He said the he had no idea until this morning that this would be
taking place. He was given no notice in this regard. DCTC is not the only
company which will be affected by this change in SEC regulations. In the
case of DCI Telecommunications, Inc., Edge Communications was purchased in
April 1998 through a "pooling of interest" purchase. Restating the purchase
will have the effect of lowering the earnings for Fiscal 1997 and drastically
increasing the earnings for Fiscal 1998. This is not necessarily a bad
thing.
DCI will be putting out a press release on the suspension as soon as all of
the pieces have been gathered and put into a cohesive form. Joe said that
they are working hard to restate the earnings and that everything should be
okay when the restated earnings are submitted to the SEC.
I see no reason to panic over this, and neither does Joe Murphy. He will
update us all as soon as possible. It is simply an accounting problem.
SEC halts trading in DCI through May 14
WASHINGTON, May 3 (Reuters) - Federal securities regulators Monday suspended
trading in telecommunications services provider DCI Telecommunications Inc.
through May 14 because DCI allegedly inflated revenues via a popular
accounting method.
In handing down the suspension, the Securities and Exchange Commission said
questions have been raised about the accuracy and adequacy of DCI's financial
statements, namely, an apparent inflation of its revenues by accounting for
one or more business combinations as a pooling of interests.
A spokesman at the Stratford, Conn.-based company did not immediately return
a telephone call seeking comment on the SEC action.
The commission did not elaborate on the suspension in its news release but it
has been cracking down lately on some companies that SEC Chairman Arthur
Levitt said used pooling and other accounting methods in order to satisfy
Wall Street's expectations for healthy financial numbers.
Pooling allows a company to write off goodwill though a one-time, non-cash
charge that does not impact future earnings. Goodwill is the premium a
company pays above fair market value for intangible assets, such as a
well-known name brand.
Last month the rule-making U.S. Financial Standards Accounting Board voted to
scrap pooling by the end of 2000.
DCTC closed Friday at $2.125 in Bulletin Board trading. The stock has a
year-high price of $4.25.
Here is an article that sheds a bit of light on what is happening with the
change of rules taking place:
New Rule To Purge Urge To Merge?
April 21, 1999: 5:42 p.m. ET
NORWALK, CONNECTICUT, U.S.A. (NB) -- By Bob Woods, Newsbytes. The "pooling of
interests" method of accounting for business mergers will soon be history,
and the costs for such corporate marriages may eventually go up, thanks to a
vote today by the Financial Accounting Standards Board (FASB). The eventual
elimination of the method, wildly popular among Internet and
technology-related companies contemplating corporate marriages, may translate
to a short-term increase in such mergers.
In a unanimous vote among its seven members, the board tentatively decided
that using the "purchase" method is preferable to the pooling of interests
model.
Pooling of interests lets companies add together the old book values of their
assets without charging the costs of a merger against the earnings of the
resulting company. Deals based on pooling of interests have to use at least
some stock in the merger.
The purchase method, meantime, adds together all acquired intangible assets,
like trademarks, at their current costs, with any cost above fair market
value -- known as goodwill -- being charged to the buying company's earnings
over time. In addition, companies in purchase-based mergers can use just
cash.
"The reason firms prefer to use pooling in many cases is that they don't like
putting goodwill in their balance sheets, because once its on there, it has
to be amortized over a period of years, under current rules, not to exceed 40
(years)," said Dr. Debra Jeter, assistant professor of management at
Vanderbilt University's Owen Graduate School of Management. "This means that
for the next 40 years, in every year, they have a hit to their income
statement for the amortization expense on the goodwill."
"The bigger the premium and the more intangible assets are involved in an
acquisition, the more attractive pooling becomes because you're avoiding more
of an amortization hit to your earnings," Jeter said. Internet-related
concerns like to use pooling because they tend to have intangible assets, she
also said.
High-tech and especially Internet companies, though, may not be hurt as much
as banks and insurance companies because of the myriad of regulations faced
by the latter group, Jeter also said.
Even though a change is being made, no cash difference exists between the two
methods, Jeter said. "If the market is perfectly efficient, it should be able
to see right through it, and it shouldn't make any difference." And it won't
mean that using the purchase method will turn a good deal into a bad one, or
vice versa, she said.
Today's decision is by no means final, Jeter pointed out. FASB expects to
issue for comment a formal proposal on the matter sometime "early in the
third quarter," with a final standard expected "late in 2000."
In the meantime, companies with the urge to merge can continue to use the
pooling of interests method. Jeter said the marketplace may see a surge in
mergers among many companies that want to use pooling of interests, because
"new accounting rules never go into effect overnight."
Plus, FASB is considering a way to "soften the blow" to companies that will
be required to use the purchase method after the final standard is approved,
Jeter said, by possibly allowing companies to write-off goodwill over the 40
year period, or even write it off all at once.
Fortune magazine, in an article published alongside its influential "Fortune
500" annual corporate rankings, covered the pooling of interests controversy.
The article was subtitled, "Ever wonder why so many mergers make the CEO
(chief executive officer) look like Superman? Odds are, it's not the
strategic fit. It's the accounting."
Fortune even quoted Baruch Lev, a professor at New York University's Stern
School of Business, as saying, "Pooling of interests is a joke."
The magazine said both pooling of interests and write-offs for in- process
research and development are more popular than ever in the merger and
acquisition field. Even the worst deal can look like a great business move,
because both methods inflate earnings and mask the true cost of an
acquisition.
FASB already determined last February that it would kill the in-process
research and development provision, although it formal proposal will probably
come out this June, with a ruling on the issue hopefully to come by the end
of this year, a FASB spokesperson said.
One of the biggest deals done under pooling of interests was the MCI
Communications/WorldCom Inc. merger. Other recently completed mergers using
the method include USWeb/CKS, AVT Corp./MediaTel Corp., and Cnet/KillerApp
Corp.
Among the many mergers currently underway using pooling of interest are Bell
Atlantic Corp./GTE Corp., America Online Inc./MovieFone Inc. and Lucent
Technologies/Ascend Communications. Yahoo especially seems to like pooling of
interests -- it is using the method in both of its planned acquisitions of
GeoCities Inc. and broadcast.com Inc.
Here is another a bit older article on the two forms of acquistion which
shows that even the large companies have been using "pooling of interest" for
acquisitions and that there is no reason to believe that there is anything
wrong with that form of acquisition. It also shows that it has been coming
for sometime:
Director's Alert, June 1998
New accounting rules could stall mergers
"Merger mania has struck boards in all industries. But a move by the
Financial Accounting Standards Board (FASB) could curtail deals faster than
directors can say "hostile takeover."
SBC Communications/Ameritech, Daimler-Benz/Chrysler and Citicorp/Travelers
Group are all using the accounting method known as pooling of interest for
their mergers. With pooling, an acquirer uses its own stock to purchase a
company. This transaction allows the newly merged companies to escape
millions in future expenses because the new entity does not have to record
goodwill. Goodwill is generally equal to the difference between the price
paid for a company and its net assets.
Critics say that pooling allows firms to disguise the sale price of a
company, because it never shows up in the balance sheet.
Another alternative is purchase accounting. But it is not as attractive as
pooling. When companies use purchase accounting, goodwill shrinks its future
earnings because companies must write it off over the years.
FASB is considering restricting pooling. The rule makers say they are
concerned that merging firms can create different financials by choosing
pooling over purchase accounting.
"Another reason we are addressing pooling is because we want to
internationalize accounting standards. Most other countries don't rely on
pooling as prevalently as the U.S.," says Gaylen Larson, FASB trustee.
"I would advise boards to use pooling as long as they can. You'll probably
find that people will accelerate deals simply to use pooling," says Robert
Willens, managing director at Lehman Brothers.
Critics of FASB's proposal to limit pooling are congregating on Wall Street.
"It would certainly put a crimp in our deal flow," says one investment
banker.
But FASB is throwing a bone to directors too. It is considering a change
which would make purchase accounting more palatable. Under the draft
proposal, companies would still have to record goodwill. However, they could
keep it on the balance sheet indefinitely if they could prove that its value
had not declined. Firms would then escape the annual hit to earnings caused
by writing off goodwill over the years."
Kathy Knight-McConnell
Investor to Investor
investortoinvestor.com
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