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Bitter Pill? Bristol-Myers Squibb Off by $900 Million

Company says ''inappropriate accounting,'' inventory incentives with wholesalers to blame. Elsewhere: Gemstar to restate, while KPMG settles suits over Rite Aid and Oxford. Plus: why did Ernie Smith leave US Foodservices?
Stephen Taub, CFO.com | US
March 11, 2003

Yesterday, Bristol-Myers Squibb Co. announced it overstated sales by about $2.5 billion over a three-year period. The inflated revenues were a result of deals with two large U.S. drug wholesalers. The rejiggering will force Bristol-Myers to restate earnings downward by $900 million.

The company's management said the restatement also reflects the correction of accounting policies to conform to generally accepted accounting principles (GAAP) and certain other adjustments to correct errors made in the application of GAAP, including certain revisions of "inappropriate accounting."

The pharmaceutical giant said it reduced net sales by more than $1.4 billion for 2001, $678 million for 2000, and $376 million for 1999. The company increased sales for the six months ended June 30, 2002 by $653 million.

It also reduced net earnings from continuing operations by $376 million, $206 million and $331 million in the years ended 2001, 2000 and 1999, while net earnings from continuing operations were increased by $201 million in the six months ended June 30, 2002.

Bristol-Myers said it experienced a substantial buildup of wholesaler inventories in its U.S. pharmaceuticals business over several years, mostly due to sales incentives offered to its wholesalers. These incentives were generally offered towards the end of a quarter to convince wholesalers to purchase enough products to help Bristol-Myers meet its quarterly sales projections, the company's management conceded.

Management also noted that in April 2002, it disclosed this substantial buildup, and undertook a plan to work down these wholesaler inventory levels. As CFO.com reported at the time, the pharmaceuticals giant also announced that CFO Frederick Schiff, a 20-year veteran at the company, was leaving his post.

In June, the drug company named Andrew Bonfield its new CFO. Bonfield joined Bristol-Myers from oil company BG Group, but he spent the bulk of career at British drugmaker SmithKline Beecham.

Three months after Bonfield's arrival, Bristol-Myers indicated it would need to restate its sales and earnings to correct errors in timing of revenue recognition for certain sales to certain wholesalers. That decision was apparently triggered by advice from Bristol-Myers' independent auditors, PricewaterhouseCoopers LLP.

Since then, the company's management said it undertook an analysis of the drug-maker's transactions and incentive practices. The result? Bristol-Myer's determined that certain incentivized transactions with certain wholesalers should be accounted for under the consignment model, rather than recognizing revenue for such transactions upon shipment.

The company also decided to conform historical accounting policies to GAAP and correct errors it believed were not material to its financial statements. In addition, Bristol-Myers restaffed its controller staff after the company's accounting problems came to light.

Gemstar Also Restates
Gemstar-TV Guide International, Inc. said on Monday it plans to further restate its results as a result of a previously disclosed review of its accounting policies.

The company said revenues will be reduced by $110.9 million, income before income taxes and extraordinary items will be reduced by $36.3 million, and EBITDA will be reduced by $45.2 million for fiscal periods dating back to 2000.

The company had warned in an SEC filing back in November 14, 2002, that it would restate its financials after hiring a new independent accounting firm to audit its statements.

On January 23, the company announced that as a result of the review by the independent accounting firm, it intended to restate its financial statements. The restatements would reflect that $8.2 million in previously reported revenues in the Interactive Platform Sector will not be recognized, $26.8 million in previously reported licensing revenues will be reclassified, and $47 million in previously reported revenues will be recognized over the remaining terms of the licensing agreement.

Report: US FoodServices CFO Knew
Move over, Enron, WorldCom and Adelphia.

Suddenly, the biggest accounting scandal these days is taking place on the other side of the Atlantic.

It seems that veteran Ahold executive Ernie Smith left the company just three months after being named chief financial officer of US Foodservice. The reason for Smith's sudden departure? Allegedly, Smith was uncomfortable with the division's accounting standards, according to one published report that cited a former executive.

The accounting practices at US Foodservice, which Ahold acquired in 2000, led the supermarket giant last month to announce that it overstated earnings by $500 million.

Cees van der Hoeven, Ahold chief executive officer, and Michael Meurs, chief financial officer, resigned after the revelation. (To find out what Meurs said about the company's acquisition strategy in a CFO interview conducted in 2001, read "What Meurs Told CFO.")

Interestingly, the ft.com Monday reported that according to a letter written late last week by Jim Miller, US Foodservice's chief executive, to a group of large customers, the resignations were unrelated to troubles at US Foodservice. "Their resignations had nothing to do with our company...[they were] the result of events that occurred outside the United States," Miller reportedly said.


However, Ahold said it could not "stand by" the letter, according to the British newspaper's web site.

The ft.com reported that Ahold on Monday said it had never disclosed the specific reasons behind the resignations. "Mr. Miller's business is under investigation . . . [Ahold] cannot stand by what [Miller] said to the largest customers of US Foodservice," Ahold said, according to the web site.

Miller also reportedly distanced himself from the accounting problem, noting that he felt dismay that "a few trusted employees" had worked outside accepted accounting standards.

Also on Monday, Meurs resigned from the supervisory board of Van der Hoop, the Dutch stock broker, for "personal reasons," according to ft.com. The position was subject to screening by the Dutch Central Bank, which refused to comment on whether it had played a role in his decision, the ft.com added.

KPMG to Pay $200 Million Related to Audits
KPMG LLP on Monday said it will pony up $200 million to settle lawsuits stemming from its audits of Rite Aid Corp. and Oxford Health Plans Inc.

The Big Four accounting firm said it would pay $125 million to settle class action lawsuits related to its audit of Rite Aid, which in the late 1990s overstated earnings by $1.6 billion.

It also will pay $75 million to settle suits stemming from its audit of Oxford, which was accused by regulators of failing to restate second quarter results in 1997 to correct erroneously recorded revenue.

"The settlements allow us to focus the firm on its primary missions of ensuring quality audits for our clients and helping to restore investor confidence in corporate America and the capital markets," KPMG said in a statement.

Last June former CFO Frank Bergonzi and two other former Rite Aid executives were charged with fraud by the Securities and Exchange Commission stemming from the scandal.

KPMG, in a statement, said the indictments "affirm our position that Rite Aid represents a clear example of an auditing firm being victimized by company management."

McKesson CFO to Retire
William R. Graber, who helped McKesson Corp. recover from a major accounting scandal, said he will retire as senior vice president, chief financial officer of the $50 billion in revenues company at the end of its next fiscal year, in April 2004.

Graber, who turns 60 next month, joined McKesson in February 2000 shortly after the company was rocked by an accounting scandal at HBO & Co., which merged with McKesson in early 1999 to form McKesson HBOC Corp.

When the alleged fraud was first disclosed in April 1999, McKesson HBO shares nearly halved, from about $65 to $34.

The SEC has already brought fraud and other charges against nine former HBO and McKesson HBOC officers and employees for their roles in the fraud.

"Bill joined McKesson three years ago, when the company faced significant challenges across the business," said John H. Hammergren, chairman and chief executive officer, in a statement. "Bill played a key role in improving our financial processes, strengthening our balance sheet and building stronger relationships with investors, ratings agencies and lenders. He also has led the effort to ensure that we are meeting our obligations under new accounting and financial reforms."

Prior to joining McKesson, Graber was vice president, CFO, at Mead Corp. from 1993 until he retired late in 1999. He joined Mead in 1991 and prior to becoming CFO served as controller and treasurer.

From 1965 to 1991, he was at General Electric, where he held a wide range of financial management positions.

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