Dynegy Restates–Again

Second rejiggering in three months could place company in violation of loan covenants. Plus: Pre-Paid hit with subpoena, former Sepracor finance exec charged with insider trading, and Kroger offers enhanced military leave.


More trouble for an energy giant in Houston.

Enron Corp.? No, Dynegy Inc.

On Friday the embattled company announced its second major restatement in three months. Dynegy will revise results for 1999 through 2001 and the first three quarters of 2002 as a result of a reaudit.

Back in November, the company restated results for 1999 through 2001.

Dynegy management added that the restatements could affect the company’s ability to comply with the financial covenants in certain credit agreements. Dynegy owes $1.3 billion in credit lines that are due in April and May, and another $1.5 billion to ChevronTexaco Corp. in November. Dynegy reportedly borrowed the $1.5 billion to repay a loan that was used in the company’s attempt to acquire Enron Corp. in November 2001. That deal fell through.

“Dynegy management will continue to monitor the company’s compliance with these covenants as its 2002 financial statements are finalized and will notify its lenders if the company is unable to remain in compliance,” Dynegy management said in a press release.

“I think the story in my mind is that this sort of closes the books, or changes the chapter, from the old Dynegy to the new Dynegy. We’ve cleaned up and resolved the accounting for all of that,” Dynegy CEO Bruce Williamson told Reuters.

Nevertheless, the company warned that there may be “further material revisions to its financial statements.”

As a result of the most recent round of restatements, the energy company reported a net loss of $2.8 billion for 2002, including after-tax charges totaling $2.5 billion. The company also announced a net loss of $341 million for the fourth quarter of 2002, including after-tax charges totaling $213 million.

Dynegy’s share price on Friday plunged another 21 percent to close at $1.87, considerably off its high of $32.19 last spring.

Dynegy said the latest restatements primarily relate to certain adjustments used in valuing the company’s U.S. power-marketing and trading portfolio and changes in the company’s accounting for certain generation and communications lease arrangements.

The restatements also stem from a change in the date used to compute the implied dividend the company recorded for the in-the-money conversion option on the $1.5 billion in Series B preferred stock issued to ChevronTexaco in November 2001.

Net income for 1999 and 2000 changed from $148 million and $484 million to $116 million and $494 million, respectively, primarily as a result of miscellaneous adjustments that have arisen during the company’s reaudit process.

“Our results reflect the effects of necessary adjustments based on past market conditions and business decisions and directions, all in the name of providing our stakeholders with transparency around our financial results,” said Williamson in a statement. “All substantive issues identified to date through the re-audit process are reflected in our 2002 results and have been restated in our financial statements.”

SEC Charges Former Finance Exec

The Securities and Exchange Commission filed insider-trading charges against a manager in the accounting department of pharmaceutical company Sepracor. The SEC also filed charges against the accounting manager’s father.

According to the commission, on October 18, 2000, Timothy Potter, the finance executive, tipped off his father, George Potter, after learning that Eli Lilly & Co. might terminate a license agreement with Sepracor. Minutes later George Potter bought Sepracor put options, according to the complaint.

The next day, after Sepracor publicly announced the termination of the license agreement, he sold the options, resulting in a profit of $55,172, the SEC said.

According to the commission’s complaint, on April 18, 2001, George Potter transferred about $55,000 to Timothy Potter’s account.

The SEC’s complaint alleges that Timothy Potter learned no later than October 18, 2000, that Lilly might terminate a license agreement with Sepracor concerning the development of a new version of Lilly’s top-selling antidepressant, Prozac.

According to the complaint, on October 18, “Timothy Potter tipped his father about the potential termination, in breach of a duty he owed to Sepracor and its shareholders not to trade, or direct others to trade, in the company’s securities while in possession of material, nonpublic information about the company.”

The commission’s complaint further alleges that George Potter, acting on the tip, purchased put options on Sepracor stock for $30,694, betting that the price of Sepracor stock would fall.

The SEC is seeking disgorgement of the profits from their insider trading, plus prejudgment interest, and a civil penalty of up to three times the amount of the profits from their insider trading.

CSX Taps Former Finance Exec

Another company named a onetime finance executive to be its chairman and chief executive officer.

CSX Corp. named Michael Ward to the top spot, succeeding John W. Snow, who was confirmed Thursday by the Senate to serve as Secretary of the Treasury.

Ward, who has spent his 25-year business career with CSX, once served as the railroad’s chief financial officer.

In addition, Ward received a master’s degree in business administration from Harvard Business School in 1976.

“He brings tremendous management expertise and knowledge of the transportation marketplace and its customers to this position,” said the CSX board of directors in a statement.

In another case of a finance exec rising through the ranks, on Friday Lowe’s Cos. promoted CFO Robert Niblock to president.

In his new role, Niblock, who joined the home-improvement chain in 1993, will be responsible for store operations, merchandising, logistics, and distribution. He will continue to report to chairman and CEO Robert L. Tillman.

As a result of Niblock’s appointment, Robert F. Hull Jr. was promoted to senior vice president and CFO, effective March 1. He is currently vice president of financial planning and analysis.

Hull, who joined Lowe’s in 1999, has more than 15 years of retail and financial management experience. He will report to Tillman.

The company also announced the retirement of Thomas E. Whiddon, executive vice president, logistics and technology. Whiddon joined Lowe’s in 1996 as CFO and served in the logistics and technology role since 2000.

Pre-Paid Receives Subpoena

Pre-Paid Legal Services Inc. said it received a subpoena last week from the U.S. Attorney for the Southern District of New York. Apparently the U.S. Attorney is seeking information relating to trading activities in Pre-Paid’s stock prior to the company’s January 2003 announcement regarding recruiting and membership results for the fourth quarter of 2002.

The company also indicated it received notice from the SEC that the commission is conducting an informal inquiry into the same subject.

Pre-Paid management said it is cooperating fully with these requests.

Pre-Paid’s stock has been very popular among hedge funds that like to sell short.

In late November, however, the company’s share price jumped 17 percent after hedge fund Gotham Partners Management published a very upbeat report on its Web site.

New York Attorney General Eliot Spitzer and the SEC are reportedly investigating Gotham and other hedge funds that have published research reports on the Internet.

On December 4, Pre-Paid’s chief operating officer, Randy Harp, sold 55,000 shares of his company’s stock. Since then, Pre-Paid’s share price has fallen from $28 to just over $18.

Gotham, meanwhile, is shutting down several funds after a major investment soured.

Short Takes

  • Tyco International Ltd. reported that one of its wholly-owned subsidiaries would receive $1.5 billion from a new 364-day unsecured revolving bank credit facility. In a statement, chairman and chief executive officer Ed Breen said: “The closing of this bank credit facility, combined with our recently announced placement of $4.5 billion in convertible debentures, eliminates the liquidity gap that the company would have faced later this year.”
  • Honeywell International reported a $1.47 billion loss in the fourth quarter after taking $2.83 billion in charges for restructuring, asset write-downs, and potential resolution of many asbestos-related claims.
  • The Kroger Co. said it would offer enhanced military leave for employees called to active duty. The company said it would make up the difference between Kroger pay and military pay for six months to reservists who are called to active military service, and extend medical and prescription coverage to those reservists for six months. Kroger previously offered reservists three months of benefits and wage differentials.
  • The Walt Disney Co.’s CFO Tom Staggs said at a Thursday teleconference that the media giant would try to modestly cut its debt during the next few months in a bid to get the company’s debt rating back to a single-A level. In October Disney’s long-term debt rating was cut to Baa1 from A3 by Moody’s and to BBB-plus from A-minus by Standard & Poor’s.
  • Citigroup Inc. issued $2 billion in two-year senior global floating-rate notes, up from an originally planned $1.5 billion.
  • National Rural Utilities Cooperative Finance Corp. issued $1.5 billion of debt in three parts, up from an originally planned $1 billion.
  • Wendy’s International Inc. filed a shelf registration to sell up to $500 million worth of warrants, debt securities, and preferred, common, and depositary shares. Management at the third-largest U.S. fast-food chain said the company planned to use the proceeds to refinance debt, buy back its common shares, or for such capital expenditures as the acquisition and development of restaurants, among other general corporate purposes.
  • Management at software maker Siebel Systems Inc. said the company’s board approved a poison-pill plan. Siebel’s management insisted the move is not in response to any particular takeover bid.
  • Junk-bond mutual funds lost a net $648.9 million of cash in the week ending Wednesday, the most in four months, according to AMG Data. This is the second consecutive weekly outflow following inflows in 13 of the prior 14 weeks. It is the largest outflow since the funds lost $1.4 billion in the week ending September 25.

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