Presentation Final


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Presentation Final

  1. 1. Presented by: Antoine Collins, Craig Sears, Hermann Kablan, T. Matthew Coleman
  2. 2. <ul><li>Mission Statement </li></ul><ul><li>To be a successful chain of friendly, neighborhood drugstores. Our knowledgeable, caring associates work together to provide a superior pharmacy experience, and offer everyday products and services that help our valued customers lead healthier, happier lives. </li></ul>
  3. 3. Overview <ul><li>* Rite Aid 3 rd largest drugstore chain in U.S with approximately 4,800 stores in 31 states. </li></ul><ul><li>* Between 1997 and 1999, Grass and his accomplices accused of engineering a plan that forced Rite Aid to restate it’s pre-tax earnings by $2.3 billion. (Largest restatement of earnings in U.S. history) </li></ul><ul><li>* SEC alleged that the 3 “Key Players” were involved in a widespread accounting fraud in each quarter from 1997 – 1999. </li></ul>
  4. 4. Company Timeline <ul><li>Key Dates: 1958: Alex Grass incorporates Rack Rite Distributors, Inc. 1968: The firm makes its first public offering of stock and changes its name to Rite Aid Corporation. 1982: Rite Aid opens its 1,000th store. 1983: Revenues surpass $1 billion. 1995: Perry Drug Stores Inc. is acquired; Martin Grass succeeds his father, Alex Grass , as Rite Aid's chairman and CEO. (ousted his father as Chairman) </li></ul><ul><li>1996: Rite Aid expands to the West Coast through a $2.3 billion deal for Thrifty PayLess Holdings, Inc. 1997: The acquisitions of K&B, Incorporated and Harco, Inc. add more than 300 stores located in the South. 1999: Pharmacy benefits manager PCS Health Systems, Inc. is acquired for $1.5 billion; Rite Aid enters into partnerships with General Nutrition Companies, Inc. and; the company begins restating earnings from previous years because of accounting irregularities; this, coupled with financial difficulties brought on by a huge $6.7 billion debt load, leads to the ouster of Chairman and CEO Martin Grass; Robert G. Miller is brought in from the outside as his successor. 2000: Rite Aid further restates its earnings for 1998 and 1999, revealing an additional $1.06 billion in losses; PCS Health Systems is sold off. 2002: Martin Grass and three other former Rite Aid executives are indicted on federal criminal charges stemming from the accounting scandal. 2003: Mary F. Sammons is named president and CEO; Grass pleads guilty to two criminal counts. </li></ul><ul><li>Source: </li></ul>
  5. 5. Key Players in the Fraud <ul><li>Martin Grass – Former CEO </li></ul><ul><li>*Convicted of Conspiracy to Defraud and Obstruct. </li></ul><ul><li>*Sentenced to 8 years and $500,000 </li></ul><ul><li>Frank M. Bergonzi – Former CFO </li></ul><ul><li>*Convicted of Filing False Financial Statements </li></ul><ul><li>*Sentenced to 28 months and Barred </li></ul><ul><li>Franklin C. Brown – Former RA Chief Counsel and Vice Chairman </li></ul><ul><li>*Convicted of Conspiracy </li></ul><ul><li>*Sentenced to 10 years, $20,000 fines and Barred </li></ul>
  6. 6. SECURITIES AND EXCHANGE COMMISSION <ul><li>Accounting & Auditing Enforcement Release </li></ul><ul><li>No. 1579/ June 21, 2002 </li></ul><ul><li>Accounting Entries Affecting All Quarterly and Annual Financials </li></ul><ul><li>Improper Vendor Deductions - During1998 and 1999, overstated income by </li></ul><ul><li>$8 million and $28 million. </li></ul><ul><li>Stock Appreciation Rights - During1998 and 1999, understated accrued expenses by $22 million and $33 million. </li></ul><ul><li>Accounting Entries Affecting Quarterly Financial Statements Only </li></ul><ul><li>Reduction of Previously-Recorded Expenses - Q2 1998, overstated income by $9 million and reversed during Q3 1998. </li></ul><ul><li>Gross Profit Entries - Q2 1999, overstated income by $100 million. Between 1997- 2000, Gross Profit Entries recorded during Q1-Q3 were reversed </li></ul><ul><li>during Q4. </li></ul>
  7. 7. <ul><li>Accounting Entries Recorded in the Fourth Quarter </li></ul><ul><li>That Affected the FY 1999 Financial Statements </li></ul><ul><li>Undisclosed markdowns - During1999, overstated income by $30 million. </li></ul><ul><li>Vendor Rebates - Dec. 31, 1999, recorded reductions to AP and COGS totaling $42 million. </li></ul><ul><li>Litigation Settlement - During Q4 1999, prematurely recognized a $17 million litigation settlement, thus overstating income. </li></ul><ul><li>&quot;Dead Deal&quot; Expense - Accumulated dead deal expense totaled approximately $10.6 million, thus overstating income. </li></ul><ul><li>Will-Call Payables - Between 1997 and 1999 improper reversal of entries. During 1999, $6.6 million attributable to the will-call payable was repaid to the insurance carriers. </li></ul><ul><li>Inventory Shrink - During 1999, income was overstated by $13.8 million due to improper accounting. </li></ul>
  8. 8. SECURITIES AND EXCHANGE COMMISSION <ul><li>Accounting & Auditing Enforcement Release </li></ul><ul><li>No. 1580/ June 21, 2002 </li></ul><ul><li>Timothy J. Noonan - Director, President, COO (3/95-12/99), CEO (10/15/99-12/5/99) </li></ul><ul><li>Participated in activities that caused Rite Aid to overstate its net income by understating AP and GOGS. </li></ul><ul><li>Was aware that Rite Aid improperly inflated the quantities and dollar value of damaged and outdated products reported to the deduct venders through Up-charging. </li></ul>
  9. 9. SECURITIES AND EXCHANGE COMMISSION <ul><li>Accounting & Auditing Enforcement Release </li></ul><ul><li>No. 1581/ June 21, 2002 </li></ul><ul><li>Martin Grass – CEO Franklin Brown - Vice-Chairman & Chief Legal Officer </li></ul><ul><li>Alleged that the executives conducted a wide-ranging accounting fraud scheme that resulted in the significant inflation of Rite Aid’s net income from May 1997 until Oct. 2000. Cumulative write down of pretax income was $2.3 billion. </li></ul><ul><li>Concealed Related Party Transactions that Benefited Grass. Rite Aid paid a total of $3.6 million for real estate for Grass that was not disclosed. Grass repaid $2.9 million after press reports raised questions about the transactions. </li></ul><ul><li>Grass falsely told a lender that a stock pledge was approved by the finance committee of the board of directors in order to fulfill a condition of getting a loan. Grass arranged for the creation of false minutes documenting the finance committee meeting and the results of the meeting. Grass then signed the false minutes. </li></ul>
  10. 10. SECURITIES AND EXCHANGE COMMISSION <ul><li>Accounting & Auditing Enforcement Release </li></ul><ul><li>No. 1581/ June 21, 2002 </li></ul><ul><li>Frank Bergonzi - CFO </li></ul><ul><li>Alleged that the executives conducted a wide-ranging accounting fraud scheme that resulted in the significant inflation of Rite Aid’s net income from May 1997 until Oct. 2000. Cumulative write down of pretax income was $2.3 billion. </li></ul><ul><li>Specifically charged with instructing Rite Aid’s accounting department to make improper accounting entries in the general ledger that lead to Vender-Related Accounting Irregularities and Other Major Accounting Irregularities. </li></ul><ul><li>Rite Aid was charged with accounting fraud in AAER No. 1579 because of the Accounting Irregularities that were recorded by Bergonzi. </li></ul>
  11. 11. Governance Issues <ul><li>*Tone at the Top was highly unethical </li></ul><ul><li>*Very Aggressive –Risky investment strategy </li></ul><ul><li>*KPMG stated that Rite Aid’s internal controls were severely inadequate. </li></ul><ul><li>*KPMG received significant questionable consulting fees from Rite Aid. </li></ul><ul><li>*Class Action lawsuit against KPMG regarding these consulting fees from Rite Aid. </li></ul>
  12. 12. Rite Aid after the Fraud <ul><li>*In 2004, Rite Aid agreed to pay $7 million to settle allegations that the company had submitted false prescription claims to United States government health insurance programs. </li></ul><ul><li>*At the end of 2007, Rite Aid’s stock price was trading at under $3 per share. </li></ul><ul><li>*At the end of 2008, Rite Aid’s stock was trading for less than $1 per share. </li></ul><ul><li>*In 2008, Rite Aid in danger of being removed from the New York Stock Exchange. </li></ul><ul><li>*In 2009, class action lawsuit filed against Rite Aid Corporation by its salaried California Store Managers for failing to pay overtime and denying them meals and breaks. The action settled for $6.9 million </li></ul>
  13. 13. 20 Year Stock History Comparison
  14. 14. <ul><li>http:// = </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul>References
  15. 15. <ul><li>Questions? </li></ul>