Administrative Proceeding File No. 3-9556 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 39737 / March 10, 1998 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 1015 / March 10, 1998 ______________________________ | IN THE MATTER OF | ORDER INSTITUTING PUBLIC | PROCEEDINGS PURSUANT TO JERRY STONE | SECTION 21C OF THE SECURITIES | EXCHANGE ACT OF 1934, MAKING RESPONDENT. | FINDINGS AND IMPOSING A CEASE- | AND-DESIST ORDER ______________________________| I. The Securities and Exchange Commission (Commission) deems it appropriate and in the public interest that public administrative proceedings be instituted pursuant to Section 21C of the Securities Exchange Act of 1934 (Exchange Act) against Jerry Stone (Stone). In anticipation of the institution of these administrative proceedings, Stone has submitted an Offer of Settlement (Offer) which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings, except as to jurisdiction and the facts set forth in Paragraph II(A) below, which he admits, Stone consents to the entry of this Order, its findings and the imposition of sanctions as set forth below. ACCORDINGLY, IT IS ORDERED THAT proceedings pursuant to Section 21C of the Exchange Act be, and they hereby are, instituted. II. On the basis of this Order and the Offer submitted by Stone, the Commission finds that[1]: A. At all times relevant hereto, Perry Drug Stores, Inc. (Perry) was a publicly traded company whose common stock was registered pursuant to Section 12(b) of the Exchange Act. Jerry Stone (Stone), age 66, at all times relevant hereto, was Perry's Treasurer, Senior Vice-President, Chief Financial Officer (CFO) and Principal Financial and Accounting Officer. Stone signed Perry's 1992 Form 10-K which was filed with the Commission pursuant to Section 13(a) of the Exchange Act. B. During the fiscal year ended October 31, 1992 (fiscal year 1992), Perry changed its historical inventory accounting system from the "estimated gross profit method," commonly used by food and drug store chains, to the "specific item cost method." Concurrently, it began installation of a point-of-sale system throughout its 230 store chain to improve inventory management. During the second quarter of fiscal year 1992, Perry's customary cycle inventory counts at small groups of stores disclosed apparent above-normal shrinkage in certain merchandise categories. Shrinkage represents the difference between the physical inventory and the estimated inventory. Under Stone's direction, Perry immediately began an internal investigation and subsequently consulted with retail accounting and risk management experts to determine the cause and whether such shrinkage did, in fact, exist. C. Pending completion of the investigation and receipt of further information which would hopefully reconcile the apparent discrepancies, Perry deferred the adjustment and placed it in a temporary suspense account called the "Store 100" inventory account. By the end of fiscal year 1992, the assigned value of the unverified inventory placed into the Store 100 account was approximately $20 million, which approximated 14% of total inventory at the end of fiscal 1992. As the investigation progressed, Perry eliminated system failure, fraud and theft as reasons for the problem. However, it was unable to determine any reason for the apparent substantial shrink. If Perry had determined to make an adjustment at that time, it would have reported a negative net income of close to $6 million for fiscal 1992. Perry's financial statements filed with its 1992 Form 10-K did not accurately reflect the value of Perry's inventory at that time because it included, as an asset, the unverified inventory. Stone, as Perry's CFO, signed the Form 10-K filed with the Commission. D. In early fiscal 1993, Perry continued to investigate and validate its internal systems and, upon the recommendation of its independent auditors, scheduled a full chain-wide physical inventory of all stores to obtain confirmation and a quantification of the apparent inventory shrinkage. Pending completion and reconciliation of this physical inventory, Perry began to write off a portion of the inventory shortage each quarter throughout the year. Upon completion and reconciliation of the chain-wide physical inventory, the amount of the shortage was confirmed and Perry wrote off the amount of the unverified shortage. E. As discussed above, by signing Perry's 1992 Form 10-K, Stone caused Perry to file with the Commission financial statements which did not accurately reflect the value of Perry's inventory in violation of Section 13(a) of the Exchange Act which requires every issuer of a security registered pursuant to Section 12 of the Exchange Act to file with the Commission such information and documents (and copies thereof) as the Commission shall require to keep reasonably current the information and documents required to be included in or with the registration statement filed pursuant to Section 12, and such annual reports (and such copies thereof), certified if required by the rules and regulations of the Commission by independent certified public accountants, and such quarterly reports (and such copies thereof), as the Commission may prescribe and every issuer of a security registered on a national securities exchange is also required to file a duplicate original of such information, documents, and reports with the exchange. F. As discussed above, by signing Perry's 1992 Form 10-K, Stone caused Perry to file with the Commission financial statements which did not accurately reflect the value of Perry's inventory in violation of Rule 13a-1 promulgated under the Exchange Act which requires every issuer of a security registered pursuant to Section 12 of the Exchange Act to file an annual report on the appropriate form authorized or prescribed therefor for each fiscal year after the last full fiscal year for which financial statements were filed in its registration statement and which requires registrants on Form 8-B to file annual reports for each fiscal year beginning on or after the date as of which the succession occurred and which requires annual reports to be filed within the period specified in the appropriate report form. G. As discussed above, by signing Perry's 1992 Form 10-K, Stone caused Perry to file with the Commission financial statements which did not accurately reflect the value of Perry's inventory in violation of Rule 12b-20 promulgated under the Exchange Act which requires every issuer of a security registered pursuant to Section 12 of the Exchange Act to file such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made not misleading. H. By engaging in the conduct described above, Stone caused Perry's books and records to inaccurately reflect the assets of the company in violation of Section 13(b)(2)(A) of the Exchange Act which requires every issuer which has a class of securities registered pursuant to Section 12 of the Exchange Act to file reports pursuant to Section 15(d) of the Exchange Act and to make and keep books, records, and accounts which, in reasonable detail, accurately reflect the transactions and dispositions of the assets of the issuer. III. In view of the foregoing, it is in the public interest to impose sanctions specified in the Offer of Settlement.[2] ACCORDINGLY, IT IS ORDERED: Pursuant to Section 21C of the Exchange Act, that Stone cease and desist from causing any violation and any future violation of Section 13(a) of the Exchange Act and Rules 13a-1 and 12b-20 promulgated thereunder and Section 13(b)(2)(A) of the Exchange Act. By the Commission. Jonathan G. Katz Secretary **FOOTNOTES** [1]: The findings herein are made pursuant to Stone's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. [2]: In determining to accept the Offer, the Commission considered the cooperation the Respondent afforded the Commission Staff.