Subject: NYT article that responsible for IBM's weakness
Importance: High


As It Beat Profit Forecast, I.B.M. Said Little About Sale of a Unit

February 15, 2002

By GRETCHEN MORGENSON




When I.B.M. (news/quote) announced in mid-January that it
had beat Wall Street's profit forecasts in the fourth
quarter, it did not disclose that the sale of a business
had generated $300 million that the company used to lower
its operating costs.

The company did not provide details of the transaction to
investors or account for it as a one-time gain, as is the
practice. Instead, I.B.M., during a conference call about
fourth-quarter earnings, said that its profits had grown -
even as revenue in most categories had declined - because
of increased productivity and higher sales of certain
products.

To be sure, I.B.M. has not filed its fourth- quarter and
annual financial statements with the Securities and
Exchange Commission, which the company does not have to do
until March. Its scant disclosure of the sale was made in
comments in a conference call with analysts and investors,
not in a federal filing. But the S.E.C. has recently begun
cracking down on companies that have incomplete or
misleading disclosures, even in their press releases.

One-time gains like I.B.M.'s are supposed to be identified
as nonrecurring charges. Using them to offset expenses does
not create a fair representation of the company's
operations, accounting experts said. As is its policy, the
S.E.C does not comment on questions about specific
companies or their practices.

A spokeswoman for I.B.M., Carol Makovich, said the company
was justified in using the gain from the transaction to
offset sales, general and administrative expenses because
those are a part of I.B.M.'s business, and buying and
selling assets is also a part of its business.

"We considered this transaction as the ordinary course of
business," Ms. Makovich said."This is not an unusual
practice. Our auditors have reviewed it and approved it."

The S.E.C. has written guidelines in recent years to
address this accounting issue, and it is not known how many
other companies, if any, might be using the practice.

Lynn Turner, a former chief accountant of the Securities
and Exchange Commission who is now director of the center
for quality financial reporting at Colorado State
University, said:"Staff Accounting Bulletin 101 is very
clear that gains from the sale of assets have to be in the
`other income' line. And Staff Accounting Bulletin 99 also
makes it clear that when you intentionally violate
accounting guidelines, any amount is material."

The bulletins are S.E.C. guidelines that companies are
required to follow. Companies that do not, could be asked
to restate their results or face enforcement actions.

The transaction that generated $300 million for I.B.M. came
just as a dismal quarter was ending. By the time the books
were closed on the fourth quarter of 2001, the company had
recorded revenues that were $900 million lower than a year
earlier and $1 billion below what Wall Street had expected.


Still, I.B.M.'s profits beat Wall Street's estimates for
the quarter by the all-important penny a share.

It was the type of performance that Wall Street had come to
expect from Louis V. Gerstner Jr., I.B.M.'s chief
executive, who will step down on March 1. I.B.M. has met or
exceeded quarterly earnings estimates since the end of
1997, according to Thomson Financial/First Call.

Though a company's ability to beat Wall Street expectations
was applauded by investors during the bull market, the
Enron (news/quote) collapse has heightened concern about
how companies make their numbers. Investors are now looking
at financial reports and press releases from companies much
more closely.

As a result, some investors had begun to wonder whether
I.B.M.'s quiet sale of its optical transceiver business to
JDS Uniphase (news/quote) on Dec. 28, the last Friday in
2001, was intended to help the company over the earnings
bar. JDS agreed to pay I.B.M. $340 million in shares and
cash, a price that is nearly five times the business's
sales.

On Jan. 17, when I.B.M. announced its fourth-quarter
results, there was no disclosure about the amount generated
by the sale or the company's accounting of it.

The only mention of the sale was an oblique reference in
its conference call with analysts that day to discuss
quarterly results."Our intellectual property income and
licensing royalties were flat in the quarter, which
included the sale of our optical transceiver business to
JDS Uniphase," John Joyce, I.B.M.'s chief financial
officer, said in a statement at the conference call.

During the conference call, Mr. Joyce explained that
earnings grew in the face of declining revenue because
certain areas of strength offset those weaknesses.

In the fourth quarter, the company recorded business
improvements in one of its mainframe offerings, one of its
servers and software, Mr. Joyce said. Increases in
productivity also were a factor, the company said.

For a company as big as I.B.M. - it recorded almost $86
billion in sales last year - $300 million may not seem like
much. But by using that gain to offset its expenses, and
taking into account the company's tax rate, the sale could
have bolstered the company's earnings by as much as 12
cents a share, according to a technology analyst. Such a
gain would have represented 9 percent of I.B.M.'s per-share
earnings in the fourth quarter.

Ms. Makovich, the company spokeswoman, said,"I.B.M. is a
very large company, and when you are evaluating our company
you need to look at many, many factors."

Robert A. Olstein, manager of the Olstein Financial Alert
Fund, said that he had considered buying I.B.M.'s stock in
recent years but stayed away because the company's earnings
appeared to be engineered more than generated."Mr.
Gerstner did a great job turning the company around when he
came in," Mr. Olstein said,"but basically they've had a
series of what I call `lower quality of earnings sources'
to meet analysts' earnings estimates."

The lack of disclosure about the sale was disturbing to
Jack Ciesielski, editor of The Analyst's Accounting
Observer."How can they not discuss it?" he asked."The
problem I have is, they're not telling you it didn't affect
earnings and they're not telling you it did. So what are
you to presume except the worst?"

Lewis D. Lowenfels, a lawyer who specializes in securities
law at Tolins & Lowenfels in New York, said,"Prior to
Enron, executives could justify limited disclosure based
upon intricate and technical accounting rules.

"But in the post-Enron era," Mr. Lowenfels said,"the focus
will be more upon the overall test for materiality, which
is whether the information would be important to a
reasonable investor."

http://www.nytimes.com/2002/02/15/technology/15BLUE.html?ex=1014796482&ei=1&en=fa9a914d851f2ee2




<center>

<HR>

</center>