<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From ___ To ___
COMMISSION FILE NUMBER 1-5742
RITE AID CORPORATION
--------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-1614034
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
30 HUNTER LANE, CAMP HILL, PENNSYLVANIA 17011
-----------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(717) 761-2633
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
--------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
[_] YES [X] NO
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
The registrant had 258,927,199 shares of its $1.00 par value Common Stock
outstanding as of October 29, 1999.
<PAGE>
--------------------------------------------
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
RITE AID CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (SEE NOTE A):
<S> <C> <C>
Condensed Consolidated Balance Sheets August 28, 1999 and February 27, 1999 2
Condensed Consolidated Statements of Operations
Thirteen Weeks Ended August 28, 1999 and August 29, 1998 3
Condensed Consolidated Statements of Operations
Twenty-Six Weeks Ended August 28, 1999 and August 29, 1998 4
Condensed Consolidated Statements of Cash Flows
Twenty-Six Weeks Ended August 28, 1999 and August 29, 1998 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27
ITEM 5. OTHER INFORMATION 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28
</TABLE>
NOTE A:
As discussed in Note 2 of the condensed consolidated financial statements
of Rite Aid Corporation (the "company") included herein, the company announced
on October 11, 1999 that it had determined to restate previously reported
interim and annual financial statements. In part as a result of comments of the
staff of the Securities and Exchange Commission (SEC), this restatement changes
the manner in which the company has accounted for the possible impairment of
store assets and the related exit liability for the ongoing lease obligations of
closed stores. The restatement also corrects various errors the company
identified as a result of a review of its accounting practices with respect to
historical financial statements. The company believes that the balance sheet as
of August 28, 1999 and the results for the thirteen and twenty-six weeks ended
August 28, 1999 and the amounts for the comparable prior periods presented
herein are in accordance with generally accepted accounting principles. The
company has not completed its review of the prior fiscal years, and the
company's financial data for the three fiscal years ended February 27, 1999 has
not yet been reaudited. In addition, the SEC review of the company's financial
reporting is continuing. Although the company believes that the financial
statements included in this report include all necessary corrections as a result
of the company's review, additional adjustments may be identified as the company
completes its review, considers any additional SEC comments and prepares an
amendment to its annual report on Form 10-K for the fiscal year ended February
27, 1999. The amended Form 10-K will contain restated and reaudited financial
statements for the three fiscal years ended February 27, 1999.
1
<PAGE>
--------------------------------------------
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
August 28, 1999 Feb. 27, 1999
------------------------ -------------------------
( As Restated)
CURRENT ASSETS
<S> <C> <C>
Cash $ 98,573 $ 82,949
Accounts and notes receivable 743,515 729,853
Inventories 3,106,888 2,740,293
Prepaid expenses and other current assets 73,902 74,953
----------- ----------
TOTAL CURRENT ASSETS 4,022,878 3,628,048
----------- ----------
Property, plant and equipment 3,851,129 3,584,534
Accumulated depreciation 751,776 725,423
----------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET 3,099,353 2,859,111
----------- ----------
Intangible assets 3,274,620 3,307,040
----------- ----------
Other assets 319,586 192,496
----------- ----------
TOTAL ASSETS $10,716,437 $9,986,695
=========== ==========
CURRENT LIABILITIES
Short-term debt and current maturities of long-term debt $ 20,841 $1,550,211
Accounts payable 1,642,542 1,555,918
Other current liabilities 634,479 751,995
----------- ----------
TOTAL CURRENT LIABILITIES 2,297,862 3,858,124
----------- ----------
Long-term debt and capital lease obligations, less current maturities 5,412,770 3,304,240
Other noncurrent liabilities 537,983 332,432
Redeemable preferred stock 29,278 23,559
STOCKHOLDERS' EQUITY
Preferred stock, par value $1 per share - -
Common stock, par value $1 per share 258,926 258,862
Additional paid-in capital 1,370,109 1,369,019
Retained earnings 809,509 840,459
Accumulated other comprehensive income
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 2,438,544 2,468,340
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,716,437 $9,986,695
=========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
--------------------------------------------
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
ITEM 1. FINANCIAL STATEMENTS: (CONTINUED)
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands Except Per Share Amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
August 28, 1999 August 29, 1998
----------------------- --------------------------
<S> <C> <C>
(As Restated)
Sales $ 3,506,129 $ 3,011,029
Costs and expenses:
Costs of goods sold including occupancy costs 2,705,261 2,238,666
Selling, general and administrative expenses 726,916 648,923
Goodwill amortization expense 19,024 9,212
Store closing and other charges 29,343 63,604
Interest expense 84,895 42,575
------------ ------------
3,565,439 3,002,980
------------ ------------
Income (loss) before income taxes (59,310) 8.049
Income tax expense (benefit) (43,908) 3,961
------------ ------------
Net income (loss) $ (15,402) $ 4,088
============ ============
Basic earnings (loss) per share $ (.06) $ .02
============ ============
Diluted earnings (loss) per share $ (.06) $ .02
============ ============
Cash dividends paid per common share $ .1150 $ .1075
============ ============
Basic weighted average shares 258,910,000 258,409,000
============ ============
Diluted weighted average shares 258,910,000 264,302,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
--------------------------------------------
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
ITEM 1. FINANCIAL STATEMENTS: (CONTINUED)
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands Except Per Share Amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Twenty-Six Twenty-Six
Weeks Ended Weeks Ended
August 28, 1999 August 29, 1998
---------------------- --------------------------
<S> <C> <C>
( As Restated)
Sales $ 7,130,629 $ 6,043,710
Costs and expenses:
Costs of goods sold including occupancy costs 5,368,580 4,518,270
Selling, general and administrative expenses 1,409,778 1,328,766
Goodwill amortization expense 38,276 18,391
Store closing and other charges 42,439 137,904
Interest expense 159,909 83,228
------------ ------------
7,018,982 6,086,559
------------ ------------
Income (loss) before income taxes 111,647 (42,849)
Income tax expense (benefit) 82,619 (21,260)
------------ ------------
Net income (loss) $ 29,028 $ ( 21,589)
============ ============
Basic earnings (loss) per share $ .11 $ (.08)
============ ============
Diluted earnings (loss) per share $ .11 $ (.08)
============ ============
Cash dividends paid per common share $ .2300 $ .2150
============ ============
Basic weighted average shares 258,895,000 258,340,000
============ ============
Diluted weighted average shares 262,171,000 258,340,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
--------------------------------------------
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
ITEM 1. FINANCIAL STATEMENTS: (CONTINUED)
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Twenty-Six Twenty-Six
Weeks Ended Weeks Ended
August 28, 1999 August 29, 1998
------------------------ ------------------------
<S> <C> <C>
(As Restated)
OPERATING ACTIVITIES
Income (loss) before income taxes 111,647 (42,849)
Depreciation, amortization and other non-cash charges 222,012 208,496
Store closing and other charges 42,439 146,436
Other (58,238) (24,316)
Changes in operating assets and liabilities (411,213) (281,991)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (93,353) 5,776
--------- ---------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (478,099) (554,719)
Purchases of businesses, net of cash acquired (32,480) -
Intangible assets acquired (17,881) (37,290)
Proceeds from dispositions 113,530 230,705
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (414,930) (361,304)
--------- ---------
FINANCING ACTIVITIES
Proceeds from long-term financing 300,000 -
Net proceeds of commercial paper borrowings 286,802 496,960
Cash dividends paid (59,931) (55,794)
Other financing activities, net (2,964) (20,980)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 523,907 420,186
--------- ---------
INCREASE IN CASH 15,624 64,658
CASH AT BEGINNING OF PERIOD 82,949 90,968
--------- ---------
CASH AT END OF PERIOD $ 98,573 $ 155,626
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
--------------------------------------------
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
ITEM 1. FINANCIAL STATEMENTS: (CONTINUED)
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. -- BASIS OF PRESENTATION
The accompanying financial information does not include all disclosures
required under generally accepted accounting principles because certain note
information included in the company's annual report has not been included in
this report; however, such information reflects all adjustments (consisting
primarily of normal occurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods. The results of operations for the thirteen and twenty-six week periods
ended August 28, 1999 are not necessarily indicative of the results to be
expected for the full year. See also Note A of the Index to this report on Form
10-Q.
NOTE 2. -- RESTATEMENTS
Restatement of the financial statements for the thirteen and twenty-six
weeks ended, August 29, 1998 and thirteen weeks ended May 29, 1999 and the
balance sheet as of February 27, 1999 has involved a complex process of
assessing and changing previously employed accounting practices, and making
judgments and estimates inherent in the application of those accounting
practices. The significant accounting policies employed in the restated
financial statements are described in Note 3. As a result of the restatement of
the financial statements, the company's preliminary anticipated net loss of
$67.9 for the thirteen weeks ended August 28, 1999 in the company's press
release dated October 11, 1999 was adjusted to a net loss of $15.4 million
reported herein.
The pro-forma impact of the restatement adjustments, identified by the
company to date, on the previously filed financial statements included herein is
summarized below:
6
<PAGE>
--------------------------------------------
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
As of February
27, 1999
(Unaudited)
(dollars in
thousands)
As Reported Adjustments As Restated
------------ ----------------- -----------
<S> <C> <C> <C>
CURRENT ASSETS
Cash $ 82,949 $ 82,949
Accounts and notes receivable 749,606 (18,400) ( g ) ( j ) 729,853
(1,353) ( n )
Inventories 2,893,143 (151,300) ( a ) 2,740,293
(1,550) ( n )
Prepaid expenses and other current assets 76,653 (1,700) ( n ) 74,953
-------------- --------------
TOTAL CURRENT ASSETS 3,802,351 3,628,048
-------------- --------------
Property, plant and equipment 3,830,576 (234,600) ( b ) ( l ) 3,584,534
(10,300) ( h )
(1,142) ( n )
Accumulated depreciation 962,523 (237,100) ( b ) 725,423
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, NET 2,868,053 2,859,111
-------------- --------------
Intangible assets 3,547,463 (104,100) ( b ) ( l ) 3,307,040
(169,600) ( j )
37,200 ( o )
(3,923) ( n )
Other assets 203,874 (11,378) ( n ) 192,496
-------------- --------------
TOTAL ASSETS $10,421,741 $9,986,695
============== ==============
CURRENT LIABILITIES
Short-term debt and current maturities of long-term debt $ 1,550,211 $1,550,211
Accounts payable 1,455,516 75,600 ( d ) 1,555,918
13,500 ( i )
11,302 ( n )
Other current liabilities 684,751 14,700 ( c ) ( j ) ( l ) 751,995
99,523 ( e )
19,000 ( f )
(18,300) ( j )
20,000 ( m)
15,721 ( n )
37,200 ( o )
(120,600) ( p )
-------------- --------------
TOTAL CURRENT LIABILITIES $ 3,690,478 $3,858,124
-------------- --------------
Long-term debt and capital leases, less current maturities 3,304,240 3,304,240
Other noncurrent liabilities 449,732 32,700 ( c ) 332,432
(3,300) ( n )
(146,700) ( p )
Redeemable preferred stock 23,559 23,559
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock 258,862 258,862
Additional paid-in capital 1,360,219 8,800 ( n ) 1,369,019
Retained earnings 1,334,651 (494,192) ( q ) 840,459
Accumulated other comprehensive income - -
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 2,953,732 2,468,340
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,421,741 $9,986,695
============== ==============
</TABLE>
7
<PAGE>
--------------------------------------------
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Thirteen
Weeks Ended
August 29, 1998
(dollars in
thousands)
As Reported Adjustments As Restated
------------ ------------------ -----------
<S> <C> <C> <C> <C>
Sales $3,011,029 $3,011,029
Costs of goods sold including occupancy costs 2,210,666 $ (22,200) ( a ) 2,238,666
3,300 ( i )
49,400 ( k )
(2,500) ( n )
Selling, general and administrative expenses 631,223 (7,800) ( b ) 648,923
8,200 ( c )
14,400 ( e )
800 ( f )
(400) ( g )
1,800 ( h )
600 ( j )
100 ( n )
Goodwill amortization expense 10,212 (1,000) ( j ) 9,212
Store closing and other charges 264,204 36,400 ( b ) 63,604
27,200 ( c )
(264,200) ( l )
Interest expense 42,575 42,575
------------- --------------
Income (loss) before income taxes (147,851) 8,049
Income tax expense (benefit) (59,139) 63,100 ( p ) 3,961
------------- --------------
Net income (loss) $ (88,712) $ 4,088
============= ==============
</TABLE>
8
<PAGE>
--------------------------------------------
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Twenty-six Weeks Ended August 29, 1998
(Unaudited)
(dollars in thousands)
As Reported Adjustments As Restated
----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Sales $6,043,710 $6,043,710
Costs of goods sold including occupancy costs 4,412,870 $ 4,900 ( a ) 4,518,270
6,500 ( I )
96,500 ( k )
(2,500) ( n )
Selling, general and administrative expenses 1,280,517 (14,200) ( b ) 1,328,766
24,100 ( c )
25,500 ( e )
15,200 ( f )
(800) ( g )
2,600 ( h )
1,800 ( j )
(5,951) ( n )
Goodwill amortization expense 20,291 (1,900) ( j ) 18,391
Store closing and other charges 264,204 62,500 ( b ) 137,904
75,400 ( c )
(264,200) ( l )
Interest expense 83,228 83,228
------------------ -------------------
Loss before income taxes (17,400) (42,849)
Income tax benefit (6,960) (14,300) ( p ) (21,260)
------------------ -------------------
Net loss $ (10,440) $ (21,589)
================== ===================
</TABLE>
9
<PAGE>
--------------------------------------------
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Thirteen Weeks Ended May 29, 1999
(Unaudited)
(dollars in thousands)
As Reported Adjustments As Restated
---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Sales $3,624,500 $3,624,500
Costs of goods sold including occupancy costs 2,663,531 $ (2,960) ( d ) 2,663,319
3,300 ( i )
(552) ( n )
Selling, general and administrative expenses 719,765 (11,700) ( b ) 682,862
(400) ( c )
(32,087) ( e )
5,400 ( f )
(300) ( g )
4,300 ( h )
600 ( j )
(2,716) ( n )
Goodwill amortization expense 20,252 (1,000) ( j ) 19,252
Store closing and other charges 6,896 6,400 ( b ) 13,096
(200) ( c )
Interest expense 72,914 2,100 ( n ) 75,014
------------------ -------------------
Income before income taxes 141,142 170,957
Income tax expense 60,127 66,400 ( p ) 126,527
------------------ -------------------
Net income $ 81,015 $ 44,430
================== ===================
</TABLE>
10
<PAGE>
--------------------------------------------
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
(a) Correction of accounting errors related to the impact of retail
markdowns on the calculation of store inventories and cost of goods
sold.
(b) Change in the method of analyzing impairment of long-lived assets including
assets associated with the 1999 strategic exit plan, from a geographic
market grouping to a store-by-store approach. Under the store-by-store
approach, long-lived assets related to open stores are assessed for
impairment based on cash flow criteria. The adjustment includes the write
off of certain assets attributable to closed stores, which had not
previously been written off.
(c) Adjustment of estimated exit liability for noncancelable lease obligations
and ancillary costs based on the appropriate application of accounting
principles regarding remaining net lease obligations for closed stores,
including stores associated with the 1999 strategic exit plan.
(d) Correction of accounting error related to certain manufacturer rebates
recorded in the wrong period.
(e) Correction of accounting for certain employee compensation costs
(principally performance related bonus plans) that historically had been
reported on a cash basis. For plans where the bonus is a function of the
trading price of the company's common stock, a reduction of expenses occurs
when stock price declines cause reversal of previously accrued expenses.
(f) Adjustment as of estimated liabilities and costs associated with self-
insurance programs. The adjustment includes the elimination of the use of a
discount factor applied in computing certain liabilities, where the timing
of the payments are uncertain.
(g) Write off of net unreconciled difference between the accounts receivable
trial balance and the general ledger balance.
(h) Write off of capitalized costs related to abandoned real estate acquisition
and development projects at the time the projects were abandoned.
(i) Write off of uncollectible vendor credits (including amounts related to
returned goods and claims where the company's business relationship with a
specific vendor had ceased).
(j) Correction of purchase accounting entries recorded in connection with the
acquisition of Thrifty Payless Holdings, Inc. (TPI), K&B Inc. and Harco
Inc., resulting in a reduction of goodwill. Income statements are impacted
by certain of these corrections.
(k) Reversal of quarterly entries originally recorded to adjust interim gross
profits.
(l) Reversal of strategic exit plan charge originally recorded in the second
quarter of fiscal 1999. The original accounting was reversed due to the
company's reassessment of its ability to develop an exit plan with the
required level of specificity given the nature and extent of changes
subsequently made to the original plan.
(m) Recording of an allowance for reductions of accounts payable related to
inventory returned to the vendor but for which full credit will not be
received.
(n) Other corrections, including amounts recorded for percentage rent accruals,
amortization of deferred financing costs and tax benefits related to the
exercise of nonqualified stock options.
(o) Correction of certain balance sheet reclassifications.
(p) Tax effect of the income statement adjustments and cumulative impact on the
applicable tax accounts recorded in the balance sheet.
(q) Cumulative after-tax effect on retained earnings of all income statement
adjustments through the balance sheet
In addition, the following summarizes the impact of the restatement on earnings
per share.
<TABLE>
<CAPTION>
Periods Ended August 29, 1998
13 Weeks 26 Weeks
Basic earnings (loss) per share:
<S> <C> <C>
As previously reported $(0.34) $(0.04)
Adjustments 0.36 (0.04)
------ ------
As restated $ 0.02 $(0.08)
====== ======
Diluted earnings (loss) per share:
As previously reported $(0.34) $(0.04)
Adjustments 0.36 (0.04)
------ ------
As restated $ 0.02 $(0.08)
====== ======
</TABLE>
11
<PAGE>
--------------------------------------------
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Rite Aid Corporation operates retail drugstores in the eastern, southern
and western states and the District of Columbia. In addition, the company is
engaged, through its subsidiary, PCS Health Systems, Inc (PCS), in pharmacy
benefits management and other managed health care services and mail order
pharmacy.
Fiscal Year
The company's fiscal year ends on the Saturday closest to February 29 or
March 1.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the
accounts of the company and all of its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Included in "other assets" is the company's 22% ownership interest in
drugstore.com (See Note 9). This investment is accounted for under the equity
method of accounting.
Reclassifications
Certain reclassifications have been made to the fiscal 1999 condensed
consolidated financial statements to conform to the classifications of the
fiscal 2000 condensed consolidated financial statements.
Revenue Recognition
Revenues are recognized at the point of sale for retail and mail order sales.
Service revenues and processing fees are generally recognized as services are
performed. The recognition of certain revenue and expenses associated with the
company's investment in drugstore.com is discussed in Note 9.
Cash
Cash consists of cash on hand and highly liquid investments that are readily
converted to known amounts of cash and that have maturities of three months or
less when purchased.
Accounts Receivable
During November 1997, the company and certain of its subsidiaries entered
into an agreement to sell, on an ongoing basis, receivables having a fair market
value of up to $300,000,000 to a wholly-owned bankruptcy-remote special purpose
funding subsidiary (the "funding subsidiary"). The funding subsidiary is a
distinct legal entity that engages in no trade or business, in order to make
remote the possibility that it would enter bankruptcy or other receivership.
The company and certain subsidiaries transfer accounts receivable (principally
amounts owed by third party prescription payers) to the funding subsidiary. The
funding subsidiary has sold and, subject to certain conditions, may from time to
time sell an undivided fractional ownership interest in the receivables to a
multi-seller receivables securitization company, for which there are no
repurchase agreements. The accounts receivable transferred to the funding
subsidiary and sold as an undivided fractional ownership interest to the
securitization company have been treated as sold for financial report purposes.
Under the terms of the agreement, new receivables interests are transferred
to the funding subsidiary as previously sold accounts receivable are collected.
Total proceeds from sale of receivables for the twenty-six weeks ended August
28, 1999 were approximately $300,000,000 as compared to $263,000,000 for the
comparable period ended August 29, 1998. Since the securitized receivables were
for prescription sales and most prescription sales result in third party
receivables, the company considers related costs (including transaction costs) a
component of the cost of the prescription. Accordingly, related costs of
approximately $7,800,000 and $7,700,000 are included as a component of cost of
goods sold for the twenty-six weeks ended August 28, 1999 and August 29, 1998,
respectively.
The company reports its retained interest in the pool of receivables at
estimated net realizable value. An allowance for estimated uncollectable
amounts is provided for both receivables not included in the pool and for its
retained interest in the pool. The company's accounts receivable from retail
drugstores are due primarily from third party providers (e.g., insurance
companies and governmental agencies) under third party payment plans. Since
payments due from third party payers are sensitive to payment criteria changes
and legislative actions, the allowance is reviewed frequently and adjusted for
accounts deemed uncollectible. Accounts receivable for PCS are primarily claims
reimbursement, claims processing fees and manufacturer program receivables.
12
<PAGE>
--------------------------------------------
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
Inventories
Inventories are stated at the lower of cost or market using the last-in,
first-out (LIFO) flow of costs assumption for substantially all inventories. At
August 28, 1999 and February 27, 1999, respectively, inventories were
$238,700,000, and $220,340,000 lower than amounts that would have been reported
using the first-in, first-out (FIFO) method. If inventory is liquidated in
connection with the closing of one or more stores, the inventory is also reduced
to the lower of cost or market in connection with closing the store.
Liquidation costs are reflected as a component of cost of goods sold.
Property, Plant and Equipment
Depreciation and amortization generally are computed on a straight-line basis
over the following estimated lives: buildings, 30 to 45 years; leasehold
improvements, term of lease or useful lives of assets, whichever is shorter; and
equipment, 3 to 15 years. Accelerated methods are used for income tax purposes.
Additionally, assets and the related accumulated depreciation recorded under
capital leases are included under the caption Property, Plant and Equipment.
Interest costs for the development of certain long-term assets are capitalized
and amortized over the related assets' estimated useful lives.
Intangible Assets
Goodwill is generally being amortized on a straight-line basis over 40
years. There is a risk that the determination that goodwill will benefit the
company for no less than 40 years will prove to have been incorrect and that the
company will be amortizing this goodwill over too long a period. If the company
has done this, earnings reports for the periods immediately following the
acquisition will be overstated, and, in later years, the company will be
burdened with a continuing charge against earnings without a corresponding
benefit to income. If the company later determines that it is no longer
receiving the benefit of this goodwill, the company may have to write off or
write down remaining goodwill, resulting in a reduction in earnings for the
period in which such a determination is made. The company can give no assurance
that its initial determinations will prove to be correct.
The company reviews intangibles for impairment at the individual store level
whenever events or changes in circumstances indicate the carrying amount of the
asset may not be recoverable. Goodwill is allocated to the stores based upon
their earnings before taxes.
Debt financing costs are deferred and amortized, using the interest method,
over the term of the related debt. Lease acquisition costs incurred principally
for acquisition of store locations generally are amortized over the term of the
leases on a straight-line basis. Patient prescription file costs are amortized
over their estimated useful lives.
Impairment of Long-Lived Assets
In accordance with SFAS No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of", the company analyzes
undiscounted cash flows at the store level, the lowest level at which individual
cash flows can be identified, for purposes of assessing and measuring impairment
of long-lived assets. Based on an analysis of those cash flows, an assessment
of impairment is made each quarter. If a determination is made that the store
is impaired, the carrying values of the related assets (generally, store
fixtures, leasehold improvements, and intangibles, including allocated goodwill)
are reduced to estimated fair value. In the restated financial statements, the
company recognized impairment charges of $23,761,000 and $66,476,000 for the
twenty-six weeks ended August 28, 1999 and August 29, 1998, respectively.
Closed Store Exit Liabilities
The company records closed store exit liabilities on a store-by-store basis
when it determines a store closing is reasonably probable. The store closing
exit liability is estimated by discounting future noncancelable lease
obligations, noncancelable ancillary costs associated with the property
(referred to as "common area maintenance" or "CAM") and prospective sublease
income. The company discounts future noncancelable lease obligations and
related sublease income using an interest rate commensurate with its credit
standing for ten year corporate debt securities to determine the present value
of the exit liability. The company reevaluates exit liabilities quarterly and
updates assumptions and discount rates as considered necessary in the
circumstances.
Internal-Use Software
The costs of internal-use software are capitalized based on estimated
direct incremental development costs and direct external application development
costs.
Stock Based Compensation Arrangements
The company continues to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the company's stock at the date of the grant
over the
13
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RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
amount an employee must pay to acquire the stock. Compensation cost for stock
appreciation rights and similar variable rate plans is recorded based on the
quoted market price of the company's stock at the end of each reporting period.
Preopening Expenses
Noncapital expenses incurred prior to the opening of a new store or
associated with a remodeled store, or related to the opening of a distribution
facility, are charged against earnings when incurred as administrative and
general expenses.
Advertising
Advertising costs are expensed as incurred.
Insurance
The company is self-insured with respect to certain general liability and
workers' compensation claims that occurred prior to January 1, 1997. With
respect to claims occurring subsequent to December 31, 1996 for the company's
East Coast operations, substantially all general liability and workers'
compensation claims are insured through a fixed cost premium-based policy. The
company maintained self-insurance through December 31, 1998 for its West Coast
operations. Effective January 1, 1999, substantially all general liability and
workers' compensation claims are covered through a fixed cost premium based
policy. The company continues to maintain self-insurance for all covered
employee medical claims. Liabilities related to self-insured workers'
compensation are generally discounted at the risk free rate.
Excess insurance coverage is maintained for the company's self-insured
workers' compensation and general liability claims exceeding $250,000. As of
January 1, 1999, all claims for workers' compensation and general liability are
insured. The company generally uses actuarial studies as the basis for
estimating its self insured costs and liabilities.
Income Taxes
Deferred tax assets and liabilities are recognized for any future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect of a change in tax rates on deferred tax
assets and liabilities is recognized in income in the period that includes the
enactment date.
Earnings per Share
The company presents both basic and diluted earnings per share on the face
of the statement of operations. Basic earnings per share excludes dilution and
is computed by dividing income available to common stockholders by the weighted-
average number of common shares outstanding for the period. Diluted earnings
per share reflects potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. All share and per share data reflect a two-for-one stock split
distributed to shareholders on February 2, 1998.
Comprehensive Income
Comprehensive income is the change in equity during a period from
transactions and other events and circumstances from non-owner sources.
Excluding net earnings, the company's source of other comprehensive income is
from a minimum pension liability adjustment.
NOTE 4 - ACCOUNTING ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires judgments, estimates and assumptions that affect
reported amounts of assets, liabilities, revenues, and expenses. The company
reviews its accounting estimates each reporting period and adjusts those
estimates based on information reasonably available at that time. Most
estimates require assessing the impact of events and circumstances in the future
and therefore always are subject to a degree of uncertainty. Actual results
can and do differ from estimates, and those differences can be material.
Summarized below are certain financial statement items involving accounting
estimates and related sources of uncertainty that are significant to the company
and where it is at least reasonably possible that events in the near term will
change the particular estimates.
[_] Inventory and related cost of sales (see also Note 3) - Estimated
gross profit margins; competitive or other market factors impacting
future markdowns of goods on hand; realization of claims for goods
returned to vendors; adjustments to value
14
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RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
inventory on a LIFO basis; goods that are stolen, or are damaged or
otherwise unsaleable; and ultimate realization on any inventories
to be liquidated in connection with store or distribution center
closings and relocations;
[_] Property, plant, and equipment and related depreciation and
amortization (see also Note 3) - Estimated fair value of assets
considered impaired as well as estimates of the fair value of
certain assets; particularly store related assets, the useful life
and any salvage value of assets being depreciated or amortized;
[_] Goodwill - (see Note 3);
[_] Intangible assets other than goodwill and related amortization (see
also Note 3). Estimated ultimate recovery of assets considered
impaired; the useful life of intangible assets;
[_] Liabilities and costs associated with closed store leaseholds (see
also Notes 3 and 8) - Estimated lease termination costs, subtenant
income and contractual costs associated with leases;
[_] Estimated liabilities and costs associated with exiting certain
activities (see also Notes 3 and 8) - Estimated employee
termination, shut down and other costs;
[_] Employee compensation (see also Note 3) - Estimated costs and
liabilities associated with performance measures or changes in the
market price of the company's common stock;
[_] Acquisition of businesses (see also Notes 3 and 9) - Estimated fair
values of assets acquired and liabilities assumed; and
[_] Occupancy costs - Estimated costs and liabilities associated with
leased property where amounts ultimately to be paid are partly
dependent on sales at that location ("percentage rents").
NOTE 5 -- EARNINGS (LOSS) PER SHARE
Following is a reconciliation of the numerator and denominator of the basic
earnings (loss) per share computation to the numerator and denominator of the
diluted earnings (loss) per share computation:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Thirteen Thirteen Twenty-six Twenty-six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
(In thousands of dollars) August 28, 1999 August 29, 1998 August 28, 1999 August 29, 1998
(As Restated) (As Restated)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $(15,402) $ 4,088 $ 29,028 $(21,589)
Cumulative preferred stock dividends 566 -- 1,131 --
-------- -------- -------- --------
Net income (loss) available for common
stockholders $(15,968) $ 4,088 $ 27,897 $(21,589)
Interest expense assuming dilution -- -- -- --
-------- -------- -------- --------
Net income (loss) available for common
stockholders assuming dilution $(15,968) $ 4,088 $ 27,897 $(21,589)
Basic weighted average shares 258,910 258,409 258,895 258,340
Options and other equivalents assuming -- -- -- --
dilution 5,893 3276
Diluted weighted average shares 258,910 264,302 262,171 258,340
======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 6 - COMPREHENSIVE INCOME (LOSS)
Comprehensive loss for the thirteen weeks ended August 28, 1999 was
$15,402,000 compared to income of $4,088,000 last year. Comprehensive income for
the twenty-six weeks ended August 28, 1999 was $29,028,000 compared to a loss of
$21,589,000 for the comparable period in the prior year.
NOTE 7 - BUSINESS SEGMENTS
15
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RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
The company operates in two business segments. The company's business
segments are organized according to the products and services offered to its
customers. The company's dominant business segment is the operation of retail
drugstores across the United States, with pharmacy services forming the core of
the business. In addition, through its acquisition of PCS in the fourth
quarter of fiscal 1999, the company operates the PBM segment which offers
pharmacy benefit management, mail-order pharmacy services, marketing
prescription plans and the sale of other managed health care services to
employers, health plans and their members, and government-sponsored employee
benefit programs. Prior to its acquisition of PCS, the company operated one
business segment, the Retail Drug segment.
The following table presents selected financial information for the Retail
Drug and PBM business segments. The measure of segment profit or loss shown for
each segment is pre-tax operating profit excluding interest expense, store
closing charges and the effects of LIFO. In the company's annual report on
Form 10-K, the measure of profit shown was net income, excluding the effects of
LIFO.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Retail PBM Store Closing LIFO Consolidated
Segment Segment Charges Charge Totals
(In thousands of dollars)
- --------------------------------------------------------------------------------------------------------
THIRTEEN WEEKS ENDED:
August 28, 1999:
- ---------------
<S> <C> <C> <C> <C> <C>
Net sales $3,196,144 $ 309,985 $ -- $ -- $ 3,506,129
Operating profit excluding store
closing charges and LIFO $ 51,514 $ 12,852 $ (29,343) $ (9,438) $ 25,585
August 29, 1998:
- ----------------
Net sales $3,011,029 $ -- $ -- $ -- $ 3,011,029
Operating profit excluding store
closing charges and LIFO $ 120,128 $ -- $ (63,604) $ (5,900) $ 50,624
TWENTY-SIX WEEKS ENDED:
August 28, 1999:
- ----------------
Net sales $6,560,588 $ 570,041 $ -- $ -- $ 7,130,629
Operating profit excluding store
closing charges and LIFO $ 288,796 $ 43,606 $ (42,439) $(18,407) $ 271,556
Total assets $8,496,804 $2,219,633 $ -- $ -- $10,716,437
August 29, 1998:
- ----------------
Net sales $6,043,710 $ -- $ -- $ -- $ 6,043,710
Operating profit excluding store
closing charges and LIFO $ 192,383 $ -- $(137,904) $(14,100) $ 40,379
Total assets $7,524,633 $ -- $ -- $ -- $ 7,524,633
</TABLE>
NOTE 8 -- STORE CLOSING AND OTHER COSTS
The company has closed or relocated a significant number of stores during
the three fiscal years ended February 27, 1999 and through the 26 weeks ended
August 28, 1999. The company routinely evaluates whether certain of its stores
should be closed, relocated, consolidated with other stores or renovated. In
the second quarter of fiscal 1999 the company adopted a plan to close a large
number of stores as part of a strategic consolidation exit plan addressing
duplicate stores in the same market. The 1999 strategic store consolidation
exit plan did not eliminate the need for the company to periodically evaluate
whether other stores should be closed. Decisions to close stores may be made
because of projected cash flows of the store or the termination of a lease,
because the location has become undesirable, or for other reasons. As discussed
in Note 2, the restated financial statements reflect an exit liability for all
noncancelable lease obligations, including future ancillary lease costs, for all
non-operating store locations. The exit liability, which is recorded when the
store closing is reasonably probable, is determined by discounting future
noncancelable lease payments and ancillary costs associated with non-operating
locations, net of discounted future (actual or estimated) sublease income. As
of August 28, 1999, the discount rate was approximately 7.9% and the average
remaining life of the underlying leases was approximately 4.75 years. The
following table summarizes the exit liability for the 26 weeks ended August 28,
1999 and August 29, 1998, respectively:
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RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
<TABLE>
<CAPTION>
(In Thousands of Dollars)
Twenty-six Twenty-six
Weeks Ended Weeks Ended
August 28,1999 August 29,1998
-------------- --------------
<S> <C> <C>
Exit liability at beginning of period (as restated) $182,244 $122,629
Provision for future exit costs, net (1) 8,221 37,259
Net exit costs paid (14,550) (11,760)
Acquisition - Edgehill Drugs, Inc. (2) 1,842 -
-------- --------
Exit liability at end of first quarter 177,757 148,128
Provision for future exit costs, net (1) 9,603 28,349
Net exit costs paid (11,826) (10,665)
-------- --------
Exit liability at end of period $175,534 $165,812
======== ========
</TABLE>
(1) The quarterly provision includes the estimated exit liability for stores
closed in the quarter, changes in the estimates of lease costs and
subtenant income for stores closed in prior periods, and accretion of the
discount based on the aggregate exit liability at the beginning of the
quarter. The provision includes the closure of 111 and 189 stores during
the twenty-six weeks ended August 28, 1999 and August 29, 1998
respectively.
(2) This increase in the exit liability arose from the acquisition accounting
for the purchase of Edgehill Drugs, Inc. (Note 9).
NOTE 9 - ACQUISITIONS
In the first quarter of fiscal 2000, the company purchased twenty-five east
coast drug stores from Edgehill Drugs, Inc. for approximately $25 million of
cash. The purchase was not significant to operations.
In June 1999, the company signed a ten-year agreement with drugstore.com
that resulted in the company obtaining an approximate 22.0% ownership in
drugstore.com, a public company as of July 1999, for a cash investment of
$8,100,000 as well as other marketing commitments and obligations. The company
recorded this investment at the estimated fair value of the shares received
(approximately $186,700,000) which was included in "other assets" as of August
28, 1999. The company accounts for its interest in drugstore.com using the
equity method of accounting. The company also recorded deferred revenue in the
amount of $178,600,000, which will be accreted to income over the term of the
agreement as earned. The difference between the value of the company's
investment and the underlying equity of drugstore.com (approximately
$95,800,000) is being amortized as an expense over a seven-year period. A
deferred tax asset and income taxes payable were recorded in the amount of
$36,000,000. Because the financial statements of drugstore.com are reported on
a calendar basis, the company includes its proportionate share of
drugstore.com's net income or loss one quarter in arrears. Accordingly, no
income or loss was reported in the results of operations for the period ended
August 28, 1999. Results for the company's third fiscal quarter will include
the company's proportionate share of the results of drugstore.com for the
thirteen weeks ended October 3, 1999. On October 20, 1999 drugstore.com
announced it had incurred a net loss of approximately $42 million for the
quarter ended October 3, 1999.
NOTE 10- INDEBTEDNESS AND CREDIT AGREEMENTS
Following is a summary of indebtedness at August 28, 1999 and February 27, 1999:
<TABLE>
<CAPTION>
(In Thousands of Dollars)
August 28, February 27,
1999 1999
- ---------------------------------------------------------------------------------------------------------------------
In thousands of dollars
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper, 5.6% and 5.0% weighted average rates at August 28, 1999 and February 27, $2,069,927 $ 1,783,125
1999
5.25% convertible subordinated notes due 2002 649,986 649,991
6.70% notes due 2001 350,000 350,000
7.125% notes due 2007 350,000 350,000
7.70% notes due 2027 300,000 300,000
Note payable, LIBOR +3.5% due 2000 300,000 -
5.50% fixed-rate senior notes due 2000 200,000 200,000
6.00% dealer remarketable securities due 2003 200,000 200,000
6.00% fixed-rate senior notes due 2005 200,000 200,000
7.625% senior notes due 2005 200,000 200,000
6.875% senior debentures due 2013 200,000 200,000
6.125% fixed-rate senior notes due 2008 150,000 150,000
6.875% fixed-rate senior notes due 2028 150,000 150,000
Obligations under capital leases 79,787 87,010
Other 33,911 34,325
- ---------------------------------------------------------------------------------------------------------------------
5,433,611 4,854,451
Short-term debt and current maturities of long-term debt (20,841) (1,550,211)
- ---------------------------------------------------------------------------------------------------------------------
Long-term debt less current maturities $5,412,770 $ 3,304,240
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
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RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
As of February 27, 1999, the company had a $1,000,000,000 unsecured
revolving credit facility, expiring in July 2001, to support its commercial
paper program and a $1,300,000,000 unsecured revolving credit facility, expiring
in October 1999, to support commercial paper borrowings to complete the
acquisition of PCS. In September 1999, the company determined it was in default
of certain financial covenants in the credit agreements. On October 27, 1999,
the company's banks agreed to extend and restructure $2,700,000,000 of its
outstanding credit facilities. As a result, the due dates of the $1,300,000,000
of bank debt scheduled to mature on October 29, 1999 and an additional
$300,000,000 of bank debt that was due on demand have been extended to November
1, 2000. The company's $1,000,000,000 credit facility, which was also
restructured, terminates on July 19, 2001. Accordingly, these borrowings are
reflected as noncurrent liabilities in the condensed balance sheet as of August
28, 1999. Borrowings under the credit facilities carry higher interest costs
than commercial paper. The interest rates under the company's credit facilities
are based on prime or LIBOR that adjusts with changes to the company's credit
rating. At the company's current credit ratings, borrowings under the
$1,300,000,000 facility are at LIBOR plus 3.0% and borrowings under the
$1,000,000,000 facility and the $300,000,000 bank note are at LIBOR plus 3.5%.
In connection with obtaining waivers of compliance with certain of the
covenants in September and October 1999 and the subsequent extensions and
restructuring described above, the company paid fees and transaction costs of
approximately $43,000,000. Additionally, the company issued three year warrants
to purchase 2,500,000 shares of common stock at $11 per share and has agreed to
a one year financial services advisory contract for a monthly fee of $2,000,000.
As of October 29, 1999, the company had outstanding $602,000,000 of
commercial paper and $1,833,000,000 borrowed under its credit facilities. As
commercial paper matures, the company expects to borrow necessary replacement
funds directly under the $1,000,000,000 credit facility. The company must
maintain certain financial covenants as defined in the extension agreement. The
credit facilities prohibit the payment of cash dividends or the repurchase of
the company's capital stock and restrict the incurrence of additional
indebtedness, sales leaseback transactions, and certain other corporate
activities.
The company has announced its intention to and is actively seeking to sell
approximately 300 of its larger format drug stores which are located in the
western United States. The company also has engaged an investment bank to sell
all or a portion of the company's interest in PCS. All net proceeds realized
from any asset sale must be applied to reduce the outstanding balance of its
credit facilities; amounts so applied may not be reborrowed. In the event the
company does not generate $500,000,000 of net proceeds from asset sales by
February 15, 2000, the interest rate applicable to its credit facilities will be
increased by 50 basis points.
NOTE 11- COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
On March 12, 1999 the company announced that the preliminary estimate for
fully diluted earnings per share for the fourth quarter of fiscal 1999 would be
approximately $0.30 to $0.32 as compared to the then existing First Call
analyst's consensus estimates of $0.52 per share. Subsequent to the March 12
announcement, several purported class action lawsuits were commenced in the
United States District Court for the Eastern District of Pennsylvania against
the company, Martin Grass, former Chairman and Chief Executive Officer and a
director, Timothy Noonan, interim Chief Executive Officer, President, Chief
Operating Officer and a director, Franklin Brown, Vice Chairman and a director,
and Frank Bergonzi, former Senior Executive Vice President and Chief Financial
and Accounting Officer. The plaintiffs in these suits allege that the company
failed to make prompt public disclosure of matters mentioned in its March 12
announcement that affected results for the fourth quarter and seek to recover
damages on behalf of all purchasers of the company's common stock between
December 14, 1998 and March 11, 1999. On April 18, 1999, the Court approved a
stipulation among counsel that, among other things, provided for consolidation
of these suits. Thereafter, the court granted the plaintiffs leave to amend the
complaints to include purchasers of the company's common stock after March 11,
1999, and to include additional allegations of wrongdoing by the defendants.
The company is unable to predict the ultimate outcome of this litigation.
Since May 1999, various complaints have been filed in federal courts in
Philadelphia, Pennsylvania and Wilmington, Delaware derivatively and on behalf
of the company against the same officers named in the class action lawsuits and
against the directors of the company. The complaints allege essentially the
same wrongful acts as are alleged in the class action lawsuits and charge the
defendants
18
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RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
with mismanagement, waste of corporate resources and breach of fiduciary duty.
Certain of the complaints also allege that certain of the transactions discussed
in the Current Report on Form 8-K filed by the company on February 9, 1999
constituted mismanagement, waste of corporate resources and breach of fiduciary
duty. The plaintiffs seek indemnity and contribution on behalf of the company
from the individual defendants. The company is unable to predict the ultimate
outcome of this litigation.
In September 1999, the Florida Attorney General filed a lawsuit charging the
company with deceptive trade practices, civil theft and racketeering. The
complaint alleges the company's practice of varying the price it charged
customers who paid cash for prescription medication constituted a deceptive
trade practice. Subsequently, a number of purported class action lawsuits were
filed in various states and federal courts alleging the practice violated
applicable consumer protection laws in the jurisdictions in which the lawsuits
were filed. The company has denied that it engaged in any improper practices
and intends to defend these actions vigorously. The outcome of these lawsuits
cannot be predicted. The company is defending various lawsuits alleging with
other things, breach of contract and breach of lease obligations and failure to
comply with applicable wage and hours laws. The company believes it has made
adequate provision for any resulting liabilities.
In addition, the company is a defendant in claims and lawsuits arising in the
ordinary course of business. In the opinion of management, these matters are
covered adequately by insurance or, if not so covered, are without merit or are
of such nature or involve such amounts as would not have material effect on the
financial statements of the company if decided adversely. The company,
regardless of insurance coverage, does not believe that is has a material,
estimable, and probable liability in regard to these claims and lawsuits as of
August 28, 1999.
In connection with the development of certain of its drugstores, the company
agreed with individual lenders providing construction financing to the various
developers that the company would purchase the construction loan from the lender
in the event the developer was unable to obtain permanent mortgage financing.
At August 28, 1999, the company was obligated to purchase approximately
$40,000,000 in construction loans.
When the company sells stores operated in leased facilities, the leasehold
ordinarily is assigned to the buyer, who assumes primary liability for the
rental leasehold obligation. The company has a continuing contingent liability
for those obligations should the assignee fail to make payment to the lessor.
The Company purchases approximately 90% of the dollar volume of its
pharmaceuticals from a single supplier. Should there be a significant
disruption in the company's relationship with the supplier, the company could
have difficulty in filling prescriptions and those difficulties could have a
severe impact on the company's business.
The company has outstanding letters of credit of approximately $ 40,075,000
as of October 29, 1999.
NOTE 12- SALE LEASEBACK TRANSACTION
In June 1999, the company completed a sale and lease back transaction
involving 26 of its owned store locations. Proceeds in the amount of
$74,899,000 were received. The company has agreed to lease back the store
locations under noncancellable leases with twenty-two year lease terms. The
loss recorded on the transaction was approximately $1,000,000.
NOTE 13- SUBSEQUENT EVENTS
In connection with the refinancing activities discussed in Note 10, on
October 27, 1999, the company issued and sold to Green Equity Investors III,
L.P. (GEI), an affiliate of Leonard Green & Partners L.P. (LGP), 3,000,000
shares of the company's 8% series A cumulative convertible pay-in-kind preferred
stock, par value $1.00, at a purchase price of $100 per share, for an aggregate
purchase price of $300,000,000. At any time after the expiration or termination
of any applicable waiting period under the Hart-Scott Rodino Antitrust Act of
1976, the series A preferred stock is convertible into the company's common
stock, $1.00 par value, at a current conversion price of $11.00 per share
(subject to certain adjustments). Each share of series A preferred stock will be
exchangeable, either at the option of the company or all holders of such shares,
for one share of the company's series B convertible preferred stock with
substantially the same terms as the series A preferred stock, except that the
series B preferred stock will have certain voting rights. The holders of series
B preferred stock will vote with holders of common stock and each holder of
series B preferred stock will have one vote for each share of common stock
issuable upon conversion of such holder's series B preferred stock. The holders
of series B preferred stock will also be entitled to vote separately as a class
to elect two directors to the Board of Directors.
The series A preferred stock accrues dividends at a rate of 8% per annum,
such dividends payable in cash or in additional shares of series A preferred
stock at the option of the company, subject to the restriction on paying cash
dividends in the financial covenants of the company's credit facilities. The
initial conversion price will be reset (1) in the event that prior to October
27, 2000, the company issues shares of its common stock at a sale price lower
than the then current conversion price, to such lower sale price and (2) on
March 1, 2001, to the lowest average price (but not less than $7.50) of the
company's common stock during any consecutive three-month period
19
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RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
from October 27, 1999 through February 28, 2001 if such average price is lower
than the then current conversion price or, if not lower, to $11.50 (assuming no
other adjustment). The company may redeem the Series A preferred stock after
October 24, 2004 at $105 per share plus accrued and unpaid dividends to the date
of redemption.
The company agreed to register, at its expense, on or after October 25, 2001,
the company's common stock issuable upon conversion of the preferred shares. The
company paid a $3,000,000 fee to LGP and agreed to pay annual consulting fees of
$1,000,000 to LGP at the end of each of the first three anniversaries of the
closing.
In September 1999, the company entered into an agreement with Longs Drug
Stores Inc. to sell 38 West Coast stores. The agreement included the sale of
all the fixed assets and inventories at the stores for approximately
$186,000,000 in cash. This transaction is not expected to have a material
impact on the pre-tax results of operations for the remainder of fiscal year
2000. As of October 31, 1999, 32 stores were transferred to Longs resulting in
expected net cash proceeds of approximately $138,000,000.
Also in September, the company announced corporate staff reductions and
realignment of its west coast distribution network. The corporate downsizing
did not affect direct store personnel or personnel at PCS and is intended to
reduce overhead. The company will offer severance packages and outplacement
support to persons affected by the downsizing. In a separate action, the
company announced its plans to close a distribution center in Ogden, Utah in
mid-2000 as a part of its consolidation of its west coast distribution network.
The company is evaluating whether the operations currently performed at the
Ogden distribution center will ultimately be transferred to a new, one million
square foot distribution facility now being built in Lancaster, California.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
As noted in Note A to the Index to this report on Form 10-Q, the company has
been discussing various accounting matters with the staff of the Securities and
Exchange Commission in connection with the staff's review of the company's
filings. On June 1, 1999, the company filed its Form 10-K for the fiscal year
ended February 27, 1999, which included restated financial statements for the
fiscal years ended February 28, 1998 and March 1, 1997 and the interim periods
of fiscal 1999 and 1998. Those restated financial statements reflected
adjustments relating to various accounting matters which the company had been
discussing with the staff. Since June, the company has continued to discuss
with the staff various accounting matters, including the company's historical
policy relating to the accounting for impairment of assets, principally closed
and under performing stores, and the company's accounting for the exit liability
for future lease obligations related to closed stores. In connection with those
discussions and the company's review of other accounting practices with respect
to its historical financial statements, the company is further restating its
financial statements and intends to file, in an amended report on Form 10-K,
restated audited financial statements as of February 27, 1999 and February 28,
1998 and for the three fiscal years ended February 27, 1999. The restated
financial statements included in this report on Form 10-Q reflect the
adjustments described in Note 2, which the company has thus far determined to be
necessary, resulting from the company's consideration of the SEC staff's views
and the Company's review of the historical financial statements. Although the
company believes the financial statements included in this report include all
necessary corrections, additional adjustments may be identified as the company
completes its review, considers any additional SEC comments and prepares any
amendment to its annual report on Form 10-K for the fiscal year ended February
27, 1999.
SUMMARY
Net income in the first six months of fiscal year 2000 increased to $29.0
million from a loss of $21.6 million in the first six months of fiscal year
1999. The company had a loss of $15.4 million in the thirteen weeks ended
August 28, 1999 as compared to net income of $4.1 million in the thirteen weeks
ended August 29, 1998. The decrease in second quarter comparable operating
results was attributable to gross margins that were 2.9% lower in 1999 than in
1998, goodwill amortization expense that was higher by 206% than in the
comparable period in 1998 as a result of the company's acquisition of PCS Health
Systems Inc. ("PCS") in January 1999, and interest expense that was 200% higher
in 1999 than in 1998 as a result primarily of the borrowings to finance the
acquisition of PCS. The decrease in both periods resulted from the operations
of the company's retail drug segment. The company acquired its pharmacy benefit
management (PBM) segment in the fourth quarter of its fiscal year ended February
28, 1999. There follows a discussion and analysis of both the retail drug and
the PBM segments' results under the caption "Segment Information."
SEGMENT INFORMATION
The company is engaged in two business segments: the retail drug segment and
the PBM segment. The larger of the two segments is the company's retail drug
segment, which operates retail drugstores across the United States, with
pharmacy services forming the core of the business. The PBM segment offers
pharmacy benefit management and mail-order pharmacy services and markets
prescription plans and other managed health care services to employers, health
plans and their members, and government-sponsored employee benefit programs.
20
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RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
RETAIL DRUG SEGMENT
As of August 28, 1999, the company's retail drug segment operated 3,857
retail drugstores in 30 states and the District of Columbia. Each drugstore
offers a full selection of health and personal care products, convenience food
items, seasonal merchandise and a large private label product line
(collectively, the "front-end" products) and pharmacy services. A large
percentage of the company's pharmacy services are provided under pharmacy plans,
where the prescription is paid for by a person or entity other than the
recipient of the prescribed pharmaceutical ("third party" sales).
RESULTS OF OPERATIONS
Sales for the thirteen-week period ended August 28, 1999 were $3,196.1
million compared to $3,011.0 million in the same period last year, representing
an increase of 6.1%. Same-store sales for the quarter ended August 28, 1999,
increased 8.0% as compared to the year-ago period reflecting a 17.5% increase in
pharmacy sales and a 3.2% decline in front-end sales, which are all non-pharmacy
sales. Prescription sales accounted for 58.8% of drugstore sales for the
quarter, compared to 53.4% last year. Third party prescription sales, which are
generally subject to negotiated reimbursement rates in conjunction with a
pharmacy benefit plan, were 87.6% of prescription sales compared to 85.0% last
year. For the twenty-six weeks, retail sales were $6,560.6 million compared to
$6,043.7 million a year ago, an increase of 8.6%. Same-store sales for the
twenty-six weeks ended August 28, 1999 rose 9.6%, reflecting growth of 19.7% in
pharmacy sales and a 2.1% decline in front-end sales. Same-store comparisons
include stores that have been expanded or relocated, and most relocations
involve an increase in square footage of the sales floor. During the quarter
the company added or acquired 52 drugstores, closed 48 and expanded or relocated
58 units.
As a percentage of sales, cost of goods sold including occupancy costs was
76.3% and 74.7% for the thirteen and twenty-six week periods ended August 28,
1999, respectively, compared to 74.1% and 74.5% for the same periods in the
previous year. The company continues to experience higher growth in
prescription sales as compared with front-end sales at its retail drugstores,
which contributed to a decline in overall gross margins for the thirteen and
twenty-six week periods because prescription gross margins are lower than front-
end gross margins. The percentage of front-end sales to total sales declined to
41.2% and 41.5% of sales for the thirteen and twenty-six week periods ended
August 28, 1999 compared to 46.6% and 46.5% in the prior year. Front-end gross
profit margins also declined for the thirteen weeks, which also contributed to
the decline in margins. This included increases in shrinkage expense (inventory
losses) of $1.8 million and $2.8 million, respectively, for the thirteen and
twenty-six week periods, when compared to the same periods last year. As a
percentage of sales, shrinkage expense was 0.37% and 0.39% of total drugstore
sales for the quarter and year-to-date periods in fiscal 2000 as compared to
0.34% and 0.38% of drugstore sales for the same periods last year. Pharmacy
gross profit margins also decreased when compared to the same period in the
prior year, as the percentage of third party sales to total prescription sales
continued to increase. Finally, occupancy costs, which are a component of cost
of goods sold, increased, negatively impacting gross margins. As the company
has moved its stores to larger, freestanding units, these costs have risen. For
the quarter, occupancy costs increased $23.9 million over the prior year period.
Year-to-date, occupancy costs have increased by over $51.6 million compared to
last year.
Selling, general and administrative expenses were $696.8 million or 21.8%
of sales for the quarter, compared to $648.9 million or 21.6% of sales for the
comparable period last year. For the year to date these expenses were $1,348.9
million or 20.6% of sales compared to $1,328.8 million or 22.0% of sales in the
prior year. The favorable decline in the current year operating expense ratios
for the year-to-date periods resulted from strong pharmacy same-store sales,
especially at the company's East Coast stores, which creates expense leverage.
Operating profit of the retail drug segment, excluding store closing
charges and LIFO, decreased from $120.1 million in the thirteen weeks ended
August 29, 1998 to $51.5 million in the thirteen weeks ended August 28, 1999.
The decrease resulted from reduced gross profit margin and higher selling,
general and administrative expenses.
The second quarter operating results do not reflect the company's share of
drugstore.com's losses. See Note 9 to the financial statements.
PHARMACY BENEFIT MANAGEMENT SEGMENT
The company's PBM segment offers pharmacy benefit management, mail-order
pharmacy services, marketing prescription plans and other managed health care
services to employers, health plans and their members, and government-sponsored
employee benefit programs. Prior to its acquisition of PCS, the company
operated one business segment, the retail drug segment.
RESULTS OF OPERATIONS
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RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
Net sales of the PBM segment for the thirteen and the twenty-six weeks ended
August 28, 1999 were $310 million and $570 million, respectively.
Selling, general and administrative expenses were $30.1 million or 9.7% of
sales for the quarter, and $60.8 million or 10.6% of sales for the twenty-six
weeks ended August 28, 1999.
Operating profit for the PBM segment for the thirteen and the twenty-six
weeks ended August 28, 1999 was $12.9 million and $43.6 million, respectively.
CORPORATE AND UNALLOCATED COSTS AND EXPENSES
The company uses the LIFO inventory method that requires interim estimates
of annual inflation rates. Costs of goods sold included a LIFO provision of
$9.4 million for the thirteen weeks ended August 28, 1999, compared to $5.9
million in the same period last year.
Goodwill amortization expenses increased to $19.0 million for the thirteen
weeks ended August 28, 1999 compared to $9.2 million last year. For the twenty-
six week periods goodwill amortization was $38.3 million as of August 28, 1998
compared to $18.4 million last year. The increase each period in goodwill
amortization is principally attributable to the acquisition of PCS in January
1999. Whereas the thirteen and twenty-six weeks ended August 29, 1998 contained
no goodwill amortization for PCS, the thirteen and twenty-six weeks ended August
28, 1999 had goodwill amortization expenses of approximately $10.3 million and
$20.5 million, respectively. The company's balance sheet as of August 28, 1999
includes goodwill amounting to approximately 27.7% of total assets and 122% of
stockholders' equity. Approximately 53.3% of goodwill, or $1.6 billion,
resulted from the acquisition of PCS. The company has determined that the
useful life of goodwill recorded with the PCS acquisition is no less than 40
years, and accordingly, that goodwill is being amortized over a 40-year period.
There is risk that this determination will prove to have been incorrect and the
company will be amortizing this goodwill over too long a period. If this
occurs, the company's earnings this year, and in the years following will have
been overstated, and, in later years, the company will be burdened with a
continuing charge to earnings without a corresponding benefit to income. If
management determines in a later year that the company is no longer receiving
the benefit of this goodwill, the company may have to write off the remaining
goodwill in that year, resulting in a reduction in earnings for that fiscal
year. The company reviewed the anticipated cash flows and other factors when
considering the cost the company was willing to incur to purchase PCS and
concluded that anticipated future cash flows associated with the intangible
assets acquired would continue indefinitely. Additionally, management has found
no persuasive evidence that any material portion of these intangible assets will
be depleted in less than 40 years, however, no assurance can be given that this
determination will prove to be correct.
The company treated 57 and 111 stores as closed for accounting purposes
during the thirteen and twenty-six weeks ended August 28, 1999 as compared to 77
and 189 stores considered closed for accounting purposes during the thirteen and
twenty-six weeks ended August 29, 1998. It recorded exit costs of $29.3 million
and $42.4 million during the thirteen and twenty-six weeks ended August 28, 1999
as compared to exit costs of $63.6 million and $137.9 million recorded during
the thirteen and twenty-six weeks ended August 29, 1998.
Interest expense increased to $84.9 million and $159.9 million for the
quarter and year-to-date periods in fiscal 2000, compared to $42.6 million and
$83.2 million for the comparable periods last year. The increase in interest
expense resulted from higher weighted average borrowings this year compared to
the same periods last year. The higher borrowings this year are largely due to
the acquisition of PCS in the fourth quarter of fiscal 1999. For the twenty-six
weeks ended August 28, 1999, borrowings related to the acquisition of PCS
contributed approximately $43.5 million of interest expense. Higher borrowings
were also required to fund the store development program during fiscal 1999, as
well as additional borrowings to complete store development projects during
fiscal 2000 and other capital projects. Borrowings were also necessary to fund
operating activities, particularly the investment in inventory, which increased
$366 million during the twenty-six weeks ended August 28, 1999. The weighted
average interest rates on the company's commercial paper were approximately 5.3%
for the quarter ended August 28, 1999 and 5.1% year-to-date, compared to 5.7%
for the quarter and year-to-date periods last year.
The income tax benefit was $43.9 million for the quarter ended August 28,
1999 compared to an expense of $4.0 million last year. Year-to-date, income tax
expense was $82.6 million compared to an income tax benefit of $21.3 million
last year. The effective income tax rate was 74%, compared to an effective rate
of 49.6% last year. The increase in the effective tax rate is attributable to
the impact of non-deductible amortization, principally goodwill, on the
estimated earnings before income taxes for fiscal 2000. The increase in
non-deductible amortization expenses is due principally to the acquisition of
PCS last year. Depreciation and amortization expenses were $222.0 million for
the twenty-six weeks ended August 28, 1999 compared to $208.5 million for the
comparable period last year. The increase in these expenses is attributable to
the increase in goodwill amortization of $20.5 million from the acquisition of
PCS, as well as increases in other intangible assets such as lease acquisition
costs and increases in property, plant and equipment resulting from the store
development program.
22
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RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
The net loss for the quarter was $15.4 million compared to a net income of
$4.1 million last year. Year-to-date, net income was $29.0 million compared to
a net loss of $21.6 million last year. Both periods include charges related to
store closings and impairment of assets related to all closed stores and certain
open stores. The provision for store closing liabilities and impairment
aggregated $29.3 million and $42.4 million for the thirteen weeks and twenty-six
weeks to date ended August 28, 1999. The comparable amounts for fiscal 1999
were $63.6 million and $137.9 million.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities used cash of $93.4 million for the twenty-six weeks
ended August 28, 1999. Last year, operating activities provided cash of $5.8
million. Negatively impacting cash provided by operating activities were
increases in prepaid expenses and inventories, as well as cash payments related
to the company's closed stores. The company's fiscal 1999 strategic exit plan
as well as the stores closed during fiscal 2000 will have a negative effect on
future cash flows for closed locations with remaining noncancellable leases.
Payments for lease terminations, as well as monthly payments on lease
obligations and ancillary expenses resulted in cash payments of $17.1 million
for the quarter and $36.7 million through the 26 weeks ended August 28, 1999.
Excluding lease termination payments that cannot readily be determined, the
company currently expects to pay down approximately $34.2 million of the closed
store liability during the remainder of fiscal 2000.
Cash from operating activities was positively impacted by approximately
$118.3 million of cash provided by PCS operations for the thirteen weeks ended
August 28, 1999. PCS's operating cash flows can be significantly influenced by
the timing of payments to pharmacy providers and customer collections. For the
year-to-date period, cash from operations benefited from the timing of customer
collections and pharmacy provider payments by a net amount of approximately
$20.2 million. For the thirteen weeks ended August 28, 1999, payments to
providers exceeded customer collections by a net amount of approximately $239.4
million, contributing to an overall reduction in operating cash flows of
approximately $188.1 million from PCS operations. These timing differences will
continue to vary in future periods based upon the differences in payment and
collection cycles at or near the end of each reporting period.
Year-to-date, capital expenditures for property, plant and equipment were
approximately $478.1 million in connection with the company's store
construction, renovation and relocation projects already underway at the
beginning of the first quarter and other capital projects. Other investing
activity included the purchase of the Edgehill drugstore chain in the first
quarter, which resulted in net cash expenditures of approximately $25 million.
In June 1999, the company completed a sale and leaseback transaction involving
twenty-six stores, for which the company received proceeds in the amount of
$74.9 million. The company has agreed to leaseback store locations under
noncancellable twenty-two year leases. Capital expenditures for property, plant
and equipment at PCS were approximately $25.4 million for the twenty-six weeks
ended August 28, 1999. Cash was also used for dividend payments of $59.9
million.
In June 1999, the company borrowed $300 million from one of its banks under
a demand note to satisfy additional working capital needs because its $2.3
billion of credit facilities would not support any additional issuances of
commercial paper. The borrowings were used for general corporate purposes
including repayment of the company's commercial paper.
On September 24, 1999, the company began using funds borrowed under its
$1.3 billion credit facility to pay its outstanding commercial paper as it
matured. The company lost access to the commercial paper market upon the
downgrading of its credit ratings by Standard & Poor's and Moody's. Currently,
the company's senior unsecured debt and commercial paper are rated BB and B,
respectively, by Standard & Poor's and Ba2 and Not Prime, respectively, by
Moody's. The company historically used its credit facilities to support its
outstanding commercial paper. The amount available as of October 29, 1999 for
borrowings by the company for general corporate purposes under the credit
facilities, taking into account the amount needed to support outstanding
commercial paper, was approximately $165 million.
On October 27, 1999, the company's banks agreed to extend and restructure
$2.7 billion of the outstanding credit facilities. As a result, the due dates
of the $1.3 billion of bank debt scheduled to mature on October 29, 1999 and the
$300 million of bank debt borrowed in June 1999 and that was due on demand, have
been extended to November 1, 2000. The company's $1.0 billion credit facility,
which was also restructured, terminates on July 19, 2001. Borrowings under the
credit facilities carry higher interest costs than commercial paper. The
interest rates under the company's credit facilities are based on prime or LIBOR
that adjusts with changes to the company's credit rating. At the company's
current credit ratings, borrowings under the $1.3 billion facility are at LIBOR
plus 3.0% and borrowings under the $1.0 billion facility and the $300 million
bank note are at LIBOR plus 3.5%. In connection with obtaining waivers of
compliance with certain of the covenants in September and October 1999 and the
subsequent extensions and restructuring described above, the company has paid
fees and transaction costs of approximately $43 million. Additionally, the
company issued three year warrants to purchase 2.5 million shares of common
stock at $11 per share and agreed to a one year financial services advisory
contract for a future monthly payment of $2 million. If all of the company's
borrowings under its commercial paper program and $300 million of above
mentioned bank debt had been financed through its restructured credit facilities
during the 13 weeks ended August 28, 1999,
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RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
interest expense for the quarter would have been $50.8 million, which is
approximately $19 million, or 59.7 % , greater than the actual expense for the
quarter.
In addition, the financial covenants in all $2.7 billion of the company's
credit facilities have been amended to be consistent with the company's current
business plan. The principle financial covenants consist of a capitalization
leverage ratio, cash flow leverage ratio and fixed charge coverage ratio. The
facilities prohibit the company from paying any cash dividends or from redeeming
or otherwise repurchasing its capital stock and are secured by the company's
ownership interests in PCS and drugstore.com. The facilities also limit the
amount of the company's capital expenditures to $620 million for the fiscal year
ended February 2000 and $295 million for the fiscal year ending February 2001.
The company has announced its intention to and is actively seeking to sell
approximately 300 of its larger format drug stores located in the western United
States. The company has engaged an investment bank to sell all or a portion of
the company's interest in PCS. All net proceeds realized from any asset sale
must be applied to reduce the outstanding balance of the company's credit
facilities; amounts so applied may not be reborrowed. In the event that the
company does not generate $500 million of net proceeds from asset sales by
February 15, 2000, the interest rate applicable to its credit facilities will be
increased by 50 basis points.
Concurrent with the restructuring of the credit facilities, on October 27,
1999, the company issued and sold to Green Equity Investors III, L.P. (GEI), an
affiliate of Leonard Green & Partners L.P. (LGP), 3,000,000 shares of the
company's 8% series A cumulative convertible pay-in-kind preferred stock, par
value $1.00, at a purchase price of $100 per share, for an aggregate purchase
price of $300,000,000. At any time after the expiration or termination of any
applicable waiting period under the Hart-Scott Rodino Antitrust Act of 1976, the
series A preferred stock is convertible into the company's common stock, $1.00
par value, , at a current conversion price of $11.00 per share (subject to
certain adjustments). Each share of series A preferred stock will be
exchangeable, either at the option of the company or all holders of such shares,
for one share of a series of the company's series B convertible preferred stock
with substantially the same terms as the series A preferred stock, except that
the series B preferred stock will have certain voting rights. The holders of
series B preferred stock will vote with holders of common stock and each holder
of series B preferred stock will have one vote for each share of common stock
issuable upon conversion of such holder's series B preferred stock. The holders
of series B preferred stock will also be entitled to vote separately as a class
to elect two directors to the Board of Directors.
The series A preferred stock accrues dividends at a rate of 8% per annum,
such dividends payable in cash or in additional shares of series A preferred
stock at the option of the company, subject to the restriction on paying cash
dividends in the financial covenants of the company's banking facilities. The
initial conversion price will be reset (1) in the event that prior to October
27, 2000, the company issues shares of its common stock at a sale price lower
than the then current conversion price, to such lower sale price and (2) on
March 1, 2001, to the lowest average price (but not less than $7.50) of the
company's common stock during any consecutive three-month period from October
27, 1999 through February 28, 2001 if such average price is lower than the then
current conversion price or, if not lower, to $11.50 (assuming no other
adjustment). The company may redeem the Series A preferred stock after October
24, 2004 at $105 per share plus accrued and unpaid dividends to the date of
redemption.
The company agreed to register, at its expense, on or after October 25,
2001, the companys' common stock issuable upon conversion of the preferred
shares. The company paid a $3 million fee to LGP and agreed to pay annual
consulting fees of $1 million to LGP at the end of the first three anniversaries
of the closing.
On September 15, 1999, the company announced the sale of 38 of its
California stores to Longs Drug. The transfer of 32 stores to Longs was
completed as of October 31, 1999, resulting in expected net cash proceeds of
approximately $138 million. The net proceeds from the Longs transactions must
be used to retire borrowings under the credit facilities.
Based on the $300 million the company received from GEI, the $165 million
available under its credit facilities, the paydown of bank debt expected from
asset sales, the prohibition on the payment of cash dividends, planned
reductions of capital expenditures, and cash generated from operations,
management believes that the company has the necessary liquidity for working
capital needs and to meet its financial obligations.
Total debt to total capitalization was 70.5% as of August 28, 1999,
compared to 67.4% at February 27, 1999.
YEAR 2000
In 1996, the company began a project to convert information technology
("IT") and non-information technology ("non-IT") systems to be Year 2000 (Y2K)
date compliant. The Y2K issue creates risk to the company from unforeseen
problems in its own computer systems and from that of the systems of other
companies and governmental agencies on which the company's operations rely. The
company developed a Y2K remediation plan to assess the compliance of its IT and
non-IT systems, as well as the remediation efforts
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RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
of key customers, vendors, suppliers, financial institutions and governmental
agencies (collectively referred to as "business partners") to identify the
nature and potential impact of issues presented by the Y2K problem on operating
activities. The remediation process includes creating an inventory of systems
subject to the Y2K problem and assessing the scope of the problem as it relates
to those systems; remediating Y2K problems; testing the systems following
remediation; and promoting the remediated programs back into the production
environment. To date, the company has completed the initial assessment phase of
all of its IT systems, giving highest priority to those systems that are
considered critical to the company's operations. Of these systems, approximately
99% have been remediated, tested and determined compliant or have been replaced
or retired. Included in the 99% are the company's financial applications. The
remediation and system testing of these were completed prior to February 28,
1999. The company entered into Fiscal year 2000 in March, 1999 without any Y2K
impact. The remaining 1% are either items that are scheduled to be retired,
upgraded or are in the process of being system tested. Through September 1999,
all systems that had been designated as critical were either determined
compliant or were in the final testing phase for certain applications. The
integration of the materials handling equipment with the warehouse management
system has yet to be system tested to determine compliance, although the company
has received assurances from software vendors that it will be compliant.
Currently the company anticipates that final system testing will be completed by
November 13, 1999 and the company anticipates that all other systems will be
complaint by November 30, 1999.
To date, the company has compiled a comprehensive inventory of its non-IT
systems and business partners. The company's non-IT systems include systems
containing embedded chip technology commonly found in buildings and equipment
connected with a building's infrastructure. The company has also assessed the
potential risks associated with key business partners and their own Y2K
compliance programs. Although there can be no assurance that the company will
not be adversely affected, the company continues to monitor the progress of its
key business partners and continually assesses the need to enact contingency
plans to minimize the risks associated with those partners who will not be Y2K
compliant. This includes assessing the need to locate alternative vendors or
service providers. Through October 1999, 85% of the non-IT systems and business
partners have been determined compliant or the systems have been retired. The
company anticipates that all other systems will be compliant by the end of
November 1999. The remaining 15% have not been determined compliant to date;
however, this includes those business partners who have indicated they will be
compliant before the Year 2000. The company had also identified third party
agencies that, combined, represent over 90% of the third party business, to test
for compliance with the company's systems. Testing is well underway and
approximately 78% of the agencies have been tested successfully. Other testing
and remediation activities are following a developed plan, and currently, these
systems are scheduled to be updated throughout the remainder of the year.
Rite Aid Dispensing system has passed independent testing in cooperation with
NHIN (National Health Information Network). NHIN is leading collaborative
effort by pharmacy benefit managers, software vendors, chain drug stores and
others to establish a single testing protocol for claims processing and payment.
The possible impact on business operations from the company's failure to
comply with Y2K requirements, or by the failure of one or more of its business
partners, to do so could be material to the company's future results of
operations, liquidity and capital resources. A possible worst case scenario
includes, but is not limited to, disruption of store operations, the inability
to communicate with key third party vendors, service providers, customers and
financial institutions, as well as pharmacy system or point-of-sale failure.
This could result in the temporary inability to properly stock the company's
stores, bill and receive payment on third party receivables, as well as the
limitation of access to necessary capital resources. Although there can be no
assurance that the company will correctly identify and resolve all Y2K related
issues, the company's remediation efforts are progressing in accordance with
established timetables. Additionally, contingency plans in the event of non-
compliant systems have been completed for most critical areas while other areas
are still being finalized. These contingency plans include, but are not limited
to, off-line prescription fill, off-line point-of-sale mode or paper processing
at the stores and other manual processing where computer systems have failed or
are not reliable. The various contingency plans in place, or under development,
would be utilized in the event that operations are adversely affected by the Y2K
problem, despite the company's best efforts or due to events outside the
company's control. The company estimates that total Y2K remediation costs will
be approximately $9.0 million. To date, the company has incurred approximately
$8.0 million of these costs. Total Y2K remediation costs are based upon
management's best estimate and are subject to change as additional information
becomes available.
RECENT ACCOUNTING PRONOUNCEMENTS
In the first quarter of fiscal 2000, the company adopted the American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance concerning recognition
and measurement of costs associated with developing or acquiring computer
software for internal use. The company also adopted SOP 98-5, "Reporting on the
Costs of Start-Up Activities." SOP 98-5 provides guidance concerning the costs
of start-up activities. Adoption of these standards did not have a significant
impact on the company's as restated financial statements.
In June 1998, the FASB issued SFAS No.133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS133"). SFAS 133 requires companies to
recognize all derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged asset or
25
<PAGE>
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RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS 133 amends the guidance in SFAS No. 52, "Foreign Currency
Translation," to permit special accounting for a hedge of a foreign currency
forecasted transaction with a derivative. It also supersedes SFAS No. 80,
"Accounting for Futures Contracts, "SFAS No. 105, "Disclosure of Information
about Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk," and SFAS No. 119,
"Disclosure about Derivative Financial Instruments." In addition, it amends
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," to
include in SFAS No. 107 the disclosure provisions about concentrations of credit
risk from SFAS No. 105. The FASB has delayed the effective date of SFAS 133
for one year, to quarterly and annual financial statements in fiscal years
beginning after June 15, 2000. The company is studying the provisions of SFAS
133 and has not adopted such provisions in its August 28, 1999 consolidated
financial statements.
RISKS AND UNCERTAINTIES IN THE FUTURE
Certain statements contained in this Form 10-Q for the period ended August
28, 1999, that are not historical facts are forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements address activities or
events that the company expects will or may occur in the future. The company
cautions that a number of important factors could cause actual results to differ
materially from those expressed in any forward-looking statements, whether
written or oral, made by or on behalf of the company. Such factors include, but
are not limited to, competitive pricing pressures, third party prescription
reimbursement levels, continued consolidation of the drugstore industry,
consumer preferences, regulatory changes governing pharmacy practices, general
economic conditions, inflation, merchandise supply constraints, interest rate
movements, access to capital, compliance with financial covenants in the
company's restructured credit facilities (including the reduction in capital
expenditures and the need to use cash from sales of assets to repay its debt
rather than grow or improve the company's operations), actual results of the
company's closed store locations compared to the assumptions utilized to accrue
the related liability, changes in the ongoing evaluation of previously impaired
assets, actual cost savings achieved from restructuring activities, availability
of real estate, construction and start-up of drugstore and distribution center
facilities, the effect of adoption of new accounting pronouncements, the
effects, if any, that may result from ongoing discussions with the staff of the
SEC, and the effects of technological difficulties including successful
completion of Year 2000 conversion activities. Consequently, all of the
forward-looking statements made are qualified by these and other factors, risks
and uncertainties. Investors are also directed to consider other risks and
uncertainties discussed in documents filed by the company with the SEC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 12, 1999 the company announced that the preliminary estimate for
fully diluted earnings per share for the fourth quarter of fiscal 1999 would be
approximately $0.30 to $0.32 as compared to the then existing First Call
analyst's consensus estimates of $0.52 per share. Subsequent to the March 12
announcement, several purported class action lawsuits were commenced in the
United States District Court for the Eastern District of Pennsylvania against
the company, Martin Grass, former Chairman and Chief Executive Officer and a
director, Timothy Noonan, interim Chief Executive Officer, President, Chief
Operating Officer and a director, Franklin Brown, Vice Chairman and a director,
and Frank Bergonzi, former Senior Executive Vice President and Chief Financial
and Accounting Officer. The plaintiffs in these suits allege that the company
failed to make prompt public disclosure of matters mentioned in its March 12
announcement that affected results for the fourth quarter and seek to recover
damages on behalf of all purchasers of the company's common stock between
December 14, 1998 and March 11, 1999. On April 18, 1999, the Court approved a
stipulation among counsel that, among other things, provided for consolidation
of these suits. Thereafter, the court granted the plaintiffs leave to amend the
complaints to include purchasers of the company's common stock after March 11,
1999, and to include additional allegations of wrongdoing by the defendants.
The company is unable to predict the ultimate outcome of this litigation.
Since May 1999, various complaints have been filed in federal courts in
Philadelphia, Pennsylvania and Wilmington, Delaware derivatively and on behalf
of the company against the same officers named in the class action lawsuits and
against the directors of the company. The complaints allege essentially the
same wrongful acts as are alleged in the class action lawsuits and charge the
defendants with mismanagement, waste of corporate resources and breach of
fiduciary duty. Certain of the complaints also allege that certain of the
transactions discussed in the Current Report on Form 8-K filed by the company on
February 9, 1999 constituted mismanagement, waste of corporate resources and
breach of fiduciary duty. The plaintiffs seek indemnity and contribution on
behalf of the company from the individual defendants. The company is unable to
predict the ultimate outcome of this litigation.
26
<PAGE>
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RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
In September 1999, the Florida Attorney General filed a lawsuit charging the
company with deceptive trade practices, civil theft and racketeering. The
complaint alleges the company's practice of varying the price it charged
customers who paid cash for prescription medication constituted a deceptive
trade practice. Subsequently, a number of purported class action lawsuits were
filed in various states and federal courts alleging the practice violated
applicable consumer protection laws in the jurisdictions in which the lawsuits
were filed. The company has denied that it engaged in any improper practices
and intends to defend these actions vigorously. The outcome of these lawsuits
cannot be predicted. The company is defending various lawsuits alleging among
other things, breach of contract and breach of lease obligations and failure to
comply with applicable wage and hours laws. The company believes it has made
adequate provision for any resulting liabilities.
In addition, the company is a defendant in claims and lawsuits arising in the
ordinary course of business. In the opinion of management, these matters are
covered adequately by insurance or, if not so covered, are without merit or are
of such nature or involve such amounts as would not have material effect on the
financial statements of the company if decided adversely. The company,
regardless of insurance coverage, does not believe that is has a material,
estimable, and probable liability in regard to these claims and lawsuits as of
August 28, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company's market risk results from changes in interest rates. The company
enters into debt obligations to support general corporate purposes including
capital expenditures, acquisitions and working capital needs. The company's
policy is to manage interest rates through the use of a combination of variable
rate borrowings and fixed-rate long-term debt obligations. Increases in
interest rates would increase the company's interest expense, which would
adversely affect cash flow and the results of operations.
As of August 28, 1999, the company had $2,069.9 million of outstanding
commercial paper that had a weighted average fixed rate of 5.6% and a weighted
average life of 41 days and was supported by committed lines of credit. However
on September 24, 1999, the company began using funds borrowed under credit
facilities to redeem its outstanding commercial paper as it matured. The
company lost its access to the commercial paper market with the downgrade of its
credit ratings by Standard & Poor's and Moody's. Currently, the company's
senior unsecured debt and commercial paper are rated BB and B, respectively, by
Standard & Poor's and Ba2 and Not Prime by Moody's. At the company's current
credit ratings, borrowings under its $1.3 billion credit facility are at LIBOR
plus 3.0% and borrowings under its $1.0 billion credit facility and $300 million
bank note are at LIBOR plus 3.5%. These interest rates will increase by .50%
if the company does not generate net cash proceeds of $500 million from asset
sales by February 15, 2000 to reduce the amount borrowed under the credit
facilities.
The interest rate on borrowings under the company's variable rate credit
facilities is based on LIBOR. Therefore, changes in one month LIBOR affect the
company's cost of borrowings. If the market rates of interest for one month
LIBOR change by 10% (approximately 54 basis points) as compared to the rate of
5.4%, the company's annual interest expense would change by approximately $12.8
million, assuming the aggregate amount of variable-rate debt remains at $2,369.9
million, the amount outstanding at August 28, 1999. The company's goal is to
manage this market risk by maintaining the ratio of variable rate debt to total
debt within a defined range. The percentage of the company's variable rate debt
to total debt at August 28, 1999 was 43.6% and 44.3% at October 29, 1999, as
compared to 36.7% at February 27, 1999.
Standard and Poor's has kept the company on credit watch with negative
implications and Moody's maintains a negative outlook. Further downgrade of the
company's credit ratings would not impact the rate on the borrowings under the
credit facilities since the company is currently borrowing at the highest level
of the pricing grid as defined in the credit facilities.
A change in interest rates generally does not impact future earnings and cash
flow for fixed-rate debt instruments. As fixed-rate debt matures, however, and
if additional debt is acquired to fund the debt repayment, future earnings and
cash flow may be impacted by changes in interest rates. This impact would be
realized in the periods subsequent to the periods when the debt matures.
27
<PAGE>
--------------------------------------------
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
ITEM 5. OTHER INFORMATION
On October 18, 1999, Martin Grass resigned his positions as Chairman, Chief
Executive Officer and director of the Company. While the Board searches for a
permanent Chief Executive Officer, Timothy Noonan, the Company's current
president and chief operating officer, is acting as interim Chief Executive
Officer.
In connection with issuance of the preferred stock in October 1999 (See Note
13), Leonard Green and Jonathan Sokoloff have joined the company's Board of
Directors and Mr. Green has become a member of the executive committee and of
the audit committee.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
The following are filed as exhibits to Part I of this Form 10-Q:
Exhibit 10. Material Contracts -- Amendment to McKesson contract
dated July 13, 1999
Exhibit 11. Statements re computations of per share earnings
Exhibit 27. Financial Data Schedule for the quarter ended August
28, 1999 (EDGAR Filing Only)
Exhibit 27.1 Restated Financial Data Schedule for the quarter
ended August 29, 1998 (EDGAR Filing Only)
The following is filed as an exhibit to Part II of this Form
10-Q:
None
(b) Reports on Form 8-K
None
28
<PAGE>
--------------------------------------------
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RITE AID CORPORATION
--------------------
(Registrant)
Date: November 1, 1999 /s/ Joseph S. Speaker
- ----------------------- -----------------------
Joseph S. Speaker
Senior Vice President, Acting
Chief Financial Officer and
Chief Accounting Officer
29
<PAGE>
--------------------------------------------
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------------- -----------
<S> <C>
ITEM 10 MATERIAL CONTRACTS - AMENDMENT TO MCKESSON HBOC, INC. CONTRACT
DATED JULY 13, 1999
ITEM 11 STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS.
ITEM 27 FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED AUGUST 28, 1999
(EDGAR FILING ONLY).
ITEM 27.1 RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED AUGUST
29, 1998 (EDGAR FILING ONLY).
</TABLE>
<PAGE>
Exhibit 10
Confidential treatment with respect to certain information in this Exhibit has
been requested of the Securities and Exchange Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended. The bracketed portions of
the Exhibit have been omitted from material filed in accordance with Rule 24b-2
and have been filed separately with the Commission.
<PAGE>
PROPRIETARY AND CONFIDENTIAL
----------------------------
AMENDMENT
---------
This Amendment ("Amendment") is entered into as of July 13, 1999 ("Effective
Date") by and between Rite Aid Corporation ("Rite Aid") and McKesson HBOC, Inc.
("McKesson"), formerly McKesson Corporation.
BACKGROUND
----------
A. McKesson and Rite Aid entered into an agreement effective as of April 10,
1998 ("Agreement") whereby McKesson agreed to supply Rite Aid branded
prescription drug products and other products to Rite Aid's retail stores
and warehouse facilities that supply such retail stores.
B. Rite Aid operates or is planning to operate facilities other than its
retail stores and warehouse facilities, and Rite Aid and McKesson desire
that McKesson supply such non-direct facilities with prescription drug
products and other products currently available to Rite Aid's retail stores
and warehouse facilities in accordance with the terms and conditions of the
Agreement applicable to warehouse facilities, as modified by this
Amendment.
NOW THEREFORE, in consideration of the premises and the mutual covenants and
agreements contained in this Agreement and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
intending to be legally bound hereby, Rite Aid and McKesson agree as follows:
1. APPLICABILITY AND DEFINITIONS
1.1. Applicability.
a) Except as specifically set forth in this Amendment, all
provisions of the Agreement applicable to purchases of
prescription drug products for Warehouse facilities under the
Agreement shall be applicable to purchases of any Products for
Non-Direct Facilities under the terms of this Amendment,
including without limitation, all provisions that are generally
applicable to all purchases under the Agreement.
b) Except as specifically set forth in this Amendment, all
provisions of the Agreement applicable solely to DSD purchases
under the Agreement shall not be applicable to purchases for
Non-Direct Facilities under the terms of this Amendment.
c) Except as specifically modified in this Amendment, all
provisions of the Agreement shall remain in full force and
effect.
- --------------------------------------------------------------------------------
Rite Aid/McKesson Amendment (Execution Copy 7/13/99) Page 1 of 15
<PAGE>
PROPRIETARY AND CONFIDENTIAL
----------------------------
1.2. Definitions.
a) In addition to the terms defined above and elsewhere in this
Amendment, the following defined terms as used in this Amendment
and, except as otherwise noted therein, in the Exhibits attached
to this Amendment, shall have the meanings set forth below:
"End User" means the person for whom a prescription is
prescribed and filled.
"PCS Facility" means a mail order facility owned or operated by
Rite Aid's subsidiary PCS Health Systems, Inc. that fills
prescriptions, but such prescriptions are not picked up by the
End User at such mail order facility; provided that if Rite Aid
Corporation owns, directly or indirectly, less than [ ] of
such PCS Facility, McKesson shall not be required to provide
services to such PCS Facility unless, if requested to by
McKesson prior to the PCS Facility being added to this
Amendment, Rite Aid Corporation guarantees payments for such PCS
Facility. The initial list of PCS Facilities is set forth in
Exhibit A.
"Other Fulfillment Facility" means a Rite Aid owned or operated
facility filling prescriptions, other than a PCS Facility, that
generates [ ] in purchases of Rx Products from McKesson per
month pursuant to this Amendment, but such prescriptions are not
picked up by the End User at such facility; provided that if
Rite Aid Corporation owns, directly or indirectly, less than
[ ] of such Other Fulfillment Facility, McKesson shall not
be required to provide services to such Other Fulfillment
Facility unless, if requested to by McKesson prior to the Other
Fulfillment Facility being added to this Amendment, Rite Aid
Corporation guarantees payments for such Other Fulfillment
Facility. Notwithstanding anything herein to the contrary, the
minimum requirement of [ ] in purchases of Rx Products from
McKesson per month pursuant to this Amendment shall not apply
(i) to any Other Fulfillment Facility to be serviced by McKesson
under this Amendment during the initial [ ] month period
following the Non-Direct Facility Start Date for such facility;
or (ii) to Rite Aid affiliate Drugstore.com's Prescription
Fulfillment Center at any time during the term of this
Amendment.
"Non-Direct Facilities" shall mean collectively the PCS
Facilities and Other Fulfillment Facilities.
"Non-Direct Facility Order and Delivery Schedule" means the
applicable Order and Delivery Schedule for Non-Direct Facility
purchases. An individual schedule shall be provided by Rite Aid
to McKesson for each Non-Direct Facility prior to the Non-Direct
Start Date for such Non-Direct Facility.
- --------------------------------------------------------------------------------
Rite Aid/McKesson Amendment (Execution Copy 7/13/99) Page 2 of 15
<PAGE>
PROPRIETARY AND CONFIDENTIAL
----------------------------
"Non-Direct Facility Start Date" shall mean the Transition Start
Date that Rite Aid identifies to McKesson for a Non-Direct
Facility after McKesson has demonstrated to Rite Aid that it is
prepared to service the Non-Direct Facility.
b) As of the Effective Date of this Amendment, the following
defined term shall be used in both the Agreement and this
Amendment and, except as otherwise noted therein, in the
Exhibits attached to the Agreement and this Amendment:
"Rite Aid" shall mean Rite Aid Corporation and any other entity
that Rite Aid Corporation, directly or indirectly, owns or
operates; provided that if Rite Aid Corporation owns, directly
or indirectly, less than [ ] of such entity, McKesson
shall not be required to provide services to such entity unless,
if requested to by McKesson prior to the entity being added to
the Agreement, Rite Aid Corporation guarantees payments for such
entity.
1.3. Exhibits. The following Exhibits are attached to this Amendment:
Exhibit A: Listing of PCS Facilities subject to this Amendment
Exhibit B: Listing of Other Fulfillment Facilities subject to this
Amendment.
2. AGREEMENT TO BUY AND SELL
2.1. Sole Source Products. Except as set forth in Section 2.1(c) of the
Agreement, beginning on the Effective Date of this Amendment and
continuing during the Term, McKesson agrees to sell, supply and
delivery to Rite Aid, upon Rite Aid's Orders therefor from time to
time, and Rite Aid agrees to purchase from McKesson only for the
purpose of dispensing by Rite Aid, upon the terms and subject to the
conditions of this Amendment, all of Rite Aid's requirements for Rx
Products for Rite Aid purchases for Non-Direct Facilities.
2.2. Non-Sole Source Products. Beginning on the Effective Date of this
Amendment and continuing during the Term, McKesson agrees to sell,
supply and deliver to Rite Aid, subject to availability and upon Rite
Aid's Orders therefor from time to time, upon the terms and subject to
the conditions of this Amendment, any Product that is not a Rx Product
other than General Sundry Products for Rite Aid purchases for Non-
Direct Facilities.
2.3. Free Goods. McKesson shall take, process, handle and ship to Rite Aid
all Free Goods that are destined for Non-Direct Facilities in
accordance with Section 2.3 of the Agreement provided that the Non-
Direct Facility will be responsible for fulfilling all Rite Aid
obligations under Section 2.3 and no other Rite Aid entity other than
such Non-Direct Facility will be responsible for taking any such Free
Goods.
- -------------------------------------------------------------------------------
Rite Aid/McKesson Amendment (Execution Copy 7/13/99) Page 3 of 15
<PAGE>
PROPRIETARY AND CONFIDENTIAL
----------------------------
3. PRICE
3.1. Non-Direct Facilities. Except for Contract Products and [ ] Products,
the EDI Invoice Price for all Products purchased by Rite Aid for
Non-Direct Facilities during any calendar day at the place from which
Rite Aid places an order shall be equal to the [ ] in effect at
[ ]m., local time, on the calendar day that Rite Aid or the
Non-Direct Facility places the order; provided that such Products for
Non-Direct Facility shall be subject to the following [ ] expressed
in basis points (bps), which shall be determined as of the time that
the [ ] is determined:
Prior to the end of the first and second complete calendar month
after the Effective Date, an [ ] mark-up shall be added.
Thereafter, the mark-up to be added for all Products ordered based
on the following bps markup schedule for the combined EDI Invoice
volume of all Non-Direct Facilities for the calendar month two
months prior to the month of the order (e.g. the bps mark-up for
Products order in the third month shall be based on the combined
monthly EDI Invoice volume in the first month):
Combined Monthly EDI Invoice Volume Markup
----------------------------------- ------
[ ]............................... [ ]
[ ]...................... [ ]
[ ]...................... [ ]
[ ].......................[ ]
[ ].......................[ ]
[ ]................................[ ]
Within fifteen (15) days of the end of the month during the Term
of this Amendment, the actual combined EDI Invoice volume will be
determined for such month. If the bps markup for the actual
combined volume is different from the bps markup in the original
EDI Invoice, such difference shall be paid by Rite Aid or
McKesson, as the case may be, as a payment under Exhibit W of the
Agreement, subject to the Rite Aid Payment Adjustment.
3.2. [ ].
a) The [ ] for DSD shall not be applicable to Non-
Direct Facility.
b) The [ ] for Warehouse set forth in Sections [ ]
and 3.12 shall be applicable to Non-Direct Facility.
3.3. [ ]. McKesson shall provide the Non-Direct Facility with
the same [ ] and [
].
- --------------------------------------------------------------------------------
Rite Aid/McKesson Amendment (Execution Copy 7/13/99) Page 4 of 15
<PAGE>
PROPRIETARY AND CONFIDENTIAL
----------------------------
3.4. Price Reporting. McKesson shall be required to provide the same price
reporting provided to Rite Aid under Section 3.11 of the Agreement to
the Non-Direct Facility, including without limitation, the [ ]
List, WAC price list, [ ] price list and [ ].
4. ORDERS
4.1. Non-Direct Facilities. Rite Aid may place Orders for Products for
Non-Direct Facility at any time and from time to time, but the
delivery of such orders shall be based on the Non-Direct Facility
Order and Delivery Schedule for that facility. EDI Orders for Non-
Direct Facilities shall be delivered by Telxon, EconoLink or other
mutually acceptable means. The Non-Direct Facility shall not be
required to order in manufacturer's full case quantities or full
innerpacks and McKesson shall ship the Products in the package size
requested by the Non-Direct Facility; provided that in the event that
a Branded Rx Product is ordered in a large package size and McKesson
not have the package size available, McKesson shall ship enough units
of a smaller package size such that the order is filled with the same
number of units (i.e., tablets, capsules, etc.) ordered. It is agreed
that the invoice and EDI prices for such orders shall be based on the
package size delivered, and the difference in cost per unit that Non-
Direct Facility pays for the smaller package size shall become an
Exhibit W adjustment payable to the Non-Direct Facility, subject to
the Rite Aid Payment Adjustment.
4.2. Purchase Reporting. McKesson will provide Consolidated Weekly,
Monthly, Quarterly and Annual Purchase Reports and monthly controlled
drug reports for each Non-Direct Facility to the Non-Direct Facility
with a copy to Rite Aid.
5. DELIVERIES
5.1. Non-Direct Facilities. Each Non-Direct Facility shall receive
deliveries from the corresponding McKesson distribution center in
accordance with the Non-Direct Facility Order and Delivery Schedule
for that facility. The Products subject to EDI Orders for Non-Direct
Facility that are required to be included in each delivery shall be
determined based upon the EDI Order time and dates, cut-off and dock-
out times, delivery dates and times, and payment schedule specified
on the Non-Direct Facility Order and Delivery Schedule. In the event
that an EDI Order is received after the Cut-off Time, such EDI Order
shall be aggregated with the next Order for such Non-Direct Facility.
5.2. General Delivery Schedule.
a) PCS Facility. Unless otherwise set forth in the applicable Non-
Direct Facility Order and Delivery Schedule, each PCS Facility
shall order and McKesson shall deliver [ ] per day Monday
through Friday, and each PCS Facility shall order [ ] on
Friday to be delivered by McKesson on Saturday. Deliveries
must be available to the PCS Facility no more than [ ], but
- --------------------------------------------------------------------------------
Rite Aid/McKesson Amendment (Execution Copy 7/13/99) Page 5 of 15
<PAGE>
PROPRIETARY AND CONFIDENTIAL
----------------------------
no less then [ ] hours from the time the order is telxoned
or delivered to McKesson in another mutually acceptable format.
b) Other Fulfillment Facility. Unless otherwise set forth in the
applicable Non-Direct Facility Order and Delivery Schedule or as
otherwise specified below, each Other Fulfillment Facility shall
order and McKesson shall deliver [ ] per day Monday through
Friday. If and when any Other Fulfillment Facility generates
[ ] in purchases of Rx Products from McKesson per month
pursuant to this Amendment, McKesson shall deliver [ ]
per day Monday through Friday, and each Other Fulfillment
Facility shall order [ ] on Friday to be delivered by
McKesson on Saturday. Deliveries under this Section 5.2(b) must
be available to the Other Fulfillment Facility no more than
[ ], but no less then [ ] hours from the time the
order is telxoned or delivered to McKesson in another mutually
acceptable format.
5.3. Out-of Stock.
Non-Direct Facilities. With respect to each Non-Direct Facility that
directly delivers at least [ ] of the prescriptions
filled by such facility to End-Users ("End-User Delivery Facility"),
McKesson agrees that if McKesson does not have the inventory of
Products to fill an Order for such End-User Delivery Facility from its
corresponding McKesson distribution center in accordance with the Non-
Direct Facility Order and Delivery Schedule, to the extent available
McKesson shall fill the balance of the Order from its other
distribution centers and shall deliver such balance to such End-User
Delivery Facility [ ] of the initial Order. The
delivery of such Order shall be at McKesson's cost. The Out-of-Stock
provisions of Section 4.3 of the Agreement shall apply to the End-User
Delivery Facility provided that all reports thereunder shall be
provided to both the End-User Delivery Facility and Rite Aid.
5.4. No [ ] Distribution. Rite Aid and McKesson agree that McKesson will
distribute all Products to a Non-Direct Facility from [
] and Rite Aid shall not receive an
additional payment day, nor shall the number of payment days be
reduced.
5.5. Zone Delivery.
Non-Direct Facilities. Rite Aid and McKesson agree to develop for each
Non-Direct Facility a system for delivery and invoicing of "zones" for
product placement within the facility. Such Zones shall be identified
by the Non-Direct Facility.
6. INVOICES
Invoices. McKesson shall invoice all amounts actually due and payable by
Rite Aid on EDI Invoices. The EDI Invoices shall be provided directly to
the Non-Direct Facility, to Rite Aid or to both based on Rite Aid's
instructions, but payment for such EDI invoice shall only be due from
either Rite Aid or the Non-Direct Facility, as directed by Rite Aid. EDI
Invoices for Non-Direct Facility shall be computed in accordance with
Section 3 of this Amendment. No amount
- --------------------------------------------------------------------------------
Rite Aid/McKesson Amendment (Execution Copy 7/13/99) Page 6 of 15
<PAGE>
PROPRIETARY AND CONFIDENTIAL
----------------------------
shall be due and payable with respect to any Product unless such amount is
properly reflected on an EDI Invoice. In addition to the EDI Invoice, Store
Invoices for Non-Direct Facilities will contain the price and other
information, and be provided to the Non-Direct Facility and/or Rite Aid, as
directed by Rite Aid. The Non-Direct Facility Invoice Dates shall be the
date the order is placed by the Non-Direct Facility.
7. PAYMENT
7.1. Non-Direct Facilities
a) EDI Invoices for deliveries of Products for Non-Direct Facilities
shall be due and payable as follows, but in no event before [
] after receipt by Rite Aid:
i) EDI Invoices dated from the 1st to the 15th day of the
month, inclusive, shall be due and payable on [
]
ii) EDI Invoices dated from the 16th to the end of any month
shall be due and payable on the [ ].
b) The provisions of Section 7.1(b) of the Agreement, [
], shall apply to the Non-Direct
Facility.
7.2. Non-Business Days. Notwithstanding anything to the contrary in this
Section 7 of this Amendment or any term of the Agreement, if a payment
is due pursuant to Section 7.1 of this Amendment or Section 7.1 or
Section 7.2 of the Agreement on a day specified as the "Scheduled Due
Date" below:
---------------------------------------------------------------
Scheduled Due Date Actual Due Date
---------------------------------------------------------------
Saturday Preceding Business Day
---------------------------------------------------------------
Sunday Following Business Day
---------------------------------------------------------------
Monday Holiday Even Calendar Years - Following
Business Day
Odd Calendar Years - Preceding
Business Day
---------------------------------------------------------------
- --------------------------------------------------------------------------------
Rite Aid/McKesson Amendment (Execution Copy 7/13/99) Page 7 of 15
<PAGE>
PROPRIETARY AND CONFIDENTIAL
----------------------------
---------------------------------------------------------------
Non-Monday Holiday Even Calendar Years - Preceding
Business Day
Odd Calendar Years - Following
Business Day
---------------------------------------------------------------
7.3. Offsets. Rite Aid or the Non-Direct Facility, as the case may be,
agrees to render payment in full to McKesson's designated bank on the
applicable due date as specified in this Amendment or the Agreement
without making any deductions, offsets, short payments or other
accounts payable adjustments to such payment obligation; provided that
Rite Aid may, to the extent specifically set forth in Section 7. of
the Agreement, defer payment of the specified portion of a McKesson
EDI Invoice. All other setoffs, adjustments, recoupments, short
payments, excuses for delay by Rite Aid are waived by Rite Aid as a
ground for delaying payment.
8. RETURNS
8.1. Regular Returns. At any time during the Term of this Amendment, the
Non-Direct Facility may return any Product that is currently being
shipped by any McKesson distribution facility at the time of the
return for a full credit based on the price the Non-Direct Facility
could have purchased such Product on the date such Product was
returned. Notwithstanding the foregoing, in no event shall the
aggregate volume of returns by each Non-Direct Facility under this
Section 8 exceed [ ] of Product ordered from McKesson
by the facility based on such facility's then current annualized
purchase volume run rate; provided, however, the following categories
of returns shall be excluded from such percentage calculation:
(i) Products ordered in error and returned to McKesson within thirty
(30) days of invoice; and
(ii) Mispicks, shortages, recalls and short-dated Product.
In the event that the Non-Direct Facility's percentage of aggregate
returns of Products for any twelve (12) month period ending on the
anniversary of the Effective Date of this Amendment, based on such
facility's actual purchases of Products for such twelve month period
and excluding the categories of returns specified in subsections
8.1(i) and (ii) above, is [ ] the excess of such amount may
be carried forward into the subsequent twelve month periods during
this Amendment.
- --------------------------------------------------------------------------------
Rite Aid/McKesson Amendment (Execution Copy 7/13/99) Page 8 of 15
<PAGE>
PROPRIETARY AND CONFIDENTIAL
----------------------------
8.2. [
].
9. TRANSITION
9.1. General.
a) Non-Direct Facilities. On or before the Non-Direct Facility Start
Date, McKesson shall acquire sufficient inventory and take all
other steps necessary to provide Products to Rite Aid for Non-
Direct Facility out of McKesson's own inventory in compliance
with the terms of the Transition Plan to be mutually agreed upon
by Rite Aid and McKesson. In the event that external conditions
require Rite Aid to transition the Non-Direct Facility earlier
than the times set forth in such Transition Plan, Rite Aid may
place an Order for any Rx Product with McKesson. If McKesson does
not have sufficient inventory to provide such Rx Product from the
assigned distribution center, to the extent available McKesson
shall deliver such Product from its other distribution centers
within [ ] of such Order, provided that there
shall be no Service Level Penalties until such time as the Non-
Direct Facility Start Date. Except for delivery turn-around
periods, all pricing and all other terms regarding such Orders
shall be governed by the terms and conditions of this Amendment.
b) Other Services. Rite Aid and McKesson will use reasonable
commercial efforts to transition the Non-Direct Facilities in
accordance with the Non-Direct Facility Start Date.
9.2. Conversion Allowance. [ ] after the Effective Date of
this Amendment, McKesson will pay to Rite Aid a Conversion Allowance
in an amount that shall equal [ ]. In the event of any termination of
this Amendment prior to the end of the Initial Term of the Agreement
other than a termination by Rite Aid pursuant to Section 15.3(a), (b)
or (d) of the Agreement, or upon the occurrence of a Repayment Event
set forth in Section 9.5 of the Agreement, Rite Aid will, [
] before the effective date of such termination or Repayment
Event, pay to McKesson, in immediately available funds, an amount
equal to [
].
9.3. Development Allowance. If at the end of the Initial Term of the
Amendment, the Amendment is extended for an additional three year
term, McKesson will pay to Rite Aid, [ ] after the first day
of such extension term, a Development Allowance in the amount of [
]. In the event of any termination of this Amendment prior
to the end of such extension [ ] or upon the occurrence of a
- --------------------------------------------------------------------------------
Rite Aid/McKesson Amendment (Execution Copy 7/13/99) Page 9 of 15
<PAGE>
PROPRIETARY AND CONFIDENTIAL
----------------------------
Repayment Event set forth in Section 9.5 of the Agreement, Rite Aid
will, [ ] before the effective date of such termination or
Repayment Event, pay to McKesson, in immediately available funds, [
].
10. GENERIC DRUGS
10.1. Generic Autosubstitution. The generic autosubstitution program shall
be determined for each Non-Direct Facility, provided that, unless the
parties otherwise mutually agree, the generic autosubstitution
program shall be similar to the generic autosubstitution program
provided in the Agreement for DSD purchases.
10.2. Generic Program. Rite Aid or the Non-Direct Facility shall be
responsible to give notice to McKesson of changes to any preferred
generic product for the Non-Direct Facility.
10.3. [
].
11. [ ]
11.1. [
].
12. McKESSON SERVICES
12.1. Customer Support.
a) PCS Facilities. At no cost to Rite Aid, McKesson will supply an
account manager either at each PCS Facility or another location
as determined by Rite Aid to assist with transition and
operations for the PCS Facilities subject to this Amendment. Such
persons will be experienced and fully trained in inventory
management, distribution and information technology, and supplied
with personal computers by McKesson. The account managers will
work closely with personnel from the PCS Facility and Rite Aid to
coordinate inventory procurement activities, support customer
reporting systems, assist in daily/weekly/month-end financial
reconciliation activities, interface with the PCS Facility, Rite
Aid and McKesson to resolve service issues, schedule and
facilitate unique events. The account managers shall have the
ability to access information regarding the [ ] List,
inventory levels for specific Products, purchase order status,
return receipts and other similar information for purposes of
determining the prices and Composite Performance Measures under
this Amendment and to provide such information to the PCS
Facility upon
- --------------------------------------------------------------------------------
Rite Aid/McKesson Amendment (Execution Copy 7/13/99) Page 10 of 15
<PAGE>
PROPRIETARY AND CONFIDENTIAL
----------------------------
request.
b) Other Fulfillment Facilities. With respect to each Other
Fulfillment Facility which generates [ ] in purchases of
Rx Products from McKesson per month pursuant to this Amendment,
McKesson will supply an account manager with the qualifications
as specified in Section 12.1(a) above to perform the support
functions as described therein at either such Other Fulfillment
Facility or another location as determined by Rite Aid. Any and
all remaining Other Fulfillment Facilities subject to this
Amendment shall be supported by a single account manager at a
location to be determined by McKesson.
c) Other Services. McKesson shall provide the Non-Direct Facilities
with the services set forth in Sections 12.2(b), (c) and (d) of
the Agreement.
12.2. Contract Management. McKesson agrees to provide the contract
management services set forth in Section 12.3 of the Agreement for
each Non-Direct Facility.
12.3. System Services and Equipment.
a) McKesson agrees to provide the system services and equipment set
forth in Section 12.4 of the Agreement to the each Non-Direct
Facility at no charge. In addition McKesson shall provide the
InfoLink/EconoLink system (including all hardware) in each Non-
Direct Facility.
b) Within thirty (30) days after signing this Amendment with respect
to the initial PCS Facilities listed in Exhibit A and within ten
(10) days of the Non-Direct Facility Start Date with respect to
other Non-Direct Facilities, McKesson will make certain payments
to Rite Aid in accordance with the following schedule for
anticipated information technology expenditures relating to
procurement of Products from McKesson for the Non-Direct
Facilities, including replenishment and reporting:
(i) [ ] for each PCS Facility; and
(ii) [ ] for each Other Fulfillment Facility.
McKesson will be responsible for 100% of its own information
technology expenditures for required technology investments.
13. CONFIDENTIALITY
13.1. General. The terms of Sections 13.1 and 13.2 of the Agreement shall
apply to Non-Direct Facilities, provided that McKesson shall not
divulge the terms or conditions of the Agreement or Amendment to the
Non-Direct Facility personnel, without the written consent of Rite
Aid.
14. TERM AND TERMINATION
- --------------------------------------------------------------------------------
Rite Aid/McKesson Amendment (Execution Copy 7/13/99) Page 11 of 15
<PAGE>
PROPRIETARY AND CONFIDENTIAL
----------------------------
14.1. Initial Term. The initial term of this Amendment (the "Initial Term")
commences on the Effective Date of this Amendment and expires on the
end of the Initial Term of the Agreement, unless earlier terminated
in accordance with Section 15 of the Agreement; provided that the
provision of services for any Non-Direct Facility under this
Amendment shall not commence until the Non-Direct Facility Start Date
for such facility.
14.2. Renewal Term. Unless the Initial Term of this Amendment has
previously been terminated or expired in accordance with this Section
13, Rite Aid may renew this Amendment for an additional three (3)
year term ("Renewal Term") at the conclusion of the Initial Term on
the same terms and conditions by giving not less than 90 days' prior
written notice in accordance with the provisions of Section 17.4 of
the Agreement.
14.3. Termination. In the event that the Agreement is terminated under the
terms of Section 15 of the Agreement, this Amendment shall terminate
concurrently therewith.
15. RECORDS AND AUDIT
15.1. General. The Non-Direct Facility shall be responsible for all records
and audit provisions under the Agreement as such provisions apply to
the Non-Direct Facility.
16. MISCELLANEOUS
16.1. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be an original and all of which
shall constitute together one and the same document.
16.2. Entire Agreement. This Amendment and the Exhibits attached hereto
constitute the entire agreement and understanding of the parties
relating to the subject matter hereof, and no representation,
condition, understanding or agreement of any kind, oral or written,
shall be binding upon the parties unless expressly set forth herein
or therein.
This Amendment supersedes all prior written and oral agreements and all
other communications between Rite Aid and McKesson. Further amendments to
this Amendment or the Agreement shall be effective only if in writing and
signed by Rite Aid and McKesson.
- --------------------------------------------------------------------------------
Rite Aid/McKesson Amendment (Execution Copy 7/13/99) Page 12 of 15
<PAGE>
PROPRIETARY AND CONFIDENTIAL
----------------------------
IN WITNESS WHEREOF, Rite Aid and McKesson have executed this Amendment as of the
day first written above.
RITE AID CORPORATION McKESSON HBOC, INC.
By:_____________________ By:_______________________________
Name:___________________ Name:_____________________________
Title:__________________ Title:____________________________
- --------------------------------------------------------------------------------
Rite Aid/McKesson Amendment (Execution Copy 7/13/99) Page 13 of 15
<PAGE>
PROPRIETARY AND CONFIDENTIAL
----------------------------
EXHIBIT A
---------
PCS Facilities Subject to the Amendment dated July 13, 1999
1. PCS Health Systems, Inc.
2105 Eagle Parkway
Ft. Worth, TX 76177
2. PCS Health Systems, Inc.
2800 Milan Court, Suite 115
Birmingham, AL 35211-6908
- --------------------------------------------------------------------------------
Rite Aid/McKesson Amendment (Execution Copy 7/13/99) Page 14 of 15
<PAGE>
PROPRIETARY AND CONFIDENTIAL
----------------------------
EXHIBIT B
- ---------
Other Fulfillment Facilities Subject to the Amendment dated July 13,
1999
1. Drugstore.com Prescription Fulfillment Center
(Location to be determined)
- --------------------------------------------------------------------------------
Rite Aid/McKesson Amendment (Execution Copy 7/13/99) Page 15 of 15
<PAGE>
--------------------------------------------
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
EXHIBIT 11
----------
RITE AID CORPORATION AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
THIRTEEN WEEKS ENDED AUGUST 28, 1999 AND AUGUST 29, 1998
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
August 28, 1999 August 29, 1998
----------------------- -----------------------
(As Restated)
<S> <C> <C>
Net income (loss) available for common stockholders $ (15,968) $ 4,088
------------ ------------
Basic weighted average shares 258,910,000 258,409,000
------------
Basic earnings per share (.06) .02
------------ ------------
Numerator for diluted earnings per share:
Net income (loss) $ (15,402) $ 4,088
------------ ------------
Cumulative dividends on preferred stock 566 --
------------ ------------
Net income (loss) available for common stockholders $ (15,968) $ 4,088
------------ ------------
Effect of dilutive securities:
5.25% convertible subordinated notes (a) -- --
------------ ------------
Net income (loss) available for common stockholders assuming (15,968) $ 4,088
dilution ============ ============
Denominator for diluted earnings per share:
Basic weighted average shares 258,910,000 258,409,000
============ ------------
Effect of dilutive securities:
Options and other equivalents -- 5,893,000
------------
5.25% convertible subordinated notes (a) -- --
------------ ------------
Dilutive potential common shares -- 5,893,000
------------ ------------
Diluted weighted average shares 258,910,000 264,302,000
============ ============
Diluted earnings per share: (.06) $ .02
============ ============
</TABLE>
(a) For the thirteen weeks ended August 28, 1999 , the assumed conversion of
all potential dilutive securities would have increased diluted earnings per
share, and accordingly, were not considered. In addition, the company's
5.25% convertible subordinated notes were anti-dilutive for the thirteen
weeks ended August 29, 1998.
<PAGE>
--------------------------------------------
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED AUGUST 28, 1999
--------------------------------------------
EXHIBIT 11
----------
RITE AID CORPORATION AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
TWENTY-SIX WEEKS ENDED AUGUST 28, 1999 AND AUGUST 29, 1998
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
August 28, 1999 August 29, 1998
---------------------- -----------------------
(As Restated)
<S> <C> <C>
Net income (loss) available for common stockholders $ 27,897 $ (21,589)
------------ ------------
Basic weighted average shares 258,895,000 258,340,000
------------ ------------
Basic earnings per share $ .11 $ (.08)
------------ ------------
Numerator for diluted earnings per share:
Net income (loss) $ 29,028 $ (21,589)
------------ ------------
Cumulative dividends on preferred stock 1,131 -
------------ ------------
Net income (loss) available for common stockholders $ 27,897 $ (21,589)
------------ ------------
Effect of dilutive securities:
5.25% convertible subordinated notes (a) -- --
------------ ------------
Net income (loss)available for common stockholders assuming
dilution $ 27,897 $ (21,589)
============ ============
Denominator for diluted earnings per share:
Basic weighted average shares 258,895,000 258,340,000
------------
Effect of dilutive securities:
Options and other equivalents 3,276,000 --
------------
5.25% convertible subordinated notes (a) -- --
------------ ------------
Dilutive potential common shares 3,276,000 --
------------ ------------
Diluted weighted average shares 262,171,000 298,340,000
============ ============
Diluted earnings per share: $ .11 $ (.08)
============ ============
</TABLE>
(a) For the twenty-six weeks ended August 28, 1999 and August 29, 1998, the
assumed conversion of convertible subordinated notes would have increased
diluted earnings per share, and accordingly, were not considered. In
addition, options and other equivalents were anti-dilutive for the twenty-
six weeks ended August 29, 1998.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FORM 10-Q
QUARTERLY REPORT FOR THE QUARTER ENDED AUGUST 28, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-26-2000
<PERIOD-END> AUG-28-1999
<CASH> 98,573
<SECURITIES> 0
<RECEIVABLES> 743,515
<ALLOWANCES> 0
<INVENTORY> 3,106,888
<CURRENT-ASSETS> 4,002,878
<PP&E> 3,851,129
<DEPRECIATION> 751,776
<TOTAL-ASSETS> 10,716,437
<CURRENT-LIABILITIES> 2,297,862
<BONDS> 5,412,770
0
0
<COMMON> 258,926
<OTHER-SE> 2,438,544
<TOTAL-LIABILITY-AND-EQUITY> 10,716,437
<SALES> 7,130,629
<TOTAL-REVENUES> 7,130,629
<CGS> 5,368,580
<TOTAL-COSTS> 5,368,580
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 159,909
<INCOME-PRETAX> 111,647
<INCOME-TAX> (82,619)
<INCOME-CONTINUING> 29,028
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,028
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.11
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FORM 10-Q
QUARTERLY REPORT FOR THE QUARTER ENDED AUGUST 29, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-27-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> AUG-29-1998
<CASH> 155,626
<SECURITIES> 0
<RECEIVABLES> 164,112
<ALLOWANCES> 0
<INVENTORY> 2,869,754
<CURRENT-ASSETS> 3,254,331
<PP&E> 2,443,124
<DEPRECIATION> 745,570
<TOTAL-ASSETS> 7,524,633
<CURRENT-LIABILITIES> 1,653,211
<BONDS> 3,029,179
0
0
<COMMON> 258,466
<OTHER-SE> 2,525,924
<TOTAL-LIABILITY-AND-EQUITY> 7,524,633
<SALES> 6,043,710
<TOTAL-REVENUES> 6,043,710
<CGS> 4,518,270
<TOTAL-COSTS> 4,518,270
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,228
<INCOME-PRETAX> (42,849)
<INCOME-TAX> (21,260)
<INCOME-CONTINUING> (21,589)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,589)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
