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Footnote No More

Constant currencies often offer a better performance measure for overseas units. Plus, business responds to slashing funds fo the Ex-Im Bank; states crack down on employee-exemption-rule violations; retail bond offerings; and more.
CFO Staff, CFO Magazine
May 1, 2001

FOOTNOTE NO MORE

With U.S. multinationals taking a beating on exchange rates, constant currencies--numbers that exclude foreign currency translation effects--are becoming more prominent in U.S. financial statements. Quarterly financial reports from McDonald's Corp., for example, display reported results and constant currencies side by side. In its 2000 year- end results, total revenue was reported up 6 percent, but was up 13 percent in constant currencies.

"That's what a global economy is about," says Herman Styler of the Washington, D.C.-based Atlantica Associates. Revenue reported in constant currencies often offers a better performance measure for overseas units than the dollar results reported to U.S. shareholders.

But that's a double-edged sword. Making the performance of international units look better also highlights the currency effect suffered by the parent. "CFOs lose their jobs if they don't cover their currency risks," notes Frederick Shepperd, of Akron-based Quadral Group.

Investors, agrees Styler, should focus on the profit margins of overseas units, not revenue, because currency depreciation also affects costs. -- Tim Reason

ACCOUNTING FRAUD
Where's the CFO?

The Cendant Corp. accounting debacle was the biggest corporate swindle of the 1990s, where some $500 million in phony revenue was recorded at CUC International Inc. in the two years prior to its 1997 merger with HFS Inc. to form Cendant. But did this fraud go back as far as the 1980s?

Cendant certainly thinks so. Last June, the company filed a claim for "substantial monetary damages" against Stuart L. Bell, CUC's former CFO, in which it described a "massive fraudulent scheme" to inflate earnings that began by 1988.

Government attorneys also believe the fraud at CUC was ongoing, although they have not pressed charges against Bell. In a criminal indictment filed on February 28, the U.S. Attorney's Office in New Jersey charged CUC ex-CEO Walter A. Forbes and onetime president E. Kirk Shelton with a 10-year legacy of accounting improprieties. That same day, an SEC enforcement action accused the duo of similar wrongdoing.

Bell hooked up with Forbes in 1979, right out of Harvard Business School. He was named CFO in 1983, when CUC went public, and stared down the bears in 1989, when the firm switched its accounting policy from amortizing marketing costs to expensing the costs immediately.

According to an analyst who followed CUC, Bell had tired of playing second fiddle to Forbes when he resigned in January 1995. And though Bell agreed to a three-year, $1.2 million contract to serve as a special adviser to Forbes, he was not implicated in the 260-page audit report that detailed the half-billion-dollar deceit that came to light in 1998.

The U.S. Attorney's Office declined to comment on why Bell was not named along with Forbes and Shelton for the alleged improprieties from the 1980s. One possibility is that the statute of limitations on fraud is five years, and Bell resigned as a CUC officer more than six years ago. The SEC doesn't face such restrictions, but has also chosen to leave Bell alone.

Another possibility is that attorneys were unable to sort out the conflicting accounts of Cosmo Corigliano and Casper Sabatino, both of whom are unindicted co-conspirators in the case against Forbes and Shelton. Corigliano, who succeeded Bell as CFO, has said that fraud was "in-grained by our superiors" at CUC, while Sabatino, the head of external re-porting, told auditors that he did not believe "unsupported adjustments were made while Bell was CFO."

Cendant also would not comment about its case against Bell. But court papers filed by Bell describe Cendant's legal efforts against him as "an irrelevant, malicious, and untrue smear campaign."

Forbes and Shelton's trial is tentatively set for March 25, 2002. -- Stephen Barr

SLASHERS: Congress passed bills to cut fees levied on securities transactions in half. Savings estimates: $14 billion over 10 years.

LABOR LAW
Whitewashing Blue Collars

A new labor movement is gaining momentum in the bellwether courts of California, and large multistate companies will likely feel the effects. At issue is retroactive overtime pay for employees who have been incorrectly classified as managers, and thereby excluded from overtime compensation. The stakes are potentially enormous, as tens of thousands of employees have launched class-action suits against U-Haul, AutoZone, Taco Bell, Wal-Mart, Farmers Insurance, and other companies that employ production workers.

California gives employees more rights than other states, says Harris & Kaufman's Matthew A. Kaufman, the Los Angeles attorney representing plaintiffs against U-Haul and AutoZone. But he expects employees in other states to file similar suits sparked by developments in California.

For example, a Los Angeles court recently ruled against U-Haul in a case involving 480 workers seeking back pay. The case is reportedly worth $10 million to the plaintiffs. U-Haul, which is considering an appeal, declined to comment. Other companies, including AutoZone and Taco Bell, are working out settlements with their employees. "The burden of proof is on the employer," says Kaufman.


A written job description and proof that a worker collects a salary are sometimes enough to satisfy federal employee exemption rules, but state laws go much further, says Jeffrey Pasek, a partner with Cozen & O'Connor, in Philadelphia. For instance, California requires an audit of the duties the worker performed and the time he or she spent supervising other employees. Pasek suggests that companies with multistate operations consider a human-resources review of the payroll department to determine whether it is applying the exempt status properly.

A common compliance mistake is for a company to dock a salaried employee for disciplinary reasons. Once pay is reduced using an hourly calculation, explains Pasek, the employee is considered nonexempt, and so is every other worker in that job group. -- Marie Leone

RIPE FOR TAKEOVER

FASB's interest-pooling and goodwill rules, set to take effect July 1, make hostile exchange offers more practical and attractive, says Martin Lipton, of Wachtell, Lipton, Rosen & Katz.

CORPORATE WELFARE
Business Battles Bush

Who could have predicted that in one of its first political skirmishes, the new Republican Administration would find itself allied with consumer advocate Ralph Nader against America's largest exporters, who also happen to be among the nation's biggest GOP campaign contributors?

That's how the battle lines have been drawn over President Bush's fiscal 2002 budget proposal to slash funding for the U.S. Export-Import Bank by 24 percent, to $699 million. The cut would limit Ex-Im's lending to about $8.5 billion, compared with the $12.6 billion in loans, guarantees, and export credit insurance that the bank, an independent federal agency, provided in fiscal 2000, which ended in September.

In a commentary in the Wall Street Journal, Nader praised the cuts as "a glimmer of hope" that the President is determined to end corporate subsidies. But business interests have rapidly deployed an aggressive lobbying effort on Capitol Hill to restore the bank's funding. "This is not about corporate welfare for the big multinationals," says Willard Workman, vice president and general manager for international affairs at the U.S. Chamber of Commerce. "This is an attack on small businesses that need government support."

Workman notes that 2,500 exporters rely on Ex-Im financing annually, with smaller companies accounting for about 30 percent of that total. Furthermore, big companies like Boeing Co. and Caterpillar Inc. have argued that some 100,000 of their small suppliers benefit indirectly from the bank's support of export sales.

"These cuts will cripple the one really effective government tool in the international trade area," says Dick O'Leary, chairman of H Enterprises International Inc., in Minneapolis, which has occasionally relied on the Ex-Im Bank for overseas machinery sales. -- S.B.

SUDDEN IMPACT

Ex-Im Bank export financing ranked by state.*

State Export total % Sm. bus.**
Washington$7,100 mill. 56%
California 2,400 mill.77%
Texas966 mill. 63%
Massachusetts 736 mill. 72%
Florida585 mill. 69%

 *FY 2000 **% of export total that supports small business
SOURCE: U.S. EXPORT-IMPORT BANK

IGNORING DISABILITY absences could skew health-cost estimates by up to 80%, reports the Integrated Benefits Institute.

RAISING CAPITAL
Bonds Go Retail

At a time when individual investors are seeking safe harbors from a volatile stock market, five large corporate issuers have gone retail with their bond offerings, and several more are expected to do so this spring.

"This is a way to diversify our sources of funding and build a stable base of new fixed-income investors," says John Mack, a senior vice president in charge of raising $6 billion in unsecured debt at Bank of America Corp.


In January, the bank teamed with Incapital LLC, a Chicago-based underwriter, to launch a $3 billion medium-term-note program. The program sold some $750 million in bonds in the first two months, with a variety of rates, maturity dates, and interest-payment options. At the same time, Bank of America took an equity stake in Incapital.

Here's how the program works. New tranches are priced at the start of each week, and the notes are sold retail, with a minimum $1,000 investment. Incapital takes orders through its national broker-dealer network and nearly 100 others, and the bank fills the orders each Friday.

By working with Incapital, the bank is able to price the bonds on an all-in basis--at 5 to 10
basis points less than what it costs to issue institutional bonds-- despite having to pay higher retail commission fees.

The Lasalle Broker Dealers Services Division, based in Boca Raton, Fla., offers a similar retail program called
Direct Access Notes. So far, General Motors Acceptance, Caterpillar Financial Services, Freddie Mac, and UPS are on board as issuers. --S.B.

PAST IS PROLOGUE

Workers over 50 and victims of downsizing who took a buyout package are in demand during an economic downturn, says Challenger, Gray & Christmas Inc.

E-PROCUREMENT
No Rush

Racing to keep up with the Joneses regarding E-procurement? Breathe easy. A survey by the National Association of Purchasing Management (NAPM) says only about 8 percent of the 368 members polled think the Web has significantly changed internal purchasing procedures.

The main reason is that moving all processes online tends to blunt relationships with suppliers, especially those that have already upgraded their electronic data interchange (EDI) systems. And with E- procurement technology a moving target, buyers aren't pushing the envelope. Winfred Clingenpeel, director of purchasing for Howard Hughes Medical Institute, says he'd like to integrate Web capabilities into his EDI system. But he is still grappling with whether to move suppliers to a new Web-based format or to augment the existing EDI system.

Jupiter Media Metrix agrees with the NAPM. A recent JMM study says that of the firms considering E-procurement, only 20 percent expect to buy online next year. -- Alix Nyberg

INVESTMENT RECOVERY
Spring Cleaning

Got a Glatt WSG 1 lying around? How about an Edwards Freeze Drier? Those are just two of the pieces of machinery that the U.S. arm of Novartis AG, the Swiss-based health-care company, found gathering mothballs when it installed a new asset-management system last year. "We were looking for a program to address our asset management needs," says associate director of purchasing Mike Brueckner.

Redeploying equipment may not be a top financial priority, but Richard G. Kabobjian, managing partner with Deloitte & Touche, says that some CFOs have instituted metrics to measure ROI at the plant level. In those cases, idle machinery affects results.

For Novartis, the attic-cleaning solution was an Internet-based system developed by EquipNet Direct, of Braintree, Mass. This centralized tracking tool permits far-flung facilities to identify and register unused equipment that might be needed elsewhere in the company, or eventually sold into the $30 billion used-equipment market.

Within six months, Novartis posted some $1.1 million in fallow machinery, and redeployed about a third of that total. One of the items deployed was the Glatt WSG 1, which is used in the drug-development process. "It's an efficient way to divert capital from new equipment to other projects," says Brueckner. Furthermore, he notes, selling direct through EquipNet brings in more than 75 cents on the dollar, compared with about 10 cents selling to a used-equipment wholesaler. -- S.B.

RECOVERING YOUR ASSETS
Investment recovery department benchmarks

Source: Investment Recovery Association, 2000 Survey Results

LOW TECH: 24% of CFOs say they are not yet involved in any online business activities, according to a Business Week Forum poll.

SHELL BANKS
Filthy Lucre

Despite the strictest anti-money-laundering laws in the world, U.S. banks are still the involuntary custodians of up to $500 billion a year in dirty money. Even the $5 billion that drug cartels launder through the receivables departments of U.S. corporations passes through a U.S. bank at some point. The United States, says the Brookings Institution's Raymond Baker, is "the largest repository of ill-gotten gains in the world."

In February, a Senate report revealed that correspondent banking-- the system by which small, often poorly regulated offshore banks outsource their transactions and services to U.S. banks--provides a wide-open back door for bad guys. "Through correspondent accounts, U.S. banks become unwitting abettors in the laundering of proceeds from drug trafficking, financial fraud, tax evasion, Internet gambling, and other illegal acts," notes Sen. Carl Levin (D­Mich.), whose staff wrote the report.


Among the offshore entities cited in the report is M.A. Bank, a shell bank that is licensed in the Cayman Islands but has no physical office anywhere. During an undercover operation, U.S. Customs agents transferred $7.7 million of a Mexican cartel's drug funds into M.A. Bank's account at the New York branch of Citibank. "We [later] seized $1.8 million in Juarez cartel drug money from M.A. Bank," says Customs spokesman Dean Boyd. The rest of the money, according to the report, was transferred from the Citibank correspondent account to Argentina before the Customs sting ended.

"We found that virtually every major U.S. bank has opened correspondent accounts for high-risk foreign banks," says Levin aide Elise J. Bean, who co-wrote the report. Prohibiting shell banks from opening such accounts, she says, would be a major blow to money- launderers.

The alternative--smuggling cash out of the United States in bulk--is a major hassle for drug lords. "Smaller bills create such logistics problems for money-laundering cells that they are sometimes destroyed rather than laundered or stored," notes U.S. Customs special agent Allan J. Doody. It takes only 44 pounds of cocaine to generate $1 million, but the resulting cash weighs 220 pounds in $10 bills. That's a fivefold increase--and it won't fit in the overhead compartment. -- T.R.

HEAVY DRUGS?
Why money-laundering matters to drug dealers.

ValueCocaineCrack or Heroin $10 bills
$100,000 4.4 lbs.2.2 lbs.22 lbs.
$1 million44 lbs.22 lbs. 220 lbs.

Source: U.S. Customs

DOMAIN NAMES
Dot What?

The Internet Corporation for Assigned Names and Numbers (ICANN), a multi-government-sanctioned organization based in Marina del Rey, Calif., is close to delivering seven new top-level domains (TLDs) to the world. TLDs are the distinctive letters that follow the dot in Internet addresses, such as com, net, or org. ICANN expects to wrap up negotiations and release the new designations, which include aero, biz, info, and museum, by late Spring, says CFO
Andrew McLaughlin.

Meanwhile, Pasadena, Calif.-based New.net Inc. has already introduced 20 new TLDs, ranging from inc, ltd, and gmbh, to travel, sport, kids, and family. Unlike those who use ICANN-
approved TLDs, surfers who use New.net domains must either download free software that sets up a browser interface, or access the Web via one of New.net's Internet service provider partners.

David Hernand, CEO of New.net, asserts that there is an immediate need for new TLDs, explaining that the fresh domains will "open up the name space." This is particularly beneficial for small businesses, because more descriptive names make Web sites easier to find, says Hernand.

Timothy Appnel, director of technology at New York­based Agency.com Ltd., a global E-business firm, also believes there is a shortage of domain names. "The Internet has seen explosive growth, despite the recent slowdown. Yet the choice of coveted English-language names is extremely limited." As a result, companies are fighting over the same addresses.

Jeffrey Mann, vice president for electronic business strategies at META Group, in Stamford, Conn., does not
believe a shortage of domain names is the issue. The better reason for increasing the number of TLDs is to
organize, at least to some extent, Web offerings. "It would be useful to have addresses that designated a site's
content." -- Joan Urdang

EVEN IN A SLUGGISH economy, 63% of corporate tenants plan to expand their staffs in 2001, according to Design Management Corp. 

TAX SHELTERS
Cover Me

The jury is still out on corporate tax shelters, but keep your eye on the courts: That's where the tax-shelter debate is being played out. In February, the Internal Revenue Service claimed its third legal victory over companies that leveraged corporate-owned life insurance (COLI).

American Electric Power, Winn-Dixie Stores Inc., and Camelot Music Holdings are taking their COLI cases to appeals court, and legal observers predict that the impending judgments will influence lawmakers as they debate the IRS's power to prosecute and penalize ever-slippery tax shelters.

"These cases will have a bearing on tax shelters in general, not just on COLI decisions," says Don Alexander, a former IRS commissioner and now a partner with Akin Gump Strauss Hauer & Feld LLP, in Washington, D.C. Furthermore, he expects that the upcoming appeals decisions will influence the future of IRS enforcement action.


Bolstered by the creation of the Office of Tax Shelter Analysis last February, the IRS is beginning to offer guidance on what tax-shelter practices are prosecutable. The requirement provisions are temporary, but still carry weight. For instance, the code now requires any "confidential corporate tax shelters" purchased from a third party to be registered.

But many companies complain that the definitions of "good" and "bad" tax- shelter practices are still too vague, and fail to separate true shelters from normal business practices. The Tax Executives Institute, whose members represent 2,800 businesses, is pushing for clarity. "We need to narrow what the IRS has a legitimate right to look at," says Timothy McCormally, general counsel for TEI.

Based on the response to the agency's new disclosure requirements, the IRS may be inclined to agree. Out of 2,900 tax havens registered so far, 900 are earmarked as being potentially abusive.

On the congressional front, the Senate Finance Committee issued draft legislation last October proposing stricter definitions of tax abuses and higher penalties for infringements. While the change in Administrations has orphaned the proposals, Capitol Hill sources say that given the crackdown's momentum, there's little reason to hope that the vigilance surrounding tax shelters will disappear.

On the upside, some companies may benefit from the ambiguity. "At least with case law, you can hopefully make the point that your case is distinguishable from those that have gone before," says Peter Norton, a partner with Baker & McKenzie, in New York. -- A.N.

WATCHFUL EYE

Tax shelters with a high potential for abuse.

BOSS (bond and option sales strategy): Generates an artificial tax loss to offset other income.

COLI (corporate-owned life insurance): Deducts life insurance interest despite lacking a business purpose.

DEBT STRADDLE: Creates tax loss by manipulating the interest rates of two debt instruments.

FAST-PAY STOCK: Deducts principal and interest from preferred stock.

LILO (lease-in, lease-out): Uses circular transactions to avoid taxes.

REIT (real estate investment trust): Joins two unrelated provisions to avoid income-tax payments.

Source: U.S. Treasury Dept.

NEW PRIORITY

Expanding self-service technology for benefits administration is a top-five priority among HR professionals, says Deloitte & Touche. Last year, self-service wasn't even on the radar screen.

SEVERANCE STRATEGY
Pension Dipping

Besides being unpleasant, layoffs can be expensive if a company is saddled with high severance payments. So, when Lucent Technologies Inc. recently announced that it was reducing head count by 10,000, the company tapped into its $45 billion pension fund to pay a supplemental pension benefit similar to a severance package.

"It doesn't do anything to compromise or jeopardize the pensions of retirees, and we don't believe current pension benefits will be affected either," says Lucent spokeswoman Debi Lewis. As of September 30, Lucent's pension fund was 73 percent overfunded, leaving $19 billion in extra cash.

Pension fund consultants are inclined to agree with Lucent's strategy. Such surpluses have limited applications, and are generally not recoverable without high tax penalties, "so it makes a lot of sense to use an otherwise illiquid asset to fund the packages," notes Jim McKee, vice president of quantitative consulting at Callan Associates, in San Francisco.

However, as the bull market slows and pension-fund surpluses evaporate, such severance funding strategies will be more difficult to arrange, says Ashwinpaul "Tony" Sondhi, president of A.C. Sondhi & Associates, a financial advisory firm in Maplewood, N.J. Sondhi says the question is, "How long will the overfunding last?" given that the surpluses are drawn from the same well that's causing the downturn--the stock market. Corporate pension funds across the S&P 500 were down 1.2 percent in the fourth quarter of 2000, according to Hartland & Co., a Cleveland-based pension research firm.

For Lucent, the combined effects of a sagging stock market and rerouting pension assets may still create an earnings hit. According to the Center for Financial Research and Analysis Inc., Lucent's pension income accounted for a whopping 56 percent of its net income in the last fiscal year. Absent the pension income, earnings per share could fall to 16 cents, instead of the reported 37 cents. -- A.N.

NEXT UP: Sen. Don Nickles (R­ Okla.) has been named chairman of the Senate Finance Subcommittee on Taxes and IRS Oversight.




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