Houston-based Continental Airlines reported a net loss for the third quarter on Tuesday as high fuel prices and competition from low-cost carriers continued to savage the “legacy carrier” segment of the airline industry. In announcing the loss, the fifth-largest U.S. airline in terms of passenger traffic predicted that it expects to report a significant loss for this year and will do the same next year if conditions persist
As with other reeling legacy carriers such as United Airlines and Delta Airlines, Continental continues to fare badly in competing with the widespread fare discounting of such low-cost carriers as JetBlue Airways and Southwest Airlines. Continental has slashed costs through layoffs and negotiating better deals with suppliers, but it has had insufficient liquid reserves to be able to hedge high fuel prices and now there there is not much they can do about the soaring fuel costs.
Despite the loss, Continental is actually faring better than many of its traditional competitors, which are expected to report even steeper losses later this week. Continental’s revenue continues to grow at a steady rate because its hubs such as Newark, N.J. have particularly strong local traffic bases. Revenue in the latest quarter rose 8.4% to $2.56 billion as Continental boosted capacity, flew more miles and filled more of its seats.
Continental’s unit costs, which are expenses spread over each seat mile flown, rose 4.9% to 9.45 cents mostly because of a higher fuel bill. Had fuel prices been at year-earlier levels, Continental’s unit costs would have fallen 2.1%.

This New York Times article reports that federal investigators are focusing on four American oil companies and three U.S. citizens with Houston connections who allegedly received vouchers for oil from Saddam Hussein as he sought to flout United Nations sanctions.
The U.S. companies include Exxon Mobil Corp., ChevronTexaco Corp. and Houston-based El Paso Corp. Exxon, El Paso, and Chevron previously confirmed that they were among companies to receive subpoenas. The Times also reported that the U.S. attorney’s office in Manhattan is investigating corruption allegations against the former head of the U.N. Oil-for-Food program, Benon Sevan.
The companies and the individuals were identified in the Central Intelligence Agency‘s 1,000-page report on the Hussein regime’s campaign, although the names were redacted from the publicly released version. While confirming that sanctions had prevented Iraq from obtaining weapons of mass destruction, the report by arms inspector Charles Duelfer’s report describes efforts by the Hussein regime to manipulate the Oil-for-Food program in its favor by circumventing U.N. mandates and federal law. Others identified in the Duelfer report as receiving the vouchers include Bayoil, a closely held Houston oil company, and three individuals who campaigned to end the Iraq sanctions, including long-time Houstonian Oscar Wyatt. Together, the Duelfer report alleges that the companies and individuals received vouchers from the Hussien regime valued at 111 million barrels of oil.
The U.N. Security Council blocked Iraqi oil sales to punish Hussein following Iraq’s 1990 invasion of Kuwait. During the 1990s, U.N. Security Council members such as France and Russia sought to end sanctions by contending that they were primarily harming Iraq’s civilian population. As a compromise, the U.S. and Britain agreed to the Oil-for-Food Program, which was intended to allow carefully monitored sales of Iraqi oil to pay for humanitarian supplies.
Consequently, the allocation of vouchers — which are negotiable instruments that could be traded for Iraqi oil — was not necessarily criminal in nature and that no one has been charged with a criminal offense in connection with the investigation. However, a May 2002 Wall Street Journal ($) article reported that the Hussein regime had skimmed hundreds of millions of dollars and that several U.S. companies had been major consumers of Iraqi oil.
Relying on captured Iraqi documents and interrogations of Mr. Hussein and other Iraqi officials, the Duelfer report estimates that the Hussien regime illegally collected $11 billion through selling the oil below market price and receiving the difference through kickbacks. The report alleges that Mr. Hussein peddled influence through giving oil vouchers to powerful foreigners and foreign organizations.
Major oil companies have been under increasing pressure to line up new supplies as reserves in more-stable regions have declined, and this search often puts them in contact with countries with rampant corruption and unstable governments. As a result, it is not unusual for such companies to receive subpoenas and be the subject of such investigations.
The Duelfer report lists hundreds of foreign companies and individuals who allegedly received Iraqi oil vouchers — including Mr. Sevan — but not the U.S. companies and citizens. However, the names were included in versions sent to congressional committees and officials have confirmed their accuracy. Many of the names were disclosed in January when documents purportedly taken from Iraqi oil-ministry files were published in an Iraqi newspaper.

Following on this earlier post on the subject, four former Houston-based El Paso Corp. natural gas traders have agreed to plead guillty under cooperation agreements with the Justice Department after being been charged with making false reports used to calculate the index price of natural gas.
Industry publications, such as the Inside FERC Gas Market Report, use data from traders to calculate the index price of natural gas. Accordingly, movement in index prices often affects the level of profits traders can generate. In this particular case, it remains unclear whether the publication actually used the false information provided, but the government needs only to prove that fake trades were reported and not not that they were actually published or affected the markets.
Each of the traders worked for the Houston company’s El Paso Merchant Energy division and were charged with one count of false reporting. They will enter their guilty pleas later this month. The four who were released on personal recognizance bonds were Christopher Bakkenist, 41; Dallas Dean III, 60; Donald J. Guilbault, 51; and William L. Hamm, 45.
Wednesday’s indictments came nearly two years after former El Paso trader Todd Geiger was indicted for wire fraud and reporting fake trades to an industry publication. He pleaded guilty in 2003 to the fake-trade-reporting charge and agreed to cooperate with prosecutors in the probe.
Earlier this year, ten former El Paso Corp. traders and supervisors received targe letters from the U.S. Attorney’s Office in Houston alerting them that they were targets of a criminal investigation into manipulation of natural gas prices. Moreover, in the last two years, the Commodity Futures Trading Commission has filed civil charges against several companies and subsidiaries in which the CFTC alleges that traders knowingly reported false data to industry publications in an effort to manipulate natural gas prices. So far, the CFTC has settled such allegations against approximately 25 companies for more than $250 million, and El Paso settled such CFTC charges for $20 million in March 2003.
However, in a recent case involving another trader who had been charged with false reporting, a federal district judge threw out the charges after ruling that the part of the Commodity Exchange Act that deals with reporting of false and misleading information on on commodity trades is unconstitutionally broad. That ruling is currently on appeal, and the Fifth Circuit Court of Appeals in New Orleans conducted oral argument on the case earlier this week.

The Justice Department announced Wednesday that a federal grand jury has indicted eight former Peregrine Systems Inc. executives with taking part in a massive conspiracy that inflated the company’s revenue by more than $500 million over several years. Peregrine is in the business of developing software to track corporate assets.
Former Houstonian John Moores — who founded Houston-based BMC Software, has been a major philanthrapist for the University of Houston and is currently the owner of the San Diego Padres Baseball Club — is the former chairman of the board of Peregrine. Dozens of shareholder lawsuits filed over the past several years allege that Mr. Moores and his entities sold over 14 million Peregrine shares worth $630 million from 1999 to 2001 during a time in which Peregrine’s financial reports were being falsified. Mr. Moores denies any knowledge of the falsity of Peregrine’s financial statements and has never been charged criminally in regard to Peregrine or any other venture.
The indictment charged former Peregrine CEO Stephen Gardner and former President and COO Gary Lenz, and other executives involved in sales, finance and accounting at the company. The indictment also charged a former Arthur Andersen LLP audit partner, who oversaw Peregrine’s bookkeeping. Messrs. Gardner and Lenz, and four other executives also face related civil fraud charges filed by the Securities and Exchange Commission.
Peregrine filed for bankruptcy protection in 2002 after announcing an internal probe of its accounting. It later restated financial results for 11 quarters from 2000 through 2002 in which it reduced its previously reported revenue of $1.3 billion by over a half a billion dollars. Peregrine had reported 17 consecutive quarters of rising earnings from 1997 through 2002, and its stock price reached nearly $80 in March, 2002. The plaintiffs in the civil lawsuits against Mr. Moores and others — and now the Justice Department — are taking the position that those results were the result of the Peregrine executives’ cooking of the company’s books.
In the meantime, a former Peregrine sales executive on Wednesday agreed to plead guilty to charges of obstructing justice and will join several others who are cooperating in the government’s ongoing investigation of the company. Moreover, Peregrine’s former chief financial officer previously pled guilty to conspiracy and securities fraud charges, and two other former Peregrine executives also pled guilty to conspiracy charges.

Japanese technology and printing company Toppan Printing Co. announced on Tuesday that it will acquire Round Rock, Texas-based DuPont Photomasks Inc. for about $650 million. The deal will create the world’s largest maker of photomasks, which are like stencils that are used to etch circuits onto silicon and, thus, are key components in semiconductor production. The transaction is expected to close in early 2005.
Under the deal, DuPont Photomasks shareholders will receive $27 a share. After the completion of the deal, the U.S. company will become a wholly owned Toppan unit named Toppan Photomasks Inc. DuPont Co., which is DuPont Photomasks’ largest shareholder with about a 20% stake, has agreed to the deal.

In this Form 8-K filing with the Securities and Exchange Commission today, Dallas-based Brinker International Inc. — the operator and franchiser of Chili’s Bar & Grill and a number of other popular casual-dining restaurants — said the Internal Revenue Service has demanded “the employer’s share of FICA taxes on unreported tips during the examination period totaling $31.4 million.” It is not clear from the statement in the filing whether the $31.4 million represents the taxes owed or the amount of unreported tips.
The company also disclosed that the the IRS is alleging that alleged that Brinker has failed to fulfill its obligations under a 1996 tip-reporting alternative-commitment agreement with the IRS and has retroactively revoked the agreement. As a result, the IRS is alleging that some portion of the unreported tips should have been treated as service charges subject to employment taxes. The proposed assessment is based on the assumption that the cash-tip reporting rate should have been about two percentage points less than the charge-tip reporting rate.
In the filing, Brinker asserted that it has complied with all of the terms of the January 1996 agreement and with the law pertaining to the employment-tax treatment of service charges, and that it is “vigorously” contesting the accuracy of the proposed assessment related to unreported tips.
Restaurant owners and their counsel should watch this situation carefully. Brinker is a big fish in the restaurant industry, and a successful IRS assessment on this issue will send shock waves through the industry.

As expected, Houston-based El Paso Corp. disclosed a huge loss for 2003 and restated previous financial results in a delayed Form 10-K filing with the Securities and Exchange Commission.
El Paso posted a full-year 2003 loss of $1.93 billion, or $3.23 a share, on revenue of $6.7 billion. The loss from continuing operations was $616 million, or $1.03 a share. The company also restated its financial results for every year since 1999 as a result of an investigation into its reserve accounting and accounting for hedging transactions. The overall impact of the restatements was to cut shareholder equity by about $2.4 billion at Sept. 30, 2003. Of this amount, about $1.7 billion related to the restatement of El Paso’s historical reserve estimates and about $700 million related to the restatement of its historical accounting for hedges. Here are the earlier posts on El Paso’s mounting financial problems.
The 10-K also disclosed that one of El Paso’s units has been subpoenaed by a grand jury from the U.S. District Court for the Southern District of New York to produce records regarding the United Nations’ Oil for Food Program governing sales of Iraqi oil. The unit, El Paso CGP Company, was formerly Coastal Corp., which the company acquired in January 2001. The former chairman of Coastal — Oscar Wyatt — was an unabashed critic of Operation Desert Storm in the first Persian Gulf War and has been a vocal public critic of El Paso’s management over the past several years.
El Paso also received a subpoena from the SEC earlier this year relating to its reserve revisions, which are also being investigated by the U.S. attorney. Moreover, the company’s hedge accounting is also the subject of an investigation by the U.S. Attorney and may become the subject of a separate inquiry by the SEC.
Man, is El Paso a white collar criminal defense attorney’s dream or what?
Finally, El Paso reported that it expects to meet its November 30 deadline for filing its delayed Form 10-Q’s for the first two quarters of 2004. El Paso remains on my reorganization watch as a likely candidate for a chapter 11 case in the near future, so stay tuned.

In a surprise move, Plano, Texas-based Perot Systems Corp. announced Friday that Ross Perot Jr. had dropped CEO from his title at the Plano, Texas computer services firm and given up the founding family’s operational control of the company.
Peter Altabef, 45, the company’s general counsel, succeeds Mr. Perot as president and chief executive. Mr. Altabef has been a Perot Systems executive for 11 years, since joining the company from the Dallas office of law firm Hughes & Luce LLP, which has long been the Perot family’s law firm. Del Williams, a longtime Perot family friend, succeeds Mr. Altabef as general counsel.
Mr. Perot, 45, will become chairman of the company, succeeding his father, Ross Perot, Sr., 74, who becomes chairman emeritus. The changes in top management allow the Perots to maintain input into the strategic direction of the company while leaving day-to-day management decisions to others.
Mr. Perot Sr. founded Perot Systems in 1988 after leaving his first company, Plano-based Electronic Data Systems Corp, which he sold to General Motors in 1984 in a $2.5 billion deal. Mr. Perot is generally credited with inventing the computer services industry.
Mr. Perot, Jr. is also chairman of the real estate investment company he founded, Hillwood Development Corp. He took the Perot Systems reins from his father in 2000 and earned generally positive performance reviews from on Wall Street.

TXU Energy Co. LLC, Dallas-based TXU Corp.’s subsidiary and the largest electric utility company in Texas, has postponed implementation of its controversial pricing plan that would set electric rates for customers who live outside of North Texas based on their past credit scores.