Sunday, February 11, 2001 - Page updated at 12:00 AM

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Reeling from the dot-com fallout

Seattle Times business reporter

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Investors who thought they had a bad year in Internet stocks may find consolation in what a few of the Seattle area's biggest corporations experienced: losses exceeding a half-billion dollars.

As quarterly and annual financial statements multiply, a picture emerges of one company after another effectively admitting they made major mistakes by plunging their valuable stock or cash into a bubble that now has burst.

Precisely what that means - charges companies stress are non-cash - is debatable. Even Wall Street analysts' opinions come in varying shades.

But several conclusions are possible:

** Charges, whether non-cash or cash, diminish profitability, the reason for existence for most companies.

** Companies burned by such mistakes may think twice about such ventures down the road, possibly stifling important investment to a new generation of smaller companies.

** No matter how prestigious, no company may be immune to such toe-stubbers. But companies with enormous resources can be so diversely invested, that even a multibillion-dollar bankruptcy is not even a blip.

Companies are obligated to inform shareholders how their investments do. As the third quarter closed last fall, Seattle corporate icons Nordstrom and Starbucks revealed that their investments in dot-coms were virtually worthless. Nordstrom's charge was $31.2 million; Starbuck's was $58.8 million.

When the year concluded, two other Seattle companies kissed off staggering sums: bid adieu to $343 million in non-cash charges related to a half-dozen or so mistakes, including the bankrupt Network Commerce penciled in $120 million in disappearing value. founder Jeff Bezos didn't try to gift wrap the bad news a week ago in a Seattle Times interview.

"With hindsight, we would not have made some of the investments in some smaller e-commerce companies. Everybody thought, `Boy, what a smart company to have made these investments.' That lasted about three months."

Two sets of books

Bezos' candor is in contrast to the method companies use to present such data to shareholders and the rest of the public. To put the best face on disaster, companies keep two sets of books. The one, called pro forma, essentially shows the parts that don't include one-time write-offs, write-downs and related charges. The other set, the one required for regulators, presents all the numbers, blemishes and all.

Wall Street has grown so accustomed to the pro-forma set of numbers that unless the real set contains unbelievable and totally unexpected numbers, they are disregarded.

"I'm usually after the pro-forma number," said Paul Latta, a respected numbers cruncher and securities analyst with the Seattle brokerage of McAdams Wright Ragen.

Latta said a company defines its success by its cash flow. Only sustained write-offs over extended periods would disrupt his model.

Steve Weinstein, an analyst with Pacific Crest Securities in Portland, concurred.

"Typically, if it doesn't affect the ongoing business of the company, I tend to shrug that off," Weinstein said. And despite the enormous write-offs in recent times, Weinstein said he believes that instead of becoming gun-shy, some companies will recognize the much better values and take advantage.

Microsoft and

To Latta, a behemoth like Microsoft can generate so much cash from its business that it glosses over even mediocre quarters.

Which makes for an appropriate segue into the Redmond-based company that could lose billions in invested value and hardly get a case of the sniffles. Microsoft ended its fiscal year last June. Between June and December, the value of its hundreds and hundreds of investments in smaller companies rose more than a half-billion dollars, to $18.3 billion from $17.7 billion.

Yet, one of the companies in its portfolio, Lernout & Hauspie, filed for bankruptcy protection. The $6 billion company was worthless. Microsoft, the largest outside shareholder with 5.3 percent, witnessed about a $300 million diminution in the value of its stock, meanwhile, saw enormous value in,, and others virtually evaporate. Network Commerce, which as made available coupon discounts online but now has remolded itself as an Internet infrastructure company, mainly got into mischief by exchanging its shares for private Internet-related companies.

Stephen Smith, Network's vice president of finance and interim chief financial officer, offered a strong defense for the company's maladies.

First, Smith said, write-downs or charge offs can be either because the company determined it made a bad decision and the acquisition no longer had value, or because of market conditions. He said Network Commerce's were almost all "not business decisions, but because of market conditions."

Smith said the market endorsed companies such as his for enhancing sales; that sales took precedence over profit. Then, in midstream, as the market suddenly tightened, the rules changed. The market wanted profits. The bonus for multiplying sales vanished.

The Greenspan factor

Evidence of how quickly things changed, Smith said, was Alan Greenspan's decision to switch from tightening credit to loosening credit. The chairman of the Fed suddenly decided to cut rates by two steps in one swoop - and he did it, without waiting for the usual January Fed meeting.

"Even though he has the best information," Smith said, "the economy went down faster than he thought." So give some slack, Smith urges, for businesses caught in the same maelstrom.

In business, pro forma used to mean one would take a company's financial basics, make some assumptions about growth in sales or taxes or some other category, and extrapolate what that might mean. Today, pro forma means a profit statement tailored to meet a company's special needs, usually excluding anything that has to do with non-cash items such as writedowns, charge offs, amortization, depreciation and the like.

So if analysts and companies and many others have been trained to read and understand pro forma statements, what's not to like?

For one, if a company used cash for an acquisition, and that cash is now gone, investors ought to know that and be able to consider that when deciding whether to invest in a company, said Adam Hamilton, also an analyst with McAdams Wright Ragen.

Employing stock instead of cash may not be as egregious, but if the company has made a series of investments - no matter how they are funded - that demonstrate poor judgment, shareholders and potential investors ought to be paying attention, Hamilton suggested.

As investments decline in value, they also demand additional management time, sometimes forcing key executives to take their eyes off the main business.

There is another factor. No matter how non-cash a charge may be, it reduces income, said Loyd Heath, a retired accounting professor who spent more than 30 years teaching at the University of Washington.

In turn, that reduces shareholder equity, which is the sum of what the shareholder invests, elevated or reduced by profits and losses.

"Shareholders want to see equity ... as great as possible," Heath said. "That's the name of the game: Increase the wealth of the shareholder."

Viewed in that light, investors in and Network Commerce, the two biggest investor dot-com decliners, 2000 was truly a bum year. investors saw their equity drop from $266 million at year's start to a deficit of $967 million, a $1.2 billion reversal. Network Commerce holders watched $33.5 million dissolve, to $196 million.

It is said one can make any case with numbers. Here's one.

Greg Heberlein's phone number is 206-464-2267. His e-mail address is:


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