ATLANTA — The Coca-Cola Co. said today that it has reached a settlement with the Securities and Exchange Commission over its business practices in Japan. Separately, company officials said the Justice Department had closed its two-year-old investigation into allegations of accounting irregularities without taking any action.
"We are pleased that today's settlement with the Securities and Exchange Commission, and the decision by the Department of Justice to close its investigation, mark an end to the U.S. government inquiries initiated in 2003," said Neville Isdell, chairman and chief executive officer.
In a memo to employees, Mr. Isdell said that under the settlement with the S.E.C., the company agreed to maintain certain measures that were implemented prior to or during the last two years and to undertake additional remedial actions in the areas of corporate compliance and disclosure. The settlement agreement provides that Coca-Cola neither admits nor denies the S.E.C.’s factual findings and does not involve a monetary fine or penalty.
"I am gratified that the S.E.C. has acknowledged the fact that the company cooperated with its investigation, which was the primary directive provided by management and the board throughout this process," Mr. Isdell said. "We continue to expect all of our operations around the world to adhere to the highest ethical standards.
"The measures identified in this settlement and those we have taken over the past few years are an important step forward in ensuring our systems continually improve. That is an obligation we all share that requires constant vigilance."
In its order, the S.E.C. found that, at or near the end of each reporting period between 1997 and 1999, Coca-Cola implemented an undisclosed "channel stuffing" practice in Japan known as "gallon pushing" for the purpose of pulling sales forward into a current period. To accomplish gallon pushing's purpose, Japanese bottlers were offered extended credit terms to induce them to purchase quantities of beverage concentrate the bottlers otherwise would not have purchased until a following period.
As Coca-Cola typically sells gallons of concentrate to its bottlers corresponding to its bottlers' sales of finished products to retailers, typically bottlers' concentrate inventory levels increase approximately in proportion to their sales of finished products to retailers.
However, as a result of gallon pushing, from 1997 to 1999 Coca-Cola's Japanese bottlers' concentrate inventory levels increased at a rate more than five times greater than that of finished product sales to retailers, the S.E.C. said. Gallon pushing pulled forward sales from subsequent periods and made it likely that Coca-Cola's bottlers would purchase less concentrate in subsequent periods.
This practice contributed approximately 1c to 2c to Coca-Cola's quarterly earnings per share and was the difference in eight out of the 12 quarters from 1997 through 1999 between Coca-Cola meeting and missing analysts' consensus or modified consensus earnings estimates, the S.E.C. said. Despite the impact to current earnings and the likely impact to future earnings, Coca-Cola failed to disclose its gallon pushing practice in its periodic reports.
Katherine Addleman, associate director of enforcement for the Commission's Atlanta District Office, said, "In addition, Coca-Cola made misstatements in a January 2000 Form 8-K concerning a subsequent inventory reduction and in doing so continued to conceal the impact of prior end of period practices and further mislead investors."
Although Coca-Cola's accounting treatment for sales made in connection with gallon pushing was found to be without issue, the S.E.C. still found that Coca-Cola's failure to disclose the impact of gallon pushing on current and future earnings, as well as the false statements and omissions within the Form 8-K, violated the antifraud and periodic reporting requirements of the federal securities laws.
Ms. Addleman commented, "Prior to and during the investigation, Coca-Cola took laudable and substantial steps to enhance and strengthen its disclosure review process to prevent similar failures from occurring in the future."