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Rite Aid CEO resigns
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October 18, 1999: 8:02 p.m. ET
Troubled drugstore gets $300 million infusion from former board member
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NEW YORK (CNNfn) - Martin L. Grass resigned Monday as chairman and chief executive officer of Rite Aid Corp., as the company announced it would have to restate its fiscal results for the last three years - lowering them by an approximate total of $500 million.
The cash-strapped drugstore chain also announced it had received a $300 million equity infusion from investment banking firm Leonard Green & Partners, and had been granted a one-year extension by its agent banks on roughly $2.7 billion in loans, including $1.3 billion due later this month.
Timothy Noonan, 57, Rite Aid's current president and chief operating officer, will assume Grass' responsibilities as chief executive on an interim basis, the company said.
The announcements came after the financial markets had closed for the day.
Financial hardships continue
Company officials declined to expand on why Grass, 45, had resigned but the Camp Hill, Pa.-based Rite Aid (RAD), the nation's third-largest drug vendor, has fallen on hard financial times of late.
Rite Aid reported a "preliminary" net loss of $67.9 million for its fiscal second quarter last week and said it would have to restate earlier results because of accounting practices related to some stores it has closed. The company's stock fell to a new 52-week low on that news.
Monday, Rite Aid disclosed those restatements would total $500 million pre-tax for its 1999, 1998 and 1997 fiscal years. Rite Aid said it also plans to restate prior years as well, but a company spokeswoman said those adjustments would total "significantly less" than the $500 million adjustment for the last three years.
The company does not expect that its second quarter results would "show any material differences from the preliminary results" announced last week.
Green returns
Grass also resigned from the company's board Monday, which in turn created a new executive committee composed of four outside directors.
Those members include Gerald Tsai, chairman and CEO of Delta Life Corp., Preston Robert Tisch, co-chairman and co-CEO of Loews Corp., Leonard Stern, Chairman and CEO of The Hartz Group, and Nancy Lieberman, a partner with Skadden, Arps, Slate, Meagher and Flom.
Following the equity infusion, Leonard Green, founding director of Leonard Green & Partners and a former Rite Aid board member, and another person designated by his company will join the board and executive committee and assist in the search for a full-time CEO and continuing search for a chief financial officer.
Grass recently told analysts the company was looking to unload the PCS Health Systems drug store chain it acquired only eight months ago for $1.5 billion in a bid to raise some extra cash and reduce its debt.
With a $1.3 billion credit facility due on Oct. 29, however, Rite Aid instead turned to Green, who was a major shareholder in Thrifty Payless drugstore chain purchased by Rite Aid in 1996 -- an acquisition that gave Rite Aid its first national presence.
Green's investment will be exchanged for new Rite Aid preferred stock having an 8 percent pay-in-kind dividend that is convertible into common stock at $11 per share. If converted, Leonard Green would own 9.7 percent of Rite Aid's current outstanding shares.
Debt payment postponed one year
In addition to the equity infusion, Rite Aid said its agent banks have agreed to recommend extending the bank's $1.3 billion lending facility due Oct. 29 for one year.
The banks also agreed to amend the financial covenants on all the banks loans to "be consistent with the company's current business plan." Company officials would not elaborate on what those amendments will include.
In addition to the $1.3 billion facility, Rite Aid also has a $1 billion revolving credit facility due in 2001 and $400 million in other loans.
"Our investment reflects the confidence we have in Rite Aid's core business and our belief that the combination of our investment and the amendments to the banking facilities and will provide the company with the financial resources it needs to rebound and prosper," Green said in a statement.
Both announcements came after the markets closed Monday. Rite Aid's (RAD) stock closed up 1/16 to 9-5/8 in regular trading.
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Rite Aid Corp.
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