Earlier this month, Michael Bechtol said he would leave as Catalina's chief operating officer only four months after being promoted to the post. He had assumed some of the duties handled by David Diamond, who left as chief vision officer in June, though he still consults for the checkout-coupon operator. Last year, Mike McClorey, who had headed the Health Resource Publishing unit whose revenue accounting has come under the most scrutiny, left and the unit has since seen its rapid growth come to a screeching halt.
None of those departures had anything to do with the accounting review or flattening of Catalina's growth, however, said Chairman-CEO Dan Granger in an interview last week. He said Mr. McClorey wanted to retire, Mr. Diamond had a longstanding desire to return to consulting, and Mr. Bechtol and family wanted to return to their California roots.
But another management change, hiring a corporate controller who took a fresh look at the business, led Catalina's senior management to question revenue accounting practices at Health Resources, which in turn led auditor Ernst & Young to question practices in Catalina's core Checkout Coupon business, Mr. Granger said. Ernst & Young replaced Arthur Andersen as Catalina's auditor last year.
The audit covers only timing, not the amount, of revenue and is likely to ultimately involve no more than $7 million in revenue shifts from 2003 to 2004 for the $474.4 million company, Catalina has said.
An executive close to the company said the audit initially focused on Health Resource Publishing extending free months of service to clients after their contracts expired and as renewals were negotiated, leading to questions of whether revenue should be spread over the additional months. Similar practices ultimately could trip up other media and marketing services firms, the executive said.
Mr. Granger described that account as "not far off" but would not elaborate, adding that the Checkout Coupon aspect of the audit deals with a different set of technical issues related to revenue timing.
Beyond accounting issues, Health Resource, which publishes direct-marketing material attached to prescription bags and aimed at getting consumers to switch drugs or comply better with directions for their current brands, has faced deeper problems. Mr. Granger blamed them primarily on client and retailer confusion over implications of the Health Insurance Privacy Protection Act.
Health Resources doesn't run afoul of HIPPA because it targets only based on what prescription is in the bag, not based on patient data, Mr. Granger said. Even before possible restatements, however, Catalina's numbers weren't good for the fiscal year ended March 31. Prior to launching the audit, Catalina reported overall revenue up only 6% after years of double-digit growth.
Unaudited earnings per share fell 4.6% to $1.03. Health Resource, which had been growing 25% or more annually, saw sales decline 9% for the year, with projections of up to another 5% decline for 2004.
Some company observers believe Catalina's growth may be slowing for good, in part because of its heavy reliance on the declining supermarket industry and inability to break into faster-growing mass, club, dollar and national drug chains
But Mr. Granger contends Catalina's days as a growth company aren't over. He believes Health Resource is turning a corner. And he said the core Checkout Coupon business, which grew 9% last year prior to possible restatements, has branched into such new channels as PetsMart and McDonalds restaurants, even if Wal-Mart remains elusive.