Risk & Compliance

Incredible Shrinking Assets

Accounting woes bedevil Enron; company may take $24 billion in write-downs. Also: Telecom CFOs do okay—companies don't. Plus: Lucent's swell stock ...
Stephen TaubApril 23, 2002

If ever there was a company that didn’t have its numbers tied down, it’s Enron.

In October, the company was forced to restate revenues by more than $600 million. That unexpected rejiggering eventually forced the once-powerful energy trader into Chapter 11. Now, in the middle of a massive restructuring to claw its way out of bankruptcy, the company has announced more bookkeeping problems.

In Securities and Exchange Commission documents filed yesterday, Enron management noted it could write down another $14 billion worth of assets, partly due to accounting errors. Other causes: the write-down on Enron’s numerous Chapter 11 cases, lower-than-expected sale values of company assets, and decisions to sell assets not previously up for sale. Oh yes, Enron management also noted it may have overstated the value of assets by $8 billion to $10 billion.

The company’s current executives seemed to lay some of the blame for the bad math on the company’s previous executives—as well as former auditor Arthur Andersen. “The possible accounting errors or irregularities relating to these several assets were not, to the best of current management’s knowledge, presented to the board’s audit and compliance committee,” stated Enron in the filing. “The company’s reported financial information for periods in 2001, including the accounting treatment of these assets, was prepared by prior management and (in the case of the first two quarters of 2001) reviewed by Arthur Andersen.”

Enron also said it does not have an independent auditor and does not intend to provide audited financial statements for the fiscal year ended December 31, 2001. The reason: a court-appointed examiner will be performing a comprehensive review of certain prior period transactions, and the company doesn’t believe it would be the best way to use its limited resources.

Besides, the company’s recent audited financial statements haven’t exactly been pillars of reliability. As you recall, Enron listed $61.5 billion in assets when it filed for bankruptcy last year. The company also reported liabilities of $49 billion, but has since said the liabilities could swell to $100 billion.

“No matter how cynical you would have been about Enron, it’s defied all of them in terms of being worse than imagined,” analyst John Olson of Houston investment bank Sanders Morris Harris told Reuters. “They were making it up as they were going along apparently, but $14 billion is real dollars. This thing is just a staggering number to me.”

Pay for Performance?

Tough times for telecom companies mean tough times for telecom CFOs, right? Not necessarily.

According to a proxy filing, Nextel Communications CFO Paul Saleh had a pretty good 2001. He took home $154,984 in salary and a $503,500 bonus. He also received $80,898 in other compensation, mostly due to allowances for relocation expenses. Saleh also received $509,000 from restricted stock. That adds up to more than $1.2 million—not bad considering Nextel’s share price is also down 75 percent from its one-year high, and fell more than 11 percent on Monday amid the latest telecom sell-off.

Under Saleh’s employment agreement reached in August 2001, the finance chief received an annual salary of $475,000, along with and a minimum 2001 bonus of $475,000—even though he only spent a few months with the company. Saleh also received a grant of options to purchase 500,000 shares of common stock. The options are 20 percent vested upon granting, and then vest monthly over a four-year term. Saleh also received a grant of 50,000 deferred shares, which vest annually over a three-year term.

The agreement also provides for a $200,000 interest-free loan, which will be forgiven on a pro rata quarterly basis over a three-year period, unless Saleh terminates his employment with Nextel.

What’s more, if Saleh is fired in the first three years of his employment, the company will pay him his current base salary, bonus, and benefits for a period of two years.

Scott Sullivan, Worldcom Inc.’s CFO and treasurer, didn’t fare as well as Saleh. According to a recent proxy filing, Sullivan was denied a bonus for 2001. That’s a slight adjustment for the Worldcom finance chief—Sullivan received a $10 million retention bonus in 2000. The contract requires Sullivan to stay on with the company for two years, through September 2002. In 1999, he received a $2.76 million bonus. Sullivan didn’t receive a raise last year, either. His base pay: $700,000.

The proxy filing came the same day the share price of Worldcom Group (the company’s data, Internet, international, and commercial voice businesses) took a hammering. That hammering—Worldcom share price dropped nearly 33 percent—was triggered by the company’s announcement on Friday that earnings would come in much lower than expected. Not great news for Worldcom shareholders, who have taken a beating of late. As of the market close yesterday, Worldcom shares have lost nearly three-quarters of their value during the past year.

Today’s Andersen Defections

Embattled auditor Arthur Andersen saw more clients walk yesterday. None of the walkers were high-profile, large-cap companies, though.

A handful of smaller companies did announce they were dumping the auditor. And at least for one day, Deloitte & Touche was the beneficiary.

The Andersen-dumpers include Boykin Lodging Co., a real-estate investment trust; Sourcecorp Inc., which provides outsourcing services; and GlycoGenesys, a developer of pharmaceutical and agricultural products.

Radiologix Inc., an outpatient diagnostic-imaging company, replaced Andersen with Ernst & Young.

(To see how Big Five firms stack up in revenues and lines of practice, click here.)

Today’s FAS 142 Charges

Three more companies took sizable impairment write-offs yesterday. Once again, the write-offs were necessitated by FAS 142.

Park Place Entertainment Corp. recorded a noncash charge of $979 million to write down the value of goodwill, mostly associated with the 1996 acquisition of Bally Entertainment by former parent Hilton Hotels Corp.

BorgWarner management also announced it was taking a FAS 142—related, first-quarter after-tax charge of $269 million.

And management at Longs Drug Stores Corp. said it expects to take a $41 million goodwill impairment charge in the first quarter of the year ending January 30, 2003. The first quarter ends on May 2.

Short Takes

>> Management at Lucent Technologies Inc. said it will permit its employees to exchange their stock options—currently under water—for a smaller number of options. Those options will carry a lower strike price—meaning workers can cash out some of their holdings. The company said all employees, except senior management, will be eligible for the swap.

>> Regal Entertainment Group, one of the largest movie-theater operators in the United States, plans to issue 18 million shares in an initial public offering. Admission price will likely be anywhere from $16 to $18 per share, meaning Regal would gross between $288 million and $324 million. The date for the offering has yet to be determined.