Don't let 'em see your dotcom holdings!

Andrea Orr

PALO ALTO: It was not so long ago that companies were tripping over each

other to broadcast all the details of the new Internet divisions they were

building to avoid being left in the bricks-and-mortar dust.

Now it seems they would rather people didn't know about their dotcom

holdings.

It is one of the stranger developments resulting from the shift in dotcom

sentiment and one that some believe stretches the limits of ethics for

publicly-traded corporations.

But during the current earnings reporting season, a number of companies have

reported results that exclude their dotcom assets, a practice that may help them

put on their best face, but might be misleading to stockholders.

Last week, Quintiles Transnational Corp., a provider of pharmaceutical

testing services to drug makers, reported fourth-quarter earnings from what it

called "core operations," a figure that excluded costs from its

Internet initiative, which provides market research and data online.

Unlike many companies that exclude certain costs from their operating income

but include them in net income, Quintiles left out Internet costs all the way

through to the bottom line.

Similarly, the computer security company Network Associates Inc. last week

reported a fourth-quarter loss that excluded results from its 80 per cent-owned

McAfee.com Corp. subsidiary.

Some argue that Network Associates is more justified in omitting results from

its dotcom operations, since McAfee has been spun off into a separate company,

albeit one that is still mostly parent-owned. But critics say that's just as

misleading.

"This is just plain wrong," said Chuck Hill, director of research

for First Call/Thomson Financial. "I don't know how you can make any case

for excluding your share of a dotcom business. Do you mean to tell me that when

it turns profitable, they are going to continue excluding it forever and

ever?"

Network Associates was not immediately available to comment on its accounting

practices. However, one analyst who follows the company said there is, at least

in part, a logical reason to exclude the McAfee results. The two businesses are

quite separate and operate in different sectors, with Network Associates

concentrating on corporate customers and McAfee making products for consumers,

said Jeffries & Co analyst Richard Williams.

"What they're trying to do is to get Wall Street to cover them just as

Network Associates," Williams explained. But he also said it amounted to

Network Associates distancing itself from its dotcom affiliate, and that it

worked in its favor to do so, since McAfee's results would only add to its own

losses.

"That is in their best interest. It is not so much an accounting stance

as it is a strategic stance," he said.

Quintiles defended its accounting practices as a way "to give a more

realistic picture of how our business is doing."

"We treat our Internet initiative kind of like a separate venture,"

a spokeswoman said. "It would really mask our core operating performance if

we didn't exclude that. We're investing way beyond what anybody in our industry

is doing, so we think it is appropriate to report separately."

There is not always a clear rule on which results and costs companies may

legitimately exclude from their balance sheets.

"Whether it is okay, so-so or just really wrong depends on a lot of

technical details. There is no trivial answer," said one accounting

professor who said he did not wish to be quoted by name since he had not yet

reviewed the earnings statements of the companies cited.

Still, if it seems reasonable to allow companies flexibility in which part of

their operations they consider to be material, some recent earnings statements

reveal how such hidden costs never really go away.

Also last week, for instance, the Internet content and service provider

ExciteAtHome Corp. reported fourth-quarter income that included a write-off for

a staggering $4.6 billion, mostly reflecting various online media assets whose

value did not materialize as had been hoped.

In explaining the large write-off, a company official conceded that some of

the Internet businesses ExciteAtHome had spent billions to acquire over the past

years had probably turned out to be just "a passing fad."

(C) Reuters Limited 2001.