Pro Forma Chronicles: Pitt Mulls Enforcement Action

But exclusive poll shows finance executives want to offer pro forma results. Elsewhere: Sagent may restate revenues, Weight Watchers fattens up, and Andersen tells workers to take the week off, sort of.


SEC chairman Harvey Pitt is turning up the heat on companies that rely on controversial “pro forma” earnings results.

The top cop for the securities markets said he is considering taking enforcement actions against companies that mislead investors with bogus “pro forma” results, according to Reuters.

Pitt wouldn’t say how many companies are being examined or name the companies the SEC has taken an interest in. But Pitt told the wire service the SEC is eyeing “cases in which we may be able to demonstrate that some companies took inappropriate liberties … that created misleading impressions. We’re looking at some situations and, if they warrant it, we will take enforcement action.”

“If there are instances of misleading pro forma disclosures, our staff will pounce on them,” Pitt reportedly told the press at a conference. “We have existing ample authority to take action against them.”

On Tuesday, SEC accountants said that they were studying the issue and would present recommendations soon on whether the SEC should issue guidelines on pro forma accounts, according to published reports.

The Financial Accounting Standards Board (FASB) reported in August that it is looking at ways to standardize the reporting process.

More recently, Standard & Poor’s Corp. sent a letter to Wall Street executives detailing suggestions for creating a uniform definition for operating earnings.

It will treat a number of frequently excluded items as part of a company’s operating earnings, including restructuring charges, stock option expenses, and write-downs from ongoing operations.

“The issue is whether you can have some generic rules that give people appropriate guidance as to what standards they have to meet, as opposed to telling everybody how they have to do pro formas, which I think is not possible,” Pitt reportedly said. “So, I’m not sure whether we can adopt any additional rules or not. But I am sure that we have an obligation to study the situation and try to bring some order out of the chaos.”

But Survey Shows Finance Executives Are Pro Pro Forma

When the SEC gets down to studying the situation, what it’s likely to discover is: Many finance managers believe pro forma earnings do bring some order to the chaos. In fact, the SEC will quickly discover that the majority of companies use pro forma results — and like using them.

Or at least, that’s the conclusion to be drawn from an exclusive survey taken this week. In the survey, 82 percent of 196 finance managers said their companies report some kind of non-GAAP (that is, pro forma) earnings in press releases. The poll, which was conducted at the Financial Executives Institute conference held in New York on Monday, also showed that the lion’s share of corporate filers — 88 percent — believe it is appropriate to include nonfinancial measurements in growth trends.

When asked why they issue pro forma results, the respondents were divided. Around 45 percent said non-GAAP results help convey their companies’ true financial performance. And 27 percent said they released pro forma results to meet the demands of analysts. But intriguingly, one quarter of the finance executives said pro forma earnings help “put the best spin on the results.”

This is not to say that finance executives don’t think some work needs to be done on how pro forma results are presented. Most of the respondents (93 percent) believe a company should be required to reconcile non-GAAP financial measures and GAAP operating results in an earnings press release. What’s interesting, however, is that finance managers apparently would much rather have the SEC providing guidance on pro forma numbers, not FASB. Fully 65 percent of the respondents indicated the commission should take a more formal role in the earnings release process. But when asked if FASB should address pro forma earnings computation and reporting issues in their project on performance reporting, well over half the respondents said no.

Happy Holidays

Andersen is encouraging its employees to enjoy a nice long holiday celebration. In fact, it told most of them to spend the entire week celebrating.

The Big Five accounting firm said that except for skeleton crews, all offices in the United States and Canada will be closed from December 24 through January 1, according to published reports. This is no freebie, however. Employees must use personal vacation time for the required holiday.

According to the report, Andersen employees received notice of the plan in an E-mail message from Larry Gorrell, Andersen’s new managing partner. It stated, “This period of time is generally one of our least chargeable times of the year. By accelerating vacation into this timeframe, we realize both a short- and long-term positive financial impact.”

Of course, it’s unclear where Andersen’s plan leaves employees who don’t want to use up vacation time that week — but whose offices are closed.

Sagent May Restate Revenues, Names New CFO

Software company Sagent Technology said Thursday it may restate revenues because some sales orders to government agencies booked as revenue may not be valid.

The company also announced that it appointed Steven R. Springsteel executive vice president and chief financial officer.

Sagent said it discovered information indicating that a sales order totaling $1.1 million recognized as revenue in the third quarter of 2001 may not be valid. As a result, Sagent is reviewing all sales orders booked by the same individual for which revenue has been booked but payment has not yet been received.

“If these sales orders are found to be invalid, there is potential for a restatement of revenues recognized in the first nine months of 2001 totaling $4.9 million,” the company said in statement. “It is possible that a restatement and the failure to collect anticipated receivables would have a material effect on the company.”

Sagent added that it this point it does not believe the restatement will affect previously reported December 31, 2000, results.

“Sagent is reviewing actions necessary, including additional expense reductions, to ensure that the company continues toward its previously stated goals for profitability and liquidity,” it added.

Springsteel will be responsible for all aspects of financial management and planning, investor relations as well as legal and audit affairs. He has more than 20 years of experience in financial and operational management of both public and privately held high-tech companies. Before joining Sagent, Springsteel was chief operating office and chief financial officer of NOCpulse, a provider of operational support system technology to monitor and control Internet infrastructures.

Brightpoint to Restate Four Years of Financials

Brightpoint Inc. said it will restate its annual financial statements for 1998, 1999, 2000, and the interim periods of 2001.

In 1998 the mobile-phone distributor purchased an insurance policy that provided coverage for both retroactive and prospective occurrences. The retroactive occurrences related primarily to previously reported (October 2, 1998) losses the company had sustained in its trading division, an operation that the company closed in 1998. The company recorded the premiums on this policy as expense over the prospective policy period.

The company said it has responded to requests for information and a subpoena from the Securities and Exchange Commission.

“In connection with those responses, the company and its independent auditors reviewed the policy and the accounting for the related insurance transactions,” said the company in a statement. “Upon further review, the company and its independent auditors now believe that premium expense should have been accrued at the date the company entered into the insurance policy, rather than over the prospective policy period because the company could not allocate the costs of the policy between the retroactive and prospective coverage.”

While the method of accounting for combined retroactive and prospective insurance premiums used in the restatement is based upon accounting practices that were widely recognized as being generally accepted at the time the company issued the 1998 financial statements, it was not until May 1999 that the Financial Accounting Standards Board staff confirmed the restated accounting practice as being generally accepted for entities other than insurance companies, the company added. The restatement also includes certain adjustments and reclassifications that previously were deemed to be immaterial.

Interestingly, Stull, Stull & Brody, a law firm representing shareholders of Brightpoint Inc., said it will ask an Indiana court to reconsider its more than two- year-old class action lawsuit against the company, or file a new one.

It seems that the U.S. District Court for the Southern District of Indiana had dismissed the suit, which was filed June 23, 1999. But this was before Brightpoint said on Tuesday that it will restate its financials.

“The restatement reconfirms the validity of the allegations made in the plaintiffs’ original complaint,” the law firm said in a statement.

More Good IPO News

This is getting scary, folks.

First, the IPO calendar starts to get crowded. Then, three companies that went public on Tuesday all rose the same percentage on their first day of trading.

Now, Weight Watchers International Inc., which is scheduled to begin trading on Thursday, actually raised its offering price.

On Wednesday the diet specialist wound up selling 17.4 million shares, or a 17 percent stake, at $24 a pop, while the company had intended to sell the shares for between $21 and $23 apiece. As a result, the company raised $417.6 million.

None of the proceeds, however, will go to Weight Watchers itself. Rather, most of the shares are being sold by Artal Luxembourg SA, a private European investment company that acquired Weight Watchers from H.J. Heinz Co. in September 1999.

Its underwriters are Credit Suisse First Boston, Goldman, Sachs, Merrill Lynch, Salomon Smith Barney, and U.B.S. Warburg.

In other IPO News:

  • On Wednesday, Lawson Software Inc. raised the number of shares for its planned offering. However, it lowered the projected share price. The software firm now plans to offer 14 million shares at $13 to $15 per share. It had planned to offer 13 million shares in a range of $15 to $17 each.
  • Dj Orthopedics Inc., an orthopedic sports medicine company, will also begin trading Thursday. It priced 9 million shares at $17 apiece.
  • Northwest Biotherapeutics Inc., a biotech company focused on discovering, developing, and commercializing immunotherapy products to treat cancer, decreased its price from $9-$11 to $8-$10.
  • Diversified Security Solutions Inc., a systems integrator and manufacturer of security and communication devices, decreased its price from $7 to $6-$7.
  • On Wednesday, Prudential Financial Inc. filed more-specific terms for its planned IPO. It also added 13 underwriters to its syndicate. Prudential said it will sell 110 million shares at between $25 and $30 a pop for estimated proceeds of $3.03 billion.

Other Financing News

  • On Wednesday, FleetBoston Financial Corp. issued $1 billion in 5-year global notes, led by Credit Suisse First Boston, Bear, Stearns & Co., and FleetBoston. It was priced to yield 4.964 percent, or 118 basis points over comparable Treasurys, and was rated A1 by Moody’s and A by S&P.

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