Stock Plunges on News of Blunder : Costly Accounting Errors Disclosed by Archive Corp.
Archive Corp., the Costa Mesa computer parts maker, said Tuesday that recently discovered accounting errors will cause it to report unspecified losses in the fiscal fourth quarter and to reduce third-quarter profits by about $1.4 million.
The announcement, which stunned investors and caused the company’s stock to drop $3.25, came after more than a year of spectacular growth for the computer disk-drive maker. In extremely active trading of 762,300 shares Tuesday, the stock closed at $5.88, nearly 36% below its opening price.
“It’s embarrassing,” said President and Chief Operating Officer J. Peter Wilson. “We had established a pretty good track record and this will knock us off for a while.”
Wilson said the 6-year-old company will record a $5-million write down of its inventories for the fourth quarter ended Sept. 26 because their value was overstated when they were shipped from the company’s manufacturing plant in Singapore to its headquarters in Costa Mesa.
Loss Still Undetermined
Although the exact amount of the fourth-quarter loss is still undetermined, the company said it did not expect it to exceed $900,000 on sales of about $18 million.
As a result of the miscalculations, Wilson said, the company overstated its inventories and understated its actual manufacturing costs. Because manufacturing costs are actually higher than previously believed, the company’s third-quarter profits will be reduced from the previously announced $1.8 million to approximately $400,000.
However, the company said that it still expects to report a profit for its 1986 fiscal year of about $2 million on sales of about $78 million and to be profitable in its current quarter. But the company acknowledged that its future profit margins will be lower than earlier estimated.
“There were errors in the procedures used to calculate the difference between the prices of the goods in Singapore and their value in American dollars,” Wilson said. He added that he suspects that “heads will roll” in the company’s accounting and finance departments.
Wilson said the errors were discovered last week by auditors closing the company’s books for the 1986 fiscal year. He said that as soon as the discrepancies were found, the company notified the Securities and Exchange Commission.
Despite the negative tone of Tuesday’s announcement, analysts following the company remained convinced that the company’s basic business would not be harmed.
‘Not End of the World’
“It’s not the end of the world,” said Donald Sinsabaugh of the investment firm Swergold, Chefitz & Sinsabaugh in New York. “The company is going to be able to come back,” he said.
Sinsabaugh estimated that it will take the company about six months to right itself from the blow, which he termed a “major blunder.”
Melodie McCrossen, an analyst with Needham & Co. in New York said Archive Corp. remains strong and is expected to continue dominating its niche in the market for computer tape drives.
In the last 18 months, Archive Corp. sales and profits have surged as the company has solidified its manufacturing and sales operations. Sales for the first nine months of the 1986 fiscal year were $60.6 million, up 51% from the $40.1 million of the year before.
