Restatements du Jour

Changes in prior financial reports eat into the profits of two prominent restaurant franchises. Also: employers display a bullishness about hiring prospects unseen since the 1990s, and Calpers slaps a lawsuit on the NYSE and seven specialist firms.

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Two fast-food chains–Outback Steakhouse and AFC Enterprises–recently restated their results for prior years.

On Monday, AFC filed its long-awaited 10-K for 2002, restating previously reported earnings by $27.4 million over a three-year period as a result of what the restaurant franchiser’s management called “accounting errors.” The restatement pared profits by $21.3 million for fiscal 2001 and by $9.2 million in 2000.

The chain, which operates Cinnabon, Church’s Chicken, and Popeye’s was able to recoup a bit in restating the first three quarters of last year, increasing net earnings by $3.1 million for that period. The restatement also affected years prior to 2000, reducing shareholders’ equity at Dec. 26, 1999 by $5.4 million.

In March, the company had announced that it would need to restate earnings for 2001 and the first three quarters of 2002. The following month executives said the company that a restatement of the results for 2000 was in the cards, as well as a delisting by Nasdaq. A week later, AFC CFO Gerald Wilkins resigned “to pursue other interests.”

In Monday’s government filing and accompanying press release, the company said earnings were affected by at least 22 different issues, including impairment of long-lived assets and post-employment payments to a former officer.

The Securities and Exchange Commission is looking into a possible violation of Regulation Fair Disclosure (FD) at AFC on November 7, 2002, according to the company. The matter could relate to a briefing in which the company gave analysts a peek at a lowered earnings guidance hours before Web-casting the news, according to Dow Jones. The revised number was in packets of information distributed to those attending the session, the wire service added.

Lost in the Outback

To properly account for its employee-partners program as a compensation expense, Outback last week revised its financial results for 2000 through 2002. In the program, managers get a share of revenues.

Further, the chain restated its financial results for 1998 and 1999, although it wasn’t clear from the filing why these results were restated, according to a published analysis of the government filing. For all five years, the company’s restatements reduced net income by $44.2 million.

Outback’s most recent quarterly filing contained a restatement of its results for the three and nine months ended September 30, 2002, reflecting a change in its accounting for the compensation of general managers and area operating partners.

In October, Outback had warned that it would restate prior periods’ financial statements to reflect a compensation-accounting model for its operating partner programs rather than the partnership- accounting model previously used by the company.

Hiring Picture Brightens

Not since the late 1990s have employers been anywhere near as upbeat about hiring as they are this quarter.

That’s a major inference that can be drawn from the most recent quarterly survey by Manpower Inc., which found that 20 percent of 16,000 U.S. employers plan to hire more people in the first quarter of 2004 than they did in the final three months of 2003.

In comparison, 13 percent expect a slower hiring pace. Sixty-one percent of employers think they’ll offer the same number of jobs, and 6 percent are just not sure.

It’s been five years since the Manpower survey recorded an increase in hiring expectations between the fourth quarter and the new year. “Although hiring intentions are still not as buoyant as they were in the late 1990s, employers are taking a step in that direction with their hiring plans for the beginning of the year,” said Jeffrey Joerres, Manpower chairman and chief executive officer.

Further, employers in nine of the 10 industry sectors polled are more upbeat about their hiring intentions in the first quarter than they were for the fourth quarter of 2003. In fact, public administration is the only sector in which employers expect fewer jobs than last quarter.

In the construction sector, the job prospects are exceedingly bullish– the strongest since the first quarter of 2001. The employment outlook for construction is expected to be strongest in the South and weakest in the Northeast, according to the survey. Services employers expect to hire at a steady pace in the first quarter of 2004, Manpower notes.

In a regional breakdown, Employers in the West seem the most optimistic while those in the Midwest are the most prone to pessimism.

”Widespread Fraud” by Specialists and NYSE, Alleges Calpers

The California Public Employees’ Retirement System sued the New York Stock Exchange and seven specialist firms, alleging that they defrauded investors, according to Bloomberg.

The NYSE and the specialists “engaged in a fraud so widespread it has generated untold shareholder losses,” Calpers president Sean Harrigan reportedly said at a news conference. “The NYSE not only knew these practices existed, but perpetuated them. It profited from them and it hid the extent of the practices.”

Calpers, the largest pension fund in the United States, is openly upset with the Big Board’s new governance plan and has been pushing for a separation between its regulatory and commercial functions. At the press conference, Harrigan said the specialists are “the poster child of a failed system of self-regulation.”

The lawsuit charges that investors suffered millions of dollars of damages because the firms and the exchange “employed devices, contrivances, manipulations and artifices to defraud, made false and misleading statements and concealed material facts and engaged in a scheme to defraud investors,” according to a copy of the suit posted on the Calpers Web site.

The seven specialists are Goldman Sachs Group Inc.’s Spear, Leeds & Kellogg; Van der Moolen Holding NV’s Van Der Moolen Specialists USA; Bear Wagner Specialists; Performance Specialist Group; Susquehanna Specialists Inc.; LaBranche & Co.; and FleetBoston Financial Corp.’s Fleet Specialist Inc. unit.

HealthSouth Undergoing Rehab

HealthSouth is slowing moving toward regaining its credibility and respect in the marketplace.

The company announced that longtime board members George Strong and Charles Newhall III are the first to leave under a plan announced earlier this month. A third and fourth director will leave no later than April 15, 2004, and a fifth will depart no later than August 31, the company added.

The board overhaul is part of a settlement of a shareholder suit brought against the scandal-plagued operator of rehabilitation clinics and surgical centers by the Teachers Retirement System of Louisiana.

HealthSouth has been embroiled in an accounting scandal that sent it into bankruptcy and resulted in criminal charges against 16 former executives. All except former CFO Richard Scrushy have pleaded guilty.

The health-care company, which had defaulted on its debt, also announced that it paid about $52 million in semi-annual interest to its bondholders in December, making it current on its interest due. The company added that it intends to remain current on all upcoming interest payments.

Short Takes

  • In October, foreign investors more than doubled their investments in U.S. corporate bonds compared with a year earlier, to nearly $21 billion, according to the Treasury Department. On the heels of September’s $19.8 billion, total purchases this year are approaching a record high.

Foreign investors have purchased $221 billion of U.S. corporate bonds through October of this year, just shy of the record $222 billion for all of 2001, according to published reports citing Citigroup.

  • Johnson Controls Inc. said it filed a shelf registration to sell $1.5 billion in debt, warrants, and stock. The auto-parts maker said it plans to use the proceeds for general corporate purposes, including paying down existing debt.
  • Union Pacific Corp. filed a shelf registration to sell up to $1 billion in debt securities and stock. The railroad plans to use the proceeds for general corporate purposes, including debt repayment, working capital, acquisitions, and stock repurchase programs.
  • CEC Entertainment Inc., operator of the Chuck E. Cheese restaurant chain, named Chris Morris as chief financial officer.
  • The Walt Disney Co. said it expects its cash contributions to its pension plan to increase more than fivefold this fiscal year.
  • Honeywell International Inc. said next year’s earnings could fall as much as 9 percent because of higher prescription drug costs for retirees and increased pension expenses.

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