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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q/A
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 27, 2000
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)
<TABLE>
<S> <C>
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)
</TABLE>
(Registrant's telephone number, including area code) (717) 761-2633
(Former name, former address and former fiscal year, if changed since last
report) Not Applicable
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. [X] Yes [_] 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 329,671,633 shares of its $1.00 par value common stock
outstanding as of June 30, 2000.
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TABLE OF CONTENTS
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<CAPTION>
Page
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Explanatory Statement................................................... 1
Cautionary Statement Regarding Forward-Looking Statements............... 1
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets as of May 27, 2000 and
February 26, 2000.............................................. 2
Condensed Consolidated Statements of Operations for the
Thirteen Weeks Ended May 27, 2000 and May 29, 1999............ 3
Condensed Consolidated Statements of Cash Flows for the
Thirteen Weeks Ended May 27, 2000 and May 29, 1999............ 4
Notes to Condensed Consolidated Financial Statements........... 5
Management's Discussion and Analysis of Financial Condition and
ITEM 2. Results of Operations......................................... 16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..... 33
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................. 35
ITEM 2. Changes in Securities and Use of Proceeds...................... 37
ITEM 3. Defaults Upon Senior Securities................................ 37
ITEM 4. Submission of Matters to a Vote of Security Holders............ 37
ITEM 5. Other Information.............................................. 37
ITEM 6. Exhibits and Reports on Form 8-K............................... 38
</TABLE>
<PAGE>
EXPLANATORY STATEMENT
After filing its Form 10-K for the 2000 fiscal year and its Form 10-Q for
the thirteen weeks ended May 27, 2000, Rite Aid initiated the process of
posting the $1.6 billion of restatement adjustments previously reported to the
company's detailed books and records for each of the periods presented in its
Form 10-K for the 2000 fiscal year. As a result of this process, certain
additional adjustments having a cumulative effect on retained earnings of
$1.6 million at February 26, 2000, were made to the financial statements for
fiscal years 2000, 1999 and 1998. Although the overall impact of these
adjustments on Rite Aid's financial position as of February 26, 2000 and May
27, 2000 is immaterial, the company further restated the financial statements
included in its amended Form 10-K for the 2000 fiscal year because of their
effects on certain previously reported annual and interim periods. The
cumulative effect of these further restatements is to increase Rite Aid's
accumulated deficit at February 26, 2000 by $1.6 million, from $1,420.2
million to $1,421.8 million, an adjustment of 0.11%. The adjustments also
increase (decrease) Rite Aid's previously reported net losses for fiscal years
2000, 1999 and 1998 by ($10.0) million, $39.0 million and ($21.0) million,
respectively, resulting in restated net losses of $1,133.0 million, $461.5
million and $165.2 million, respectively. The adjustments increase Rite Aid's
accumulated deficit at May 27, 2000 by $1.6 million, from $2,115.6 million to
$2,117.2 million and decrease Rite Aid's reported net loss for the thirteen
weeks ended May 29, 1999 by $39.7 million from $43.8 million to $4.1 million.
The information contained in this amended Form 10-Q is as of July 18, 2000,
except for the information relating to the sale of PCS and the further
restatement of the consolidated financial statements for fiscal years 2000,
1999 and 1998, which has been updated through October 2, 2000. This amended
Form 10-Q should be read in conjunction with the Form 10-Q for the second
quarter of fiscal 2001, which has been filed as an exhibit to this Form 10-Q/A
and is incorporated by reference herein.
For additional information, see note 10 to the condensed consolidated
financial statements.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are identified by terms and phrases such as "anticipate,"
"believe," "intend," "estimate," "expect," "continue," "should," "could,"
"may," "plan," "project," "predict," "will" and similar expressions and
include references to assumptions and relate to the future prospects,
developments and business strategies of Rite Aid Corporation.
Factors that could cause actual results to differ materially from those
expressed or implied in such forward-looking statements include, but are not
limited to:
. Our high level of indebtedness and our ability to refinance our
substantial debt obligations which mature in August and September 2002;
. Our ability to make interest and principal payments on our debt and
satisfy the other covenants contained in our credit facilities and other
debt agreements;
. Our ability to improve the operating performance of our existing stores,
and, in particular, our new and relocated stores in accordance with our
new management's long term strategy;
. The outcomes of pending lawsuits and governmental investigations, both
civil and criminal, involving our financial reporting and other matters;
. Competitive pricing pressures, continued consolidation of the drugstore
industry, third-party prescription reimbursement levels, regulatory
changes governing pharmacy practices, general economic conditions and
inflation, interest rate movements, access to capital and merchandise
supply constraints; and
. Our failure to develop, implement and maintain reliable and adequate
internal accounting systems and controls.
Rite Aid undertakes no obligation to revise the forward-looking statements
included in this report to reflect any future events or circumstances. The
company's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking
statements. Factors that could cause or contribute to such differences are
discussed in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Our Future
Results" included in our Annual Report on Form 10-K/A for the fiscal year
ended February 26, 2000 ("the Fiscal 2000 10-K/A"), which was filed with the
Securities and Exchange Commission on October 11, 2000, and is available on
the SEC's website at www.sec.gov.
1
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
May 27, 2000
(as
restated,
see note 10) February 26, 2000
------------ -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ 114,917 $ 179,757
Accounts receivable, net...................... 126,360 152,035
Inventories, net.............................. 2,612,300 2,472,437
Prepaid expenses and other current assets..... 133,132 211,258
---------- ----------
Total current assets........................ 2,986,709 3,015,487
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET.............. 3,400,369 3,449,594
GOODWILL AND OTHER INTANGIBLES.................. 1,279,296 1,311,123
NET NON-CURRENT ASSETS OF DISCONTINUED
OPERATIONS..................................... 1,403,677 1,743,828
DEFERRED TAX ASSET.............................. -- 146,916
OTHER ASSETS.................................... 268,633 242,899
---------- ----------
Total assets................................ $9,338,684 $9,909,847
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term debt, current maturities of long-
term debt and lease financing obligations.... $ 81,850 $ 102,050
Accounts payable.............................. 924,309 854,062
Other current liabilities..................... 977,669 949,361
Net current liabilities of discontinued
operations................................... 413,627 390,053
---------- ----------
Total current liabilities................... 2,397,455 2,295,526
---------- ----------
CONVERTIBLE SUBORDINATED NOTES.................. 649,986 649,986
LONG-TERM DEBT, LESS CURRENT MATURITIES......... 4,697,650 4,738,661
LEASE FINANCING OBLIGATIONS, LESS CURRENT
MATURITIES..................................... 1,116,741 1,125,937
OTHER NONCURRENT LIABILITIES.................... 701,082 647,771
---------- ----------
Total liabilities........................... 9,562,914 9,457,881
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 8)..........
REDEEMABLE PREFERRED STOCK...................... 19,457 19,457
STOCKHOLDERS' EQUITY (DEFICIT):
PREFERRED STOCK, par value $1 per share....... 314,211 308,250
COMMON STOCK, par value $1 per share.......... 260,107 259,927
ADDITIONAL PAID-IN CAPITAL.................... 1,303,371 1,292,337
ACCUMULATED DEFICIT........................... (2,117,188) (1,421,817)
DEFERRED COMPENSATION......................... (4,188) (6,188)
---------- ----------
Total stockholders' equity (deficit)........ (243,687) 432,509
---------- ----------
Total liabilities and stockholders' equity
(deficit).................................. $9,338,684 $9,909,847
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
May 29, 1999
Thirteen Weeks Ended (as restated,
May 27, 2000 see note 10)
-------------------- --------------------
<S> <C> <C>
REVENUES............................. $3,442,186 $3,354,621
COSTS AND EXPENSES:
Cost of goods sold, including
occupancy costs.................... 2,657,927 2,500,279
Selling, general and administrative
expenses........................... 838,085 730,778
Goodwill amortization............... 6,074 6,168
Interest expense.................... 171,641 98,232
Store closing and impairment
charges............................ 15,879 28,238
Share of loss from equity
investment......................... 11,574 --
---------- ----------
3,701,180 3,363,695
---------- ----------
Loss from continuing operations
before income taxes and cumulative
effect of change in accounting
method............................ (258,994) (9,074)
INCOME TAX EXPENSE (BENEFIT)......... 144,382 (28,959)
---------- ----------
(Loss) income from continuing
operations........................ (403,376) 19,885
DISCONTINUED OPERATIONS:
Income from discontinued operations
(including income tax expense of
$13,846 and $14,951).............. 11,335 3,345
Estimated loss on disposal of PBM
segment (including tax expense of
$22,750).......................... (303,330) --
CUMULATIVE EFFECT OF AN ACCOUNTING
CHANGE, NET OF TAX OF $18,200....... -- (27,300)
---------- ----------
Net loss........................... $ (695,371) $ (4,070)
========== ==========
BASIC AND DILUTED (LOSS) INCOME PER
SHARE:
(Loss) income from continuing
operations......................... $ (1.57) $ .08
(Loss) income from discontinued
operations......................... (1.12) .01
Cumulative effect of accounting
change, net........................ -- (.11)
---------- ----------
Net loss per share.................. $ (2.69) $ (.02)
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Thirteen
Weeks Ended
May
Thirteen 29, 1999
Weeks Ended (as
May 27, restated,
2000 see note 10)
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................ $(695,371) $ (4,070)
Income from discontinued operations................. (11,335) (3,345)
Loss on disposal of discontinued operations......... 303,330 --
--------- --------
Loss from continuing operations..................... (403,376) (7,415)
Cumulative effect of a change in accounting method.. -- 27,300
Depreciation and amortization....................... 91,684 75,594
Store closing and impairment charges................ 15,879 28,238
Changes in operating assets and liabilities, net of
acquisitions....................................... 286,356 (162,866)
--------- --------
NET CASH USED IN CONTINUING OPERATIONS................ (9,457) (39,149)
--------- --------
CASH FLOWS PROVIDED BY DISCONTINUED OPERATIONS........ 37,149 43,872
--------- --------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment...... (18,862) (141,185)
Purchase of business, net of cash acquired.......... -- (24,454)
Intangible assets acquired.......................... (1,131) (31,308)
--------- --------
NET CASH USED IN INVESTING ACTIVITIES................. (19,993) (196,947)
--------- --------
FINANCING ACTIVITIES:
Principal payments on long-term debt................ (70,407) (9,741)
Net (payments) proceeds of commercial paper
borrowings......................................... (192,000) 212,037
Net proceeds from bank loans........................ 192,000 --
Proceeds from issuance of stock..................... 180 42
Cash dividends paid................................. (373) (29,964)
Other financing activities, net..................... (1,939) 6,688
--------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES... (72,539) 179,062
--------- --------
DECREASE IN CASH AND CASH EQUIVALENTS................. (64,840) (13,162)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...... 179,757 84,522
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............ $ 114,917 $ 71,360
========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(unaudited)
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 recurring 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 week period ended May 27,
2000 are not necessarily indicative of the results to be expected for the full
year. These condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Fiscal 2000 10-K/A filed with the SEC.
2. Results of Operations and Financing
During the thirteen-week periods ended May 27, 2000, and May 29, 1999, the
Company incurred net losses of $695,371 and $4,070, respectively, and during
the thirteen-week period ended May 27, 2000, net cash used in continuing
operations was $9,457. Additionally, during fiscal years 2000, 1999 and 1998,
the Company incurred net losses of $1,133,043, $461,522 and $165,240,
respectively. The Company obtained various loan covenant waivers and/or
modifications, and refinanced or extended maturity dates from certain of its
lenders. In addition, the Company obtained a new senior credit facility in
June 2000.
Since December 1999, management of the Company has taken a series of steps
intended to stabilize and improve the operating results of the Company's
retail drug segment. Management believes that available cash and cash
equivalents together with cash flow from operations, available borrowings
under the new senior credit facility (see note 9) and other sources of
liquidity (including asset sales) will be sufficient to fund the Company's
operating activities, investing activities and debt maturities for fiscal
2001. In addition, management believes that the Company will be in compliance
with its existing debt covenant requirements throughout fiscal 2001. However,
a substantial portion of its indebtedness will mature in August and September
2002, which will require the Company to refinance the indebtedness at that
time.
3. Loss Per Share
Following is a reconciliation of the numerator and denominator of the basic
loss per share computation to the numerator and denominator of the diluted
loss per share computation:
<TABLE>
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
May 27, 2000 May 29, 1999
------------ ------------
<S> <C> <C>
Numerator for earnings per share:
Net (loss) income from continuing operations...... $ (403,376) $ 19,885
Cumulative preferred stock dividends.............. (5,961) (470)
------------ ------------
Net (loss) income from continuing operations
attributable to common stockholders.............. (409,337) 19,415
Net income from operation of discontinued
operations, net of tax........................... 11,335 3,345
Estimated loss on disposal, net of tax............ (303,330) --
Cumulative effect of accounting change, net of
tax.............................................. -- (27,300)
------------ ------------
Net loss attributable to common stockholders...... $ (701,332) $ (4,540)
============ ============
Denominator:
Basic weighted average shares..................... 260,076,000 258,880,000
============ ============
</TABLE>
5
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
Fully diluted shares are not presented as the Company incurred losses for
the 13 weeks ending May 27, 2000 and May 29, 1999. At May 27, 2000, an
aggregate of 105,176,000 potential common shares related to stock options,
convertible notes and preferred stock and warrants, have been excluded from
the computation of diluted income per share.
4. Business Segments
The Company operated in two business segments during the reporting periods:
i) the Retail Drug segment, and ii) the Pharmacy Benefit Management ("PBM")
segment, which includes other managed health care services and mail-order
pharmacy services. The Company's business segments are organized according to
the products and services offered to its customers. The Company's dominant
segment is the Retail Drug segment, which consists of the operation of retail
drugstores across the United States. The drugstores' primary business is
pharmacy services, with prescription drugs accounting for approximately 60
percent and 58 percent of total segment sales for the thirteen week periods
ended May 27, 2000 and May 29, 1999, respectively. In addition, the Company's
drugstores offer a full selection of health and personal care products,
seasonal merchandise and a large private label product line.
The Company operated a PBM segment, principally through the operations of
PCS, which was acquired in January 1999. Through its PBM segment, the Company
offered 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. On
July 12, 2000, the Company announced that it had entered into an agreement to
sell its PBM segment to Advance Paradigm Inc. This agreement was consummated
on October 2, 2000. As a result of the agreement and sale of PCS, the PBM
segment has been reclassified and is accounted for as a discontinued operation
in the accompanying financial statements. Accordingly, the Company's
continuing operations consist solely of the Retail Drug segment.
5. Store Closing and Impairment Charges
Store closing and impairment charges include non-cash charges of $8,169 and
$15,692 for the thirteen weeks ended May 27, 2000 and May 29, 1999,
respectively for the impairment of long-lived assets (including allocable
goodwill) at 42 and 76 stores, respectively. These amounts include the write-
down of long-lived assets at stores that were assessed for impairment because
of management's intention to relocate or close the store or because of changes
in circumstances that indicate the carrying value of an asset may not be
recoverable.
Store closing and impairment charges consist of:
<TABLE>
<CAPTION>
Thirteen
Weeks Ended
---------------
May 27, May 29,
2000 1999
------- -------
<S> <C> <C>
Store lease exit costs..................................... $ 7,710 $12,546
Impairment charges......................................... 8,169 15,692
------- -------
$15,879 $28,238
======= =======
</TABLE>
Costs incurred to close a store, which principally include lease termination
costs, are recorded at the time management commits to closing the store, which
is typically 90 days preceding the closing date or in the case of a store to
be relocated, the date the new property is leased or purchased. The Company
calculates its liability for closed stores on a store-by-store basis. The
future minimum lease payments and related ancillary costs, from the date of
closure to the end of the remaining lease term, net of estimated cost
recoveries that may be achieved
6
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
through subletting properties or through favorable lease terminations, are
computed. This liability is discounted using a risk-free rate of interest. The
Company evaluates these assumptions each quarter and adjusts the liability
accordingly.
A rollforward of the Company's lease exit liability follows:
<TABLE>
<CAPTION>
Reversal
of
reserves
Changes in for stores
Provision for assumptions that Interest
present value about future management accretion Cash
of noncancellable sublease determined and payments,
Balance, lease payments on income, will changes in net of Balance,
beginning stores designated terminations, remain interest sublease end of
of period to be closed Etc. open rates income period
--------- ----------------- ------------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Thirteen weeks ended
May 27, 2000........... $ 212,812 $ 19,357 $ (7,301) $ (4,346) $ 3,235 $ (10,051) $ 213,706
Thirteen weeks ended
May 29, 1999 .......... $ 246,805 $ 17,141 $ (3,516) $ (1,079) $ (173) $ (20,357) $ 238,821
</TABLE>
6. Investments In Fifty Percent Or Less Owned Subsidiaries
In July 1999, the Company purchased 9,334,746 of Series E Convertible
Preferred Shares in drugstore.com, an on-line pharmacy (the "investee"), for
cash of $8,125, including legal costs, and the Company's agreement to provide
access to the Company's pharmacy networks and insurance coverages, advertising
commitments, and exclusivity agreements. Also in July 1999, each of the
Company's Series E Convertible Preferred Shares converted to one share of
common stock at the time of the investee's initial public offering
representing 21.6% of the voting stock immediately after the initial public
offering. The initial investment which is recorded in Other assets was valued
at $168,025, equal to the initial public offering price of $18 per share
multiplied by the Company's shares. The Company accounts for the investment on
the equity method because the Company has significant influence over the
investee resulting from its share of the voting stock and its right to appoint
one board member and a number of significant operating agreements. Included in
Other noncurrent liabilities is the unamortized portion of the fair value of
the operating agreements of $145,900, which is being amortized over 10 years,
the life of the arrangements described above. The excess of the initial
investment value over the Company's share of the underlying equity of the
investee is $77,320 and is being amortized over 7 years. As a result of the
start-up nature of the investee, the Company recorded an increase to its
investment of $16,034 and a corresponding increase to equity in connection
with the sale of stock by the investee during the quarter ended May 27, 2000.
The sale of PCS to Advance Paradigm is not expected to have an effect on the
Company's ability and obligations to comply with its current contractual
commitment to drugstore.com.
7
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
7. Indebtedness and Credit Agreements
Following is a summary of indebtedness at May 27, 2000 and February 26,
2000:
<TABLE>
<CAPTION>
May 27, February
2000 26, 2000
----------- -----------
<S> <C> <C>
Commercial paper borrowings...................... $ -- $ 192,000
Revolving credit facility (amended and
restated)....................................... 875,264 716,073
Term loan due 2002 (amended and restated)........ 1,300,000 1,300,000
Term note due 2002 (amended and restated)........ 262,579 272,422
5.25% convertible subordinated notes due 2002.... 649,986 649,986
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
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
5.875% to 10.475% industrial development bonds
due through 2016................................ 5,196 5,196
Lease financing obligations...................... 1,142,706 1,151,901
Other............................................ 10,496 29,056
----------- -----------
6,546,227 6,616,634
Short-term debt, current maturities of long-term
debt and lease financing obligations............ (81,850) (102,050)
----------- -----------
Long-term debt, less current maturities.......... $ 6,464,377 $ 6,514,584
=========== ===========
</TABLE>
On June 14, 2000, the Company refinanced certain of its debt (see note 9).
8. Commitments and Contingencies
Legal Proceedings
This Company is party to numerous legal proceedings, as described below. An
unfavorable resolution of certain of these matters could materially adversely
effect the Company's results of operations, financial position and cash flows.
Federal investigations
There are currently pending federal governmental investigations, both civil
and criminal, by the SEC and the United States Attorney, involving the
Company's financial reporting and other matters. The Company is cooperating
fully with the SEC and the United States Attorney. Also, as previously
announced, the Company engaged the law firm of Swidler Berlin Shereff Friedman
LLP to conduct an independent investigation of those matters. The results of
Swidler Berlin's investigation have been conveyed to the audit committee and
to management and were considered in connection with the preparation and
restatement of the financial statements included in the Fiscal 2000 10-K/A and
herein.
8
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
The U.S. Department of Labor has commenced an investigation of matters
relating to the Company's employee benefit plans, including its principal
401(k) plan which permitted employees to purchase the Company's common stock.
Purchases of the Company's common stock under the plan were suspended in
October 1999. The Company is cooperating fully with the Department of Labor.
These federal investigations are ongoing and the Company cannot predict
their outcomes. If the Company were convicted of any crime, certain contracts
and licenses that are material to its operations may be revoked, which would
have a material adverse effect on its results of operations and financial
condition. In addition, substantial penalties, damages or other monetary
remedies assessed against the Company could also have a material adverse
effect on the Company's results of operations, financial condition and cash
flows.
Stockholder litigation
The Company, its former chief executive officer Martin Grass, its former
president Timothy Noonan, its former chief financial officer Frank Bergonzi,
and its former auditor KPMG LLP, have been sued in a number of actions, most
of which purport to be class actions, brought on behalf of stockholders who
purchased the Company's securities on the open market between May 2, 1997 and
November 10, 1999. With one exception, the cases have been consolidated in the
U.S. District Court for the Eastern District of Pennsylvania, where plaintiffs
have filed a third amended complaint and have been given leave of court to
file a fourth amended complaint on or before August 10, 2000. Most of the
existing complaints assert claims against defendants under Sections 10 and 20
of the Securities Exchange Act of 1934, as amended, based upon the allegation
that the Company's financial statements for its 1997, 1998 and 1999 fiscal
years fraudulently misrepresented its financial position and results of its
operations for those periods, among other allegations. Two actions also assert
claims against defendants under Section 18 of the Exchange Act and one action
asserts claims under the Florida Securities Act and Florida common law, all
based upon similar allegations.
If any of these cases were to result in a substantial monetary judgment
against the Company, or is settled on unfavorable terms, the Company's results
of operations, financial position and cash flows could be materially adversely
affected.
Certain of the Company's former officers (Martin L. Grass, Timothy J. Noonan
and Frank Bergonzi), certain of its current and former directors (Alex Grass,
Philip Neivert, Franklin C. Brown, Leonard I. Green, Leonard N. Stern and
Nancy A. Lieberman), its former auditor, KPMG LLP, and Rite Aid as nominal
defendant, have been sued by Company shareholders derivatively on behalf of
the Company in derivative actions brought in the U.S. District Court for the
Eastern District of Pennsylvania and the Chancery Court of the State of
Delaware. The derivative complaints purport to assert claims on behalf of the
Company against the defendants for violation of duties asserted to be owed by
such defendants to the Company, based upon allegations similar to those
contained in the complaints in the securities cases described above. The time
for defendants to respond to the derivative complaints has not yet run. The
Company has made no determination yet as to how it will respond to the
derivative complaints and is unable to predict the ultimate outcome of this
litigation.
Drug pricing and reimbursement matters
Civil proceedings are continuing involving Rite Aid's pricing-related
practices for prescription drugs. On September 22, 1999, the Florida Attorney
General filed a complaint against Rite Aid in the Second District, Leon
County, alleging violations of the Florida Deceptive and Unfair Trade
Practices Act and the state RICO statute. Rite Aid no longer operates any
retail drugstores in Florida. In essence, Florida asserted that Rite Aid's
former practice of allowing its pharmacists the discretion to charge non-
uniform prices through the use of positive overrides for cash purchases of
prescription drugs was unlawful. Rite Aid discontinued its use of this policy
in June 1998 throughout its retail drugstores. On February 18, 2000, the
9
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
reviewing Florida state court dismissed with prejudice the Florida Attorney
General's complaint. On May 5, 2000, the same court denied Florida's motion to
rehear the case and affirmed the initial decision on the merits, but granted
Florida's motion to amend its complaint. On July 5, 2000, the Company filed a
motion to dismiss the amended complaint.
The filing of the complaint by the Florida Attorney General, and the
Company's press release issued in conjunction therewith, precipitated the
filing of purported federal class actions in Alabama and California and
purported state class actions in New Jersey, New York, Oregon, and
Pennsylvania. All of the class actions are based on facts essentially
identical to those contained in the Florida complaint and none specify
damages. The Company has asserted in court filings that its imposition of
positive overrides was a legitimate utilization of non-uniform pricing
similarly engaged in by many other sectors of retail commerce. The Company
filed motions to dismiss each of the uncertified class action complaints for
failure to state a claim for which relief could be granted. The Company's
arguments have prevailed in each of the cases in which a court decision has
been rendered thus far. On December 27, 1999, the United States District Court
for the Northern District of Alabama dismissed the federal RICO claims against
the Company with prejudice and the plaintiffs later filed an appeal with the
Eleventh Circuit. That appeal is currently pending. On May 21, 2000, an Oregon
state court judge granted the Company's motion to dismiss the purported class
action there with prejudice. On June 12, 2000, the United States District
Court for the Central District of California dismissed that case and on June
27, 2000, a New Jersey state court dismissed that class action there. Motions
to dismiss the state class actions in New York and Pennsylvania are currently
pending.
The Company believes that all of the positive override lawsuits are without
merit under applicable state consumer protection laws and/or state or federal
RICO statutes. As a result, the Company intends to continue to vigorously
defend each of the pending actions and does not anticipate, if fully
adjudicated, that any of the lawsuits will result in an award of damages
and/or civil penalties. However, such an outcome for each of the actions
cannot be assured and a ruling against the Company could have a material
adverse effect on the financial position and operations of the company as well
as necessitate substantial additional expenditures to cover legal costs as it
pursues all available defenses.
The Company has also recently been notified that it is being investigated by
multiple state attorneys general for its reimbursement practices relating to
partially-filled prescriptions and fully-filled prescriptions that are not
picked up by ordering customers. The Company is supplying similar information
with respect to these matters to the Department of Justice. The Company
believes that these investigations are similar to investigations which were,
and are being, undertaken with respect to the practices of others in the
retail drug industry. The Company also believes that its existing policies and
procedures fully comply with the requirement of applicable law and intends to
fully cooperate with these investigations. The Company cannot, however,
predict their outcomes at this time.
If any of these cases result in a substantial monetary judgment against the
Company or is settled on unfavorable terms, the Company's results of
operations, financial position and cash flows could be materially adversely
affected.
PCS legal proceedings
In November 1999, the Company's PCS subsidiary received a subpoena from the
Office of Inspector General of the Department of Health and Human Services
("OIG"). The subpoena requests general information about PCS's formulary
programs and rebate practices and makes no allegation of any wrongdoing by
PCS. PCS is fully cooperating with the inquiry and believes that no regulatory
action will be taken by OIG against PCS that will have a material adverse
effect on PCS's business. The Company cannot predict the outcome of this
matter.
10
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
In January 1998, a purported class action was brought against PCS by a
participant in a plan managed by PCS in the federal district court in New
Jersey. The plaintiff alleged that PCS is an ERISA fiduciary and that, as
such, breached its fiduciary obligations under ERISA and that PCS received
improper kickbacks and rebates from certain drug manufacturers. PCS believes
that the plaintiff's action is without merit and is vigorously defending this
action. The Company cannot predict the outcome of this action.
Other
In addition, the Company is subject from time to time to 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 a material
adverse effect on the Company's financial condition, cash flow or results of
operations if decided adversely. The Company, regardless of insurance
coverage, does not believe that the ultimate resolution of these matters will
have a material adverse effect on the Company's financial condition, results
of operations and cash flows.
9. Subsequent Events
Refinancings
On June 14, 2000, the Company obtained a new $1,000,000 senior secured
credit facility (the "Senior Facility") from a syndicate of banks. The Senior
Facility is guaranteed by substantially all of the Company's wholly-owned
subsidiaries, and the banks have a security interest in substantially all of
those subsidiaries' accounts receivable, inventory, and intellectual property
and a security interest in certain of their real property. Of this amount
$500,000 is in the form of a term loan due in August 2002 with interest at
LIBOR plus 3.00% and $500,000 remains available as a revolving credit facility
under the Senior Facility due in August 2002. Funds drawn under the term loan
were used to repay $300,000 of drawings under the accounts receivable
securitization program and to pay $200,000 for working capital and transaction
expenses.
In connection with the above refinancing on June 14, 2000, the Company
exchanged $52,500 of its 5.50% fixed-rate senior notes due in December 2000
and $321,800 of its 6.70% notes due in December 2001 for $374,300 of 10.50%
senior secured notes due September 2002. The Company has entered into an
agreement with certain banks under which they agreed to purchase $93,200 of
the 10.5% senior secured notes due 2002 when the 5.5% notes become due in
December 2000.
The senior secured credit facility contains customary covenants, which place
restrictions on the assumption of debt, the payment of dividends, mergers,
liens and sale-leaseback transactions. The facility requires the Company to
meet various financial ratios and limits its capital expenditures. These
ratios and capital expenditure limits are subject to adjustment if PCS is
sold. These covenants require the Company to maintain a minimum interest
coverage ratio of .75:1 (.72:1 if PCS is sold) for the quarter ended August
26, 2000, increasing to 1.40:1 (1.40:1 if PCS is sold) for the four quarter
period ending June 1, 2002 and a minimum fixed charge coverage ratio of .88:1
(.88:1 if PCS is sold) for the quarter ended August 26, 2000, increasing to
1.20:1 (1.19:1 if PCS is sold) for the four quarter period ending June 1,
2002. The Company also must maintain consolidated EBITDA (as defined in the
senior secured credit facility) of no less than $104.0 million ($81.0 million
if PCS is sold) for the quarter ended August 26, 2000, increasing to $894.0
million ($720.0 million if PCS is sold) for the four quarter period ending
June 1, 2002. In addition, capital expenditures are limited to $70.0 million
($64.0 million if PCS is sold) for the fiscal quarter ended August 26, 2000
and $265.0 million ($243.0 million if PCS is sold) for the four quarter period
ending June 1, 2002.
11
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
Also on June 14, 2000, the Company exchanged certain credit facility debt
with a carrying amount of $284,820 for 51,785,434 shares of the Company's
common stock and extended the maturity of its remaining $2,147,188 of bank
debt from November 1, 2000 to August 2002. As a result of the exchange of the
credit facility debt, the Company is expected to record a gain of $11.4
million in the second quarter of fiscal 2001.
On June 26, 2000 in a separate transaction, the company exchanged a total of
17,779,000 shares of Rite Aid common stock for $177,790 principal amount of
the 5.25% Convertible Subordinated Notes due 2002. As a result of the
exchange, the Company is expected to record a loss of approximately $89.0
million in the second quarter of fiscal 2001.
Discontinued Operations
On July 12, 2000, the Company announced that it had entered into an
agreement to sell PCS, its PBM segment, to Advance Paradigm, Inc. The sale was
consummated on October 2, 2000. The selling price of PCS consisted of $675,000
in cash; $200,000 in principal amount of Advance Paradigm's unsecured 10 year
senior subordinated notes (with warrants attached) and $125,000 in liquidation
preference of Advance Paradigm's 11% Series A Preferred Stock. The senior
subordinated notes bear interest at the rate of 11% per annum for the first 18
months after their date of issuance (October 2, 2000), 12% for the next six
months and 13% thereafter until maturity.
The warrants attached to the senior subordinated notes are not exercisable
for the first 24 months after the date the senior subordinated notes were
issued. Once exercisable, they will be transferable separately from the senior
subordinated notes and entitle the holders collectively to purchase, for $20
per share, 780,000 shares of Advance Paradigm's Class A Common Stock (subject
to adjustment for certain dilutive events). The senior subordinated notes may
be prepaid by Advance Paradigm in whole at any time; however, if less than the
entire outstanding principal amount is prepaid not more than an aggregate of
$75,000 principal amount may be prepaid from the date of issuance. Upon any
prepayment prior to October 2, 2002, a ratable portion of the warrants
attached to the senior subordinated notes will expire. The fair value of the
senior subordinated notes is estimated at 75% of their principal amount. The
fair value of the Series A Preferred Stock is estimated at its stated value.
The Company is in the process of obtaining an appraisal to determine the fair
value of the Series A Preferred Stock and warrants at the consummation date.
Commencing January 30, 2001 and until Advance Paradigm's stockholders
approve the issuance of Class B Common Stock upon conversion of the Series A
Preferred Stock, the Series A Preferred Stock will pay quarterly dividends,
solely in additional shares of Series A Preferred Stock, at the rate of 11%
per annum for the first six months, 13% for the next six months and 16%
thereafter. Upon approval by Advance Paradigm's stockholders, the Series A
Preferred Stock will be convertible, at Rite Aid's option, at $20 per share
(subject to adjustment for certain dilutive events), into shares of Class B
Common Stock of Advance Paradigm (which are convertible into shares of Class A
Common Stock which is publicly traded). Once converted, the Class B Common
Stock will be entitled to share ratably with the Class A Common Stock in
dividends declared. Holders of the Class A Preferred Stock (and of the Class B
Common Stock issuable upon its conversion) have the right to elect two members
of Advance Paradigm's board of directors.
The Company has the right to cause Advance Paradigm to register the senior
subordinated notes (and the attached warrants and the shares issuable upon
exercise of the warrants) and the Series A Preferred Stock (and if converted,
the shares issued upon conversion) for sale under the Securities Act of 1933.
The Company has agreed not to sell more than 50% of the shares of Series A
Preferred Stock (and the shares into which it may be converted)
12
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
for a period of 24 months from their date of issuance unless the stockholders
of Advance Paradigm do not approve its conversion into Class B Common Stock by
January 30, 2001 or unless the market price of Advance Paradigm's Class A
Common Stock averages $40 per share for 20 consecutive trading days after
April 2, 2001.
When the sale was consummated, the Company applied $575,000 of the cash
portion of the proceeds to reduce the outstanding balance of the PCS credit
facility, and pledged the Series A Preferred Stock (and all securities issued
upon its conversion) and the senior subordinated notes to the lenders under
the PCS credit facility and RCF credit facility to secure the Company's
obligations thereunder. The Company is required to use any net proceeds
received from any sale of those securities to further repay the then
outstanding balance of the PCS credit facility and, if repaid in full, to
repay the then outstanding balance of the RCF credit facility.
The PBM segment is reported as a discontinued operation for all periods
presented in the accompanying financial statements and the operating results
of the PBM segment are reflected separately from the results of continuing
operations. The estimated loss on the disposal of the PBM segment, subject to
closing adjustments and final determination of fair value of the Series A
Preferred Stock and warrants, is $334,763 (of which $303,330 was recorded in
the first quarter of fiscal 2001 and $31,433 will be recorded in the second
quarter of fiscal 2001 due to changes in estimates subsequent to the filing of
the Company's original fiscal 2001 Form 10-Q for the period ended May 27,
2000), which consists of an estimated loss on disposal, estimated transaction
expenses and estimated net operating income through the sale date of October
2, 2000. Summarized operating results of the PBM segment for the thirteen
weeks ended May 27, 2000 and May 29, 1999, are as follows:
<TABLE>
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
May 27, 2000 May 29, 1999
------------ ------------
<S> <C> <C>
Net sales............... $ 333,319 $326,487
Income from operations
before income tax
expense................ 25,181 18,296
Income tax expense...... (13,846) (14,951)
--------- --------
Income from discontinued
operations............. 11,335 3,345
--------- --------
Loss on disposal before
income tax expense..... (280,580) --
Income tax expense...... (22,750) --
--------- --------
Loss on disposal........ (303,330) --
--------- --------
(Loss) income from
discontinued
operations............. $(291,995) $ 3,345
========= ========
</TABLE>
At May 27, 2000 and February 26, 2000, the assets of PCS consisted of
accounts receivable, property, plant and equipment and intangible assets, net
of liabilities. Net assets are comprised of $413,627 of net current
liabilities and $1,403,677 of net noncurrent assets at May 27, 2000 and
$390,053 of net current liabilities and $1,743,828 of net noncurrent assets at
February 26, 2000.
As a result of the decision to discontinue the operations of the Company's
PBM segment, the Company recorded an increase to the tax valuation allowance
and income tax expense of $146,916 in the thirteen week period ended May 27,
2000.
13
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
10. Restatement
The financial statements for the thirteen weeks ended May 29, 1999 and the
balance sheet as of May 27, 2000 have been restated to reflect various
adjustments to the previously reported financial statements. The further
restatement resulted in a $1,582 net decrease in retained earnings as of May
27, 2000 (see note 25 to the consolidated financial statements in the
Company's Fiscal 2000 Form 10-K/A). The May 27, 2000 balance sheet reflects
certain other adjustments principally resulting in a reduction to inventory
and accrued expenses of approximately $140 million and an additional
adjustment increasing current liabilities and decreasing noncurrent
liabilities by $210 million. Additionally, the Company has sold its PBM
segment, which requires it to be reclassified as a discontinued operation. The
following table sets forth the restated results of operations, net loss and
net loss per share and the impact of reclassifying the PBM segment as a
discontinued operation.
<TABLE>
<CAPTION>
For the thirteen weeks ended May 29, 1999
------------------------------------------------------------------------------------------------
Restatement
Adjustments as Restated as
Previously Previously Further As Restated
As Originally Reported in 2001 Reported in 2001 Restatement and
Reported(1) Form 10-Q(2) Form 10-Q(2) Adjustments(3) Reclassifications(4) Reclassified
------------- ---------------- ---------------- -------------- -------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $3,624,500 $ 1,642 $3,626,142 $ -- $(271,521) $3,354,621
Costs and expenses
excluding store closing
and impairment
charges................ 3,465,468 149,613 3,615,081 (8,199) (271,425) 3,335,457
Store closing and
impairment charges..... 17,890 10,348 28,238 -- -- 28,238
---------- --------- ---------- ------- --------- ----------
Income (loss) from
continuing operations
before income taxes and
the cumulative effect
of a change in
accounting method...... 141,142 (158,319) (17,177) 8,199 (96) (9,074)
Income tax expense
(benefit).............. 60,127 (60,824) (697) (31,511) 3,249 (28,959)
---------- --------- ---------- ------- --------- ----------
Income (loss) from
continuing operations.. 81,015 (97,495) (16,480) 39,710 (3,345) 19,885
Income from discontinued
operations, net of
tax.................... -- -- -- -- 3,345 3,345
Cumulative effect of
accounting change, net
of tax................. -- (27,300) (27,300) -- -- (27,300)
---------- --------- ---------- ------- --------- ----------
Net income (loss)....... $ 81,015 $(124,795) $ (43,780) $39,710 $ -- $ (4,070)
========== ========= ========== ======= ========= ==========
Basic and diluted
earnings (loss) per
share:
Income (loss) from
continuing
operations............ $ 0.31 $ (0.37) $ (0.06) $ 0.15 $ (0.01) $ 0.08
Income from
discontinued
operations............ -- -- -- -- 0.01 0.01
Cumulative effect of
change in accounting
method................ -- (0.11) (0.11) -- -- (0.11)
---------- --------- ---------- ------- --------- ----------
Net income (loss)...... $ 0.31 $ (0.48) $ (0.17) $ 0.15 $ -- $ (0.02)
========== ========= ========== ======= ========= ==========
</TABLE>
(1) The amounts shown are as previously reported in the Company's Fiscal 2000
Form 10-Q for the thirteen weeks ended May 29, 1999.
(2) Reflects restatement adjustments previously reported in the Company's
Fiscal 2001 Form 10-Q for the thirteen weeks ended May 27, 2000. For a
description of the adjustments which resulted in the net loss and loss per
share, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -Restatement of Historical Financial Statements"
and the Company's Fiscal 2000 Form 10-K/A.
(3) To record adjustments identified subsequent to the filing of the Company's
Fiscal 2000 Form 10-K and the Fiscal 2001 Form 10-Q for the thirteen weeks
ending May 27, 2000. Also, see notes 23 and 25 to the consolidated
financial statements in the Company's Fiscal 2000 Form 10-K/A.
(4) To reclassify the PBM Segment as a discontinued operation and to reflect
certain other reclassifications. See note 9.
14
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
11. Change in Accounting Method
Retroactive to the first quarter of fiscal 2000, the Company changed its
application of the last-in, first-out ("LIFO") method of accounting by
restructuring its LIFO pool structure through a combination of certain
existing geographic pools. The reduction in the number of LIFO pools was made
to more closely align the LIFO pool structure to the Company's store
merchandise categories. The cumulative effect of the accounting change for
periods prior to fiscal 2000 was a charge of $27,300 (net of tax effect of
$18,200), or $.11 per diluted common share. The effect of this accounting
change was a reduction in income of $1,710 net of income tax effect of $1,140
or $.01 per diluted common share for the quarter ended May 29, 1999.
15
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Recent Events
On October 18, 1999, Rite Aid announced that Martin L. Grass had resigned
his positions as chairman of the board and chief executive officer of the
company. On October 27, 1999, Rite Aid completed the sale of $300 million of
convertible preferred stock to an affiliate of Leonard Green & Partners, L.P.
Following the investment, Leonard I. Green joined Rite Aid's board of
directors and became a member of its executive committee. On November 15,
1999, Mr. Green became the chairman of the board.
On December 5, 1999, a new executive management team, led by Robert G.
Miller, was hired to address and resolve the business, operational and
financial challenges confronting the company. Mr. Miller also succeeded Mr.
Green as the chairman of the board of directors. The new management team,
which has 94 years of collective experience in retail businesses, consists of:
. Robert G. Miller, Chairman of the Board and Chief Executive Officer;
. Mary F. Sammons, President, Chief Operating Officer and Board Member;
. David R. Jessick, Chief Administrative Officer and Senior Executive Vice
President; and
. John T. Standley, Chief Financial Officer and Executive Vice President.
Upon arrival, the new management team began to address the immediate
operational and liquidity challenges that confronted Rite Aid. We believe that
these short term challenges have now been substantially resolved. A more
complete discussion of the challenges faced by our new management, and their
responses to these challenges, is contained in our Fiscal 2000 10-K/A under
the caption "Business--Recent Events--The Initial Problems" and "Business--
Recent Events--New Management's Response."
New management has also developed a long term operational plan that seeks to
capitalize on the substantial investment that Rite Aid has made in its store
base and distribution facilities. By significantly scaling back our new store
development program and focusing our resources on the successful operation of
existing stores, new management intends to increase prescription drug and
front-end sales and restore the profitability of our operations. New
management is also developing a comprehensive plan to establish and maintain a
reliable system of internal accounting controls. We believe that the
successful implementation of these plans will allow Rite Aid to meet the
continuing challenges that it faces.
On July 12, 2000, we announced that we have entered into a definitive
agreement to sell our wholly-owned subsidiary, PCS Health Systems, Inc., our
pharmacy benefits management (PBM) segment, to Advance Paradigm, Inc. This
sale was consummated on October 2, 2000. We expect the sale of the PBM Segment
to result in a loss, subject to closing adjustments and final determination of
fair value of the Series A Preferred Stock and warrants, of approximately
$334.8 million (of which $303.3 million was recorded in the first quarter of
fiscal 2001 and $31.4 million will be recorded in the second quarter of fiscal
2001 due to changes in estimates subsequent to the filing of the Company's
original Fiscal 2001 Form 10-Q for the period ended May 27, 2000) which
consists of an estimated loss on disposal of PCS, estimated transaction
expenses and estimated net operating income through the consummation of the
sale. As a result of the decision to discontinue the operations of our PBM
segment, we recorded an increase to the tax valuation allowance and income tax
expense of $146.9 million in the thirteen week period ended May 27, 2000.
On July 11, 2000, we announced the summary results of our first quarter of
fiscal 2001. We announced that we had revenues of $3.8 billion, a net loss of
$238 million and a loss per diluted share of $0.92. As set forth in this Form
10-Q/A, the results announced on July 11, 2000 have been adjusted primarily to
reflect the PBM segment as a discontinued operation, to reflect the valuation
allowance charge, and to make other adjustments as a result of the restatement
on October 11, 2000 of the consolidated financial statements for fiscal years
2000, 1999, and 1998. The information contained in this Form 10-Q/A is as of
July 18, 2000, except for information relating to the sale of the PBM segment
and the effect of the restatement discussed in Note 10 to the financial
statements, which has been updated through October 2, 2000.
16
<PAGE>
Our Long Term Strategy
New management's long term strategic plan will scale back our new store
development program and focus on enhancing the performance of our existing
store base. We intend to improve the performance of our existing stores by (1)
capitalizing on our substantial investments in our stores and distribution
facilities; (2) enhancing our customer and employee relationships; and (3)
improving our product offerings in the stores. We will also build a
comprehensive plan to establish and maintain adequate and reliable accounting
systems and controls.
Capitalize on Investments in Store Base and Distribution Facilities. Over
the last five years, we have opened 537 new stores, relocated 1,003 stores,
generally to larger or free-standing sites, remodeled 383 stores and closed
1,039 stores. We also acquired 1,639 stores during the same period. All of our
stores are now integrated into a common information system. Our investments
have given us one of the most modern store bases in the industry, with 29% of
our stores at June 30, 2000 having been constructed or relocated since the
beginning of fiscal 1998. It generally takes two to four years for our new and
relocated stores to develop the critical mass of customers necessary to
achieve profitability. Because of the large percentage of our stores which
have been built or remodeled in the last three years, attracting more
customers is a key component of our long term strategy. We have also made
significant improvements to our distribution network to support these new
stores, including the opening of two new high capacity distribution centers.
Enhance Customer and Employee Relationships. We have initiated various
promotional programs that are designed to improve our image with customers.
These include the weekly distribution of a nationwide advertising circular to
announce vendor promotions, weekly sales items and, in our expanded test
market, Rite Aid's customer reward program, "Rite Rewards." Through the use of
technology and attention to customers' needs and preferences, we are
increasing efforts to identify inventory and product categories to enable us
to offer more personalized products and services to customers. We are
developing employee-training programs to improve customer service and educate
our employees about the products we offer. We are also developing new employee
programs that create compensatory and other incentives for employees to
provide customers with good service and to promote Rite Aid's private label
brands.
Improve Product Offerings. In recent years Rite Aid has added popular and
profitable product departments, such as our General Nutrition Companies, Inc.
("GNC") stores-within-Rite Aid-stores and one-hour photo development
departments. We are continuing to develop ideas for new product departments
and have begun to implement plans to expand the categories of front-end
products that we sell in our larger west coast stores. Another important focus
of our new management team is to increase our offerings and sales of private
label Rite Aid brand products by identifying additional product categories
that we can bring to market under our private label brands. We also want to
increase our sales of generic prescription drugs, which provide the same
desired medical benefits as brand name prescription drugs but provide cost
savings to us and our customers. As private label and generic prescription
drugs generate higher margins than national branded label products, we expect
that increases in the sales of these products would enhance our profitability.
We believe that the addition of new departments and increases in offerings of
products and services are integral components of our strategy to distinguish
Rite Aid from other national drugstore chains.
Build a Stable and Reliable Financial Reporting System. Following our
comprehensive review of Rite Aid's books and records, new management concluded
it was first necessary to stabilize our accounting systems and procedures and
then to develop, implement and maintain appropriate improvements to assure
that we have adequate and reliable accounting systems and controls. The
company has retained Arthur Andersen LLP to provide accounting support to
assist Rite Aid's financial personnel with the resources required to support
the audit of the company's financial statements. New management's long term
strategy includes the development of a comprehensive program to address the
integrity and reliability of Rite Aid's reporting of financial information.
Accordingly, new management will undertake the first step of this long term
plan by developing policies and procedures that establish a foundation for its
financial and accounting functions, support ongoing improvements and provide
mechanisms for directing, controlling and monitoring our accounting and
financial organization.
17
<PAGE>
New management expects that Arthur Andersen LLP will continue to provide
assistance as needed until we are able to operate an adequate system of
internal accounting controls without outside support.
Current Challenges and Risks
. Financial Challenges. We have a high level of debt. In June 2000, new
management completed a restructuring of our indebtedness, which extended
the maturities of a significant amount of our indebtedness until at
least August 2002 and provides us with additional borrowing capacity. We
will continue to have significant debt service obligations going forward
and we will be constrained by:
--interest payment obligations with respect to a total of $5.6 billion
of borrowings and $1.1 billion of capital leases outstanding at June
24, 2000;
--the financial covenants in our debt agreements, which must be
satisfied in order for us to continue borrowing funds under our
revolving credit facility and may limit our operating flexibility;
and
--interest rate fluctuations with respect to our floating-rate
indebtedness.
Our ability to refinance our substantial indebtedness before August
2002 will depend, in part, on our ability to execute our long term
strategy and attract more customers to our new and relocated stores.
. Operational Challenges. Our modern, fully-integrated store base allows
us to focus on the challenges of improving our store operations and
increasing store productivity. In responding to the operational issues
that confronted us during fiscal 2000, new management instituted a
number of initiatives to improve store performance. To further improve
our operating performance, we will need to:
--attract customers through new product offerings and better services;
--price our products competitively;
--resolve any new issues that may arise with our suppliers; and
--improve the image of our pharmacies.
. Other Risks. In addition to the foregoing, our business is subject to
other risks including:
--pending lawsuits against us as well as civil and criminal
investigations by various governmental agencies, including, among
others, the SEC and the United States Attorney;
--our ability to develop, implement and maintain reliable and adequate
accounting systems and controls;
--our reliance on third-party suppliers;
--changes in third-party reimbursement levels for prescription drugs;
--our dependence upon key personnel;
--competition in our markets; and
--our ability to adhere to governmental regulations with respect to our
pharmacy business.
We describe these risks in greater detail under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Our Future Prospects" included in our
Fiscal 2000 10-K/A.
Restatements of Historical Financial Statements
The consolidated financial statements for fiscal 1998, 1999 and 2000 and
summarized quarterly financial information for fiscal 1999 and 2000 have been
restated to reflect various adjustments. The aggregate effect of these
adjustments on the historical financial statements was to reduce net income by
$471.1 million and $605.2
18
<PAGE>
million for fiscal 1998 and fiscal 1999, respectively, to reduce the net loss
by $10.0 million for fiscal 2000 and by $85.1 million for the thirteen weeks
ended May 29, 1999. On an aggregate basis these adjustments reduced Rite Aid's
retained earnings at February 26, 2000, and May 27, 2000 by $1.6 billion and
$1.6 million, respectively.
The principal adjustments to Rite Aid's financial statements may be
categorized as follows:
Inventory/Cost of Goods Sold
The restated financial statements reflect adjustments to inventory and cost
of goods sold related primarily to reversals of unearned vendor allowances
previously recorded as a reduction to cost of goods sold, to correctly apply
the retail method of accounting, record writedowns for slow moving and
obsolete inventory, recognize certain selling costs including promotional
markdowns and shrink in the period in which they were incurred, accrue for
inventory cut-off, and to reflect unearned vendor allowances in the inventory
balances.
Property, Plant and Equipment
The restated financial statements reflect adjustments to charge certain
items previously capitalized to expense in the period in which they were
incurred. Such items include certain costs for repairs and maintenance,
interest, and internal software expenditures. The adjustments also include
increases to depreciation expense to reverse the effects of retroactive
changes made to the useful lives of certain assets, to depreciate assets
misclassified as construction in-progress and to recognize depreciation
expense in the appropriate periods.
Lease Obligations
The restated financial statements reflect the sale-leaseback of certain
stores as financing transactions. Such transactions had previously been
accounted for as sales with corresponding operating leases. The adjustment to
correct these items resulted in the reversal of the asset sales and the
establishment of lease obligations. In addition, certain leases previously
accounted for as operating leases were determined to be capital leases.
Purchase Accounting
The company acquired Thrifty PayLess, Inc. in fiscal 1997 and Harco Inc. and
K&B Incorporated in fiscal 1998. Certain liabilities associated with these
acquisitions that had previously been established with a corresponding
increase to goodwill have been either reduced or eliminated to correctly
reflect the fair value of the assets and liabilities acquired at the date of
acquisition.
Accruals for Operating Expense
The restated financial statements reflect adjustments to expense certain
operating costs in the period in which they were incurred and to record a
corresponding liability for those items not paid at the end of the period.
Such costs primarily consisted of payroll, vacation pay, incentive
compensation, executive retirement plans, scheduled rent increases, and
certain insurance claims.
Exit Costs and Impairment of Operating and Other Assets
The restated financial statements reflect adjustments to appropriately
recognize charges related to store closures in the period in which the
decision, and ability, to close a store had been made. In addition, other
changes not related to exiting stores and gains from the sale of certain
assets that had previously been recorded as adjustments to the store exit
liability have been reflected as income or expense in the period in which they
were incurred or realized.
Adjustments have also been made to record impairment charges for stores and
other assets in the period in which the impairment occurred, and to change the
method used to evaluate assets for impairment from a market
19
<PAGE>
level to an individual store level because this is the lowest level of
independent cash flows ascertainable for purposes of measuring impairment.
We expect the following factors to affect our results of operations on a
going forward basis.
Maturing Store Base. Since the beginning of fiscal 1998, Rite Aid has built
372 new stores, relocated 713 stores and closed 791 stores. These new and
relocated stores represent approximately 29% of Rite Aid's total stores at
June 30, 2000. The new and relocated stores opened in recent years are
generally larger, free standing stores with higher operating expenses than our
older stores. New stores generally do not become profitable until a critical
mass of customers is developed. Relocated stores also must attract additional
customers to achieve comparable profitability to the store that was replaced.
We believe that the period of time required for a new store to achieve
profitable operations is generally between two and four years. This period can
vary significantly based on the location of a particular store and on other
factors, including the investments made in purchasing prescription files for
the location and advertising. Our recent liquidity constraints have limited
our ability to purchase prescription files and make other investments to
promote the development of our new and relocated stores. We believe that our
relatively high percentage of new and relocated stores is a significant factor
in our recent operating results. As new management continues to implement its
long term strategy, it will scale back Rite Aid's new store construction
program and focus on making the operations of its existing base of new and
relocated stores profitable. Management believes that as these newer stores
mature they should gain the critical mass of customers needed for profitable
operations. This continuing maturation should positively affect Rite Aid's
operating performance in future periods. If we are not able to improve the
performance of these new and relocated stores it will adversely affect our
ability to restore the profitability of our operations.
Reclassification of Lease Obligations. In connection with the restatement of
Rite Aid's operating results for fiscal 1999 and 1998, certain store leases
that had previously been classified as operating leases have now been
classified as capital leases. As a result of this restatement, our property,
plant and equipment and total debt balances at February 26, 2000 were
increased by $964.9 million and $1,080.0 million, respectively. The change in
classification of these lease obligations will result in an allocation of
depreciation charges to cost of goods sold and selling, general and
administrative expense. In addition, a portion of the lease payments will be
included in interest expense.
Substantial Investigation Expenses. The company has incurred substantial
costs in connection with the process of reviewing, reconciling and restating
its books and records, the investigation of its prior accounting practices and
the preparation of its audited financial statements. Included in these
expenses are the costs of the Deloitte & Touche LLP audit, the investigation
by Swidler Berlin, assisted by Deloitte & Touche LLP and the costs of
retaining Arthur Andersen LLP to assist management in reviewing and
reconciling its books and records. Management currently estimates that these
costs will total approximately $50.0 million, of which $10.1 million was
incurred in fiscal 2000, $19.5 million was incurred in the first fiscal
quarter of fiscal 2001, and the balance is expected to be incurred in the
second quarter of fiscal 2001 and thereafter. Rite Aid anticipates that it
will continue to incur significant legal and other expenses in connection with
the ongoing litigation and investigations to which it is subject.
Sale of PBM Segment: Discontinued Operations. On July 12, 2000, Rite Aid
announced that it had entered into an agreement to sell PCS, its PBM segment,
to Advance Paradigm, Inc. for $1.0 billion. The sale was consummated on
October 2, 2000. The selling price of PCS consisted of $675.0 million in cash;
$200.0 million in principal amount of Advance Paradigm's unsecured 10 year
senior subordinated notes (with warrants attached) and $125.0 million in
liquidation preference of Advance Paradigm's 11% Series A Preferred Stock. The
senior subordinated notes bear interest at the rate of 11% per annum for the
first 18 months after their date of issuance (October 2, 2000), 12% for the
next six months and 13% thereafter until maturity. The warrants attached to
the senior subordinated notes are not exercisable for the first 24 months
after the date the senior subordinated notes were issued. Once exercisable,
they will be transferable separately from the senior subordinated notes and
entitle the holders collectively to purchase, for $20 per share, 780,000
shares of Advance Paradigm's Class A Common Stock subject to adjustment for
certain dilutive events. The senior subordinated notes may be prepaid by
Advance Paradigm in whole at any time; however, if less than the entire
outstanding principal amount is prepaid not more than an aggregate of $75.0
million principal amount may be prepaid from the date of issuance. Upon any
20
<PAGE>
prepayment prior to October 2, 2002, a ratable portion of the warrants
attached to the senior subordinated notes will expire. The fair value of the
senior subordinated notes is estimated at 75% of their principal amount. The
fair value of the Series A Preferred Stock is estimated at its stated value.
The Company is in the process of obtaining an appraisal to determine the fair
value of the Series A Preferred Stock and warrants at the consummation date.
Commencing January 30, 2001 and until Advance Paradigm's stockholders
approve the issuance of Class B Common Stock upon conversion of the Series A
Preferred Stock, the Series A Preferred Stock will pay quarterly dividends,
solely in additional shares of Series A Preferred Stock, at the rate of 11%
per annum for the first six months, 13% for the next six months and 16%
thereafter. Upon approval by Advance Paradigm's stockholders, the Series A
Preferred Stock will be convertible, at Rite Aid's option, at $20 per share
(subject to adjustment for certain dilutive events), into shares of Class B
Common Stock of Advance Paradigm (which are convertible into shares of Class A
Common Stock which is publicly traded). Once converted, the Class B Common
Stock will be entitled to share ratably with the Class A Common Stock in
dividends declared. Holders of the Class A Preferred Stock (and of the Class B
Common Stock issuable upon its conversion) have the right to elect two members
of Advance Paradigm's board of directors.
Rite Aid has the right to cause Advance Paradigm to register the senior
subordinated notes (and the attached warrants and the shares issuable upon
exercise of the warrants) and the Series A Preferred Stock (and if converted,
the shares issued upon conversion) for sale under the Securities Act of 1933.
Rite Aid has agreed not to sell more than 50% of the shares of Series A
Preferred Stock (and the shares into which it may be converted) for a period
of 24 months from their date of issuance unless the stockholders of Advance
Paradigm do not approve its conversion into Class B Common Stock by January
30, 2001 or unless the market price of Advance Paradigm's Class A Common Stock
averages $40 per share for 20 consecutive trading days after April 2, 2001.
When the sale was consummated, the Company applied $575.0 million of the
cash portion of the proceeds to reduce the outstanding balance of the PCS
credit facility, and pledged the Series A Preferred Stock (and all securities
issued upon its conversion) and the senior subordinated notes to the lenders
under the PCS credit facility and RCF credit facility to secure the Company's
obligations thereunder. Rite Aid is required to use any net proceeds received
from any sale of those securities to further repay the then outstanding
balance of the PCS credit facility and, if repaid in full, to repay the then
outstanding balance of the RCF credit facility.
The PBM segment is reported as a discontinued operation for all periods
presented in the accompanying financial statements and the operating results
of the PBM segment are reflected separately from the results of continuing
operations. The estimated loss on the disposal of the PBM segment, subject to
closing adjustments and final determination of fair value of the Series A
Preferred Stock and warrants, is $334.8 million (of which $303.3 million was
recorded in the first quarter of fiscal 2001 and $31.4 million will be
recorded in the second quarter of fiscal 2001 due to changes in estimates
subsequent to the filing of the Company's original fiscal 2001 Form 10-Q for
the period ended May 27, 2000) which consists of an estimated loss on disposal
of the PBM segment, estimated transaction expenses, and estimated net
operating income through the date the sale is consummated. Additionally, as a
result of the decision to discontinue the operations of the PBM segment, the
company recorded an increase to the tax valuation allowance and income tax
expense of $146.9 million in the first quarter of fiscal 2001.
Dilutive Equity Issuances. In June 2000, Rite Aid completed a series of debt
restructuring transactions as described further below under "--Liquidity and
Capital Resources." In connection with these transactions an aggregate total
of 69,564,434 shares of Rite Aid's common stock were issued in exchange for
$462.6 million principal amount of outstanding indebtedness. As a result of
these exchanges, we expect to record an aggregate loss on extinguishment of
approximately $77.6 million in the second quarter of fiscal 2001. In addition,
pursuant to the conversion price adjustment and pay-in-kind dividend
provisions of the convertible preferred stock issued to an affiliate of
Leonard Green and Partners, L.P. in October 1999, 57,129,273 shares of Rite
Aid common stock were issuable upon the conversion of such preferred stock at
June 30, 2000. Assuming these transactions had occurred on May 27, 2000,
shares outstanding would have increased from 260,076,000 to 386,800,805. In
light
21
<PAGE>
of our substantial leverage and liquidity constraints, we will continue to
consider opportunities to use the company's equity securities to discharge
debt or other obligations that may arise. Such issuances may have a dilutive
effect on the outstanding shares of Rite Aid common stock.
Accounting Systems. Following its review of the company's books and records,
management concluded that further steps were needed to establish and maintain
the adequacy of its internal accounting systems and controls. In connection
with the audit of the company's financial statements, Deloitte & Touche LLP
advised Rite Aid that it believed there were numerous "reportable conditions"
under the standards established by the American Institute of Certified Public
Accountants which relate to the company's accounting systems and controls and
could adversely affect the company's ability to record, process, summarize and
report financial data consistent with the assertions of management in the
financial statements. Management's long term strategy includes a comprehensive
plan to develop, implement and maintain adequate and reliable accounting
systems and controls which address the reportable conditions identified by
Deloitte & Touche LLP.
Results of Operations
Consolidated Revenues
<TABLE>
------------------------------------------------------------------------------
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
May 27, May 29,
2000 1999
----------- -----------
(dollars in thousands)
<S> <C> <C>
Sales.............................................. $3,442,186 $3,354,621
Sales growth....................................... 2.6% 10.5%
Same store sales growth............................ 6.2% 11.2%
Pharmacy sales growth.............................. 7.2% 20.3%
Same store pharmacy sales growth................... 9.6% 21.4%
Pharmacy as a % of total sales..................... 60.1% 57.6%
Third party sales as a % of total pharmacy sales... 89.6% 87.1%
Front end sales growth............................. (1.4)% (0.8)%
Same store front end sales growth.................. 1.4% (0.5)%
Front end as a % of total sales.................... 39.9% 42.4%
Store data:
Total stores (beginning of period)............. 3,802 3,870
New stores..................................... 4 21
Closed stores.................................. (27) (46)
Store acquisitions, net........................ -- 33
Total stores (end of period)................... 3,779 3,878
Relocated stores .............................. 24 50
</TABLE>
-------------------------------------------------------------------------------
The 2.6% growth in sales for the thirteen week period ended May 27, 2000 was
primarily due to the continuing strong growth of our pharmacy sales, which
more than offset a decline in our front end sales.
For the thirteen week period ended May 27, 2000 and for the thirteen week
period ended May 29, 1999, prescription drug revenues led sales growth with
same-store sales increases of 9.6% and 21.4%, respectively. Our pharmacy sales
growth continued to benefit from our ability to attract and retain managed
care customers, our ongoing program of purchasing prescription files from
independent pharmacies and favorable industry trends. These trends include an
aging American population with many "baby boomers" now in their fifties and
consuming a greater number of prescription drugs. The use of pharmaceuticals
as the treatment of choice for a growing number of healthcare problems and the
introduction of a number of successful new prescription drugs also contributes
to the growing demand for pharmaceutical products.
Front-end sales, which include all non-prescription sales such as seasonal
merchandise, convenience items and food and other non-prescription sales,
decreased in the thirteen week period ended May 27, 2000 from the same period
prior year, primarily as a result of store closures. Offsetting the impact of
the store closures was a
22
<PAGE>
1.4% increase in same store sales. The same store sales increase was primarily
a result of the initiatives put into place by new management which included,
among other things, lowering prices on key items, weekly distribution of a
nationwide advertising circular and expanding certain product categories.
Costs and Expenses
<TABLE>
------------------------------------------------------------------------------
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
May 27, May
2000 29, 1999
----------- -----------
(dollars in thousands)
<S> <C> <C>
Costs of goods sold.................................. $2,657,927 $2,500,279
Gross margin......................................... 22.8% 25.5%
Selling, general and administrative.................. $ 838,085 $ 730,778
Selling, general and administrative as a % of
revenues............................................ 24.3% 21.8%
Goodwill amortization................................ $ 6,074 $ 6,168
Interest expense..................................... 171,641 98,232
Closed store and impairment charges.................. 15,879 28,238
Share of loss from equity investment................. 11,574 --
------------------------------------------------------------------------------
</TABLE>
Cost of Goods Sold
Gross margin was 22.8% for the thirteen week period ended May 27, 2000
compared to 25.5% for the same period the prior year. Gross margins for the
thirteen week period ended May 27, 2000 declined from the prior year as a
result of the continuing growth of third party pharmacy sales as a percentage
of total retail drug sales.
Negatively impacting gross margins in the periods presented was the
continuing trend of rising third party sales coupled with decreasing margins
on third party reimbursed prescription sales. Third party prescription sales
typically have lower gross margins than other prescription sales because they
are paid by a person or entity other than the recipient of the prescribed
pharmaceutical and are generally subject to lower negotiated reimbursement
rates in conjunction with a pharmacy benefit plan. Pharmacy sales as a
percentage of total sales were 60.3% and 57.6% for the thirteen weeks periods
ended May 27, 2000 and May 29, 1999, respectively. The ratios of third party
sales to total pharmacy sales were 89.6% and 87.1% for the thirteen weeks
periods ended May 27, 2000 and May 29, 1999, respectively. These effects were
partially offset by front-end gross margin improvements.
The company uses the last-in, first-out (LIFO) method of inventory
valuation, which can only be determined annually when inflation rates and
inventory levels are finalized. Therefore, LIFO costs for interim period
financial statements are estimated. Cost of sales includes a LIFO provision of
$5.3 million for the thirteen weeks period ended May 27, 2000 versus $9.0
million for the same period a year ago.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 24.3% of sales for the
thirteen weeks ended May 27, 2000 and 21.8% of sales for the same period the
previous year. The increase in SG&A is a result of a $36.0 million decrease in
expense in the thirteen weeks ended May 29, 1999 resulting from the reversal
of a Stock Appreciation Rights accrual due to a decline in the stock price. In
addition, corporate expenses for the thirteen weeks ended May 27, 2000 were
substantially higher as a result of approximately $17.2 million of costs
associated with the restatement of the Company's historical financial
statements.
Interest Expense
Interest expense was $171.6 million for the thirteen week period ended May
27, 2000 compared to $98.2 million in the thirteen week period ended May 29,
1999. The increase in interest expense in fiscal 2000 is due to higher levels
of indebtedness throughout the period. The level of the company's indebtedness
increased in the 2000 period primarily as a result of $300 million of demand
note borrowings incurred in June 2000. The annual weighted average interest
rates excluding capital leases on the company's indebtedness for the thirteen
weeks ended May 27, 2000 and May 29, 1999, were 8.10% and 6.15%, respectively.
23
<PAGE>
Store Closing and Impairment Charges
Store closing and impairment charges include pre-tax charges of $10.9
million and $12.4 million and non-cash charges of $8.2 million and $15.7
million for the thirteen weeks ended May 27, 2000 and May 29, 1999,
respectively for the impairment of long-lived assets (including allocable
goodwill) at 42 and 76 stores, respectively. These amounts include the write-
down of long-lived assets at stores that were assessed for impairment because
of management's intention to relocate or close the store or because of changes
in circumstances that indicate the carrying value of an asset may not be
recoverable.
Store closings and impairment charges consist of:
<TABLE>
<CAPTION>
For the Thirteen
Weeks Ended
-----------------------
May 27, May 29,
2000 1999
----------- -----------
(dollars in thousands)
<S> <C> <C>
Store lease exit costs.............................. $ 7,710 $ 12,546
Impairment charges.................................. 8,169 15,692
----------- -----------
$15,879 $ 28,238
----------- -----------
</TABLE>
Costs incurred to close a store, which principally include lease termination
costs, are recorded at the time management commits to closing the store, which
is typically 90 days preceding the closing date or in the case of a store to
be relocated, the date the new property is leased or purchased. The Company
calculates its liability for closed stores on a store-by-store basis. The
future minimum lease payments and related ancillary costs, from the date of
closure to the end of the remaining lease term, net of estimated cost
recoveries that may be achieved through subletting properties or through
favorable lease terminations are computed. This liability is discounted using
a risk-free rate of interest. The Company evaluates these assumptions each
quarter and adjusts the liability accordingly.
A rollforward of the company's lease exit liability follows:
<TABLE>
<CAPTION>
Thirteen Thirteen
Weeks Weeks
Ended Ended
May 27, May 29,
2000 1999
-------- --------
(dollars in
thousands)
<S> <C> <C>
Balance--Beginning of Period............................... $212,812 $246,805
Provision for present value of noncancellable lease
payments of stores designated to be closed.............. 19,357 17,141
Changes in assumptions about future sublease income,
terminations, etc....................................... (7,301) (3,516)
Reversals of reserves for stores that management has
determined will remain open............................. (4,346) (1,079)
Interest accretion and changes in interest rates......... 3,235 (173)
Cash Payments, net of sublease income.................... (10,051) (20,357)
-------- --------
Balance--End of Period..................................... $213,706 $238,821
======== ========
</TABLE>
Income Taxes
Rite Aid had net losses for the thirteen week periods ended May 27, 2000 and
May 29, 1999. The full benefit of the net operating losses generated in the
thirteen week period ended May 27, 2000 has been fully offset and the thirteen
week period ended May 29, 1999 has been partially offset by a valuation
allowance based on management's determination that, based on available
evidence, it is more likely than not that some or all of the deferred tax
assets will not be utilized. The restated financial statements were adjusted
to properly reflect the
24
<PAGE>
federal and state tax effect of all restatement adjustments. In addition,
certain adjustments were made to the accrued Federal income tax payable and
the deferred income tax accounts to expense items in the proper period and
reflect the tax benefit of the exercise of non-qualified stock options as a
component of stockholders' equity.
The income tax provision for the thirteen week period ended May 27, 2000
reflects the effect of the decision to sell PCS and to discontinue the
operations of Rite Aid's PBM segment.
Liquidity and Capital Resources
Rite Aid has two primary sources of liquidity: cash provided by operations
and the revolving credit facility under our new senior secured credit
facility. We may also generate liquidity from the sale of assets, including
sale-leaseback transactions. During the thirteen weeks ended May 27, 2000 and
the thirteen weeks ended May 29, 1999, cash provided by operations was not
sufficient to fund our working capital requirements. As a result, we have
supplemented our cash from operations with borrowings under our credit
facilities. Our principal uses of cash are to provide working capital for
operations, service our obligations to pay interest and principal on our debt,
and to provide funds for capital expenditures.
Credit Facilities and Debt Restructuring
In June 2000, we completed a major financial restructuring that provided us
with additional liquidity, extended the maturity dates of a substantial amount
of our debt until at least August 2002 and converted a portion of our debt to
equity. These refinancing transactions are described below.
New Senior Secured Credit Facility. We entered into a new $1.0 billion
syndicated senior secured credit facility with a syndicate of banks led by
Citibank N.A., as agent. The new facility matures on August 1, 2002, and
consists of a $500.0 million term loan facility and a $500.0 million revolving
credit facility. We used the term facility to terminate our accounts
receivable securitization facility and repurchase $300.0 million of unpaid
receivables thereunder, to fund $66.4 million of transaction costs relating to
our financial restructuring and to provide $133.6 million of cash that will be
available for general corporate purposes. The revolving facility provides us
with borrowings for working capital requirements, capital expenditures and
general corporate purposes. Borrowings under the facilities generally bear
interest either at LIBOR plus 3.0%, if we choose to make LIBOR borrowings, or
at Citibank's base rate plus 2%. For additional information about the interest
rates applicable to our credit facilities, see "Quantitative and Qualitative
Disclosures about Market Risks" below.
We are required to pay fees of 0.50% per annum on the daily unused amount of
the commitment. Substantially all of our wholly-owned subsidiaries guaranteed
our obligations under the senior secured credit facility. These subsidiary
guarantees are secured by a first priority lien on the inventory, accounts
receivable, intellectual property and some of the real estate assets of the
subsidiary guarantors. Our direct obligations under the senior credit facility
are unsecured.
The senior secured credit facility contains customary covenants, which place
restrictions on the assumption of debt, the payment of dividends, mergers,
liens and sale and leaseback transactions. The facility requires us to meet
various financial ratios and limits our capital expenditures. These ratios and
capital expenditure limits are subject to adjustment if we sell PCS. These
covenants require us to maintain a minimum interest coverage ratio of .75:1
(.72:1 if PCS is sold) for the quarter ended August 26, 2000, increasing to
1.40:1 (1.40:1 if PCS is sold) for the four quarter period ending June 1,
2002, and a minimum fixed charge coverage ratio of .88:1 (.88:1 if PCS is
sold) for the quarter ended August 26, 2000, increasing to 1.20:1 (1.19:1 if
PCS is sold) for the four quarter period ending June 1, 2002. We also must
maintain consolidated EBITDA (as defined in the senior secured credit
facility) of no less than $104.0 million ($81.0 million if PCS is sold) for
the quarter ended August 26, 2000, increasing to $894.0 million ($720.0
million if PCS is sold) for the four quarter period ending June 1, 2002. In
addition, our capital expenditures are limited to $70.0 million ($64.0 million
if PCS is sold) for the fiscal quarter ended August 26, 2000 and to $265.0
million ($243.0 million if PCS is sold) for the four quarter period ending
June 1, 2002. As indicated, the sale of PCS was completed on October 2, 2000.
25
<PAGE>
The facility provides for customary events of default, including nonpayment,
misrepresentation, breach of covenants and bankruptcy. It is also an event of
default if any event occurs that enables, or which with the giving of notice
or the lapse of time would enable, the holder of Rite Aid debt to accelerate
the maturity of debt equaling $25.0 million or more.
Our ability to borrow under the senior secured credit facility is based on a
specified borrowing base consisting of eligible accounts receivable and
inventory. At June 24, 2000, the $500.0 million term loan was fully drawn. We
had no outstanding borrowings under the revolving facility at June 24, 2000;
however, $39.8 million of the availability was being utilized to support trade
letters of credit.
Other Existing Facilities. We extended to August 2002 the maturity date of
our existing syndicated credit facilities, which consist of the RCF facility
and the PCS credit facility. Borrowings under the PCS credit facility bear
interest at LIBOR plus 3.25% and borrowings under the RCF credit facility bear
interest at LIBOR plus 3.75%. These credit facilities contain restrictive
covenants which place restrictions on the assumption of debt, the payment of
dividends, mergers, liens and sale-leaseback transactions. These credit
facilities also require us to satisfy financial covenants which are generally
slightly less restrictive than the covenants in the new senior secured credit
facility. The facilities also limit the amount of our capital expenditures to
$70.0 million for the quarter ended August 26, 2000 and to $265.0 million for
the four quarters ending June 1, 2002. Any net proceeds realized from a sale
of PCS must be applied first to reduce the outstanding balances of the PCS
credit facility and then to reduce the then outstanding balance of the RCF
credit facility. The amounts repaid with the proceeds of asset sales may not
be reborrowed. The PCS credit facility continues to be secured by a first lien
on the stock of PCS and the RCF credit facility continues to be secured by a
first lien on the stock of drugstore.com and a second lien on the stock of
PCS. At June 24, 2000 we had $1.9 billion of borrowings outstanding under
these credit facilities. These facilities are also guaranteed and secured as
described below.
Exchange Offers. In June 2000, we completed the exchange of $52.5 million of
our 5.5% notes due December 2000 and $321.8 million of our 6.7% notes due
December 2001 for an aggregate of $374.3 million of our new 10.5% senior
secured notes due September 2002. After the exchange, $147.5 million of the
5.5% notes due December 2000 and $28.2 million of the 6.7% notes due December
2001 remained outstanding. In connection with the exchange, we entered into a
forward purchase agreement to sell $93.2 million of our 10.5% senior secured
notes due September 2002 to certain financial institutions. The proceeds from
such sale will permit us to repay approximately $93.2 million of the 5.5%
notes due 2000 when they mature in December of this year. The remaining 5.5%
notes due in December 2000 and 6.7% notes due December 2001 will be retired
with Rite Aid's general corporate funds.
Exchange of Debt for Equity and Exchange Debt. As part of our restructuring,
certain affiliates of J.P. Morgan, which had lent us $300.0 million under a
demand note in June 1999 and was also a lender under the RCF and PCS credit
facilities, together with certain other lenders under the two credit
facilities, agreed to exchange a portion of their loans for a new secured
exchange debt obligation and common stock. This resulted in a total of $284.8
million of debt under these facilities, including $200 million of the
outstanding principal of the demand note, being exchanged for common stock at
a price of $5.50 per share. We expect to record a gain on this exchange of
$11.4 million in the second quarter of fiscal 2001. An additional $274.8
million of borrowings under the facilities were exchanged for the exchange
debt, including the entire remaining principal amount of the J.P. Morgan
demand note. The terms of the exchange debt are substantially the same as the
terms of our RCF and PCS credit facilities and the interest rate is currently
LIBOR plus 3.25%. The lenders of the RCF and PCS credit facilities have the
same collateral as they did with respect to their loans under the credit
facilities or demand note, as applicable, and also received a first lien on
our prescription files.
On June 26, 2000, we issued 17.8 million shares of our common stock in
exchange for $177.8 million in principal amount of our 5.25% convertible
subordinated notes due 2002. As a result of this exchange, we expect to record
a loss of $89.0 million in the second quarter of fiscal 2001.
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<PAGE>
Synthetic Leases. As part of our restructuring, we amended our existing
guarantees of two synthetic lease transactions to provide substantially the
same terms as the terms of our RCF and PCS credit facilities.
Second Priority Collateral. In connection with modifications to the RCF and
PCS credit facilities, the guarantee of the Prudential note, the exchange for
exchange debt and the guarantees of the synthetic lease transactions,
substantially all of our wholly-owned subsidiaries guaranteed our obligations
thereunder on a second priority basis. These subsidiary guarantees are secured
by a second priority lien on the inventory, accounts receivable, intellectual
property and some of the real estate assets of the subsidiary guarantors.
Except to the extent previously secured, our direct obligations under those
facilities and guarantees remain unsecured.
Commercial Paper. Until September 24, 1999, we issued commercial paper
supported by unused credit commitments to supplement cash generated by
operations. Since the loss of our investment grade rating in fiscal 2000, we
are no longer able to issue commercial paper. Outstanding commercial paper of
the company amounted to $192.0 million at February 26, 2000. All remaining
commercial paper obligations were repaid in March 2000.
Debt Capitalization. The following table sets forth our debt capitalization
(in millions) at June 24, 2000, following the completion of the refinancing
transactions described above:
<TABLE>
<CAPTION>
As of
June 24,
2000
--------
<S> <C>
Secured Debt:
Senior secured credit facility(1)................................... $ 500
PCS credit facility................................................. 1,142
RCF credit facility................................................. 730
10.5% senior secured notes due 2002(2).............................. 374
Exchange debt(2).................................................... 275
Prudential note..................................................... 31
Other............................................................... 16
Lease Financing Obligations......................................... 1,104
Other Senior Debt:
5.5% notes due 2000................................................. 147
6.7% notes due 2001................................................. 28
6.0% notes due 2005................................................. 200
7.625% notes due 2005............................................... 200
7.125% notes due 2007............................................... 350
6.125% notes due 2008............................................... 150
6.0% Drs SM due 2003................................................ 200
6.875% senior debentures due 2013................................... 200
7.7% notes due 2027................................................. 300
6.875% debentures due 2028.......................................... 150
Subordinated Debt:
5.25% convertible subordinated notes due 2002(3).................... 650
------
Total Debt...................................................... $6,747
======
</TABLE>
--------
(1) Proceeds from the term loan portion of the senior secured credit facility
were used to repay the $300.0 million outstanding balance of our
receivables securitization facility, to pay approximately $66.4 million of
expenses in connection with the refinancing transactions
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<PAGE>
and to provide $133.6 million of incremental cash on our balance sheet. No
borrowings under the revolving credit portion of the senior secured credit
facility were outstanding at June 24, 2000; however, $39.8 million of
availability was being utilized to support trade letters of credit. The
receivables securitization facility was an off-balance sheet liability and
therefore was not included in the company's balance sheet in prior periods.
(2) Outstanding amount of 10.5% senior secured notes due 2002 at June 24, 2000
does not include $93.2 million of such notes which are held by a special
purpose subsidiary of the company and are subject to a forward purchase
commitment by certain financial institutions. The proceeds from the sale
of these notes will be used to retire an equivalent amount of the
remaining 5.5% notes due 2000 upon their maturity in December 2000. The
remaining 5.5% notes due 2000 will be retired with the company's general
corporate funds.
(3) Outstanding principal amount was reduced to $472.2 million with the
exchange offer for common stock consummated on June 26, 2000, pursuant to
which $177.8 million principal amount of these notes were exchanged for
common stock.
Net Cash Used in Operating, Investing and Financing Activities
We used $9.5 million of cash to fund operations in the thirteen weeks ended
May 27, 2000. Operating cash flow was negatively impacted by $153.3 million of
interest payments. Operating cash flow benefited from an increase in other
liabilities partially offset by an increase in current assets.
In the thirteen weeks ended May 29, 1999, the company used $39.1 million of
cash flow from operations. Operating cash flow was negatively impacted by an
increase in accounts receivable and a decrease in accounts payable, which was
mostly offset by a corresponding decline in inventory.
Cash used for investing activities was $20.0 million and $196.9 million for
the thirteen weeks ended May 27, 2000 and May 29, 1999, respectively. Cash
used for store construction and relocations amounted to $18.9 million and
$141.2 million for the thirteen weeks ended May 27, 2000 and May 29, 1999,
respectively. In addition, cash of $24.5 million was used to acquire Edgehill
in fiscal 2000.
The accounts receivable securitization program provided additional cash of
approximately $2.6 million and $5.8 million during fiscal 2000 and the
thirteen weeks ended May 27, 2000, respectively. Total proceeds from the sale
of the company's accounts receivable were $300,000 at May 27, 2000 and $294.1
million at February 26, 2000. The securitization facility was repaid and
terminated on June 14, 2000.
Working Capital
Net working capital was $589.2 million at May 27, 2000, compared to $720.0
million at February 26, 2000. The current ratios were 1.25 and 1.31,
respectively.
Capital Expenditures
Rite Aid plans to make total capital expenditures of approximately $225.0
million during fiscal 2001. Such expenditures consist of approximately $139.0
million related to new store construction, store relocation and other store
construction projects. An additional $61.0 million will be dedicated to other
store improvement activities including the purchase of Script Pro automated
prescription dispensing available under our senior secured facility, and the
purchase of script files from independent pharmacists. Management expects that
these capital expenditures will be financed primarily with cash flow from
operations and borrowings under the revolving credit facility. During the
thirteen weeks ended May 27, 2000, Rite Aid spent $18.9 million on capital
expenditures.
Future Liquidity
We are highly leveraged. Based upon current levels of operations and
expected improvements in our operating performance, management believes that
cash flow from operations, together with available borrowings under the new
senior secured credit facility and its other sources of liquidity (including
asset sales) will be
28
<PAGE>
adequate to meet anticipated requirements for working capital, debt service
and capital expenditures until August 2002, when $2.6 billion of our
indebtedness matures, including the revolving credit facility under the new
senior secured credit facility, matures. Our ability to replace, refinance or
otherwise extend these obligations will depend in part on our ability to
successfully execute our long-term strategy and improve the operating
performance of our stores. For a discussion of factors that could affect our
current assessment, see "--Factors Affecting Our Future Prospects" below.
Accounting Change
In fiscal 2000, we changed our application of the LIFO method of accounting
by restructuring our LIFO pool structure through a combination of certain
geographic pools. The reduction in the number of LIFO pools was made to more
closely align the LIFO pool structure to store merchandise categories. The
effect of this change in fiscal 2000 was to decrease our earnings by $6.8
million (net of income tax benefit of $4.6 million, or $.03 per diluted common
share. The cumulative effect of the accounting change for periods prior to
fiscal 2000 was a charge of $27.3 million (net of income tax benefit of $18.2
million), or $.11 per diluted common share. The effect of this accounting
change was a reduction in net income of $1.7 million, net of income tax effect
of $1.1 million or $.01 per diluted common share for the thirteen weeks ended
May 29, 1999.
Recent Accounting Pronouncements
In November 1999, the Staff of the SEC issued Staff Accounting Bulletin
(SAB) 101, "Revenue Recognition." This SAB sets forth the Staff's position
regarding the point at which it is appropriate for a Registrant to recognize
revenue. The Staff believes that revenue is realizable and earned when all of
the following criteria are met:
.persuasive evidence of an arrangement exists;
.delivery has occurred or service has been rendered;
.the seller's price to the buyer is fixed or determinable; and
.collectibility is reasonably assured.
The company uses the above criteria to determine whether revenue can be
recognized, and therefore believes that the issuance of SAB 101 does not have
a material impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133). This statement, which
establishes the accounting and financial reporting requirements for derivative
instruments, requires companies to recognize derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of SFAS No. 133.
These statements, as amended, are effective in fiscal 2002. We are evaluating
the effects that the adoption of SFAS Nos. 133 and 138 may have on the
consolidated financial statements.
Factors Affecting Our Future Prospects
Risks Related to Our Financial Condition
We are highly leveraged. Our substantial indebtedness may severely limit
cash flow available for our operations and could adversely affect our ability
to service debt or obtain additional financing if necessary.
As of June 24, 2000, Rite Aid had $5.6 billion of outstanding indebtedness
for borrowed money and $1.1 billion of capital leases (including current
maturities but excluding letters of credit) and negative stockholder's equity.
As of the same date we had additional borrowing capacity under our revolving
credit facility of $460.2 million. On a pro forma basis, giving effect to the
debt restructuring transactions completed in June 2000, our
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<PAGE>
earnings would have been insufficient to cover our fixed charges for the year
ended February 26, 2000, by $1.2 billion. Based on the indebtedness
outstanding, at June 24, 2000 (and then current interest rates) our annualized
interest expense would be approximately $574.0 million. Our high level of
indebtedness will have consequences on our operations. Among other things, our
indebtedness will:
.limit our ability to obtain additional financing;
.limit our flexibility in planning for, or reacting to, changes in our
business and the industry;
.place us at a competitive disadvantage relative to our competitors with
less debt;
.render us more vulnerable to general adverse economic and industry
conditions; and
.require us to dedicate a substantial portion of our cash flow to service
our debt.
A substantial portion of our indebtedness matures in August and September,
2002. Our ability to refinance this indebtedness will be substantially
dependent on our ability to improve our operating performance.
Approximately $3.7 billion of our indebtedness at June 24, 2000 will mature
in August and September 2002. In order to satisfy these maturing obligations,
we will need to refinance the obligations, sell assets to satisfy them or seek
postponement of the maturity dates from our existing lenders. Our ability to
successfully accomplish any of these alternative transactions will be
substantially dependent on the successful execution of our long term strategic
plan and the resulting improvements in our operating performance.
The interest rate on certain of our outstanding indebtedness is based upon
floating interest rates. If interest rates increase, our interest payment
obligations will increase.
Approximately $2.6 billion of our outstanding indebtedness as of June 24,
2000 bears an interest rate that varies depending upon LIBOR. If we borrow
additional amounts under our senior secured facility, the interest rate on
those borrowings will vary depending upon LIBOR. If LIBOR rises, the interest
rates on this outstanding debt also increases. An increase in LIBOR therefore
would increase our interest payment obligations under these outstanding loans
and have a negative effect on our cash flow and financial condition.
The covenants in our outstanding indebtedness impose restrictions that may
limit our operating and financial flexibility.
The covenants in the instruments governing our outstanding indebtedness
restrict our ability to incur liens and debt, pay dividends, make redemptions
and repurchases of capital stock, make loans, investments and capital
expenditures, prepay, redeem or repurchase debt, engage in mergers,
consolidations, asset dispositions, sale-leaseback transactions and affiliate
transactions, change our business, amend certain debt and other material
agreements, issue and sell capital stock of subsidiaries, make distributions
from subsidiaries and grant negative pledges to other creditors.
Moreover, if we are unable to meet the terms of the financial covenants or
if we breach of any of these covenants, then a default could result under one
or more of these agreements. A default, if not waived by our lenders, could
result in the acceleration of our outstanding debt and cause our debt to
become immediately due and payable. If such acceleration occurs, we would not
be able to repay our debt and it is unlikely that we would be able to borrow
sufficient additional funds to refinance such debt. Even if new financing is
made available to us, it may not be available on terms acceptable to us.
Risks Related to Our Operations
Major lawsuits have been brought against us and certain of our subsidiaries,
and there are currently pending both civil and criminal investigations by the
U.S. Securities and Exchange Commission and the United States Attorney's
Office. Any criminal conviction against the company may result in the loss of
30
<PAGE>
licenses that are material to the conduct of our business, which would have a
negative effect on our financial condition, results of operations and cash
flows.
There are currently pending both civil and criminal governmental
investigations by the SEC and the United States Attorney concerning our
financial reporting and other matters. An investigation has also been
commenced by the Department of Labor concerning our employee benefit plans.
These investigations are ongoing and we cannot predict their outcomes.
Lawsuits have been filed against us, as well as certain of our past and
present officers and directors. Class action lawsuits have been filed in which
the plaintiffs allege numerous violations of the securities laws; we cannot
predict the outcome of these cases.
Suits in six states are outstanding alleging that our pricing practices
violated applicable consumer protection laws and racketeering laws. Cases
against us regarding consumer protection and racketeering allegations have
been dismissed in the state courts of Florida, Oregon and New Jersey and in
the federal courts in Alabama and California, but we cannot predict the
outcome of an appeal, if any, nor can we predict the outcome of any of the
other cases in other jurisdictions.
In addition, given the size and nature of our business, we are subject from
time to time to various lawsuits which, depending on their outcome, may have a
negative impact on our results of operations, financial condition and cash
flows.
We are substantially dependent on a single supplier of pharmaceutical
products and our other suppliers to sell products to us on satisfactory terms.
We obtain approximately 87% of our pharmaceutical supplies from a single
supplier, McKesson, pursuant to a long-term supply contract. Pharmacy sales
represented approximately 58.4% of our total sales during fiscal 2000, and
therefore our relationship with McKesson is important to us. Any significant
disruptions in our relationships with our suppliers, particularly our
relationship with McKesson, would make it difficult for us to continue to
operate our business, and would have a material adverse effect on our results
of operations and financial condition.
Several of our executive officers have joined Rite Aid recently. We cannot
assure you that management will be able to successfully manage our business or
successfully implement our strategic plan.
Since December 1999, we have hired a new management team, including Robert
G. Miller as chief executive officer and chairman. Our management team has
considerable experience in the retail industry. Nonetheless, we cannot assure
you that management will be able to successfully manage our business or
successfully implement our strategic business plan.
We are now depending on our new management team, and the loss of their
services could have a material adverse effect on our business and the results
of our operations or financial condition.
The success of our business is materially dependent upon the continued
services of our chairman and chief executive officer, Mr. Miller, and the
other members of our new management team. The loss of Mr. Miller or other key
personnel due to death, disability or termination of employment could have a
material adverse effect on the results of our operations or financial
condition, or both. Additionally, we cannot assure you that we will be able to
attract or retain other skilled personnel in the future.
We need to improve our operations in order to improve our financial
condition but our operations will not improve if we cannot effectively
implement our business strategy.
Our operations during the fiscal year ended February 26, 2000 and the
thirteen weeks ended May 27, 2000 were adversely affected by a number of
factors, including our financial difficulties, inventory shortages,
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<PAGE>
allegations of violations of the law, including drug pricing issues, problems
with suppliers and uncertainties regarding Rite Aid's ability to produce
audited financial statements. To improve operations, new management developed
and has been implementing a business strategy to improve the pricing of
products, provide more consistent advertising through weekly, national
circulars, eliminate problems with shortages of inventory and out-dated
inventory, resolve all issues with our vendors, develop programs intended to
enhance customer relationships and provide better service and continue to
improve our stores and the product offerings within our stores. If we are not
successful in our efforts to implement our business strategy, or if our
business strategy is not effective we may not be able to improve our
operations. Failure to improve operations would adversely affect our ability
to make principal or interest payments on our debt.
The additional unregistered shares of Rite Aid common stock that we issued
may depress the market price of Rite Aid common stock because we have agreed
to register those shares under the Securities Act to enable the holders of the
shares to sell them.
In connection with the refinancing of our debt, we agreed to register the
51,785,434 shares of Rite Aid common stock that we issued to the lenders under
its RCF facility, PCS facility and demand note. In addition, we have agreed to
register the 57,571,389 shares of Rite Aid common stock underlying (as of June
30, 2000) the series B convertible preferred stock that we issued in October
1999 and the 2,500,000 shares of Rite Aid common stock underlying the warrant
issued to J.P. Morgan Ventures Corporation in October 1999. The possible
public sale of such large numbers of shares may have an adverse effect on the
market price of Rite Aid's common stock.
Risks Related to our Industry
The markets in which we operate are very competitive and further increases
in competition could adversely affect us.
We face intense competition with local, regional and national companies,
including other drug store chains, independent drug stores, Internet retailers
and mass merchandisers. We may not be able to effectively compete against them
because our existing or potential competitors may have financial and other
resources that are superior to ours. In addition, we may be at a competitive
disadvantage because we are more highly leveraged than our competitors. We
believe that the continued consolidation of the drugstore industry will
further increase competitive pressures in the industry. As competition
increases in the markets in which we operate, a significant increase in
general pricing pressures could occur which would require us to increase our
sales volume and to sell higher margin products and services in order to
remain competitive. We cannot assure you that we will be able to continue to
effectively compete in our markets or increase our sales volume in response to
further increased competition.
Changes in third-party reimbursement levels for prescription drugs could
reduce our margins and have a material adverse effect on our business.
We are reimbursed by third-party payors for approximately 87.8% of all of
the prescription drugs that we sell. These third-party payors could reduce the
levels at which they will reimburse us for the prescription drugs that we
provide to their members. Furthermore, if Medicare is reformed to include
prescription benefits, Medicare may cover some of the prescription drugs that
we now sell at retail prices, and we may be reimbursed at prices lower than
our current retail prices. If third-party payors reduce their reimbursement
levels or if Medicare covers prescription drugs at reimbursement levels lower
than our current retail prices our margins on these sales would be reduced,
and the profitability of our business could be adversely affected.
We are subject to governmental regulations, procedures and requirements; our
noncompliance or their significant change could hurt our business, the results
of our operations or our financial condition.
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Our pharmacy business is subject to several federal, state, and local
regulations. These include local registrations of pharmacies in the states
where our pharmacies are located, applicable Medicare and Medicaid
regulations, and prohibitions against paid referrals of patients. Failure to
properly adhere to these and other applicable regulations could result in the
imposition of civil and criminal penalties and could adversely affect the
continued operation of our business. Furthermore, our pharmacies could be
affected by federal and state reform programs, such as health care reform
initiatives which could, in turn, negatively affect our business. The passing
of these initiatives or any new federal or state programs could adversely
affect our business and results of operations.
Certain risks are inherent in the provision of pharmacy services, and our
insurance may not be adequate to cover any claims against us.
Pharmacies are exposed to risks inherent in the packaging and distribution
of pharmaceuticals and other health care products. Although we maintain
professional liability and errors and omissions liability insurance, we cannot
assure you that the coverage limits under our insurance programs will be
adequate to protect us against future claims, or that we will maintain this
insurance on acceptable terms in the future.
Any adverse change in general economic conditions can adversely affect
consumer-buying practices and reduce our sales of front-end products, which
are our higher margin products.
If the economy slows down and unemployment increases or inflationary
conditions worry consumers, consumers will decrease their purchases,
particularly of products other than pharmaceutical products that they need for
health reasons. We make a higher profit on our sales of front-end products
than we do on sales of pharmaceutical products. Therefore, any decrease in our
sales of front-end products will decrease our profitability.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Rite Aid's future earnings, cash flow and fair values relevant to financial
instruments are dependent upon prevalent market rates. Market risk is the risk
of loss from adverse changes in market prices and interest rates. The
company's major market risk exposure is changing interest rates. Increases in
interest rates would increase the company's interest expense. Since the end of
fiscal 1999, Rite Aid's primary risk exposure has not changed. The company
enters into debt obligations to support capital expenditures, acquisitions,
working capital needs and general corporate purposes. The company's policy is
to manage interest rates through the use of a combination of variable-rate
credit facilities, fixed-rate long-term obligations and derivative
transactions.
The table below provides information about the company's financial
instruments that are sensitive to changes in interest rates. The table
presents principal payments and the related weighted average interest rates by
expected maturity dates as of May 27, 2000.
<TABLE>
<CAPTION>
Fair Value
at May 27,
2001 2002 2003 2004 2005 Thereafter Total 2000
------- ------- ---------- -------- ------ ---------- ---------- ----------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt,
including
Current portion
Fixed rate............ $55,884 $30,055 $1,121,871 $200,854 $2,465 $1,554,549 $2,965,678 $1,604,967
Average Interest
Rate................. 5.50% 6.78% 7.46% 6.01% 11.59% 7.00%
Variable Rate......... -- -- $2,437,843 -- -- -- $2,437,843 $2,437,843
Average Interest
Rates................ -- -- 10.07% -- -- --
</TABLE>
In June 2000, Rite Aid refinanced certain variable- and fixed-rate
obligations maturing in fiscal years 2001 and 2002 and entered into an
interest rate swap that fixes the LIBOR component of $500.0 million of Rite
Aid's
33
<PAGE>
variable-rate debt at 7.083% for a two year period. In July 2000, Rite Aid
entered into an additional interest rate swap that fixes the LIBOR component
of an additional $500.0 million of variable rate debt at 6.946% for a two year
period. As a result of these financing activities, Rite Aid's ratio of
variable rate exposure changed from 37.7% as of February 26, 2000 to 27.3% as
of July 10, 2000.
Our ability to satisfy our interest payment obligations on our outstanding
debt will depend largely on our future performance, which, in turn, is subject
to prevailing economic conditions and to financial, business and other factors
beyond our control. If we do not have sufficient cash flow to service our
interest payment obligations on our outstanding indebtedness and if we cannot
borrow or obtain equity financing to satisfy those obligations, our business
and results of operations will be materially adversely affected. We cannot
assure you that any such borrowing or equity financing could be successfully
completed.
As of July 10, 2000, Rite Aid had three credit facilities: the new $1.0
billion senior secured credit facility entered into on June 14, 2000, and the
RCF credit facility and PCS credit facility. In addition, it had fixed-rate
obligations in the amount of $4.0 billion and exchange debt in the amount of
$274.8 million. In March 2000, all remaining commercial paper obligations were
repaid. The ratings on these credit facilities and obligations as of July 10,
2000 were as follows: the $1.0 billion RCF facility: B by Standard and Poor's
and B2 by Moody's; the $1 billion senior secured credit facility: BB- by
Standard & Poor's and Ba3 by Moody's; the $1.3 billion PCS facility: B by
Standard & Poor's and B2 by Moody's; the fixed-rate obligations: B- by
Standard & Poor's and Caa1 by Moody's; and the exchange debt is not rated yet.
The interest rates on the variable-rate borrowings are as follows: the $1.0
billion RCF facility: LIBOR plus 3.75%, the $1.0 billion senior secured credit
facility: LIBOR plus 3.00%, and the $1.3 billion PCS facility and the exchange
debt: LIBOR plus 3.25%.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Federal investigations
There are currently pending federal governmental investigations, both civil
and criminal, by the SEC and the United States Attorney, involving our
financial reporting and other matters. Rite Aid is cooperating fully with the
SEC and the United States Attorney. Also, as previously discussed, Rite Aid's
audit committee engaged the law firm of Swidler Berlin Shereff Friedman LLP to
conduct an independent investigation of those matters. The results of Swidler
Berlin's investigation have been conveyed to the audit committee and to
management and were considered in connection with the preparation and
restatement of the financial statements included in the Fiscal 2000 10-K/A and
in this report.
The U.S. Department of Labor has commenced an investigation of matters
relating to Rite Aid's employee benefit plans, including its principal 401(k)
plan which permitted employees to purchase Rite Aid common stock. Purchases of
Rite Aid common stock under the plan were suspended in October 1999. Rite Aid
is cooperating fully with the Department of Labor.
These federal investigations are ongoing and we cannot predict their
outcomes. If Rite Aid were convicted of any crime, certain contracts and
licenses that are material to our operations may be revoked, which would have
a material adverse effect on our results of operations and financial
condition. In addition, substantial penalties, damages or other monetary
remedies assessed against Rite Aid could also have a material adverse effect
on our results of operations and financial condition.
Stockholder litigation
Rite Aid, its former chief executive officer Martin Grass, its former
president Timothy Noonan, its former chief financial officer Frank Bergonzi,
and its former auditor KPMG LLP, have been sued in a number of actions, most
of which purport to be class actions, brought on behalf of stockholders who
purchased Rite Aid securities on the open market between May 2, 1997 and
November 10, 1999. With one exception, the cases have been consolidated in the
U.S. District Court for the Eastern District of Pennsylvania, where plaintiffs
have filed a third amended complaint and have been given leave of court to
file a fourth amended complaint on or before August 10, 2000. Most of the
existing complaints assert claims against defendants under Sections 10 and 20
of the Securities Exchange Act of 1934, as amended, based upon the allegation
that Rite Aid's financial statements for its 1997, 1998 and 1999 fiscal years
fraudulently misrepresented its financial position and results of its
operations for those periods, among other allegations. Two actions also assert
claims against defendants under Section 18 of the Exchange Act and one action
asserts claims under the Florida Securities Act and Florida common law, all
based upon similar allegations.
If any of these cases were to result in a substantial monetary judgment
against Rite Aid, or is settled on unfavorable terms, Rite Aid's results of
operations, financial position and cash flows could be materially adversely
affected.
Certain of Rite Aid's former officers (Martin L. Grass, Timothy J. Noonan
and Frank Bergonzi), certain of its current and former directors (Alex Grass,
Philip Neivert, Franklin C. Brown, Leonard I. Green, Leonard N. Stern and
Nancy A. Lieberman), its former auditor, KPMG LLP, and Rite Aid as nominal
defendant, have been sued by Rite Aid shareholders derivatively on behalf of
Rite Aid in derivative actions brought in the U.S. District Court for the
Eastern District of Pennsylvania and the Chancery Court of the State of
Delaware. The derivative complaints purport to assert claims on behalf of Rite
Aid against the defendants for violation of duties asserted to be owed by such
defendants to Rite Aid, based upon allegations similar to those contained in
the complaints in the securities cases described above. The time for
defendants to respond to the derivative complaints has not yet run. Rite Aid
has made no determination yet as to how it will respond to the derivative
complaints and is unable to predict the ultimate outcome of this litigation.
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<PAGE>
Drug pricing and reimbursement matters
Civil proceedings are continuing involving Rite Aid's pricing-related
practices for prescription drugs. On September 22, 1999, the Florida Attorney
General filed a complaint against Rite Aid in the Second District, Leon
County, alleging violations of the Florida Deceptive and Unfair Trade
Practices Act and the state RICO statute. Rite Aid no longer operates any
retail drugstores in Florida. In essence, Florida asserted that Rite Aid's
former practice of allowing its pharmacists the discretion to charge non-
uniform prices through the use of positive overrides for cash purchases of
prescription drugs was unlawful. Rite Aid discontinued its use of this policy
in June 1998 throughout its retail drugstores. On February 18, 2000, the
reviewing Florida state court dismissed with prejudice the Florida Attorney
General's complaint. On May 5, 2000, the same court denied Florida's motion to
rehear the case and affirmed the initial decision on the merits, but granted
Florida's motion to amend its complaint. On July 5, 2000, Rite Aid filed a
motion to dismiss the amended complaint.
The filing of the complaint by the Florida Attorney General, and Rite Aid's
press release issued in conjunction therewith, precipitated the filing of
purported federal class actions in Alabama and California and purported state
class actions in New Jersey, New York, Oregon, and Pennsylvania. All of the
class actions are based on facts essentially identical to those contained in
the Florida complaint and none specify damages. Rite Aid has asserted in court
filings that its imposition of positive overrides was a legitimate utilization
of non-uniform pricing similarly engaged in by many other sectors of retail
commerce. Rite Aid filed motions to dismiss each of the uncertified class
action complaints for failure to state a claim for which relief could be
granted. Rite Aid's arguments have prevailed in each of the cases in which a
court decision has been rendered thus far. On December 27, 1999, the United
States District Court for the Northern District of Alabama dismissed the
federal RICO claims against Rite Aid with prejudice and the plaintiffs later
filed an appeal with the Eleventh Circuit. That appeal is currently pending.
On May 21, 2000, an Oregon state court judge granted Rite Aid's motion to
dismiss the purported class action there with prejudice. On June 12, 2000, the
United States District Court for the Central District of California dismissed
that case and on June 27, 2000, a New Jersey state court dismissed that class
action there. Motions to dismiss the state class actions in New York and
Pennsylvania are currently pending.
Rite Aid believes that all of the positive override lawsuits are without
merit under applicable state consumer protection laws and/or state or federal
RICO statutes. As a result, Rite Aid intends to continue to vigorously defend
each of the pending actions and does not anticipate, if fully adjudicated,
that any of the lawsuits will result in an award of damages and/or civil
penalties. However, such an outcome for each of the actions cannot be assured
and a ruling against Rite Aid could have a material adverse effect on the
financial position and results of operations of the company as well as
necessitate substantial additional expenditures to cover legal costs as it
pursues all available defenses.
Rite Aid has also recently been notified that it is being investigated by
multiple state attorneys general for its reimbursement practices relating to
partially-filled prescriptions and fully-filled prescriptions that are not
picked up by ordering customers. We are supplying similar information with
respect to these matters to the Department of Justice. Rite Aid believes that
these investigations are similar to investigations which were, and are being,
undertaken with respect to the practices of others in the retail drug
industry. Rite Aid also believes that its existing policies and procedures
fully comply with the requirement of applicable law and intends to fully
cooperate with these investigations. We cannot, however, predict their
outcomes at this time.
If any of these cases result in a substantial monetary judgment against Rite
Aid or is settled on unfavorable terms, Rite Aid's results of operations,
financial position and cash flows could be materially adversely affected.
PCS legal proceedings
In November 1999, PCS received a subpoena from the Office of Inspector
General of the Department of Health and Human Services ("OIG"). The subpoena
requests general information about PCS's formulary programs and rebate
practices and makes no allegation of any wrongdoing by PCS. PCS is fully
cooperating
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<PAGE>
with the inquiry and believes that no regulatory action will be taken by OIG
against PCS that will have a material adverse effect on PCS's business. Rite
Aid cannot predict the outcome of this matter.
In January 1998, a purported class action was brought against PCS by a
participant in a plan managed by PCS in the federal district court in New
Jersey. The plaintiff alleged that PCS is an ERISA fiduciary and that, as
such, breached its fiduciary obligations under ERISA and that PCS received
improper kickbacks and rebates from certain drug manufacturers. PCS believes
that the plaintiff's action is without merit and is vigorously defending this
action. Rite Aid cannot predict the outcome of this action.
Other
In addition, Rite Aid is subject from time to time to 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 a material
adverse effect on Rite Aid's financial condition, cash flow or results of
operations if decided adversely. Rite Aid, regardless of insurance coverage,
does not believe that the ultimate resolution of these matters will have a
material adverse effect on our financial condition, results of operations and
cash flows.
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders during the
thirteen week period ended May 27, 2000.
ITEM 5. Other Information
Not applicable.
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<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report.
<TABLE>
<CAPTION>
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
<C> <S> <C>
2.1 Stock Purchase Agreement between Advance Paradigm, Inc. Exhibit 2.1 to Form 8-K
and Rite Aid Corporation. filed July 14, 2000
4.1 Commitment Letter dated April 10, 2000 Exhibit 4.1 to Form 8-K
filed on April 11, 2000
4.2 Indenture, dated as of June 14, 2000, among Rite Aid Exhibit 4.1 to Form 8-K
Corporation, as Issuer, each of the Subsidiary Guarantors filed on June 21, 2000
named therein and State Street Bank and Trust Company, as
Trustee.
4.3 Exchange and Registration Rights Agreement, dated as of Exhibit 4.2 to Form 8-K
June 14, 2000, by and among Rite Aid Corporation, State filed on June 21, 2000
Street Bank and Trust Company and the Holders of the
10.50% Senior Secured Notes due 2002.
4.4 Registration Rights Agreement, dated as of June 14, 2000, Exhibit 4.3 to Form 8-K
by and among Rite Aid Corporation and the Lenders listed filed on June 21, 2000
therein.
10.1 Senior Credit Agreement, dated as of June 12, 2000, among Exhibit 10.1 to Form 8-K
Rite Aid Corporation, the Banks party thereto, Citicorp filed on June 21, 2000
USA, Inc., as Senior Administrative Agent, Citicorp USA,
Inc., as Senior Collateral Agent, and Heller Financial,
Inc. and Fleet Retail Finance Inc., as Syndication
Agents.
10.2 Collateral Trust and Intercreditor Agreement, dated as of Exhibit 10.2 to Form 8-K
June 12, 2000, among Rite Aid Corporation, each filed on June 21, 2000
Subsidiary Guarantor of Rite Aid Corporation listed
therein, Wilmington Trust Company, Citcorp USA, Inc.,
Morgan Guaranty Trust Company of New York, The Prudential
Insurance Company of America, State Street Bank and Trust
Company and The Sumitomo Bank, Limited, New York Branch.
10.3 Senior Subsidiary Security Agreement, dated as of June Exhibit 10.3 to Form 8-K
12, 2000, made by the Subsidiary Guarantors identified filed June 21, 2000
therein and any other person that becomes a Subsidiary
Guarantor pursuant to the Senior Credit Facility, in
favor of Citicorp USA, Inc., as Senior Collateral Agent.
10.4 Senior Subsidiary Guarantee Agreement, dated as of June Exhibit 10.4 to Form 8-K
12, 2000, among each of the Subsidiary Guarantors of Rite filed June 21, 2000
Aid Corporation listed therein and Citicorp USA, Inc., as
Senior Collateral Agent.
10.5 Senior Indemnity, Subrogation and Contribution Agreement, Exhibit 10.5 to Form 8-K
dated as of June 12, 2000, among Rite Aid Corporation, filed June 21, 2000
each of the Subsidiary Guarantors listed therein and
Citicorp USA, Inc., as Senior Collateral Agent.
10.6 RCF Facility, dated as of June 12, 2000, among Rite Aid Exhibit 10.6 to Form 8-K
Corporation, the Banks from time to time parties thereto filed June 21, 2000
and Morgan Guaranty Trust Company of New York, as
Administrative Agent, with JP Morgan Securities Inc., as
Lead Arranger and Book Runner.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
<C> <S> <C>
10.7 PCS Facility, dated as of June 12, 2000, among Rite Aid Exhibit 10.7 to Form 8-K
Corporation, the Banks from time to time parties thereto filed June 21, 2000
and Morgan Guaranty Trust Company of New York, as
Administrative Agent, with JP Morgan Securities Inc., as
Lead Arranger and Book Runner.
10.8 Exchange Debt Facility, dated as of June 12, 2000, among Exhibit 10.8 to Form 8-K
Rite Aid Corporation, the Banks from time to time parties filed June 21, 2000
thereto and Morgan Guaranty Trust Company of New York, as
Administrative Agent, with JP Morgan Securities Inc., as
Lead Arranger and Book Runner.
10.9 Second Priority Subsidiary Guarantee Agreement, dated as Exhibit 10.9 to Form 8-K
of June 12, 2000, among each of the Subsidiary Guarantors filed June 21, 2000
of Rite Aid Corporation listed therein and Wilmington
Trust Company, as Second Priority Collateral Trustee.
10.10 Second Priority Subsidiary Security Agreement, dated as Exhibit 10.10 to Form 8-
of June 12, 2000, made by the Subsidiary Guarantors K filed June 21, 2000
identified therein and any other person that becomes a
Subsidiary Guarantor pursuant to the Second Priority Debt
Documents, in favor of Wilmington Trust Company, as
Second Priority Collateral Trustee.
10.11 Second Priority Indemnity, Subrogation and Contribution Exhibit 10.11 to Form 8-
Agree- ment, dated as of June 12, 2000, among Rite Aid K filed June 21, 2000
Corporation, each Subsidiary Guarantor listed therein and
Wilmington Trust Company, as Second Priority Collateral
Trustee.
10.12 First Priority Subsidiary Security Agreement, dated as of Exhibit 10.12 to Form 8-
June 12, 2000, made by the Domestic Subsidiaries K filed June 21, 2000
identified therein and any other person that becomes a
Domestic Subsidiary pursuant to the Exchange Debt
Facility Documents, in favor of Morgan Guaranty Trust
Company of New York, as Agent.
10.13 Amended and Restated Drugstore.com Pledge Agreement, Exhibit 10.13 to Form 8-
dated as of June 12, 2000, between Rite Aid Corporation K filed June 21, 2000
and Morgan Guaranty Trust Company of New York, as Agent.
10.14 Amended and Restated PCS Pledge Agreement, dated as of Exhibit 10.14 to Form 8-
June 12, 2000, between Rite Aid Corporation and Morgan K filed June 21, 2000
Guaranty Trust Company of New York, as Agent.
10.15 Form of Second Priority Mortgage, Assignment of Leases Exhibit 10.15 to Form 8-
and Rents, Security Agreement and Financing Statement, by K filed June 21, 2000
the Subsidiary Guarantor listed therein, to Wilmington
Trust Company, as Second Priority Collateral Trustee.
10.16 Amendment No. 3 to Note Agreement, Amendment No. 4 to Exhibit 10.16 to Form 8-
Guaranty Agreement, and Amendment No. 1 to Put Agreement, K filed June 21, 2000
for Adjustable Rate Senior Secured Notes due August 15,
2002, among Finco, Inc., Rite Aid Corporation, The
Prudential Insurance Company of America, and Pruco Life
Insurance Company, as of June 12, 2000.
10.17 Amendment No. 5 to Guaranty, dated as of June 12, 2000, Exhibit 10.17 to Form 8-
from Rite Aid Corporation, as Guarantor, to RAC Leasing K filed June 21, 2000
LLC, as Lessor.
10.18 Amendment No. 4 to Master Lease and Security Agreement, Exhibit 10.18 to Form 8-
dated as of June 12, 2000, between RAC Leasing LLC, as K filed June 21, 2000
Lessor, and Rite Aid Realty Corp., as Lessee.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INCORPORATION BY
NUMBERS DESCRIPTION REFERENCE TO
------- ----------- ----------------
<C> <S> <C>
10.19 Amendment No. 4 to Guaranty, dated as of June 12, 2000, Exhibit 10.19 to Form 8-
from Rite Aid Corporation, as Guarantor, to Sumitomo Bank K filed June 21, 2000
Leasing and Finance, Inc., as Lessor.
10.20 Amendment No. 5 to Master Lease and Security Agreement, Exhibit 10.20 to Form 8-
dated as of June 12, 2000, between Sumitomo Bank Leasing K filed June 21, 2000
and Finance, Inc., as Lessor, and Rite Aid Realty Corp.,
as Lessee.
11 Statements re Computation of Per Share Earnings Included herein; see
note 3 to condensed
consolidated financial
statements
27 Financial Data Schedules (EDGAR Filing Only) Filed herewith
99 Form 10-Q for the second quarter of fiscal 2001. Filed herewith
</TABLE>
(b)Rite Aid Corporation has filed the following Current Reports on Form 8-K
since February 26, 2000:
(1)Rite Aid Corporation filed a Current Report on Form 8-K on April 11, 2000
disclosing under Item 5 a press release describing the receipt of a
commitment letter to provide a financing and to announce that one of
the Company's lenders had agreed to convert $200 million existing bank
debt into Rite Aid common stock and setting forth under Item 7 a copy
of the commitment letter.
(2)Rite Aid Corporation filed a Current Report on Form 8-K on June 21, 2000
disclosing under Item 5 a press release announcing the completion of
its refinancing transactions and setting forth under Item 7 copies of
the related Indenture and Agreements as exhibits.
(3)Rite Aid Corporation filed a Current Report on Form 8-K and Form 8-K/A on
July 14, 2000 and July 17, 2000, respectively, disclosing under Item 5
a press release dated July 11, 2000 announcing its unaudited financial
results for the first quarter of fiscal year 2001 ended May 27, 2000,
as well as its financial results for the fiscal year ended February 26,
2000 and restated financial results for the fiscal years ended February
27, 1999 and February 28, 1998. The Current Report also disclosed under
Item 5 that on July 12, 2000, Rite Aid Corporation and Advance
Paradigm, Inc. jointly issued a press release announcing that they had
entered into a definitive agreement under which Advance Paradigm will
acquire 100% of the equity of Rite Aid's PCS Health Systems, Inc.
subsidiary for $1 billion, consisting of $675 million in cash, $200
million in senior subordinated notes and $125 million in newly issued
equity in Advance Paradigm.
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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.
Date: October 11, 2000 RITE AID CORPORATION
/s/ Elliot S. Gerson
By: _________________________________
Elliot S. Gerson
Senior Executive
Vice President and
General Counsel
Date: October 11, 2000
/s/ John T. Standley
By: _________________________________
John T. Standley
Senior Executive Vice President
and Chief Financial Officer
41
