Brian Marshall

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• Brian Marshall
• Lu Zhang
• Roger How
• Vineeta Arole

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Business Profile

• Founded in Scranton, Pennsylvania
• Over 72,000 employees
• Over 3,400 stores in 28 states and D.C.
• Third largest drugstore chain in the U.S.
• 15.8 Billion in sales for Fiscal 2003
• 
  www.riteaid.com, Fortune
  

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Timeline of Rite Aids Undoing

• March 1999 The company's stock plummets 39
  percent after Rite Aid reports that
  fourth-quarter earnings will be well below
  forecasts, beginning a prolonged downward slide.
  Shareholder lawsuits are filed in the following
  weeks.
• The Associated Press

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Timeline of Rite Aids Undoing

• June 1999 Frank Bergonzi resigns as Rite Aid's
  chief financial officer.
  
• October 1999 Grass resigns as chairman and CEO.
  The company says it will restate its earnings for
  the prior three fiscal years downward by about
  500 million.
• The Associated Press

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Timeline of Rite Aids Undoing

• November 1999 KPMG resigns as Rite Aid's
  longtime auditor, saying it can no longer rely on
  information provided by the company. Rite Aid
  discloses it is under investigation by the
  Securities and Exchange Commission
• The Associated Press

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Timeline of Rite Aids Undoing

• December 1999 Robert G. Miller, a turnaround
  specialist from Oregon, is named chairman and
  CEO. Deloitte Touche is hired as Rite Aid's new
  auditor.
• February 2000 Franklin C. Brown resigns as the
  company's general counsel and vice chairman.
  Timothy Noonan resigns as president and chief
  operating officer.
• The Associated Press

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Timeline of Rite Aids Undoing

• July 2000 Rite Aid issues an earnings
  restatement increasing its losses in the late
  1990s by 1.6 billion - the largest in U.S.
  history at the time. The company also announces
  plans to sell PCS Health Systems to a Texas
  company for 1 billion.
• June 2002 Grass, Bergonzi, Brown and Eric
  Sorkin, the company's executive vice president
  for pharmacy services, are charged with various
  crimes in a 37-count indictment handed up by a
  federal grand jury.
• The Associated Press

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Fraud Scheme

• Accounting Experts say that Rite Aid Engaged in
  just about every form of accounting impropriety
  available.
  
• Net Income Overstated by
• 566.2 million in fiscal 1999 492.1 million
  in fiscal 1998 141.7 million in fiscal 1997
  
• Total
• The Wall Street Journal, Financial Executive

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Comparison of Net Income
The Wall Street Journal
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Revenue Overstatement
Scheme
Results

• Recognizing income from ?17 million
• a litigation settlement not
• in legally binding form.
• The Associated Press State Local Wire

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Expense Understatement
Scheme
Results

• Reversing recorded Ex.?100 million
• expenses incurred and for 2nd Qtr 1999
• making improper entries
• COGS and A/P
• Recording supposed ?75 million
• rebates due from two
• vendors twice when
• they were not earned
• The Associated Press State Local Wire

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Expense Understatement
Scheme
Results

• Not recording expenses ?55 million
• from employee stock/cash
• compensations tie to the
• companys stock price
• Inflating deductions against ?36 million
• amounts owed to vendors
• for damaged and outdated
• products
• The Associated Press State Local Wire

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Expense Understatement
Scheme
Results

• Overcharging vendors for ?30 million
• undisclosed markdowns on
• those vendors products.
• Not writing off expenses ?10.6 million
• for store sites considered
• and rejected at the time of
• they were rejected
• The Associated Press State Local Wire

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Expense Understatement
Scheme
Results

• Improperly reducing ?5 million
• accrued shrink expense
• for stores where no
• inventory was done
• The Associated Press State Local Wire

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Balance Sheet Manipulation

• Improperly reversed payable of 6.6 million
• Failed to record 8.8 million in inventory
  shrink
  
• Kept expenses for store sites as assets which
  should be written off
  
• Used improper entries to reduce A/P
• The Associated Press State Local Wire

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Improper Disclosure

• Transfer funds of 2.6 million to a real-estate
  development company owned by CEO Mr.Grass and his
  brother-in-law.
  
• Fabricated minutes of approval for a pledge of
  Rite Aid stock in PCS Health Systems Inc. as
  collateral which in fact did not happen.
  
• The Associated Press State Local Wire, The
  Wall Street Journal
  

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Snapshot of Financial Conditions after Restatement

• Annual Interest Expense
• Debt Capital Leases
• (Debt Capital Leases)/Equity
• The Wall Street Journal

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Throughout November 1998 to March 1999, Rite Aid
concealed from the investing public the fact that
that they have been continuously committing gross
violations of the federal securities law and
misleading the public regarding the company's
business conditions.Let us have a look at the
effects of various information on the stock
prices.On 17th November 1998, Rite Aid announced
the acquisition of Eli Lilly

www.wyca.com
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• On 17th November 1998, Rite Aid announced the
  acquisition of Eli Lilly
  

• On 8th January 1999, Morgan Stanley analyst
  report stated the stock as a strong buy. This
  report was based upon the information given by
  the company.

Yahoo! Finance
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• On 1st February 1999, the Company announced over
  Business Wire that the store sales had risen by
  8.7 in comparison to the same period last year.
  

• On 3rd March 1999, again the company announced
  over the Business Wire that the sales had risen
  by 9.8 over the same period in the previous
  year.

Yahoo! Finance
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• Finally, on 12th March 1999, the company
  announced that its EPS for the 4th quarter of
  0.32 WERE MUCH LESSER THAN Wall Street
  expectations of 0.52

Yahoo! Finance
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• The prices fell dramatically after the news.
• The stock has been under performing ever since.

Yahoo! Finance
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Penalties

• Top executives indicted on up to 37 counts, some
  carrying10-year prison sentences and 1 million
  fines
  
• Charges include conspiracy to defraud,
  securities fraud, making false statements to the
  SEC, tampering with witnesses, and obstruction
  
• CEO Martin Glass plead guilty, up to 8 years in
  prison, 3.5 million fine
  
• CFO Frank Bergonzi plead guilty, up to 5 years
  in prison
  
• 
  Drug Store News, Wall Street Journal
  

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Penalties, contd

• COO Tim Noonan plead guilty, up to 3 years in
  prison, 250K fine (may get probation if he
  cooperates)
  
• General Counsel Franklin Brown found guilty,
  sentence pending but prison is likely
  
• Forced to restate earnings down 1.6 billion
• Civil lawsuits pending for repayment of over 4
  million in bonuses paid to executives
  
• 
  Drug Store News, www.msnbc.com