The troubled Rite Aid Corp. announced the sale of its PCS pharmacy benefit subsidiary Wednesday for about one-third less than the company paid for it only two years ago. The move came a day after Rite Aid disclosed that its profits for 1998 and 1999 had been overstated by more than $1 billion and that it had lost $1.1 billion in the fiscal year ended Feb. 26.
Rite Aid, the drugstore chain that grew rapidly through acquisitions under Martin Grass, its former chief executive, acknowledged that it had overstated profits in numerous ways. It said it was cooperating with investigations by the Securities and Exchange Commission and the Justice Department.
PCS was sold to Advance Paradigm Inc., a competitor, for $1 billion: $675 million in cash, $200 million in a note and $125 million in stock, which will give Rite Aid a 14 percent stake in the combined company.
Though the sale of PCS was viewed in a positive light, Wall Street was surprised by the magnitude of the earnings restatement. Shares of Rite Aid fell 62.5 cents, to $6, in New York Stock Exchange trading Wednesday. Advance Paradigm fell $1.50, to $21.0625, in Nasdaq trading.
Robert G. Miller, a former Kroger Co. executive who was brought in as Rite Aid's chief executive in late December, was upbeat in an interview Wednesday. "We're going to work this out," he said. "We're going to be successful."
But Miller, whose hiring caused Rite Aid shares to leap 41 percent, to $11.625, in one day, said he had no idea then just how bad the situation was. Had he known, he said, "I would not be here."
"But I am here," he went on. "I'm absolutely committed and am sure we can make this a viable company."
Rite Aid remains saddled with large debts taken on during an expansion binge in which the company bought six chains of pharmacies with a total of 1,409 stores while opening 376 new and 727 relocated stores. The restated financial results make it clear that the company was never as profitable as it said it was, and some on Wall Street remain dubious. Rite Aid shares peaked at $51.125 early last year.
But the company has managed to reorganize its debts so that none come due until August 2002, and Miller said that if the company was able to do as well as it expects to do in the next two years, "this company is very refinanceable."
But he shied away from predicting when it would return to profitability.
The company said same-store sales, which exclude sales from new or closed stores, were rising sharply. The company has cut prices on many items to try to overcome its reputation for high prices.
Rite Aid's restatement of earnings began last year, after the company's auditors at KPMG voiced complaints and later resigned, saying they had no faith in the management. Grass was later forced out, as was the chief financial officer.
That led to an investigation by auditors at Arthur Andersen, which produced the revised numbers, which in turn were audited by Deloitte & Touche. They concluded that profits for Rite Aid's fiscal year 1998 were overstated by $492 million and should have shown a net loss of $186 million. For fiscal year 1999, the overstatement was $566 million, producing a net loss of $422 million.
The report of fiscal 2000 results, for the year ended Feb. 26, was the company's first report for that period. It showed a loss of $1.14 billion. For the quarter ended May 27, the company reported a loss of $238 million, or 92 cents a share, compared with a restated net loss of $44 million, or 17 cents a share, in the period a year earlier..
Rite Aid had also planned to restate results for the 1997 fiscal year but concluded that that would be too much trouble. But it did restate its balance sheet in a way that indicated that the profits it reported in 1997 and earlier had been overstated by $554 million.
The company said earnings in 1998 and 1999 were overstated because of a wide variety of factors, among them understatements of operating expenses, like payroll, and overstatements of incentives provided by companies whose products were sold by Rite Aid. Miller declined to say whether he thought fraud was involved, saying he would leave that to the government investigations under way.