Kendall Square Research Corporation by gdy65554

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									               Accounting
     Case: “Kendall Square Research”
                 February 14th 2008
           “Perspectives on Management”
                     Peter Bell
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Kendall Square's Q2 Results: Parallelism Can Be Profitable
News Analysis by Norris Parker Smith, Editor at Large

ANALYSIS & FEATURES


07/23/93 Waltham, Mass. -- Is it possible to make money in scalable parallel
processing (SPP)? With second-quarter financial results showing a net income
of just over $1 million on $13.1 million in revenues, Kendall Square Research
 has demonstrated once again that profitability is possible even in today's thin,
 highly competitive market. (For Kendall Square Research's complete second
-quarter earnings statement and balance sheet, select 1858.) KSR is the only
specialist SPP vendor that is a free-standing, publicly owned venture and so
must report results in detail. Thus, its report casts light on the otherwise murky,
closely held economics of SPP. In a press conference, CEO Henry Burkhardt III
 highlighted two encouraging sales trends: increasing sales abroad (international
sales accounted for 34 percent of the quarter's revenues) and a sale to an
unnamed "large financial services firm" that will use the KSR1 system for
jumbo databases.

Source: HPCWIRE
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           Discussion



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                      Accounting Policy

• What is GAAP?
    – Generally Accepted Accounting Principles
    – set of accounting rules used to standardize the reporting of financial
      statements
    – Can differ by country
    – Who sets it?
• Why is it important?




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    When is Revenue Recognizable?
It must be:

a) realized or realizable
        AND
b) Earned

Criteria

•     Persuasive evidence of an arrangement exists

•     Delivery has occurred

•     The vendor’s fee is fixed or determinable

•     Collectibility is probable.

Source: SEC SAB No. 101, Revenue Recognition in Financial Statements, issued in December 1999 and www.fasb.org

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              Revenue Recognition
•   Revenue usually is the largest single item in financial statements
•   issues involving revenue recognition are among the most important and
    difficult that standard setters and accountants face.
•   no comprehensive standard on revenue recognition exists,
•   there is a significant gap between the broad conceptual guidance in the
    FASB’s Concepts Statements and the detailed guidance in the authoritative
    literature
•   Most of the authoritative literature provides industry or transaction-specific
    has been developed largely on an ad hoc basis in various pronouncements
•   Those pronouncements include Accounting Principles Board (APB) Opinions,
    FASB Statements, American Institute of Certified Public Accountants
    (AICPA) Audit and Accounting Guides, AICPA Statements of Position
    (SOPs), FASB Interpretations, Emerging Issues Task Force (EITF) Issues,
    Securities and Exchange Commission (SEC) Staff Accounting Bulletins
    (SAB), and the like. Each focuses on a specific practice problem and has a
    narrow scope, and the guidance is not always consistent across
    pronouncements.
•   Source: http://www.fasb.org



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                       Analysis
•    DSO-235 days at the end of 1992
•    355 Days of Inventory
•    20 Fold increase in revenue over the past year
•    Company Stock Option Plan
•    Bank Line-Terms
      – Prime plus two percent until quarterly earnings
        exceeded $250,000, then line increases to $5 MM
• Tax loss carry forward-no need to account
  conservatively

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                  Auditors
• What does an auditor do?
• What is an audit opinion? Why is it
  important?
• There are only 20 customers? Why not
  check each one?
• Did the PW partner focus on ensuring that
  operating practices were consistent with the
  revenue recognition policy?

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              Wall Street
• Growth Story

• Analysts

• Investment Bankers

• Institutional Investors
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           Restatement




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               Restatements
• A few examples: Enron, HealthSouth, Conagra,
  SunBeam, Xerox, Outback Steakhouse, Worldcom,
  Microsoft, Oracle, CA, Sybase, Symantec, Red Hat,
  Macromedia, BMC
• Restatements
   – 216 restatements in 1999
   – 330 in 2002
   – 354 for the 12 month period ending June 30,
     2004, according to the Huron Consulting Group's
     tracking of Securities and Exchange Commission
     data.
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                What happened?
 • Lawsuits/Settlement
       – $5.35 MM in cash and additional
         stock/warrants issued to shareholders
 • William Koch invested an additional $25
   MM
 • Thinking Machines (competitor) cancelled
   IPO
 • KSR reported an operating loss of $10.1
   MM in the first quarter of 1994

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January 14, 1994
COMPANY NEWS; KENDALL SQUARE DROPS
   PRICE WATERHOUSE AS ITS AUDITOR
The Kendall Square Research Corporation has replaced Price Waterhouse,
   its outside auditor since its founding in 1986, with Coopers &
   Lybrand. The Cambridge, Mass., supercomputer maker, whose
   accounting troubles came to light in the fall under Price Waterhouse,
   said yesterday that Coopers would audit its 1993 financial statements
   and restate its 1992 figures. Price Waterhouse rescinded its earlier
   clearance of the 1992 figures after it became apparent that the
   company had been posting as sales orders from buyers who could not
   pay for the merchandise. The accounting developments at the company
   have prompted an investigation by the Securities and Exchange
   Commission, more than a dozen lawsuits, and the ouster of the
   company's founder and former chief executive, Henry Burkhardt 3d,
   and two other executives.
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September 23, 1994
COMPANY NEWS; KENDALL SQUARE STOCK FALLS ON
   BANKRUPTCY FEARS
The shares of the Kendall Square Research Corporation lost most of their
   value yesterday after the financially troubled supercomputer maker
   said late Wednesday that it might be forced to file for bankruptcy.
   Kendall Square said it would stop making supercomputers, its only
   product, and concentrate on licensing the underlying technology. The
   company also announced that it would lay off all but 50 of its 180
   employees, effective Oct. 3, and that its chief executive and president,
   Larry Reeder, had resigned after little more than a month on the job.
   Kendall Square's shares dropped $1.50, to 25 cents, in Nasdaq trading



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December 31, 1994
COMPANY NEWS; KENDALL SQUARE FILES A CHAPTER 11
   BANKRUPTCY
The Kendall Square Research Corporation, the battered former
   supercomputer maker, made good on earlier warnings and filed for
   Chapter 11 bankruptcy protection in Boston yesterday. William I.
   Koch, the company's largest shareholder, resigned as chairman and
   director. The company had warned of a possible bankruptcy filing in
   September, when it said it would get out of the supercomputer business
   and reduce its workforce to 50 employees from 180. "The filing under
   Chapter 11 is unfortunate, but unavoidable as a necessary step to
   maximize the value of the company's assets," Zachary Shipley, the
   company's chief executive, said in a statement yesterday.



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Henry Burkhardt III (1945-2000) was born in Ann Arbor,
  Michigan, grew up in South Hadley, Massachusetts, and was
  schooled there. He graduated from Phillips Exeter Academy
  and attended Princeton University He began his career as a
  programmer at Digital Equipment Corporation. In 1968 he
  was one of the founders of Data General Corporation where
  he designed their first minicomputer, the Nova. He also
  founded Encore Computer and, later, Kendall Square
  Research Corporation. He held eight patents in the fields of
  high-performance computing and parallel processing.
• Burkhardt died in August 2000 of pancreatic cancer. He is
  buried in Mount Auburn Cemetery in Cambridge,
  Massachusetts.
• Source: Wikipedia
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                 Stakeholders
Public Shareholders              Employees (families)

Founders/Management              Board/Audit Committee

Venture Capitalists              Bankers

Press/Analysts                   Auditors

Customers                        Competitors

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                Summary
• Operating practices and accounting
  principles must be in sync
• Skepticism often takes a backseat to hope
  and greed
• The unraveling and fall often happen much
  more quickly than the rise
• The price managers pay for inattention to
  financial reporting is extremely high
• Leadership/entrepreneurial spirit-risk
  taking/integrity
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