Rite Aid Corp., the problem-plagued drugstore chain, is expecting the U.S. Securities and Exchange Commission to launch an investigation into accounting practices that are forcing the company to revise its financial statements and slash past profit by $500 million, a company official said yesterday.
Rite Aid has been contacted by the SEC's enforcement division, said Karen Rugen, Rite Aid's senior vice president of communications.
"There is no formal investigation right now," she said. "But given the size of the restatement -- approximately $500 million -- one can be anticipated."
An SEC official said the agency does not confirm or deny whether it intends to investigate a company.
Separately, in an SEC filing yesterday, the No. 3 U.S. drugstore chain disclosed that it paid $43 million in fees and transaction costs to renegotiate its loans last month and to get a one-year extension on $1.6 billion worth of its debt.
The Camp Hill, Pa.-based Rite Aid also agreed to pay its financial adviser, J. P. Morgan & Co., $2 million a month in service fees for one year and granted it warrants to buy 2.5 million shares of the retailer's stock at $11 per share, according to the filing.
Shares closed yesterday at $8.625, down 31.25 cents each. The shares reached $51 in January.
"I was blown away to see the specifics of what they're paying to refinance," said analyst Eric Bosshard, with Midwest Research in Cleveland.
The company's mounting problems reached a critical point last month, after a review of its financial statements revealed what it labeled as "aggressive" accounting practices. Rite Aid Chairman Martin L. Grass was ousted and the company nearly defaulted on some of its debt, dodging that problem with the rich refinancing deal.
In the SEC filing, Rite Aid reported a smaller-than-projected loss of $15.4 million, or 6 cents a fully diluted share, for its fiscal 2000 second quarter ended Aug. 28. Earlier, it had forecast a second-quarter loss of $67.9 million, or 26 cents per fully diluted share.
Rite Aid said it took a pretax charge of $29.3 million in this year's second quarter related partly to the closing of 57 stores.
Also in the filing, the company revised results for several of its previous quarters:
An $88.7 million loss for its fiscal 1999 second quarter -- ended Aug. 29, 1998 -- becomes a $4.1 million profit.
The $10.4 million net loss for the first half of fiscal 1999 widens to $21.6 million.
The $81 million in net earnings for this fiscal year's first quarter, which ended May 29, drops to $44.4 million.
Analysts weren't shocked by the revisions.
"It's really hard to call anything coming out of Rite Aid a surprise," said analyst John Ransom, who follows Rite Aid for Raymond James Financial Inc. in St. Petersburg, Fla. "It's difficult to peg the core earnings level of the company because of the accounting issues.
"The first-quarter restatement was troubling, especially since the company had pledged that as a squeaky-clean quarter in terms of the accounting. So that's a bit of a surprise."
Bloomberg News contributed to this article.