In 1967, Lancer Corp. got off the ground by making a single part
for Coca-Cola.
Over the next three decades, the little San Antonio company
continued to work for Coke. Today the beverage company is
responsible for the bulk of Lancer's business.
Now Lancer and its close ties to Coca-Cola are a major part of an
intensifying investigation by the Securities and Exchange
Commission. Both companies said Wednesday that they are subjects of
formal inquiries by the SEC.
The SEC is interested in allegations first made by a former Coke
auditor who charged the company with accounting irregularities
between Coke and Lancer, plus an array of other issues that go well
beyond the equipment supplier.
Some who follow the situation say the outcome of the SEC probes
could be more damaging to Lancer than Coke. Lancer is just one of
thousands of suppliers that do business with Coke. Lancer's revenue
was $139 million in 2002, tiny in comparison to Coke's $19.56
billion.
John Faucher, an analyst with J.P. Morgan, said in a report that
he has "always viewed the implications for Coke in this case as very
minor."
"For Lancer Corp.," Faucher said, "the potential damage could be
more significant given the company's smaller size."
The SEC's precise areas of interest remain unclear when it comes
to Coke and Lancer, as the agency doesn't comment on ongoing
investigations. But this much is known: Coke previously acknowledged
accounting problems in some of the company's dealings with the
beverage dispenser supplier.
The issues were first made public in lawsuits filed by former
Coke employee Matthew Whitley, who was fired by the company during a
massive reorganization last year. His lawsuits were filed in May and
settled in October.
In disputing his firing, Whitley raised the specter of several
problems, including wrongdoing in the problem-plagued development of
iFountain, a new type of machine that was meant to produce
better-quality fountain drinks.
The big project was in Lancer's hands. Coke helped in the
development and financing of iFountain and, when sales were slow to
restaurants and other fountain customers, wanted to improve results.
Whitley claimed Coke directed Lancer to "secretly overcharge"
for standard fountain dispensers, thus allowing lower prices on
iFountain machines.
When this and many other claims surfaced, the audit committee of
Coke's board of directors ordered an investigation.
The probe concluded that Coke should take write-downs on assets
that were "capitalized at an amount that was in excess of fair
value."
Those write-downs included costs for activities related to Lancer
and other suppliers. The total was $9 million, although $3 million
of that was unrelated to Lancer and no specific amount of the
remaining $6 million was attributed to the supplier.
But Coke disputed many of Whitley's claims, including some about
Lancer. Coke said there was "no evidence indicating that the
fountain division improperly shifted $4 million of capital funding
to the iFountain project in 2002," as alleged by Whitley.
Lancer has not weighed in on Whitley's assertions and has yet to
release results of its own investigation, which started in June.
The delay has had a ripple effect. Most significantly, Lancer
hasn't been able to release audited financial results for the second
and third quarters of 2003.
And the investigation has been costly. In December, Lancer said
it had spent $1.3 million on its internal probe in the third quarter
and would have "significant" additional costs in the fourth quarter.
This kind of money -- plus possible adjustments to fix any
improper accounting methods -- could have a major impact on Lancer,
which made $4 million in profit in 2002.
The news of the SEC's heightened interest also is a reminder that
Coke's troubles remain far from resolved when it comes to Whitley's
allegations.
