The indictment of three former Rite Aid Corp. executives last week marked the close of a significant chapter in the company's history, but the drugstore chain still carries the burden of their legacy - about $4 billion in debt.
The chain is still not out of the hole dug by former Chief Executive Officer Martin L. Grass and the other indicted executives, several analysts said yesterday.
"It remains a very dicey situation [at Rite Aid]," said Sheldon Grodsky, director of research at Grodsky Associates Inc. in South Orange, N.J. "The company's results are improving, but the balance sheet is very, very weak. ... They have very little equity and they have a lot of debt."
Rite Aid wiped away $1.6 billion in profits from its books - the largest restatement ever in corporate history - after accounting irregularities came to light in 1999.
Soon after, several top executives retired or resigned, including Grass, 47; Franklin C. Brown, 74, the vice chairman and chief counsel; and Franklyn M. Bergonzi, 57, the former chief financial officer.
All three were indicted Friday in U.S. District Court in Harrisburg, Pa., charged in a scheme that inflated the chain's earnings and personally enriched the former executives.
The three men also face a civil lawsuit filed by the Securities and Exchange Commission. Former Rite Aid President Timothy J. Noonan, 60, who cooperated with investigators, intends to plead guilty to a criminal charge of failing to report a felony.
Rite Aid's current management did not escape indictment. Eric S. Sorkin, 53, head of the pharmacy services division, was indicted on charges of conspiring to obstruct justice and lying to a grand jury. Rite Aid suspended him from his job.
Rite Aid announced Friday that it entered into a settlement with the Securities and Exchange Commission in which it neither admitted nor denied wrongdoing and agreed to abide by securities laws. The SEC did not seek any fines from the company.
"There is a little bit of a sigh of relief that the SEC didn't come after the company," said Eric Bosshard, research director for Midwest Research in Cleveland.
The indictments are "almost like a separate issue at this point," said David Rodgers, a research analyst with McDonald Investments in Cleveland who focuses on drugstores. "In the end, slowly, the company's getting better and that's the biggest attestation you can give to the management."
The company racked up billions in debt in the mid-1990s as Grass acquired other drugstore chains in a quest to become a bigger national player.
Today, Rite Aid remains the nation's third-largest drugstore company, with roughly 3,500 stores and annual sales of $15 billion. But only in the past fiscal quarter that ended in February did Rite Aid make enough money to cover the interest on its massive debt, said Bosshard of Midwest Research.
Since the new management came on board, Rite Aid has lowered its debt from $6.6 billion to approximately $4 billion, said a Rite Aid spokeswoman.
The company completed a refinancing in 2000 that brought in $600 million in working capital, settled a shareholder lawsuit for $195 million and drastically curtailed the previous management's growth plans.
Shares of Rite Aid closed yesterday at $2.55, down 14 cents from Friday. The company plans to announce financial results for the first quarter today.
Sun staff writer Julie Bell contributed to this article.