Eyes Wide Shut at HealthSouth

Five longtime directors resign; company's troubles occurred ''on their watch.'' Also: Sony plans huge convertible offering; former Interspeed CFO settles charges; Cablevision restates again; Akorn CFOs should've called in the reserves, says SEC; and more.


HealthSouth Corp. announced the resignation of five longtime directors who sat on the board while the health giant’s massive fraud was taking place, as part of a settlement of a lawsuit by the Louisiana Teachers’ Retirement System

Grant & Eisenhofer, the law firm representing the retirement fund, stated that the settlement does not affect the fund’s lawsuit against HealthSouth founder and former CEO Richard Scrushy, the directors themselves, and other parties, Reuters points out.

The settlement provides for the replacement of the directors “on whose watch HealthSouth’s troubles occurred,” the law firm reportedly added.

During this transition period, significant action by the HealthSouth board will require an 80 percent supermajority vote, ensuring that all such actions will have the support of a majority of new directors.

HealthSouth also promised to hold its next annual meeting within 60 days of its receipt of audited financial statements. The company has not held a shareholders’ meeting in 18 months because of concern that a change of control will prompt demands for immediate repayment of $2 billion of debt, according to Bloomberg.

The five departing directors — Larry D. Striplin Jr., Charles W. Newhall III., C. Sage Givens, George H. Strong, and John S. Chamberlin — will step down by August 30, 2004.

A search for four new directors will begin immediately, overseen by a search committee consisting of one member of the nominating committee of HealthSouth’s board, a representative of the Louisiana teachers’ fund, and representatives of up to three of HealthSouth’s major institutional stockholders that agree to participate.

Under the transition plan, the three directors who joined HealthSouth’s board after August 2002 — Jon F. Hanson, Robert P. May, and Lee S. Hillman — together with Joel C. Gordon, will remain on the board to help ensure the continuity and stability of the company’s turnaround efforts.

In addition, Gordon and May have agreed to continue as interim chairman and interim CEO, respectively, until the board’s special committee believes the turnaround is largely accomplished and a permanent management team is in place. HealthSouth’s special committee consists of all of HealthSouth’s current directors except Scrushy, who has refused the board’s request that he resign as a director.

Scrushy and 15 other former HealthSouth executives have been charged with fraud; all but Scrushy have agreed to plead guilty.

Sony Plans Huge Convertible Offering

Sony is planning Japan’s largest convertible offering of the year in what appears to be a growing trend among Japanese companies.

Sony is selling up to 250 billion yen ($2.3 billion) in convertible bonds to finance investment in key technologies, according to Dow Jones. The yen-denominated bonds went on sale Monday to investors primarily in Europe. The paper pays no interest and matures in five years; it is convertible to shares if, before maturity, Sony’s stock price climbs around 45 percent to 55 percent over Monday’s closing price, according to the report.

The company plans to use the proceeds to invest in its semiconductor business, especially a high-speed microprocessor called “cell” that the company is hoping to integrate in its next-generation electronics gadgets, said the wire service.

Reportedly, some of the funds will also be dedicated to a $2 billion liquid-crystal-display factory the company intends to build with Samsung Electronics Co. of South Korea.

Other Japanese companies planning to issue convertible bonds include Fujitsu Ltd. and Nikon Corp., according to Dow Jones. Before the Sony deal, Japanese companies raised about $7.3 billion this year from global sales of convertibles, compared with about $6.8 billion in 2002.

In other financing-related news, defense contractor Raytheon Co. announced that it is offering to repurchase up to $1.24 billion of its outstanding debt; the offer is for its 6.3 percent notes due 2005 and 8.2 percent notes due 2006.

Raytheon will finance the repurchase with cash on hand, borrowings under credit facilities, or the proceeds of an offering of debt, it said in a statement.

Former Interspeed CFO Settles Criminal Charges

The Securities and Exchange Commission said a Massachusetts federal judge recently sentenced William J. Burke, the former chief financial officer of Interspeed Inc., to three years’ probation and a $10,000 fine. The sentence stemmed from criminal charges, arising from a fraudulent reporting scheme, filed against him by the U.S. Attorney for the District of Massachusetts.

Burke pleaded guilty to one count of falsification of Interspeed’s books and records. He admitted concealing information from the company’s auditors and structuring a product payment in a way that falsely described the payment’s origin.

Burke was ordered to serve the first six months of his probation in community confinement.

The SEC had previously filed a related civil injunctive action against Burke and two other former officers of Interspeed, alleging that they caused the company to engage in a $9 million fraud that inflated reported sales between 25 percent and 93 percent from January to September 2000. The commission is seeking an order permanently barring Burke from acting as officer or director of any public company.

Cablevision Restates Again

Cablevision Systems Corp. said in a regulatory filing that it uncovered another $400,000 in improperly booked expenses as part of its ongoing accounting investigation, which will cut into previously announced earnings by one penny per share for each of the first three quarters of 2003 and the second and third quarters of 2002.

As a result of the restatement, Cablevision’s net loss for the third quarter ended September 30 is now 37 cents a share, not 36 cents as the company announced earlier this month.

On the other hand, the restatement lifted Cablevision’s earnings for the first quarter of 2002 by $87,000.

The total impact of the restated results for the five quarters appeared to be just under $13 million, according to Dow Jones.

Last month the company said it would restate its results for the first three quarters of 2003 to account for about $15 million of expenses incorrectly recorded in 2002 and earlier periods.

On November 11 Cablevision said that the law firm Wilmer, Cutler & Pickering, which was brought in to conduct an investigation of the company’s finances, had identified about $1.3 million in accelerated expenses in units outside the Rainbow Media Holdings unit that has been the main focus of the internal investigation.

Last week the cable and entertainment giant said it identified about $1.7 million in improperly accelerated expenses in those non-Rainbow units. Once again, Cablevision attributed the accounting errors to “sales and marketing, maintenance and consulting expenses.”

The company did not provide an explanation for the additional $400,000 in last week’s SEC filing.

Akorn CFOs Should’ve Called in the Reserves, Charges SEC

The SEC recently instituted cease-and-desist proceedings against two former chief financial officers of Akorn Inc., a maker of health-care products.

The commission accused Rita J. McConville and Kevin M. Harris of making false statements concerning Akorn’s financial condition and causing Akorn to carry on its books at least $7 million in accounts receivable that were significantly impaired, if not completely uncollectable.

Had Akorn appropriately recorded a reserve for these receivables, it would have posted a $2 million loss for its fiscal year ended December 31, 2000, rather than the $2 million profit it claimed in its 2000 annual report, the SEC asserts.

The commission alleges that McConville engaged in accounting fraud by drafting or reviewing statements regarding accounts receivable in Akorn’s 10-K for the fiscal year ended December 31, 2000, and that McConville had no reasonable basis to believe they were accurate or in accordance with generally accepted accounting principles. In addition, the SEC alleges that McConville knowingly failed to implement a system of internal controls, caused Akorn’s books and records to be false, lied to auditors, and caused Akorn’s reporting violations with regards to the company’s 2000 10-K.

The commission also alleges that Harris lied to auditors and misrepresented Akorn’s accounts receivable in its annual and quarterly statements.

Short Takes

  • Unizan Financial Corp. announced that James J. Pennetti has resigned as executive vice president and chief financial officer. Pennetti will be awarded severance worth about $2.2 million, which will result in a one-time charge to earnings of 10 cents per share in the fourth quarter and full-year 2003.

James H. Nicholson, executive vice president and chief operating officer, will assume the responsibilities of chief financial officer on an interim basis while the company searches for a permanent successor. Nicholson, a former CPA with PricewaterhouseCoopers, was the CFO for BancFirst Ohio Corp. from 1990 to 1997. He was executive vice president of BancFirst and president and chief executive officer of its principal banking subsidiary prior to the March 2002 merger of BancFirst and UNB Corp.

Since the merger, in addition to his Unizan Financial Corp. responsibilities, Nicholson has served as president and CEO of Unizan Bank, National Association. He will continue to serve in those capacities while Unizan completes its search for a permanent CFO.

  • Drug-maker Wyeth said its board of directors agreed to terminate the company’s shareholder rights plan on December 15 because of opposition by many of its shareholders to the anti-takeover measure. “The board took note of the opposition of shareholders to such plans, as had been demonstrated by the approval of non-binding resolutions seeking a shareholder vote or termination of Wyeth’s plan at its last two shareholder meetings,” the company said in a release.
  • PepsiCo Inc. said it would cut about 750 jobs as it reorganizes its North American soft-drink business and its international operations and closes some Frito-Lay plants and manufacturing lines. The company also said it would start expensing stock options granted to employees, which will cost the company 20 cents per share in a non-cash charge in 2003.

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