ERP Implementation Deflates Goodyear’s Earnings

Also: SEC adopts new rules for nominating committees; attention, former Kmart executives: you're being sued; Spitzer, SEC charge PBHG founders with fraud; and CFOs on the move.

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Goodyear Tire & Rubber Co. restated earnings by $84.7 million for periods going back as far as 1998, and announced that the Securities and Exchange Commission has launched an informal inquiry into the company’s revisions.

Last month the company announced that it would restate its earnings back to 1998, primarily due to the implementation of an enterprise resource planning (ERP) system in 1999 and errors in intercompany billing systems.

“During the third quarter of 2003, the company identified additional adjustments arising from the account reconciliations and was advised by its independent accountants, PricewaterhouseCoopers LLP, that these issues resulted in a material weakness in internal controls that required strengthening procedures for account reconciliation, internal reporting and monitoring,” the company said on Thursday.

Goodyear said that the restatements can be broken down into four categories:

Account reconciliations that include items previously not identified or recorded, resulting from the failure to either reconcile accounts or to resolve certain reconciliation issues in a timely manner. The most significant adjustments in this category relate to certain reconciliations for accounts receivable, inventories, fixed assets, intercompany accounts, prepaid expenses, and accounts payables-trade.

These adjustments were associated with the integration of a new ERP system into the company’s accounting processes beginning in 1999, and resulted in a decrease to income before tax of $89.2 million.

Out-of-period adjustments that include items previously identified but deemed to be immaterial and items recorded in the period in which management identified the error or in a subsequent period. These adjustments change the timing of income and expense items that were previously recognized. The result was a decrease to income before tax of $1.4 million.

Chemical Products segment amounts include those identified as a result of a stand-alone audit of a portion of the Chemical Products business segment. In connection with the restatement, the amounts that were previously recorded in 2002 but that related to years prior to 2002 were reflected in the appropriate periods.

The most significant adjustments in this category relate to the timing of the recognition of the actual cost of inventories and the fair-value adjustment of a hedge for natural gas.

Tax adjustments include an additional federal and state valuation allowance of $30.2 million, which was required to be recognized in 2002, the period in which the company previously provided for its valuation adjustments, as a result of the restatement adjustments. The remaining amounts relate to the correction of errors in the computation of deferred tax assets and liabilities.

Goodyear stated that its audit committee commissioned an independent investigation by an outside law firm, which resulted in no finding of fraud or intentional misconduct relating to the account reconciliation issues that led to the restatement. The company added that it is cooperating fully with the SEC and has provided requested information as expeditiously as possible.

SEC Adopts New Rules for Nominating Committees

The Securities and Exchange Commission has adopted new rules intended to improve disclosure about the nominating committee processes of public companies and the ways investors may communicate with company directors.

The new standards require companies to disclose:

  • Whether they have a separate nominating committee, or the reasons why they don’t, and who determines nominees for director.
  • Whether members of the nominating committee satisfy independence requirements.
  • Their process for identifying and evaluating candidates to be nominated as directors.
  • Whether they pay a third party to assist in the process of identifying and evaluating candidates.
  • Minimum qualifications and standards that companies seek for director nominees.
  • Whether they consider candidates for director nominees recommended by shareholders and, if so, the process for considering them.
  • Whether a company has rejected candidates put forward by large, long-term investors or groups of investors.

The new disclosure standards also require companies to disclose significant, new information regarding shareholder communications with directors, including:

  • Whether companies have a process for communications by shareholders to directors, or the reasons why they don’t.
  • The procedures for those communications.
  • Whether such communications are screened and, if so, by what process.
  • The company’s policy regarding director attendance at annual meetings and the number of directors that attended the prior year’s annual meeting.

The new rules go into effect 30 days after their publication in the Federal Register.

Attention, Former Kmart Executives: You’re Being Sued

A civil suit by creditors of embattled retailer Kmart charges that former chief executive Charles Conaway and other former top officers lost the company billions of dollars before Kmart filed the largest-ever retail bankruptcy in January 2002, according to Reuters.

The lawsuit — which alleges that former managers led Kmart into a “financial meltdown” and calls into question expenditures on such items such as luxury cars, nannies, and a $230,000 trip to Las Vegas — seeks the return of any money improperly taken from the company. The suit was filed on Tuesday in Kmart’s home state of Michigan by the Kmart Creditor Trust.

This past spring, the company emerged from bankruptcy, led by hedge fund manager Edward Lampert.

The creditor trust was set up as part of Kmart’s bankruptcy reorganization to try to recoup money for creditors who lost billions of dollars, Reuters reported. A small portion of any money recovered will go to former shareholders, who lost their entire investments when Kmart reorganized, the wire service added.

According to published reports, the lawsuit says Conaway billed Kmart $106,191 for improvements to his private home, including $34,948 for a guard house and $3,590 for a “safe room.” He also reportedly had two company-issued Jaguars, plus a Lincoln Navigator and a driver to take his children to school.

The suit also alleges that executives arranged a $230,000 trip to Las Vegas for 60 employees.

Conaway’s attorney, Scott Lassar, said in a written statement provided to Reuters that the former Kmart CEO “poured his heart and soul into trying to turn around the giant retailer. At all times he acted honorably and in the best interests of Kmart’s employees and shareholders.”

(Read more about the company’s travails in “Kmart: Out of the Box?,” part of our special report on corporate cleanups.)

Spitzer, SEC Charge PBHG Founders with Fraud

New York Attorney General Eliot Spitzer and the Securities and Exchange Commission filed charges against Gary L. Pilgrim, Harold J. Baxter, and Pilgrim Baxter & Associates Ltd., charging them with fraud and breach of fiduciary duty in connection with market timing of the PBHG Funds.

Spitzer filed civil charges, and the SEC filed securities fraud charges, in a Pennsylvania federal court.

The action against the founders of the Pilgrim-Baxter funds and their investment advisory firm marks the first time in the widening mutual fund industry investigation that top fund managers have been charged in connection with illegal trading practices, according to Spitzer’s office.

“The top managers of this mutual fund lost their ethical compass and were unable to distinguish between what was in their shareholders’ interest and their own interest,” Spitzer said in a statement. The complaint alleges that between 1998 and 2001, Pilgrim and Baxter facilitated market timing of mutual fund shares by favored investors, including a hedge fund and a broker-dealer to which they had direct or indirect connections.

Spitzer’s complaint maintains that Pilgrim, his wife, and two other partners established the Appalachian Trails hedge fund, and that Pilgrim and his wife maintained a substantial ownership interest even as the hedge fund was permitted to conduct extensive timed trading of PBHG’s funds, in violation of limitations on short-term trading in the PBHG prospectus.

The complaint also alleges that the individuals facilitated timed trading of PBHG funds by clients of a broker-dealer, Wall Street Discount Corp., which was run by a close friend of Baxter. The individuals provided Wall Street Discount with non-public information about the portfolio holdings of PBHG funds, adds Spitzer’s complaint adds. This information allowed Wall Street Discount customers to conduct additional market timing of PBHG funds and generate significant profits.

The arrangements that were engineered or permitted by Pilgrim and Baxter came while portfolio managers were complaining that market timing was having a negative impact on returns for typical shareholders, Spitzer’s office said.

PBHG officials estimated that market timers held $466 million in assets in the flagship PBHG Growth Fund in late 2001, according to Spitzer. This accounted for more 14 percent of the fund.

Although PBHG moved to restrict market timing of funds — instituting a policy whereby shareholders were allowed only four trades of a mutual fund annually — Pilgrim and Baxter arranged for favored clients to be exempted from these restrictions, asserted Spitzer’s complaint.

Earlier in the week, the SEC settled an enforcement action against Morgan Stanley DW Inc. for failing to provide customers important information relating to their purchases of mutual fund shares.

As part of the settlement, Morgan Stanley will pay $50 million in penalties, all of which will be placed in a Fair Fund for distribution to certain Morgan Stanley customers.

CFOs on the Move

  • AMR Corp. said senior vice president-finance and chief financial officer Jeffrey C. Campbell is leaving for a similar job with McKesson Corp. He has agreed to stay at AMR during a transition period. At McKesson, he will succeed CFO William R. Graber, who will retire April 30.
  • Specialty retailer The Wet Seal Inc. said chief financial officer William B. Langsdorf resigned for personal reasons, effective in January. Langsdorf joined the company as CFO in October 2002. Joseph Deckop, the company’s executive vice president of central planning and allocation, will assume the role of interim chief financial officer until a permanent appointment is made.
  • Phoenix Cos. Inc. said chief investment officer Michael Haylon will take over as chief financial officer at the end of the year. He replaces Coleman Ross, who is stepping down on December 31.

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