Cash Flow

Ringing in the Restatements

Sanyo, McAfee, Leap Wireless announce end-of-year accounting adjustments.
Stephen TaubDecember 27, 2007

Three companies hoping to start the new year with a clean slate announced significant restatements during the last full week of 2007. Sanyo Electric said on Tuesday that it would restate prior earnings reports after the electronics company admitted it had understated losses from subsidiaries for six years, according to the Financial Times. Meanwhile, McAfee Inc., and Leap Wireless International completed their restatements to bring regulatory filings up to date.

Shares of Japan’s Sanyo sunk nearly 11 percent after the Tokyo Stock Exchange said it may delist the company’s stock as a result of the restatement. The adjustment will cover six years through to 2006, and push Sanyo’s dividend paid out between 2002 and 2004 to $245 million, which is higher than legally allowed compared to its recalculated reserves, said the FT

Sanyo officials said that the restatement was caused by a mistaken rule interpretation related to accounting for losses at subsidiaries, and that the company was not trying to mislead investors, noted the news report. They added that the adjustments will be limited to the non-consolidated financial results
of previous periods, “and will not have any significant or noteworthy impact on consolidated results for the same periods.”

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On Tuesday, Sanyo issued the results of its internal investigation into the accounting problem, citing company-wide deficiencies that led to the restatement, including inadequate and vulnerable accounting systems; a lack of independence for auditors; an inadequate governance system, and an incomplete management supervisory function and inspection. Sanyo also detailed preventive measures that it would take to avoid making the same mistakes again, including “risk-minded” training for management, a strengthened governance system with decentralized authority, and a doubling of corporate finance personnel from 12 to 24.

As a result of the restatement, Sanyo said it will withhold nearly $10 million in bonuses or retirement pay from former and current management, as well as regular pay from seven persons, including the company’s executive director and president, and current corporate auditors.

Meanwhile, McAfee announced that it completed its restatement and recorded an additional $137.4 million of pre-tax, non-cash stock based compensation charges for the years 1995 through 2005. The company previously announced it would take pre-tax non-cash stock-based compensation charges of between $100 million and $150 million. The security software maker added that approximately 98 percent of the charges were recorded in fiscal years through 2004.

The adjustments stemmed primarily from annual merit grants, grants made to new hires, and modifications to employee option agreements that took place after employees were terminated. The restatement also includes corrections of other errors not related to stock options.

McAfee officials also said the company has filed its annual report for the year ended December 31, 2006, as well as quarterly reports for the second and third quarters of 2006 and the first, second and third quarters of 2007. As a result, its filings with the Securities and Exchange Commission are now current.

In related news, McAfee said it reached a tentative settlement with plaintiffs in pending federal and state derivative securities lawsuits related to its stock option practices. The company also noted that it has accrued $13.8 million in its second quarter 2006 financial statements related to expected payments from the tentative settlement, and expects to complete the documentation and the required approvals in late December or early in the first quarter of 2008.

Also this week, Leap Wireless restated its financial results for the years ended December 31, 2006 and 2005, and for quarterly periods in 2004 to correct certain errors. The mobile phone service provider said the errors relate to revenue recognition issues. Specifically, Leap Wireless cited the timing of recognition of service revenue prior to, or subsequent to, the period in which it was earned; the recognition of service revenue for customers that voluntarily disconnected service; and the classification of some components of service revenue, equipment revenue and operating expenses.