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ImClone CFO Named Chief Executive

Lynch replaces Harlan Waksal, who replaced Sam Waksal, who repla.... Plus: Possible Tyco accounting snafus, very dry in Silicon Valley, and Chapter 11 looming for HealthSouth?
David M. Katz, | US
May 1, 2003

And then there was one: the CFO.

Daniel Lynch, the finance chief of ImClone Systems, has been named acting CEO of the troubled biopharmaceutical company. Lynch was apparently the highest-ranking officer left standing after Harlan Waksal resigned as president and CEO and Robert Goldhammer quit as chairman.

Waksal, who replaced his older brother, Samuel Waksal, as chief executive about a year ago, and Goldhammer, the chairman since 1991, were under heat from the board to step down. The company's "current difficulties" led its independent directors "to conclude that a change in leadership was appropriate," according to an ImClone statement. The change was prompted by an internal tax investigation, said company management.

At the end of March, you'll recall, ImClone management indicated it would have to restate the company's financial statements from 2001 on (and possibly some statements covering earlier periods). The reason? Founder Waksal allegedly didn't pay $60 million in income taxes. The restatement will reflect a potential withholding tax liability on the exercise of ImClone stock options and warrants issued to Waksal.

ImClone has charged that the elder Waksal didn't pay New York State income taxes—and maybe didn't pay federal income taxes—on those stock grants. Waksal has already agreed to cough up $800,000 in an insider-trading case brought against him by the Securities and Exchange Commission, although he did not admit or deny the allegations against him in settling that case. He has also pleaded guilty to criminal charges involving insider trading.

Lynch, currently a senior vice president as well as CFO, picks up the chief administrative officer title to go with his new acting chief executive role. Besides his current responsibilities for finance, control and compliance, human resources, communications, and information technology, he will add sales and marketing, legal, and business development to his portfolio.

Lynch joined ImClone in 2001 as its finance chief. From 1999 through 2001, he served as CFO at Derby Cycle Corp. For 15 years before that, Lynch worked in various jobs at Bristol-Myers Squibb, most recently as a vice president of finance. He earned $749,000 in 2001, the latest year for which figures are available.

For his part, Harlan Waksal picked up the title of chief scientific officer. Goldhammer will stay on as a director until his current term expires.

More Gloom from Tyco Expected
On Wednesday Tyco management moved up the company's second-quarter earnings call from early today to late yesterday—after the stock markets closed. The company's management seemed eager to reveal details of a quarterly loss from continuing operations of 23 cents per share.

Why the haste? The likely answer is that the executives wanted to respond as swiftly as possible to a Wall Street Journal story reporting there was a good chance that Tyco management would reveal another $1.2 billion in accounting woes at the Bermuda-based conglomerate.

The revelations might raise questions about whether investors doling out $4.5 billion for convertible bonds issued by the company in January were fully informed about Tyco's finances, according to the story, which cited people familiar with the matter.

Mostly, the alleged accounting issues were reportedly unearthed in Tyco's fire and security division and in its Earth Tech engineered-services unit. Managers misused acquisition-accounting methods to increase revenue, according to the story. The accounting problems are said to come from the increased bookkeeping conservatism of new Tyco management rather than actual errors.

Other problems reportedly stemmed from past accounting practices at the company's ADT Security Services, which provides electronic safety systems. The Journal story cited critics that said Tyco has tended to write off its investment in its on-premises security-alarm systems over too long a period. The write-offs were said to fail to reflect the high rate of service cancellations.

A Tyco spokesman declined to comment late yesterday, according to the story.

Report: HealthSouth Chapter 11 Seen
HealthSouth, the embattled rehabilitation-services company, will likely seek bankruptcy protection this summer, according to a New York Times story citing Bryan Marsal, the turnaround specialist running the company. The bankruptcy filing would stem from a deal the company has arranged with its banks and bondholders.

HealthSouth is carrying about $3.3 billion of debt. On April 1, the company reportedly missed a payment of about $350 million on a convertible-bond issue. That was after the SEC accused Richard M. Scrushy, the company's former CEO, of accounting fraud.

Claiming that the company will not know its true earning power for another two months, Marsal says HealthSouth still has a decent chance of avoiding a bankruptcy, according to the Times. The company has boosted its cash on hand to $200 million and is in a "positive cash generation mode," the executive reportedly said.

To avoid bankruptcy, however, HealthSouth would have to come up with $250 million in yearly interest payments alone, according to Marsal. The company, which has halted the interest payments for now, would also have to start repaying debt and would need at least $150 million a year for capital spending, he told the Times.

Treasury to Issue $58 Billion in Notes
To meet its burgeoning budget needs—and to meet the possibility of unanticipated borrowing—the U.S. Treasury will issue $58 billion in notes next week. The Treasury also plans to increase offerings of 5-year and 10-year notes beginning in August.

The department will auction $22 billion in 3-year notes on May 6, $18 billion in 5-year notes on May 7, and $18 billion in 10-year notes on May 8. The securities will be used to raise about $55.7 billion in cash.

"While these changes have been made in response to larger financing needs, they will benefit Treasury by creating additional flexibility in meeting unexpected swings in borrowing needs," said Brian Roseboro, assistant Treasury secretary for financial markets.

The amount of cash raised exceeds both the previous record of $37 billion last November and the $24 billion in last year's second-quarter refunding, according to Bloomberg. Earlier this week, department officials said it would borrow a net $79 billion from April through June. That's a record for the second quarter and marks the first time the government has been a net borrower over that period since 1995, according to the financial-news service.

Dry Days in Silicon Valley
The amount of money invested by venture capitalists in Silicon Valley start-ups in the first quarter dropped 18 percent from what it was the previous quarter. This according to an article in the San Jose Mercury News, citing a survey sponsored by PricewaterhouseCoopers, Venture Economics, and the National Venture Capital Association.

That's the smallest amount of venture capital pumped into the tech hotbed in more than five years.

The first-quarter results followed a relentless downward jag since the Internet bubble burst. VCs injected $1.27 billion into Silicon Valley companies for the three months ended March 31.

During the second quarter of 2000 (the high point of the New Economy bull market), Silicon Valley companies received $9.68 billion, according to the survey. The steady decrease in available venture capital could mean a delay in the local economy's recovery.

(Editor's note: To find out more about the fall-off in venture capital, read "The Dry Season.")

Finance Chief Pleads Guilty
Omega Engineering, along with company CFO Ralph Michel, pleaded guilty to illegally shipping equipment to Pakistan. Apparently, government officials feared the equipment could be used to help manufacture nuclear devices, according to the Associated Press.

Michel pleaded guilty in U.S. District Court in Hartford, Connecticut, to violating the International Emergency Economic Powers Act and the Export Administration Act. He faces up to 10 years in prison and a $50,000 fine when he is sentenced on July 16. Omega has agreed to pay a $313,000 fine to the U.S. government.

In 1997, the U.S. Department of Commerce reportedly rejected Omega's request for an export license to ship $187,000 worth of technological equipment to Pakistan. Authorities were said to be concerned that the equipment would be used in nuclear explosive devices or nuclear fuel activities. Reportedly Omega shipped the equipment anyway.

Michel did not immediately return reporters' calls, the AP story said.