Rite Aid Says SEC Has Begun Investigating the Drugstore Chain's Finances

Rite Aid also disclosed in a filing with the SEC that KPMG resigned as the retailer's auditor last week because they were unable to continue to rely on management's representations.
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Rite Aid

(RAD) - Get Report

said Thursday that the

Securities and Exchange Commission

has begun a formal investigation of the company and its past financial statements.

The ailing company hinted earlier this week that an investigation "may be anticipated."

At the same time, Rite Aid, the No. 3 drug retailer, disclosed in a filing with the SEC that

KPMG

resigned as the drugstore chain's auditor last week "because they were unable to continue to rely on management's representations."

Rite Aid had expected KPMG to re-audit its past financial statements connected to a $500 million restatement of its earnings over the last three years. KPMG left abruptly, saying it would be "not be available" to fulfill that duty, Rite Aid said in a statement.

"We know that our change in auditors and the investigation by the SEC have raised concerns," said Leonard Green, who was

appointed chairman of Rite Aid last week. "We understand those concerns and we certainly know that this company not only has to substantially improve its performance but also needs to enhance its financial controls and discipline. We have been working diligently on this front and will intensify our efforts going forward."

Rite Aid shares lost 1/8, or 2%, to 6 7/8 ahead of the expected release. The stock has fallen about 86% this year, losing $11.2 billion in market value.

Rite Aid has been in turmoil for more than a month. Last week, the company canceled a conference call with analysts and cautioned investors "not to rely on earnings guidance provided at its analyst meeting on Oct. 11, 1999," by Martin Grass, then its chairman and chief executive. Grass was ousted a week after the Oct. 11 projections.

Green said Thursday that the company hoped to conclude its search for a permanent chief executive and a chief financial officer by year's end. Timothy Noonan is currently serving as interim chief executive.

Also last week, the Camp Hill, Pa.-based company said it was attempting to sell hundreds of its West Coast stores, although not all of them. Analysts said a flurry of buyouts under Glass left them scrambling for cash to meet a debt-refinancing deadline on Feb. 15, 2000.

Green, who became chairman on Monday, heads the investment firm

Leonard Green & Partners

. He helped rescue the

Thrifty

drugstore chain, merging it with

Payless

.

ThriftyPayless

was acquired by Rite Aid in 1997.

In October, an affiliate of Green's firm invested $300 million in Rite Aid convertible preferred stock, and he joined the company's board.

The chief financial office has been empty since this summer when long-time officer Frank Bergonzi retired.

In the statement released Thursday, Green asserted that "Rite Aid is one of the top three drugstore chains in the U.S. and is fundamentally a very solid company."

Also Thursday, a class-action lawsuit was filed in federal district court in Philadelphia against Rite Aid on behalf of its corporate bond holders. The suit, brought by the law offices of Steven E. Cauley, based in Little Rock, Ark., contends that the company "and certain of its officers and directors violated the federal securities laws by making misrepresentations about Rite Aid's financial condition and filing false financial statements with the Securities and Exchange Commission." The law firm did not return calls for comment.