Rite Aid results soften scandal's blow - Brief Article - Statistical Data Included

HARRISBURG, PA. -- The indictment of four Rite Aid executives (only one of whom still works at the chain) a week before the company's annual shareholder meeting June 25 generated a storm cloud, sweeping aside its promising forecast even though the charges stemmed from a $1.6 billion restatement of Rite Aid's net income three years ago.

Dollar General, a $5.3 billion discounter, weathered a similar storm last year after having to restate $100 million less in profits. However, if Dollar General's experience is any barometer, a resurgent balance sheet should help shield Rite Aid from criticism concerning its financial misstatements going forward. The chain is surely laying the groundwork for sunny days ahead with its current focus on employee relations and customer service.

Year-end results, though not rosy by any standards, still represented a vast improvement for the chain, prompting Bob Miller, chairman and ceo, to speculate it may post a profit by the fourth quarter of 2002, as Rite Aid generated positive cash flow for the first time in three years.

For fiscal 2002, Rite Aid reported a net loss of $761.1 million, or negative $1.68 per diluted share, compared with a loss of $1.4 billion, or $5.15 per diluted share, a year ago. The day before the annual meeting, Rite Aid announced positive first quarter results.

In fact, a hefty tax benefit and an 11.8% boost in same store pharmacy sales helped Rite Aid reverse a first quarter loss. For the quarter ended June 1, the chain posted net income of $2.6 million compared with a loss of $211.1 million last year. Loss per diluted share was 1 cent versus 56 cents in the year-ago period. Loss per diluted share includes a charge for preferred stock dividends that is not reflected in net income.

Excluding noncash charges of $12.3 million, $16.9 million of asset sale gains, $26.7 million of legal charges and the $44 million tax benefit, the net loss was $19.3 million, or 5 cents per share. Analysts surveyed by Thomson Financial/First Call expected a loss before one-time items of 7 cents per share.

Revenues for the quarter totaled $3.9 billion, up 5.8%. Same store sales rose 8.3%, with a front-end same store sales increase totaling 2.7%.

During the meeting, shareholders praised Miller's regime, while sharing disdain for former management. However, following a once-bitten, twice-shy philosophy, shareholders questioned Miller about $5.6 million in loans and payments Rite Aid made to its senior management team to offset taxes owed on restricted stock they received as part of their 2001 compensation.

Such stock often is sold to cover the taxes, but at the time, Miller noted, Rite Aid was negotiating a $1.9 billion refinancing deal. If anyone were to sell their stock then, the action may have been misinterpreted by the creditors. Further, the stock was trading at some $9, significantly higher than what the Rite Aid stock is valued at now.

Executives agreed not to sell the stock to avoid disrupting the refinancing deal. As a result, the executive committee felt it only fair to loan executives the money for taxes due on that stock. The loans have since been satisfied. "No senior employee made one penny on this transaction," Miller said.

Miller recognized David Jessick for his contributions as chief administrative officer and announced Jessick's plans to assume reduced responsibilities to could spend more time with his family in Oregon. John Standley was promoted from cfo to the newly vacated position. Chris Hall, former executive vp of finance, will assume cfo duties.

The three former Rite Aid executives who faced charges of conducting a wide-ranging accounting fraud scheme were Martin Glass, ex-ceo; Franklin Brown, former chief counsel and vice chairman; and Frank Bergonzi, one-time cfo. Eric Sorkin, executive vp for pharmacy services, was indicted on conspiracy to obstruct justice and making false statements to a grand jury Sorkin's inclusion in the indictments caught executives off-guard. "We had no idea he was going to be indicted when he was and suspended him immediately," Miller told shareholders.

The financial misstatements forced Rite Aid to restate its operating income by $2.3 billion, one of the largest such restatements until WorldCom last month restated its earnings by $3.8 billion.

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