McKesson ousts top officials

Board discovers HBO deliberately misled it before Jan. acquisition



In one of the drug industry's largest corporate shake-ups, the board of McKesson HBOC Inc. ousted its top executives yesterday, including its chairman, Charles McCall, over accounting irregularities at HBO & Co., a software maker it acquired in January.

The removals come after the McKesson board discovered that discrepancies in HBO's sales, once thought to be routine accounting errors, were a deliberate attempt to inflate the company's revenue.

"These improprieties were intentionally kept from the due diligence process when McKesson acquired HBO," said Alan Seelenfreund of McKesson's board. "I can certainly say that we overpaid substantially for HBO as we know it now."

Investors reacted coolly to yesterday's announcement.

Shares in McKesson, the nation's largest drug wholesaler, dropped $2.375, or 6.6 percent, to $33.6875.

When the San Francisco drug company first announced its accounting troubles in April, the stock plunged 48 percent.

While analysts had expected HBO's woes to prompt several management changes, few expected the carnage to be this severe.

McCall was dismissed and Mark A. Pulido, McKesson's chief executive officer, and Richard H. Hawkins, the chief financial officer, were forced to resign.

McKesson's board also dismissed four executives who worked at its Information Technology Business unit -- what was formerly HBO -- for their involvement in the improprieties.

Among those dismissed were Albert Bergonzi, the unit's president and chief executive officer; David Held, the chief financial officer and controller; Jay Lepine, senior vice president and general counsel, and Michael Smeraski, a senior vice president and head of enterprise sales.

After two months of investigation, what happened at McKesson has only now become clear. The company announced in late April that it would have to restate earnings for its last four quarters after it uncovered $42.2 million in improperly recorded sales at HBO during a routine audit.

The situation then grew worse. McKesson, disclosed last month that it would further revise its earnings.

The company first explained the inflated sales as contracts that contained contingencies, such as board approval, but were recorded as completed sales before the contingency was met.

Seelenfreund said yesterday that several of these account contingencies were placed in separate letters that hid them from accountants during a routine audit.

"It appears now that there were severe problems at HBO," said Michael Krensavage, an analyst with Brown Brothers Harriman. "This wasn't, `Oops, we made a mistake.' It definitely looks like a conspiracy."

Seelenfreund declined to say whether McKesson would push for a criminal investigation.

After watching its stock drop 50.6 percent since April 1, the company's management wanted to reorganize quickly.

The board announced yesterday that John H. Hammergren, 40, previously the company's executive vice president, and David L. Mahoney, formerly the head of McKesson's pharmaceutical services business, would become co-chief executives. Heidi E. Yodowitz, McKesson's controller, will become acting chief financial officer.

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